Friday, April 27, 2007

Roth on EOP - sour grapes or sage wisdom?

Tom Corfman and company once again dug up some good material on the Vornado/Blackstone/EOP acquisition -- this time from Steve Roth's annual shareholder letter. This is a must read for anyone who cares about big-time real estate deals.

I'd been hearing through the grapevine and reading little tidbits about how things went down, and this just confirms it all. Other than Zell's poem, this is my favorite, and perhaps the most telling, part of the letter:

"We are in the income property business, and our strategy is to hold assets for income and long-term capital appreciation for the benefit of our shareholders. Blackstone’s model is to buy wholesale and sell retail, holding for so long as to time markets, build platforms, etc., to create best returns for their investors, and they do it brilliantly. In this case, it seems they bought high and sold even higher, disposing of over half the EOP portfolio for what we make to be about a 10% profit on assets, a huge return on their equity, within days. By and large, they sold what would have been our keepers. Interestingly, all their sales have been to highly leveraged players, funds or other intermediaries who intend, after a hold period of their own, to re-sell (except for Harry in New York) for a profit. In fact, some of these assets have now been sold two or even three times in weeks. Except for Harry in New York, none of these assets has yet found a long-term permanent owner, if such exists any more.

If all this doesn’t convince market participants that these office properties are scarce and cheap, nothing will. And all this should also convince market participants that private market values are well higher than public trading prices, and that private market players can be and are much more aggressive."

I go with the wisdom option. These are just two different investment strategies, both of which work. And again, I like the flipping because it keeps us lawyers employed.