Lehman Unloads Archstone for $6.5 Billion in Cash and Stock

In one of the biggest real-estate deals of the year, the estate of bankrupt investment bank Lehman Brothers sold apartment owner Archstone to a pair of investors for $6.5 billion in cash and stock.

The deal also includes the assumption of about $9.5 billion in debt.

The transaction rids Lehman of its largest single asset and comes amid growing signs that the U.S. real-estate market is continuing to recover from the subprime meltdown.

Lehman said Equity Residential (NYSE:EQR) and AvalonBay Communities (NYSE:AVB) agreed to pay $2.685 billion in cash and $3.8 billion of shares in the companies in exchange for Archstone.

Earlier this year Lehman acquired the 53.6% stake in Archstone it did not own, paving the way for the bankrupt company to mull an initial public offering before ultimately deciding on the sale.

“The transaction delivers significant return on the investment we made earlier this year to fully control Archstone and has generated immediate and considerable proceeds for our next distribution to creditors,” Owen Thomas, chairman of Lehman’s board, said in a statement.

The deal gives Equity Residential 60% of Archstone’s assets and liabilities, while AvalonBay is acquiring the remaining 40%.

Equity Residential will get its hands on 78 wholly-owned properties, consisting of 23,110 apartment units with an average rent of $2,492 per unit. The largest number of the properties are located in Washington,   D.C., San Francisco and Southern California.

“Archstone's assets will fit perfectly into the Equity Residential portfolio, further improve the overall quality of our assets and add scale to our operating platform in our core markets,” David Neithercut, Equity Residential’s CEO, said in a separate statement.

The companies said they expect the deal to close in the first quarter of 2013.

Shares of Chicago-based Equity Residential dropped 1.51% to $53.61 in after-hours trading on the news.

AvalonBay, which is headquartered in Arlington, Va., saw its shares slide 1.71% to $126.75 in extended trading.

Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM) advised Lehman on the deal, while Morgan Stanley (NYSE:MS) advised Equity Residential and Greenhill & Co. served as AvalonBay’s bankers.