Equity Office Properties

Blackstone’s Real Estate Bonanza

blackstoneipoprospectussecfilingrevisedtitlesmall.JPGIt’s widely known that Blackstone had a powerful real-estate arm. Its $39.2 billion purchase of Equity Office Properties broke records and made headlines for weeks. The firm manages six general real estate funds and two internationally focused real estate funds, and has somewhere in the neighborhood of $20 billion of assets under management for its real estate deals.
But it wasn’t until the most recent filing by Blackstone that we learned how lucrative its real estate business has been in recent months. The firm’s real estate business garnered pre-tax income of $762 million in the first three months of this year alone, according to the prospectus filed with the Securities and Exchange Commission on Monday. That puts it well on pace to soundly beat the $902.7 million of income from real estate last year.
Blackstone doesn’t disclose the details of this huge increase in income but we suspect a good deal of it comes from flipping EOP properties. At the time the deal was announced, there was lots of tut-tutting from those who simply could not believe the gods of finance would not punish the hubris of Blackstone for daring to take on such a huge deal. Isn’t that the lesson of all of Greek tragedy?
Blackstone’s Jon Gray, who orchestrated the EOP buyout, looks to be following the path of a writer from another era who told us: fortune favors the bold.

Jon Gray: Paragon of Virtue or Party-Pooper?

jongrayblackstonepropertyking.jpgIs it really true that there isn’t going to be any closing dinner for the Blackstone acquisition of Equity Office Properties? That’s what this profile of Blackstone hot shot Jon Gray suggests. We knew the team at Blackstone was already busy unloading some of the biggest properties but no celebration at all? There were lots of people doing a lot of work on that deal. And bonuses are a long way off. Things like deal dinners are usually a not bad way to keep the troops happy and make your people feel appreciated. Besides, at the tender age of thirty-seven, Gray seems a bit young to have totally foregone the pleasure of a good party. Maybe he’s just waiting to the sell-off to throw the party.
There’s a lot more of interest in the Bloomberg profile of Gray. First, he refused to comment for the article which (a) makes us feel better about the fact that nobody in his office returned our call and (b) makes us worry about him. Or, rather, it makes us worry about everyone else. If Gray can’t grow a giant ego by closing the Biggest Deal Ever, what hope is there for the rest of us?
Second, Gray’s background is almost sickeningly admirable. While he does come from finance blood and breeding—his father was an investment adviser and his step-father an executive at an investment bank, he majored in economics and English at Penn. Not finance. And that English degree means he actually went to Penn, not Whartonjust Wharton. [Note: Several readers insist he did go to Wharton. So note the correction.]
So how did the lad do so well? Gray seems to have started very early at Blackstone. So that finance blood and breeding, plus the Econ degree, seemed to have paid off. His wedding announcement lists the private equity shop as his employer in 1995, when he was just 25. (Another sign of almost dangerous-sounding virtue: early and only marriage.) A mere five years later he was a senior managing director.
So, yes. Jon Gray is simply a better person than you are. Deal with it.
(As a sucker-prize, though, you may in fact know how to party better than Gray. You just have to do it with less money.)

Jon Gray Skips Party, Afraid Record Buyout Will Fail

If we were ever diligent to keep up with our long promised “Deal of the Day” feature, today’s deal would obviously have been the Blackstone buyout of Equity Office Properties Trust. It’s been news for a while, of course. But last night it finally got, well, finalized.
EOP was a giant real-estate trust. Basically a real-estate vulture fund that snapped up properties when owners found themselves in trouble with their debt. Many thought that it was too big to get bought, at least in one piece. If there was an exit strategy for EOP, it would be a break-up. But then came the buyout build-up of 2006, when the price tags on going private deals started showing numbers that once would have been implausible. (See this WSJ chart for the explosion of huge deals in the past year.) Suddenly, EOP was in play.
Blackstone was always the favored bidder. It had the money and the desire. The initial papers carried a no-shop provision and a break-up fee. But the break-up fee wasn’t high enough to dissuade a competing group of bidders from jumping into the deal, offering a larger package of cash and equity.
Now “no-shop” provisions—which bar sellers from seeking higher bids from other buyers—are one of the few contractual provisions (as opposed to price points and asset valuations) that business people seem to care about in deals (at least in our experience). But it’s not clear they actually provide much value, especially if the deal is big enough to grab headlines. The seller doesn’t need to shop the deal if it’s terms are spelled out on the front page of the Wall Street Journal.
But break-up fees—the amount a seller pays to a buyer who gets outbid after the deal is signed—do matter. Bankers and private equity folks will give you all sorts of reasons they want break-up fees—to pay for work already done, as a sign of good faith and fair play and a promise that the would-be buyers won’t walk-away totally empty handed. But most of that is gum-flapping. What break-up fees really do is place a floor on the next highest bid. Every subsequent bid has to beat the last bid plus the fee to attract the sellers. As the Blackstone people pushed up their bid during negotiations, they also pushed up the break-up fee. In the end, the EOP-Blackstone break-up fee reached $720 million.
(Lawyers, by the way, hate break-up fees. Especially big ones. Or, rather, corporate lawyers hate them. Mostly because the plaintiff’s bar loves to sue over these things, claiming that they discourage competing bids. A claim which has the unfortunate character of being largely true and the entire reason the break-up fees exist. But you didn’t hear that from us.)
But what really won the day for Blackstone was the fact that their bid was cash. And cash is king. For a variety of reasons, current market conditions tend to favor bidders with money (what the industry calls “financial bidders”) rather than bidders with experience (what the industry calls “strategic bidders”). Here Blackstone was offering EOP a mountain of cash, in part because they were already lining up follow-up deals to sell-off assets and recoup part of the cash. The competing group were real-estate guys and were offering cash and equity in an on-going business. But it quickly became clear that the EOP shareholders weren’t interested in owning part of a business run by some other real-estate guys. They wanted the money, and Blackstone were the guys showing it to them.
‘Course, you’ve got to be careful drawing any lessons from bid deals. Their very size alone means they aren’t “typical” and rules that apply to them might not apply to the broader markets. Except that everyone else will be looking for lessons, and this deal will quickly become a “reference deal” against which others are measured. So might as well get a bit reckless with us. Everyone’s doing it.
Update: More thoughts on no-shop provisions, break-up fees and the EOP deal from Larry Ribstein here. As always, very clear, very concise and worth reading. (Also, he pretty much anticipates a lot of our arguments above so what’s not to like?)

How Blackstone Won a Prize
[Wall Street Journal]