Barry Vinocur

By Erin Corcoran

Barry Vinocur’s Insight on M&A

Veteran industry observer Barry Vinocur is no stranger to the twists and turns of the REIT industry. He has been reporting on the REIT industry for the past 20 years. As the editor of Realty Stock Review, REIT Wrap and The REIT Newshound, and the CEO and founder of REIT Zone Publications, LLC, Vinocur knows the inside-out of most events happening in the industry.

Portfolio sat down with Vinocur to get his take on the biggest acquisition in REIT history, when an affiliate of The Blackstone Group acquired Equity Office Properties Trust for $39 billion. The deal closed after a bidding war between Blackstone and public REIT Vornado Realty Trust (NYSE: VNO) with investors from Starwood Capital Group and Walton Street Capital. The negotiation pushed Blackstone’s initial bid of $48.50 a share to a final $55.50 a share, creating the largest private buyout in history.

Portfolio: What was your initial reaction to Blackstone’s bid for Equity Office Properties in November 2006 followed by Vornado’s bid in January?

Vinocur: REITZone wasn’t shocked when Equity Office announced it had agreed to be acquired by Blackstone for $48.50 per share in cash. In April 2006, we had heard that the California Public Employees’ Retirement System (CalPERS) and Commonwealth Partners approached Equity Office. We figured it was only a matter of time. We didn’t know exactly when it would happen, so the timing was a surprise.

We thought that someone would top Blackstone, and Vornado was on the list of possibles. Vornado was a logical buyer for a large portion of the Equity Office portfolio. We were rooting for Vornado because it would have been a good deal for the company at the right price, and it would have been good for the REIT industry. However, our focus is always the investor, and the highest price was the best possible outcome for Equity Office shareholders.

Portfolio: What is Blackstone’s next strategic move? Will Blackstone set its sites on another REIT?

Vinocur: Blackstone is in the midst of raising capital for its sixth real estate fund. It raised roughly $5.25 billion for its last fund. The face amount on Fund VI is $8 billion, but sources tell us that Blackstone expects the fund to raise more than $10 billion. That’s a lot of money by any standards. However, when you layer the type of leverage Blackstone typically employs, it’s a whole lot of buying power. Fund VI will be a global fund, so the mandate is broad.

Blackstone, like many of its competitors, seeks outsized opportunities. The REIT industry isn’t the target-rich environment it was a few years ago. Our view is that strategic buyers are re-emerging as a force in the industry and will impact the opportunity set for financial buyers, such as Blackstone. But Blackstone is not finished.

Portfolio: What impact did this deal have on the REIT industry?

Vinocur: Short-term impacts included unprecedented media attention for REITs. As far as I know, the story didn’t make it to “Entertainment Tonight,” but it was all over the news. It raised the industry’s profile, which was good because more people should know about REITs. On the flip side, a lot of media coverage came up short and some was downright bad and potentially harmful to investors who were trying to understand the issues on the Blackstone proposal.

The REIT industry has been shrinking for several years, and Equity Office leaves a huge hole. The office sector particularly has been hard hit. However, on a market cap basis, the industry is growing and stock prices have soared. In the end, our industry is a smaller place.

While this level of privatization is both staggering and unprecedented, it’s also the way the financial markets ebbs and flows. Down the road, we fully expect assets acquired in privatizations to find their way back into public REITs.

Portfolio: How does this deal impact indexes, such as Standard & Poor’s?

Vinocur: Equity Office was the first REIT listed on the S&P 500, and it is now gone. It also means that index funds will have to reallocate Equity Office dollars. Cosmically, it doesn’t have an impact. Thanks to the efforts of NAREIT and others, REITs are now well accepted by non-dedicated investors and REITs aren’t going away.

Portfolio: This was quite a deal to jumpstart 2007. Do you think there will be similar deals and bidding wars throughout the year?

Vinocur: There will be more M&A activity this year. Several have already been announced, such as when Brookfield Asset Management (NYSE: BAM) agreed to acquire Longview Fibre Company (NYSE: LFB) in February. However, at some point, this trend will pass. If Sam Zell is right—and we never bet against Sam—this trend could last at least another several years. However, that doesn’t mean it will be at the same level we saw last year.

As for bidding wars, there’s already one battle underway in Canada for Sunrise REIT. No doubt, there will be others. It would be very tough to top Equity Office, however.

Portfolio: Now that the dust has settled with Equity Office taking Blackstone’s bid, who do you think is the big winner of this deal? On the same note, who do you think is the loser in this situation? Why?

Vinocur: The “winner/loser designation” implies it’s a zero-sum game. Sometimes that’s the case, but not nearly as often as many people believe.

We haven’t heard many complaints from Equity Office shareholders, however; so we figure they feel they got a good deal.

The mainstream media has done its best to paint a gloom and doom picture vis-à-vis Blackstone. No question Blackstone would have preferred to have bought Equity Office for $48.50. It would have made even more gobs of money. Don’t worry about Blackstone. They’re very smart folks. They’ll do just fine.

If there has to be a “loser,” it’s the REIT industry because now there are fewer companies, and that hurts in the short run. The office sector has been hard hit by the privatization wave. However, we believe there’s a cyclical aspect to these events. This part of the cycle has been pretty darn dramatic. Of course, the flip side is that the redeployment of cash from privatizations has been a major driver of REIT performance over the past few years.