Jeff Johnson: What's Driving the Wheeling and Dealing of Equity Office Properties?

Some observers are scratching their heads right now over this year's surge in sales and acquisitions by Equity Office Properties Trust. By mid-year, Equity Office had sold 9.1 million sq. ft. of assets for $1.6 billion — exiting Cleveland and other markets in the process. During the same period, the company paid $860 million to acquire 2.7 million sq. ft. in San Francisco and other 24-hour cities.

Equity Office expects to spend another $505 million by year's end to buy an 80% stake in 1095 Avenue of the Americas, better known as the Verizon Building, in New York. What is the nation's largest office owner trying to accomplish with the flurry of deals? NREI recently talked with Jeffrey Johnson, Equity's executive vice president and chief investment officer, about the company's investment strategy.

NREI: Equity is on track to complete nearly $3 billion in deal volume this year alone, and your five-year plan proposes $1 billion to $2.5 billion in transactions each year thereafter. What will that accomplish?

Johnson: We'd like to grow the company, on average, with net investments of $500 million each year. We are first and foremost a value investor, meaning we buy and sell based on a comparison of an asset's long-term cash flow with present value. So depending on the market, some years we will be a net seller and some years we will be a net buyer. Our goal is not to just do a lot of volume, but to make every sale or purchase accretive to the portfolio.

NREI: One of your recent sales was the BP Tower, a Class-A office building in Cleveland. How was selling that property accretive to the portfolio?

Johnson: That's a great example of a phenomenal asset that was not a strategic value for us because Cleveland is not strategic for us. We make a lot more money, in terms of cost savings, retaining tenants and providing tenants with what they need, in markets where we have a significant market presence.

NREI: Is market size a factor in deciding where you will concentrate your holdings?

Johnson: As a $28 billion company, we need to be in larger markets because you have to have a large transaction volume to impact a 117 million sq. ft. portfolio. We could buy and sell in a market the size of Indianapolis right now, for example, and it wouldn't even move the needle in respect to the size of our overall portfolio.

NREI: Equity has announced its intention to pay $505 million for 1.03 million sq. ft. at 1095 Avenue of the Americas. Is that a good price when the current occupant, Verizon, plans to vacate next year?

Johnson: We view it as a redevelopment play. We are going to put about $170 million more into the building to re-tenant it and make it an Equity Office property. With Verizon on a short-term lease, the rate of return on our total cost is about 6%, but if we can achieve what we believe are market rental rates today, we're going to get an 8.5% or 9% return on our total cost. Our investment strategy overall is about improving the quality of our portfolio. We're not going to get a steal on anything today, so we're making sure we buy very high quality at a fair price.