High-Risk Realty by Andrew Bary
Summary: Tishman Speyer group's buyout of apartment REIT Archstone (ASN) at $60.75/share, or nearly $16b, and $6b of debt sent Archstone shares from pre-buyout $51 to $60.50. Archstone has desirable properties in tight markets, and there's lots of real estate-seeking-capital around: Post Properties (PPS) is reportedly being pursued too. But Barron's says apartment REIT's like AvalonBay Communities' (AVB) and Archstone have peaked. Archstone's yield or cap-rate of 4.3%, is lower than apartment (5.1%) and general (5.7%) REITs. The 6% interest on the $17.1b loan to buy Archstone could cost $1b annually, more than Archstone's 2007 operating income ($800 million), denoting a possible yield of 1%. Properties will likely be flipped to pay off debts a lá Blackstone's disposal of Equity Office Properties (EOP) assets. But Archstone's buyout price is so high, flipping profits may be low. Archstone's Adjusted Funds from Operations [AFFO]-- a REITs 'P/E'—is at a premium to the industry. Respected managers like EOP's Sam Zell and Archstone's are getting out, and after years of whopping returns, Morgan Stanley's MSCI REIT index is trending downwards. Investors accepting low yields in hopes of rising property values might find the nationwide residential slump and resultant credit crunch catching up to apartment REITs soon.
ASN 1-yr. chart: