Source: Company
Sam Zell, successful real estate investor and billionaire always had a good nose for savvy investment deals. The real estate tycoon has had a track record of pursuing promising real estate investments, but notably shot the lights out when he sold Equity Office Properties Trust for $39 billion at the height of the real estate boom to Blackstone in 2007.
Speaking about clever timing.
But Sam Zell did not only make a name for himself by investing in office properties. He also founded and built one of the largest apartment REITs in the United States, Equity Residential (EQR 1.00%). Fortunately for investors, Equity Residential is a publicly traded residential REIT which allows investors to practically partner up with one of the most successful real estate investors in the United States.
Equity Residential concentrates mostly on highly promising urban core markets, has an appealing growth profile and has paid investors regular dividends since 1993.
How is that for a real estate investment story?
Source: Company
Background
Real estate is one of the most attractive asset class in the long-run for two reasons: First, landlords usually link the contractual rental fee to an underlying consumer price index and secondly, property values are likely to go up in the long-run.
These two themes result in the protection against purchasing power erosion, also known as inflation. Both automatic rent increases and property appreciation provide fairly efficient hedges against inflation, which is clearly what long-term investors should be concerned about.
Portfolio
One distinguishing characteristic of Equity Residential is its focus on high growth urban areas with high potential for household formation and employment growth in high-paying sectors such as health care and technology.
The residential apartment REIT mainly concentrates on core markets in San Francisco, New York, Boston, Seattle, Los Angeles, Washington D.C., Denver and South Florida though it does also have properties in non-core markets such as Phoenix or Dallas.
At the end of 2013, Equity Residential owned and managed 352 properties in its core markets with 94,717 units representing about 95% of its total net operating income.
Source: Equity Residential Investor Presentation
The focus on high-growth core markets has a couple of advantages for Equity Residential, most notably those market produce higher occupancy rates and stronger rental growth compared to the U.S. market averages.
The concentration on densely populated, urban residential markets also has another advantage: They make it so much harder for real estate investment companies and developers to add additional supply which is a key driver of long-term property appreciation.
Moreover, Equity Residential's real estate portfolio should handsomely profit from economic tailwinds which are likely to work their magic first and foremost in metropolitan markets.
Portfolio characteristics
As already indicated, focusing on the dynamic real estate markets on the West and East Coast, should benefit Equity Residential just as it did in the past.
Just consider the following chart highlighting Equity Residential's upward trend in base rent and consistently high occupancy rates.
Like they say in the real estate business: There is no better record, than your past record.
Source: Equity Residential Investor Presentation
In 2013, base rents increased 4.3% compared to 2012 and renewal rents jumped 5.3%. Renewal contracts actually allow Equity Residential to boost its overall rental growth as new rental contracts can stipulate higher rental fees than existing rental contracts; this is especially true in hotly contested real estate markets.
Dividends
Ultimately, Equity Residential is a REIT and needs to entice investors with a decent dividend yield. The company presently pays investors $0.50 quarterly per share which translates into a respectable dividend yield of 3.17%.
While this yield is solid, investors who can look a couple of years down the line, should see much higher dividends and higher yields, particularly when the U.S. economy grows more dynamically and lifts the real estate asset class up in the process.
The Foolish Bottom Line
Equity Residential is an interesting apartment REIT for investors who specifically seek exposure to quality residential real estate in key metropolitan areas with significant growth potential.
With a long-track record in distributing capital to shareholders and a best-in-class property portfolio, Equity Residential and shareholders will have much more to smile about in the coming years.
