Archstone Smith LBO Sags Under Debt - Barron's

Lehman Brothers (LEH) and Tishman Speyer Group may not be able to sell the debt from their leveraged buyout of apartment REIT Archstone Smith, according to Barron's. Of the $4.6 billion bridge loan needed to close the deal, only $500 million had been sold to investors as of October's closing. Peer apartment REITs like AvalonBay Communities (AVB) and Equity Residential (EQR) have since declined 30% on average, likely making it even harder for Lehman, Bank of America (BAC) and Barclays to unload equity to investors.

For now, Archstone has more than $16B of debt, keeping interest expense at $1B-plus annually. That's more than its Q2'07 annual cash flow rate of $700M. Cap rates were at 4.3% when Archstone was sold but have now risen as REIT shares plunged. AVBs cap rate is now 6.3%, but that means it's worth less too. A 6% cap rate for Archstone would mean a $14B enterprise value-- if they generate operating income of $850M this year. With Archstone's $16B in debt, that would mean negative equity, wiping out the $5B loan. Archstone owns good properties in strong markets, but rent increases are likely to slow as unsold house inventory become rentals. Their only hope is an economic turnaround, still nowhere in sight.