Equity Residential (EQR:US)’s partial purchase of Archstone Inc. completes the company’s evolution from a garden-apartment landlord into an owner of high-rises in markets where development is difficult, Chairman Sam Zell said today.
“Today, with this transaction, we’ll be all barrier-to- entry,” Zell said in an interview on Bloomberg Television’s “In the Loop.” The Archstone deal gives Chicago-based Equity Residential more apartments in such markets as New York and San Francisco, where the scarcity and high cost of land combined with zoning restrictions limit new construction.
Equity Residential, the largest publicly traded U.S. apartment landlord, will acquire about 60 percent of Archstone in a cash-and-stock deal valued at about $16 billion, including debt. The purchase, from Lehman Brothers Holdings Inc., increases Equity Residential’s 119,000-unit portfolio by 20 percent, and bolsters its holdings in cities where it already has properties, sometimes across the street. AvalonBay Communities Inc. (AVB:US), the No. 2 public apartment company, is buying the other 40 percent of Archstone.
The properties Equity Residential will acquire are mostly in Washington, San Francisco, Southern California and New York, while AvalonBay’s will be chiefly in the mid-Atlantic region and Southern California. The transaction will give Equity Residential 78 properties with 23,110 apartments, while Arlington, Virginia-based AvalonBay will receive 66 complexes with 22,222 units.
The deal’s size, the largest in either company’s history, made it “prudent” to bring in a partner, even one who is a competitor, Zell said in the Bloomberg TV interview. The firms “worked together just like hand in glove, so it was a seamless transition,” he said.
The landlords carved up Archstone assets in a session similar to the National Football League draft, Zell said.
“You have a pool of guys and then each team picks one, then the other one picks one,” Zell said. “So we put AvalonBay and EQR in the room, we put all the Archstone assets on the table and we said, ‘OK, flip a coin, who goes first?’”
Equity Residential got the first pick for $450 million, and AvalonBay got the second and third picks for $300 million each, according to a Nov. 29 report by Green Street Advisors Inc., a Newport Beach, California-based research firm. Values for each asset were pre-determined by both companies ahead of the selections, Green Street said.
The acquisition means Equity Residential “will have completed its process of evolution from a garden-apartment company in 1993, when we went public at $800 million of total enterprise value,” Zell said in the interview. The deal’s completion is expected by the end of March.
Equity Residential, with a market value of about $18 billion, climbed 1.1 percent to $55.02 at 11:18 a.m. in New York trading. AvalonBay rose 0.8 percent to $133.80.
Including debt, the Archstone sale is the biggest real estate transaction since Blackstone Group LP’s $26 billion purchase of hotelier Hilton Worldwide Inc. in July 2007, according to Dan Fasulo, a managing director at New York-based Real Capital Analytics Inc.
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