Business Strategy and 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 noncore 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, analysts are 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 as people begin to resume their prepandemic lifestyles. Equity Residential has created significant shareholder value through development, but the increased competition for apartment assets combined with high construction costs is making accretive deals more difficult to find and underwrite. As a result, Equity Residential’s development pipeline is now down to $700 million
Financial Strength:
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 is believed 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. 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.
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 Profile:
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)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
