Moody’s Investors Service said in a report today that the AvalonBay and Equity Residential’s acquisition of Archstone Enterprise’s multifamily portfolio poses integration risk and will cause immediate deterioration in leverage metrics for both companies.
On Monday, AvalonBay and Equity Residential jointly announced their $16 billion acquisition of private multifamily giant Archstone from Lehman Brothers.
Archstone owns about 58,000 apartments in U.S. coastal markets such as New York, Washington, D.C., Seattle and California. As of Sept. 30, it had plans to develop an additional 8,900 apartments. The firm also owns 10 apartment properties in Germany.
The large number of apartment units changing hands means EQR will increase its apartment count by 23,110 or 20%, to 136,433 and AVB will increase its unit count by 22,222, or 37%, to 82,323, according to Moody’s.
However, the terms of the purchase means that each buyer must also absorb $9.5 billion in debt that are mostly mortgages. “Based on our calculations, this will initially increase each of the companies’ secured debt levels by more than 10% relative to gross assets and drop their fixed-charge coverage by approximately 0.5x,” said Moody’s analysts in the report.
Over the long-term, Moody’s believes that the buyers’ experienced management teams and large and flexible balance sheets will be able to absorb the $16 billion portfolio. The acquisition removes a potentially large competitor for capital and tenants because Lehman was also considering reintroducing Archstone into the public via an initial public offering, Moody's said.