Lehman sells Archstone to Equity, AvalonBay for $6.5bn

The former Wall Street banking giant has agreed to sell its single largest asset to two REITs in lieu of an IPO.

After winning full control of the asset earlier this year, Lehman Brothers Holdings is selling the Colorado-based apartment REIT Archstone Enterprise to Equity Residential and AvalonBay for $6.5 billion.

A statement from the former Wall Street banking giant said that Lehman has entered into a definitive agreement to sell full ownership of Archstone, its single largest asset, to Sam Zell’s Equity Residential and Arlington, Virginia-based AvalonBay Communities for cash and stock with an aggregate value of approximately $6.5 billion. Under the terms of the agreement, Equity Residential will acquire approximately 60 percent of Archstone’s assets and liabilities, while AvalonBay will acquire roughly 40 percent.

In turn, Lehman will receive in cash and stock in Equity Residential and AvalonBay valued at $2.69 billion and $3.8 billion respectively, based on closing prices from 23 November. As a result, Lehman will own 9.8 percent of Equity Residential and 13.2 percent of AvalonBay.

Equity Residential will acquire 78 wholly owned stabilised operating properties, consisting of 23,110 apartment units. AvalonBay will purchase 66 apartment communities, containing 22,222 apartment homes, of which six communities are under construction and are expected to contain 1,666 apartment homes upon completion.

The transaction is expected to close during the first quarter of 2013.

Owen Thomas, chairman of Lehman's board of directors, said in a statement: “The sale of Archstone to Equity Residential and AvalonBay is a very positive outcome for our creditors. 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.”

This deal follows Lehman purchasing the remaining 53.6 percent stake in Archstone earlier this year from minority co-owners Bank of America and Barclays after a lengthy and contentious battle for ownership of the apartment giant between Lehman and Equity Residential. Since completing its purchase of the asset, Lehman has evaluated a broad range of monetisation alternatives for the company, including filing in August for an initial public offering.

“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 Neithercut, Equity Residential’s president and chief executive officer.

Tim Naughton, AvalonBay’s president and CEO added: “This acquisition accelerates our strategic growth vision of more deeply penetrating our core, high barrier-to-entry coastal markets.”

The initial battle between Equity Residential and Lehman over ownership of Archstone followed the failure of Lehman, Bank of America and Barclays to agree over what to do with the troubled REIT. In June 2011, the three firms could not decide whether to sell their stakes via an IPO, sell the company outright or infuse some fresh capital into the platform. Following this communication breakdown, Bank of America and Barclays chose to sell their shares to the highest bidder.