EQUITY RESIDENTIAL (EQR)

Ye Jiang

Rajani Meka

Tim Schmelzle

Prateek Sharma

November 18, 2010Photograph provided by Equity Residential

Equity : Raised capital from many investors to purchase and manage property, includingnleasing, development and tenant services. Acquisition and development of properties for their own portfolio rather than resell them once developed.

Mortgage: Lend money directly to real estate owners or indirectly through the acquisition of loans or mortgage backed securities.

Hybrid : Both Equity REIT and mortgage REIT

REIT = Real Estate Investment Trust

REIT – Tax Treatment

No corporate tax on income so long as 90% of its taxable income is dispersed as dividends

Must invest 75% of its assets into real estate Dividends usually taxed at normal income rate not

special dividend rate Return of capital distribution is treated as L-T capital

gains when the stock is sold

Segmentation

Measures of Performance: FFO / AFFO / FAD• Net Income per GAAP

- Gains from disposal of real estate + Depreciation and amortization = FFO (AFFO adds back only a portion of gains or depreciation)

• AFFO- Capital improvements+ Rent adjustments = FAD (Funds Available for Distribution)

REIT Accounting: FCF

FAD- R.E. acquisitions- Change in net working capital- Principle payments+ Gain on sale of R.E.+ Equity issued= FCF

Industry Overview

• Capital intensive Highly levered Importance of debt management

• Market concentration Top five accounts for 29.4% of total market Access to capital markets is often restricted based

on the size

Source: Industry report: Real estate Investment Trusts in the US, Reference Code 52593http://www.ibisworld.com/industryus/default.aspx?indid=1344

Key drivers• Revenue largely affected by economic condition House Price Index

Reflect: Asset value

Affect: rental price and capital gains

National unemployment rate Per capita disposable income Number of businesses Corporate profits

Reflect: Demand for residential, retail and commercial space

Affect: rental rate, vacancy rate

10 year Treasury yield

Reflect: Interest rate

Affect: cost of capital and demand

Annual growth rate from ’10-’15 is estimated to be at 4.4%Source: Industry report: Real estate Investment Trusts in the US, Reference Code 52593http://www.ibisworld.com/industryus/default.aspx?indid=1344

Home Ownership

Impact

Upside

downside

Industry performance

Prior to 2010 REIT industry had benefited from the real estate bubble since ‘05

and prior to ‘08 the industry revenue grew at 15.9% After the sub-prime mortgage crisis developed, the industry lost

26.2% of their value in ‘07 and ‘08 REIT market capitalization decreased by 56.3% The growth of the industry declined since ‘07 but the revenues

have been stable due to long-term lease contracts

2010 Revenue in 2010 has been $52.3 billion Profit in 2010 has been $5.2 billion Annual growth from ‘05-’10 has been 6.8%

Historical Source of Returns

Acquisitions & Maint.

Stock Purchases

EQRRents

Money Flow, Mutual-style Investing

Dividends

Trademarked property of Hasbro Inc.

Company Overview

Equity Residential was founded in 1993 and is headquartered in Chicago

Real estate company focused on acquisition, development and management of apartment properties

Key products: Properties are leased out on a yearly basis Garden style properties Mid/High rise properties Military housing

Key services: Maintenance and upkeep Asset Management Property Development Rental services

Strategic Purchasing

http://www.simplymap.com/map.php?entry=first#

Housing images are the trademark property of Hasbro Inc.

The company owns or has investments in 548 properties in 23 states and 147, 244 units in District of Columbia, favors properties less than 20 years old, targets acquisitions in areas expected to have high population growth

M & A Activity- 1998 to 2009Announced Date Closed Date Role Target Size ($mm)

Jul-08-1998 Oct-19-1998 Buyer Merry Land LLC 2,117.34 Jun-30-1999 Oct-01-1999 Buyer Lexford Residential Trust 718.06 Jan-13-2000 Jul-07-2000 Buyer Equity Corporate Housing, Inc. 140.69 Jul-15-2000 Dec-21-2000 Buyer Grove Property Trust 490.38 Jul-21-2000 Jul-21-2000 Buyer - Parent Temporary Quarters, Inc. 3.3

Nov-06-2000 Nov-06-2000 Buyer Viva Group, Inc. 17.3

Mar-07-2001 Mar-07-2001 Buyer OpsTechnology, Inc. -

Nov-11-2005 - Target Equity Residential (NYSE:EQR) 1,700.0 Jun-28-2006 Oct-05-2006 Seller Equity Residential, Lexford Housing Division 1,086.0 Dec-31-2006 Dec-31-2008 Buyer 304 Property Units in Phoenix, Arizona 43.8 Jan-10-2007 Jan-10-2007 Buyer NYC Upper East Side Apartments 65.0 Apr-25-2007 Apr-25-2007 Buyer Eagle Real Estate Group, Teresina Apartments 90.3 Jul-30-2008 Jul-30-2008 Buyer Mosaic at Metro in Hyattsville -

Oct-14-2008 Oct-14-2008 Seller OpsTechnology, Inc. -

Dec-31-2008 Dec-31-2008 Buyer 7 Properties including 2,141 Apartment Units 380.68

Dec-31-2008 Dec-31-2008 Buyer Uncompleted Development Property in U.S. 56.6

Feb-11-2009 Feb-11-2009 Seller 436 Apartments Portfolio 42.7

Jun-25-2009 Jun-25-2009 Seller Vista del Lago Apartments in Dallas -Sep-22-2009 Sep-22-2009 Seller The Carlyle Apartments -Oct-29-2009 Oct-29-2009 Seller Saddle Creek Apartments -Oct-30-2009 Oct-30-2009 Buyer Metropolitan at Pentagon Row 100.0

