AvalonBay Communities Inc. Park Loggia Condominium (center) reflected in the building in New York, USA
Mark Abramson | Bloomberg | Getty Images
The largest merger in real estate investment trust history, Equity Residential and AvalonBay, announced Thursday, has surprised investors and analysts alike.
According to the release, the all-stock merger will result in a market capitalization of approximately $52 billion and a total corporate value of approximately $69 billion. This will create the largest real estate company in the United States with more than 180,000 rental apartments.
“This combination creates a fundamentally stronger new company with differentiated capabilities that drive structurally superior cash flow generation, earnings and dividend growth, and shareholder value,” said AvalonBay CEO Benjamin Schall.
Mr. Schall will become CEO of the new company, and Equity Residential CEO Mark Parrell will retire upon completion of the transaction.
Alan Swaringen, president and CEO of JLL Income Property Trust, called the partnership “incredible.”
“It’s really incredible that they’re merging,” 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 both companies’ shares are trading below their net asset values, making them ripe for acquisition and privatization.
“I think this is a defense against privatization. Together, we’re too big to be taken over,” Swaringen said.
He also noted the high cost of building technology currently required by residential tenants, from online leasing to credit checks to the provision of bandwidth and Wi-Fi. Consolidation has the potential to reduce these costs.
“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 this could be the first of many more mega-deals in the space.
“We have too many apartment REITs and it’s a sector ripe for consolidation,” he said in emailed comments to CNBC.
Auerbach noted that the deal comes at a difficult time for apartment landlords, who are struggling with sluggish rent growth due to the post-COVID-19 construction boom that has brought a large wave of new supply.
Both Auerbach and Swaringen said they don’t expect any impact on rents. Although the combined company’s market share may have increased in certain markets, it will still have to compete in other areas. The apartment market is highly diversified from building to building, giving consumers many choices.
Given the sheer size of the deal and the current excitement around housing affordability, regulatory and political scrutiny is likely. However, even after the merger, the combined company’s market share will likely be small.
“Although antitrust regulatory approval is not required, management seems to have made a clear case that there is a political PR battle and that the combined company has less than 3% market share and is investing heavily in housing expansion,” said Alexander Goldfarb, senior analyst at Piper Sandler. “Ultimately, we believe the combined company will need to improve its revenue growth beyond one-time synergies to demonstrate that larger scale 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 article incorrectly characterized investment vehicles.
