EOP

Vornado was Company C in the Equity Office Properties Trust (EOP) December 29, 2006 proxy statement - no secret there. I approached EOP's Chairman, Sam Zell (we're friends - but remember, business is business and this little morsel was really big, big business) in July 2006. This approach was in response to market rumblings that Sam was entertaining a conversation with, it turned out to be, Company B and that something was likely up.

Now poor Sam had been really beaten up in EOP.⁽⁶⁾ EOP was born out of brilliantly timed distressed purchases, typical for Sam, of great office buildings in the early and mid 1990's, which were then rolled up into a public company, which then grew by acquisitions in Boston, the Pacific Northwest and, in fact, all over the country. Sam's quite logical belief was that the largest, lowest "debtest� (think competitive advantage from lowest cost of capital) company owning the best buildings (think premium for quality) in each of the top, say, 25 cities (think national footprint) would be the institutional darling, rewarded with the highest multiple. Lots went wrong - it was not to be, but enough about all that ancient history.

Our idea was born out of our long-held belief that relentless socio-economic trends in America have and will continue to favor a handful of coastal cities⁽⁷⁾ for real estate




(6) He turned out a real winner in the end.
(7) The cities that our smart, ambitious young people flock to, the ones who wear black.

investing. In other words, the mantra "location, location, location" in our minds is now "location, location, location in New York, Washington and California." EOP had assembled the largest collection of Class A assets in New York, Washington, Boston and Northern and Southern California. It was the quality and scale of their assets in these few cities that we sought. Our investment thesis was also driven by our belief that these assets are scarce (think Park Avenue, Sixth Avenue or West LA) and were priced well below replacement cost in rapidly rising rental markets.

Our original proposal to Sam was a merger where the surviving company would retain both our great office assets and theirs in the coastal cities. The balance of EOP's assets would be sold (and some of Vornado's as well) and, likely, Vornado's other assets would be separated, thus creating the largest real estate company in the world with pure-play, best-in-class office assets, in scale, in each of the select American coastal cities. Newco would have a pristine balance sheet with immense unused financial capacity and be the beneficiary of rent growth as far as the eye could see and it would be the institutional darling at the industry's premier multiple. My one slight miscalculation - Sam wanted to sell, not merge, and he did.