Total: $7052.15 mmSource: Capital IQ

M&A Activity- 2010Announced Date Closed Date Role Target Size ($mm)

Jan-13-2010 Jan-13-2010 Buyer Property At Tenth Avenue And West 23 Street

11.25

Jan-28-2010 Jan-28-2010 Buyer Vista on Courthouse Apartments 85.0

Jan-29-2010 Jan-29-2010 Buyer River Tower and 777 Sixth Avenue -

Jan-29-2010 Mar-31-2010 Buyer Longacre House -

Feb-09-2010 Feb-09-2010 Buyer Rianna Apartments 33.4

Mar-15-2010 Mar-15-2010 Seller Hidden Oaks Apartments and the Woodbridge Apartments

40.5

Mar-16-2010 Apr-07-2010 Buyer 559-Unit Dumont Complex at 401 and 425, Massachusetts Avenue

167.0

Mar-23-2010 Mar-23-2010 Seller Bainbridge in the Park Apartment Complex in South Durham

10.7

Mar-31-2010 Mar-31-2010 Seller Eight Consolidated Properties 145.94

Jun-30-2010 Jun-30-2010 Buyer 183-unit Property in Fullerton, CA 43.3

Jun-30-2010 Jun-30-2010 Seller Eagle Rim 18.6

Sep-28-2010 Sep-28-2010 Buyer Vantage Pointe in San Diego 200.0

Total: $755.69Source: Capital IQ

Sources of Revenue

Key Financials

Year 2006 2007 2008 2009Total Revenue 1,702.5 1,801.8 1,952.6 1,921.0

Growth Over Prior Year 13.8% 5.8% 8.4% (1.6%)

Gross Profit 992.8 1,060.9 1,165.0 1,149.1

Margin % 58.3% 58.9% 59.7% 59.8%

SG&A 709.7 741.0 787.6 771.9

SG&A Margin % 2.8% 2.3% 2.1% 2.0%

EBITDA 946.0 1,019.7 1,124.4 1,111.5

Margin % 55.6% 56.6% 57.6% 57.9%

EBIT 463.2 494.5 571.0 535.4

Margin % 27.2% 27.4% 29.2% 27.9%

Earnings from Cont. Ops. 30.3 (54.0) (50.1) 0.4

Margin % 1.8% (3.0%) (2.6%) 0.0%

Net Income 1,072.8 980.2 407.6 362.3

Margin % 63.0% 54.4% 20.9% 18.9%

All dollar figures are in millions

Same Property Metrics

Year 2004 2005 2006 2007 2008 2009

Same Property revenue Growth

(1.5%) (3.2%) 3.4% 6.9% 3.2% (2.9%)

Same property expense growth

1.7% (5.9%) (1.5%) 4.0% 2.2% (0.1%)

Funds from Operations - FFO

Residential Segment

Market Cap Market Share Op. Margins

Industry $793.0 BEQR $ 13.8 B 1.74% 25.13%Avalon $ 8.9 B 1.01% 29.67%UDR $ 3.9 B 1.05% -19.34%Camden $ 3.4 B 0.43% 23.54%Essex $ 3.3 B 0.41% 28.43%

(as of 11/15/10)

Stock Performance

Source: Capital IQ

SWOT

Strengths• Well positioned• Large market share• Sound management and

goals

Weaknesses• Sensitive to interest Rate

changes• Investments have low

liquidity

• Opportunities• Interest rates currently at an all-time

low• Willingness to enter joint venture

• Threats• Interest rates will go up sometime• Thin margins, competitive market

Porters 5

New Market Entrants Medium

Supplier Power Low

Buyer Power High

Product and Technology Dev. Low

Corporate Rivalry Medium

WACCCapital Structure 　Total Debt ( in millions ) 10269.907Total Equity ( in millions ) 4748.623Total Capital ( in millions ) 15018.53　 　Weight of Debt 68.38%Weight of Equity 31.62%

Wacc (CAPM) 　　 　Beta (Bloomberg) 1.21

Beta (Yahoo Finance) 1.28

Beta average 1.25

　 　Market Return 10.63%

Risk Free Rate (U.S 10 yr government bond) 3.27%

Market Risk Premium 7.36%

　 　Cost of Equity (CAPM) 12.44%

Cost of Debt 6.98%

Tax Rate 0%

　 　Weighted Average Cost of Capital 8.7%

Wacc (ROE) 　Cost of Equity (Historical) 11.25%Cost of Debt 6.98%　 　Weighted Average Cost of Capital (ROE) 8.33%

Wacc (Goal Post) 　Cost of Equity 11.85%

Cost of Debt 6.98%

　 　Weighted Average Cost of Capital 8.52%

DCF and DDM Valuation

Summary

Why select a REIT? Real estate is currently cheap but expected to

appreciate Believed to have some counter-cyclical

characteristics that would benefit the fund

Why this REIT? EQR is a star performer

Strong skilled management History of superior margins Superior growth Good positioning

Observations

Company matches S&P 500 performance Investor could invest in an S&P 500 index fund and

have better diversification while realizing the same return

Investor is seeking alpha, not market returns

Dividends would disadvantage investor Income dividends represent a large portion of the

stock’s value Normal investor tax rate = 35%, special dividend rate

= 15%

Conclusion

This company is the best performing REIT within its segment. While it would make an excellent investment for many investors, this company does not meet the basic needs of our client.

Do not purchase