AvalonBay and Equity Residential, two of the country’s largest apartment owners, are reportedly discussing a merger, Bloomberg reported Wednesday.
The two REITs are in the early stages of discussion over what would be one of the largest real estate deals ever, although there is no guarantee it will happen, sources familiar with the situation told Bloomberg. Both firms have market capitalizations of around $25 billion, making them the top U.S. apartment REITs as measured by market value.
The Bloomberg story “makes sense and reflects the reality of today's political landscape,” Alexander Goldfarb and Connor Mitchell, analysts at Piper Sandler, said in a Wednesday research note shared with Multifamily Dive.
“Whether this story becomes reality or someone floating a ‘trial balloon,’ this type of consolidation play has long been part of REITland banter,” the analysts wrote. “Not only do the two portfolios line up well, but so do their balance sheets. It would greatly de-risk the development program while providing improved insight into local operations, especially helpful given the recent RealPage litigation settlements.”
Consolidation is a “natural consequence” given the growing legal and political advocacy landscape of an already heavily regulated sector, the Piper Sandler analysts wrote, and if the combination goes through, it would truly be a “merger of equals, with the savings through corporate efficiencies.” It would also likely inspire peers to consider similar moves, they said.
Arlington, Virginia-based AvalonBay’s shares have fallen 11% in the past 12 months, according to Bloomberg, while Chicago-headquartered Equity Residential’s shares were down 5.9% over that period. Multifamily Dive reached out to the firms but did not hear back by publication time.
Public apartment REITs have long been in consolidation mode, J.P.Morgan analysts said in a Thursday research note.
“There were over 20 of these companies in the 1990s, with most either going private or merging into one of the six larger ones that dominate the space today, including EQR, AVB, CPT, MAA, UDR, and ESS. It would not surprise us to see further M&A in the space,” they wrote.
“We like the idea of a much larger offering in this business that would offer investors a simple, extraordinarily liquid way to be invested in the rental housing sector with little financial leverage and tremendous transparency.”
Combination benefits, challenges
The two firms have comparable geographic footprints that are concentrated in the major coastal regions with a smaller presence in the Sunbelt and Denver, according to J.P.Morgan analysts.
Per Piper Sandler, “both companies are downsizing their exposure to the heavy regulatory markets like New York and California to increase exposure to the Sunbelt,” though those areas have performed well recently. Driven in part by low supply, AVB reported its strongest performances in the New York metro region and Northern California in a Tuesday earnings call, while EQR said Wednesday its top regions were San Francisco and the New York City area.
Given their size and reach, a merger would likely draw antitrust scrutiny, according to Bloomberg. However, even combined, the two firms would own a relatively small percentage of the rental housing stock in the areas where they operate.
J.P.Morgan calculated that the combined entity would have 2% market share of units across their footprint, though that number is likely higher if focused on market share of larger, higher-end buildings specifically. They estimate the gross real estate value for the assets owned by both REITs to total roughly $78 billion.
“Given the market share point, we don’t think a tie-up would result in any broad pricing power improvement, though it could help in very select submarkets,” the J.P.Morgan analysts wrote.
“CRE remains very fragmented, and competition comes not only in the form of other similar nearby rental projects but also from any number of developers putting up a new building, residents opting for home ownership, or even general demographic trends.”
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