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Lightening Debt Load, Archstone Shedding at Least $1.7B In Assets to Prepare for IPO

Apartment Company Hopes To Reduce Leverage By Capitalizing on Property Sales In Strong Multifamily Market
November 7, 2012
Englewood, CO-based Archstone Inc. disclosed some interesting and specific details about its plans to slice its debt load by $9.65 billion as it prepares for what would be the largest initial public offering (IPO) for a REIT ever, and the largest IPO for any company since Facebook went public earlier this year.

Just two months after winning full control of the apartment giant following a legal battle with Sam Zell’s Equity Residential, Lehman Bros Holdings Inc. on Aug. 11 filed a registration statement to relaunch Archstone, one of the largest apartment owners in the country, as a public company.

Most are familiar with the backstory: Lehman and Tishman Speyer teamed up in October 2007 to acquire wjat was then called Archstone Smith Trust, one of the largest multifamily REITs, in a leveraged buyout valued at $23.7 billion. The massive debt taken out to finance the acquisition at the height of the real estate market shortly prior to the Great Recession played an important role in the investment bank’s ultimate collapse and bankruptcy.

Fast-forward to this week. Prepping for its proposed IPO, Archstone filed an amended S-11 document with the U.S. Securities and Exchange Commission revealing more details of an extensive asset disposition plan in place since June of this year.

Communities targeted for disposition are typically lower growth assets, consistent with the strategy Archstone previously employed as a public company, by reducing its holdings in non-core markets and divesting less-attractive assets within its core markets, with the goal of shedding at least $1.7 billion in properties. From 2001 to 2010, Archstone said it sold an average of $1.4 billion in apartment communities per year.

Archstone's properties are located primarily in highly desirable supply constrained submarkets within its core markets of the Washington, D.C. metro area, Southern
California, the San Francisco Bay Area, New York City, Boston, Seattle and Southeast Florida. Real estate consulting firm Rosen Consulting Group (RCG) expects Archstone's core markets to experience higher-than-average-growth in effective rent and lower vacancy rates from 2013 through 2016.

According to RCG, the improving economy, long-term demographic trends and tight credit standards in the single-family home mortgage market are expected to continue to bolster demand for most rental apartments, while new supply declined significantly as a result of the recession, favoring landlords in many markets.

See related CoStar coverage: Apartment Market Dynamics Look Strong for Next Two Years

"We believe that these attractive market dynamics and the highly desirable locations of our communities combine to position our company to achieve superior cash flow growth over the long term," Archstone said in its filing.

Since June 30 of this year, Archstone said it has already sold or is in the process of selling $755.5 million in assets, including $504.6 million in sold transactions and $260.6 million in deals under contract. Projects disposed of since June 30 include the following:

  • Archstone Thousand Oaks Crest, Thousand Oaks, CA, 191 units

  • Archstone Sierra Del Oro, Corona, CA, 300 units

  • Archstone Long Beach Harbor, Long Beach, CA, 160 units

  • Archstone Ventura Colony, Ventura, CA, 272 units

  • Archstone Cedar River, Renton, WA, 153 units

  • Archstone Waterford Place, Woodinville, WA, 360 units

  • Westchester Peachtree Valley, Atlanta, GA, 349 units

  • Archstone Tech Ridge, Austin, TX, 256 units

  • Champions Park, Thornton, CO, 480 units

  • Ironwood Apartments at SanTan, Gilbert, AZ, 315 units

  • Tempe Groves, Tempe, AZ, 408 units

Properties under contract for disposition as of June 30 include:

  • Archstone City Place, Long Beach, CA, 221 units

  • Archstone Long Beach, Long Beach, CA, 206 units

  • Archstone Terracina, Ontario, CA, 736 units

  • Archstone Redmond Park, Bellevue, WA, 260 units

The disposition plan also includes an option requiring Lehman to purchase 13 communities totaling 4,495 units by Dec. 31, 2013 for about $1 billion if Archstone is unable to find another buyer at a higher price, though Archstone expects to sell the properties to a third party at a higher aggregate price.

The 13 communities that may be sold to Lehman under the asset put option agreement include: Westchester at Clairmont in Atlanta; Archstone Quincy, Quincy, MA; Westchester Rockville Station, Rockville, MD; Westchester at the Pavilions, Waldorf, MD; Archstone Cronin’s Landing, Waltham, MA; Archstone Wheaton Station, Wheaton, MD; Archstone Monument Park, Fairfax, VA; Archstone Charter Oak, Reston, VA; Archstone Redmond Court, Bellevue, WA; Archstone Northcreek, Bothell, WA; Archstone Belltown, Seattle, WA; Archstone Fremont Center, Fremont, CA, and Archstone Warner Center, Woodland Hills, CA.

Also, during the course of its 2007 privatization, Archstone contributed $1.5 billion of apartment assets in Southern California to a joint venture. Through June 30, 2012, the company had disposed of $3.2 billion of those assets in order to reduce debt and improve portfolio quality.

As of June 30, 2012, Archstone owned or had an ownership interest in 182 U.S. communities with 59,355 units, including eight communities with 2,830 units under construction. In addition, Archstone owned or had an interest in 29 U.S. development projects in the planning stages that would add more than 8,517 new units to the portfolio, and Archstone’s development pipeline had a total expected investment of $5 billion at mid-year 2012, according to the filing. The company also owns and manages properties in Germany.

Archstone said it plans to sell or recapitalize select assets where it finds valuations compelling, and use the net proceeds to repay secured debt, make investments with higher expected returns and re-deploy capital into assets with superior long-term growth prospects located in its core markets. Those markets include La Jolla and Marina del Rey in Southern California; Silicon Valley and San Francisco, Dupont Circle in Washington, D.C., the Upper East Side and Upper West Side of Manhattan, and downtown Boston.

"We believe that concentrating our investments in these and other similar neighborhoods, where we have existing infrastructure and can leverage our operating platform, will enable us to generate superior long-term growth in rents, NOI and investment values," the company said in the filing.

Meanwhile, on Aug. 23, Archstone entered into a new revolving credit facility with JPMorgan Chase Bank, N.A. and Citibank, N.A consisting of a $500 million secured revolving credit facility at a base rate plus an applicable margin which is initially 1.75% plus an applicable margin which is initially 2.75%.

The facility, backed by affiliates that own the majority of Archstone’s assets, has an initial expiration of Nov. 1, 2014 with an option to extend under certain conditions until Aug. 23, 2015. The new credit facility provides a commitment for up to $75 million in swing line loans and up to $250 million for letters of credit.

Follow Randyl Drummer on Twitter for CRE news updates.

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