On Feb. 27, 2013, Equity Residential (EQR) finally completed its almost six-year pursuit of Denver-based apartment behemoth Archstone. But you wouldn’t know it by looking at the company’s senior management.

After endless days of developing strategy, proposing counteroffers, restructuring loans, picking properties, and making strategic dispositions, you’d think the team would celebrate by popping corks at the REIT’s snazzy downtown-Chicago, high-rise office, right?

Wrong. It turns out they were just too damn tired.

“We had a couple of drinks last night,” said CEO David Neithercut on Feb. 28, the day after closing EQR’s acquisition of 21,781 units in 76 properties. “It was really one of those things where, if you remember college and final exams, sometimes you just want to go home and go to bed.”

When Neithercut woke up on the 28th, he was suddenly managing a very different company from the one he took the helm of in 2006. With 127,814 units nationwide, EQR had accumulated a critical mass of apartments in high-barrier markets that it had targeted more than a decade ago. But it took a lot of time, money, and determination to get there.

On the Hunt

EQR’s chase of Archstone started soon after New York–based ­Lehman Bros. took the company private.

“We had been bird-dogging this thing since 2007,” Neithercut says. “We certainly knew that when Lehman had problems, there would need to be some kind of endgame. The banks didn’t want to own it and Lehman didn’t want to own it.”

Though industry buzz connected EQR with Archstone, Neithercut says he didn’t have formal talks with Archstone’s owners until 2010. But EQR developed a strategy to go after the banks owning Archstone.

On the Monday after Thanksgiving in 2011, Equity entered into an agreement with Bank of America and Barclays Bank to spend $1.325 billion in cash for a 26.5 percent ownership interest in Archstone (half of what the banks controlled). Lehman’s estate had the right to match that offer, which it exercised.

In May 2012, EQR bid on the other 26.5 percent the banks controlled and Lehman matched that offer, as well. In the end, EQR earned a $150 million breakup fee and Lehman’s estate gained full control of Archstone (with a bankruptcy court approving its liquidation plan).

Those watching from afar were expecting to see Archstone come back into the public sphere. “I always thought it would be an IPO,” says Alexander Goldfarb, managing director of equity research of ­REITs for New York–based Sandler O’Neill + Partners.

Neithercut had another card to play. As the bidding process played out, EQR devised other options, assuming Lehman ended up with ultimate control.

Originally, Lehman wanted only cash (and no stock) for Archstone. Neithercut said that would have meant too much execution risk for EQR. So, EQR needed a partner.

After talking to some large financiers, such as sovereign wealth funds, EQR decided that to minimize risk it needed someone more familiar with American apartments. Who better than one of its biggest rivals?

In January 2012, Neithercut approached Tim Naughton, CEO at Arlington, Va.–based REIT AvalonBay Communities (AVB) about joining forces to get Archstone. Naughton thought the idea was a “powerful concept.”

“By combining the balance sheets of the two largest REITs in the sector, we significantly increased the likelihood of striking a successful deal that would work for AVB, EQR, and Lehman, as well as the GSEs, who were an integral part of the transaction,” Naughton says.

Shortly after a bankruptcy board had been appointed to oversee the Archstone liquidation, the board met with EQR to gauge its commitment to the transaction. As the rest of the world expected an IPO (even though the public markets would have probably valued Archstone at less than its net asset value), Neithercut remained optimistic he could close the deal.

“They continued working on an IPO while they were working with us,” Neithercut says. “It sort of kept the heat on us.”

In November 2012, nearly a year after Equity made its first bid, EQR and AVB announced they paid Lehman $16 billion for Archstone. “I always felt this was the best outcome for the estate, and never once did I feel that it wouldn’t happen,” Neithercut says.

Neithercut’s confidence may have been a product of his own determination to cross the finish line.

“The deal was something David Neithercut was relentless in pursuing,” says Alan George, executive vice president and chief investment officer at EQR.“We dug a number of dry holes, as they say in the oil business, before we got to the point where there was a deal we could put together.”

Now came the fun: EQR had to absorb 60 percent of Archstone’s portfolio by February … and fund the purchase.

Ramping Up

Within minutes of the deal’s closing, you could already find Archstone apartments on EQR’s website—an Archstone resident could pay rent, review a lease, or submit a service request through EQR’s portal.

“The work that our team had done in preparation for this, by switching off Archstone’s system and switching on EQR’s system, was nothing less than awesome,” Neithercut says.

EQR has been the biggest buyer in the business, so incorporating new properties wasn’t anything new. But absorbing Archstone’s 21,781 units presented new challenges.

