TEXT-S&P: AvalonBay ratings unchanged on Archstone deal news

Wed Nov 28, 2012 2:56am IST

Nov 27 - Standard & Poor's Ratings Services said today that its rating and
outlook for Arlington-based AvalonBay Communities Inc. (AVB; BBB+/Stable) are
unchanged following AVB's announcement that it has entered into an agreement to
acquire 40% of Archstone Enterprises L.P. from Lehman Brothers Holdings Inc. for
roughly $6.9 billion (excluding transaction costs). The acquisition will include
the assumption of $3.9 billion of debt (including a noncash component related to
the mark-to-market for certain debt that adds roughly $200 million debt and $238
million of unconsolidated joint venture debt). The acquisition is expected to
yield a low return in the high 4% area, based on AVB's projected 2013 net
operating income (NOI). The transaction is expected to close in the first
quarter of 2013. AVB's balance sheet and credit metrics are currently strong,
providing cushion, in our view, to absorb the incremental debt assumed with this
transaction. The company intends to fund the majority of the cash portion of 
the transaction with equity. We view AVB's acquisition of the Archstone 
properties as strategically positive for the business with limited integration 
risk. The expanded operating platform should also provide a greater cushion 
for AVB's historically sizeable development pipeline. We further expect AVB to 
continue pursuing strategies that will return key credit metrics to 
pre-transaction levels by the end of 2013. 

AVB will acquire roughly 66 communities totaling 22,222 units (about $275,000 
per unit) that will be located in existing markets and are consistent with the 
company's coastal market strategy. We believe the transaction makes sense from 
a business and portfolio perspective given the assets the company is acquiring 
are in existing markets. Pro forma for the acquisition, AVB's exposure in 
Southern California will increase to 20% of NOI, from 14%, a region AVB has 
wanted to increase its footprint in. Washington, D.C., will rise to 18% from 
13%. This market has experienced some softness recently and we expect the D.C. 
market to continue to face pressure in 2013. The transaction will also 
modestly reduce AVB's exposure in New England to 14% from 19% and reduce 
exposure to the metro New York/New Jersey area to 25% from 29%. We believe 
integration risk is limited, and the transaction could provide certain 
operating efficiencies, particularly as the company spreads overhead across a 
larger asset base.

We expect AVB to fund the acquisition with roughly 60% equity and 40% debt, 
consisting of about $2.9 billion of assumed consolidated debt (after some 
expected debt repayment from equity sale proceeds). AVB plans to issue just 
under $4 billion of equity ($1.9 billion directly to Lehman upon closing and 
$1.9 billion of new equity-more if the over-allotment option is exercised- 
with proceeds used to fund transaction costs and reduce debt). Based on our 
assessment of the proposed financing plan, including the issuance of equity to 
reduce debt, we estimate AVB's debt-to-undepreciated real estate and coverage 
metrics will remain stable at 40% and over 3x, respectively, but 
debt-to-EBITDA will likely increase from 6x to between 6.5x-7x initially. 
However, this leverage measure should decline to the low 6x area by the end of 
2013. As part of the transaction, AVB has put a $2.2 billion bridge loan in 
place; however, under our base-case scenario, we do not assume the company 
uses this facility. While AVB is funding the transaction conservatively, in 
our view, to preserve its strong balance sheet and credit metrics, we continue 
to view the company's development pipeline as somewhat aggressive. Given the 
larger platform, we will monitor the company's appetite for development and 
would expect the company to continue to fund development in a conservative 
manner. 

Our base-case scenario assumption includes 2012 and 2013 same-store NOI growth 
expectations of 5.75% and 4%, respectively, and the noted equity raise and 
related debt repayment, which results in an estimated $2 billion of 
incremental debt by year-end 2013. We estimate AVB will end 2013 with roughly 
$6 billion of debt and EBITDA will be around $950 million. We estimate key 
credit metrics will end 2013 at levels near current, pre-transaction levels, 
including debt-to-EBITDA in the low 6x area and fixed-charge coverage in 
mid-3x range. Due to the increase in secured debt and sale of unencumbered 
assets, we estimate that unencumbered NOI will decline to about 60% from over 
70% at the trough in 2013. However, we expect this measure to rise to the 
mid-to-high 60% area by year- end 2013 due to additional secured debt 
reductions, organic growth, and the stabilization of development properties. 
Given AVB's strong balance sheet and key credit metrics, and its intent to 
prefund the proposed acquisition with a healthy component of equity, we 
currently see limited downside to the rating. The expanded operating platform 
should also provide a greater cushion for AVB's historically sizeable 
development pipeline.