Equity Residential (EQR) is a multifamily residential property REIT, which is all about apartments in high-density urban markets like New York, Boston, Los Angeles, San Francisco, Seattle and Washington, D.C., explains Todd Shaver, editor of BullMarket.com.
This is a great company. Its key competitive edge lies in its ability to plan and build new developments in burgeoning markets where demand is strong.
Wherever the median home price is a significant and unaffordable multiple of the median household income, Equity Residential sees a strategic opportunity. That’s a big factor in an era when headlines commonly note that minimum wage workers are unable to find housing anywhere in the country.
For example, in Los Angeles, one of Equity Residential’s most favored markets, the median home price is $470,000, and the median household income is $55,000.
That’s an 8.5x multiple, which means it’s extremely difficult for Los Angelenos to purchase homes under normal mortgage underwriting limits, that restrict loan amounts to just two or three times income. And when people can’t buy, they need to rent.
All of this translates into persistent growth. Funds From Operations, a key metric for Real Estate stocks, edged up 1% last year and is on track to climb as much as 4% in 2018. After all, this is a company that knows how to invest capital.
Equity Residential recently trimmed debt from its balance sheet to a mere 35% of total assets, earning an A- credit rating from both S&P and Fitch. In an industry that tends to lever itself to the moon, an A- credit rating signals management’s conservative approach to financing, which should make dividend investors extremely happy.
In fact, the company’s currently pays 62% of its income back to shareholders, which implies room to raise the dividend going forward. And let’s not forget about the $1.8 billion in liquidity that Equity Residential is currently sitting on, thanks to a $2 billion revolving line of credit; plenty of room to maneuver should they wish to acquire or expand via increased development.
And speaking of management, Equity Residential has one of the best in the business, led by industry legend Sam Zell. Zell founded the company in 1993 and over the past 25 years he’s steered his company through bust and boom times alike. And Zell’s top executives have all been with the company for at least 20 years apiece.
That’s exactly the type of management structure we love to bank on. As the REIT market continues to rebound from the weakness which occurred at the start of the year, expect Equity Residential to break out as a top performer in its peer group.
