INTELLECTUAL PROPERTY: Take my assets, please

The estate of Lehman Brothers reportedly is taking a somewhat unorthodox approach to getting rid of a good asset in order to pay off a bad loan. According to a story by Reuters, Archstone, a Denver-based apartment REIT owned by its lenders – Lehman, Bank of America and Barclays, is seeking bids on its assets from a number of private equity firms, as well as other companies.

Among the potential bidders that Archstone has reached out to include The Blackstone Group, TPG Capital and Vornado Realty Trust. Other companies that might have an interest in buying the REIT’s assets include Equity Residential, AvalonBay Communities and Apollo Global Management, as well as sovereign wealth funds. The list of potential buyers is only likely to grow.

What’s unusual about this move is that typically, when a firm wants to sell an asset, it announces the sale and waits to hear from bids. It’s not as common, however, for the seller to seek out specific potential buyers and ask them for bids.

Although the approach from Archstone is atypical, perhaps it’s because the entire situation is atypical. Lehman and Tishman Speyer bought Archstone-Smith Trust for $22 billion in 2007, the buyout of which played a big part in Lehman going bankrupt the following year. And in the wake of the ensuing global financial crisis, Tishman lost almost all of its investment in the REIT.

In May, the management of Archstone, which also happens to include Lehman, started to consider alternatives for the REIT in an effort to help the lending banks recover at least some of their losses on loans backing the buyout. The question is whether this logic is influenced by Lehman or if there is some other motivation for getting its finances in order.

One reason for approaching investors directly could simply be because Archstone is pursuing many options at once in order to figure out the best plan of attack. After all, a direct sale is just one of the possibilities. In fact, the REIT is considering a sale of assets, an initial public offering or a combination of both. With that last option, the REIT is contemplating selling a chunk of its assets and then possibly trying for an IPO of the remaining company.

Still, the decision to sell assets comes at a time when values for apartment properties have recovered, vacancies are decreasing and rents are trending higher. At the end of 2010, national vacancy rates in the apartment sector had fallen to 6.6 percent from 7.1 percent – one of the sharpest drops on record – with net effective rents rising an average of 0.5 percent each quarter last year, according to data provider Reis. In fact, occupancy levels rose enough last year to ensure net absorption of 227,011 units from the system.

Helping such statistics is the fact that the global financial crisis spurred a decline in home ownership, primarily due to a wave of mortgage defaults and retreat from new originations, and a corresponding increase in apartment rentals. So, with more people renting and fewer people buying, it seems as though an apartment portfolio would be a savvy purchase.

Then again, the move could be less of an endgame and more of a test of the waters. Jack Kern, managing director of Washington DC-based consulting firm Kern Investment Research, asserted his beliefs in a report released last month. “Archstone is using these discussions to determine how the portfolio will be valued by prospective buyers and that helps to set what will be the structure of any public offering,” he wrote. An interesting theory, indeed.

Archstone is one of the largest owners of US apartments, with many of its holdings in metropolitan areas such as New York, Washington DC, San Francisco, Boston, southern California and Seattle. At the end of last year, the company owned or had stakes in 436 apartment properties comprising about 78,207 units in the US and Europe.

Meanwhile, as all of this is playing out, Archstone remains active on the investment front. In June, the REIT began construction on a new luxury apartment community near the Texas Medical Center in Houston. Archstone’s newest as-yet-unnamed Houston community will have 474 apartments for rent when completed in 2013.

Although Kern said he believes that “Archstone likely will be a public company again within the next 18 months” – and that may very well happen – the process is still in the very early stages, so it is far too soon to speculate on the REIT’s ultimate fate. For now, the giant apartment REIT’s future remains up in the air.