Friday, December 17, 2010

Big Restructures

COMMERCIAL REAL ESTATE

DECEMBER 17, 2010

Blackstone Reworks $7 Billion in Debt

Deal Is Struck to Restructure Cash Owed on Purchase of Sam Zell's Equity Office Properties Trust

By LINGLING WEI And ELIOT BROWN, Wall Street Journal


Blackstone Group LP has reached an agreement to restructure about $7 billion of the remaining debt tied to its epic 2007 purchase of Sam Zell's Equity Office Properties Trust, the largest leveraged buyout ever, according to people familiar with the matter.

The deal marks the second major restructuring Blackstone has pulled off this year as the credit markets have thawed, enabling well-capitalized owners to restructure properties that were purchased near the top of the market.

In the other deal, Blackstone reworked the balance sheet of Hilton Worldwide Inc., the firm's single-largest investment, cutting Hilton's $20 billion debt load by nearly $4 billion.

Under the Equity Office deal, which is expected to be finalized by year's end, the maturity of the debt will be extended to 2014 from 2012, the people said. In exchange, Blackstone will pay down the $7 billion debt by 10% and the interest rate on the remaining debt will increase by one percentage point, these people said.

The deal represents the latest chapter in the story of Blackstone's purchase of Equity Office for $39 billion, including debt and equity. In retrospect, that top-of-the-market deal could have hurt Blackstone because values tanked shortly afterward.

But immediately after the acquisition, Blackstone sold about $30 billion of properties to raise cash and reduce the debt taken on for the buyout.

Most of those who picked up the buildings from Blackstone in 2007—the list reads like a Who's Who in real estate—have hit financial problems because they were overwhelmed by the debt they took on to do the deals.

The 149 Equity Office buildings Blackstone held on to had $7 billion of debt, including $4.9 billion of mortgages that were packaged and sold as commercial-mortgage-backed securities, or CMBS, and about $2.1 billion of "mezzanine," or junior, debt that fills the gap between the first mortgage and the equity.

The buildings are generating enough income to service all their debt, and their debt doesn't mature until 2012.

But, like most of the properties in the Equity Office portfolio, they likely have dropped in value even though property values have rebounded in recent months.

The debt extension is expected to make it easier for Blackstone to come up with an exit strategy for the remaining EOP portfolio, which largely is made up of top-tier buildings in Boston, New York and California.

Blackstone could choose between selling the entire portfolio in an initial public offering or selling it in parts to deal-hungry investors such as publicly traded real-estate investment trusts and sovereign-wealth funds.

The largest building in the portfolio, valued at about $1 billion by some estimates, is 1095 Ave. of the Americas in Midtown Manhattan, whose tenants include insurer MetLife Inc. and law firm Dechert LLP.

The Hilton acquisition was more of a problem for Blackstone because of the huge debt load it took. Nevertheless, Blackstone pulled off a coup earlier this year when it cut Hilton's $20 billion debt load by nearly $4 billion while putting $800 million of new equity into the deal.

Many of the developers and real-estate companies that purchased Equity Office properties from Blackstone have been working through their problems.

Earlier this month, Beacon Capital Partners, which paid $6.3 billion to Blackstone for buildings in Washington, D.C., and Seattle, gained a five-year extension of a $2.7 billion securitized loan, agreeing to put up $200 million in new collateral.

And on Monday, MPG Office Trust Inc., the firm formerly known as Maguire Properties that bought 24 Blackstone properties, announced it would default on a $470 million loan it is trying to restructure for the 54-story Two California Plaza tower in Los Angeles.

Other buyers of the onetime EOP portfolio have been forced to sell some of the properties to stay afloat, or simply to hand over the keys to lenders.

Macklowe Properties, which bought seven buildings in New York from Blackstone in 2007, defaulted on $7 billion in debt and turned them over to lenders in 2008 when the firm couldn't refinance a short-term loan.

Write to Lingling Wei at lingling.wei@wsj.com