EOP Fuels the REIT Fire

On Monday, Equity Office Properties Trust (NYSE: EOP  ) announced that it had agreed to be acquired by The Blackstone Group in a transaction valued at approximately $36 billion. The terms of the agreement call for Blackstone to acquire all of the outstanding common stock of Equity Office at an 8.5% premium over its closing price on November 17, 2006.

The final completion of the transaction is expected to take place in the first quarter of 2007. Equity Office's president and CEO said the following of the transaction, "Our ultimate goal has always been to maximize shareholder value, and we believe we have done that through the Blackstone Group, one of the world's premier private equity firms."

News of the transaction sent Equity Office shares soaring. The stock hit a new 52-week high and closed 7.7% higher than its opening price. The transaction also had a ripple effect throughout the commercial REIT sector. Other REITs seeing new 52-week highs on Monday included SL Green Realty (NYSE: SLG  ) , Boston Properties (NYSE: BXP  ) , and VornadoRealty Trust (NYSE: VNO  ) . Also standing to gain from the run-up the sector experienced on Monday: funds that invest heavily in office-space REITs, such as the CGMRealty Fund (FUND: CGMRX  ) and the ProFundsReal Estate UltraSector Investor Shares (FUND: REPIX  ) . These two funds were up 3% and 4.6%, respectively, on Monday.

While office-space REITs largely turned in strong earnings in their recent third quarters, I was expecting future stock price appreciation to be tempered in the sector, given that most of these REITs were already operating near maximum capacity and had realized huge run-ups in their stock prices in the past 12 months. While I am expecting most of these REITs to turn in strong fourth-quarter and full-year results, I would no longer be surprised to see the office-space REITs continue their run into 2007. Monday's transaction is a clear indication of the overwhelming demand for prime commercial real estate.

On the subject of the Equity Office transaction, JPMorgan analyst Anthony Paolone noted, "It demonstrates that the pool of capital available to purchase commercial real estate is enormous, and valuations, while historically quite high, are still acceptable to major institutions."

I'm inclined to agree with Mr. Paolone. For those Fools looking to jump into REITs, it still might not be too late, despite the high valuations. For those already holding shares of the aforementioned REITs, I wouldn't transition into a profit-taking mode at this point. Monday's happenings just might be a sign of more to come for this sector in 2007.

Related REIT Foolishness:

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned.


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