Equity Residential (EQR) owns a portfolio of high-quality multifamily communities consisting of rental apartments in urban and high density suburban locations in U.S. cities. On a YTD basis, EQR is down by more than 30% versus a decline of ~2.5% for the Dow, while the S&P 500 reached a record high. To put it mildly, this is massive underperformance.
The coronavirus has had a detrimental impact on the economy and various real estate sectors like retail and hotels, however the residential sector is holding up quite well, as one would have expected. In fact, during Q2 2020, EQR collected on average 97% of its total monthly residential rental income. What’s more, July 2020 collections continue to trend on a similar pace to prior months. As such, the performance of EQR is a head scratcher to say the least.
Due to the collapse in the share price, EQR now carries a dividend yield of almost 4.5%, which is well above its long-term average (3% average 10- year dividend yield)
Prior to the coronavirus, it is important to note that EQR had been a stellar performer, delivering 14%+ 10-year total shareholder return CAGR and 5% dividend growth CAGR. This performance is underpinned by one of the strongest balance sheets in the REIT Sector (A-/A3/A Rated) and solid operating metrics, including 4.8% 10-year same store NOI growth CAGR (driven by 3.9% same store revenue growth, higher than the 2.4% same store expense growth).
These are impressive results for both income and capital gain investors. In fact, from August 12, 1993 (EQR’s IPO date) to December 31, 2019, total shareholder return has been in excess of 2250%, well above the S&P 500 and NASDAQ as well as companies like Walmart (WMT) and JP Morgan (JPM):
EQR is a large company (S&P 500 constituent) with a great management team and corporate governance (founded and chaired by Sam Zell). Prior to the coronavirus, EQR had a market cap of $40Bn+ versus ~$20Bn today. I do not think the market is behaving rationally especially since EQR is collecting 97% of its rental income. I dare to say that EQR hasn’t really felt the coronavirus that much, at least financially unlike, for example, hotel and retail REITs. Plain and simple, residential real estate is a necessity. Residential REITs have been on my radar for years, but I always found them to be a bit pricey, with very low dividend yields. What I find surprising is that EQR is still hovering around its March low levels, when we experienced the very large sell-off.
For months, EQR is trading at a hefty discount (25%+) to consensus NAV. I do not expect this situation to last for too long, especially since rent collection is exceptionally strong (97% for Q2 2020), occupancy remains resilient (94.9% for Q2 2020 and slightly picking up to 95% for July 2020) and normalized FFO is certainly not falling off a cliff:
Source: Q2 2020 Results
The Price-to-Adjusted FFO multiple is close to historic lows and so is the discount to NAV. As the CEO, Mark Parrell, commented during the Q&A session of the Q2 2020 conference call:
the company rarely trades at this significant a discount to NAV.
Naturally, when a stock trades at a discount to NAV and as long as a company is financially strong, like EQR, share repurchases come to mind. As the CEO noted:
I’m not at all dismissive of share buybacks…we’re open to it, we have a $13 million share allocation on the share buyback side, that’s a conversation we’ll continue between the Board and myself and we’ll think more on that
The good news is that EQR has a solid track record of creating value throughout the real estate cycle, including more than $1 billion in buybacks over the period 2006-2008 at as much as 40% discount to NAV. In other words, management knows the playbook well and I expect long-term investors, buying at current depressed levels, will be handsomely rewarded.
Disclosure: I am/we are long EQR. 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.