I'm currently reading King of Capital and I am fascinated by the EOP deal. Briefly one thing about me: I will shortly enter college in Switzerland with a finance / economics major and my whole PE knowledge stems from King of Capital and some investopedia articles - just so you know I'm not familiar with all the terms yet.
In the EOP deal, Blackstone partner gray and his friend Leventhal were convinced that the deal will be profitable due to the "replacement theory."
The replacement theory says (p. 245): ... in the best markets, where it was hard to build new offices, you would make money over the long run if you bought buildings below their replacement cost, because prices had a natural tendency to rise where the supply couldn't expand much." ... "an explose rise in construction costs on the coasts made it a good time to invest, even though building prices had been shooting up."
So it basically says that buildings / properties in great locations (where few new properties can be built) will be profitable despite buying at a market high / high price, right?
Blackstone continued to sell off all of EOP's assets in mediocre areas (and made good money because of the high real estate prices) and only kept the properties in prime locations (east coast (NY) & west coast (SF).) It did however sell the majority of its properties in New York - was the only reason for selling these because they received such an outstandingly high bid on them (6.6B)? I first thought that they would keep the NY properties because it correlates with the "keep the prime locations" approach but a 30x cash flow offer might have swung them.
Am I understanding this correctly? Please feel free to add additional insight, as I said, I am new to finance and am fascinated by PE! Can't wait to continue reading and then diving into Barbarians at the Gate and learning the accounting / finance basics later on.
Thank you for your time :)