Lehman Files for IPO of Apartment Landlord Archstone
Lehman Brothers Holdings Inc. filed to take Archstone Inc. public after battling billionaire Sam Zell to get full control of the apartment landlord amid the strongest demand for rentals in a decade.
Englewood, Colorado-based Archstone, Lehman’s biggest property holding, filed to raise $100 million in an initial public offering. The amount is a placeholder that may change and is used to calculate fees. Besides reducing debt, proceeds from the IPO may be used to finance acquisitions and development, according to yesterday’s filing.
“This is setting the stage for a multibillion-dollar IPO later this year or very early next,” Andrew McCulloch, a managing director at research firm Green Street Advisors Inc. in Newport Beach, California, said in a telephone interview. “Lehman’s likely goal is to eventually liquidate its position in order to pay creditors.”
Lehman, which exited bankruptcy in March, took over all of Archstone in May following a fight with former shareholders Bank of America Corp. and Barclays Plc’s investment-banking unit, which in December tried to sell their joint stake to Zell’s Equity Residential. The lenders had helped finance the $22.2 billion acquisition of Archstone by Lehman and Tishman Speyer Properties LP in October 2007, close to the peak for property prices.
The debt taken on for the acquisition contributed to Lehman’s collapse in 2008 as credit markets seized up, ultimately leaving Archstone controlled by Lehman’s bankrupt estate and the two banks. Bank of America and Barclays Capital had sought to sell their joint 53 percent stake last year, while Lehman favored waiting for an IPO, saying Archstone was worth about $6 billion in equity value, or $1 billion more than the banks estimated.
After Bank of America and Barclays struck an agreement to sell their stakes to Zell, Lehman exercised its right to match the offer and in May reached an agreement to buy the rest of Archstone and pay Zell a breakup fee.
Peter Jakel, a spokesman for Archstone, and Kimberly Macleod, a spokeswoman for Lehman, both declined to comment.
Lehman, run by Chief Executive Officer Richard Fuld when its collapse helped bring on the worst economic slump since the Great Depression, failed because of too much debt and risky real estate investments, according to a bankruptcy examiner’s report. Bryan Marsal, who ran Lehman after its bankruptcy, said in May 2009 that it made more sense to manage properties and maximize their value than liquidate them at “fire sale” prices.
“With full ownership of Archstone, we will now be able to move forward and pursue monetization opportunities for the company,” Lehman Chairman Owen Thomas said in a May 25 statement.
U.S. apartment vacancies fell to 4.7 percent in the second quarter as home foreclosures and stricter mortgage standards drove demand for rental housing, according to Reis Inc. It was the lowest vacancy rate since the end of 2001.
Archstone plans to organize itself as a real estate investment trust. Shares of U.S. apartment REITs (BBREAPT) have gained 246 percent since dropping to a low in March 2009, outperforming the broader Bloomberg REIT Index, which has tripled, and the Standard & Poor’s 500 Index, which has doubled.
Archstone is the 11th-largest U.S. apartment landlord by number of units owned, according to the Washington-based National Multi Housing Council. The company generated $1.12 billion in revenue in 2011, a 7.2 percent increase from a year earlier, yesterday’s filing shows. Archstone’s net loss for the year narrowed to $41.2 million from $909 million.
“We are a little surprised they are trying an IPO with the sizable amount of debt sitting on the balance sheet,” said McCulloch, the Green Street analyst. “It seemed like they had a lot of wood to chop on the asset sale-side” before filing.
Archstone owned all or part of 181 apartment complexes in the U.S., with 59,419 units operating or under construction, as of March 31, according to the filing. Its properties are located mainly in Washington, D.C.; Southern California; the San Francisco area; New York; Boston; Seattle and southeast Florida. The company also owns development land in the U.S. and apartments in Germany.
McCulloch estimates that Archstone’s asset value totals $16 billion to $17 billion, including about $10 billion of debt.