Fitch Rates Equity Residential's Senior Unsecured Bonds 'A-'

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to the senior unsecured notes due 2026 issued by ERP Operating, L.P., the operating partnership of Equity Residential (NYSE:EQR). Net proceeds are expected to be used for working capital and general corporate purposes. A full list of Fitch's ratings for EQR follows at the end of this release.

KEY RATING DRIVERS

The ratings reflect EQR's high-quality portfolio focused in core, coastal markets as well as the company's market-leading capital access.

Portfolio Consolidated Within Core, Coastal Markets

EQR disposed of non-core, primarily suburban assets, to Starwood completing the exit from two markets and consolidating the portfolio within the markets that it wishes to focus on long term. EQR's portfolio is now contained (98%) within Boston, Los Angeles (including Orange Country), New York, San Diego, San Francisco, Seattle and Washington, D.C. markets, which generally have above-average growth and liquidity through-the-cycle.

Appropriate Credit Metrics

For the trailing 12 months (TTM) ended June 30, 2016, EQR's leverage was 4.9x and fixed charge coverage (FCC) was 3.3x; both of which are good for the rating. Fitch assumes that EQR continues to maintain a robust development pipeline, such that, combined with the company's special dividend to be paid in October 2016, leverage will sustain in the 6.5x-7.0x range over the long term.

Good Contingent Liquidity

Fitch expects EQR will maintain unencumbered asset coverage of unsecured debt in excess of 2.5x, consistent with prior periods. Based on location and age, the quality of the unencumbered portfolio is consistent with that of the overall portfolio.

Preferred Unit Notching

The two-notch differential between EQR's Issuer Default Rating (IDR) and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'A-'. Based on Fitch criteria in 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, dated Feb. 29, 2016 and available at www.fitchratings.com, these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

Stable Outlook

The Stable Outlook reflects Fitch's expectation that EQR's leverage should sustain within the expected 6.5x-7x range over the longer term.

KEY ASSUMPTIONS

Fitch's key assumptions for EQR in our base case include:

--SSNOI growth is in the low single digits for 2016-2017;

--$500 million of annual acquisitions at a 5% capitalization rate and $500 million of annual dispositions at a 6% capitalization rate;

--$600 million of development completions in each of the three years of the forecast period;

--Adjusted funds from operations payout ratio between 69%-77%;

--Secured debt is refinanced dollar-for-dollar in all three years of the forecast period.

RATING SENSITIVITIES

The following factors may have a positive impact on EQR's ratings or Outlook:

--Combined with EQR management's commitment, Fitch's expectation of leverage sustaining below 6.5x throughout cycles (Fitch expects leverage to sustain between 6.5x-7.0x on a longer-term basis; leverage was 4.9x as of June 30, 2016);

--Fitch's expectation of FCC sustaining above 3.5x (coverage was 3.3x for TTM ended June 30, 2016).

The following factors may have a negative impact on EQR's ratings or Outlook:

--A deviation from EQR's current portfolio, capitalization or financing strategy that could result in a deterioration in the company's market-leading access to capital on an absolute or relative basis;

--Fitch's expectation of leverage sustaining above 7.5x;

--Fitch's expectation of FCC sustaining below 2.5x;

--A liquidity coverage ratio sustaining below 1.0x.

FULL LIST OF RATINGS

Fitch currently rates EQR as follows:

Equity Residential

--Long-Term IDR 'A-';

--Unsecured revolving term loan 'A-';

--Preferred stock 'BBB'.

ERP Operating Limited Partnership

--Long-Term IDR 'A-';

--Short-Term IDR 'F2';

--Unsecured revolving credit facility 'A-';

--Senior unsecured notes 'A-';

--Commercial paper notes 'F2'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: April 21, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Recovery Ratings and Notching Criteria for Equity REITs (pub. 03 Dec 2015)

https://www.fitchratings.com/site/re/874214

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)

https://www.fitchratings.com/site/re/878264

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012739

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Steven Marks
Managing Director
+1-212-908-9161
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Britton Costa, CFA
Director
+1-212-908-0524
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Steven Marks
Managing Director
+1-212-908-9161
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Britton Costa, CFA
Director
+1-212-908-0524
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com