Fitch Ratings has affirmed the ratings for
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
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
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
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
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;
Development spend of
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 '
LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity, Access to Markets: The company held nearly full availability on its
EQR has a liquidity coverage ratio (total sources divided by total uses) of 3x (including commercial paper) through 2022 as of
Fitch estimates that EQR's UA/UD was over 3x at
ISSUER PROFILE
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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