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Questions Linger Over Giant Apartment REIT Privatization

Not even the first unofficial holiday of the summer can slow down the REIT privatization juggernaut.

On a sultry Memorial Day afternoon, Tishman Speyer Properties and Lehman Brothers formalized a $13.5 billion bid on the nation’s second largest apartment REIT, Englewood, Colo.-based Archstone-Smith Trust (ASN). While shareholders have yet to vote on the offer, the ASN board has unanimously approved the deal.

The Tishman/Lehman all-cash bid of $60.75 per share represents a 22.7% premium to the closing price on Thursday. ASN was up 8.91% yesterday, ending the day at $60.15 per share. Manhattan-based Tishman Speyer is one of the largest private real estate owners and developers in the world. Lehman Brothers is the world’s fourth largest investment bank.

The proposed deal ratchets up to $22 billion with assumed debt, and it could soon become the second largest REIT privatization by dollar volume. The largest to date is Blackstone Group’s $23 billion purchase of Equity Office Properties Trust. But as that deal illustrated, taking a large REIT private these days can flush out plenty of counter-bidders.

In a Tuesday research note, Goldman Sachs analyst Jonathan Habermann expressed doubts about the offer. “In our view, the price of $60.75 per share [all cash], while attractive, may not be enough to win over current shareholders,” says Habermann. “Risks [to the offer] include a higher bid for ASN or a lack of shareholder support.”

ASN owns and operates a coveted apartment portfolio. As of March 31, ASN owned 344 apartment properties with 86,014 units. Many of these units are located in Southern California, Washington, D.C., Boston, Seattle, San Francisco and New York City. ASN is also the largest public owner of apartment units in Manhattan. Aside from its existing assets, ASN also has a vibrant $4.4 billion development pipeline with projects slated in many key metro markets.

So just how safe is the Tishman/Lehman bid? Much will depend on the size of the breakup fee that ASN has agreed to pay if the deal falls through. The lower the breakup fee, the more likely that ASN can accept a higher offer. Knowing what the negotiated breakup fee is would be nice, but neither side is talking.

“There is clearly a lot of money out there,” says Hans Nordby, director of U.S. markets at Boston-based real estate consulting firm Property & Portfolio Research (PPR). “And when you have this much capital in the market, it tends to grind out the inefficiencies pretty quickly.”

He also believes that private buyers will continue to target other apartment REITs. One reason is that many apartment REITs are trading below their net asset value (NAV). This metric is also called liquidation value, and it estimates what the entire portfolio would fetch in the market. The Tishman/Lehman $60.75 per share offer for ASN was roughly $2.25 per share less, than Goldman Sachs’ 12-month target NAV. Nordby of PPR says that REIT share prices often trade at a premium or discount to NAV, however.

“Public REIT share values aren’t directly tied to private values,” he says. “And we’ve seen times in the past where REIT share prices were disjointed from the values that private investors are willing to pay.”

It appears that Tishman/Lehman would keep ASN chairman R. Scot Sellers on board. The buyers obviously like the existing management, but it’s unclear if they see retaining the ASN name as another priority. The ASN name may carry weight with investors, but it’s questionable if tenants identify with the brand.

“In the U.S., residential living really isn’t a branded experience,” says Nordby. “Right now the market is highly fragmented, and the apartment owners haven’t been able to push their brands through as effectively as the hoteliers.”

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