Equity Residential has created significant shareholder value through development

Business Strategy & Outlook

Equity Residential has repositioned its portfolio over the past decade to focus on owning and operating high-quality multifamily buildings in urban, coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth. The company has sold out of inland and southern markets and increased its operations in high-growth core markets: Los Angeles, San Diego, San Francisco, Washington, D.C., New York, Boston, and Seattle. These markets exhibit traits that create demand for apartments, like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger people. The company regularly recycles capital by selling non core assets or exiting markets and using the proceeds for its development pipeline or acquisitions with strong growth prospects, a strategy that has produced strong returns. While Equity Residential has repositioned its portfolio into markets with strong demand drivers, it looks cautious on its long-term growth prospects, given that many markets have historically seen high supply growth.

The urban, luxury end of the apartment market where Equity Residential traditionally operates has seen the highest amount of new supply, competing directly with the company’s portfolio. Additionally, the pandemic has caused many millennials to consider moves to the suburbs, either into suburban apartments or their own single-family homes, though demand for new urban apartments has remained resilient. Equity Residential has created significant shareholder value through development, though rising interest rates may cut into the expected return on new projects. However, high inflation has driven revenue significantly higher as apartment leases are generally only a year long, allowing Equity Residential to push rate growth that has matched inflation. While revenue growth is to decelerate as inflation growth is brought under control and also expect a period of higher than normal expense growth, the company’s funds from operations per share are already above pre pandemic levels and are continued same-store growth to push FFO even higher.

Financial Strengths

Equity Residential is in good financial shape from a liquidity and solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which will serve stakeholders well. Near-term debt maturities should be manageable through a combination of refinancing, asset sales, and free cash flow. The company should be able to access the capital markets when acquisition and development opportunities arise. The2023 net debt/EBITDA and EBITDA/interest to be roughly 4.0 and 6.8 times, respectively, both of which are within the company’s targeted range and are reasonable levels. As a REIT, Equity Residential is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by cash flow from operating activities, providing plenty of flexibility to make capital allocation and investment decisions. The company’s credit rating to remain stable through steady rental income growth in its existing portfolio and the stabilization of its current developments, which should allow Equity Residential to continue to access the debt market in combination with equity issuance and asset dispositions to fund its debt maturities, acquisitions, and new development activity.

Bulls Say

Equity Residential’s portfolio of high-quality assets should see relatively consistent levels of demand long term from high-income earners and will likely see just a small hit to fundamentals during the current pandemic as most residents have not experienced job losses.
Equity Residential has a history of finding accretive development opportunities to bolster its growth prospects.
While current supply deliveries are near peak levels, rising construction costs and tighter lending standards should lead to lower supply growth.

Company Description

Equity Residential owns a portfolio of 310 apartment communities with around 80,000 units and is developing three additional properties with 1,136 units. The company focuses on owning large, high-quality properties in the urban and suburban submarkets of Southern California, San Francisco, Washington, D.C., New York, Seattle, and Boston.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.