EQR - Equity Residential: Management Hints At Attractive Entry Price For The Stock

2024-05-02 03:14:12 ET

Summary

• The spread between apartment REIT cap rates and the US 10-year treasury is narrower than usual, signalling downward pressure for the stock price of Equity Residential.
• The current macroeconomic environment has directly increased the cost to finance acquisitions for EQR. Unsurprisingly, EQR did not make any acquisitions in Q1.
• Employing an enterprise perspective, EQR is trading at a cap rate that is below its cost of capital. Investors should wait until conditions rebalance and the spread is positive.

Introduction

One of the salient features of REITs is that profits and prices often move in cycles. And there are two cycles worth considering. First, there is the space market cycle, which describes the supply and demand forces for a particular type of space. In the case of Equity Residential (EQR), the type of space would be residential apartments that cater to the affluent worker segment in predominantly the coastal markets. A space market review for EQR might consider leasing trends, occupancy statistics, the rent-to-income ratio of their typical tenant and perhaps even the leasing concessions currently offered in their expansion markets . The capital market cycle has to do with the level of investor demand for real estate assets and the valuations at which they trade and is the focus of this article. In this paper, we look at the historic relationship between capitalization rates, or cap rates, and the US 10-year treasury and infer what the implications for valuations might be. We delve into EQR’s capital structure and quantify how the current macroeconomic conditions might impact their business strategy. We corroborate our framework with items disclosed in their Q1 2024 earnings supplement and conference call . Finally, we string together the items discussed in the article and conclude that given the current macroeconomic conditions, a price approaching $58 might be a better entry point for investors contemplating a position in the stock....

For further details see: