Equity Residential (NYSE: EQR), a popular residential real estate investment trust (REIT) that specializes in upscale urban apartments in high-density cities across the United States, has shown signs of resilience throughout the pandemic, leading investors to wonder whether this REIT is a safe haven during uncertain times. Let's take a look at where the company stands today to see if it's a buy currently.
Unlike other residential REITs, a large part of Equity Residential's portfolio is focused on the acquisition and renovation of older existing multifamily properties rather than focusing primarily on ground-up construction. The company's 304 properties are in some of the country's most expensive and populated real estate markets like Boston, Los Angeles, New York City, Denver, and Washington D.C., where demand for rentals is high because of the premium real estate prices and land for new development is limited. Its tenant base is also upper working class, which has been one of the least affected groups by COVID-19.
On top of its unique investing strategy and well-positioned portfolio, the company has a great track record. It definitely suffered initially from COVID-19 related losses but is on the rebound with applications, occupancy rates, and rental collections on par with Q2 of the year prior with Q2 marking its second highest month for tenant retention ever. Earnings per share is down 15.7%, but core funds from operations (FFO) is up 7.5% from the same quarter of the previous year.
The company is well-positioned financially, with $2.4 billion in liquidity and relatively low 4.82x debt to earnings before interest, taxes, depreciation, and amortization (EBITDA). Its payout ratio is fairly conservative at 70%, meaning it has a lot of room to maintain current dividend payouts even if revenues continue to dip. Equity Residential has sold six properties to date in 2020, achieving a weighted average disposition yield of 4.7% and an unlevered internal rate of return (IRR) of 10.8%. This added to its liquidity while reducing its debt to EBITDA.
While Equity Residential is in great financial standing, there are a few vulnerabilities, mainly from the current economic state. The first is its retail portfolio. While retail space only accounts for about 4% of annual revenues, it suffered a large drop in collection rates and revenues from its tenants in this space at the start of the pandemic. Another weakness facing the company is the shift in tenant preference away from high-density housing to alternative housing like smaller apartments or single-family homes. Luckily its properties are in areas where alternative housing like this can be hard to come by, reducing the likelihood of demand decreasing in its markets.
Its most recent earnings report shows that Equity Residential is well positioned to overcome the current economic challenges, maintaining strong occupancy and collection rates because of the markets it occupies and the quality of its tenant base. If we look beyond the current crisis, there's a strong likelihood that Equity Residential will expand its portfolio, especially since it has a large amount of capital to deploy, making this a great buy in the long run. Its current dividend yield of 4% makes this a compelling buy not just for the return but for the long-term growth potential.