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Cabot Accepts $2.1 Billion Buyout Offer from CalWest

CalPERS and RREEF joint venture agree to pay $24 per share for Boston-based industrial REIT.
October 29, 2001
Ferdinand Colloredo-Mansfeld, Chairman and CEO, Cabot Industrial Trust (NYSE: CTR)
Ferdinand Colloredo-Mansfeld, Chairman and CEO, Cabot Industrial Trust (NYSE: CTR)
The thinning ranks of REITs grew a little thinner today as Boston-based Cabot Industrial Trust (NYSE: CTR) announced it accepted an unsolicited buy-out offer from CalWest Industrial Properties, a joint venture between the California Public Employees' Retirement System (CalPERS) and RREEF, a real-estate pension fund adviser in Chicago that manages CalWest.

The CalWest venture agreed to pay $24 per share, all cash, for Cabot Industrial. The total value of the transaction, including Cabot's debt and preferred securities, totals approximately $2.1 billion. Closing is expected in December 2001. The offer represents approximately a 20% premium to Cabot's closing share price on Friday, October 26, 2001.

Formed in 1998, Cabot Industrial Trust owns approximately 42 million square feet of industrial property in 19 markets as of September 30, 2001 comprising 372 warehouse, distribution or workspace properties . IBM Personal Pension Plan Trust owns almost 20% of the firm.

JP Morgan acted as exclusive financial advisor to Cabot Industrial Trust and Mayer, Brown & Platt acted as its legal advisor. For CalWest, Goldman, Sachs acted as exclusive financial advisor, CB Richard Ellis acted as real estate agent, and Orrick, Herrington & Sutcliffe acted as its legal advisor.

"Cabot created a high quality industrial property portfolio concentrated in several of the best markets in the country," commented Charles B. Leitner, principal at RREEF. "We see excellent opportunities in the industrial property sector, and by acquiring Cabot Industrial Trust we are able to complete one of the largest acquisitions ever in that sector."

Although Cabot Industrial met analysts'expectation in its recent third quarter report, the company was facing a number of challenges confronting many office and industrial REITs. An impressive increase in overall rent growth of 19.9% was offset by a big slowdown in leasing activity levels and a 220 basis point decline in total occupancy.

Adding to the uncertainty was the impact of the slowdown on the REIT's under construction projects which are 59% preleased and the bankruptcy of Exodus Communications, one of Cabot Industrial's biggest tenants.

Despite these uncertainties, given its size and strong balance sheet, Cabot was considered by most analysts as a potential purchaser of other industrial property owners rather than a seller. The REIT reportedly had ample internal funding and the option of tapping up to $270 million through various joint venture partners.

The deal for Cabot would be at least the second major acquisition for CalWest. Last year, the RREEF-managed venture agreed to acquire Pacific Gulf Properties, another industrial REIT with major holdings on the West Coast, for approximately $812 million. According to brokers, RREEF also has an agreement with Equity Office Properties to buy the former industrial portfolio of Spieker Properties. A RREEF spokesperson said she could not comment on that deal.

The pending Cabot Industrial sale followings a string of sales and mergers among REITs as projections for falling demand for office and industrial space make REIT investors increasingly jittery, especially for those with a high percentage of leases expiring in the near future. Many companies are in contraction mode and either not renewing leases as they come due or putting space up for sublease.

End of a Long Lineage

Although Cabot Industrial Trust only went public in January 1998, its forerunners stretch back decades to Cabot, Cabot & Forbes, the original Boston "blue blood" private real estate development company best known for pioneering the planned industrial park. CC&F started building industrial parks along Route 128 around Boston in the 1950s and 1960s and successfully exported the concept across the country.

Cabot Industrial's Chairman and CEO Ferdinand Colloredo-Mansfeld began his real estate career in 1970 when he joined Cabot, Cabot & Forbes. The Harvard Business School graduate quickly rose through the ranks, becoming its chief financial officer in 1973, chief operating officer in 1974 and chief executive officer in 1976, a position he held until his retirement from that company in 1989.

In 1986, Colloredo-Mansfeld established a pension advisory affiliate, Cabot, Cabot & Forbes Realty Advisors (now Cabot Advisors), to offer industrial investment expertise to the burgeoning corporate and public pension fund investment sector. At the time, pension funds had very little capital allocated to industrial property.

Colloredo-Mansfeld and others helped "sell" the attractiveness of industrial property as a stable, dependably performing asset class to pension funds. Under Colloredo-Mansfeld, Cabot Advisors eventually eclipsed the development firm, growing to about $1.1 billion in assets under management.

In 1997, Cabot Advisors restructured its business and obtained the consent of many of its clients to convert their ownership stakes into REIT shares. The IPO was held in January of 1998 with Colloredo-Mansfeld as its Chairman and CEO.

In an interview earlier this year with The Wall Street Transcript, an investment newsletter, Cabot Industrial's Chief Financial Officer Franz Colloredo-Mansfeld (Ferdinand's son), said a key differentiator in the company's investment strategy was its focus on what it called "workspace properties" which he described as industrial properties used by businesses for value-added activities and not just for distribution.

"Those kinds of activities require employees (on site), and those businesses are very sensitive to their location. We believe that by owning these kinds of properties in our portfolio we'll see rising rents, rents that will increase faster than the average for industrial property rents because these businesses are so sensitive to those locations," Colloredo-Mansfeld said.
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