As the COVID-19 crisis deepens, more and more Americans are losing their jobs. Stocks for apartment real estate investment trusts (REITs) have been sold off with the rest of the REIT sector. Some of the mortgage REITs are being looked at like bankruptcy candidates, and investors are starting to worry about retail REITs that aren't receiving rent.
But what about apartment REITs? How are they holding up in the crisis?
Report: 31% of renters missed their April payment
The National Multifamily Housing Council reported that 31% of renters missed their April rent payment, up from 18% a year ago. So far, about 22 million people have filed initial unemployment claims in the U.S. since the lockdown began about one month ago, and that number is probably understated as state unemployment systems have been overwhelmed with applicants. This works out to be roughly 15% of those who were employed at the end of February.
On April 8, Equity Residential (EQR 1.25%) -- the second-largest owner of residential apartments in the U.S. -- issued an update on April rents. The REIT said 93% of its tenants made their April rent payment, and the company was working with the remainder to work out a payment plan. Can this continue?
Equity Residential attracts professionals as tenants
Equity Residential's portfolio includes 306 properties and 79,065 units located in urban and high-density suburban areas. The company focuses on locations where there are high single-family house prices, a tight housing market, and a knowledge-based economy with high wage growth. Equity Residential's largest markets are Los Angeles, San Francisco, and Washington, D.C.
Equity Residential's tenants are more likely to work in the knowledge industries and therefore more likely to work remotely during the crisis. Note that in the March Employment Situation Report, of the 701,000 jobs that were lost in the U.S., over 500,000 were in leisure, hospitality, and retail. These are at the lower end of the wage scale and are probably not those of the typical renter in upscale Equity Residential properties. That said, as the crisis drags on, more and more white-collar workers will be let go.
Liquidity appears solid, valuation is high historically
At the end of 2019, Equity Residential had $46 million in cash and $1.38 billion worth of borrowing capacity on its revolving credit agreement. The company has $1 billion in commercial paper coming due this year. Equity Residential also has $23.9 billion in unencumbered real estate assets that it can borrow against. Equity Residential has been an active buyer and seller of properties, often managing to swap out older buildings for newer ones at the same cap rate. With a large unencumbered portfolio, Equity Residential can sell properties or borrow against them to raise cash.
Equity Residential is currently trading at a P/E ratio of 27 and 20 times funds from operations (FFO). This is on the high side for Equity Residential historically. Below is a chart of the historical P/E ratio. Look at where the stock traded during the 2008-2009 recession and the 2001 recession. During the 2008 recession, the stock traded with a P/E as low as 8. During the 2001 recession, it bottomed around 13.
How safe is the dividend?
Equity Residential's revenue last year totaled $2.7 billion. Funds from operations were $1.3 million. Fixed costs of taxes, insurance, interest, maintenance, and G&A came out to be just about $1.3 billion. While the company has some commercial paper to refinance, it has no other debt maturities this year. The REIT paid a dividend of $2.27 a share out of an FFO per share of $3.39. This 67% payout ratio gives the company some breathing room. Note that the March dividend payment was increased by 6.3% to $0.60 a share. A very rough estimation suggests 15% of Equity Residential's tenants could stop paying rent before the dividend becomes higher than FFO.
Overall, Equity Residential is one of the top U.S. apartment REITs and has historically been a strong performer. The stock is down about 14% year-to-date, which is much better than much of the overall financial sector. If the COVID-19 crisis winds down over the next couple of months, then the dividend should be fine and the multiple should hold up. If we do enter into a major recession, we could see both a decrease in earnings and a decrease in the multiple, which would be a double-whammy for the stock.