US NEWS: The last big crusade

The owners of Denver-based Archstone are finalising plans for what to do with the troubled REIT, which has caused them nothing but problems since getting involved in its buyout in 2007. Regardless of what Lehman Brothers, Bank of America and Barclays decide to do with the apartment giant – valued at more than $15 billion – this could mark the end of large distressed real estate-related workouts in the US.
“We’re moving into the later innings of the distressed cycle right now,” said Dan Fasulo, managing director of real estate data provider Real Capital Analytics.  “More assets are exiting the distressed sector than entering it, so I don’t foresee that many additional surprises going forward.” However, he hastened to add: “All bets are off if we fall into another recession.”

According to a report in the Wall Street Journal in September, The Blackstone Group, Brookfield Asset Management, Equity Residential and AvalonBay Communities have submitted bids for all or part of Archstone. Sources familiar with the situation, however, told the WSJ that so far bids have not been high enough to enable the three owners to make a final decision on what to do with the REIT. This comes on the heels of a debate among the owners in June whether to sell their stakes through an IPO, sell the company outright or infuse some fresh capital into it.
Lehman, in conjunction with Tishman Speyer, originally purchased Archstone-Smith Trust for $22 billion in 2007. The acquisition, particularly the high leverage used to finance it, turned out to be a big contributor to Lehman’s bankruptcy the following year. It also caused Tishman to lose virtually all of its investment in the REIT, as lenders Bank of America and Barclays converted their debt positions into equity in the wake of the ensuing global financial crisis.
A sale would not only enable the lending banks to recover some of their losses on loans backing the initial deal, it would mark the largest commercial real estate sale since the crisis if Archstone – one of the nation’s largest apartment landlords, with ownership stakes in roughly 78,000 apartments – were sold in its entirety. Such a transaction would not just be the largest, it also could be quite possibly the last of its kind.
“At north of $15 billion in assets, this is about as big as it gets,” said Doug Weill, co-founder of advisory firm Hodes Weill & Associates. “There are a number of highly-stressed companies in the market that are worth $2 billion to $3 billion, but I can’t think of anything else at this scale.”

A dying breed
In the US, large real estate bankruptcies and hotly contested bidding wars were seen with a certain degree of frequency in the wake of the global financial crisis. When shopping mall REIT General Growth Properties (GGP) filed for bankruptcy in April 2009, it was the largest real estate-related Chapter 11 filing in US history. In February 2010, GGP finalised a deal with a Brookfield-led consortium involving a total equity investment of $2.63 billion and a total recapitalization of $6.8 billion.

In May 2010, a group led by Centerbridge Partners won control of bankrupt Extended Stays Hotels in a $3.93 billion buyout. In addition, The Blackstone Group closed a $1.2 billion deal in August 2010 to acquire 146 senior-living properties from bankrupt Sunwest Management.
Of course, not all deals go according to plan, as proven by the sale of Innkeepers USA Trust. The bankrupt hotel REIT is suing Cerberus Capital Management for pulling out of a $1.12 billion deal to acquire it. In May 2010, Cerberus teamed with Chatham Lodging Trust to buy the troubled company, but it pulled out of the deal this August, citing “a material adverse effect.”

Because of the changing landscape of the real estate market, however, some industry insiders believe that, after the sale of Archstone, the big Chapter 11 real estate deal could be a thing of the past. “At least in the US, most of the skeletons are out of the closet with regard to distressed portfolios,” said Fasulo. “Archstone looks like it’s going to be one of the next ones to come down the pipeline. This could have been sold awhile ago had it not been for the bickering among the owning parties.”

Weill agreed that Archstone is a very attractive asset, although he thinks the feasibility of an IPO is questionable given the amount of capital that needs to be raised. “I don’t think there’ll be an outright sale, and I don’t think an IPO is the right way to go,” he said. “So someone infusing capital into the REIT is probably the most logical route.”
Regardless of how its owners decide to proceed, Archstone’s sale – whether it be in whole or in part – is likely to mark the end of large distressed real estate-related workouts in the US.