Archstone First and M in Washington, D.C., was among the communities acquired by AvalonBay in one of the largest portfolio deals in the past decade. Photo: Sam Kittner[/caption] Alan George can recall the rush of relief he felt as the ink dried, sealing the deal on Equity Residential’s purchase of former Archstone properties.
After all, Equity’s chief investment officer had been waiting for the deal to go down as his company haggled with AvalonBay over properties that composed one of the most powerful, high-quality portfolios in the industry.
Given the acquisition’s size and scope, it would be impossible for any other transaction to overshadow the carving up of the Archstone portfolio between Sam Zell’s Equity Residential and AvalonBay (AVB) this year.
Several communities changed hands this year, including (from left) Westchester at the Pavilions in Waldorf, Md., which Equity Residential acquired in the Archstone portfolio; Current in San Diego, part of a deal between UDR and MetLife; Whisper Creek Apartments in Lakewood, Colo., a property in the Equity Residential portfolio purchased by Greystar Real Estate Partners, Goldman Sachs, and Ivanhoe Cambridge; and Bravern Signature Residences in Bellevue, Wash., sold by Schnitzer West in the No. 10 deal of the year. Westchester: Courtesy Equity Residential; Current: © LaCasse Photography; Bravern Signature: Courtesy Schnitzer West[/caption] The Chicago-based firm’s purchase of 78 former Archstone properties was locked in at a whopping $8.961 billion, according to data from Real Capital Analytics, a market-research firm based in New York City. The deal brought about 23,100 units into Equity’s portfolio, doubling the size of its multifamily empire and pushing it to become the industry’s largest REIT, holding about $36 billion in assets, according to Newport Beach, Calif.-based market-research firm Green Street Advisors.
George says the largest point of appeal for the transaction was the sheer size of the portfolio.
“We saw volume that rarely comes around like this and would have taken us a long time to accumulate otherwise,” he says.
AvalonBay fell in line right behind Equity and bought the other portion of the Archstone portfolio, putting them on the list with the No. 2 largest deal of the year.
That transaction added more than 22,000 former Archstone units at 66 properties into Arlington, Va.–based AvalonBay’s portfolio, enabling AVB to become the second-largest REIT in the nation, with $24.6 billion in assets.
The two transactions combined for a pricetag of more than $16 billion and went down in the history books as the second-largest deal in the past 10 years. In fact, the only deal larger also involved Archstone—the $20.8 billion sale of Archstone-Smith to Tishman Speyer and Lehman Bros. (the latter of which eventually folded) at the height of the market in 2007.
Between Equity and AvalonBay, the Archstone properties were “drafted” by creating two separate transactions that satisfied both companies, George says.
One of the highlights for Equity was being able to gain ground in the competitive, high-barrier San Francisco market.
“We ended up with four development sites in San Francisco, and that is fabulous and unprecedented,” George says.
Southern California was also a clear point of interest for AvalonBay, Matthew Birenbaum says.
Birenbaum, AVB’s executive vice president of corporate strategy, says the deal was also about bringing in high-quality assets, both in properties and people. In addition to increasing the company’s portfolio size by about 35 percent through its largest transaction ever, AVB was also able to take over a stellar team of employees.
“We wound up getting a lot of great people through the process as well,” Birenbaum says. “It was easier to underwrite the real estate instead of the people.”
And in the midst of it all, one of the largest risk factors in taking on such a huge acquisition had nothing to do with the acquisition itself. The biggest risk was in being able to manage the existing business plans AvalonBay already had in motion prior to engaging in the transaction.
By the end of this year, the company will have more new development under way than it has ever had before, Birenbaum says.
“Sometimes the risk [in a huge transaction] is the distraction risk,” he says. “Does it take the eye off the ball of your core business?”
And the deal’s quick turnaround added more pressure for all companies affected. The Archstone deals, as well as all of the transactions that trickled down from them, took place in rapid-fire motion, causing each firm involved to dedicate countless hours to ensuring everything could fall into place.
Both Birenbaum and George note how the Archstone transaction changed the face of the industry by shaking up the size of their top competitors and causing other businesses to seize the opportunities emerging in the wake of those mega-deals.
Dweck Properties, for example, got a piece of the Archstone pie in acquiring an Arlington, Va., property for a hefty $322.3 million (roughly $352,344 per unit). That deal put Washington, D.C.–based Dweck at No. 9 on the biggest-transactions list. The community it purchased from Equity Residential, called the Crystal Towers Apartments, includes two buildings comprising 914 luxury units.
The Archstone deal’s massive impact on the industry is reflected elsewhere on the list, too, as other assets changed hands in a chain reaction. George says the deal was a once-in-a-lifetime opportunity that Equity just couldn’t overlook, so it decided to sell about $4 billion in assets to acquire about $9 billion, he says.
Once the Archstone deal was done, officials at Charleston, S.C.–based Greystar knew that Equity would have to consider selling some properties, opening the door to a unique purchasing opportunity, says Wes Fuller, executive director of investments at Greystar.
