This month's REIT Focus is on Equity Residential apartment company (EQR). EQR is a self-administered and self-managed Maryland real estate investment trust that is the 95.7% owner of the general partner interest in ERP Operating Limited Partnership, the UpReit partnership that owns the assets of EQR. EQR engages in the ownership and management of a diverse portfolio of 427 apartment properties, including 404 wholly owned, 21 partially owned and 2 military properties with a total of 121,011 units. EQR's properties are located in 16 states and the average occupancy and monthly rent as of the first quarter of 2012, was 94% and $1,578, respectively. EQR was incorporated in the State of Maryland in 1993 and is based in Chicago, IL.
EQR has 300 million shares outstanding, a stock price of $61/sh and a market capitalization of approximately $18.3 billion. EQR has a solid and well regarded management team including CRE icon, Sam Zell, 69, founder and chairman, David Neithercut, 55, president and chief executive officer and Mark Parrell, 44, executive vice president and chief financial officer.
Select financial data for EQR as of the 3/31/12 10Q and for the period 1/1-3/31/12 is as follows (in millions where applicable):
|Real Estate Assets, Gross||$20,537|
|Mortgages and Notes Payable||$9,412|
|Earnings Per Share||$.47|
|Cash Flow from Operations||$235|
|Unsecured Revolving Credit Facility ($1.68 billion available)||$1,750|
|Market Capitalization (equity value only)||51%|
|Real Estate Assets Per Unit||$169,000|
|Dividend Yield ($1.35/sh)||2.20%|
|NOI and Value Calculation:|
|Revenues Per Above Annualized||$2,112|
|Less: Operating Expenses||$772|
|Projected NOI 2012||$1,340|
|Projected Inflation Rate||103.5%|
|Projected NOI for Next Year||$1,387|
|Projected Cap Rate||7%|
|Projected Value of Company||$19,814|
|Less: Total Debt & Preferred Stock||($9,612)|
|Projected Value of Company Equity||$10,202|
|Projected Value Per Share||$34|
|Market Price Per Share (6/14/12)||$61|
As shown above, our value for EQR is $34 per share versus a market price of $61 per share. The market is valuing EQR at a low cap rate of 5%, which is similar to most of the other highly regarded apartment REITs reviewed here on VOM, except Apartment Investment and Management Company (AIV), which was reviewed and recommend for purchase in last month's issue. The stock prices of most apartment REITs have been bid up to pricey levels due to positive growth fundamentals and the desire for yield, in this low interest rate environment. In addition, many momentum investors during the last year have pushed capital into the REIT sector further pushing up prices and lowering dividend yields.
For valuation purposes, our cap rate of 7% is lower by half a percent than the rates used on other apartment REITs. This is because EQR is the market leading apartment company with a solid management team, quality assets, relatively low level of debt and is considered one of the best managed REITs in the market. Total revenue and cash flow from operations have increased 21% and 19% from 2009 to 2011, respectively. EQR was recently in a bidding war for the 26.5% interest in the Archstone apartment company partially owned by the bankrupt Lehman estate. EQR lost the bid in May 2012; however it did receive a $150 million break-up fee. Although EQR is a great company, we do not recommend purchase of the stock at these levels.
REIT Focus reviews in prior issues of VOM are as follows:
- BRE Properties, Inc., (BRE) June 15, 2011
- Boston Properties, Inc. (BXP) , July 15, 2011
- Simon Properties Group, Inc. (SPG) , August 15, 2011
- First Industrial Realty Trust (FR), September 15, 2011
- Public Storage (PSA), October 15, 2011
- Ashford Hospitality Trust, Inc. (AHT), November 15, 2011
- AvalonBay Communities, Inc. (AVB), December 15, 2011
- Alexandria Real Estate Equities, Inc. (ARE), January 15, 2012
- Federal Realty Investment Trust, Inc. (FRT), February 15, 2012
- Digital Realty Trust, Inc. (DLR), March 15, 2012
- Lasalle Hotel Properties (LHO), April 15, 2012
- Apartment Investment and Management Company (AIV), May 15, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.