Continuing its push into REIT financing, J.P. Morgan & Co. is leading a $1.5 billion short-term loan for real estate giant Sam Zell.
The banking company, which co-advised Zell's Equity Office Property Trust for its blockbuster acquisition of Beacon Properties Corp., is emerging as a large player in the lucrative business of lending to real estate investment trusts.
J.P. Morgan is acting as sole leader on the Equity Office loan, which will be the largest unsecured loan it has ever made to a REIT.
Equity Office said Monday that it would buy Boston-based Beacon for $4 billion of stock and assume $883 million of its debt. The deal is the biggest office REIT merger ever.
Merrill Lynch & Co. also co-advised Equity Office on the deal. It underwrote the REIT's $525 million initial public offering in early July.
Merrill had also been set to lead a $300 million junk bond offering for Beacon, but the transaction, priced Sept. 11, was canceled once the merger was announced.
This is the fifth advisory assignment Morgan has landed from Mr. Zell as he has embarked on an acquisition tear, rounding up properties for his three REITs, which include Equity Residential Properties Trust, the largest owner of apartment properties, and Manufactured Home Communities, one of the biggest owners of land rented to manufactured-home companies.
Though Equity Office is only 22% leveraged-far below the 70% to 80% leverage ratios that were common in the 1980s-the loan remains an aggressive move for the blue-chip bank.
Morgan risks being stuck with the loan if interest rates should spike, which could affect real estate valuations. That would make other lenders less willing to buy pieces of the loan.
But other bankers do not see trouble on the horizon, especially with lenders' renewed enthusiasm for REITs.
"It's quite a coup for" Morgan, said Matthew Galligan, a managing director in Fleet Bank's real estate corporate finance group. "This deal is literally going to rock the market."
Equity Office will use proceeds of the loan, which has a nine-month maturity and an option to extend for three months, to pay off Beacon's existing debt.
The REIT sector has been active for lenders. Just last week, BT Alex. Brown Inc. agreed to make a $1.2 billion loan to Phoenix-based Starwood Lodging Trust. The loan will back Starwood's $780 million cash and stock acquisition of Westin Hotels & Resorts.
So many lenders have opened their checkbooks to REITs that the premium on lending to the sector has been squeezed. The typical spread on a loan to an investment-grade REIT is 80 basis points over the London interbank offered rate, lenders said.
While that's still a premium over the minuscule spread on other corporate loans, it's far below the 225 basis points over Libor that bankers were getting three years ago.
And real estate experts expect more REIT megamergers to come, as the trusts push to satisfy the liquidity demands of their investors.
The Zell deal "is the single most important event we've seen in five years for consolidation in the REIT industry," said REIT analyst Steve Hash, a senior vice president at Lehman Brothers Inc.
"Consolidation is going to start at the high end," he said, "as the big, successful companies, the leaders, see the benefits and the smaller ones will follow."
Daniel Alpert, managing director and principal at Westwood Capital, a New York investment bank that specializes in real estate, agreed, saying, "There is a huge benefit to consolidation in the office sector.
"No one is playing it like Zell is. In office, the size of assets is so enormous, and diversity is really meaningful, so consolidation makes a lot of sense."