Fitch Rates ERP Operating Partnership's Commercial Paper Program 'F2'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a short-term Issuer Default Rating (IDR) of 'F2' to ERP Operating Limited Partnership, the operating partnership of Equity Residential. EQR. In addition, Fitch has assigned an expected rating of 'F2 (EXP)' to ERP Operating Partnership's $500 million commercial paper (CP) note program, which has not yet been accessed. ERP Operating Partnership is the issuer of the CP paper, which has a maximum term of 397 days. Equity Residential guarantees the obligations of ERP Operating Partnership.

On Feb. 2, 2015, Equity Residential announced that it established a U.S. unsecured CP note program, for with ERP OP will be the issuer. Under the program, the issuer may issue unsecured CP notes denominated in U.S. dollars, up to a maximum amount of $500 million. The CP notes rank pari passu with all of the operating partnership's other senior unsecured indebtedness, all of which is rated 'BBB+' by Fitch. Per the Fitch criteria report, 'Short-Term Ratings Criteria for Non-Financial Corporates,' dated Aug. 5, 2013, a Long-term IDR of 'BBB+' corresponds with a short-term IDR of 'F2.'

The unsecured CP note program is a credit positive in that it establishes another source of unsecured debt capital -- albeit not a committed long-term source -- for the company. The CP program provides a borrowing arbitrage opportunity for the company. As of Sept. 30, 2014, the company's $2.5 billion credit facility, which has an initial maturity of April 1, 2018, bears an interest rate of LIBOR plus 1.05% and an additional facility fee of 0.15%. Conversely, recent U.S. CP rates are 0.38% for 90 days. Fitch would view the program negatively if overall sources of liquidity - principally the revolving line of credit - were reduced thus increasing the reliance on the CP note program. Fitch does not expect this will occur.

KEY RATING DRIVERS

EQR's Long-term IDR of 'BBB+' takes into account the company's focus on high-quality properties in strong markets and sound financial management. The company is the largest multifamily REIT in the U.S. by market capitalization and is a leading owner/operator in many of the top markets in the U.S. including New York, San Francisco, Los Angeles and Boston. The company is focused on markets that have historically experienced above average growth and are expected to continue to exhibit strong growth in the future.

CREDIT METRICS NORMALIZED

EQR's leverage was temporarily elevated as a result of funding the Archstone transaction which closed in the first quarter of 2013 (1Q'13), but leverage has subsequently returned to normalized levels via asset sales and same store net operating income (SSNOI) growth. Leverage as of Sept. 30, 2014 was 6.6x, slightly lower than Fitch's expectations pre-Archstone transaction. Fitch expects the company's leverage to remain around 6.8x from 2014 through 2016. Fitch defines leverage as net debt divided by recurring operating EBITDA.

EQR's fixed-charge coverage for the LTM period ended Sept. 30, 2014 was 2.9x which is strong for the rating and up from 2.7x and 2.4x for 2013 and 2012, respectively. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital improvements divided by cash interest incurred and preferred distributions. EQR has benefited in recent years by refinancing debt at historically low interest rates while achieving strong SSNOI growth. Fitch expects the company's fixed-charge coverage will increase to approximately 3.0x from 2014 through 2016.

IMPROVED PORTFOLIO

EQR closed on the acquisition of $9 billion of assets in core markets during the 1Q'13 via the Archstone transaction at a 4.9% capitalization rate. The Archstone transaction bolstered EQR's ownership of Class A properties in top markets such as San Francisco, New York, Seattle and Boston, among others. These markets tend to exhibit relatively strong long-term demand, limited buildable land and high construction costs, curtailing potential supply growth.

Dispositions were focused on non-core markets including Phoenix, Atlanta and suburban Maryland. The activity in 2013 accelerated what may have otherwise been a multi-year process, as the company has historically been active in pruning its portfolio. The higher quality portfolio is evidenced by an average rental rate per unit of $2,198 at Sept. 30, 2014 versus $1,737 in 2012, a 26.5% increase.

