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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the ratings for Equity Residential (NYSE: EQR) and ERP Operating Limited Partnership, EQR's principal operating subsidiary (collectively EQR). A full list of affected ratings is at the end of this release.

The Rating Outlook is Stable.

The ratings affirmations follow the announcement on Dec. 2, 2011 that EQR will pay approximately $1.325 billion to acquire a 26.5% equity interest in Archstone from affiliates of Bank of America and Barclays Bank PLC.

EQR's consummation of the transaction is subject to the Lehman Estate, which owns 47% of Archstone, not exercising its right of first offer to purchase or designate such purchase of, the 26.5% interest at the offered price.

Assuming EQR consummates the transaction, Fitch expects the company will finance the transaction with a combination of cash, debt and proceeds from asset sales. Pro forma for the transaction, the company's primary credit metrics remain appropriate for the 'BBB+' Issuer Default Rating (IDR), despite the transaction not likely providing EQR with any near-term cash flow or direct ownership of any Archstone assets.

The 26.5% equity interest will provide EQR approval rights related to certain corporate governance provisions. These approval rights may ultimately serve as a catalyst for EQR to acquire all of Archstone in the future, or may enable the company to acquire certain of Archstone's assets. As such, this transaction likely represents the first stage of a lengthier and more involved process with respect to Archstone.

The company will need to access additional external financing sources if, after EQR consummates this transaction, it further negotiates an increased ownership stake or acquisition of some or all of Archstone's assets. Fitch's rating affirmations and Stable Outlook do not contemplate the likelihood of these events, although Fitch would expect to revisit the ratings and Outlook at such time when there is more clarity with respect to the long-term direction of EQR's involvement.

The actions thus far on the part of EQR management appropriately balance the investment and financial leverage undertaken with the amount of approval rights obtained in exchange for such investment.

Pro forma Sept. 30, 2011 leverage (net debt divided by recurring operating EBITDA), assuming the company funds the transaction entirely with debt, would be 8.0 times (x), up from 7.0x actual leverage. The increase in leverage is due to Fitch assuming that the company incurs approximately $1.325 billion of debt with no commensurate increase in EBITDA, as Fitch does not expect the Archstone investment to yield any recurring cash distributions to EQR for the foreseeable future.

Pro forma 12 months ended Sept. 30, 2011 fixed charge coverage (recurring operating EBITDA less capital improvements divided by interest incurred and preferred distributions), assuming the company funds the transaction entirely with debt, would be 2.0x, down from 2.1x actual coverage. Fitch expects the company's cost of debt financing utilized to effectuate the Archstone transaction would be approximately 3.0%.

Pro forma Sept. 30, 2011 unencumbered asset coverage of unsecured debt, utilizing a stressed 7.0% capitalization rate to derive an implied unencumbered asset value would be 2.0x, down from 2.6x actual coverage.

Pro forma liquidity coverage would decline to approximately 0.5x, assuming the company funded the transaction with short-term debt. Liquidity coverage is also low due to EQR having sizeable 2012 unsecured debt maturities. This low coverage is offset in large part by the company's strong access to multiple forms of capital, which should enable it to refinance upcoming debt maturities.

Fitch calculates liquidity coverage 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 forma debt maturities and expected capital expenditures) for the period Oct. 1, 2011 to Dec. 31, 2013.

Each of the pro forma metrics noted above would be slightly stronger if the company funded a portion of the Archstone transaction with asset sales as opposed to fully financing the transaction with debt.

The following factors may have a positive impact on Equity Residential's ratings and/or Rating Outlook:

--Leverage sustaining below 7.5x (pro forma Sept. 30, 2011 leverage was 8.0x);

--Fixed charge coverage sustaining above 2.3x (pro forma coverage for the trailing twelve months ended Sept. 30, 2011 was 2.0x);

--Unencumbered asset coverage sustaining above 2.5x (pro forma Sept. 30, 2011 asset coverage utilizing a 7.0% capitalization rate on 3Q 2011 annualized unencumbered

NOI was 2.3x).

The following factors may have a negative impact on Equity Residential's ratings and/or Ratings Outlook:

--EQR's inability to access the unsecured debt market to finance the transaction;

--Leverage sustaining above 8.5x;

--Fixed charge coverage sustaining below 1.8x;

--A liquidity coverage ratio sustaining below 1.0x (pro forma base case liquidity coverage was 0.5x for the period Oct. 1, 2011 to Dec. 31, 2013).

Fitch affirms the following ratings:

Equity Residential

--IDR at 'BBB+';

--Preferred stock at 'BBB-'.

ERP Operating Limited Partnership

--IDR at 'BBB+';

--Senior unsecured notes at 'BBB+'.

Fitch has also assigned a 'BBB+' rating to ERP Operating Limited Partnership's $1.25 billion unsecured revolving credit facility maturing on July 13, 2014.

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:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011);

--'Rating Hybrid Securities' (July 28, 2011);

--'Treatment of Hybrids in Corporate and REIT Credit Analysis'(July 11, 2011);

--'Recovery Rating and Notching Criteria for Equity REITs' (May 12, 2011);

--'Criteria for Rating U.S. Equity REITs and REOCs' (March 15, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

Parent and Subsidiary Rating Linkage

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647091 ]

Treatment of Hybrids in Corporate and REIT Credit Analysis

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642132 ]

Recovery Rating and Notching Criteria for Equity REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]

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