“When the Archstone transaction was announced, I sent our team out and we underwrote about 77 Equity assets,” Fuller says. “Because we knew they were going to have to get rid of something. So, we basically underwrote 77 to approach EQR [Equity] with a proposal.”
From that list of 77, the firm zeroed in on the most coveted, though the high quality of the portfolio made the choices difficult.
“We selected specific assets,” Fuller says. “Typically in a portfolio, when you buy it, there are some cats and dogs that you really don’t care about. But that wasn’t the case here.”
The Greystar team hand-selected 27 assets that fit its business strategy and proposed to buy them from Equity as the latter firm prepared to make space for the Archstone deal.
“We were able to buy assets that we wanted in the markets that we wanted,” Fuller says.
Ivanhoe Cambridge also got into the game, by buying in as an institutional investor with Greystar and Goldman Sachs on the Equity portfolio transaction. The Canadian company was already discussing business strategies with Greystar at the time and decided the Equity deal was the best bet, says Sylvain Fortier, the company’s executive vice president of residential and hotels. Making a move into the deal fit Ivanhoe Cambridge’s strategic plan to gain ground in core markets such as Los Angeles, Washington, D.C., and the Bay Area.
Together, the three companies purchased more than 7,700 units at 27 properties from Equity for a price of about $1.5 billion, making that transaction the No. 4 deal of the year, according to Real Capital Analytics.
Six months into ownership, Greystar officials say they couldn’t be more pleased with how it all worked out. Fuller says absorbing the acquired communities went as well as they could have hoped, without any unexpected bumps along the way.
By the end of 2013, the company was busy assuming control of the assets without any surprises. But the biggest challenge in acquiring so much property is folding each into the company’s business model and implementing national practices across each staff.
“We use different systems and different training from EQR,” says Fuller. “So, you’re training new people in different systems and new philosophies all at one time across 27 properties.”
And although the team at Greystar has been burning the midnight oil for most of the year, it’s been well worth it.
“It’s like having a baby, in a lot of ways,” Fuller says. “You love the opportunity, but you know you’re not going to get a lot of sleep in the first six months.”
SEIZE THE DEAL
In addition to the Archstone-related transactions, this year also offered unique opportunities for other firms.
Highlands Ranch, Colo.–based UDR extended a partnership with MetLife in the No. 7 deal of the year, while Newport Beach, Calif.–based Irvine Co.’s purchase of a San Diego community wound up in the No. 8 spot. The massive property, La Mirage, features about 1,400 units, with rents ranging from $1,490 to $2,535, according to the company’s website.
Irvine Co., a privately owned investment company, bought the property from Equity Residential for about $360 million, according to Real Capital Analytics.
And while the La Mirage deal included only rental housing, the No. 6 deal of the year wasn’t a purely for-rent play. The Aldyn and Ashley buildings transaction was different for Boston-based GID Investment Advisers because Aldyn included individually owned condos as well as rental housing.
Andrew Scandalios, a senior managing director at commercial real estate capital intermediary HFF, headquartered in Pittsburgh, helped broker the $401 million deal on the 345 newly constructed units, located in Manhattan. The deal included massive California pension fund CalPERS as an equity partner.
“Not all the investors were enthusiastic about buying the remaining condos, because it’s not a pure rental building,” Scandalios says. “A lot of these core investors want to buy just rentals.”
But despite the fact that the new owners would have to agree to work with a condo board and a homeowners association, there was a lot of interest in the deal.
More than 130 investors were interested, and more than 30 tours of the property were given to evaluate it. Scandalios says it was rare to see new product on the market at that time, making the deal more competitive.
“Coming out of this last cycle, there wasn’t a lot of development in ’09 and 2010,” Scandalios says. “This was some of the newest product—it was started in ’07, ’08 and it was completed. It was one of the first properties to be marketed and sold. Carlyle always wanted to sell it.”
Top Ten Deals of 2013
1. Archstone Portfolio, Equity Residential from Lehman Bros.
2. AvalonBay Archstone Portfolio, AvalonBay Communities from Lehman Bros.
3. GE Capital U.S. Apartments Portfolio, Blackstone from GE Capital
4. Equity Residential Portfolio, Goldman Sachs, Greystar, and Ivanhoe Cambridge
from Equity Residential
5. Lone Star Funds Apartment Portfolio, Lone Star Funds from ORIX Capital Markets
6. Aldyn & Ashley Portfolio, GID OBO CalPERS from Carlyle Group
7. UDR Portfolio, MetLife from UDR
8. La Mirage (San Diego), Irvine Co. from Equity Residential
9. Archstone Crystal Towers (Arlington, Va.) Dweck Properties from Equity Residential $322.3 million
10. Bravern Signature Residences (Bellevue, Wash.), Invesco RE from Schnitzer West
List provided by Real Capital Analytics.
Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.