Fitch Affirms Equity Residential's IDR at 'BBB+'; Outlook Stable
NEW YORK -- March 13, 2014
Fitch Ratings has affirmed the credit ratings of Equity Residential (NYSE:
EQR) and its operating partnership, ERP Operating Limited Partnership,
(collectively EQR, or the company) as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--Unsecured revolving term loan at 'BBB+';
--Preferred stock at 'BBB-'.
ERP Operating Limited Partnership
--IDR at 'BBB+';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation is supported by EQR's focus on high-quality properties in
strong markets and sound financial management. The company is the largest
multifamily REIT in the U.S. by market capitalization and is a leading
owner/operator in many of the top markets in the U.S. including New York, San
Francisco, Los Angeles and Boston. The company is focused on markets that have
historically experienced above average growth and are expected to continue to
exhibit strong growth in the future.
The company's ratings are further supported by its strong access to capital
which has been demonstrated in multiple forms throughout various market
cycles. In 2013, EQR greatly improved the quality of its portfolio by
acquiring $9.0 billion of assets from Archstone Enterprise LP (Archstone) and
selling almost $4.5 billion of non-core assets in secondary markets.
CREDIT METRICS NORMALIZED
EQR's leverage was temporarily elevated as a result of funding the Archstone
transaction which closed in the first quarter of 2013 (1Q'13), but leverage
has subsequently returned to normalized levels via asset sales and same store
net operating income (SSNOI) growth. Leverage as of Dec. 31, 2013 was 6.8x,
consistent with Fitch's expectations pre-Archstone transaction. Fitch expects
the company's leverage to remain around 6.8x from 2014 through 2016. Fitch
defines leverage as net debt divided by recurring operating EBITDA.
EQR's fixed-charge coverage for the year ended Dec. 31, 2013 was 2.7x which is
strong for the rating and up from 2.4x and 2.2x for 2012 and 2011,
respectively. Fitch defines fixed-charge coverage as recurring operating
EBITDA less recurring capital improvements divided by cash interest incurred
and preferred distributions. EQR has benefited in recent years by refinancing
debt at historically low interest rates while achieving strong SSNOI growth.
Fitch expects the company's fixed-charge coverage will increase to
approximately 3.0x from 2014 through 2016.
EQR closed on the acquisition of $9 billion of assets in core markets during
the 1Q'13 via the Archstone transaction at a 4.9% capitalization rate. In full
year 2013, the company sold 94 apartment properties for an aggregate price of
$4.5 billion at a weighted average capitalization rate of 6%. The Archstone
transaction bolstered EQR's ownership of Class A properties in top markets
such as San Francisco, New York, Seattle and Boston, among others. These
markets tend to exhibit relatively strong long-term demand, limited buildable
land and high construction costs, curtailing potential supply growth.
Dispositions were focused on non-core markets including Phoenix, Atlanta and
suburban Maryland. The activity in 2013 accelerated what may have otherwise
been a multi-year process, as the company has historically been active in
pruning its portfolio. The higher quality portfolio is evidenced by an average
rental rate per unit of $2,110 in 2013 versus $1,737 in 2012, a 21.5%
POSITIVE SAME-STORE RESULTS
SSNOI growth remains strong relative to historical performance, although it
has been decelerating. EQR's SSNOI growth was 7.6% in 2012, 5% in 2013 and
Fitch anticipates that fundamentals will remain solid, but continue to
decelerate towards the longer term historical average of 2% to 3% SSNOI
growth. Fitch expects occupancy to remain in the 95%-96% range as the company
continues its focus on utilizing its industry-leading operational platform and
technology to optimize NOI.
WEAK WASHINGTON DC EXPECTATIONS
Washington, DC is EQR's largest market at 18.6% of stabilized NOI and may
continue to weigh on the overall portfolio performance. SSNOI grew by 2.7% in
2013 versus 2012, but this growth was the lowest among the company's core
markets and occupancy declined by 0.3%. Although Washington, DC was one of the
strongest real estate markets during the global financial crisis, the metro
has been hurt by an abundance of new supply coupled with tepid job growth and
uncertainty surrounding near-term government job growth.
