Privatization mania reached a crescendo in late November when Blackstone Group, the largest buyout fund in the world, offered to pay $20 billion for Equity Office Properties Trust (NYSE: EOP), the nation's largest office landlord with a $25 billion market capitalization.

Blackstone offered Equity Office shareholders $48.50 per share, which was an 8.5% premium to the November 17 closing share price of $44.72. If the deal is finalized, the Blackstone Group will own a $40 billion portfolio of office buildings.

It's the latest in a series of major transactions for Blackstone, which has spent more than $53 billion — including the Equity Office deal — on listed real estate portfolios over the past three years. The biggest REIT privatization prior to this newly announced deal was also carried out by Blackstone when it bought office landlord CarrAmerica for $5.6 billion in March of this year.

“The private [equity] players are momentum buyers. When they see a long-term cash flow, they want to buy into it and put plenty of leverage on it,” says Hans Nordby, research analyst at Boston-based real estate consulting firm Property & Portfolio Research. Private equity firms often finance their buyouts by tapping into the target firm's cash flow. “The REITs cannot use nearly as much leverage as these private guys, so I expect Blackstone to put a hefty amount of debt on this portfolio,” adds Nordby.

Aside from the dollar size of this deal, which ratchets up to $36 billion with assumed debt, it's telling that Equity Office is going private. Equity Office chairman Sam Zell, who earned the nickname “grave dancer” in the 1980s for capitalizing on distressed real estate deals, was a huge proponent of real estate securitization.

“Sam Zell was the REIT sector's most visible emissary, promoting the structure and pushing REITs into the S&P 500,” wrote Stifel Nicolaus analyst John Guinee in a Nov. 21 research note on the deal. “If Equity Office is a seller, everyone is a takeout candidate.”

Zell took Equity Office public in 1997 at $21 per share. Four years later, he also helped push for REITs to be included in the S&P 500 Index. Equity Office was officially added in October 2001, and his enthusiasm for the world of property trusts was infectious.

Over the past few years, however, Equity Office ran up against harsh analyst reports and criticism that centered on Zell's “bigger-is-better” approach to the business of owning and managing real estate. In 2005, the company began to sell off assets and recalibrate its portfolio.

During the first six months of this year, Equity Office sold $500 million in assets. The disposition campaign fed rumors that the company was paring itself down for a sale. Last fall, in fact, Zell publicly admitted that a “flirtation” had occurred between Equity Office and giant California pension fund CalPERS. As of Nov. 20, Zell owned 1.9 million shares of company stock.

“You have to remember that Sam Zell is a fiduciary to his shareholders, so he's obligated to consider any offers made on the company,” says Barry Vinocur, editor of independent industry newsletter REIT Wrap.

Vinocur believes that the office REIT market is shrinking for a simple reason: private buyers value listed portfolios higher than the public markets. While Vinocur believes that the gap is narrowing due to rising REIT share prices, he still maintains that many listed office portfolios are undervalued.

One thing is fairly certain: Equity Office won't be the last REIT to take a handsome exit package. Vinocur predicts that as many as five more REITs will be privatized before the end of this year. Specifically, he anticipates that Los Angeles-based Maguire Properties (NYSE: MPG) will likely announce plans to go private before 2006 closes.

“Public real estate is still trading at a discount to the private market,” concludes Vinocur. “Many office owners simply don't need to become REITs anymore because there's so much money coming in from the private side.”

EQUITY OFFICE PROPERTIES TRUST

Headquarters: Chicago

Stock Symbol: EOP

Market Cap: $25 billion

52-week high stock price: $48.77 (11/21/06)

52-week low stock price: $28.78 (12/15/05)

Total Portfolio: 105 million sq. ft.