Lehman Opts for Archstone Sale as Apartment REITs Slide
Lehman Brothers Holdings Inc. agreed to sell its Archstone Inc. unit to Equity Residential and AvalonBay (AVB) Communities Inc. for $6.5 billion, scrapping plans for an initial public offering after a four-month slide in U.S. apartment stocks.
Equity Residential, founded by Sam Zell, and AvalonBay will together pay $2.69 billion in cash along with stock valued at $3.8 billion, based on their Nov. 23 prices, New York-based Lehman said yesterday in a statement. The buyers, the two biggest U.S. apartment landlords by market value, will also assume $9.5 billion of Archstone debt.
“The window was closing to optimize an Archstone IPO,” said Richard Anderson, an analyst with BMO Capital Markets in New York. “This basically eliminates the overhang of Archstone and will it or won’t it be a success.”
Lehman, which filed the biggest bankruptcy in U.S. history in 2008, is selling assets to pay off creditors after leaving court protection in March. Equity Residential (EQR), which will get 60 percent of Archstone, and AvalonBay, which is taking 40 percent, are making their biggest acquisitions as the recovery in U.S. home sales has helped drive down shares of apartment real estate investment trusts.
A Bloomberg index of 16 apartment REITs has fallen 13 percent since July 17, when the group hit a post-financial crisis high, and is heading for its first annual decline since 2008. The gauge had more than tripled from March 2009 amid rising rents and falling vacancies caused by the surge in home foreclosures.
Archstone, based in Englewood, Colorado, owns about 58,000 apartments in U.S. coastal markets such as New York, Washington, D.C., Seattle and California. As of Sept. 30, it had plans to develop an additional 8,900 apartments. The firm also owns 10 apartment properties in Germany.
Archstone filed in August to go public. Last week, the landlord said it was planning to raise as much as $3.45 billion in the offering, though it didn’t disclose what percentage of the company it was seeking to sell.
There have been five U.S. apartment REIT IPOs in the past 10 years and none since March 2011, according to data compiled by Bloomberg. Of the four that are still publicly traded, three have declined since their listing, the data show.
“It’s a reflection of being able to take the money today at a known value versus going through the IPO process,” Alexander Goldfarb, a REIT analyst at Sandler O’Neill & Partners LP in New York, said in a telephone interview.
“If it was an IPO it would have gotten done, but the question is at what price?” he said. “Lehman may have decided that, you know, we have two people who are willing to write us this check today.”
Lehman had been planning for an IPO while negotiating with both Equity Residential and AvalonBay since the middle of 2011, said two people familiar with the deal who asked not to be named because they were not authorized to speak publicly about it. The value of the offers Lehman received for Archstone, its largest asset, improved over that time. Ultimately, Lehman concluded that cash up front, at the current value, made this a better option than to test the uncertainty of the IPO market, the people said.
IPOs worldwide slumped to the second-lowest level since the financial crisis last quarter as a global economic recovery remained uncertain, and the Standard & Poor’s 500 Index has declined more than 2 percent since the end of September, posing a further challenge to new share sales.
The apartment REIT index has fallen 1.2 percent in 2012, according to data compiled by Bloomberg. Including reinvested dividends, the gauge returned 1.3 percent this year, trailing a 14 percent gain for a broader index of 126 publicly traded REITs, the data show.
Those “managing the Lehman real estate portfolio missed the entire bull run in apartment stocks and missed the best pricing for apartment assets generally,” said James Corl, managing director of Siguler Guff & Co. overseeing distressed real estate investments. The New York-based firm manages more than $10 billion, according to its website. “It’s always more fun to sell into a bull market than into a bear market,” he said.
Including debt, the Archstone sale is the biggest real estate deal since Blackstone Group LP’s $26 billion acquisition of hotel company Hilton Worldwide Inc. in July 2007, according to Dan Fasulo, a managing director at New York-based Real Capital Analytics Inc.
“The sale of Archstone to Equity Residential and AvalonBay is a very positive outcome for our creditors,” Owen Thomas, Lehman’s chairman, said in the statement. “The transaction delivers significant return on the investment we made earlier this year to fully control Archstone and has generated immediate and considerable proceeds for our next distribution to creditors.”
As a result of the deal, Lehman and its affiliates will own 9.8 percent of Chicago-based Equity Residential and 13.2 percent of Arlington, Virginia-based AvalonBay, according to the statement.
In December, Equity Residential had offered to buy 26.5 percent of Archstone for $1.33 billion, bidding on a stake held by Bank of America Corp. and Barclays Plc. Lehman accused Zell of trying to bid up the price, then eventually matched it, paying $3 billion for the 53 percent of Archstone that it didn’t already own.
Equity Residential realized that it needed “a strategic partner, with complementary interests” if it wanted to acquire Archstone, Chief Executive Officer David Neithercut said on a conference call after the deal was announced. “So last January, we reached out to one and only one firm, AvalonBay, and I can tell you it was one of the best decisions we’ve made in this entire process.”
Equity Residential and AvalonBay have 120 days to complete the deal, according to Lehman’s statement.
Rental revenue at Archstone increased 8.3 percent in the third quarter from a year earlier to $272.7 million, last week’s filing showed. The company booked a net loss of $176.6 million compared with a profit of $106.2 million a year earlier.
Richard Wolff, a spokesman for AvalonBay, and Bryan Locke, a spokesman for Equity Residential, said the companies had no comments beyond their statements and the joint conference call.
Equity Residential, the largest apartment landlord, owns or has a stake in 418 properties with about 119,000 apartments in 13 states and the District of Columbia. Zell, its chairman, also ran office landlord Equity Office Properties Trust, which he sold to Blackstone Group LP for $39 billion including debt in February 2007, before Lehman went bankrupt, the economy went into recession and office real estate values plunged.
AvalonBay owns, operates and develops apartment communities in markets such as New York, San Francisco and throughout the Northeast and mid-Atlantic U.S. As of Sept. 30, the company owned or held stakes in 205 apartment communities with more than 60,000 apartments, in nine states and Washington, D.C.
Morgan Stanley provided financial advice to Equity Residential, while Hogan Lovells US LLP and Morrison & Foerster LLP served as legal advisers. Greenhill & Co. acted as financial adviser to AvalonBay, with Goodwin Procter LLP providing legal advice. Gleacher & Co. served as lead financial adviser to Lehman, while Citigroup Inc. and JPMorgan Chase & Co. also provided financial advice. Weil Gotshal & Manges LLP acted as legal counsel to Lehman on the deal.
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