On 21st May, just before the Memorial Day weekend, a remarkable event in the public real estate markets was announced: AvalonBay Communities, owner of 98,000 apartments and with a market capitalisation of $25 billion, would merge with Equity Residential, one of America's oldest Real Estate Investment Trusts (REITs), holding 85,000 apartments and $20.5 billion in assets under management.
Allan Swaringen, President and CEO of JLL Income Property Trust, a REIT, commented on the initial reaction: 'The initial reaction was, 'Holy cow, two of the country's largest and most storied apartment REIT companies are opting to merge.' He added: 'These are the two largest players in the multifamily market who have decided to come together. It's a true merger of equals.'
Details and Dimensions of the Merger
With a total enterprise value of approximately $71 billion, this deal represents the largest public REIT merger ever, eclipsing the $26 billion agreement between Prologis and Duke Realty in 2022. The two apartment companies announced in late July that their new entity would be called Vivmark Residential. Once the all-stock merger is finalised later this year, this new multifamily conglomerate will own over 180,000 rental apartments across more than 600 communities in the US – primarily in the largest coastal cities. Additionally, there are 10,800 more apartments and projects worth $4.4 billion under construction in 32 communities, 50 per cent of which will feature an affordable or mixed-income component, as emphasised by the companies in a joint statement.
Matt Frankel, equity market analyst at The Motley Fool, commented: 'My initial reaction is that they should have done it a few years ago. It’s a very natural merger.' He noted that about 95 per cent of Equity Residential's and AvalonBay's businesses operate in the same markets, mainly New York, San Francisco, Boston, and Washington, D.C. Equity is headquartered in Chicago, while AvalonBay is based in Arlington, Virginia. Frankel drew a comparison: 'This would be like if Visa or Mastercard were allowed to merge. They are similarly sized companies that specialise in the same markets and the same price points in these apartments. The combination just makes a lot of sense.'
Challenges and Opportunities in the Current Environment
The timing of the merger is crucial. In the years leading up to and following the COVID-19 pandemic (approximately 2019 to 2022), Equity and AvalonBay had no reason to merge, as capital was cheap. This allowed them to raise the debt needed for expansion via corporate bonds, even as apartment rents rose faster than construction costs, which had not yet been affected by inflation. As listed REITs, both companies also react strongly to interest rate fluctuations, as their share prices are often pressured by high interest rate environments when debt costs are generally higher and operating costs increase.
Frankel remarked: 'Now we have a high interest rate environment, rents in many markets are moderating, so it will be important to achieve efficiency gains wherever possible. And that is a big motivating factor behind this deal: finding efficiency between the two companies.' The two companies forecast cost synergies or savings of $175 million within 18 months of the deal's closing. Equity Residential and AvalonBay Communities declined to comment on the transaction.
David Auerbach, Chief Investment Officer at Hoya Capital, a Securities and Exchange Commission registered investment advisor and research firm, explained that the merger will improve operational density in core markets while expanding the growth path into newer expansion regions, including potentially enhanced access to capital from corporate bondholders. However, he also pointed out a potential challenge: 'The only thing I see against them is the loss of human capital. There will, unfortunately, be some expendable people when it comes to that.'
Auerbach also saw the risk that the merger could be challenged by the government. 'The immediate reaction is that this will be stopped by the government. The government will not let these two come together.' He compared the situation to a merger of Marriott and Hilton. Nevertheless, Auerbach stressed that while the new company comprises the two largest residential REITs, it will still own less than 1 per cent of the US housing market, making the merger less problematic from a regulatory perspective, as the apartment market remains highly fragmented.
- —High bond yields (10-year Treasury bond at 4.6 per cent)
- —Fluctuating labour market figures and persistent inflation
- —Geopolitical uncertainties (war with Iran, closure of the Strait of Hormuz and resulting energy cost increases)
- —A moody stock market
The market reaction to the merger was relatively neutral. Swaringen noted that the share performance of both companies was exactly in line with the overall multifamily REIT sector. Since the merger, Equity Residential's shares rose from $65.76 per share on 21st May to approximately $67.57 by 4th August, an increase of 2.7 per cent. AvalonBay's shares increased from $184.11 per share to $188.81 over the same period, a rise of 2.5 per cent. Swaringen concluded: 'No investors piled in and said, 'I have to get in now.' The market didn’t pile into it like it did with SpaceX.'
