Lehman’s Bust-to-Boom Archstone Seen Returning at Peak
Lehman Brothers Holdings Inc., whose $22 billion purchase of Archstone Inc. (ASN) at the height of the property boom helped sink the bank, is now trying to sell the apartment owner at another peak in potentially the largest initial public offering of a real estate investment trust.
Archstone announced the plan last month after shares of U.S. apartment REITs reached a record following an almost 300 percent rally since March 2009. Investors have turned less bullish because of the prospect rent increases will slow as the Federal Reserve pushes mortgage rates to record lows and more Americans buy homes. A Bloomberg apartment REIT Index had its worst losing streak this month since 2008 and has declined 2.9 percent since the Aug. 10 announcement through yesterday.
“When you go public you want the next few years to look really bright,” said Richard Anderson, an analyst with BMO Capital Markets in New York. “You want to be able to tell a story about accelerating growth prospects in the first couple of years out of the box. While fundamentals are very good across the entire country, it’s more likely the good growth rate is on a decelerating path.”
Lehman is seeking to extricate itself from property investments ranging from Detroit office towers to condos in Hawaii to help raise $53 billion to repay creditors. It’s prepared to keep some of its holdings at least through 2015 to capitalize on recoveries in residential and commercial markets. With Archstone, the eighth-largest apartment manager in the country, it’s moving about as fast as it can. The defunct investment bank exited bankruptcy in March and took full control of Englewood, Colorado-based Archstone in June after battling former investors and billionaire Sam Zell’s Equity Residential.
Kimberly Macleod, a Lehman spokeswoman, and Peter Jakel for Archstone, declined to comment.
Lehman paid $3 billion for the remaining 53 percent of Archstone it didn’t own, almost five years after buying and helping finance the takeover of the REIT, then known as Archstone-Smith Trust, with Tishman Speyer Properties LP.
An initial public offering may raise $3 billion to $4 billion, Rod Petrik, an analyst with Stifel Nicolaus & Co. in Baltimore, said in an Aug. 23 note.
That would be the largest U.S. IPO since Facebook Inc. (FB) sold $16 billion worth of stock in May and about twice the size of the biggest initial share sale of a U.S. REIT, according to data compiled by Bloomberg. Douglas Emmett Inc. (DEI), the Santa Monica, California-based owner of office and multifamily properties, raised $1.6 billion in a 2006 offering.
Wall Street is pushing to take public companies tied to the housing market. Trulia Inc. (TRLA), the operator of a listings website, raised $102 million in an IPO and surged 41 percent in its trading debut last week. Domus Holdings Corp., the parent company of Realogy Corp. which has rights to brokerage brands including Century 21 and Sotheby’s International Realty, announced plans in June to raise $1 billion.
Whereas those companies may benefit from a housing market rebound, rising home demand is weighing on apartment REITs (BBREAPT), which like other publicly traded real estate investment trusts, must distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends.
The premium investors are willing to pay for multifamily stocks over other REITs declined to 13 percent in August from 35 percent a year earlier, Petrik said in his note.
Apartment REITs were little changed today after rising 0.2 percent yesterday, the first gain in eight days, following the longest consecutive decline since October 2008. That helped trim this year’s return to 5 percent including reinvested dividends, according to Bloomberg REIT index data.
The companies have been the worst performers this year among all other publicly traded REITs that own commercial property, according to data compiled by Bloomberg. Retail landlords have returned 25 percent, compared with 12 percent for owners of office buildings.
Apartment stocks surged after REIT landlords increased rents by 19 percent between the market bottom at the end of 2009 through the second quarter of 2012, according to Dallas-based Axiometrics Inc. While rents are projected to keep climbing through 2017, the rate of annual growth peaked in the second quarter of 2011 at 5.1 percent. Rents are on pace to rise about 4 percent nationally this year, Axiometrics said.
