Can Equity Residential (EQR) Counter Excess Supply Woes?

We have updated our research report on Equity Residential (NYSE:EQR) on Jun 24, 2016.

Ahead of the company’s second-quarter earnings release that is expected in July, estimates have been trickling down for Equity Residential. Persistent weakness in the New York portfolio along with the recent downtrend in the San Francisco portfolio has compelled the company to cut its 2016 guidance for same store revenue and net operating income (NOI) earlier in June.

In fact, the residential real estate investment trust (REIT), which blamed 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%.

The company also 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. This should eventually complete its planned exit from the Phoenix market as well as specific New-England submarkets.

The Zacks Consensus Estimate for second quarter normalized funds from operation (“FFO”) per share is currently pegged at 76 cents, reflecting a decline of 2.6% over the last 60 days; while that for full year 2016 stands at $3.09, which depicts a fall of 1.0% over the same time period.

Nevertheless, despite the earnings dilution effect from such a move, these assets sales are expected to help in focusing exclusively on its core, high-density urban markets. Moreover, growth in the millennial population, lifestyle transformation, and creation of new households are expected to augment demand for renting units in the long run.

Equity Residential currently has a Zacks Rank #3 (Hold).

However, investors interested in the residential REIT industry can consider other stocks like Armada Hoffler Properties, Inc. (NYSE:AHH) , EdR (NYSE:EDR) and Post Properties Inc. (NYSE:PPS) . Each of these stocks presently carries a Zacks Rank #2 (Buy).

Note: 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.