Boston pays $3.9b for Macklowe buildings

Real Estate Weekly, May 28, 2008 by Daniel Geiger

Boston Properties, already the darling of REIT analysts despite the fact that most predict that real estate trusts will continue to sink in value due to the slowing economy, garnered rave reviews for its purchase over the weekend of a group of office buildings from Harry Macklowe, including the fabled General Motors Building.

According to reports, Boston Properties and its investment partners reached a deal with Macklowe in the early hours of Saturday morning to buy the GM Building and three other midtown office towers that were part of Macklowe's holdings, 540 Madison Avenue, 125 West 55th Street and Two Grand Central Tower, for $3.95 billion.

Boston Properties said that it will hold a 49% interest in the towers with the majority stake ostensibly going to its partners in the transaction, who were identified in a New York Times report as Goldman Sachs and investment funds for the Middle Eastern countries Kuwait and Qatar.

The deal values the GM Building at around $2.9 billion, below the over $3 billion price tag that Macklowe had first sought for the trophy building when he put it on the market in recent months. Macklowe was forced to sell the building below his original target as part of an emergency effort to extricate himself from a mountain of debt he had arranged to buy a seven-building portfolio for $7 billion in 2007, including a $1.4 billion bridge loan with the investment firm Fortress.

A source familiar with Macklowe's situation said that if he hadn't been able to sell the properties, he would have had to declare bankruptcy next month, a situation that would have been catastrophic for him because Fortress could have seized his personal assets as collateral.

Bank of America REIT analysts Mitchell Germain and Christy McElroy issued a report on Monday noting the purchase price of the GM Building and how--although it represents the most ever paid for a single office building--the company appears to have gotten a strong deal.

"In our view, the GM Building does not represent an accurate proxy for core office pricing given its iconic status; though at $1,450 per square foot, the price fell 15-20% short of Macklowe's original expectations," the report said.

"However, BXP's [Boston Properties'] acquisition of the other three assets for $645 per square foot is well below the $800 per square foot plus valuation like--quality assets have garnered recently, indicating Macklowe was likely under pressure to close the deal in order to satisfy his debt obligations."

According to the BofA report, Boston Properties is in a strong position even if the office leasing market slows down, which appears to be the case so far this year. Only 8% of the company's Manhattan portfolio is scheduled to rollover between now and 2011. The new acquisitions won't create much vacancy. The report said that 125 West 55th and Two Grand Central Tower are fully leased. The GM building will have 1% of its space come available by 2010. 540 Madison has the most available space, the report said, around 10% of its 292,000 s/f.

"While NYC fundamentals have become less compelling as slowing demand and increasing sublease space are expected to cause rent growth to moderate, BXP's NYC portfolio should be resilient," the report said.

Boston Properties owns commercial buildings nationally in large office markets. But the strength of its Manhattan holdings is critical to the company's earning. BofA said that the firm derives a third of its earnings from its dense collection of towers in midtown where the firm owns prominent buildings like the Citigroup Center and 399 Park Avenue.

BofA gives Boston Properties' shares a buy rating. Boston Properties shares rose above $97 per share in early trading Tuesday but stink back down by a dollar to hover near where the firm's stock was trading on Friday.