In 2005, ING Clarion Partners bought Atlanta-based Gables Residential Trust for $2.8 billion in cash. That same year, Morgan Stanley Real Estate's Prime Property Fund announced that it would buy Chicago-based AMLI Residential Properties for $2.1 billion. Then, in October 2007, the big domino fell—a fund of Tishman Speyer and Lehman Bros. bought Denver-based Archstone for $22.2 billion just as the credit crunch was gripping the world.
Now, almost two full years to the day after Tishman and Lehman bought Archstone, the buzz is increasing that some of these companies could find themselves re-entering the public markets.
“The vast majority of the private deals occurred with a lot of leverage,” says Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O'Neill + Partners. “It’s very realistic to see them come back either in their old form or repackaged perhaps into regionalized companies."
Others agree. “There’s been a lot of chatter recently about some of the companies that went private coming back public,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm.
Archstone, which declined to interview for this story, is the one name that keeps popping up. “I think it’s a very obvious candidate,” Goldfarb says. “I think it would be well-received by the market. It’s a name the analyst and investor community knows well."
And today, there’s definitely money chasing public real estate. Just look at all of the IPOs issued over the summer as well as the surge in REIT stock prices over the past few months. “With the re-equitization of REIT land that has gone so far, nobody would be surprised to see private companies come back into the public world,” says Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm. “That’s partially because that’s the only place for capital right now.”
In 1991, KIMCO was in financial trouble and went public. In 1993, Simon Office Properties followed suit. “There are parallels between that period and today,” McCulloch says.
Pulling the Trigger
Gables acknowledges that a return to the public markets is possible, but that it’s ultimately one of many strategies the firm will consider over the next three years. The company might also consider another closed-end fund or an open-ended fund.
“In that we are owned by a closed-end fund (finite life), we will be considering a variety of strategies to recapitalize over the next several years and one of those would be an IPO,” says David Fitch, CEO of Gables Residential.
If Archstone or Gables were to return to public life, McCulloch thinks they would be welcomed. “The public would welcome a company like an Archstone back,” McCulloch says. “It did well the last time around and has proven that it can create shareholder value. Assuming it comes back in a similar structure and with most of the previous senior management team in place, I think it would be welcome.”
AMLI, on the other hand, due to its strong, unlevered financial standing, is not a likely candidate for re-emerging as a public REIT.
Still, for any of these companies to go public earlier, there needs to be a trigger. One executive, who preferred to remain anonymous, suggests that the valuation of stock prices from companies such as Houston-based Camden Property Trust, Alexandria, Va.-based AvalonBay Communities, or Chicago-based Equity Residential could potentially trigger a move.
"But ultimately, the banks will have to buy into whatever the companies choose to do. The lenders have to say the current situation is something we can’t stomach any longer,” Goldfarb says. “Until that, there will be nothing. If you’re the owner, and the lender is not pushing your hand, why would you do anything?”
In fact, it will ultimately take a cataclysmic event to push these companies back to the public markets. “It would be some kind of liquidity event driving them back on the market,” McCulloch says.
There will also be some hurdles to overcome with the analyst community. “Handicapping if and when these companies come back is a difficult task,” McCulloch says. “As these companies are now private entities, getting a current read on their operations, portfolios, and balance sheets is hard thing to do.”