When, and How, Lehman’s Holdings Could Dispose of Archstone

Englewood, Colo.—Recent reports indicate that Lehman Brothers, Barclays and Bank of America will be pushing forward on plans to either sell or list Archstone, which Lehman purchased for $22 billion in 2007.

“It had always been the plan, when Tishman Speyer bought Archstone with Lehman Brothers, that they would consolidate the business, increase the amount of development and go public again at some part in the future,” recalls says Jack Kern, managing director of Germantown, Md.-based Kern Investment Research LLC and former head of research at Archstone-Smith. “This side road that Archstone ended up taking was the nature of the change in the economy and unforeseen consequences of Lehman Brothers paying an excessive amount of money for the company.

“Barclays has come out and said they don’t want to wait anymore to see whether Archstone will continue to improve and whether the real estate economy will grow to the point where it will be able to recoup most of their investment,” Kern tells MHN. “They feel that the values of the Archstone properties are as high right now as the foreseeable future and they just don’t want to wait any longer to see. Archstone, in fact, continues to perform at a high level and continues to generate sufficient cash through its net operating income to meet its obligations.”

Kern says there are two distinct possibilities for the future of Archstone, the first of which is that it will continue to operate as an apartment owner and investment company but with a smaller portfolio. Another possibility is that another REIT—likely AvalonBay or Equity Residential, in his opinion—will acquire the company.

He adds, however, “I don’t think either AvalonBay or Equity Residential is of the mind to buy Archstone out completely, take it apart, keep the pieces that they want and put the rest of it through a disposition process. That wouldn’t make any sense, and they would end up paying way too much for a lot of assets that ultimately they would want to sell.”

An Archstone spokesperson declined to comment.

“What’s unclear is how successful an Archstone IPO would be in raising sufficient equity to be satisfactory to Barclays, Bank of America and the creditors for Lehman Brothers Holdings,” Kern tells MHN. “I would be surprised if they were able to raise much more than $5 billion or $6 billion, keeping in mind that the company was originally sold for almost $22 billion.”

Kern estimates an IPO wouldn’t take place until at least the first quarter of 2012. “With Wall Street being shaken up with some of the disappointing reports that are coming out and the stock market declining, JP Morgan, which was selected as the underwriter, is deciding what the timing of the IPO would be.”

According to reports, Lehman now holds about 47 percent of Archstone, while Bank of America owns 28 percent and Barclays holds 25 percent. According to the Financial Times, the two banks invested about $4.8 billion in common equity and provided more than $5 billion in financing as part of the original deal.

“There are quite a few properties that AvalonBay and Equity Residential have that are close to or similar to assets that Archstone has,” points out Kern. “If you look at their portfolios and try to figure out where they would like to have properties or what properties Archstone has that maybe they wouldn’t want to have, that opens up the door from them to be able cherry-pick the assets that make the most sense for their existing portfolios.”