NEW YORK Real estate investment trust Archstone-Smith (ASN.N) on Tuesday said it agreed to be acquired by Tishman Speyer and investment bank Lehman Brothers Holdings Inc. LEH.N in a deal valued at $13.5 billion, reflecting the strong demand for high-end real estate by private investors.
Archstone, the No. 2 U.S. apartment REIT behind Equity Residential (EQR.N), is considered to have one of the top portfolios of apartments and projects under development, concentrated in the Washington D.C., New York, Boston, Southern California, Seattle and San Francisco Bay areas.
As of May 1, Archstone-Smith had 222.9 million shares outstanding, according to filings with the U.S. Securities and Exchange Commission. Based on that total, the deal would be valued at $13.5 billion, or $60.75 per share.
The companies have said the total value, including the assumption and refinancing of Archstone-Smith's outstanding debt and excluding transaction costs, was $22.2 billion.
Archstone declined to provide additional details.
The per-share price represents a 22.7-percent premium over the share price on May 24, when The REIT Newshound, an industry newsletter, published a note concerning a possible deal.
"That's a really decent price," Richard Imperiale, portfolio manager of the Forward Progressive Real Estate Fund, which owns Archstone shares, adding that it was unclear whether the deal included the company's fairly sizable development pipeline.
"Add that to the mix, you can probably squeeze out another $3 or $4 per share, potentially," he said.
Green Street Advisors analyst Craig Leupold, however, said he found the offer price low.
"To see shareholders being paid what I would argue is a very slim or insignificant premium to underlying real estate value and basically giving up the entire operating platform and development platform, I view as disappointing," he said.
The trust's California properties, which constitute just under 40 percent of its holdings, shave about $3 per share from the price because the new owners would have to pay higher real estate taxes there, Leupold said.
Archstone shares closed at $61.42, up 11 percent, or $6.19 on the New York Stock Exchange, signaling that a better offer may appear.
The deal also lifted many other apartment REITs. The company's closest rival, AvalonBay Communities Inc. (AVB.N), saw its shares close up $8.20, or 7 percent, to $127.10. Equity Residential (EQR.N) shares rose $3.20, or 6.7 percent, to $50.75, and Apartment Investment and Management Co.(AIV.N) closed up $2.62, or 5 percent, at $54.66.
Archstone said its board of trustees unanimously approved the deal, which still needs Archstone shareholders' approval.
R. Scot Sellers, Archstone's chairman and chief executive, will continue to play a role at the newly-formed company.
The deal continues the trend of private buyers acquiring large portfolios of properties by buying entire publicly traded real estate companies. In February, Blackstone Group acquired office REIT Equity Office for $23 billion, plus the assumption of debt, which brought the total value of the deal to roughly $39 billion.
But the Archstone deal marks a departure because most of the companies that have already been in play have needed some corporate or portfolio restructuring, which the public market usually does not relish.
"I think the low-hanging fruit is gone," Imperiale said. "Now the quality portfolios with the good operators are being sought out. It's not Blackstone repositioning the portfolio."
Tishman Speyer last year agreed to buy New York City's largest apartment complex, Stuyvesant Town and Peter Cooper Village, for $5.4 billion from MetLife Inc. (MET.N)
Tishman also owns New York's Rockefeller Center and the Chrysler Building. Additionally, the company invests abroad, and Archstone's acquisition last year of German residential property buyer Deutsche WohnAnlage GmbH may be a good fit.
"Now it becomes a pure real estate deal, and the leverage and the cost of capital are driving these type of deals -- very low cost of capital and a fair amount of leverage that makes the equity return look pretty attractive," Imperiale said.
Morgan Stanley, Lehman Brothers and Bank of America all served as financial advisers on the transaction.