Archstone: Private Equity's Latest Real-Estate Prize

The apartment REIT will be taken private in a $22 billion deal

Archstone-Smith (ASN) shares rallied May 29 on news that Tishman Speyer Properties, a private real estate investor, and Lehman Brothers (LEH) will acquire the apartment real estate investment trust in a deal worth $22.2 billion, including debt to be assumed and refinanced.

Archstone-Smith's board approved the deal unanimously at a price of $60.75 per share. That's a 19% premium to the stock's closing price of $51.13 on May 24, a day before speculation of the deal first surfaced in the industry newsletter REIT Wrap.

On May 29, Archstone-Smith shares jumped 10% to $60.90 on the New York Stock Exchange. That followed an 8% rise on May 25.

Other apartment REITs got a lift from the news on Tuesday, including AvalonBay (AVB) Equity Residential (EQR), and BRE Properties (BRE).

The Wall Street Journal reported May 29 that a deal was imminent, and that it was likely to be priced higher than Archstone-Smith's market capitalization of $12.3 billion. The newspaper said the buyers would also assume $6.3 billion in debt. The planned deal is expected to close in the third quarter, subject to necessary approvals.

Archstone-Smith, based in Englewood (Colo.), owns 86,000 apartments in New York, Los Angeles, San Francisco, Boston and Washington, D.C. Tishman Speyer owns and operates many well-known properites around the world, including New York City's Chrysler Center and Rockefeller Center, London's CityPoint and Tower Place, Frankfurt's MesseTurm, and Berlin's Sony Center.

Commercial REITs have been attractive to private-equity buyers this year. In February, Blackstone Group announced it would pay $23 billion for Sam Zell's Equity Office Properties Trust, after Vornado Realty Trust (VNO) backed down from the bidding (see, 2/7/07, "At Last, Blackstone Bags Equity Office").

Meanwhile, shares of apartment REITs have pulled back this year amid worries about economic growth and the soft housing market. Standard & Poor's analyst Royal Shepard notes that the industry had higher vacancy rates in the last two quarters, and he believes renters may be starting to resist rent increases that averaged 4-6% in 2006. But he has a positive outlook for the long term, amid "a gradual decline in housing starts through 2008, as well as steady growth in household formation due to increased immigration and as "echo-boomers" enter the work force," he said in a research report.

With private-equity deals heating up even more lately, some experts worry about the high leverage being used and see lower returns down the road (see, 5/29/07, "Private Equity's Big Debt Burden"). But a recipe of depressed stock prices and rosy long-term outlooks looks appetizing to many private-equity players.

Indeed, Wall Street seems to like the Archstone-Smith deal. "We view the price as fair, in view of our $60 calculation of net asset value," said S&P's Shepard in a note on May 29. To reflect the agreement price, he raised his target price for the stock to $61. Right before the deal was announced, he had hiked his target by $5 to $60, and kept his hold recommendation on the stock. "We reiterate our view of ASN as a high quality operator in supply-constrained markets, including New York City and the West Coast," he said in a note.

On May 25, Shepard said he believes the company's 2007 earnings growth will likely be tempered by investments in new ventures and dilution from asset sales. He also noted that the stock was trading just above his $55 12-month target price, or 24 times his 2007 FFO per share estimate of $2.30. "We think the current yield of 3.3% still justifies holding onto existing positions," he said in a note on May 25. (S&P, like BusinessWeek, is owned by the McGraw-Hill Cos. (MHP).)

    Before it's here, it's on the Bloomberg Terminal.