According to reports, Equity Residential (EQR), a multifamily real estate investment trust (REIT), has emerged as the front-runner in the race to acquire a lion’s share in rival company Archstone – one of the largest investors, developers and operators of apartment communities in the U.S.
The proposed bid of $2.6 billion in cash and stock, if realized, would arguably create one of the largest real estate transactions since the recession.
Archstone is presently owned by a consortium of financial institutions that include Bank of America Corporation (BAC), Barclays PLC (BCS), and the bankruptcy estate of Lehman Brothers Holdings Inc. While the banks collectively hold a 53% stake in the company, Lehman holds the remaining 47%.
Earlier this year, the owners failed to reach a unanimous decision on how to unwind Archstone, leading the banks to put their ownership stake ‘up for sale’ in their concerted effort to raise cash and avoid a similar fate as that of Lehman.
Insider sources have revealed that the proposed buyout by Equity Residential values Archstone at about $16 billion, including $11 billion in debt held primarily by government-sponsored mortgage companies like Fannie Mae and Freddie Mac.
However, Archstone was valued at about $22 billion in 2007 when Lehman had first bought it. The market value was partly eroded by the continuous asset sales worth approximately $2 billion, leaving it presently with about 77,000 apartments.
The lower valuation is also due to the fact that the new owner would have a contentious partnership with every major decision requiring unanimous consent from all owners and is likely to be dilutive to earnings.
In addition to Equity Residential, Archstone’s owners have received competitive bids from other REITs like Avalonbay Communities Inc. (AVB), private-equity firm The Blackstone Group (BX), and Canada-based investment firm Brookfield Asset Management Inc.
The renewed interest in owning one of the prized apartment companies in the U.S. is primarily due to the underlying fact that the multifamily sector has emerged as one of the best performing commercial real estate sectors in recent quarters.
As ‘echo boomers’ (the children of the baby boomer generation) opt to move out on their own and more renters decide to part ways with family and roommates, the single-family homeownership rate across the U.S. has witnessed a continuous decline and demand for multifamily rental apartments has surged.
With new supply remaining muted until late 2013 or 2014, renting has emerged as the only viable option for customers who could not get mortgage loans or are unwilling to buy a house at present. Consequently, national apartment vacancy rates have dipped to 5.6% at the end of third quarter 2011 – the lowest since 2006.
The increased frenzy in owning apartment company Archstone has become murkier with the ‘right to first offer’ by Lehman, under which the banks are obliged to present it with any offer they would like to accept and give the estate a chance to either match or beat it. Lehman is likely to have a brief period to respond and roughly about 50 days to put up the money.
Insiders familiar with the situation are of the opinion that Lehman might block Equity Residential from owning Archstone as it fears losing management control of the company. Equity Residential already has a large management operation line-up and Lehman might want to replace Archstone’s management team and apartment management operation with that of its own.
As the acquisition saga continues, representatives of all the participating companies have either declined or refused to comment on the issue. Irrespective of the outcome of this ownership battle, the apartment sector as a whole is expected to benefit in the long run with the consolidation in the market.
In particular, Equity Residential is also expected to benefit from the acquisition of premium assets in some of the most desirable markets in the U.S. We maintain our ‘Neutral’ recommendation on Equity Residential, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.
