LA QUINTA, Calif. -- Sam Zell's real estate empire just got bigger.
Equity Office Properties
has agreed to purchase
, a real estate investment trust, or REIT, with nearly 25 million square feet of office space and approximately 12 million square feet of industrial property focused on high-tech markets up and down the West Coast. Zell serves as the chairman of Equity Office.
Equity Office will pay about $7.2 billion, or $57.52 per share in cash and stock for each share of Spieker and will also assume about $2.5 billion of debt and preferred stock from the company. The total purchase prices equals about $200 per square foot. "They paid full price," says Craig Silvers, managing director of real estate research at Sutro. "It certainly wasn't cheap based on today's rents, but Speiker's portfolio provides Equity Office with good future growth opportunities." Silvers estimates the value of Spieker's assets at $56 per share.
The purchase comes at a time of uncertainty in California real estate markets as technology companies struggle to regain their footing amid an economic slowdown and as the current power crisis threatens to slow growth in the state. Ross DeVol, an economist with the
, a California think tank, estimates the energy crisis will slow growth in the state by 0.25% to 0.50%, adding to a growing lethargy in real estate activity in the San Francisco Bay area, one of Speiker's primary markets.
"We are going to see San Francisco cool off," DeVol says. "We're seeing a lot of space coming back on the market, a lot of it from technology companies, especially dot-coms."
Spieker is likely to rally on the news. The purchase price is 10% above Spieker's closing price Thursday of $52.10. Silvers says investors may want to hold on to shares if they are interested in West Coast exposure. "This creates the dominant West Coast office REIT," he says. "Sam Zell has always said there are far too many REITs, and this is Zell putting his money where his mouth is." Spieker shareholders will receive $13.50 per share in cash with the balance paid in Equity Office stock.
With Equity Office paying full price for Spieker, Silvers says investors may want to look at other West Coast office REITs that should receive increased investor attention as a result of the deal. "Companies like
are all solid California plays that could be next in line if consolidation continues," says Silvers. "And if the full-price offer for Spieker is any indication, the possible returns on these companies are significant."
Silvers says Arden trades at a 40% discount to its net asset value; Kilroy at a 25% discount, and Mission West at more than a 30% discount. "All of those net asset values assume a square foot price below the $200 paid by Equity Office for Spieker," Silvers says.
Often referred to as a "grave dancer" for his penchant for purchasing assets of distressed operations on the cheap, Zell's decision to up his stake in tech-rich Silicon Valley might be construed as a message about the future of the high-tech economy. "Sam Zell and Equity Office are making a $7 billion bet that tech isn't dead," says Silvers. "For investors in Silicon Valley real estate, that's good company to be in."
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to