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Why AvalonBay Communities Acquired Archstone Enterprise

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Overview

In 2013, AvalonBay Communities (AVB) and Equity Residential (EQR) acquired assets and liabilities of Archstone Enterprise LP from Lehman Brothers Holdings, Inc., which consisted principally of a portfolio of high-quality apartment communities in major markets in the United States. AvalonBay Communities acquired ~40% of Archstone’s assets and liabilities, while Equity Residential acquired ~60% of Archstone’s assets and liabilities.

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Transaction details

AvalonBay Communities’ portion of the completed transaction was valued at ~$6.5 billion. In addition to assuming ~$3.9 billion of consolidated and unconsolidated debt, AvalonBay paid $669 million in cash and delivered 14.9 million shares of AvalonBay Communities common stock, valued at $1.9 billion.

What was gained?

As part of the Archstone Acquisition, AvalonBay Communities acquired 60 apartment communities, containing 20,089 apartment homes, of which five communities were under construction with 1,198 apartment homes. The deal also involved five parcels of land containing a total of 1,414 apartment homes once developed. In addition, the acquisition involved interests in joint ventures, which own 12 apartment communities, containing 2,851 apartment homes; and a 40% ownership interest in a joint venture arrangement with Equity Residential that contains certain non-core assets and residual liabilities that will be jointly managed until disposition or resolution. The acquisition of Archstone seems to have led to a competitive advantage for AvalonBay Communities over its peers such as UDR (UDR), and Camden Property Trust (CPT). The iShares Residential Real Estate Capped ETF (REZ) invests 8.25% of its portfolio in AvalonBay Communities.

Management’s perception

The management painted a bullish picture after the Archstone acquisition. The company’s CEO, Tim Naughton, said, “Our acquisition of assets from Archstone represents a rare opportunity to expand our presence across our markets with a portfolio that is complementary on three important dimensions – market concentration, sub-market positioning, and price point. In addition, this acquisition provides scale benefits in terms of brand penetration and G&A leverage, which we believe will strengthen our competitive position over time and create long-term value for shareholders.”

In the next article, we will discuss AvalonBay Communities’ development and redevelopment projects.

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