Lehman to sell apartment owner Archstone for $6.5 billion
NEW YORK (Reuters) - 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 (EQR.N) and AvalonBay Communities Inc (AVB.N), will split the assets 60-40 and will also take on Archstone's debt, for a total transaction value of $16 billion.
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 creditors.
"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 (BARC.L) and Bank of America Corp (BAC.N) owned a combined 53 percent.
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 Archstone.
Lehman said the transaction price represented a significant return on its purchase of the remaining stakes it bought this summer.
It is not clear, however, how the price compares to the original purchase 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 share.
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 percent to $128 in late trade.
(Reporting by Ilaina Jonas; Editing by Paritosh Bansal, Gary Hill, Tim Dobbyn and Richard Pullin)
- Tweet this
- Share this
- Digg this
- Kerry presses India on global trade deal as deadline looms
- Gaza toll soars as Israel "days" from completing tunnel hunt
- HCL Tech Q4 dollar revenue disappoints investors, shares fall
- China should set lower 2015 GDP growth target of 6.5-7 pct - IMF
- Some WTO members discussing customs deal without India - sources