Moody's Investors Service, a bond credit rating agency and the subsidiary of Moody's Corporation ( MCO ), has revised the outlook of Equity Residential ( EQR ) from stable to positive. Improved credit profile, particularly low leverage and robust cash flow metrics, along with enhancement of portfolio quality, have driven this rating upgrade. Further, favorable demographic trends in the core markets of Equity Residential have influenced the rating.
Over the past few years, Equity Residential has strived hard to turn into a focused real estate investment trust ("REIT") with high-quality assets in high barrier-to-entry as well as high-growth potential core markets, by repositioning its portfolio. This ensured consistent earnings growth for the company.
Equity Residential reported normalized funds from operations ("FFO") per share of 86 cents in fourth-quarter 2014, exceeding the Zacks Consensus Estimate by 3 cents. The bottom line also surpassed the prior-year quarter figure by 9 cents.
For the year ended Dec 31, 2014, Net Debt/EBITDA declined to 6.4x from 7.5x as of Dec 31, 2011. During the same time frame, Fixed Charge Coverage improved to 3.2x from 2.5x. These positives were, however, somewhat offset by high levels of secured debt. The improved credit metrics worked in favor of the company.
The rating upgrade not only reflects the financial strength of the company but is also expected to boost investors' confidence in the stock.
Currently, Equity Residential carries a Zacks Rank #2 (Buy). Investors interested in residential-REITs may also consider other top-ranked stocks like Essex Property Trust Inc. ( ESS ) and Silver Bay Realty Trust Corp. ( SBY ). Both these stocks sport a Zacks Rank #1 (Strong Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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