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Win-Win for SL Green

The Equity Office buyout is good news for the REIT.

Monday's announcement that private-equity giant Blackstone Group will pay $20 billion to take over

Equity Office Properties


gave a boost to all office REITs.

But the news might be the best of all for

SL Green

(SLG) - Get SL Green Realty Corp. Report


SL Green, a pure-play owner of New York City office space, has found itself in a bit of a pickle. Over the summer the company agreed to purchase most of the New York office assets of

Reckson Associates

(RA) - Get Brookfield Real Assets Income Fund Inc. Report

to expand its foothold in Manhattan, which is enjoying tremendous rent growth.

Last week, however, financier Carl Icahn and real estate firm Macklowe Properties, a key competitor of SL Green's, swooped in with a higher bid of $49 a share for Reckson.

Analysts had scratched their heads as to whether SL Green could possibly justify a higher price than the $45 a share it offered.


Equity Office deal, however, could help SL Green out of its Reckson jam.

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SL Green's stock surged 6.1% Monday after the Equity Office deal was announced and was up another 4% Tuesday to $139.22. With the stock now trading at an all-time high, SL Green has more valuable currency to justify a higher bid for Reckson if it chooses to do so. Whereas Icahn and Macklowe are offering all cash, SL Green is offering a combination of cash and stock.

But even if SL Green decides not to pursue a bidding war with Icahn, the company still will be sitting pretty.

If the Reckson deal falls through, SL Green will be viewed as a takeover candidate, sending its stock "through the roof," says one hedge fund manager who closely follows the sector.

The Equity Office buyout shows that the "valuation of institutional quality office assets is more than people thought," the manager says.

That means the assets SL Green already owns in midtown Manhattan are probably worth even more now -- which should alter analysts' valuation models on the company.

In addition, the sale of Equity Office to Blackstone will leave dedicated REIT investors with a pile of money to pour back into office REIT stocks like SL Green, along with

Vornado Realty

(VNO) - Get Vornado Realty Trust Report


Boston Properties

(BXP) - Get Boston Properties, Inc. Report


Brookfield Properties



Even if SL Green


now justify a higher bid for Reckson, the question remains whether it



The SL Green deal raised the ire of several Reckson investors. Arnhold and S. Bleichroeder Advisers, a Reckson shareholder, had publicly opposed the sale of the REIT to SL Green because of a peripheral deal with Reckson CEO Scott Rechler.

With the current SL Green pact, Rechler would pay $2.1 billion for Reckson's Long Island office portfolio and other assets.

Bleichroeder opposed the deal because it felt Reckson didn't adequately shop the Long Island assets that Rechler planned to buy. Icahn and Macklowe offered to buy all of Reckson, including those tertiary assets.

One REIT buyside investor says he heard that Rechler had a hard time raising capital to buy the Long Island office assets of Reckson, so the $2.1 billion he offered wasn't necessarily the highest value for the properties, just what he could afford.

Rechler also likely wouldn't be too happy about the Icahn deal because such a sale would present him with a huge tax bill.

When Reckson went public in 1995, the Rechler family contributed the properties to the REIT, and in turn received operating partnership units, or OP units, which are convertible to Reckson common stock at any point.

Rechler will incur a taxable gain on those OP units upon the all-cash sale of the properties to Icahn. In the SL Green deal, Rechler will buy back the properties from Reckson and avoid paying some of the taxable gains.

Of course, in theory then, this explains why Icahn can pay more for Reckson, if the Long Island assets are really worth more than the $2.1 billion Rechler originally offered. And it also suggests that SL Green could pay higher than its original price for Reckson -- especially with SL Green's stock trading at a new high.

But even if SL Green loses Reckson, the stock likely remains a winner.