- Equity Residential recently closed out another strong first quarter with robust top and bottom line growth.
- Most of Equity Residential's markets have median home price to median household income ratios that are well above the national median.
- EQR stock is materially down from a year ago and trades far below its normal valuation, giving investors the potential for strong total returns.
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It's no surprise that many real estate investment trusts, or REITs (VNQ), have fallen since the start of the year. Renewed concerns around commercial real estate have resurfaced in light of recent blow-ups of regional banks, including Silicon Valley Bank (OTCPK:SIVBQ) and ongoing pressures on First Republic Bank (FRC).
However, while office REITs could continue to face pressures, it appears that even well-run multifamily REITs have been placed in the same risk bucket. This brings me to Equity Residential (NYSE:EQR) which I last covered here in December, highlighting strong leasing demand.
As shown below, EQR is now trading 32% below it 52-week high. In this article, I provide an update on the stock and discuss why it's a strong buy at near 52-week lows, so let's get started.
Equity Residential was founded 30 years ago, and is today one of the largest multifamily REITs on the market and a member of the S&P 500 (SP500) index. At present, EQR has 301 properties across the U.S. encompassing 79K apartment units. EQR focuses on owning apartments in high barrier to entry coastal markets with higher income demographics and has recently expanded into growing markets in Denver and along the Sunbelt in Texas and Atlanta, Georgia.
Meanwhile, EQR recently closed out another strong quarter, with Normalized FFO per share growing by 13% YoY during Q1. This was driven by strong leasing trends, as same store revenue grew by 9.2% YoY due to continued healthy demand and lower than expected bad debt expense.
Also impressive, EQR is seeing positive operating leverage, as it was able to grow revenue at a faster pace than expense, which grew by 7.2%. Notably, this expense growth was actually higher than what management had anticipated, due to severe rainstorms in California. Looking out to the rest of the year, EQR could see higher operating leverage as management anticipates lower expenses for the remainder of the year, and guided for 4% to 5% same property expense growth for the full year 2023.
While economic uncertainty and higher interest rates are some obvious concerns for REITs including EQR, it's worth mentioning that EQR's key markets are well-positioned with well-above national median household income. Moreover, the high cost of home ownership compared to median income in these markets results in stickier tenant relationships. As shown below, most of EQR's markets have median home price to median household income ratios that are well above the national median of 4.9x.
Moreover, the supply-constrained nature of EQR's markets should continue in the current higher interest rate environment, as builders are priced out of the market due to the high cost of debt. At the same time, EQR carries a strong balance sheet and is one of just a handful of REITs to hold an A- credit rating. This includes having a low net debt to EBITDAre ratio of 4.17x, which sits lower than the 4.38x from the end of last year. 95% of EQR's debt is fixed rate, and it carries a low weighted average interest rate of 3.55% on total debt.
It appears that management isn't overly concerned about the immediate impact of higher interest rates, as EQR recently raised its dividend by 6% this year. The new dividend rate remains well-covered at a 76% payout ratio, based on $0.87 NFFO per share in the first quarter.
Lastly, EQR appears to be in value territory at the current price of $60 and change, with a forward P/FFO of 16.0, sitting well under its normal P/FFO of 20.1. Sell side analysts who follow the company have a consensus Buy rating with an average price target of $68.76, which comes to a potential 19% total return over the next 12 months.
Equity Residential remains a strong buy at near 52-week lows, given its focus on high barrier to entry coastal markets, very strong balance sheet, and safe and growing dividend. While there are headline risks around higher interest rates, they could actually work to EQR's benefit as new construction is priced out of the market. Lastly, Equity Residential appears to be in value territory with a forward P/FFO that sits well below its historical level, setting up income investors with a decent starting yield with potential for strong capital appreciation.
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This article was written by
I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.I provide high-yield, dividend growth investment ideas in the investing group Hoya Capital Income Builder. The group helps investors achieve dependable monthly income, portfolio diversification, and inflation hedging. It provides investment research on REITs, ETFs, closed-end funds, preferreds, and dividend champions across asset classes. It offers income-focused portfolios targeting dividend yields up to 10%. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of EQR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.
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