POSITIVE SAME-STORE RESULTS

SSNOI growth remains consistent relative to historical performance. EQR's SSNOI growth was 5.3% for the first nine months of 2014 and 5% in 2013 and Fitch anticipates that fundamentals will remain solid, but continue to decelerate towards the longer term historical average of 2% to 3% SSNOI growth over the next several years. Fitch expects occupancy to remain in the 95%-96% range as the company continues its focus on utilizing its industry-leading operational platform and technology to optimize NOI.

WEAK WASHINGTON DC EXPECTATIONS

Washington, DC is EQR's largest market at 18.6% of stabilized NOI and may continue to weigh on the overall portfolio performance. SSNOI declined by (1.5%) during the first nine months of 2014, compared with growth of 2.7% for full year 2013. This market was the weakest performer among the company's core markets. Although Washington, DC was one of the strongest real estate markets during the global financial crisis, the metro has been hurt by an abundance of new supply coupled with tepid job growth and uncertainty surrounding near-term government job growth.

SMALL UPTICK IN DEVELOPMENT

EQR acquired several attractive development sites through the Archstone transaction, which should provide growth opportunities over the next several years. The unfunded development pipeline as a percentage of gross assets was 3.8% at Sept. 30, 2014, up from 2.8% at year-end 2013. Despite this uptick, the company's total development pipeline and unfunded development pipeline as a percentage of gross assets is smaller than many of its closest peers. The development projects are focused in strong markets including New York, Seattle and Los Angeles.

APPROPRIATE CONTINGENT LIQUIDITY

EQR's unencumbered cash NOI stressed at a 7.0% capitalization rate covered its net unsecured debt by approximately 3.1x as of Sept. 30, 2014. The company has consistently maintained adequate net UA/UD above 2.5x. The quality of the unencumbered portfolio is consistent with the quality of the overall portfolio.

SLIGHTLY LOW LIQUIDITY; MITIGATED BY CAPITAL ACCESS

Fitch calculates that EQR's sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (debt maturities, developments and recurring capital expenditures) results in a liquidity coverage ratio of 1.0x for the period Oct. 1, 2014 to Dec. 31, 2016, which is slightly low for the rating. The low liquidity is driven by over $1.0 billion of expected development expenditures during this projection period. The company has demonstrated strong access to nearly all forms of capital, mitigating to a large degree expected uses of capital.

PREFERRED UNIT NOTCHING

The two-notch differential between EQR's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, dated Nov. 25, 2014 and available on Fitch's Web site 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 multifamily operating fundamentals will continue to revert toward its long-term average. The company's leverage should remain approximately at current levels in the short term, and range between 6.5x and 7.5x over the longer term due to the timing of developments. In addition, EQR has good access to capital, and should be able to refinance maturing obligations due to strong coverage ratios.

RATING SENSITIVITIES

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

--Fitch's expectation of leverage sustaining below 7.0x (leverage was 6.6x at Sept. 30, 2014 and Fitch expects leverage to sustain between 6.5x - 7.5x on a longer term basis);

--Fitch's expectation of fixed charge coverage sustaining above 2.5x (coverage was 2.9x for the LTM period ended Sept. 30, 2014 and is projected to improve);

--Unencumbered asset coverage of net unsecured debt sustaining above 2.5x (coverage as of Sept. 30, 2014 was 3.1x).

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

--Fitch's expectation of leverage sustaining above 8.0x;

--Fitch's expectation of fixed charge coverage sustaining below 2.0x;

--A liquidity coverage ratio sustaining below 1.0x.

Fitch currently rates the company as follows:

Equity Residential

--Issuer Default Rating (IDR) 'BBB+';

--Unsecured revolving term loan 'BBB+';

--Preferred stock 'BBB-'.

ERP Operating Limited Partnership

--IDR 'BBB+';

--Short-Term IDR 'F2' assigned;

--CP Notes 'F2 (EXP)' assigned;

--Unsecured revolving credit facility 'BBB+';

--Senior unsecured notes 'BBB+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Nov. 25, 2014);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014);

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26, 2014).

Applicable Criteria and Related Research:

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Criteria for Rating U.S. Equity REITs and REOCs -- Effective Feb. 26, 2013 to Feb. 25, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979143

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