March 16, 2015 Equity Residential Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 11/15/2009 Current Price (03/13/15) $77.02 Target Price $81.00 52-Week High $80.27 52-Week Low $56.89 One-Year Return (%) 35.23 Beta 0.59 Average Daily Volume (sh) 1,689,561 Shares Outstanding (mil) 364 Market Capitalization ($mil) $28,035 Short Interest Ratio (days) 2.74 Institutional Ownership (%) N/A Insider Ownership (%) 5 (EQR-NYSE) SUMMARY Equity Residential s normalized FFO per share in fourth-quarter 2014 came in at $0.86, exceeding the Zacks Consensus Estimate by $0.03. The bottom line also surpassed the prior-year quarter figure by $0.09. Results were primarily driven by higher same store net operating income ( NOI ) and NOI from non-same store properties presently in lease up, as well as lower G&A expenses. All these were, however, partly marred by the dilution from the company s 2014 transaction activity. Nevertheless, the company has increased its dividend by 10.5%. We believe Equity Residential s concerted efforts toward repositioning its portfolio from low barrier-to-entry/non-core markets to high barrier-toentry/core markets will drive its top-line growth, going forward. Also, the echo boomers population and lifestyle transformation continue to raise the demand for apartments. Yet, elevated supply in several of the company s markets is anticipated to cause pricing pressure. Apart from this, an expected rise in interest rates remains a concern. Risk Level * Below Avg., Type of Stock Large-Blend Industry Reit-Eqty Trust Zacks Industry Rank * 95 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $2.21 Dividend Yield (%) 2.87 5-Yr. Historical Growth Rates Sales (%) 6.4 Earnings Per Share (%) 9.0 Dividend (%) 10.1 using TTM FFO/Share 24.4 using 2015 Estimate 22.6 using 2016 Estimate 21.2 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy 2013 505 A 617 A 627 A 639 A 2,388 A 2014 633 A 653 A 664 A 665 A 2,615 A 2015 664 E 682 E 695 E 701 E 2,742 E 2016 2,871 E Funds From Operations (FFO) Per Share (FFO is operating earnings before non-recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.64 A $0.71 A $0.71 A $0.77 A $2.83 A 2014 $0.71 A $0.78 A $0.81 A $0.86 A $3.16 A 2015 $0.80 E $0.85 E $0.87 E $0.89 E $3.41 E 2016 $3.64 E Projected FFO/share growth - Next 5 Years % 7 * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Based in Chicago, IL, Equity Residential is one of the leading, fully integrated, publicly traded multi-family real estate investment trusts (REITs) in the U.S. Equity Residential has a portfolio of high-quality apartment properties in some of the most desirable markets across the country Boston, New York, Washington, DC, South Florida, Seattle, San Francisco, Southern California and Denver. As of Dec 31, 2014, the company owned or had investments in 391 properties comprising 109,225 apartment units. These properties are located in 12 states and the District of Columbia. The company s properties are of 3 categories: garden, mid-rise/high-rise and military housing. Gardenstyle properties consist of two or three-story buildings. Mid-rise/high-rise properties are more than three floors high. On the other hand, military housing properties are defined as those situated on military bases. The garden-style and mid-rise/high-rise apartments typically feature amenities like clubhouses, swimming pools and laundry facilities. REASONS TO BUY Equity Residential has assets in some of the leading apartment markets of the U.S. Its current focus is to acquire and develop assets primarily in six core coastal metropolitan areas Boston, New York, Washington D.C., Southern California, San Francisco and Seattle. In fact, concentration of properties over high-density, urban markets with close proximity to public transportation, dining, culture, education and nightlife offers solid scope for greater demand. The home ownership cost in most markets of Equity Residential is significantly higher than the national average. Considering the current macroeconomic environment, such a trend is expected to continue, which in turn, would drive the demand for rented apartments. Moreover, creation of new households as well as the decline in single-family home ownership rates across the country continues to benefit the company. In fact, going forward, the rising consumer preference for flexibility of rental housing is expected to drive continued strong demand for rental housing. Demographic growth also continues to be strong in the young adult age cohort, which has a higher propensity to rent. This age cohort has benefited considerably from the net job growth and provides a significant source of pent-up demand. Additionally, this age cohort, often referred as echo boomers, prefers to remain single for a longer period compared with the previous generations and hence, they have a general tendency to remain as apartment renters. Therefore, we expect the demand for apartments to remain comparatively steady in the coming quarters. Moreover, renting is the only viable option for customers who cannot avail mortgage loans or are unwilling to buy a house at present. Equity Residential has made concerted efforts toward repositioning its portfolio from low barrier-toentry/non-core markets to high barrier-to-entry/core markets. In 2013, the company had completed the Archstone acquisition that added properties across diverse geographic locations and contributed greatly to revenue growth. Moreover, during 2014, the company acquired 6 properties (1,353 apartment units) for a total of around $469.8 million and 2 land parcels for an aggregate of about $28.8 million. On the other hand, the company disposed 10 consolidated apartment properties (consisting of 3,092 apartment units) for a total of around $467.0 million. With an improving economy, job growth and favorable demographics, we expect the portfolio repositioning to augur well for topline growth. Solid dividend payouts remain arguably the biggest attraction for REIT investors and Equity Residential remains committed to that. The company recently declared an increase in its first-quarter Equity Research EQR Page 2
