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NEW YORK CITY-As Sam Zell explains, the REIT market was created in the mid-'90s out of necessity--financing options had stopped cropping up and the real estate industry had only the public markets. In the past 14 years, REITs have gone from a $6-billion industry to an $8-billion industry. Now, the way Zell sees it, the latest trend of public companies being taken private is the "ultimate validation of everything we've done over the past 13 to 14 years."
And Zell, speaking at NYU's 39th Annual Conference on Capital Markets in Real Estate, should know. Last week, the Blackstone Group made headlines with its move to take Equity Office Properties private in a $36-billion transaction. Zell is founder of EOP. "We created an environment where there is actually bidding for control of real estate companies," he said. And that environment is not limited to small companies, he added.
And although he sees the public-to-private play cyclical, he does see it lasting another five to 10 years. "In the '90s we saw everyone going public," Zell said. "Now a significant number of companies are being taken private. It's all about liquidity. This is not a short-term phenomenon. There will be excess capital over the next five to 10 years."
In addition to EOP, in the past year Trizec became a name in real estate history books when it dissolved as part of a $9-billion merger with the Blackstone Group. An affiliate of the Blackstone Group closed on its $6-billion acquisition of CarrAmerica of in July, taking that public REIT private. And in May, Arden Realty shareholders approved its $4.8-billion sale to GE Real Estate.
All this activity, Zell pointed out, is an "indictment of the analytical community in real estate." For example, the NAV for Trizec in January 2004 was a high of $17.57, a low of $12.80 and an average of $14.87. However, in October 2006, the Blackstone-Trizec deal closed at $29.01 per share. "How can they be so far off," he asked. "Maybe this industry is moving faster than its analyticals."
But public companies going private does not signal the end of the REIT era. For example, Douglas Emmitt is planning to operate as a REIT on the New York Stock Exchange with a $1-billion initial public stock offering.
"Today, it is a classic example of supply and demand. The supply of capital and demand on the private side is in excess of the public markets," Zell said. However, this "without any question, will reverse itself," he added. "This is not the end of the 'modern REIT era.' Companies are going private part of the normal transition.
"I've long said that 216 REITs just don't make any sense," he added. "Part of this process is the waning process."
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