Lehman Brothers to Sell Archstone to 2 REITs for $6.5bn

December 1
1:01 PM 2012

In the wake of strong demand for apartments in key US markets, Lehman Brothers Holdings Inc has decided to sell its property group Archstone to two real estate investment trusts (REITs) -- AvalonBay Communities Inc and Equity Residential -- for a total consideration of $6.5 billion. The deal is for $2.7 billion of cash as well as stock from Equity Residential and AvalonBay valued at $3.8 billion.

AvalonBay will give $669 million in cash and 14.9 million shares, or 13.2 percent of its stock. Equity Residential will contribute $2.02 billion in cash and 34.5 million shares, or 9.8 percent of its stock.

Archstone is among the largest owners of US apartments and holds a portfolio of properties in areas that command high property prices. With this sell-out, Lehman would have finally divested its ownership of a business that had caused its bankruptcy in the midst of the sub-prime crisis.

Equity Residential will pick 60 percent of Archstone assets, whereas AvalonBay Communities will get a 40 percent share. The two REITs will also take on Archstone's debt for a total transaction value of $16 billion.

This acquisition will give Equity Residential the opportunity to expand its footprint in mid-Atlantic and Northeastern states, while AvalonBay would expand its base in Southern California. AvalonBay's Chief Executive Tim Naughton was quoted saying, "This acquisition accelerates our strategic growth vision of more deeply penetrating our core, high barrier-to-entry coastal markets."

Prior to this deal, Lehman had planned for taking Archstone public and had even filed for a $3.5 billion initial public offering (IPO), potentially the biggest ever US real estate IPO. However, the IPO did not come through as Archstone had a high debt load compared with other public apartment companies.

The fact that it had a highly concentrated ownership also did not help the IPO cause. Now, the outright sale will help Lehman to fast-track the repayment to its creditors. Having filed for bankruptcy in 2008, Lehman has been liquidating assets to pay back creditors who are still owed more than $30 billion.

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