AvalonBay, Equity Residential apartment merger: What it means

The biggest ever merger of real estate investment trusts — the combination of Equity Residential and AvalonBay, announced Thursday — has investors and analysts alike left with dropped jaws. 

The all-stock merger will have a market capitalization of about $52 billion and a total enterprise value of approximately $69 billion, according to a release. It will create one of the largest real estate companies in the U.S., 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 value for shareholders,” 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, which manages about $90 billion of real estate investments globally for institutional clients and high-net-worth individuals, called the tie-up “unbelievable.”

“That they would merge is really incredible,” he said. 

Swaringen noted that the stocks of both companies are trading at below their net asset values, a situation that makes them both ripe to be bought and privatized. 

“I think this might be a defense against privatization. By putting themselves together, they’re almost too big to get bought,” Swaringen said. 

He also noted the high cost of building technology, which residential tenants now demand – from online leasing to credit checking to delivering bandwidth and Wi-Fi. Consolidating could reduce those costs.

“Strategically, the rationale is straightforward: scale, liquidity, balance sheet efficiency and overhead synergies,” said David Auerbach, chief investment officer at Hoya Capital Real Estate. 

Auerbach said he thinks this could be the first of more megadeals in the space. 

“We have WAY too many Apartment REITs out there, and it’s a sector ripe for consolidation,” he wrote in emailed comments to CNBC. 

Auerbach noted that the deal comes after a challenging stretch for apartment landlords, who have been dealing with sluggish rent growth due to the post-Covid construction boom that delivered 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 are still going to have to compete with the rest of the field. The apartment market is highly diversified, building to building, giving consumers a lot of options. 

Regulatory and political scrutiny may arise, given the sheer size of the deal and the current drumbeat on housing affordability. But even after merging, the combined company will have a small market share. 

“While there are no antitrust regulatory approvals needed, there is the political PR battle for which we think management well articulated [that] the combined company is < 3% market share and heavily invests in expanding housing,” wrote Alexander Goldfarb, senior analyst with Piper Sandler. “Ultimately, we believe the combined company needs to improve earnings growth beyond the one-time synergies to show bigger is actually more profitable.”