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Boston Properties: The Next REIT Privatization?

Through the first three months of this year, some $9 billion in takeover deals involving publicly traded REITs have been struck. Now, says one Manhattan-based real estate source backed by growing market chatter, the $10.8 billion office REIT Boston Properties (NYSE: BXP) is contemplating a sale to private-equity investors.

If BXP went private, its take-out cost would far surpass the $5.8 billion privatization of office REIT CarrAmerica earlier this month. That now stands as the richest REIT privatization to date; private equity firm Blackstone Group was the buyer on that deal.

It’s fairly obvious why similar buyers would be interested. BXP, which has a $10.8 billion market cap, commands one of the most attractive portfolios in the nation. The Boston-based REIT owns Class-A office properties in New York, Boston, San Francisco, Princeton and Washington, D.C., and many of these properties are trophy assets such as the CitiGroup Center in Manhattan and Boston's Prudential Center.

Not only is the portfolio highly visible, but it's also very healthy. BXP's six-building New York City portfolio, for example, was 98% occupied at the end of 2005. BXP is also expected to sell a pair of Manhattan assets — the Times Square Tower and 280 Park Avenue — for roughly $1 billion per building in the near future. It wouldn't be the first time that BXP sold into this market — last year the REIT disposed of $838 million in assets.

While it's unclear if BXP is mulling over select asset sales or an outright privatization — the company declined to comment for this story — the sheer weight of capital looking for a home in the real estate market suggests that the demand is there. So is the cash: Institutional investors plowed $51 billion into commercial properties last year versus $44 billion in 2004, reports real estate consulting firm Kingsley & Associates. The firm also projects that institutional capital flows into real estate will hit $59 billion in 2006.

"Boston Properties would be a nice acquisition for several reasons,” says Michael Hudgins, research strategist at Boston-based institutional research firm Property & Portfolio Research. "First, we see their core office markets outperforming the nation over the next few years and BXP also has a very strong development pipeline in place. And second, the investors could acquire a really strong portfolio all at once rather than assembling it piece by piece."

Hudgins projects that the creation of new office-using jobs will increase from 623,839 in 2005 to 790,800 in 2006. He sees pronounced office-using job growth this year in markets such as New York and Washington, D.C., which already boast tight vacancy. That, he says, is a lucrative backdrop to BXP's $317.6 million Washington, D.C., development pipeline.

BXP is also poised to boost rents in former tech-wreck markets like Boston and San Francisco. According to BXP, these two markets will account for roughly 74% of its portfolio-wide office rollover in 2006. While many of these expiring leases were signed during the heady days of 1999 and 2000 when rents were artificially high, Hudgins of PPR believes that both markets are tightening at a decent clip. Occupancy within BXP's seven-building San Francisco portfolio was 91% at the end of last year.

One sell-side REIT analyst scoffs at the notion of BXP going private. His reasoning is that BXP would command such a dizzying price that few private equity firms could take it down. With so many investors bidding up REIT shares in hopes of catching the next privatization, share prices have soared in recent weeks. According to SNL Financial, equity REIT returns are up 13.84% over the three months leading up to yesterday's close.

"The rumor does not have much substance," says Louis Taylor, a REIT analyst at Deutsche Bank Securities. "The equity component would be too huge. I mean, Boston Properties has a $10 billion market capitalization."

Another potential drawback is BXP's share price, which has risen nearly 100% within the past year. Shares were trading around $75 in the beginning of January, but they have climbed into the mid-$90's within the past few weeks. Shares in office REITs have also increased 15.91% over the past three months, according to SNL Financial. The Standard & Poor 500, by comparison, has risen just 9.33% during that same period. Share prices in BXP were rallying this morning, too, after the stock was officially added to the S&P’s 500 Index. New additions to the S&P 500 typically see their share prices pop by 10% on average between getting picked to join the index and then actually occupying the index. BXP will officially join the index at the market close this Friday. BXP shares were up 5.89% at noon today

Given the lofty sale price that BXP would likely fetch, who could take BXP private? It's unlikely to be one private equity firm, but a so-called "club" deal could tackle this privatization. A club deal involves several large firms, typically in the private equity sphere, banding together to take a company private. One example was last year's $6.6 billion buyout of Toys "R" Us by private equity firms KKR (Kohlberg Kravis Roberts & Co.), Bain Capital and diversified REIT Vornado Realty Trust.

In 2005, for example, private equity firms spent roughly $197.5 billion on 845 different deals — 44% more money than they spent in 2004. Of that total, 125 were club deals, according to Buy Outs magazine, a private equity watcher.

"I could see a consortium of players bidding on Boston Properties," says Robert Stern, managing director at Perry Real Estate Partners, the real estate arm of hedge fund Perry Capital. "And their reason would be to get a critical mass of properties together very quickly. A lot of these private equity funds have raised a lot of money for these large deals."

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