Fitch Ratings has affirmed the ratings for Equity Residential (NYSE: EQR) and ERP Operating Limited Partnership, including the Long-Term Issuer Default Rating (IDR) at 'A'.

The Rating Outlook is Stable. The rating reflects the headroom in the company's financial metrics to withstand a second year of same store NOI declines as urban rents recover.

The Stable Outlook reflects Fitch's expectation that EQR's leverage should sustain within the expected range of 5x to 6x over the forecast period and that the company has some cushion relative to current metrics to absorb near-term operating weakness. In addition, Fitch views EQR as having sector-leading access to capital, transactional liquidity as well as sufficient access to financing through cycles given its high-quality portfolio located in markets with strong long-term demand, despite the near-term challenges in its urban markets.

KEY RATING DRIVERS

Dispositions Demonstrate Discipline and Asset Demand: Fitch expects leverage to rise to the high-5x in 2021, from 5.0x in 2020, before dropping to the low-5x over the forecast period. Despite the challenging environment during the pandemic, which caused a large temporary drop in urban rents, the company was able to complete $1.1 billion in dispositions in 2020 at a 4.5% cap rate, showing continued strong investor interest in coastal market assets like San Diego, San Francisco, and DC. This compares to the $1.5 billion in 2019 dispositions at a 4.6% cap rate. EQR repaid $918 million in debt and obtained a $495 million mortgage loan in 2020, demonstrating its commitment to its leverage policy of operating between 5.5x-6.5x leverage as well as the strong liquidity of its assets.

Rents to Rebound Strongly: Fitch expects rents in EQR's urban markets to bounce back as cities and offices reopen. Much of the weakness over the past year in urban rents was due to poor demand for smaller units as (typically) younger, single renters took advantage of flexible working policies, and a lack of restaurants/nightlife, to move to more affordable, spacious locations. Historically, urban rents have been the most volatile during a recession, but return to peak quickly after bottoming, as renters seek to capitalize on discounted rents to move into desirable locations and buildings.

Fitch believes the pandemic accelerated some demand to suburban and sunbelt locations to reflect aging demographics, particularly for larger unit types, but that much of the demand for EQR's type of offering, studio/one bedroom, will rebound as cities reopen and social activities return. Occupancy has recovered sharply since the start of the year, approaching 2019 levels in many urban markets, and pricing power will improve in the back half of the year. Normalizing leasing concessions and bad debt costs would add 100-200 bps to revenue growth.

Large, High Quality Portfolio: Fitch continues to forecast strong through-the-cycle growth for EQR's markets but expects the company will likely move to diversify its portfolio to other high growth markets, like Denver (which the company re-entered in 2016), which can serve to dampen portfolio volatility and reduce political risk. While overall interest for the types of markets EQR might seek to enter or expand has grown, driven by better relative performance during the pandemic, investor demand for EQR's existing portfolio remains strong and the company should be able to adjust its market exposure by recycling dispositions. The company holds a coastal gateway market focus: Boston, MA; Los Angeles, CA; Orange County, CA; San Diego, CA; San Francisco, CA; Seattle, WA; Washington, D.C.; and New York, NY. These markets generally have above-average growth, transactional liquidity and strong access to mortgage financing through the cycle.

Measured Development Exposure: EQR's total development pipeline, as a percentage of gross assets, remains smaller than many of its closest peers. Current projects are focused in the core markets of Boston, MA, Bethesda, MD, and Alameda, CA. After pursuing an increased development pipeline earlier in the decade, EQR has reduced development exposure significantly as the cycle has matured. As of March 31, 2021, total development stood at around 2% of gross assets, down from the most recent peak of 8.5% in 2014.

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 'A' IDR. Based on Fitch's Non-Financial Corporates Hybrids Treatment and Notching Criteria, 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.

DERIVATION SUMMARY

EQR owns a portfolio of excellent-quality multifamily assets in bi-coastal markets most comparable to peers Avalon Bay Communities and UDR, Inc., both not rated. EQR's ratings are able to withstand higher leverage than 'A' category-rated peer Camden, due to the company's coastal, supply-constrained market focus and market-leading capital access. EQR has the highest average rents of the peer group, and its assets are generally highly desirable from a capital markets perspective.

Fitch links and synchronizes the IDRs of the parent REIT and subsidiary operating partnership, as the entities operate as a single enterprise with strong legal and operational ties.

KEY ASSUMPTIONS

SSNOI growth averaging +5% from 2022-2024, after an approximate low double digit decline in 2021;

$750 million of dispositions per year at 4.75% to fund a similar amount of acquisitions at 4.5%;

Development spend of $200 million - $300 million per year;

No equity issuance over the forecast period.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch's expectation of leverage (net debt to recurring operating EBITDA) sustaining below 5.0x;

Fitch's expectation of REIT FCC sustaining above 4.0x;

UA/UD above 3.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's expectation of leverage (net debt to recurring operating EBITDA) sustaining above 6.0x;

Fitch's expectation of REIT FCC sustaining below 3.5x;

A change in financial strategy resulting in less conservative policies.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Ample Liquidity, Access to Markets: The company held nearly full availability on its $2.5 billion revolving credit facility, excluding the $430 million designed for the commercial paper program as of March 31, 2021. (EQR has a policy of limiting its revolving facility to maintain liquidity support for its $1 billion CP program.) The company has a manageable debt maturity schedule, with a weighted average maturity of 8.9 years.

EQR has a liquidity coverage ratio (total sources divided by total uses) of 3x (including commercial paper) through 2022 as of March 31, 2021. EQR has demonstrated exceptional access to the unsecured and secured debt markets and should be able to refinance or repay its upcoming indebtedness via accessing the public market.

Fitch estimates that EQR's UA/UD was over 3x at March 31, 2021, using a stressed 7.0% capitalization rate, providing sufficient contingent liquidity to unsecured bondholders.

ISSUER PROFILE

Equity Residential is focused on the acquisition, development and management of properties located in major cities across the US. As of Dec. 31, 2020, the portfolio consisted of 304 residential properties consisting of 77,889 apartment units, located in Boston, New York, Washington, D.C., Seattle, San Francisco, Southern California and Denver.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Equity Residential	LT IDR	A 	Affirmed		A

preferred

	LT	BBB+ 	Affirmed		BBB+
ERP Operating Limited Partnership	LT IDR	A 	Affirmed		A
	ST IDR	F1 	Affirmed		F1

senior unsecured

LT	A 	Affirmed		A

senior unsecured

ST	F1 	Affirmed		F1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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