Equity Residential (EQR) is a residential Real Estate Investment Trust focusing on multi-family properties. The company acquires, develops and manages high-quality rental properties in high-growth urban centers such as Los Angeles, San Francisco, New York, Boston, Seattle and others. Equity Residential has a market capitalization of $18.7 billion and is an S&P 500 constituent.
Sam Zell, the founder of EQR, has build a real estate empire over the last six decades growing Equity Residential into a company with a real estate portfolio consisting of 398 properties and 113,388 apartment units with an occupancy rate of 96% (data as of September 2013).
The REIT sold off in May and June as part of a sector-wide correction. However, Equity Residential proved to be more resilient than others REITs. Equity Residential has lost around 14% since May 21, 2013 when it traded at $60.75.
Equity Residential has returned a negative 3.17% over the last two years. However, the company pursues a savvy investment- and portfolio growth strategy that positions the REIT to capitalize on big demographic trends in the coming years.
The U.S. financial- and real estate crisis is an economic textbook example of a bubble inflating and subsequently deflating. As a consequence of misguided capital allocations in the U.S. housing market (oversupply of residential properties, speculative transactions), house prices eventually collapsed and the market corrected the excesses with trillions of dollars in household wealth going down the drain. In light of a massive housing inventory stemming from record levels of foreclosures, new construction collapsed and new building permits hit record lows. This supply-demand imbalance will ultimately correct itself although I think that a large part of the younger U.S. population will resort to renting rather than owning going forward.
Household formation will be a key driver for rental property demand. Population- and net immigration growth will also contribute to higher demand for rental properties in the future. The U.S. continues to be a magnet for immigrants from around the world and I expect this trend to gain momentum when the U.S. economy does better (I think this might be the case in 2-3 years). As such, real estate, whether residential, retail or healthcare, will do fine over the long-term and it will be benefiting from population growth.
On April 30, 2013 Reuters reported:
WASHINGTON, April 30 (Reuters) - Homeownership in the United States hit a 17-year low in the first quarter as more Americans opted to rent, continuing a trend exacerbated by the collapse of the housing bubble.
Economists said homeownership could decline even further given that about 10.4 million homeowners owe more on their mortgages than their homes are worth and credit is still tight.
The seasonally adjusted homeownership rate slipped to 65.2 percent, the lowest since the fourth quarter of 1995, the Commerce Department said on Tuesday. The rate, which peaked at 69.4 percent in 2004, was 65.3 percent in the fourth quarter.
Low homeownership rates and strong immigration growth will benefit Real Estate Investment Trusts that focus on residential properties. Especially young people seem to be putting off house purchase decisions due to economic uncertainty and consequently make up a large segment of the rental population. In addition, it is no secret that people marry later nowadays further increasing demand for rental properties due to the increasing number of single households. Furthermore, multi-family housing starts still remain below historical levels and make existing multi-family property portfolios more attractive (see graph below). All these factors play into the hands of multi-family property investors like Equity Residential.
Strong position in growth markets
EQR's properties are located in high-quality rental markets with strong growth prospects. The company has a strong focus on California and the Northeastern states in the U.S. where employment growth- and salary prospects are much better than the national average. Not surprisingly, buying a house in areas of economic vibrancy is much more expensive and renting becomes a valid option. In fact, renting can be the more attractive option as displayed in the graph below:
Attractive dividend prospects
Let's be real here for a moment: Creating a multi-billion dollar REIT out of nothing like Sam Zell did clearly deserves respect. If I can invest alongside a successful and visionary billionaire, I gladly take my chances. I think that Sam Zell not only has a successful track record in delivering value for shareholders, but he also plays one of the strongest short- to medium term demographic trends in the real estate sector: The propensity to rent.
EQR currently pays a quarterly dividend of $0.40 which translates into a forward annualized dividend yield of 3.1%. More importantly, Equity Residential has a long-standing dividend payment record that stretches well into the 1990s. The company also paid two special dividends in the amount of $0.12 and $0.23 in 2011 and 2012.
EQR outperformed the SNL Equity REIT Index over both a five- and ten-year measurement period. The company also produced a higher return than the S&P 500:
Equity Residential is a well-run residential REIT that plays the big demographic trends (mean-reverting household formation growth, propensity to rent, unaffordable houses). Its product offering appeals to younger people who put off house purchases and marriage and who exhibit a higher propensity to rent than other segments of the population. EQR's portfolio is concentrated in high-growth urban areas where renting is often the better option for people due to higher house prices in areas of strong economic growth (e.g. California, New York, Virginia, Florida). The company also has high occupancy rates well above 90% and displays a savvy acquisition policy (e.g. $9 billion Archstone acquisition including 21,000 apartment units from bankrupt Lehman Brothers in 2013). Furthermore, EQR allows investors to invest alongside renowned investor Sam Zell who build a multi-billion REIT from scratch. Long-term BUY on demographic trends, attractive portfolio concentrated in high-growth areas, credible dividend history and a 3.1% dividend yield with prospects for higher yields down the road. EQR's residential property portfolio also has huge valuation upside due to its location in top U.S. growth markets.