From a small northwestern observatory…

Finance and economics generally focused on real estate

Hard to feel sorry for Bank of America…

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….but let’s try, just this once. As pretty much everyone knows, over the past few years, they’ve repeatedly shot themselves in the foot, then reloaded, then opened fire again. Public displays of embarassment like the $5 debit card fee are just the tip of the iceberg (and, indeed, helped them shed a lot of low-return or even negative-return depositors who could and should be better handled by credit unions).

More interesting has been their acquisition of Countrywide a few years ago, which everyone agrees was a debacle, and their subsequent messy handling of CW’s meltdown. However, now that they’re in such a fiscal and regulatory mess, BofA is having to shed itself of assets — at firesale prices — that in good years they’d want to keep. The latest example is BofA’s interest in Archstone Residential, one of the biggest apartment owners in the U.S. with 78,000 units. Recall that apartments are doing VERY well today, and are the one sector of the real estate industry which weathered the recession storm nicely. Indeed, given the trend in apartment valuation, BofA would be well advised to hang onto this asset for dear life.

BofA and Barclays acquired a 53% interest in Archstone Residential via a Lehman Brothers-led acquisition. The original purchase price in 2007 was $22 Billion. That works out to about $282,000 per apartment, which is pretty darned high, admittedly. Let’s suggest that a reasonable value would be in the range of $200,000 per apartment, or about $15 Billion. Of course, REITs often sell for a premium over net asset value, so the $22 Billion acquisition price probably wasn’t terribly off the mark at the time. Thus, the total net asset value $15 to $16 Billion, which indeed is close to Dow Jones’ current estimate of $18 Billion.

However, who has $15 to $16 Billion laying around? (Or, to be specific, 53% of $15 to $16 Billion, or about $8 Billion?) Up to the plate steps Sam Zell — yes the same guy who gave us Equity Office Properties. He now owns Equity Residential, which is making a bid for the 53% at….. (drum roll, please)….. $2.5 Billion in cash and stock. In general, this works out to about $64,000 per apartment, which is painfully low. Note also, that Zell is the winning bidder, having out-bid AvalonBay, Blackstone, and Brookfield.

Why is BofA letting this go so cheap? For one thing, they don’t have much choice. The regulators are making them dump whatver they can at Craigslist prices to generate cash and cash-equivilents. For another, the nasty market we’re in makes cash king — no one is financing this sort of deal, not even at these firesale prices.

In some ways, Sam Zell is a lot like Warren Buffett. Often it’s said — mistakenly — that you could do worse than simply buying stock in whatever Buffett buys. That’s true, but only if you pay the prices (usually deeply discounted) that Buffett pays. Now, the same appears to be true with Zell.

Written by johnkilpatrick

November 18, 2011 at 10:36 am

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