Fitch Affirms Equity Residential's IDR at 'BBB+'; Outlook Stable

  Fitch Affirms Equity Residential's IDR at 'BBB+'; Outlook Stable  Business Wire  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:  Equity Residential  --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.  IMPROVED PORTFOLIO  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% increase.  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 portfolio.  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 of liquidity.  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 generated capital.  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, 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.  STABLE OUTLOOK  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.  RATING SENSITIVITIES  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 term basis);  --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 ''.  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 Analysis  Recovery Ratings and Notching Criteria for Equity REITs  Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage  Additional Disclosure  Solicitation Status  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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Contact:  Fitch Ratings Primary Analyst Steven Marks, +1-212-908-9161 Managing Director Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 or Secondary Analyst Britton Costa, +1-212-908-0524 Director or Committee Chairperson Sean Pattap, +1-212-908-0642 Senior Director or Media Relations, New York Sandro Scenga, +1-212-908-0278  
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