Equity Residential Partners with AvalonBay on $16B Archstone Purchase

By Barbra Murray, Contributing Editor

It’s a multi-family deal that will certainly be talked about for years to come. Equity Residential and AvalonBay have entered into an agreement to acquire Archstone Enterprise L.P., a leading apartment investment and management company, from Lehman Brothers Inc., in a transaction valued at an aggregate $16 billion.

Cash, shares and debt were included in the sale. Equity Residential and AvalonBay will walk away with full ownership of Archstone, Lehman’s single largest asset, after doling out a total of nearly $2.7 billion in cash; forking over a respective 34,468,085 and 14,889,706 of shares of common stock valued at sum of roughly $3.8 billion; and assuming $330 million of preferred equity and $9.5 billion of debt predominantly held by Fannie Mae and Freddie Mac.

In an SEC filing, AvalonBay estimates the weighted average capitalization rate for the combined Archstone portfolio to be in the high 4 percent range.

Equity Residential and AvalonBay are well-equipped to finance the multi-billion-dollar transaction. Equity Residential will partially fund its part of the deal through a $2.5 billion bridge loan facility from Morgan Stanley Senior Funding Inc., as well as proceeds from the disposition of $3 billion to $4 billion of non-core assets and properties in markets to which the company has chosen to bid adieu. AvalonBay has also secured a loan commitment; Goldman Sachs Lending Partners L.L.C. will come through with a $2.2 billion bridge loan facility for the REIT. Evidently, the lending community is keen on the planned purchase, too.

The colossal price tag reflects the hefty size and premier quality of the Archstone apartment portfolio. As of the close of the second quarter, the company owned or had an ownership interest in 182 operating and under-construction communities accounting for nearly 60,000 units in the U.S., as well as parcels of developable land. The group of assets boasts locations in such top multi-family markets as Boston, New York City and San Francisco.  The portfolio also includes a European operating platform through which Archstone manages and owns apartments in Germany.

Equity Residential and AvalonBay will own a respective 60 and 40 percent of the Archstone portfolio. The companies will have interests of the same percentage in their joint venture, under which certain properties will be jointly managed until such time as they are sold or transferred to either partner.

News of the deal comes nearly six months after Lehman completed what was ultimately a two-part acquisition of the remaining 53.6 percent interest in Archstone from affiliates of Bank of America and Barclays Bank PLC. The road to obtaining full ownership of Archstone was fraught with struggles, including a tug of war between Lehman and hopeful buyer Equity Residential. Court filings were made, injunction hearings were requested, but Lehman emerged successful in exercising its right of first offer to purchase the remaining stake from BofA and Barclays.

But now, to a certain extent, Equity Residential has gotten what it wanted. While Fitch Ratings downgraded Equity Residential–placing the company’s ‘BBB+’ Issuer Default Rating on Rating Watch Negative–since the announcement of the impending Archstone acquisition, the general consensus is that Equity Residential and AvalonBay will ultimately benefit from the deal.

“These are irreplaceable assets in great markets,” Steven Marks, managing director with Fitch, told Commercial Property Executive. “I think from a strategic standpoint [it is a good deal] in the sense that  it strengthens Equity Residential’s already vast presence in some of the best multi-family markets in the country, those markets being characterized by very high-barrier to entry and very low single-family housing affordability.” Fitch anticipates resolving the Rating Watch Negative at some point after the completion of the Archstone transaction, based chiefly on Equity Residential’s ability to reduce debt through equity offerings and asset sales. It’s a realistic goal, Marks believes. “Given current market conditions, what the company is planning on doing is achievable because multi-family fundamentals are very strong and the company will be selling high quality assets. But the deleveraging really does hinge primarily on their ability to dispose of assets, which is why we have the negative watch.”

For its part, AvalonBay has already made a major move toward accumulating cash for its portion of the Archstone purchase. On the same day of the Archstone announcement, AvalonBay commenced an underwritten public offering of 14,500,000 shares of its common stock. Some of the proceeds from the offering will also be utilized to prepay part of the Archstone debt that the REIT has agreed to assume.

Long-troubled Lehman, which emerged from bankruptcy in March of this year after having stunned the world with its massive and globally devastating collapse in 2008, will also be a winner in the Archstone trade. The $6.5 billion in cash and shares marks a substantial return on Lehman’s purchase of its partners’ 53.6 percent stake in Archstone earlier this year. As noted in a prepared statement by Owen Thomas, chairman of Lehman’s board of directors, all told, “the sale of Archstone to Equity Residential and AvalonBay is a very positive outcome for our creditors.”

The Archstone transaction is on track to close in the first quarter of 2013.