Why dividend matters
REITs like Equity Residential (EQR) must pay at least 90% of the taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable and predictable stream of rents paid by the tenants who occupy the properties. Rental rates usually rise during periods of inflation because many lease rates are tied to inflation. As a result, REIT dividends are protected, to a large extent, from the long-term effects of rising prices.
Equity Residential’s FFO (funds from operations) rose to $3.17 per share in 2014. This was a record for the company. Bolstered by higher FFO, the company increased its dividend by 8.10% to a total of $2 per common share in fiscal 2014—compared to $1.85 per share in 2013. This is the highest dividend paid by the company since its inception. With a rise in the dividend in 1H15, Equity Residential is now on course to pay around $2.21 per share this fiscal year.
FFO payout ratio
The FFO payout ratio is the dividend declared per common share divided by the diluted FFO per common share for a given period. The FFO payout ratio provides investors with relevant and useful information. It measures the portion of FFO being declared as dividends to shareholders. The FFO payout ratio was 66.80% in 2010. It fell to 55.80% in 2012. Buoyed by a higher dividend, the FFO payout ratio improved to 60.70% in 2014.
A peer group comparison shows that Equity Residential’s payout ratio pales in comparison to its major competitors. For example, AvalonBay Communities (AVB) offered a much higher FFO payout ratio of 64% in 2014. It was followed by UDR (UDR) with a payout ratio of 63% and Essex Property Trust (ESS) at 62.15%. In contrast, Apartment Investment & Management Company (AIV) offered the lowest FFO payout ratio of 50.20%. Equity Residential accounts for 4.76% of the SPDR DJ Wilshire REIT ETF (RWR).
Next, we’ll discuss Equity Residential’s debt position.