Dive Brief:
- Equity Residential and AvalonBay Communities announced an agreement to combine in an all-stock “merger of equals” in one of the biggest combinations that the apartment industry REIT sector has seen, per a May 21 press release. The deal is expected to close in the second half of the year.
- The new company will have a pro forma equity market capitalization of approximately $52 billion and a total enterprise value of approximately $69 billion. It will have more than 180,000 rental apartments, which would have ranked No. 1 on the most recent National Multifamily Housing Council list of Top 50 owners, per the release.
- Benjamin Schall, president and CEO of AvalonBay, will serve as president and CEO and trustee of the combined company. Mark Parrell will step down as CEO of Equity Residential after 30 years at the company. The firm did not announce its complete leadership team today, but it is expected to include leaders from both REITs.
Dive Insight:
The two REITs have a history of working together, dating back to their joint acquisition of Archstone’s portfolio in 2013. “I think that shared history helped make the process easier,” Parrell said on a call with analysts today.
The firms will have dual headquarters in Arlington, Virginia, and Chicago and plans to operate under a new name to be announced at closing. The Board of Trustees will initially consist of seven existing trustees of Equity Residential and seven existing directors of AvalonBay.
Steve Sterrett, current lead independent trustee of Equity Residential, will serve as chairman of the combined company, per the release. David Neithercut, current non-executive chair of Equity Residential, and Tim Naughton, current non-executive chairman of AvalonBay, will each serve as trustees.
The merger is expected to create one of the country's leading real estate companies with the differentiated scale, capabilities and balance sheet strength to expand margins, accelerate growth and redefine leadership in rental housing, per the release.
With their combined scale, the REITs will be able to make investments in artificial intelligence, automation and centralized services to drive margin expansion and enhance the resident experience, per the release.
“We're projecting $175 million of gross synergies from corporate overhead savings, property management, overhead efficiencies and property expense savings,” Schall said on the call. “After estimated real estate tax reassessments, we're expecting net synergies of $125 million.”
The combined company will also have the ability to create a data ecosystem to optimize operational and portfolio allocation decisions
“The combined company will have proprietary data from decades of interactions with residents, including over 60 million pieces of customer feedback,” Schall said on the call. “Our scale allows [us] to mine these data sets to better serve customers, provide our associates with higher quality data for real-time decision making and inform new investment decisions.”
In an environment of increased public scrutiny of mergers and a focus on housing prices, Parrell knows the AVB-EQR merger will face external scrutiny. Executives at the firms will seek to soften that by emphasizing their goal to build more apartments.
In the release, they underlined that these developments provide needed housing, support local jobs and suppliers and expand the property tax base. The combined company will also provide an affordable housing bridge loan facility to provide predevelopment capital to nonprofit developers and a naturally occurring affordable housing preservation program designed to protect long-term affordability.
“We think of this deal as very pro-housing, because, as Ben elaborated, it's very pro-housing supply,” Parrell said. “So, there will certainly be people, you know, throwing rocks and such, but this deal is helpful overall to the amount of housing production in our country. In no market are we more than 2% or 3% of the competitive stock.”
The new company will have $4.4 billion in assets, totaling 10,800 apartments under construction across 32 communities, including over 50% with an affordable or mixed-income component. It will also have a $4.2 billion development rights pipeline.
“From a development perspective, the baseline is to double the level of activity that both the companies have going on today,” Schall said on the call. “And the ambition is to find opportunities where we can grow even further to generate a larger portion of external growth.”
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