With the transaction of Archstone Enterprise from Lehman Brothers Holdings to AvalonBay Communities (AVB) and Equity Residential (EQR) both acquirers are credit negative. However, the companies will be able to absorb the acquisition due to experienced management as well as large and flexible balance sheets, according to vice president and senior analyst Chris Wimmer of Moody’s Investors Service.
The transaction is credit negative for both companies because "it poses integration risk given the large number of apartment units changing hands and will cause immediate deterioration in leverage metrics for both companies."
Fitch Ratings also placed Equity Residential on rating watch negative earlier this week after its proposed acquisition of the privately held multifamily entity Archstone.
The acquisition also removes a potentially large competitor for capital and tenants because Lehman was considering reintroducing Archstone publicly through an initial public offering.
Equity Residential will increase its apartment units by 20%, up to 136,433 from 23,110. AvalonBay will also increase its units by 37%, up to 82,323 from 22,222.
Both acquirers will assume $9.5 billion in debt — mostly mortgages — as part of the terms. This is set to increase each companies’ secured debt levels by more than 10% relative to gross assets and drop fixed-charge coverage by 0.5 times, Wimmer reported.
AvalonBay and Equity Residential have also set forth plans to bring credit metrics back to pre-transaction levels through dispositions and large equity issues.
"Helping facilitate the integration of this sizable portfolio with those of the acquirers, many of the Archstone properties are located in the same markets as those of the buyers and utilize the same leasing management systems," Wimmer stated in the report.
AvalonBay and Equity Residential acquired Archstone from Lehman for $16 billion on Monday.