Equity Residential (EQR)

1. Equity Residential (EQR) Ye Jiang Rajani Meka Tim Schmelzle Prateek Sharma November 18, 2010 Photograph provided by Equity Residential

2. REIT = Real Estate Investment Trust • 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

3. 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

4. Segmentation

5. 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)

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

7. 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 52593 http://www.ibisworld.com/industryus/default.aspx?indid=1344

8. 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

9. 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 52593 http://www.ibisworld.com/industryus/default.aspx?indid=1344

10. Home Ownership

11. Impact Upside downside

12. 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%

13. Historical Source of Returns

14. Money Flow, Mutual-style Investing Stock Purchases Dividends EQR Acquisitions & Maint. Rents Trademarked property of Hasbro Inc.

15. 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

16. Strategic Purchasing 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 Housing images are the trademark property of Hasbro Inc. http://www.simplymap.com/map.php?entry=first#

17. M & A Activity- 1998 to 2009 Source: Capital IQ Total: $7052.15 mm

18. M&A Activity- 2010 Source: Capital IQ Total: $755.69

19. Sources of Revenue

20. Key Financials All dollar figures are in millions

21. Same Property Metrics

22. Funds from Operations - FFO

23. Residential Segment Market Cap Market Share Op. Margins Industry $793.0 B EQR $ 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)

24. Stock Performance Source: Capital IQ

25. 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

26. Porters 5 • New Market Entrants Medium • Supplier Power Low • Buyer Power High • Product and Technology Dev. Low • Corporate Rivalry Medium

27. WACC

28. DCF and DDM Valuation

29. 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

30. 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%

31. 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