Fresh off accepting a $20 billion offer for his massive office company, REIT pioneer Sam Zell delivered some pointed remarks about the privatization wave yesterday morning. Aside from criticizing REIT naysayers — from the analysts and journalist camps — Zell stressed that the flurry of privatizations proves that REITs are finally being valued correctly.
“I’m going to tell you what the privatization trend is and isn’t,” said Equity Office Properties Chairman Zell, who doesn’t see the wave of privatizations as a sign that the REIT market is overheated. “Because I do not believe that many of the comments made by the savants in the press and the analyst community are accurate about this [privatization] trend.”
Zell agreed to speak at the New York University Real Estate Institute’s 39th annual capital markets conference at midtown Manhattan’s Waldorf-Astoria Hotel months ago. Of course, he now finds himself leading the REIT privatization wave into uncharted waters. Last Monday, Equity Office Properties (NYSE: EOP) accepted a multi-billion dollar offer from private equity giant Blackstone Group, which now stands as the largest REIT privatization in history by dollar.
Zell refused to discuss the Blackstone deal, which is expected to close early next year, but he did cite several large REIT privatizations as proof that analysts just don’t grasp the true value of these companies. More than $36 billion in listed office REITs — including the EOP deal — have been privatized over the past two years, and the average premium paid by the buyer was roughly 6.7%, according to Charlottesville, Va.-based SNL Financial. To Zell, who has criticized analysts for years, these premium takeout prices prove his theory that the public markets vastly undervalue real estate.
“The fact that these companies have all gone private at such premiums is an extraordinary indictment of the analyst community. And it starts with the ability to ignore realities,” he said.
REIT share prices certainly aren’t languishing. In fact, total returns for office REITs are up 45.6% year to date, reports SNL. While some of this share appreciation is likely being driven by takeout anticipation, these companies are also riding an office recovery that’s boosted rents and thinned vacancies over the past 12 months.
Boston-based Property & Portfolio Research expects office vacancy to fall by 1.4% over the next four years to hit 11.4% by the end of 2010. PPR analysts expect this slow-burning recovery to bring steady growth to landlords while high construction and materials costs keep a lid on new supply. Zell, for his part, spoke bullishly of 6% and 7% revenue increases for office landlords over the next two years.
“The privatization trend is the ultimate validation of what we’ve done as REITs,” said Zell. “But it’s not a signal of a market top. It’s all about a buyer and a seller looking at the same data and drawing different conclusions.”