After the deal was announced, the company raised a billion dollars in equity and also sold 43 properties, consisting of 11,588 apartments, for an aggregate sale price of approximately $1.68 billion to further fund the deal. At closing, it expected to sell another 39 properties, consisting of 11,621 apartment units.

Both AVB and EQR also had to refinance Archstone’s loans. Archstone had borrowed $5 billion from Fannie Mae across half a dozen pools. The companies blew up Archstone’s collateral and went through the brain damage of resecuring all of those pools of debt in a very short period of time.

On the ever-important personnel front, EQR held town hall meetings for Archstone employees, bringing in its own property personnel to answer questions from Archstone property staff. If they had concerns, ex-Archstone employees had an EQR buddy and an 800 number to call with questions.

Through finance, human resources, and asset management, EQR went to great lengths to control the acquisition process, but there were things it couldn’t really know until the deal closed. For instance, it didn’t know the condition of all of Archstone’s assets.

George thought he had a pretty good idea after having competed with Archstone on about 75 percent to 80 percent of its properties. “We know an awful lot about these assets,” he says.

But some analysts have questions about the condition of the assets. “I can’t believe the cap-ex dollars were free-flowing at Archstone [which had a bankrupt owner],” says Rod Petrik, managing director at St. Louis–based Stifel, Nicolaus and Co., a regional brokerage and investment banking firm. “But if you defer cap-ex long enough, then it’s a value-add play.”

Neithercut doesn’t shy away from that strategy. “Where they might have been short was with that capital that could have renovated units, and we look forward to taking advantage of that ourselves,” he says.

The Final Tally

In this instant-gratification world, it’s easy to want to assign winners and losers in the Archstone deal. With the possible exception of Archstone’s former management team (which was relieved of its duties the day the deal closed), you could make the argument for almost everyone to be a winner.

EQR and AVB added units in great markets at a solid price. “When you look at the 4.7 cap rate [they paid], I’d think it’s a pretty good buy,” Petrik says, acknowledging that the buyers had to assume debt. “A lot of the Archstone product would have sold for sub-4 [percent], and a fair amount would have sold in the 4 to 4.5 range.”

EQR and AVB also eliminated a potential competitor.

“It takes away one of your largest competitors that’s focused on the exact same markets,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.–based consulting and research firm. “If Archstone is public, now there will be another company for investors looking for exposure to high-barrier markets.”

As a result, AVB’s portfolio grew 35 percent to 40 percent and earned an opportunity to add talent from Archstone’s platform, which it holds in high regard.

“Given how the asset draft worked out between us and EQR, we were also able to largely achieve our portfolio allocation objectives through this transaction, in particular increasing our Southern California presence significantly, which had been a challenge for us for many years,” Naughton says.

EQR can now complete its 12-year transformation by moving out of markets like Orlando and Jacksonville, Fla.; Atlanta; and Phoenix. “Buying Archstone allowed them to be more aggressive in getting out of their noncore markets,” Petrik says.

Then there’s the Lehman estate, which avoided the risks of going public while executing a private sale that returned a significant amount of capital to bankruptcy creditors.

“The winner is Lehman,” says Dan Fasulo, managing director of New York–based Real Capital Analytics. “They did a brilliant job.”

Charleston, S.C.–based owner, builder, and manager Greystar and New York–based Goldman Sachs could call themselves winners as well. To fund the Archstone deal, EQR sold them a 27-property portfolio with more than 2,000 units for $1.5 billion.

“Given the breadth of our organization and our presence in each of their markets, we were able to underwrite a significant number of assets and had the ability to perform due diligence quickly,” says Greystar CEO Bob Faith. “We had ready capital with our partner, Goldman Sachs, and we were able to go hard $150 million in just over two weeks.”

With the sale to Greystar and its other dispositions, EQR won’t need to sell as much as originally projected in the third and fourth quarters. Nevertheless, there will be opportunities for smaller buyers.

“There has been and will likely continue to be a trickle-down impact due to the sheer size of the transaction, which will bode well for private owners,” Faith says.

Petrik thinks the domino effect of the Archstone deal represents yet another stage in the evolution of large public companies and institutions deserting secondary and tertiary markets.

“[This] could mean less public company competition in secondary and tertiary markets,” he says. “There’s more opportunity for private equity and local partners.”

If that turns out to be the case, the bubbly may be flowing at a lot of other multifamily offices around the country in the next few years.

Les Shaver is a former senior editor of multifamily executive.