Vital Lesson From Blackstone

Before we get to the lesson, let' take a look at commercial REITs. (This will all tie together nicely I assure you). Please consider the following "TA Tips". Watch these three short videos (in order) for a good laugh: (Thanks to Ilya)

REITs discussion with Beejal Patel 2007-04-18
REITS continue to be high flyers...the sector is considered over-valued by many, but Beejal tells us why the technicals show why REITS will likely keep rising.

REITs discussion with Beejal Patel 2007-05-30
Buyouts in the REIT Sector bring back the bullish momentum...A look at the technicals behind the exchange traded fund that tracks the REITS.

REITs discussion with Beejal Patel 2007-04-17
Could the Commercial Reits Sector be ready for another leg up? Beejal takes a closer look at whether the long term bull market could continue.

It seems like it's strike three on commercial REITs. Now, for some charts.

Click on any chart for a sharper image.

2007-07-26 IYR Daily



IYR 2007-07-26 Weekly



Flashback November 20, 2006

Blackstone Acquiring Trust in Richest Buyout

The Blackstone Group, a private investment firm, said yesterday that it had agreed to acquire Equity Office Properties Trust, the nation’s largest office-building owner and manager, for about $36 billion.

The deal marks the largest leveraged buyout in history, eclipsing the $33 billion paid earlier this year for H.C.A., the hospital chain, and it illustrates how private equity firms continue to gobble up corporate America. Under the transaction, Equity Office will go from being a publicly held company to a private one. Blackstone will pay $20 billion and assume $16 billion in debt.

Equity Office, with some 590 buildings and over 105 million square feet of office space in major metropolitan markets, was created in 1976 by Sam Zell, a real estate tycoon who built the business through dozens of acquisitions that were worth, in aggregate, more than $17 billion. Last year, Equity Office acquired the Verizon Building on Sixth Avenue in Manhattan for $515 million.

Matthew L. Ostrower, an analyst at Morgan Stanley, called the proposed deal “a ground-breaking transaction for the real estate world in general and an earthquake for the REIT industry.”

Private equity firms are vying to hold the crown of having led the biggest buyout in history, and, with this deal, Blackstone will be able to do so at least for now. Blackstone will move ahead of Kohlberg Kravis Roberts & Company, which led the H.C.A. sale. Kohlberg Kravis also held the prior record with its 1989 takeover of RJR Nabisco, a deal that came to define an era when it was chronicled in the book “Barbarians at the Gate.”

The transaction comes amid a private equity frenzy for the next big leveraged buyout.

Matthew L. Ostrower, an analyst at Morgan Stanley, called the proposed deal “a ground-breaking transaction for the real estate world in general and an earthquake for the REIT industry.”

Oh it was "groundbreaking" alright. Groundbreaking in LBO stupidity, right up there in silliness with the AOL "take under" of Time Warner. Someone at Time Warner clearly lost their mind to approve that deal. And the Blackstone IPO itself sure was an "earthquake" given that it just might have been the deal that finally choked the IPO market.

On that note the Mish telepathic question lines are now open. Questions are now pouring in.

Q: What did Blackstone know that Sam Zell didn't?
A: Obviously nothing. One would have to be a fool to take the other side of a bet as Sam Zell especially when Zell was selling after a runup like that.

Q: Why did they do it?
A: Everyone was desperate to see who could pulloff the biggest deal, no matter how little sense it made.

Q: Why was funding available?
A: For the same reason funding was available for subprime lending until that blew up: fees. Underwriting big deals like this means huge fees to the brokerages. The lack of such deals going forward in addition to enormously reduced fees for packaging CDOs makes it very likely that broker dealers such as Merrill Lynch (MER), Goldman Sachs (GS), and Lehman (LEH) have peaked.

Q: Did Blackstone even think they knew something that Sam Zell didn't?
A: That is much harder to answer. If they did, they were wrong. Perhaps Blackstone only thought it could unload the junk to an even greater fool.

Q: Wasn't the greater fool theory at least part of the IPO of Blackstone itself?
A: Absolutely, so let's take a look at the chart.

Blackstone - BX



Flash Forward July 27, 2007

Blackstone Falls to Record Low in Debt Market Freeze

Blackstone Group LP shares fell to a record low, making the leveraged buyout firm the worst- performing initial public offering this year.

Blackstone has tumbled 23 percent since the New York-based company sold shares in June on mounting concern that the LBO market will dry up as investors shun riskier bonds and loans used to fund takeovers. Rival Fortress Investment Group LLC fell 1.8 percent to $18.96 today, 49 percent below the $37 high reached the first trading day in February.

"If you believe private equity is under some pressure, you are definitely going to take it out on these stocks," said Frederick Lane, managing director of Boston-based investment bank Lane Berry & Co.

Investors around the world are avoiding riskier assets such as the loans that finance LBOs after being stung by losses in the U.S. subprime mortgage market. That rout may hamper New York-based Kohlberg Kravis Roberts & Co.'s plan to raise about $1.25 billion in an IPO later this year.

Ryan O'Keefe, a London-based spokesman for KKR, declined to comment.

Shares of Blackstone, led by Stephen Schwarzman, fell $1.51 to $24.10 at 10:07 a.m. in New York Stock Exchange composite trading. It's the lowest price since it went public at $31 on June 21.

Chrysler, the Auburn Hills, Michigan-based automaker, and Alliance Boots Plc, the U.K. pharmacy chain that KKR is acquiring, failed to find buyers this week for $20 billion of loans. Ten banks, including Deutsche Bank AG and JPMorgan Chase & Co., were stuck holding the debt.

A Vital Lesson

Inquiring minds might be wondering if there is a lesson in all of this. Indeed there is. It can be found by comparing Sam Zell to Bear Stearns and also to the greed at Blackstone. Sam Zell sold when he could, not when he had to. Sam Zell got top dollar. Bear Stearns sold when it had to. The High-Grade Structured Credit Strategies Enhanced Leverage Fund went to zero when Bear Stearns HAD to sell it because of margin calls. See Implications of Basis Capital Fund Missing Margin Calls for more info.

Neither the Blackstone IPO or Sam Zell's sale to Blackstone that needed $16 billion in debt to finance could be accomplished in today's market. That is the lesson here: Sell when you can, not when you have to.

I must give credit where credit is due. That is a saying I frequently hear from Bennet Sedacca on Minyanville. He's one of the brightest minds I know. And as you can see by comparing Sam Zell to Bear Stearns, the difference is vital.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/