While the number of apartment assets owned by Englewood, Colo.-based Archstone has remained steady (at 77) since the firm was privatized by Lehman Bros. and Tishman Speyer in 2007 for $22 billion, the geographic makeup of the firm’s portfolio has changed significantly, and could affect an exit strategy for the firm’s owners, who are reportedly evaluating whether to sell the company outright or pursue an IPO. 

According to a geographic exposure study recently conducted by Charlottesville, Va.-based SNL Financial, since 2007, Archstone has decreased its overall asset exposure in Massachusetts, Virginia and California, while increasing its asset bulk in Georgia, Florida, and Texas.

In truth, Archstone’s acquisition and disposition strategy has likely been driven more by transaction returns rather than strategic portfolio adjustments in anticipation of a full-fledged sale, but the firm’s geographic exposure nonetheless matches up well with Alexandria, Va.-based AvalonBay Communities and Chicago-based Equity Residential. The two publicly traded REITs are rumored to have already made offers to acquire the firm and its assets.

"That's definitely what you are seeing in terms of portfolio exposure for both AvalonBay and Equity Residential: they are both heavy in California and Massachusetts with lesser exposure in some of Archstone's other areas since the firm privatized," says Jason Lail, manager of real estate research for SNL.

Archstone’s largest market move between 2007 and 2011 took place in Georgia, the SNL study notes, where the firm jumped from one to eight properties in the Atlanta-Sandy Springs-Marietta, Ga., MSA. Archstone also more than doubled its presence in Texas (increasing from four to nine properties) and tripled its presence in Florida (from two to six properties). Loss of market exposure was the greatest in Virginia, where Archstone moved from 32 to 25 assets. In California, the firm sold four properties but retains a significant market exposure with 69 properties.

While AvalonBay currently does not hold any assets in Georgia, Florida, or Texas and would gain immediate market share, Equity has portfolio overlap, which could either create significant economies of scale in those markets or necessitate selective disposition of cannibalizing assets. According to Equity’s 2011 second-quarter earnings release, the firm owns 16 properties in Atlanta representing some 4,800 units. A full 10 percent of the REIT's holdings are also in South Florida, where the REIT owns 12,742 units across 38 properties.

In August, AvalonBay priced a public offering of 5.1 million shares of common stock at $128.25, which could generate more than $630 million that the firm intends to use fund investment activity including acquisitions, a move that could be indicative of balance sheet posturing to make the Archstone deal happen. 

 "It's an interesting question as to whether or not there is an inflexion point signifying that either Equity or AvalonBay were preparing to make a deal," Lail says. "Either firm would have to tap additional capital in some way, whether through revolving credit facilities or the issuance of debt or equity. In general, REITs don't carry a lot of cash on their balance sheets due to distribution requirements, so neither firm has the ability to take on an acquisition of this size without tapping the capital markets."

Recent reports also have the current ownership group of Archstone considering an IPO option and weighing the mercurial state of capital markets as they look to make a sale. According to SNL, Lehman Bros. currently owns a 47 percent stake in Archstone, while Bank of America Corp. and Barclays own 28 percent and 25 percent, respectively.

"An IPO could still be a viable option for the sale of Archstone to occur and it's important to keep that in mind," says Lail. "They had a high quality, geographically diverse portfolio as a public company, and the REIT world would certainly welcome back a company of their stature."

Both AvalonBay and Equity declined to comment for this story.