TEXT-Fitch may cut Equity Residential IDR on proposed Archstone deal

Tue Nov 27, 2012 12:30pm EST

Nov 27 - Fitch Ratings has placed Equity Residential's 'BBB+' Issuer
Default Rating (IDR) on Rating Watch Negative. A full list of rating actions
follows at the end of this press release.

The rating action follows Equity Residential's (EQR) announcement on Nov. 26,
2012 that it will enter into a definitive agreement to acquire 60% of the assets
and liabilities of Archstone Enterprise LP, a privately-held multifamily entity.

Pro forma for the acquisition, the company's leverage and coverage metrics will
be high for the current 'BBB+' IDR. Fitch expects to resolve the Rating Watch
Negative some time in 2013, after the acquisition is consummated in the first
quarter of 2013. The resolution will be predicated on Equity Residential's
ability to execute deleveraging transactions such as equity offerings and asset
sales. Resolution of the Rating Watch Negative will also be based on the
Company's ability to increase its unsecured revolving credit facility commitment
size and extend certain Archstone-related mortgages to reduce near-term debt
maturities and improve liquidity.

Pro forma for the acquisition immediately after announcement, EQR's leverage
will be approximately 9.1x, up from 6.9x standalone as of Sept. 30, 2012 and
7.4x as of Dec. 31, 2011. Fitch defines leverage as net debt divided by
recurring operating EBITDA.

Pro forma for the acquisition immediately after the announcement, EQR's
fixed-charge coverage will be in the low 2.0x's, down from 2.3x standalone for
the trailing twelve months ended Sept. 30, 2012 and 2.2x for the year ended Dec.
31, 2011. Fitch defines fixed-charge coverage as recurring operating EBITDA less
recurring capital improvements divided by interest incurred and preferred
distributions.

Pro forma for the acquisition immediately after the announcement, EQR's
unencumbered asset coverage of unsecured debt (utilizing a stressed 7.0%
capitalization rate) will be approximately 1.8x, down from 2.5x standalone as of
Sept. 30, 2012.

By acquisition close in early 2013, Fitch expects that the Company will have
raised follow-on common equity and sold or intends to sell assets, such that
leverage should trend below 8.0x during 2013, fixed-charge coverage will improve
to approximately 2.5x and unencumbered asset coverage will improve to the high
2.0x area. The company has demonstrated access to myriad forms of capital, which
should enable it to raise unsecured debt (acquisition bridge loan, unsecured
revolving line of credit upsize and maturity extension, unsecured bank term
loans) and common equity to fund the acquisition. In addition, the company owns
a high-quality portfolio in primary and secondary markets, which should enable
the company to dispose of assets to repay debt.

Individually, each post-announcement deleveraging event ($1 billion equity
offering, unencumbered asset sales to repay debt) and financing event (potential
line of credit upsize and extension, entry into an unsecured bridge loan,
extension of certain Archstone asset-level secured debt) should be achievable by
EQR. However, in the transaction's totality there are execution risks inherent
in each of these events that, if not fully achieved as expected could result in
the Company's metrics sustaining at levels reflective of a rating below 'BBB+',
leading to the Rating Watch Negative.

Fitch calculates that EQR's liquidity, pro forma for the Archstone transaction
and certain debt agreement amendments, is approximately 0.8x, which is low for
the 'BBB+' IDR. Fitch defines liquidity as sources of liquidity (unrestricted
cash, availability under its unsecured revolving credit facility, expected
retained cash flows from operating activities after dividends and distributions)
divided by uses of liquidity (pro rata debt maturities and expected capital
expenditures and development).

The Archstone acquisition will strengthen EQR's already-existing market presence
in high barrier-to-entry coastal destination markets, where low single-family
housing affordability drives multifamily demand. Fitch views this presence and
increased market focus positively, as these markets also have limited buildable
land and high construction costs, curtailing meaningful supply growth. Pro forma
for the acquisition, EQR's top five markets will be Washington, D.C. (20% of
NOI), Southern California (18%), New York Metro (15%), San Francisco Bay Area
(10%) and Boston (9%).

The company had demonstrated strong property-level fundamentals. EQR's same
property NOI increased by 7.4% during 3Q'12 relative to 3Q'11, and Fitch
anticipates that fundamentals will remain strong, though will moderate, due to
modest job growth and limited new supply in EQR's markets, a declining home
ownership rate and favourable demographic trends.

The two-notch differential between EQR's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'.
Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial
Corporate and REIT Credit Analysis', dated Dec. 15, 2011 and available on
Fitch's Web site at www.fitchratings.com, these preferred securities are deeply
subordinated and have loss absorption elements that would likely result in poor
recoveries in the event of a corporate default.

Removal of the Rating Watch Negative and affirmation of the IDR at 'BBB+' will
be driven by the Company's ability to reduce debt via equity offerings and asset
sales, and improvements in EQR's debt maturity profile by repaying, amending and
extending the maturity of certain unsecured and secured debt obligations. At
that stage, the 'BBB+' rating would reflect the following:

--EQR's disposition of assets as currently contemplated;
--Fitch's expectation of leverage sustaining below 8.0x (pro forma leverage
would be approximately 9.1x immediately after the transaction announcement and
8.0x at transaction close in 1Q'13);
--Fitch's expectation of fixed-charge coverage sustaining above 2.2x (pro forma
coverage would be approximately 2.1x immediately after the transaction
announcement and 2.3x at transaction close in 1Q'13);
--Fitch's expectation of unencumbered asset coverage of unsecured debt
(utilizing a stressed 7.0% capitalization rate) exceeding 2.3x (pro forma
coverage would be approximately 1.8x immediately after the transaction
announcement);
--A liquidity coverage ratio sustaining above 1.0x (base case liquidity coverage
would be 0.8x pro forma for the Archstone transaction).

Fitch would expect to downgrade EQR's IDR below 'BBB+' absent the company
achieving these asset sale, deleveraging and liquidity improvements six months
after closing.

Fitch has placed the following ratings for Equity Residential on Rating Watch
Negative:

Equity Residential
--IDR 'BBB+';
--Preferred stock 'BBB-'.

ERP Operating Limited Partnership
--IDR 'BBB+';
-- Unsecured revolving credit facility 'BBB+';
--Senior unsecured notes 'BBB+'.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 15, 2011).

Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
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