Moody's Investors Service affirmed the ratings of ERP Operating Limited Partnership (Baa1 senior unsecured debt rating, Baa1 multifamily housing revenue bonds, (P)Baa1 senior unsecured shelf rating and (P)Baa2 subordinate shelf rating) and Equity Residential (Baa2 preferred stock rating, (P)Baa2 preferred shelf rating, (P)Baa1 senior unsecured shelf rating and (P)Baa2 subordinate shelf rating) and revised the rating outlook to positive from stable. Concurrently, Moody's also assigned a Prime-2 rating to ERP Operating Limited Partnership's short-term unsecured commercial paper program.

RATINGS RATIONALE

The positive rating outlook reflects the REIT's improved credit profile, in particular stronger cash flow metrics and lower leverage, and incorporates meaningful improvements in portfolio quality, which should lead to continued strong operating earnings. The positive outlook also reflects favorable demographic trends that are driving solid demand for apartment space in Equity Residential's (NYSE: EQR) core markets.

Over the past several years Equity Residential ("EQR") has transformed into a more focused REIT with high-quality, stabilized assets in high-barrier and long-term growth markets. This has resulted in stronger, more consistent earnings growth, with Net Debt/EBITDA declining to 6.4x at YE14 from 7.5x at YE11 and Fixed Charge Coverage improving to 3.2x at YE14 from 2.5x at YE11. These strengths are counterbalanced by high levels of secured debt, which represented 17.9% of gross assets as of YE14, as well as geographic concentration in weaker-performing markets, namely Washington DC.

The new short-term rating was assigned in connection with EQR's announcement that its majority-owned operating partnership subsidiary, ERP Operating Limited Partnership has established an unsecured commercial paper (CP) note program. Under the program ERP Operating Limited Partnership may issue, from time to time, unsecured CP notes up to a maximum aggregate amount outstanding of $500 million. The CP program is backed by EQR's revolving credit facility. The CP notes will be direct, unconditional, unsubordinated and unsecured obligations of the issuer ERP Operating Limited Partnership. The CP notes will be sold under customary terms in the CP note market and will rank pari passu with all of ERP Operating Limited Partnership's other unsecured senior indebtedness. EQR's liquidity and funding have been and we expect will continue to be managed conservatively with sufficient alternate liquidity to support its new CP program. The REIT's peak CP borrowing is not expected to exceed the amount available on committed back-up facilities.

Moody's evaluates CP ratings on a case-by-case basis utilizing a mapping from the long-term global rating, reflecting the close relationship between the credit risk associated with long-term and short-term obligations. Companies rated Prime should maintain sufficient liquidity, in the form of committed credit facilities and liquid assets, to withstand losing access to both the short-term and long-term debt markets for at least a year and have strong liquidity. This normally includes alternate liquidity provisions through committed bank facilities that are at least as large as total short-term debt, including maximum anticipated commercial paper outstandings. Back-up liquidity facilities should feature access to same-day available funds in the market of commercial paper issuance and have no restrictions on funding related to material adverse changes in the borrower's financial condition. ERP Operating Limited Partnership's current Baa1 rating and its commercial paper documentation exhibits all the above referenced Prime-2 characteristics.

EQR's P-2 CP rating also reflects the REIT's strong liquidity including a sizable, high-quality unencumbered asset portfolio with a book value of approximately $20 billion, generating $1.2 billion of NOI. Furthermore, as of YE14 EQR had approximately $2.2 billion available on its $2.5 billion unsecured revolving credit facility. In addition to retained cash flow EQR has excellent access to multiple sources of external capital including secured GSE financing, unsecured debt and common equity, which allows the REIT to comfortably fund upcoming debt maturities, dividends, capex and development.

An upgrade to A3 would be contingent upon fixed charge coverage closer to 3.5x on a sustained basis, secured debt % gross assets approaching 15%, debt plus preferred stock % gross assets remaining below 40% on a consistent basis and net debt / EBITDA approaching 6.0x, on a sustained basis. A downgrade could result should net debt / EBITDA exceed 7.5x on a sustained basis, fixed charge coverage decline below 2.5x or should the company enter into a large leverage transaction.

The following ratings were affirmed with a positive outlook:

Equity Residential -- Baa2 preferred stock rating, (P)Baa2 preferred shelf rating, (P)Baa1 senior unsecured shelf rating and (P)Baa2 subordinate shelf rating

ERP Operating Limited Partnership -- Baa1 senior unsecured debt rating, Baa1 multifamily housing revenue bonds, (P)Baa1 senior unsecured shelf rating and (P)Baa2 subordinate shelf rating

The following rating was assigned:

ERP Operating Limited Partnership -- Prime-2 commercial paper program

The last rating action with respect to EQR was on November 27, 2012 when Moody's affirmed the ratings of ERP Operating Limited Partnership (senior unsecured debt rating at Baa1) and Equity Residential (preferred stock at Baa2) with a stable outlook.