SMALL UPTICK IN DEVELOPMENT
EQR acquired several strong development sites through the Archstone
transaction, which should provide growth opportunities over the next several
years. The unfunded development pipeline as a percentage of gross assets was
2.8% at year-end 2013, up from 1.8% at year-end 2012. Despite this uptick, the
company's total development pipeline and unfunded development pipeline as a
percentage of gross assets is smaller than many of its closest peers. The
development projects are focused in strong markets including New York, Seattle
and Los Angeles.
APPROPRIATE CONTINGENT LIQUIDITY
EQR's unencumbered cash NOI stressed at a 7.0% capitalization rate covered its
net unsecured debt by approximately 2.8x for the year ended Dec. 31, 2013. The
company has consistently maintained adequate net UA/UD above 2.5x. The quality
of the unencumbered portfolio is consistent with the quality of the overall
ADEQUATE LIQUIDITY; SUPPORTED BY CAPITAL ACCESS
Fitch calculates that EQR's sources of liquidity (unrestricted cash,
availability under its unsecured revolving credit facility, expected retained
cash flows from operating activities after dividends and distributions)
divided by uses of liquidity (debt maturities, developments and recurring
capital expenditures) results in a liquidity coverage ratio of 1.0x for the
period Jan. 1, 2014 to Dec. 31, 2015, which is adequate for the rating. Over
the projected period, approximately $1.5 billion of unsecured debt will
mature, and Fitch expects over $1 billion of unfunded developments and
recurring capital expenditures will be incurred, which largely offset sources
Assuming EQR refinances 80% of its maturing secured debt liquidity coverage
would improve marginally. Further, Fitch notes EQR's demonstrated access to a
variety of capital channels including public unsecured debt, bank facilities,
life insurance company mortgage debt, agency-mortgage debt and equity, which
mitigates refinance risk.
AFFO PAYOUT RATIO POLICY REVISED
EQR's annual dividend will be based on 65% of the midpoint range of normalized
funds from operations (FFO) guidance beginning in 2014. Previously, EQR had a
policy in place in which the company made three fixed dividend payments during
the first three quarters and one variable dividend payment in the fourth
quarter. Under the prior policy, the annual payout was also targeted to equal
65% of normalized FFO. Fitch-calculated adjusted funds from operations (AFFO)
payout ratio was 74% in 2013 and 65% in 2012, indicative of strong internally
PREFERRED UNIT NOTCHING
The two-notch differential between EQR's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'.
Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial
Corporate and REIT Credit Analysis, dated Dec. 23, 2013 and available on
Fitch's Web site at www.fitchratings.com, these preferred securities are
deeply subordinated and have loss absorption elements that would likely result
in poor recoveries in the event of a corporate default.
The Stable Outlook reflects Fitch's expectation that multifamily operating
fundamentals will continue to revert toward its long-term average. The
company's leverage should remain approximately at current levels in the short
term, and range between 6.5x and 7.5x over the longer term due to the timing
of developments. In addition, EQR has good access to capital, and should be
able to refinance maturing obligations due to strong coverage ratios.
The following factors may have a positive impact on EQR's ratings or outlook:
--Fitch's expectation of leverage sustaining below 7.0x (leverage was 6.8x for
2013 and Fitch expects leverage to sustain between 6.5x - 7.5x on a longer
--Fitch's expectation of fixed charge coverage sustaining above 2.5x (coverage
was 2.7x in 2013 and is projected to improve);
--Unencumbered asset coverage of net unsecured debt sustaining above 2.5x
(coverage for 2013 was 2.8x).
The following factors may have a negative impact on EQR's ratings or outlook:
--Fitch's expectation of leverage sustaining above 8.0x;
--Fitch's expectation of fixed charge coverage sustaining below 2.0x;
--A liquidity coverage ratio sustaining below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs (Sector Credit Factors) (Feb. 26, 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 23, 2013);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Steven Marks, +1-212-908-9161
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Britton Costa, +1-212-908-0524
Sean Pattap, +1-212-908-0642
Media Relations, New York
Sandro Scenga, +1-212-908-0278
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