Equity Residential to take stake in Archstone

Equity Residential, the largest publicly traded U.S. apartment owner, has agreed to buy a 26.5 percent stake in apartment owner Archstone for $1.33B from Bank of America and Barclays, the company said in December.

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The stake would be about half of the ownership held by the two banks and sets the clock ticking for the remaining owner, Lehman Brothers, to match it.

“A 26.5 percent stake gives us a seat at the table regarding making decisions and the long-term outcome of the portfolio,” Equity Residential spokesman Martin McKenna said.

Lehman, which is operating under bankruptcy protection, has the right to match the offer and is in discussions with several potential partners including the Blackstone Group and Brookfield Asset Management, sources have said.

Archstone’s three owners have not been able to agree with what to do with Denver-based Archstone, which owns about 77,084 apartment units. Under a restructuring plan reached last year, all three have to unanimously approve nearly all decisions regarding Archstone.

When the three failed to agree, Barclays and Bank of America decided to sell their stakes.

“We don’t get any more decision making power owning 53 percent,” McKenna said, when asked why Equity Residential did not decide to buy the other half of the banks’ interest in Archstone.

Equity Residential was founded by its chairman, real estate mogul Sam Zell. The Chicago-based apartment owner, which owns or has stakes in 119,011 apartments in 15 states and Washington, said it would take a fourth-quarter charge of about $5.8 million for part of the transaction and financing expenses.

It also said it planned to fund the acquisition through cash on hand, borrowings available under a revolving credit facility, and other sources.

Apartment buildings have become attractive as sets f or man y investors recently bec ause they generate strong cash flow. Landlords have been able to raise rents as more Americans shun home ownership. Job growth, a key driver of apartment demand, also continues to improve.

“Archstone has great assets and at the right price, we would like to own the assets,” McKenna said.

But Equity Residential could represent the wor st p artne r f or L ehman . Equity Residential is not interested in Archstone’s management or operating platform, as it has its own.

It could veto any plans for an increase in compensation for Archstone executives or the companies’ development plans in order to get the rest of the company at a cheaper price, sources have said.

The bankrupt investment bank has a brief period to respond but has roughly 50 days to put up the money, the source said. Lehman also would have to be presented to bankruptcy court.

A representative of Lehman could not be reached for immediate comment.