How Equity Residential (EQR) is Improving Portfolio Demography and Geography with Sale of 72 Properties to Starwood Capital

How Equity Residential (EQR) is Improving Portfolio Demography and Geography with Sale of 72 Properties to Starwood Capital

HIGHLIGHTS

  • EQR disposed of multifamily communities located in zip codes with less desirable demographics on average when compared to the rest of its portfolio.
  • EQR is becoming a more localized REIT while maintaining bi-coastal geographic diversification.
  • Overall, the Starwood disposition deepens the coastal and urban footprint of EQR’s portfolio going forward.
  • EQR is on track of transforming its portfolio to a high-density urban REIT.

On October 26th, 2015 Equity Residential announced an agreement to sell 72 properties consisting of 23,262 apartment units to Starwood Capital Group (http://starwoodcapital.com/). The sale is expected to close Q1 2016.  EQR intends to sell an additional 26 communities in 2016, transforming itself into a more northern, high-density/urban and bicoastal REIT (full press release can be found here).

REIT Data Market conducted a comparative analysis of the demographic and geographic characteristics of EQR at the Metropolitan Statistical Area (MSA) and zip code levels of geography for three variations of EQR’s portfolio: 1) EQR’s portfolio pre-Starwood sale; 2) a focused look at the 72 properties sold; and 3) EQR’s portfolio ex-“Starwood 72”. Our analysis indicates that the 72 properties sold to Starwood Capital are located in areas that are not congruent with the overall EQR portfolio. In fact, across almost all the demographic categories we considered, zip codes containing the 72 properties exhibit less desirable demographics compared to EQR’s overall portfolio. Additionally, these properties are generally more dispersed, located on average, farther apart from each other within the same MSA compared to EQR’s overall portfolio; indicating a lack of concentration at the localized level. Differences in demography and geography of the properties sold to Starwood and the remaining EQR portfolio suggest that EQR sold communities that are highly divergent and not consistent with its strategy going forward; a sign EQR did its homework.

SUMMARY OF EQR-STARWOOD TRANSACTION

According to EQR’s official press release, the 72 properties were dispersed over the following markets:

On average the properties sold to Starwood Capital are 20 years old with a majority of the communities constructed or last improved between 1995 and 2005. Below is a histogram showing the distribution of the 72 properties sold to Starwood Capital by year constructed or last improved. Property age for the 72 properties are similar to EQR’s existing portfolio. So in total the Starwood disposition does not affect the age of EQR’s total portfolio.

ZIP CODE DEMOGRAPHICS

Unlike property age, comparing the demographics between the 72 properties and EQR’s former and future portfolios show significant divergence.  We looked across demographics commonly seen as important to multi-family market analysis to evaluate EQR’s ability to execute on its stated vision going forward. The below table compares the three variations of EQR’s property portfolio across a select set of demographics.  For clarification, the figures provided reflect the population living within zip codes where EQR owns a property. We then applied a unit-based weighted average to reflect appropriate distribution of units across the 3 variations of EQR’S property portfolio. The resultant percentage reflects the estimated proportion (on average) of the population at the zip code level for the select demographic across EQR’s entire portfolio.

The differences in demographics amongst the variations of EQR’s portfolio show the 72 properties sold to Starwood Capital are located in more suburban areas with lower rents (under $1500/month), higher vacancy rates, and populated with less educated renters.  A top goal for EQR going forward is to, “own assets in high density urban environments”. Our analysis shows that zip codes containing the 72 properties EQR sold to Starwood are located in more suburban zip codes considering that on average only 6% of the rental structures are comprised of 50 or more units.  Additionally, EQR favors properties located in areas that are the “hubs of the knowledge based economy”. In zip codes containing the properties included in the Starwood disposition, an estimated 67% of the renters have not earned at least an undergraduate degree. Conversely, EQR’s portfolio going forward will be comprised of properties located in zip codes where an estimated 66% of the 25-34 year old demographic has earned a Bachelor’s degree or higher. In summary, our analysis shows the 72 properties EQR agreed to sell to Starwood Capital do not exhibit demographics that are consistent with EQR’s strategic vision and grand strategy. At the moment, EQR appears on track in executing its vision and transformation into a more urban/high-density REIT.

The locations of the properties sold to Starwood diverge significantly from the rest of EQRs portfolio.   However, even with the sale of over 20% of its portfolio (in units), the impact on the overall demographic profile of EQR is minimal.  We will continue this line of analysis applied to future EQR dispositions to monitor their progress and skill in executing this transformation (specially the sale of 26 additional assets in CT, MA and elsewhere).  Until then the jury is out on the degree/level/intensity of transformation EQR will undergo.

GEOGRAPHIC DISPOSITION OF PROPERTIES AT LOCAL LEVEL

REIT Data Market’s comparative analysis of the Starwood 72 and EQR’s pre-sale and future portfolios also identified a noticeable difference amongst the portfolio variations in the distances between EQR properties located in the same market.  For example, the average distance between properties located in the same MSA (market) when looking at the 72 properties sold to Starwood Capital is 20 miles. On the other hand, the average distance between properties comprising EQR’s portfolio after the Starwood Disposition is 14.5 miles. Suggesting the 72 properties sold ware located in markets where EQR was geographically spread out. This metric is another sign EQR is selling suburban properties in pursuit of a strategy to become more urban (as we all know most things are located farther apart in the suburbs). Therefore, EQR’s local footprint on average will become 28% more concentrated.

It is impotant to note that an average distance of 14.5 miles between properties is by no means the shortest we have measured for a publically traded REIT (See our analysis of IRT-TSRE merger).

EQR ON TRACK TO EXECUTE ITS TRANSFORMATION STRATEGY

EQR’s disposition of more than 20% of its portfolio represents a significant event within the multi-family REIT sector. As the largest (by market cap) publically traded Multi-Family REIT in the US, it is important we understand any dramatic shifts in its portfolio.  Analysis of the demographics within the zip codes where it maintains properties indicates EQR is executing on their planned transformation into a more urban, high-density and bi-coastal REIT. Though not stated specifically in the justification of the sale of 72 properties to Starwood Capital, EQR’s geography is becoming more northern. EQR will eventually own/operate in only a few markets on the East (DC, NY, and Boston) and West (SoCal, SF, and Seattle) coasts.  By the end of 2016, investors seeking geographic diversity may not see EQR as a candidate for that play. However, at REIT Data Market we favor geographic consolidation in demographically advantageous locations coupled with a concentrated footprint at the local level. We see EQR moving in this direction and look forward to observing the progress of their transformation in 2016.

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