AvalonBay, Equity Residential apartment merger: What it means
AvalonBay Communities Inc. The Park Loggia condominium center is reflected in a building in New York, USA
Mark Abramson | Bloomberg | Getty Images
The largest merger of real estate investment trusts ever: the combination of Equity Residential and AvalonBay. announced on thursday – both investors and analysts were left speechless.
According to the statement, the all-share merger will have a market value of approximately $52 billion and a total enterprise value of approximately $69 billion. It will create one of the largest real estate companies in the United States, with more than 180,000 rental units.
“This combination creates a new, fundamentally stronger company with differentiated capabilities that will deliver structurally superior cash flow generation, earnings and dividend growth, and value for shareholders,” said AvalonBay CEO Benjamin Schall.
Schall will become CEO of the newly formed company, and Equity Residential CEO Mark Parrell will retire once the transaction is completed.
Allan Swaringen, president and CEO of JLL Income Property Trust, called the merger “incredible.”
“Their combination is truly incredible,” he said.
JLL Income Property Trust is part of LaSalle Investment Management, which manages approximately $90 billion in real estate investments worldwide for institutional clients and high-net-worth individuals.
Shares of both companies are trading below their net asset values, making them ready to be acquired and privatized, Swaringen said.
“I think that might be a defense against privatization. They’re bundling themselves up and becoming almost too big to buy,” Swaringen said.
He also noted the high cost of building technology that residential tenants now demand, from online rentals to credit checks to providing bandwidth and Wi-Fi. Consolidation can reduce these costs.
“Strategically, the rationale is simple: scale, liquidity, balance sheet efficiency and overhead synergies,” said David Auerbach, chief investment officer of Hoya Capital Real Estate.
Auerbach said he thinks this could be the first of more megadeals in the space.
“We have too many Apartment REITs out there, and this is an industry ripe for consolidation,” he wrote in emailed comments to CNBC.
The deal comes after a challenging period for apartment landlords dealing with slow rent growth due to a post-Covid construction boom that has created a massive wave of new supply, Auerbach said.
Neither Auerbach nor Swaringen said they expected to see any impact on rents. Even though the combined company’s market share may be increasing in certain markets, they will still have to compete with the rest of the space. The apartment market is quite diverse; From building to building, it offers consumers many options.
Given the size of the deal and the current drumbeat on housing affordability, regulatory and political scrutiny could ensue. However, even after the merger, the merged company will have a small market share.
“While no antitrust regulatory approval is required, the administration has a political PR battle that we think is well-articulated [that] Alexander Goldfarb, senior analyst at Piper Sandler, wrote: “The combined company has <3% market share and is investing heavily in residential expansion.” "As a result, we believe the combined company needs to improve earnings growth beyond one-time synergies to demonstrate that bigger is actually more profitable."
Correction: JLL Income Property Trust is part of LaSalle Investment Management, which manages approximately $90 billion in real estate investments worldwide. A previous version of this story misidentified the investment vehicle.
