Blackstone’s Acquisition of EOP: Wholesale to Retail Arbitrage

by Greg Barrett

Sam Zell, a commercial real estate legend, spent decades building up a huge portfolio of quality office properties across the U.S.  He owned and operated through a publicly traded REIT vehicle named Equity Office Properties Trust. At the time of its sale to Blackstone, the portfolio consisted of 513 properties totaling over 100M SF. Properties were in primary and secondary markets across the U.S. In this article, I’ll summarize the transaction, explain how the deal was a win-win for both sides, and how it turned out for Blackstone after exiting the deal in 2019.

Zell Sold Equity Office Properties at the Perfect Time & Under Ideal Terms

When you hear that Blackstone made a killing off this deal, you assume that Equity Office got the short end of the stick. However, this was a win-win. Both sides realized it’s not always a zero-sum game, but that businesses with different business models might both be able to achieve a solid outcome.

Sam Zell sold the company in 2007 right before the financial and real estate crisis of 2008. So, he was able to sell the company at the top of the market—imagine what would have happened if he had waited. Keep in mind, that as a REIT structure, EOP was not positioned to be able to sell off the assets like Blackstone—so pursuing Blackstone’s strategy was not an option for EOP.

EOP also benefited from the fact that there were two prospective buyers—Blackstone and Vornado—that were bidding up the price. If Zell hadn’t sold EOP prior to the GFC, then it’s stock price would have plummeted because of the upcoming macroeconomic environment and any issuance of new stock would be terribly dilutive—so selling the company at the top of the market proved very wise.

Additionally, Vornado’s offer consisted of just 55% cash; the remaining 45% was Vornado stock. Zell realized it was the peak of the market, so he opted for the cash instead of stock in another real estate company (that was going to lose value). Long story short, EOP fared well in this transaction. Now let’s dive into how Blackstone made a killing.

Blackstone’s Wholesale to Retail Arbitrage Play

EOP’s stock was trading 25% lower than Zell’s internal valuation of the REIT’s intrinsic value. This created an opportunity for Blackstone to acquire all the assets at a steep discount. However, asset values were high given the mature stage in the market cycle. Despite knowing that asset values were sure to fall shortly after the acquisition, Blackstone moved forward with the deal because it had prior sale commitments from other real estate players for many of the assets. Thus, Blackstone knew it could quickly sell off most of the assets before a shift in the market. Therefore, both EOP and Blackstone benefited from executing transactions at the top of the market.

EOP’s stock was about 25% undervalued, trading around $30 per share, when the value of the assets minus debt pointed to an intrinsic value of about $40 per share.

Blackstone’s Selloff Strategy

Blackstone’s investment thesis involved buying the properties at wholesale prices and selling them for retail prices. Blackstone knew that by selling the assets individually or in relatively small portfolios, they would be able to extract a premium. This is effectively a breakup strategy—which I outline in my blog post “Creating Value Through a Breakup Strategy“—but on a massive scale. They sought to immediately sell the assets to pay down the debt and de-risk the investment. As you can see in the chart below, this was a highly leveraged transaction (LBP). The capital structure included $32B in long-term debt financing which equates to 82% of the purchase price, and another $3.5B in bridge financing. Blackstone only put in $3.2B in equity (10%).

Execution of the Selloff

Before Blackstone had gone under contract to purchase EOP, they had commitments from local and regional REITs and real estate investors to purchase the assets immediately after Blackstone would acquire EOP. Blackstone presented these investors with the assets and asked them what they would buy, and how much they would pay for it. By doing this diligence before agreeing to purchase EOP, Blackstone had confidence that they would be able to execute against their selloff strategy.

Before closing on the transaction, Blackstone had lined up buyers for many of the assets.

For example, on the same day Blackstone acquired EOP, Blackstone sold eight Manhattan office buildings to Macklowe properties for $7B at a 3.6 cap! Another example includes the sales of 5M SF of office space in Atlanta to Barry Real estate Companies and Rubenstein partners for $1B. Blackstone sold 11M SF of class A office property in Seattle and Washington D.C. to Beacon Properties for $6.35B. The same week Blackstone close on EOP, they sold 2.1M SF of property in San Diego to the Irvine Company for about $1B.

Within three months of the acquisition, Blackstone had sold two-thirds of the real estate ($27B). Most of those assets were riskier assets that wouldn’t fare as well during a downturn. Blackstone only wanted to keep the best of the best assets.

Within six months of the acquisition, Blackstone had sold $30B in assets. This reduced the per square foot basis down to $257 PSF from a basis of $390 PSF at acquisition. Considering Blackstone sold off the weaker properties first, you can see how they were able to achieve positive arbitrage outcomes. If they had used all the proceeds to pay down debt (not sure if this is what happened), they would have reduced the debt to just $5.8B. Their LTV dropped from above 90% at acquisition to about 64%. 

During the real estate downturn that commenced in 2008, Blackstone did very little selling. Asset values were suppressed, capital was not flowing to office assets, and thus they had to hold onto those assets until market conditions improved. They waited for the market to improve, then they went on another selling spree. By the end of 2016, Blackstone had sold a total of $44M worth of real estate. Keep in mind, at that time they still had 8.5M SF of assets under management. This indicates how successful the wholesale to retail arbitrage play had been. They made a $5B profit and still had about $2B worth of real estate.


In 2019 Blackstone sold off the remaining office assets included in the purchase of EOP. Again, perfect timing because we know what happened to the office market starting in March 2020. When it was all said and done, Blackstone sold the $39B EOP portfolio for $46B making a $7B profit. They were able to triple investor capital. That sounds great, but you have to remember that it took them until 2019 to fully divest of the assets. My best guess at an IRR on the deal is about 10%. Again, even though they made a profit of $7B, the time it took to get there had a big impact on the IRR.

What Can We Learn From This Deal

This is an interesting example of a breakup/spinoff strategy at the highest level. It’s an example of how a private equity firm can buy a publicly traded REIT at a discount to the intrinsic value of the real estate. It’s also an example of how to buy a portfolio at a wholesale price, the immediately sell most of it at retail prices. Smaller investors can use a similar playbook to spin off assets or portions of a property in order to pay down debt and de-risk the investment.

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