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Related Issuers
Announcement:

Moody's affirms Equity Residential's ratings with a stable outlook following announcement of Archstone acquisition

Global Credit Research - 27 Nov 2012

Approximately $4.8 billion of securities affected

New York, November 27, 2012 -- Moody's Investors Service affirmed the ratings of ERP Operating Limited Partnership (senior unsecured debt rating at Baa1) and Equity Residential (preferred stock at Baa2) with a stable outlook. This action follows the announcement on November 26, 2012 that Equity Residential (NYSE: EQR) has entered into an agreement to purchase approximately 60% of the assets and liabilities of Archstone Enterprise LP ("Archstone") from Lehman Brothers Holdings, Inc. ("Lehman") for a total consideration of $9.6 billion. AvalonBay Communities, Inc. ("AvalonBay") will acquire the remaining 40% of Archstone. EQR and AvalonBay will own their respective Archstone assets outright and no partnership will be in place, with the exception of a small joint venture which will include certain interests in third-party joint ventures. The transaction is expected to close in the first quarter of 2013.

RATINGS RATIONALE

The transaction will be financed with a combination of equity ($1.9 billion to Lehman and $1.0 billion secondary equity offering), non-core asset dispositions ($3.0 billion to $4.0 billion of EQR assets through a Section 1031 tax deferred exchange and $750 million of Archstone assets) and assumed mortgage debt. In addition, Equity Residential has obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $2.5 billion bridge loan facility. Immediately after the close of the transaction EQR's total leverage and secured debt levels will increase significantly as a result of the timing of asset dispositions; however, these credit metrics are expected to return to pre-acquisition levels by the end of 2013. In addition, although the company's unencumbered asset pool as a percentage of total gross assets will decline substantially as a result of this transaction, the quality of the unencumbered pool as measured by unencumbered NOI/unsecured interest expense is expected to remain the same.

The Archstone assets allocated to Equity Residential consist of approximately 23,000 apartment units located mostly in Washington DC, San Francisco, Southern California, New York, Boston and Seattle and provides the REIT with scale in high density and high barrier to entry markets. Concentration in Washington DC, New York and San Francisco will increase to approximately 19%, 18% and 12% of NOI, respectively, by year-end 2013 from 12%, 14% and 8% at 3Q 2012. Nevertheless, the Archstone asset acquisition provides EQR with economies of scale that should translate into margin growth, lower operating costs and improved access to capital.

The stable rating outlook reflects Moody's expectation that by year-end 2013 EQR's credit metrics will be consistent with current metrics (as of 9/30/12). Moody's stable outlook reflects $4 billion of asset dispositions and no new development. EQR has a strong focus on core operations in high-quality assets, which helps to mitigate earnings volatility through real estate cycles. The stable outlook also reflects Moody's expectation that EQR and its subsidiaries will provide unconditional guarantees for the benefit of the REIT's current unsecured bondholders should any structural subordination arise as a result of the acquisition of Archstone's assets and liabilities.

Moody's indicated that a rating upgrade would be predicated upon fixed charge coverage above 2.5X, secured debt closer to 10% of gross assets, effective leverage levels less than 45% and net debt to EBITDA closer to 6.0X, all on a sustained basis. A downgrade could result should net debt to EBITDA be at or close to 8.5X on a sustained basis, fixed charge coverage decline below 2.0X. Downward rating pressure will occur should the REIT not be able to substantially execute on its Archstone asset acquisition funding strategy by year end 2013.

The following ratings were affirmed with a stable outlook:

Equity Residential -- preferred stock at Baa2 and preferred shelf at (P)Baa2

ERP Operating Limited Partnership -- senior unsecured debt at Baa1 and senior unsecured debt shelf at (P)Baa1

Moody's last rating action with respect to Equity Residential was on June 7, 2012, when Moody's affirmed the senior debt ratings of ERP Operating Limited Partnership at Baa1 and the preferred stock ratings of Equity Residential at Baa2, and revised the outlook to stable from developing.

The principal methodology used in this rating was Moody's Approach for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Equity Residential [NYSE: EQR] is the largest publicly traded owner, operator and developer of multifamily housing in the USA, with approximately 118,986 apartments in 13 states and the District of Columbia. At September 30, 2012, the REIT had $16.7 billion in book assets and $6.2 billion in book equity.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Karen Nickerson
VP - Senior Credit Officer
Commercial Real Estate Finance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nick Levidy
MD - Structured Finance
Commercial Real Estate Finance
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Equity Residential's ratings with a stable outlook following announcement of Archstone acquisition
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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