Should You Invest In Equity Residential Stock?
We believe that Equity Residential stock (NYSE: EQR) has an upside potential of 60% post-pandemic when the occupancy rates and demand in residential property rent and lease markets in the urban and densely populated suburban areas improve to pre-Covid levels. EQR trades at $51 currently and it has lost 36% in value year-to-date. It traded at a pre-Covid high of $83 in February and is 38% below that level now. Also, EQR stock has gained a meager 1% from the lows of $50 seen in March 2020, despite the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market, in general, recover to a large extent. That said, the stock is lagging behind the broader markets by a huge margin (S&P 500 is up about 55%), as investors are overly cautious about Equity Residential’s retail portfolio and a possible shift in tenant preference to move away from high-density housing in business centers. The company owns properties in key business areas like Boston, Los Angeles, New York City, etc. where most of its clientele consists of affluent people. This reduces the likelihood of lower demand in these markets. In view of the marginal growth in EQR stock since late March, we believe that the stock has room for growth in the near future. Our conclusion is based on our detailed analysis of Equity Residential’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.
2020 Coronavirus Crisis
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how EQR and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of the S&P 500 index
- 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)
Equity Residential vs S&P 500 Performance Over 2007-08 Financial Crisis
EQR stock declined from levels of around $23 in October 2007 (the pre-crisis peak) to roughly $10 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 56% of its value from its approximate pre-crisis peak. This marked a slightly lower drop than the broader S&P, which fell by about 51%.
However, EQR recovered strongly post the 2008 crisis to about $20 in early 2010 – rising by 105% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
Equity Residential’s Fundamentals in Recent Years Look Strong
Equity Residential revenues saw a rise of 11% from $2.4 billion in 2016 to $2.7 billion in 2019, mainly driven by growth in retail income. Further, the company’s net income decreased from $4.3 billion to $967.3 million, resulting in an EPS decline from $11.75 in 2016 to $2.61 in 2019. The net income figure was unusually high in 2016 due to the proceeds from the sale of real estate properties. Further, the company’s Q2 2020 revenues were 2% below the year-ago period, and the EPS figure for the quarter decreased from $0.83 in Q2 2019 to $0.70 in Q2 2020.
Does Equity Residential Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Equity Residential’s total debt decreased from $9 billion in 2016 to $8.75 billion at the end of Q2 2020, while its total cash increased from $77.2 million to $187 million over the same period. The company also generated $635 million in cash from its operations in the first half of 2020. Based on the numbers, it appears that any further cash crunch can make it difficult for the company to weather the crisis.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-October 2020: July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment
Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $83 (60% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $83 level Equity Residential’s stock was at before the coronavirus outbreak gained global momentum.
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