Following a Reuters report last week that revealed Archstone was quietly shopping its apartment portfolio, a shortlist of potential buyers declined to comment on whether or not the Denver-based owner/operator of 57,474 units has solicited their respective firms regarding a deal. Representatives for Alexandria, Va.-based REIT AvalonBay Communities and Chicago-based REIT Equity Residential tell Multifamily Executive they have no comment after being named by Reuters as possible buyers of some or all of Archstone’s assets. Archstone also declined to comment.
According to the Reuters article, New York-based Vornado Realty Trust CEO Michael Fascitelli said Archstone had reached out to his firm to gauge interest in consummating a deal. The report also named New York-based Blackstone and Fort Worth, Texas-based TPG in addition to AvalonBay and Equity Residential in its shortlist of Archstone’s target buyers.
Rumors of a sale of the Archstone portfolio—via portfolio disposition, IPO, or a combination of both—have been circulating for some time as the Lehman Bros., Bank of America, and Barclays ownership group look to recoup some of the $22 billion investment made in privatizing the former REIT back in 2007, before the market collapsed.
Size Could Be an Issue
Closing a deal on a portfolio of Archstone's size and magnitude naturally limits the universe of possible purchasers, and observers see an IPO as a more logical exit strategy for Archstone’s current ownership group. Some $9 billion in agency debt placed on the assets will also reduce the opportunity for buyers to leverage the portfolio post-sale.
“When you think about an entity that has sufficient capital to take down something that is a multibillion-dollar portfolio, and it’s already levered, how do you make that deal happen?” questions Alexander Goldfarb, managing director of equity research of REITs for New York-based Sandler O’Neill + Partners. “That’s why an IPO continues to make the most sense. Vorando seems like an unlikely buyer for the whole entity, and while Equity Residential has the financial wherewithal and is the easiest in terms of understanding the buyer rationale, the Archstone owners presumably want top dollar. I don’t get a sense that REIT managements want to pay top dollar for an entire multibillion-dollar portfolio.”
Indeed, intense market competition for apartment acquisitions has galvanized pricing on the types of high-quality apartment assets that Archstone is known for, likely putting the portfolio somewhere between a 4.8 percent and 5.25 percent cap rate. That kind of ticket price would further winnow the field of likely buyers, particularly as development options heat up in select markets.
“AvalonBay has a multibillion-dollar development pipeline where initial yields are 6.5 percent, and sometimes higher,” Goldfarb says. “Presumably the price that an Archstone portfolio would trade at would be well inside of that, so I don’t see AvalonBay management making that decision [to buy the portfolio].”
Chicago-based AMLI Residential chairman and CEO Greg Mutz—no stranger himself to taking apartment portfolios public and reprivatizing them—agrees that an Archstone IPO offers a promising exit option to the Archstone ownership group. "Archstone is a premier company that generated a strong, successful record as a public company. Archstone is a first-class shop with great assets, wonderful people and a highly respected senior management team led by Scot Sellers," Mutz says. "The company enjoys a highly respected and competitive brand name in the marketplace and has all the operational, technology, development, and construction bases covered—really the whole nine yards. If anybody can go public in this pricing environment, it's these guys."
Portioning the Portfolio
While an IPO ostensibly offers Archstone surety of close on a transaction, it could also decrease the net value of the portfolio, which could compel the firm to entertain offers for one-off dispositions or groups of assets prior to going public.
"The challenge today is that there is a discount for public market REIT's with Class A property portfolios compared to valuations in the private markets, and that is even more pronounced for the assets Archstone has in Washington, D.C., and other coastal high-barrier-to-entry markets," Mutz says. "If peeled off and sold separately, Archstone's properties are going to trade at very attractive pricing levels."
Goldfarb agrees that some cherry-picking of the Archstone portfolio via asset sales is certainly conceivable, particularly to established multifamily REITs such as Equity and AvalonBay that might not otherwise have the appetite for an all-in deal. Still, Archstone’s owners would need to balance the desire for obtaining premium pricing in the private acquisition markets with the prospect of removing jewel-in-the-crown assets from the portfolio prior to an IPO.
"There would be a lot of players that would compete for parts of the Archstone portfolio," Mutz says. "Selling in bits and pieces would be a tough decision to make. That approach eliminates the value inherent in the Archstone brand name, destroys an experienced management team, and wastes a strong operating platform. Selling in pieces could mean a death by a thousand cuts. I doubt that is the optimal way to maximize investor value."
All of which has observers anticipating an eventual IPO by Archstone, a prospect that Wall Street, at least, finds palatable. “General Growth Properties showed that you can do multibillion-dollar IPOs in this environment,” Goldfarb says. “The REIT world wants good quality large cap names, and certainly an entity like an Archstone is a name that people are familiar with. It’s not a new face; it’s an old face. And it’s just a matter of bringing people up to speed on their story.”