CHICAGO-Locally based Equity Residential has sold one of its trophy divisions, Lexford Housing to affiliates of privately held Empire Group Holdings of Montvale, NJ for an all-cash price of $1.086 billion. The buyer has put up a non-refundable earnest money cash deposit of $40 million. The deal is expected to close in the fourth quarter. The sale also includes Lexford's property management business, with a staff of about 800 employees, based in Columbus, OH.

Equity Residential president and CEO David J. Neithercut says the Lexford division "played an important part in the growth of Equity Residential and performed very well for us, generating an unlevered internal rate of return of 15%." At closing, Neithercut says the company will receive about $850 million of net sale proceeds, after closing expenses and repayment of about $210 million of secured debt. He says the company expects to record a total book gain of about $430 million.

"We will use the proceeds to continue transforming our portfolio by reducing the number of markets in which we operate and focusing on markets that we believe will provide better growth prospects and higher total returns," Neithercut says. JP Morgan advised Equity.

Lexford properties were built between 1976 and 1989. Equity Residential purchased Lexford Residential Trust's 36,609 apartments in 1999 for about $738 million or $20,155 per unit. Equity later reduced the portfolio to the existing 27,115 units. "Including previous asset sales, with this anticipated closing, the company will have received total gross sales proceeds of about $1.35 billion from the disposition of its Lexford assets," Neithercut says.

He notes the capitalization rate, after capital replacements of $400 per apartment unit, on 2006 net operating income is 7.4%. Neithercut says the sale will dilute Equity's funds from operations by about five cents per share in 2006. On an annualized basis, the dilution will be about 10 cents per share. "However, this dilution will be partially offset by a reduction in capital expenditures of approximately $18 million or six cents per share because the proceeds from this transaction will likely be invested in significantly fewer apartment units," Neithercut explains.

He says the company is also revising its second quarter FFO guidance range to 56 cents to 58 cents per share from 55 cents to 60 cents per share. Also being revised is Equity's earnings-per-share guidance range to 62 cents to 64 cents per share from 61 cents to 66 cents per share. For the full 2006 year, Neithercut expects FFO will be in the middle of the $2.30 to $2.50 per share range. Equity Residential expects to release its second quarter 2006 results on Aug. 1 and host a conference call on Aug. 2.