AvalonBay Communities, Inc. (NYSE: AVB) and Equity Residential (NYSE: EQR) said May 21 they have agreed to an all-stock merger, creating a combined company with a $69 billion enterprise value with more than 180,000 rental apartments. The REITs said their goal is to redefine leadership in rental housing for the benefit of residents, associates, and shareholders.
Reports of a possible merger between the two multifamily REITs had circulated in recent days. Benjamin Schall, president and CEO of AvalonBay, will hold those same positions within the new company. Mark Parrell, CEO of Equity Residential, will retire once the transaction closes, which is expected in the second half of the year. A new name for the company will be announced at that time as well.
The combined entity 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,” Schall said. Furthermore, the company will directly increase the supply of both market rate and affordable housing, he added.
Affordable and mixed-income housing is currently included in 30% of the companies’ communities, representing about 7,200 affordable apartment units, alongside a track record of partnership with local and regional affordable housing developers, investors, and operators.
Meanwhile, Parrell noted that investors will benefit from accelerated growth from increased investment in operational innovation, a larger, self-funded development platform, “and the variety of other value creation opportunities that world class scale affords.”
Steve Sterrett, who will serve as board chair of the new company and former CFO of Simon Property Group (NYSE: SPG), said, “by combining the two premier companies in the sector, we create a company with the size and scale to be a leading operator in the space as well as a major creator of new rental housing.”
The companies noted that they have 95% regional overlap, with their operating proximity expected to boost margins.
Alexander Goldfarb, senior research analyst at Piper Sandler, noted that given the “near perfect strategic overlap,” counter bids to the deal are unlikely. At the same time, more consolidation in apartments sector-wide is expected, either as a management exit for the sellers or where combinations can provide improved profitability and cash flow growth versus stand alone, he said. “Big for big sake isn't compelling. It comes down toaccelerating the dividend potential while maintaining good customer service,” according to Goldfarb.
Under the terms of the agreement, AvalonBay stockholders will receive 2.793 newly issued Equity Residential shares for each AvalonBay share. Upon closing, AvalonBay stockholders will have a 51.2% stake in the company, while Equity Residential’s share will be 48.8%.
Gross operating synergies of $175 million are expected to be fully in place by the end of 18 months, the companies said.