Jones Lang LaSalle
Trizec's Deal Was All About Timing
Acquisition of Office REIT Was Expected by Analysts, But in Months, Not Weeks
By JENNIFER S. FORSYTH
June 21, 2006; Page B7
After the string of sizable deals that have taken place among real-estate stocks over the past two years, market experts weren't shocked that a company as big as Chicago-based Trizec Properties Inc. could be acquired. What surprised them was the timing.
On June 5, Trizec Properties, a real-estate investment trust that specializes in U.S. office buildings, announced it and its sister company, Trizec Canada, had entered into an agreement to be sold to Brookfield Properties and the Blackstone Group, a private equity firm. The deal -- $4.8 billion in cash and the assumption of about $4.1 billion in debt -- shows there is almost no real-estate company too large to be bought. It also shows there are few deals too complex to pull off.
Yet the announcement still caught many investors off guard. "I think a lot of people weren't surprised to see Trizec listed among acquisition candidates, but I think a lot of people were surprised to see it take place this year," says Jay Rosenberg, co-portfolio manager of FAF Advisors. Says Peter Munk, chairman of both Trizec Properties and Trizec Canada: "That is the problem with expert opinion." Once Mr. Munk decided this was the perfect time to sell a big real-estate company, the deal was brokered in weeks.
But a number of decisions made by Trizec executives for the benefit of their own operations ended up smoothing the way for Brookfield and Blackstone to buy the company. "We created value by looking beyond the obvious and making strategic choices designed to increase Trizec's worth," says Tim Callahan, chief executive of Trizec Properties.
One perceived obstacle was the tax constraints for the Canadian shareholders. When Mr. Munk made the decision to convert his closely held TrizecHahn Corp. into a publicly traded U.S. REIT in 2002 and rename it Trizec Properties, company executives had to ensure that a majority of the owners were U.S. investors for it to be considered a domestically controlled REIT -- an Internal Revenue Service designation that has favorable tax consequences for foreign investors.
Trizec executives set up an intricate two-company system in which the foreign investors could own stock in a company to be traded on the Toronto Stock Exchange, called Trizec Canada. Trizec Canada, in turn, would hold 38% of Trizec Properties' stock, and Trizec Properties would be traded on the New York Stock Exchange. The structure allowed the Canadian investors to avoid paying a U.S. tax known as the Foreign Investment in Real Property Tax Act of 1980, if they held the shares until 2007. At that time, Canadian shareholders can convert their shares in Trizec Canada to Trizec Properties free of the FIRPTA taxes. That is why real estate experts expected things to get interesting for Trizec by 2008.
But tax issues turned out not to be headaches because Canadian investors could simply trade their Trizec Canada stock. And as long as the buyers were willing to buy both companies and live with the two-company structure through 2007, the deal could go forward. The Brookfield/Blackstone joint venture is buying Trizec Properties and Brookfield alone will buy Trizec Canada.
Another perceived obstacle: The Trizec portfolio couldn't easily be chopped up and sold off in pieces due to another tax rule related to Trizec's efforts to get permanent REIT status. For companies operating in the U.S. such as Trizec that had converted from a "C corporation" (which pays corporate taxes) to a REIT (which doesn't pay corporate taxes if it distributes its earnings to shareholders) there is a 10-year span during which its original assets can't be sold off for cash without paying steep taxes, according to Gil Menna, an attorney with Goodwin Procter who advised Brookfield.
Trizec wouldn't have been attractive to buyers if the new owners couldn't sell off weak properties. Blackstone often buys a portfolio in bulk, adds leverage, and then sells some buildings to investors in local markets. But Trizec Properties overcame that obstacle with the way it acquired 13 properties from Los Angeles-based Arden Realty Inc. as part of General Electric Co.'s $3.2 billion acquisition of Arden.
Trizec structured that purchase as a "reverse 1031 exchange," which refers to a part of the federal tax code. In a typical 1031 exchange, a property seller defers capital-gains taxes by putting the proceeds from a sale into a new property within 180 days. In a "reverse" 1031 exchange, the buyers identify the properties they will buy before they have sold any others, but still get the tax deferral.
By acquiring the Arden properties in this manner, Trizec freed itself to sell a number of properties that weren't in its core markets -- without taking a corporate tax hit, says Mr. Menna, who spoke about the transaction at a recent REIT conference. What was planned as a move to help Trizec's balance sheet also proved useful in the acquisition deal. It allows the buyers to sell some of the properties without tax worries.
J.P. Morgan and Morgan Stanley acted as financial advisers to Trizec Properties. Bear, Stearns & Co. and Merrill Lynch were among Brookfield's advisers.
