The AvalonBay Communities Inc. Park Loggia condominium, center, is reflected in a building in New York, USA.
Mark Abramson | Bloomberg | fake images
The largest ever merger of real estate investment trusts, the combination of Equity Residential and AvalonBay, announced Thursday, left investors and analysts open-mouthed.
The all-stock merger will have a market capitalization of approximately $52 billion and a total enterprise value of approximately $69 billion, according to a statement. It will create one of the largest real estate companies in the US, with more than 180,000 apartments for rent.
“This combination creates a new, 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 Equity Residential CEO Mark Parrell will retire when the transaction closes.
Allan Swaringen, president and CEO of JLL Income Property Trust, called the merger “incredible.”
“For them to merge is really incredible,” he said.
JLL Income Property Trust is part of LaSalle Investment Management, which manages approximately $90 billion in real estate investments globally for institutional clients and high-net-worth individuals.
Swaringen noted that shares of both companies are trading below their net asset values, a situation that makes them ripe for acquisition and privatization.
“I think this could be a defense against privatization. By coming together, they are almost too big to be bought,” Swaringen said.
He also highlighted the high cost of construction technology, which residential tenants now demand, from online leasing to credit checking and the delivery of bandwidth and Wi-Fi. Consolidation could reduce those costs.
“Strategically, the reasoning is simple: scale, liquidity, balance sheet efficiency and overall 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 the space.
“We have TOO MANY apartment REITs and it is a sector ripe for consolidation,” he wrote in comments emailed to CNBC.
Auerbach noted that the deal comes after a challenging period for apartment owners, who have been grappling with slow rent growth due to a post-Covid construction boom that generated a massive wave of new supply.
Neither Auerbach nor Swaringen said they expect to see any effect on rents. While the combined company's market share might be growing in certain markets, they will still have to compete with the rest of the field. The apartment market is highly diversified, from building to building, giving consumers many options.
Regulatory and political scrutiny is likely to arise, given the size of the deal and the current turmoil over housing affordability. But even after merging, the combined company will have a small market share.
“While antitrust regulatory approvals are not needed, there is the political public relations battle for which we believe the administration is well articulated. [that] the combined company is
Correction: JLL Income Property Trust is part of LaSalle Investment Management, which manages about $90 billion in real estate investments globally. A previous version of this story mischaracterized the investment vehicle.
