Will Equity Residential (EQR) Earnings Disappoint In Q2?

Equity Residential (NYSE:EQR) is slated to report second-quarter 2016 earnings after the market closes on Jul 26.

Last quarter, this Chicago, IL-based residential real estate investment trust (“REIT”) reported in-line results. Over the trailing four quarters, the company met estimates in three and missed on the other occasion. This resulted in an average negative surprise of 0.29%

Let’s see how things are shaping up for this announcement.

EQUITY RESIDENT Price and EPS Surprise

EQUITY RESIDENT Price and EPS Surprise | EQUITY RESIDENT Quote

Factors to Consider

Persistent weakness in the New York portfolio and the recent downtrend in the San Francisco portfolio compelled Equity Residential to cut its 2016 guidance for same store revenue and net operating income (NOI) in early June.

In fact, the residential REIT, which blamed the new rental apartment supply for hurting rent growth, now expects second-quarter 2016 same store revenue growth of around 4.0–4.2%. Though occupancies and renewal rates in these markets have been in line with the company’s projections, new lease rates are falling short.

As a result, the full-year same store revenue growth projections were lowered to 4.0–4.5% from the prior expectation of 4.5–5.0%. Also, with same store expense growth guidance of 2.5–3.0%, the full-year same store NOI growth projection has been revised down to 4.5–5.5% from 5.0–6.0%.

Moreover, Equity Residential is repositioning its portfolio to focus on high-barrier markets. In fact, the company opted for substantial sale out of its portfolio in recent times. Its sale of the Starwood portfolio, together with the other 2016 dispositions, has resulted in the company's exit from the South Florida and Denver markets and should eventually complete its planned exit from the Phoenix market as well as specific New England submarkets.

While the assets sale might help the company focus exclusively on its core, high-density urban markets in the long term, the earnings dilution impact from such a move would be impossible to avoid in the near term.

For second-quarter 2016, Equity Residential had earlier revealed expectations of normalized funds from operations (“FFO”) per share of 74–78 cents.

Earnings Whispers?

Our proven model does not conclusively show that Equity Residential will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of 76 cents and the Zacks Consensus Estimate of 77 cents, is -1.30%.

Zacks Rank: Equity Residential carries a Zacks Rank #4 (Sell).

We caution against stocks with Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few stocks in the REIT sector you may want to consider, as our model shows that they have the right combination of elements to post a positive surprise this quarter:

American Campus Communities, Inc. (NYSE:ACC) has an Earnings ESP of +1.89% and a Zacks Rank #2. The company will report results on Jul 25.

Taubman Centers, Inc. (NYSE:TCO) has an Earnings ESP of +7.22% and a Zacks Rank #2. The company will release results on Jul 28.

Regency Centers Corporation (NYSE:REG) has an Earnings ESP of +1.25% and a Zacks Rank #3. The company will release results on Aug 2.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.