An Investor’s Answer to the Housing Crash — Equity Residential

With the rental market robust, this company is well positioned

   
An Investor’s Answer to the Housing Crash — Equity Residential

A crash in one part of the economy often leads to a boom in another. In the case of the housing crisis, where plummeting home values forced many people to sell their homes or into foreclosure, the apartment sector is doing well. People kicked out of their homes have to live somewhere, and that usually means downsizing to an apartment. There are other secular factors at work as well, and that’s why it’s worth checking into Equity Residential (NYSE:EQR), a rental apartment REIT.

The company’s success comes from targeting a specific demographic.

In its most recent investor presentation, the company notes that the young adult population (ages 20-34) has been growing since 1999, and the unemployment rate among the college educated in that group is only 5%. The financial crisis reduced construction of new multifamily complexes, and in 2009 and 2010 multifamily construction was at its lowest rate since the 1960s. As this population of young adults grows, the supply of multifamily housing will not meet demand. That translates to high occupancy rates (95% to 96%) for Equity Residential. Higher occupancy rates means pricing power and higher rents. Equity Residential is in the sweet spot.

There’s more to be gleaned from the 20-34 demographic, though. It is a fairly diverse group, but Equity Residential wants to target the young professionals who prefer settings known for their sophistication. So the company has entered high-value markets that also have high barriers to entry because real estate is so expensive in these locations, which include Seattle, San Francisco, Los Angeles, Boston, Washington, New York and South Florida. In all, the company owns or has an interest in 579 multifamily complexes in 24 states.

This strategy has paid off well. The company traditionally enjoyed same-store revenues of between 3.2% and 5.8% in the good times. In bad times, EQR was down only 2.9% (2009), and 0.1% (2010). This year, it is expected to bounce back up to 5%.

None of this comes cheaply. The company carries almost $10 billion in debt, and that may frighten some investors. However, with debt on investments like this, the key questions focus on whether the debt is being serviced by cash flow, whether the company is able to refinance maturities, and whether enough cash is left over to pay a dividend (since it’s a REIT). The answers to all of these questions are “yes.” The important ratios are all solid. Recurring EBITDA (or cash flow) to interest expense is 2.42, so cash flow is more than twice what’s needed to pay interest. The dividend payout to FFO (funds from operations) is 58.19%, so the company is spending 58% of its funds from operations to pay its 2.6% yield.

Conclusion

Equity Residential has an admirable track record of outperformance compared to its peers in all time frames. Ten-year total returns are 243% vs. 222% for peers and 152% for the REIT index. The one-year total returns are 39% vs. 37% vs. 19%, respectively. So Equity Residential appears to be a strong player in this space and worthy of consideration. I would suggest, however, that its yield is not attractive enough, and the stock is too volatile, for retirement accounts. Total return history, however, makes it a good addition to a diversified portfolio.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2011/10/an-investors-answer-to-the-housing-crash-equity-residential-eqr-reit/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.