2023-09-25 08:10:00 ET
Summary
- Equity Residential is a large multifamily REIT with a strong history of delivering shareholder returns.
- EQR operates in high-demand markets with a favorable supply-demand imbalance, leading to steady revenue growth.
- The company has a well-covered dividend yield, low leverage, and is currently undervalued, making it an attractive dividend choice.
It's been a while since I last visited Equity Residential (EQR) with a 'Strong Buy' rating back in April of this year. It appears that the market has not yet agreed with me, as the price has fallen by less than 1% since then.
While share price growth has been disappointing, it's important to keep the long game in mind, especially when it comes to undervalued dividend giants. In this article, I provide recent updates and discuss what makes EQR an appealing dividend choice at present, so let's get started!
Why EQR?
Equity Residential is one of the largest multifamily REITs on the market today, sitting alongside peers like AvalonBay Communities ( AVB ) and Essex Property Trust ( ESS ). It currently holds 304 properties covering over 80K units, and is focused on Tier 1 coastal markets, with expanding presence in Denver, Dallas, Austin, and Atlanta.
EQR was founded by real estate legend, Sam Zell, who died this year, and has a history of creating shareholder value. This is demonstrated by its strong record of delivering shareholder returns over its history. As shown below, while EQR's total return has lagged that of peers AVB and ESS, it nonetheless produced a far higher 438% total return than the 261% of the Vanguard Real Estate Index Fund ( VNQ ) over the past 20 years.
EQR and Peers Total Return (Seeking Alpha)
This is driven in large part to the durable nature of apartment REITs, especially in the high barrier to entry markets that EQR participates in. These markets carry higher population densities and median incomes than the national average, high demand has been driven in imbalances between supply and demand. As shown below, housing demand has outpaced supply in every year over the past 12 years.
Investor Presentation
This makes holders of existing real estate like EQR well-positioned to capture the upside from this imbalance. This is reflected by EQR's 5.5% YoY same-store revenue growth during the second quarter. What's good for EQR is that it's been able to keep same-store expense growth in check, with that growing at the same rate as revenue. Plus, management expects for SS expense growth to slow to 4.25% in the second half of this year. For the full year, EQR is still guiding for a healthy 5.9% SS revenue growth rate, with higher growth expected to come in during the current quarter in progress and Q4.
While accelerating growth in the second half of the year may be hard to imagine amidst an uncertain economic backdrop, it's not all that realistic considering that inflation remained stubbornly high in the month of August. Plus, plenty of companies such as tech giant Amazon ( AMZN ) have spelled out return to office mandates this year. This means that the urban centers in which EQR operates in, such as Seattle, where Amazon is headquartered, could see a reverse migration from lower cost secondary markets.
Concerns around EQR stem from potential for higher interest rates, as that raises cost of debt. While the Federal Reserve kept rates flat this month and anticipates just one more raise before the end of the year, the Fed Chairman's remarks suggest that rates could remain at elevated levels for longer than what the market had previously anticipated.
Nonetheless, EQR is rather insulated from higher rates in the near term, as it has no debt maturities outside of commercial paper until the middle of 2025. It also carries a material $2 billion in liquidity. Also encouraging, EQR currently carries its lowest leverage in company history, with a net debt to TTM EBITDA ratio of 4.4x.
Interestingly, higher interest rates can actually be a plus for well-capitalized REITs such as EQR, as they reduce competition from speculative players that employ high leverage to create new supply. As shown below, new constructions are expected to drop materially for the balance of the year compared to 2022, and are expected to remain low through at least 2025 and beyond.
Investor Presentation
Meanwhile, EQR currently supports a well-covered 4.4% dividend yield with a 69% payout ratio. The current yield is also at the highest level over the past 10 years outside the early pandemic time frame in 2020, and EQR grew its dividend by 6% this year.
EQR is also currently in value range at the current price of $60 with a forward P/FFO of 16.1, sitting well under its normal P/FFO of 21.3 over the past decade. Considering the strong balance sheet and analyst expectations for mid to high single digit annual FFO/share growth going forward, I believe EQR presents an attractive value proposition at the current price. However, with continued interest rate and the associated market uncertainty, I'm downgrading from a 'Strong Buy' to a 'Buy' rating.
FAST Graphs
Investor Takeaway
In conclusion, while EQR may not be a flashy or exciting investment choice, it offers stable and growing dividends with solid long-term potential. Its strong balance sheet and focus on high-demand markets make it a less risky option compared to other REIT classes in the current economic climate. While there are some concerns around interest rates, EQR is well-positioned to weather them with its strong balance sheet and could potentially benefit due to reduced new supply. Lastly, EQR's shares appear to be undervalued, setting up potentially healthy returns over the long run.
For further details see:
Equity Residential: Unlock Value In This Dividend Bargain