“Right now the market does seem to be a little less enthusiastic about apartments, so it could be a tough deal to get done and pricing on the deal might be affected,” Diane Wade, senior vice president and analyst at CBRE Clarion Securities in Radnor, Pennsylvania, said of Archstone. Her firm oversees $21 billion.
The fund Wade manages is “overweight” in its allocation to apartments, forecasting that tenant demand for leasing still outstrips the number of apartment units being built annually.
Archstone’s properties have recovered since the real estate crash, carrying an implied value of about $17.9 billion, according to Mark Biffert, a REIT analyst with Bloomberg Industries. The coastal markets where the company owns apartments have seen prices improve the most on investor demand to own rental properties.
In the Los Angeles metro area, apartment values rose 15 percent since the end of 2009, with investors paying more than $179,000 per unit, according to Real Capital Analytics Inc. In Manhattan, values climbed 64 percent.
In the Washington D.C.-metro area, where Archstone operates nearly 14,000 apartments and is building about 1,800 more, values have recovered 54 percent since the beginning of 2009, according to Real Capital and company filings.
In California, a three-bedroom apartment in Archstone’s Santa Monica on Main community was advertised for lease at $5,786 per month, according to the website. The property, with a rooftop pool and across the street from a promenade bordering the Pacific Ocean, currently has no one-bedroom or two-bedroom units available for rent, the website said.
The firm owns 11 apartment properties in Manhattan, with amenities that include doormen, fitness centers and valets who will do laundry, clean and repair shoes, according to its website. Rents at its Archstone Chelsea, where residents have access to a “rooftop skydeck” with views of the Empire State Building, range from $3,553 a month for a 446-square-foot (41- square-meter) studio, to a 1,114 square-foot two-bedroom unit for $6,588. The building recently took out its terrace bocce court and is installing a putting green.
Archstone has a development pipeline of about $5 billion, with construction and plans ongoing for more than 11,347 new units, the company said in a Sept 24 filing. The company reported net operating income of $182.5 million for the three months through June, an 11 percent increase from a year earlier.
The company has “quality properties, so there will definitely be an appetite,” said Peter Sorrentino, a money manager at Huntington Asset Advisors in Cincinnati who helps oversee $14.7 billion of assets.
The Federal Reserve’s plan to hold interest rates near zero through 2015 may also fuel investor demand for higher yielding assets, such as REITs, he said.
“There’s such a yield drought in the market right now that real estate, after being shunned for so long, is drawing an awful lot of money,” Sorrentino said.
The Fed, which said this month it will keep buying mortgage bonds to push down borrowing costs, is also helping stoke a rebound in home purchases after the homeownership rate fell to a 15-year low in the first three months of 2012. Sales of previously owned homes and work on single-family projects climbed in August to the highest levels in two years. Home prices in 20 U.S. cities rose 1.2 percent in July from a year earlier, the biggest gain since August 2010, the S&P/Case Shiller index showed this week
Demand for Archstone will depend on what it plans to do with proceeds from share sales. The company said in its filing it plans to use “substantially all” of the proceeds from the IPO to repay debt and other costs.
Net debt is about 55 percent of its market value, and Archstone would need to reduce that by at least $3 billion to be in line with publicly traded competitors such as AvalonBay Communities Inc. (AVB) and Zell’s Equity Residential (EQR), Biffert said.
Joe Rodriguez, head of global real estate securities for Invesco Real Estate, said the Dallas-based funds might consider the IPO because of its size.
“We’d be more inclined to evaluate something like that just because there’s so much capital that you have to invest prudently in the market,” he said.
Rodriguez, who oversees $20 billion in publicly traded real estate funds, 14 percent of which are allocated to apartment companies, said he favors multifamily REITs that can grow through development rather than just relying on higher lease rates. His team’s strategy seeks out companies with active development pipelines whose balance sheets aren’t weighed down by debt.
“If you’re a REIT, the ideal profile would happen to be if you’re a good developer with a good balance sheet,” Rodriguez said. “Because if your balance sheet is stretched, you’re not going to be able to participate as aggressively as you might want to in the new development part.”