Real estate investment trust (REIT) Equity Residential (EQR 0.40%) is a bit of an underdog in the world of residential REITs today. Often outshined by multifamily operators in the Sunbelt, Equity Residential is making a comeback as people return to large cities. The shares are up more than 25% over the past year and up 50% from its low in November 2020.
With sentiments looking bright in 2022, will this be the year Equity Residential hits $100?
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Equity Residential today
Equity Residential owns, develops, operates, and leases 310 high-end class-A apartment communities in 12 core markets across the country. It focuses on serving affluent tenants in high-density metro markets along the West Coast and East Coast including Boston, New York, Southern California, Seattle, and Washington, D.C.
However, in light of migration trends over the past few years, particularly after residents fled big cities during the peak of the pandemic in search of more space, cheaper rents, and more favorable weather in the South, the company is expanding into markets including Denver, Dallas/Fort Worth, Atlanta, and Austin, Texas.
Lower demand in 2020 and into early 2021 definitely hurt the company. Revenue for the full year of 2021 was down 4.6%. It offered bigger leasing concessions in 2021 than the year prior, and total blended lease rates (renewals and new leases) were down 5.6% from 2020. These factors, in addition to slightly higher expenses, resulted in a less than stellar performance. Funds from operations (FFO), one of the key metrics to determine a REIT's profitability, dropped 8% year over year.
But things are looking up. So far in 2022, blended lease rates are up 13% year over year and occupancy is at 96.4%. As people return to major cities, lease rates are growing, with many markets seeing rents at or exceeding pre-pandemic levels.
The path to $100
After a rocky two years, the company is dramatically revamping its portfolio to reduce risk and maximize performance. This included the disposition of $1.7 billion worth of older apartments, and $1.7 billion in acquisitions of newly developed properties.
It plans an 80/20 approach for acquisitions in 2022, with about 80% (around $2 billion) in spending focused primarily on its core markets, while allocating the remaining 20% toward its expansion markets, which today generate just 4.8% of its net operating income.
The REIT has a relatively strong credit rating of A-/A3 and strong financials with $2.3 billion in cash and cash equivalents, including a revolving line of credit. And it has a fairly healthy debt ratio of 5.6 times its debt to earnings before interest, tax, depreciation, and amortization (EBITDA); which is slightly higher than the industry multiple of 5.
Equity Residential's share price is already close to the $100 mark, with a dividend yield of almost 2.8%. All it would take is about a 10% jump, which is definitely attainable considering the demand for residential housing today and last year's performance. However, market volatility could hinder how quickly it gets there. The S&P 500 is down roughly 7% this year at the time of this writing.
If volatility continues to take hold of the market, it could hinder the progression of the company despite its positive performance. It seems Equity Residential has made it through the woods and is headed toward $100 this year.
Investors who want in on the action before the stock rises should consider investing today. A pullback could happen, but it's much more likely the company's stock price will continue to rise as its performance improves. Shares are currently trading around 30 times its FFO, which is a premium. But this is in line with other residential REITs.
