uploads/2015/09/Chart-12-Debt1.png

Equity Residential Has a Moderate Debt-to-Equity Ratio

By

Updated

Higher leverage is essential for expansion

As we mentioned earlier, REITs like Equity Residential (EQR) have to pay at least 90% of the taxable income to investors as dividends. A higher dividend payout by many REITs forces management to go for higher leverage to expand the real estate holdings. This results in a higher interest outgo and reduces their earnings. In contrast, the expansion in real estate holdings creates additional sources of income for leveraged REITs. It depends on how good management is at converting the higher leverage to its advantage.

At the end of fiscal 2014, Equity Residential’s consolidated debt was $10.8 billion—almost at par with the previous year. Over the last five years, Equity Residential’s total debt rose moderately from $9.9 billion in 2010 to $10.83 billion as of June 2015.

Article continues below advertisement

Debt-to-equity ratio

Equity Residential’s debt-to-equity ratio reached its high of 1.96 in 2008. Since then, it has fallen consistently from 1.72 in 2009 to 0.96 as of June 2015. Equity Residential’s debt-to-equity ratio is lower than the industry average of 1.06 as of June 2015.

A peer group comparison shows that AvalonBay Communities (AVB) had the lowest debt-to-equity ratio of 0.70. It was followed Essex Property Trust (ESS) at 0.85, Camden Property (CPT) at 0.89, and UDR (UDR) at 1.13. Equity Residential accounts for 3.30% of the iShares U.S. Real Estate ETF (IYR).

Reduced borrowing cost

Equity Residential’s effective overall borrowing rate on its debt for fiscal 2014 was 4.52%—compared to 4.56% in 2013. This reduction was primarily due to a decrease in the effective overall borrowing rate on floating rate debt. Over the last four years, Equity Residential has reduced the weighted average interest rate on its debt portfolio from 4.88% in 2010 to 4.56% at the end of 2014. The weighted average years to maturity for its debt was 7.6 years compared to 6.3 years in 2013.

In the next part of this series, we’ll analyze Equity Residential’s valuation.

Advertisement

More From Market Realist