Equity Residential (NYSE: EQR)
Last Price: US$62.06| Fair Value: US$92.00
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 is advised to be 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 expected 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 continued same-store growth is expected to push FFO even higher
Risk and Uncertainty:
Demand for multifamily assets in urban, coastal markets has benefited over the past decade from demographic trends such as a falling homeownership rate, the rising relative cost of single-family housing, and urban gentrification. Millennials have been driving many of these trends, and as the generation acquires enough capital to own single-family homes or if tastes change significantly, these trends could reverse and hurt demand for apartments. The company’s portfolio is also sensitive to any changes to the economies of its core markets. If job growth slows or industries experience significant layoffs, then demand for apartments falls. The Northern California and Seattle markets have seen significant job and income growth generated by the technology industry, which has created substantial apartment demand. A downturn in this industry would significantly affect the economies of these markets and affect the fundamentals for Equity Residential’s assets. Many of Equity Residential’s markets are seeing significant new supply. While the current level of supply is expected to be absorbed by existing demand growth and help moderate the market, increased new supply will pressure operations and asset values. Equity Residential has around $860 million in development project commitments scheduled for delivery over the next few years. The economics of these projects have marginal room for error and will depend heavily on market conditions at delivery meeting today’s expectations.
Bulls Say:
Company Description:
Equity Residential owns a portfolio of 308 apartment communities with around 80,000 units and is developing five additional properties with 1,361 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)
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