Equity Residential (NYSE: EQR). We expect the company’s earnings to benefit from above-average rental pricing, the appeal of city amenities, the high cost of home ownership relative to income, and the flexibility of rentals.
We also note that many young professionals – a key target market for EQR – are delaying marriage and children until their 30s and thus have less immediate need for large single-family homes. Lastly, we are positive on REITs, as the Fed has indicated that it will maintain low interest rates for the foreseeable future. We believe that EQR shares offer value at current levels. Our price target of $70 implies a 2020 price/FFO multiple of 22.1, and potential upside of 33% from current levels.
The beta is 0.85, in line with peers.
On July 28, EQR posted 2Q20 normalized FFO of $331 million or $0.86 per share, flat with 2Q19 but above the consensus forecast of $0.84. Same-store expenses were flat and NOI fell 3.3% to $454 million.
Rental rate growth came from Seattle and Boston (which each account for 10% of NOI), with rental rates rising 3.4% and 1.9%, respectively. However, rental rate growth was slow in San Francisco and New York, rising only 0.5% and 0.4%, respectively. Rental rates fell in Los Angeles and Denver, down 0.2% and 1.2%, respectively.
During the quarter, the company sold two properties for a combined $384 million at a 4.4% disposition yield. The buildings are in the San Francisco and Washington D.C. areas. EQR did not acquire any apartment properties during 2Q20.
EARNINGS & GROWTH ANALYSIS
In this respect, a so-called ‘K-shaped recovery’ should benefit luxury apartment operators like Equity Residential.
We are also lowering our 2021 estimate to $3.16 from $3.50.
FINANCIAL STRENGTH & DIVIDEND
Our dividend estimates for 2020 is $2.41 (raised from $2.38) and $2.41 for 2021 (lowered from $2.49 due to locked-in rent concessions that will carry through to FY21, likely hindering dividend growth).
Our price target of $70 implies a 2020 price/FFO multiple of 22.1 and potential upside of 33% from current levels.