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Rating Action:

Moody's affirms all ratings of Equity Residential; stable outlook

23 Jul 2019

New York, July 23, 2019 -- Moody's Investors Service ("Moody's") has affirmed the senior unsecured rating of Equity Residential's ("EQR") operating partnership, ERP Operating Limited Partnership, at A3. The outlook remains stable. In the same rating action, Moody's affirmed the operating's partnership's P-2 rating for its commercial paper program as well as the preferred stock and preferred stock shelf ratings of Equity Residential at Baa1 and (P)Baa1.

The following ratings were affirmed:

Issuer: ERP Operating Limited Partnership

Senior Unsecured Rating, affirmed at A3

Senior Unsecured Shelf, affirmed at (P)A3

Subordinated Shelf, affirmed at (P)Baa1

Commercial Paper Program, affirmed at P-2

Outlook, Remains Stable

Issuer: Equity Residential

Preferred Stock, affirmed at Baa1

Preferred Stock Shelf, affirmed at (P)Baa1

Outlook, Remains Stable

RATINGS RATIONALE

The A3 senior unsecured credit profile for ERP Operating Limited Partnership reflects the REIT's size and scale as the largest US apartment REIT, its solid leverage metrics and healthy earnings from its premier class apartment portfolio. With a long operational history, EQR has demonstrated good financial resilience through various market cycles. Furthermore, its operating portfolio and development projects are strategically located in vibrant and growing gateway markets with healthy apartment demand, driven by a combination of high job/high wage growth as well as low single-family homeownership or affordability rates. These thriving markets attract young professionals, who for a variety of reasons mostly prefer renting or are delaying purchasing a home.

In conjunction with both high occupancy and tenant retention, EQR's portfolio performance in the first quarter of 2019 had same store revenue and net operating income (NOI) growth rates of 3.1% and 2.5%, respectively, in comparison to the same period in the prior year. Apartment absorption in EQR's markets has resulted in stronger-than-expected revenue growth, which is trending toward the upper range of management's guidance of 2.2% to 3.2% for full year 2019.

Additionally, the REIT maintains a stable and flexible balance sheet with total debt plus preferred stock as a percentage of gross assets and net debt to EBITDA at approximately 34% and 5.6x (Moody's adjusted), respectively, as of first quarter 2019, compared to 33% and 5.5x for the same period last year. The REIT's liquidity and financial flexibility are supported by the $1.65 billion of available capacity under its unsecured revolving credit facility, as well as a fixed charge coverage ratio in excess of 4.0x and a large unencumbered asset pool at 83% of gross assets, at first quarter-end. Near-term debt maturities are manageable as the REIT has refinanced a significant portion of its 2019 maturities and has indicated its intent to prepay $500 million of its secured financings maturing in 2020.

Credit challenges include the REIT's geographic concentration in four core markets that generate approximately 70% of the portfolio's NOI as well as some elevated new supply and pricing power challenges in several submarkets. Also, EQR and some of its sector peers face rising regulatory risk and social pressures related to new or potential pro-tenant rent control laws seeking to address the growing shortage of affordable work force housing in some municipalities. While the REIT's operating portfolio is predominantly at market-rent and toward the higher-end of the price scale, EQR has approximately 3,000 apartment units in the New York metro area that are subject to some form of rent stabilization. Considering the new rent control guidelines and limitations that were signed in June 2019, these communities will experience an economic impact to their cash flows, related to a loss in income potential. While the REIT has not disclosed the economic costs, Moody's will continue to closely monitor the situation.

The stable outlook reflects our expectation that Equity Residential will continue to maintain its operating profile, supported by its strong balance sheet and excellent liquidity and funding. Furthermore, as the apartment sector is in the later stages of the economic cycle, we also anticipate that EQR will maintain, at a minimum, its current levels of operational and financial flexibility in order to adjust to any potential moderation in rent growth rates and/or volatility in its core markets.

Upward rating movement for EQR would be difficult and would be predicated upon an improvement and maintenance in the following credit metrics on a consistent basis: 1) net debt to EBITDA closer to 4.5x; 2) total debt plus preferred stock as a percentage of gross assets below 30%; 3) secured debt as a percentage of gross assets closer 5%; and 4) fixed charge coverage ratio above 4.5x.

Downward rating pressure, would result from the following on a consistent basis: 1) net debt to EBITDA above 6.0x; 2) total debt + preferred stock as a percentage of gross assets closer to 40%; 3) Secured debt as a percentage of gross assets above 15%; and 4) fixed charge coverage ratio below 4.0x.

Based in Chicago, IL, Equity Residential [NYSE: EQR] is a REIT dedicated to the acquisition, development and management of multifamily rental properties in urban and high density, suburban coastal gateway cities: Southern California, San Francisco, Washington D.C., New York, Boston and Seattle. As of March 31, 2019, EQR owned or had investments in 310 properties, consisting of 80,061 apartment units. At quarter-end, the company reported approximately $20.8 billion in total assets and $10.3 billion in book equity.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Juan Acosta
AVP - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Philip Kibel
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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