* Equity Residential, AvalonBay to split Archstone assets
* Archstone's 2007 LBO helped drive Lehman into bankruptcy
* Equity Residential, AvalonBay affirm earnings outlook
* Buyers to issue new shares to help fund the deal
* Equity Residential down 2.6 pct; AvalonBay down 0.7 pct
By Ilaina Jonas
NEW YORK, Nov 26 Lehman Brothers Holdings Inc
agreed to sell property group Archstone to two real estate
investment trusts for about $6.5 billion, taking advantage of a
strong market for apartments and marking an end to a 2007 gamble
that helped push the investment bank into bankruptcy.
The buyers, Equity Residential and AvalonBay
Communities Inc, will split the assets 60-40 and will
also take on Archstone's debt, for a total transaction value of
Lehman collapsed at the height of the financial crisis in
2008, in part because of soured real estate bets, including the
$23.7 billion leveraged buyout of Archstone. The firm filed for
bankruptcy and has been liquidating assets to pay back
creditors, who are still owed more than $30 billion.
Archstone, one of the largest owners of U.S. apartments, has
a large portfolio of properties in metropolitan areas, where
apartment buildings have been pricey and difficult to come by.
The acquisition would help real estate mogul Sam Zell's
Equity Residential expand its presence in mid-Atlantic and
Northeastern states, while AvalonBay would expand its base in
Southern California. Both buyers said they would issue stock to
help finance the deal.
"In the long term, it was a very good outcome for the REIT
industry at large," said Len Rittberg, vice president of
Adelante Capital Management. "They're both skilled operators. It
gives them scale."
Negotiations with both Equity Residential and AvalonBay have
been taking place since last year, two people familiar with the
deal said. But Lehman was also simultaneously working on taking
Archstone public, filing last week for a $3.5 billion initial
public offering in what would have been the biggest ever U.S.
real estate IPO.
Archstone's IPO faced some hurdles, including a high debt
load relative to other public apartment companies and highly
concentrated ownership, both of which would have hurt value. An
outright sale will also speed up repayment to Lehman's
"It's a better execution than they would have gotten had
they tried to become public," Craig Leupold, president of Green
Street Advisors. "It appears that the portfolio was sold within
range of what would be considered a fair price."
Lehman and real estate management company Tishman Speyer
acquired Archstone Smith at the height of the real estate boom.
As real estate values fell and credit began to dry up going
into the financial crisis, Archstone could not sell buildings to
repay some of its loans. Its lenders ended up owning the company
in 2010, with Lehman getting about 47 percent, while Barclays
Plc and Bank of America Corp owned a combined
After the financial crisis, as Lehman liquidated in
bankruptcy, the firm initially sought to spin off Archstone, but
the other banks balked. Ultimately, Lehman bought out their
stakes for about $3 billion. The deals were completed in June.
At the time Equity Residential also tried to buy all of
Lehman said the transaction price represented a significant
return on its purchase of the remaining stakes it bought this
It is not clear, however, how the price compares to the
original purchaes of Archstone in 2007, as the company's debt
and equity structure has changed significantly and its portfolio
is different as it has sold assets and built new apartments.
The combined purchase price includes $2.7 billion of cash,
as well as stock from Equity Residential and AvalonBay valued at
another $3.8 billion.
AvalonBay will contribute $669 million in cash and 14.9
million shares, or 13.2 percent of AvalonBay. Equity Residential
will contribute $2.02 billion in cash and 34.5 million shares,
or 9.8 percent of its stock. Both companies plan to issue new
shares, which will cut Lehman's stake to 12 percent in AvalonBay
and about 9 percent in Equity Residential after the deal closes.
The new issuance is likely to pressure the buyers' share
prices, which are already trading at a discount to the
underlying real estate, Leupold said.
The buyers will also assume $9.5 billion in debt, of which
Equity Residential will assume $5.5 billion.
Equity Residential will receive 78 properties or 23,110
units chiefly in Washington, D.C., San Francisco and Southern
California. Four of the properties are under development.
AvalonBay will get 66 apartment communities containing
22,222 homes. The properties are chiefly in the Mid-Atlantic
states, Southern California and Northern California.
REITS AFFIRM OUTLOOK
AvalonBay, based in Arlington, Virginia, affirmed its
outlook for the fourth quarter, including the impact of
Hurricane Sandy, of funds from operations of $1.40 to $1.45 per
It also said it expects to raise its dividend for the first
quarter 2013 by 8-12 percent, in part because of the Archstone
acquisition. It plans to issue 14.5 million shares of stock to
raise cash and repay a portion of the debt it will assume in
connection with the Archstone purchase.
"This acquisition accelerates our strategic growth vision of
more deeply penetrating our core, high barrier-to-entry coastal
markets," said Tim Naughton, AvalonBay's chief executive.
Chicago-based Equity Residential also affirmed its outlook
for the year of normalized funds from operations of $2.74 to
$2.78 per share.
Besides issuing 19 million shares to fund a portion of the
deal, the REIT is also planning to raise $3 billion to $4
billion from asset sales as it exits certain markets.
The transaction does not require approval from Equity
Residential or AvalonBay shareholders.
Equity Residential shares fell 2.6 percent to $53 in
extended trading on the New York Stock Exchange. AvalonBay
shares slipped 0.7 perent to $128 in late trade.