Write to Jennifer S. Forsyth at jennifer.forsyth@wsj.com1
Trizec's Deal Was All About Timing
Acquisition of Office REIT Was Expected by Analysts, But in Months, Not Weeks
By JENNIFER S. FORSYTH
June 21, 2006; Page B7
After the string of sizable deals that have taken place among real-estate stocks over the past two years, market experts weren't shocked that a company as big as Chicago-based Trizec Properties Inc. could be acquired. What surprised them was the timing.
On June 5, Trizec Properties, a real-estate investment trust that specializes in U.S. office buildings, announced it and its sister company, Trizec Canada, had entered into an agreement to be sold to Brookfield Properties and the Blackstone Group, a private equity firm. The deal -- $4.8 billion in cash and the assumption of about $4.1 billion in debt -- shows there is almost no real-estate company too large to be bought. It also shows there are few deals too complex to pull off.
Yet the announcement still caught many investors off guard. "I think a lot of people weren't surprised to see Trizec listed among acquisition candidates, but I think a lot of people were surprised to see it take place this year," says Jay Rosenberg, co-portfolio manager of FAF Advisors. Says Peter Munk, chairman of both Trizec Properties and Trizec Canada: "That is the problem with expert opinion." Once Mr. Munk decided this was the perfect time to sell a big real-estate company, the deal was brokered in weeks.
But a number of decisions made by Trizec executives for the benefit of their own operations ended up smoothing the way for Brookfield and Blackstone to buy the company. "We created value by looking beyond the obvious and making strategic choices designed to increase Trizec's worth," says Tim Callahan, chief executive of Trizec Properties.
One perceived obstacle was the tax constraints for the Canadian shareholders. When Mr. Munk made the decision to convert his closely held TrizecHahn Corp. into a publicly traded U.S. REIT in 2002 and rename it Trizec Properties, company executives had to ensure that a majority of the owners were U.S. investors for it to be considered a domestically controlled REIT -- an Internal Revenue Service designation that has favorable tax consequences for foreign investors.
Trizec executives set up an intricate two-company system in which the foreign investors could own stock in a company to be traded on the Toronto Stock Exchange, called Trizec Canada. Trizec Canada, in turn, would hold 38% of Trizec Properties' stock, and Trizec Properties would be traded on the New York Stock Exchange. The structure allowed the Canadian investors to avoid paying a U.S. tax known as the Foreign Investment in Real Property Tax Act of 1980, if they held the shares until 2007. At that time, Canadian shareholders can convert their shares in Trizec Canada to Trizec Properties free of the FIRPTA taxes. That is why real estate experts expected things to get interesting for Trizec by 2008.
But tax issues turned out not to be headaches because Canadian investors could simply trade their Trizec Canada stock. And as long as the buyers were willing to buy both companies and live with the two-company structure through 2007, the deal could go forward. The Brookfield/Blackstone joint venture is buying Trizec Properties and Brookfield alone will buy Trizec Canada.
Another perceived obstacle: The Trizec portfolio couldn't easily be chopped up and sold off in pieces due to another tax rule related to Trizec's efforts to get permanent REIT status. For companies operating in the U.S. such as Trizec that had converted from a "C corporation" (which pays corporate taxes) to a REIT (which doesn't pay corporate taxes if it distributes its earnings to shareholders) there is a 10-year span during which its original assets can't be sold off for cash without paying steep taxes, according to Gil Menna, an attorney with Goodwin Procter who advised Brookfield.
Trizec wouldn't have been attractive to buyers if the new owners couldn't sell off weak properties. Blackstone often buys a portfolio in bulk, adds leverage, and then sells some buildings to investors in local markets. But Trizec Properties overcame that obstacle with the way it acquired 13 properties from Los Angeles-based Arden Realty Inc. as part of General Electric Co.'s $3.2 billion acquisition of Arden.
Trizec structured that purchase as a "reverse 1031 exchange," which refers to a part of the federal tax code. In a typical 1031 exchange, a property seller defers capital-gains taxes by putting the proceeds from a sale into a new property within 180 days. In a "reverse" 1031 exchange, the buyers identify the properties they will buy before they have sold any others, but still get the tax deferral.
By acquiring the Arden properties in this manner, Trizec freed itself to sell a number of properties that weren't in its core markets -- without taking a corporate tax hit, says Mr. Menna, who spoke about the transaction at a recent REIT conference. What was planned as a move to help Trizec's balance sheet also proved useful in the acquisition deal. It allows the buyers to sell some of the properties without tax worries.
J.P. Morgan and Morgan Stanley acted as financial advisers to Trizec Properties. Bear, Stearns & Co. and Merrill Lynch were among Brookfield's advisers.
Write to Jennifer S. Forsyth at jennifer.forsyth@wsj.com1
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