dividend. It would now pay $5525 for the quarter, which reflects a hike of 10.5% from the prior dividend. REASONS TO SELL In 2015, many of the company s markets are expected to witness elevated deliveries. This is likely to result in a pricing pressure throughout much of the year. In fact, the company has a significant exposure to the Washington DC market and though conditions are improving, management remains cautiously optimistic. For Boston, a surplus of high-end deliveries in the urban core and the financial district is affecting the submarket, and the pricing pressure continues. In New York too, Jersey City and Brooklyn deliveries are anticipated to weigh on the pricing power over the next year. Considering the current economic environment, we anticipate that interest rate hike may happen in the medium term, which can pose a challenge for Equity Residential. This is because the company s ability to refinance existing debt would be restricted, while the interest cost on new debt would increase. This could adversely affect the company s financial results and consequently dent its dividend payout. Equity Residential is repositioning its portfolio to focus on high-barrier markets, which might cause near-term earnings dilution. Moreover, the continuous acquisition activities of the company involve significant upfront operating expenses with limited near-term profitability. New properties usually take time to generate revenues and will continue to drag margins till they get established. Also, the huge development pipeline increases operational risks, exposing the company to rising construction costs, entitlement delays and lease-up risks. Therefore, though these activities are expected to help rental revenues escalate in the future, the negative effects of these cannot be avoided in the near term. RECENT NEWS Equity Residential Beats Q4 FFO Estimates Feb 3, 2015 Equity Residential s normalized FFO per share in fourth-quarter 2014 came in at $0.86, exceeding the Zacks Consensus Estimate by $0.03. The bottom line also surpassed the prior-year quarter figure by $0.09. Quarterly results at this apartment REIT were primarily driven by higher same store NOI and NOI from non-same store properties presently in lease up, as well as lower G&A expenses. All these were, however, partly marred by the dilution from the company s 2014 transaction activity. Total revenue during the reported quarter was $664.7 million, nearly in line with the Zacks Consensus Estimate of $665 million and up 4% from the prior-year quarter. Quarter in Detail Same-store revenues (that includes 98,421 apartment units) increased 4.9% year over year to $632.7 million, while expenses inched up 2.2% to $203.8 million. As a result, same-store NOI during the quarter increased 6.3% year over year to nearly $429.0 million. The company experienced a 4.2% increase in average rental rates to $2,233 per apartment unit, while occupancy moved up 60 basis points year over year to 96.0% for the same-store portfolio. Equity Research EQR Page 3
Notably, same store results of Equity Residential include the stabilized apartment units acquired in the Archstone acquisition, presently owned and managed by the company. Equity Residential exited 2014 with cash and cash equivalents of $40.1 million, down from $53.5 million at the end of the prior year. 2015 Outlook For first-quarter 2015, Equity Residential expects normalized FFO per share in the range of $0.77 $0.81. For full year 2015, Equity Residential projects normalized FFO per share in the range of $3.35 $3.45 per share. Equity Residential Hikes Dividend by 10.5% Mar 12, 2015 Equity Residential finally declared an increase in its first-quarter dividend. The company would now pay $0.5525 for the quarter, which reflects a hike of 10.5% from the prior dividend of $0.50. This new dividend would be paid on Apr 10, 2015 to shareholders of record on Mar 23. Notably, at the time of its fourth-quarter 2014 earnings release, the company had revealed its dividend policy, according to which it intended to pay 65% of the mid-point of its 2015 normalized funds from operations ( FFO ) guidance range of $3.35 $3.45 per share. That constitutes an annual dividend of $2.21 per share in 2015 and $0.5525 for the quarter. Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income. Equity Research EQR Page 4
VALUATION The shares of Equity Residential currently trade at 22.6x the Zacks Consensus Estimate for 2015 FFO per share, a 31.4% premium to the industry average. On a price-to-book basis, the shares trade at 2.6x, a 44.4% premium to the industry average. Our 6-month target price of $81.00 equates to 23.8x the Zacks Consensus Estimate for 2015 FFO per share. Combined with a quarterly dividend of $0.5525 per share, this price target implies an expected total return of 6.6% over that period. This is consistent with our Neutral recommendation on the shares. Additionally, the company currently carries a Zacks Rank #2 (Buy). Key Indicators 5-Yr High 5-Yr Low F1 F2 Est. 5-Yr FFO Gr% P/CF Equity Residential (EQR) 22.6 21.2 7.0 19.9 24.4 26.8 18.2 Industry Average 17.2 15.2 9.3 24.8 21.8 59.8 16.7 S&P 500 16.4 15.3 10.7 14.6 18.0 18.4 12.0 Avalonbay Communities Inc. (AVB) 23.1 21.5 6.5 21.1 23.6 32.5 19.2 Mid-America Apartment Communities Inc. (MAA) 14.0 13.0 N/A 13.2 14.8 16.9 12.3 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Equity Residential (EQR) 2.6 3.5 1.7 6.0 1.0 2.6 23.0 Industry Average 1.8 1.8 1.8 2.1 1.0 3.7-6.8 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research EQR Page 5
Earnings Surprise and Estimate Revision History Equity Research EQR Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of EQR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform - 15.4%, Neutral - 74.9%, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor 11C Kalyan Nandy Moumita C. Chattopadhyay Moumita C. Chattopadhyay Anuja Mitra Equity Research EQR Page 7