Equity Residential steams ahead with $825m debt refinancing 

Chicago-based Equity Residential has about $825 million of debt maturing next year tied to its 2012 acquisition of a stake in fellow apartment specialist Archstone. But the real estate investment trust has already lined up about $350 million and anticipates it will be able to secure the remainder of the financing it needs. 

The debt has some structural requirements, which means the debt needs to be refinanced, said Robert Garechana, executive vice-president and chief financial officer, during the REIT’s third quarter earnings call. 

“What we’re anticipating is that we’ll refinance [the debt] in the secured market and then we put on some attractively priced hedges to manage the interest rate risk,” Garechana said. “In 2024, we have no maturities at all, which is an anomaly. When you look at the $800 million or so we need to do over the next two years, it’s very manageable.” 

Pricing in the secured debt markets is inside of the unsecured markets right now. “If you looked at the GSEs [for] relatively low leverage because this is a very well-supported kind of pool, without regard to the hedges we have in place, you’re probably in the 5.5 range,” Garechana said, noting this is about 25 basis points lower than what is available on the unsecured side. “When you factor into the swaps that we already have in place that hedge a portion of it, we should be able to execute closer to 5 or maybe even sub-5. This loan matures very late in 2023, so we have a long runway before we actually need to refinance.”  

The bigger picture is that the REIT feels very good about where its balance sheet is right now, Garechana said.

“We expect to end the [year with the] balance sheet at record low net debt to EBITDA. By the end of the year, we’ll probably be in the mid-4s and we’re already at 5 as it is,” he continued. “The balance sheet is in great shape, is very long duration, has limited kind of interest rate exposure, and we have almost no floating-rate [debt]. We feel really well-positioned.”  

The slowdown’s impact

The REIT did raise concerns, however, about the acquisition market. Equity Residential, like its peers, is also feeling the impact from a slowdown in transaction volume. Furthermore, the REIT has observed that many of the sales being discussed are situations in which the properties do not have a major premium to replacement cost, said CEO Mark Parrell.  

“At the beginning of this year, we saw transactions where acquisitions were being done at 25 percent [or] 30 percent premiums to replacement cost,” Parrell said. “You saw us stand down. We just don’t see a history of making a lot of money when you pay these kind of premiums. So, we see the price change as having evaporated a good amount of that, and we see deals being talked about, at least for sale, [are being done] much closer to replacement costs. So, we like that.” 

When the REIT thinks about asset pricing, replacement cost and cap rates are a major component, and Parrell anticipates trading out of some of assets in existing markets like Washington, DC, California, and New York in favor of properties in expansion markets.  

“In terms of deploying new capital, which would have to be raised with debt, we think our unsecured debt rate is probably 5.75,” Parrell said. “That’s a pretty mighty interest rate to overcome. And again, looking at where the stock is trading, that doesn’t make a lot of sense.” 

“For us to be net acquirers, it is going to require some shift in our capital costs. For us to be swappers of assets like we’ve been, trading is going to require that trade to make sense and then for asset values to make sense. And they are starting to, on a replacement cost basis. But I think 2018 [or] 2019 is a pretty good guidepost. I think what happened in the pandemic with ultra-low rates, that was the distortion, but I also don’t think very high rates is a permanent future either,” he said.