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Apartment REITs Fueling Takeover Buzz

The coming weeks may bring even more apartment REIT privatizations, say sources. Just two weeks after Archstone-Smith agreed to a $15.2 billion privatization, rumors are swirling that Washington, D.C.-based AvalonBay Communities (NYSE: AVB) is being pursued by real estate private equity giant Blackstone Group.

AvalonBay may not be the only REIT in play. Another company fueling heavy takeout speculation is Atlanta-based Post Properties (NYSE: PPS), which also happens to own apartment buildings. REIT industry newsletter REIT Wrap recently mentioned that Post is eying several different offers, though it’s unclear if Blackstone is backing any of them.

“With EOP broken up and the Archstone-Smith announcement, we think any company could be subject to a bid at virtually any time,” writes Deutsche Bank REIT analyst Louis Taylor in a recent research note. Taylor has a “buy” rating on AvalonBay with a target price of $145 per share.

Taking AvalonBay private would likely require more than $15.2 billion — the amount Archstone-Smith agreed to sell for. But price doesn’t seem to be a problem on the buy-side these days. After all, Manhattan-based Blackstone spent $23 billion last winter to privatize the nation’s largest public office landlord, Equity Office Properties Trust (NYSE: EOP). While Equity Office was a perennial under-performer, AvalonBay stands out for the opposite reason: AvalonBay generated total returns of 19.5% between the end of March 1997 and 2007. The company has a market capitalization of $10.2 billion.

Shares in the company were trading around $121 earlier this morning, up from roughly $104 per share last July. The REIT owns 151 apartment complexes in 10 states. Most of the assets are located on the west and east coast where property values have climbed sharply in recent years.

The average age of an AvalonBay complex is only 8.5 years, making it one of the youngest apartment portfolios in the nation. The company also has the largest development pipeline of any apartment REIT at $5.3 billion.

“I’ve heard from a number of people in the last few days that Blackstone is readying a bid on AvalonBay,” says one Manhattan-based investment banker who attended last week’s REIT convention at the Waldorf Astoria Hotel. One notable absence from the convention was Jonathan Gray, who leads Blackstone’s multi-billion dollar real estate group.

Blackstone spokesman John Ford declined to comment on the rumor. The company, which manages $88.4 billion in assets, is in a quiet period as it prepares to go public later on this month.

Parting shot: During last week’s annual NAREIT REITweek convention in Manhattan, few of the assembled dealmakers spoke glowingly of exotic summer travels. Far from it. Several Manhattan-based real estate bankers confessed that their summer plans were on hold — again.

One real estate player even lamented that the deals aren’t just getting larger; they also are getting more complex as highly complicated debt tools increasingly come into play. The end result: More hours logged in at the office.

The past two summers add weight to this theory. According to Manhattan-based Real Capital Analytics, the volume of offerings that have hit the market through the first five months of 2007 is massive. Owners put roughly $98.5 billion in commercial real estate on the market during that period last year, but the more recent period brought a whopping $157 billion in offerings to market. Bankers’ anecdotes aside, can the prime summer holiday months exceed last year’s volume? To Dan Fasulo of Real Capital Analytics director or market research, the answer is yes. “This summer will be huge,” he says.

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