Fitch Places Equity Residential's IDR on Negative Watch Following Proposed Archstone Acquisition

  Fitch Places Equity Residential's IDR on Negative Watch Following Proposed
  Archstone Acquisition

Business Wire

NEW YORK -- November 27, 2012

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=671869

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contact:

Fitch Ratings
Primary Analyst
Steven Marks, +1-212-908-9161
Managing Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
George Hoglund, CFA, +1-212-908-9149
Associate Director
or
Committee Chairperson
Robert Curran, +1-212-908-0515
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com
 
Press spacebar to pause and continue. Press esc to stop.