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EQR: A Minority Stake in Archstone? - Analyst Blog

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Confirming the latest buzz in the industry, Equity Residential ( EQR ), a multifamily real estate investment trust (REIT), has entered into an agreement to acquire about a 26.5% ownership stake in rival company Archstone - one of the largest investors, developers and operators of apartment communities in the U.S., for $1.325 billion in cash. The transaction is expected to be completed in the first quarter of 2012, subject to the fulfillment of certain conditions.

Earlier, the industry was rife with speculation that Equity Residential would acquire a lion's share in Archstone for about $2.6 billion in cash and stock, arguably creating one of the largest real estate transactions since the recession. However, the company has settled for a lower bid probably due to the complex ownership structure of Archstone.

Archstone is presently owned by a consortium of financial institutions that include Bank of America Corporation ( BAC ), Barclays PLC ( BCS ), and the bankruptcy estate of Lehman Brothers Holdings Inc. While the banks collectively hold a 53% stake in the company, Lehman holds the remaining 47%.

Earlier this year, the owners failed to reach a unanimous decision on how to unwind Archstone, leading the banks to put their ownership stake on the block in their concerted effort to raise cash and avoid a similar fate as that of Lehman. The present 26.5% ownership stake on offer represents one half of the combined interests owned by the banks.

The increased frenzy in owning apartment company Archstone has become murkier with the 'right to first offer' by Lehman, under which the banks are obliged to present it with any offer they would like to accept and give the estate a chance to either match or beat it. Lehman is likely to have a brief period to respond and roughly about 50 days to put up the money.

Insiders familiar with the situation are of the opinion that Lehman might forestall Equity Residential from owning Archstone as it fears losing management control of the company. Equity Residential already has a large management operation line-up and Lehman fears that it might replace Archstone's management team and apartment management operation with that of its own.

In addition to Equity Residential, Archstone's owners had also received competitive bids from other REITs like Avalonbay Communities Inc. ( AVB ), private-equity firm The Blackstone Group ( BX ), and Canada-based investment firm Brookfield Asset Management Inc.

The renewed interest in owning one of the prized apartment companies in the U.S. is primarily due to the underlying fact that the multifamily sector has emerged as one of the best performing commercial real estate sectors in recent quarters.

As 'echo boomers' (the children of the baby boomer generation) opt to move out on their own and more renters decide to part ways with family and roommates, the single-family homeownership rate across the U.S. has witnessed a continuous decline and demand for multifamily rental apartments has surged.

With new supply remaining muted until late 2013 or 2014, renting has emerged as the only viable option for customers who could not get mortgage loans or are unwilling to buy a house at present. Consequently, national apartment vacancy rates have dipped to 5.6% at the end of third quarter 2011 - the lowest since 2006.

Irrespective of the outcome of this ownership battle, the apartment sector as a whole is expected to benefit in the long run with the consolidation in the market. In particular, Equity Residential is also expected to benefit from the acquisition of premium assets in some of the most desirable markets in the U.S.

By the end of third quarter 2011, Archstone's portfolio included 48,922 wholly-owned and stabilized apartment units as well as 1,332 apartment units under construction, land sites for the potential development of 5,279 apartment units and 9,423 apartment units owned in unconsolidated joint ventures with third parties. The portfolio also included approximately 14,000 wholly-owned or unconsolidated joint venture-owned apartment units in Germany.

The proposed purchase price of $1.325 billion equates to a capitalization rate of 5.3% for Archstone's wholly-owned and stabilized portfolio. Equity Residential expects to fund the acquisition through a combination of cash on hand, available borrowings under its $1.25 billion revolving credit facility, proceeds from non-core asset sale, bank term debt and secured and unsecured debt and equity offerings.

We maintain our 'Neutral' recommendation on Equity Residential, which currently has a Zacks #3 Rank that translates into a short-term 'Hold' rating.

AVALONBAY CMMTY ( AVB ): Free Stock Analysis Report

BANK OF AMER CP ( BAC ): Free Stock Analysis Report

BARCLAY PLC-ADR ( BCS ): Free Stock Analysis Report

BLACKSTONE GRP ( BX ): Free Stock Analysis Report

EQUITY RESIDENT ( EQR ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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