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