Summary

• Sam Zell’s Equity Residential has refocused its apartment portfolio on urban Millennials in seven growth centers of the knowledge-based economy.
• EQR has 310 properties with over 80,000 apartments in urban and highly walkable, close-in suburban areas where today’s renters want to live, work and play.
• EQR is the largest REIT in the residential sub-sector. It has a Standard & Poor’s credit rating of A- and it’s in the S&P 500.

Our SWOT analysis is meant to serve as a baseline for doing research on companies that we might invest in at certain prices. As Warren Buffett has repeated many times, only by getting to know a company’s business, can we start to understand whether or not to invest our hard earned money.

Introduction to Equity Residential

Equity Residential (EQR) is a real estate investment trust founded in 1993 by current Chairman Sam Zell to acquire, develop and manage rental apartments. Since 2005, the REIT has repositioned the portfolio to urban and high-density suburban markets in strong economic growth centers of the knowledge-based economy.

EQR believes these urban and highly walkable, close-in suburban assets are where today’s renters want to live, work and play. The company owns or has investments in 310 properties consisting of 80,061 apartment units, primarily in Boston, New York, Washington, D.C., Seattle, San Francisco, Southern California and Denver.

With a market capitalization of $28.139 billion, EQR is the largest REIT in the residential sub-sector, slightly ahead of AvalonBay Communities (AVB) at $27.770 billion. EQR has a Standard & Poor’s credit rating of A-. In Q1 2019, EQR reported 28¢ earnings per share and funds from operations of 82¢ per share. The company produced same store revenue growth of 3.1% with 96.3% occupancy. EQR is in the S&P 500.

Strengths

Equity Residential has a seasoned, focused management, a strong balance sheet for internal redevelopment and acquisitions, a highly selective geographic footprint that is attractive to a wave of highly skilled Millennials seeking to rent upscale apartments.

• Chairman Sam Zell provides visionary leadership and industry contacts. Trustee and former Chief Executive Officer David Neithercut (2006-2018) led EQR through the transformational portfolio repositioning from suburban garden to urban and high-density suburban. New CEO Mark Parrell has worked with EQR’s finances since 1999, and served as Chief Financial Officer since 2007.
• Equity Residential’s financial strength is reflected in its $520 million development pipeline including the $410 million, 469-unit, 44-story West End Tower in Boston. Another $800 million of recently completed developments will contribute more than $40 million to net operating income in 2019. EQR generates $250 to $300 million in annual free cash flow after dividends and capital expenditures.
• EQR assets are located in the heart of the U.S. knowledge-based economy where high-wage jobs attract large segments of the population opting for high-quality rental housing as an alternative to very high home ownership costs. EQR enjoys high barriers to entry with limits on new supply because of land scarcity or government regulation.
• Equity Residential targets affluent renters looking for amenities within walking distance and easy access to public transportation. EQR has learned how to attract and serve its primary demographic: Millennials, also known as the Echo Boom Generation. This has led to high resident demand and retention.

Weaknesses

Weaknesses common among REITs include exposure to general economic risks like recessions and inflation and government risks such as unfavorable changes in tax and regulatory policies, while EQR’s geography and constituency create some company-specific weaknesses.

• REITs enjoy a tax law provision exempting them from federal income tax if they essentially pass-through their income to individual investors. This makes REITs attractive dividend investments, but it makes them dependent on this continued tax advantage.
• REITs are subject to multiple jurisdictions that levy taxes and impose regulations, and a weakness of EQR’s business model is their location in high-tax jurisdictions with stiff regulations.
• By investing in just seven urban centers and targeting a specific resident demographic, a potential weakness of EPR’s model is the risk that comes with a narrowly defined geography and clientele.

Opportunities

Equity Residential is well positioned to grow their share of highly paid, technology savvy urban adults who have chosen not to own a home but rather to rent an upscale apartment convenient to their workplace, public transportation and to amenities within walking distance.

• EQR is riding a powerful urban trend among highly-skilled, well-paid Millennials seeking to live in some of the largest urban areas of the U.S. Their target demographic group should see continued growth.
• Equity Residential uses digital marketing (each virtual or self-guided tour of a unit saves 30 minutes of staff time) and new smart home technologies for IoT, the Internet of Things. EQR is spending $800 per unit for IoT capability upgrades in anticipation of the arrival of 5G technology.
• EQR residents are prime candidates for enhanced public transportation, for Uber or Lyft, for driverless, autonomous vehicles, and for services within walking distance.
• Equity Residential properties in Washington, D.C. will benefit from their proximity to the new Amazon HQ2 site, including their 326-unit at Pentagon Row.

Threats

EQR faces several economic, governmental, ecological, societal and market-driven threats that could negatively impact their thus far successful business plan.

• Perhaps Equity Residential’s greatest threat is a severe recession that would put pressure on rent pricing and occupancy rates. Rising interest rates would increase EQR’s borrowing costs and perhaps depress the value of shares.
• Another threat is a potential wave of new supply in some of their markets, which could provide direct competition or simple living alternatives that would have fewer amenities but might be more attractive to consumption-conscious renters.
• The threats that generate the most questions from analysts in EQR earnings calls are around governmental regulation, particularly in New York City, where some units are, or could be, subject to rent controls.
• All businesses, including EQR, face cyber threats against their operating systems or physical security threats by malevolent individuals or groups. With assets concentrated in seven large metropolitan areas, EQR faces an elevated risk that a terrorist attack or a natural disaster in one city could do considerable damage to its asset base.
• If threatened with an unfriendly takeover, the company is prepared to issue up to 100 million preferred shares with rights that would prevent such a takeover.

Long-term Business Outlook

Equity Residential believes demand for rental housing today is driven primarily by the 78 million Millennials, born between 1981 and 2000, who comprise the largest segment of the U.S. population. These young adults are disproportionately renters. They want an urban lifestyle, are delaying or foregoing marriage and are avoiding home ownership in very expensive markets. 40% of EQR residents are single residents.

The company believes the impact of the Millennials cannot be overstated. The largest sub-segment of this group is now 28 years old. The median EQR resident is 33. Only 15% of EQR residents are over 50. EQR expects continued growth from the Millennials and from the Generation Z group that will follow. Gen Z comprises more than 70 million people born between 2001 and 2014. The company believes it is extremely well positioned to benefit for many years to come from the large impact these two generations will have on rental housing.

Equity Residential depends on a growing economy to provide high incomes for their mostly young, very skilled target demographic. The company believes these jobs are essential to today’s economy and therefore relatively safe. EQR’s geographic locations and renter demographics are working in its favor. An investment in EQR assumes a continuation of this successful model. One factor to consider is that many current EQR renters were not yet heads of households during the Great Recession. In a severe or protracted downturn, will they make different residential decisions—by choice or by necessity?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by Ted Leach (Dividend Sleuth) with input from Kirk Spano and David Zanoni. The article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.