Redefining the market dynamics, leading multifamily real
estate investment trusts (REITs)
Avalonbay Communities Inc.
) have recently entered into an agreement with Lehman Brothers
Holdings Inc. to acquire the entire ownership stake of Archstone
Enterprise LP - one of the largest investors, developers and
operators of apartment communities in the U.S.
The deal valued at about $16 billion will envisage Equity
Residential acquiring 60% of Archstone's assets and liabilities,
while the remainder will be acquired by Avalonbay. The
transaction is expected to be completed by the first quarter of
The combined purchase price would include (i) $2.7 billion in
cash, (ii) a pre-determined number of common shares of both
Equity Residential and Avalonbay valued at $3.8 billion based on
the closing price of November 23, 2012, and (iii) the assumption
of approximately $9.5 billion of debt and $330 million of
preferred equity. About $8.6 billion of the assumed debt is held
by Fannie Mae and Freddie Mac.
Equity Residential's Acquired Portfolio
Post-acquisition, Equity Residential would have 78 wholly-owned
stabilized operating properties in its kitty, aggregating 23,110
apartment units with an average monthly rent of $2,492 per unit.
The residential portion of the acquired portfolio is pegged at
$367,003 per apartment unit. The properties are spread across
diverse geographic locations, including Washington D.C., San
Francisco, Southern California, New York, Boston, Seattle and
In addition, the company is set to acquire four properties (one
each in the Washington D.C. metro area, San Francisco, Phoenix,
and South Florida) that are currently under development, and 15
land sites primarily in its core markets.
Avalonbay's Acquired Portfolio
Under the terms of the agreement mutually agreed by all the
participating companies, Avalonbay would acquire 66 apartment
communities totaling 22,222 apartment units, out of which six
communities (1,666 apartment units) are under construction. Bulk
of these properties are located in Southern California and the
The company also purchased three land parcels, which are expected
to contain a total of 968 apartment units. In addition, Avalonbay
acquired ownership interests in joint venture entities that own
10 apartment communities totaling 2,040 apartment units, out of
which one community (157 apartment units) is under construction.
Pre-Nuptial Joint Venture Agreements
Equity Residential and Avalonbay also entered in a joint venture
agreement to co-own and co-manage Archstone assets that are
placed in unconsolidated joint ventures that own apartment
properties in various U.S. markets, and in a portfolio of
apartment communities in Germany. Equity Residential would own a
60% stake in the joint venture entity, while Avalonbay would own
the balance 40%.
Equity Residential is likely to fund the transaction through a
combination of different payment options. These include issuance
of approximately 34.5 million common shares to Lehman and payment
of over $2 billion in cash.
The company has also assumed $5.5 billion consolidated and
unconsolidated secured debt, including $5.1 billion of Fannie Mae
and Freddie Mac secured debt. At the same time, the company has
obtained a $2.5 billion bridge loan commitment from Morgan
Stanley Senior Funding, Inc. Other possible sources of capital
include available cash in hand, borrowing capacity under its
$1.75 billion revolving credit facility, and debt financing.
AVALONBAY CMMTY (AVB): Free Stock Analysis
EQUITY RESIDENT (EQR): Free Stock Analysis
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A significant chunk of cash reserves is likely to be obtained
from non-core asset sales and disposal of properties in exit
markets such as Atlanta, Orlando, Phoenix, and Jacksonville.
Equity Residential intends to raise proceeds of approximately $3
billion to $4 billion from asset sale transactions by the end of
2013. Currently, the company has approximately $400 million of
assets under contract for sale, $250 million under letter of
intent, and over $2.0 billion in various stages of marketing.
At the other end, Avalonbay would fund the transaction with (i)
$669 million in cash, (ii) issuance of about 14.9 million shares,
and (iii) assumption of $3.9 billion debt. The assumed debt
includes $3.7 billion in principal amount for consolidated
borrowings and $238 million for a proportionate share of debt
related to unconsolidated joint ventures. Avalonbay also obtained
a commitment from Goldman Sachs Lending Partners LLC to provide a
$2.2 billion bridge loan facility.
Equity Residential reiterated its recurring FFO (funds from
operations) guidance for 2012 in the range of $2.74 to $2.78 per
share. However, the company expects its recurring FFO to dip by 4
cents per share in 2013 due to the planned asset sale
Mirroring it, Avalonbay also reaffirmed its FFO guidance for 2012
in the range of $5.45 to $5.50 per share and fourth quarter FFO
in the range of $1.40 to $1.45.
The acquisition is likely to result in operational synergies for
both Equity Residential and Avalonbay, improving the overall
quality of the portfolio with assets in high-barrier, high-growth
coastal markets. Furthermore, Equity Residential is also likely
to benefit from the additional non-core asset sale required to
fund the transaction, thereby accelerating its portfolio
We maintain our long-term Neutral recommendation for both Equity
Residential and Avalonbay, which currently have Zacks #3 Rank
each that translate into a short-term Hold rating.