AvalonBay Communities Inc.’s Park Loggia condominium, center, is reflected in a building in New York, USA
Mark Abramson | Bloomberg | Getty Images
The largest real estate investment trust merger of all time – the merger of Equity Residential and AvalonBay announced on Thursday – is surprising investors and analysts alike.
According to a press release, the all-stock merger will have a market capitalization of approximately $52 billion and a total enterprise value of approximately $69 billion. One of the largest real estate companies in the USA is being created with more than 180,000 rental apartments.
“This combination creates a new and fundamentally stronger company with differentiated capabilities that will drive structurally superior cash flow generation, earnings and dividend growth, and shareholder value,” said Benjamin Schall, CEO of AvalonBay.
Schall will become CEO of the newly formed company and Mark Parrell, CEO of Equity Residential, will retire upon completion of the transaction.
Allan Swaringen, president and CEO of JLL Income Property Trust, described the collaboration as “incredible.”
“The fact that they would merge is really unbelievable,” 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.
Swaringen noted that shares of both companies are trading below their net asset value, a situation that makes both ripe for acquisition and privatization.
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“I think this could be a hedge against privatization. By merging, they are almost too big to be bought,” Swaringen said.
He also pointed out the high costs of building technology that residential tenants now demand – from online leasing to credit checks to the provision of bandwidth and WiFi. These costs could be reduced through consolidation.
“Strategically, the rationale is simple: scale, liquidity, balance sheet efficiency and overhead synergies,” said David Auerbach, chief investment officer at Hoya Capital Real Estate.
Auerbach said he believes this could be the first of more megadeals in this area.
“We have WAY too many apartment REITs out there, and this sector is ripe for consolidation,” he wrote in an emailed comment to CNBC.
Auerbach noted that the deal comes after a difficult period for apartment landlords, which have struggled with sluggish rent growth due to the post-COVID construction boom that fueled a massive wave of new listings.
Neither Auerbach nor Swaringen stated that they expected any impact on rents. While the combined company’s market share may grow in certain markets, they will still have to compete with the rest of the industry. The housing market is very diversified from building to building and offers consumers many options.
Given the sheer size of the deal and the current debate over housing affordability, it may attract regulatory and political scrutiny. But even after the merger, the combined company will only have a small market share.
“Although no antitrust approvals are required, there is the political PR battle, which we believe management has articulated well.” [that] “The combined company has <3% market share and is investing heavily in expanding homebuilding,” wrote Alexander Goldfarb, senior analyst at Piper Sandler. “Ultimately, we believe the combined company will need to improve earnings growth beyond one-off synergies to demonstrate that bigger is indeed more profitable.”
Correction: JLL Income Property Trust is part of LaSalle Investment Management, which manages approximately $90 billion in real estate investments worldwide. An earlier version of this story misstated the investment vehicle.
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