REIT Stocks

Equity Residential Valuation – March 2019 #EQR

Company Profile (excerpt from Reuters): Equity Residential, incorporated on July 21, 1992, is a real estate investment trust. The Company’s primary business is the acquisition, development and management of multifamily residential properties. Its segments include Boston, New York, Washington D.C., Southern California, San Francisco, Seattle and Other Markets. Southern California includes Los Angeles, San Diego and Orange County. Other Markets includes Phoenix. It is engaged in leasing of apartment units to residents. It focuses on rental apartment properties in urban and high-density suburban coastal gateway markets.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of EQR – March 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $27,685,836,753 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.13 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -30.92% Fail
6. Moderate PEmg Ratio PEmg < 20 25.76 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.77 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.13 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -27.19 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.91
MG Growth Estimate 0.36%
MG Value $26.77
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $42.14
MG Value based on 0% Growth $24.70
Market Implied Growth Rate 8.63%
Current Price $74.85
% of Intrinsic Value 279.62%

Equity Residential does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.84 in 2015 to an estimated $2.91 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.63% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Equity Residential revealed the company was trading above its Graham Number of $26.99. The company pays a dividend of $2.16 per share, for a yield of 2.9%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 25.76, which was below the industry average of 61.92, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-25.87.

Equity Residential scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$25.87
Graham Number $26.99
PEmg 25.76
Current Ratio 0.13
PB Ratio 2.77
Current Dividend $2.16
Dividend Yield 2.89%
Number of Consecutive Years of Dividend Growth 1

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $47,442,000
Total Current Liabilities $371,694,000
Long-Term Debt $8,817,939,000
Total Assets $20,394,209,000
Intangible Assets $0
Total Liabilities $9,994,560,000
Shares Outstanding (Diluted Average) 384,481,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.18
Dec2018 $1.77
Dec2017 $1.63
Dec2016 $11.68
Dec2015 $2.36
Dec2014 $1.73
Dec2013 $5.16
Dec2012 $2.70
Dec2011 $2.98
Dec2010 $0.95
Dec2009 $1.27
Dec2008 $1.46
Dec2007 $3.39
Dec2006 $3.50
Dec2005 $2.79
Dec2004 $1.50
Dec2003 $1.57
Dec2002 $1.18
Dec2001 $1.34
Dec2000 $1.67
Dec1999 $1.14

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.91
Dec2018 $3.79
Dec2017 $4.70
Dec2016 $5.74
Dec2015 $2.84
Dec2014 $2.95
Dec2013 $3.25
Dec2012 $2.15
Dec2011 $1.92
Dec2010 $1.63
Dec2009 $2.14
Dec2008 $2.56
Dec2007 $2.93
Dec2006 $2.50
Dec2005 $1.89
Dec2004 $1.44
Dec2003 $1.40

Recommended Reading:

Other ModernGraham posts about the company

Equity Residential Valuation – June 2018 $EQR
11 Best Stocks for Value Investors This Week – 3/4/17
10 Low PE Stock Picks for the Defensive Investor – February 2017
Equity Residential Valuation – February 2017 $EQR
Most Undervalued Stocks of the S&P 500 – February 2017

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Vornado Realty Trust Valuation – January 2019 $VNO
Public Storage Valuation – January 2019 $PSA
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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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