EQR, AVB Purchase Archstone: The Numbers

Archstone, the apartment owner that played a major role in the demise of Lehman Brothers Holdings, is being sold by Lehman to Equity Residential and AvalonBay Communities for $6.5 billion in cash and stock.

The deal announced Nov. 26 comes as a bit of a surprise, considering that Lehman had been planning to take Archstone public in what would have been the largest-ever initial public offering of a REIT. Lehman, however, ultimately opted for a quick sale to the two rivals as such a transaction outweighed the potential pitfalls of going public amid a turbulent market for IPOs.

Roughly three-fifths of the company, or approximately 23,000 apartments, will go to Equity Residential (EQR). AvalonBay (AVB) will get the remaining 22,000 rental units. The sale is valued at $16 billion including debt.
The combined purchase price for the assets consists of (i) $2.7 billion in cash, (ii) a fixed number of shares of EQR and AVB’s common shares valued at $3.8 billion as of the market’s close Nov. 23 and (iii) the assumption of approximately $9.5 billion of debt and $330 million of preferred equity. Of the debt to be assumed, approximately $8.6 billion is held by Fannie Mae and Freddie Mac, each of which has agreed to the assumption of this debt by EQR and AVB.

"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," said David J. Neithercut, EQR’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. As a result, [EQR]’s future earnings and shareholder return will be derived from the highest quality assets in the nation's high-barrier, high-growth coastal markets."

EQR will acquire 78 wholly-owned stabilized operating properties with an average monthly rent of $2,492 per unit and valued at $367,003 per unit. Among them, EQR added 24 communities in Washington, D.C. (7,578 units) and 14 in San Francisco (4,827 units). The cap rate for its entire acquisition is approximately 5 percent. When adjusted for transaction costs and the debt mark-to-market, the cap rate would be approximately 4.7 percent.

AVB’s CEO and President Tim Naughton said, “This acquisition accelerates our strategic growth vision of more deeply penetrating our core, high barrier-to-entry coastal markets. 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.”
AVB will acquire 66 communities; among them 23 in Southern California (8,507 units) and 18 in the Mid-Atlantic (5,311 units).

Source: NAA Industry Insider and AVB and EQR press releases.