Equity Residential (EQR) Misses In Q2, Cuts Revenue Outlook

High disposition activity in 2016 has led to a decline in Equity Residential’s (NYSE:EQR) normalized funds from operations (“FFO”) per share for second-quarter 2016, which came in at 76 cents, missing the Zacks Consensus Estimate by a penny and down from the prior-year quarter figure of 85 cents.

Further, the company revised its annual guidance citing an elevated new supply and slow-down in high-paying jobs in San Francisco and New York. It lowered its revenue growth assumption to 3.5%–4.0% from 4.0%–4.5% guided earlier, leading to a change in net operating income (NOI) outlook to 3.75%–4.25% from the previous range of 4.5%–5.5%.

Also, total revenue generated during the reported quarter was $595.2 million, reflecting a 12.4% decline from the prior-year period. The figure also missed the Zacks Consensus Estimate of $607.4 million.

Quarter in Detail

No doubt, the dilution impact from the company’s 2016 asset sales and weakness in its markets have hurt its bottom line. However, its same-store revenues (includes 72,781 apartment units) inched up 4.2% year over year to $556.0 million, while expenses climbed 1.7% from a year ago, to $159.6 million. As a result, same-store NOI grew 5.3% year over year to $396.5 million.

The company experienced a 4.0% increase in average rental rates to $2,544, while occupancy notched up 10 basis points year over year to 96.3% for the same-store portfolio.

Equity Residential made no acquisitions during the quarter but sold three consolidated apartment properties, having 728 apartment units, for an aggregate sale price of around $112.5 million.

It exited second-quarter 2016 with cash and cash equivalents of $497.8 million, up from $368.0 million at the end of first-quarter 2016. Further, the company ended the quarter with $8.51 billion in debt against $8.6 billion at the end of the prior quarter.

2016 Outlook

Equity Residential is now projecting 2016 normalized FFO per share in the $3.05–$3.11 range against the prior guidance of $3.05–$3.15. The Zacks Consensus Estimate of $3.09 falls within this range.

For third-quarter 2016, the company expects normalized FFO per share in the range of 75–79 cents. The Zacks Consensus Estimate is currently pegged at 78 cents.

Our Viewpoint

Growth at Equity Residential remains a concern as elevated supply curtails landlord’s ability to command higher rents and reduces absorption. Moreover, demand is anticipated to remain stressed with a slowdown in better-paying jobs in San Francisco and New York. Further asset sales, which might help the company in focusing exclusively on its core, high-density urban markets in the long term, will continue to lead to earnings dilution in the near term.

EQUITY RESIDENT Price, Consensus and EPS Surprise

EQUITY RESIDENT Price, Consensus and EPS Surprise | EQUITY RESIDENT Quote

The company currently carries a Zacks Rank #4 (Sell). Investors interested in the apartment REIT industry may consider stocks like Mid-America Apartment Communities Inc. (NYSE:MAA) , Post Properties Inc. (NYSE:PPS) and Select Income REIT (NASDAQ:SIR) . All these stocks carry a Zacks Rank #2 (Buy).


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.