Zell Embraces New Approach In Acquisitions.

Real estate mogul Sam Zell is on a multibillion-dollar buying spree in Los Angeles and elsewhere in California, and he's paying market prices, an uncharacteristic practice for someone nick-named "the grave dancer" for his proclivity to buy distressed assets from dead ordying companies at bargain-basement prices.

Chicago-based Equity Office Properties Trust of which Zell is chairman and the largest shareholder, last week consummated its $7.2 billion acquisition of Spieker Properties Inc., whose holdings are concentrated in California. And now he is reportedly negotiating to buy MaguirePartners' 5.6 million-square-foot Los Angeles portfolio for about $1.6 billion.

In short, Zell seems intent on building Equity Office's portfolio for the long term and increasing its status as America's largest corporate landlord, and his focus is squarely on the West Coast.

One reason the Zell-led real estate investment trust might be willing to spend nearly $9 billion in less than a year to build its collection of class-A office properties is to gain a slot on the Standard & Poor's 500 Index.

"EOP is already by far the largest REIT," said John Lutzius, senior analyst at Green Street Advisors Inc. in Newport Beach. "If Sam is successful in creating a large, quality organization that becomes part of the S&P. 500, the share price would benefit 'from that...He talks about liquid real estate that can be sold on the New York Stock Exchange."

And Zell would benefit personally from that increased liquidity, considering he controls more than 14 million shares of Equity Office.

"There definitely is a theory here that bigger is better," said Carl Tash, chief executive of Cliffwood Partners LLC in Brentwood. "I don't think (Zell) minds if his timing on downtown L.A. is early or isn't perfect. He's trying to attract pension funds and mutual funds (to buy Equity Office stock)."

Still, with $30 billion in assets and a market cap of $9.8 billion, HOP would rank No. 150 on the S&P 500, so taking control of more property wouldn't necessarily impress S&P.

Equity Office Properties reported net income of $152.4 million (39 cents per diluted share) for the first quarter ended March 31, up from $116.9 million (37 cents a share) in 'the like year-earlier quarter.

First-quarter revenues were. $663.2 million, vs. $468.9. million in the first quarter of 2000.

Zell and other Equity Office officials aren't talking about the motives behind the Spieker deal or the company's pursuit of Maguire's L.A. holdings, saying company policy prohibits comment on' matters not publicly announced.

However, in a January 2000 interview with the Business Journal, Zell said he would be increasing the L.A. assets in Equity Office's portfolio and hinted that it could come in the form of direct acquisitions and acquisitions of other companies.

At the time, Zell said that downtown L.A. has irreplaceable infrastructure and, "given the right transaction, we'd buy something else in downtown L.A."

But Equity Office agreed to buy Spieker Properties last February, when the office market, particularly in Spieker's Northern California base, was softening greatly. And Zell, who real estate sources say is in final negotiations on a $1.6 billion deal for almost all of Maguire's properties, is 'adding to. his risk in the long-soft downtown L.A. market.

The pending deal with Maguire, which would be by far the biggest single commercial property transaction in Los Angeles. history, involves 5.6 million square feet of office space, most of it downtown, and 'a 350-room hotel in Pasadena

"It's hard to acquire assets; so when you have someone who needs to sell, you have an opportunity to grab a significant amount of square footage at one time," said davis Aubuchon, of AG Edwards & Sons.

Primping for S&P is one thing, but since Maguire urgently needs cash before loans on various properties downtown come due, there 'is still a bit of the old Zell in this latest activity.

For one thing, the properties might not be on the market if Maguire didn't desperately need the 'cash. For another, it's not like they're in Manhattan or Chicago or another homerun downtown metro market.

"Downtown L.A. has been an area that has really been left behind in some respects by the strong real estate conditions nationwide," Lutzius said.

Another impetus for Zell's zeal for Maguire's portfolio is his enthusiasm for the broader market. Southern California remains one of the better real estate markets in the country, and in fact was all the rage at a recent meeting of the. National Association of Real Estate Investment Trusts.

"The latest news out of Southern California is it's still pretty strong and it didn't experience the same peaks that Northern California did," said one analyst who attended the conference. "Therefore, it's not expected to experience the troughs, either. Downtown L.A. is tough, but everything's attractive at the right price."

As a REIT, Equity Office is in the fortunate position of having financial clout, allowing it to step into the market at a time when, for instance, pension funds and other similar institutional investors are holding back.

Whatever his motivation, Zell would be taking a pretty big risk by taking on Maguire's downtown assets.

"The downtown area has traditionally not' been an area where people want to work because it's hard to commute to," Aubuchon said. "It's always been an area investors have looked at with a cautious eye."

Equity Office's L.A. Holdings
Property, Location                   Square Footage
Two California Plaza, Downtown          1.4 million
SunAmerica Center, Century City             780,063
550 South Hope St, Downtown                 566,434
10960 Wilshire Blvd., Westwood              543,804
10880 Wilshire Blvd., Westwood              534,047
Pasadena Towers, Pasadena                   439,367
700 North Brand, Glendale                   203,000
Wilshire Palisades, Santa Monica            187,000
Janss Court, Santa Monica                   126,000
Searise Office Tower, Santa Monica          122,000
Commerce Park, Santa Monica                  94,000
429 Santa Monica Ctr., Santa Monica          83,000
Does not include Spieker holdings.
Source: Equity Office Properties