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CHICAGO — In a bold move to gobble up high-quality apartment properties in major U.S. coastal markets, Equity Residential and AvalonBay Communities Inc. have entered into an agreement with Lehman Brothers Holdings Inc. to acquire Archstone Enterprise LP for approximately $6.5 billion in cash and stock.

Under terms of the agreement announced Monday, Equity Residential (NYSE: EQR) will acquire approximately 60 percent of Archstone’s assets and liabilities and AvalonBay (NYSE: AVB) will acquire approximately 40 percent.

The combined purchase price for the assets consists of $2.7 billion in cash, a fixed number ofshares of Equity Residential and AvalonBay’s common shares valued at $3.8 billion as of the market’s close on Friday, Nov. 23, and the assumption of approximately $9.5 billion of debt and $330 million of preferred equity.

The transaction is expected to close in the first quarter of 2013.

Chicago-based Equity Residential will acquire 78 wholly owned stabilized operating properties, consisting of 23,110 apartment units with an average monthly rent of $2,492 per unit. The transaction values the residential portion of these stabilized operating properties at $367,003 per apartment unit. The capitalization rate is approximately 5 percent.

Of the 78 properties acquired by Equity Residential, 24 are located in Washington, D.C, followed by 14 in San Francisco, 12 in Southern California, 10 in New York, eight in Boston, seven in Seattle, and three in other markets.

“Archstone's assets will fit perfectly into the Equity Residential portfolio, further improve the overall quality of our assets and add scale to our operating platform in our core markets,” says David Neithercut, Equity Residential’s president and CEO.

“Furthermore, by funding much of this acquisition with proceeds from the sale of assets in our non-core, exit markets, we are accelerating the completion of the total transformation of our portfolio,” continues Neithercut. “As a result, Equity Residential's future earnings and shareholder return will be derived from the highest quality assets in the nation's high-barrier, high-growth coastal markets.”

Billionaire Sam Zell is the founder of Equity Residential and has served as chairman of the company’s board since 1993.

A substantial portion of Equity Residential’s acquisition will be funded with proceeds from asset sales. More specifically, Equity Residential intends to use proceeds from approximately $3 billion to $4 billion in asset sales in exit markets such as Atlanta, Orlando, Phoenix and Jacksonville and from the sale of non-core assets in other markets between now and the end of 2013.

AvalonBay will purchase 66 apartment communities, containing 22,222 apartments, of which six communities are under construction and are expected to contain 1,666 apartments upon completion. Nearly half of the properties, 32, are located in California and 18 are in the Mid-Atlantic. Another six properties are located in the Northeast and two are in the Pacific Northwest.

“This acquisition accelerates our strategic growth vision of more deeply penetrating our core, high barrier-to-entry coastal markets,” says Tim Naughton, president and CEO of Arlington, Va.-based AvalonBay. “This is a rare opportunity to acquire a high-quality portfolio of apartment communities concentrated in our markets, to better achieve our geographic portfolio allocation goals, to enhance operating efficiencies and to further advance our multi-brand strategy.”

Of the debt to be assumed, approximately $8.6 billion is held by Fannie Mae and Freddie Mac. Both government-sponsored enterprises agreed to the assumption of this debt by Equity Residential and AvalonBay.

According toThe Wall Street Journal, the deal came as a surprise because Lehman Brothers Holdings had been planning to take Archstone public. The initial public offering would have been the largest ever for a real estate investment trust. But Lehman, which is liquidating the U.S. assets of the failed investment bank, ultimately decided a quick sale to the two companies outweighed the risks of going public amid a tumultuous market for IPOs, The Wall Street Journal added.

On Monday, Equity Residential’s stock closed at $54.43 per share, up from $52.56 a year ago. The stock price of AvalonBay closed at $128.95 per share compared with $118.10 at this time last year.

— Matt Valley

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