Equity Residential (EQR) Q1 Earnings: What's In The Cards?

Equity Residential (NYSE:EQR) is slated to report first-quarter 2018 results after the market closes on Apr 24. The company is expected to experience growth in both revenues and funds from operations (FFO) per share in the quarter.

Last quarter, this Chicago, IL-based residential real estate investment trust (REIT) delivered a better-than-expected performance in terms of FFO per share. Results mirrored enhanced same-store and lease-up net operating income (NOI). However, the company incurred higher corporate overhead in the quarter.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions and met in the other two, delivering an average positive surprise of around 0.9%. The graph below depicts this surprise history:

Let’s see how things are shaping up for Equity Residential prior to this announcement.

Factors at Play

Equity Residential has been making concerted efforts to reposition its portfolio in high barrier-to-entry/core markets. The company's current focus is on the acquisition and development of assets primarily in six core coastal metropolitan areas — Boston, New York, Washington D.C., Southern California (including Los Angeles, Orange County and San Diego), San Francisco and Seattle.

Moreover, the home ownership cost in most markets of Equity Residential is significantly higher than the national average. Considering the current macroeconomic environment, such a trend is expected to continue, which in turn, would drive demand for rented apartments.

Further, corporate profits are up, and corporate tax cuts are encouraging companies to deploy capital and increase wages. As such, consumer confidence is high, driven by job growth and rising wages, promising solid prospects for Equity Residential. In addition, favorable demographics, lifestyle transformation and creation of new households amid improving economy will further accelerate demand for the company’s properties.

Amid these, Equity Residential projects normalized FFO per share of 74-78 cents for first-quarter 2018. The Zacks Consensus Estimate for the same is currently pegged at 78 cents, which denotes a projected increase of 5.4% year over year. Moreover, the Zacks Consensus Estimate for the company’s revenues is pegged at $631.3 million, reflecting expected growth of 4.5% year over year.

However, the latest report from the real estate technology and analytics firm — RealPage, Inc. (NASDAQ:RP) — states that the national apartment market moderated in first-quarter 2018, with occupancy shrinking slightly and rent growth slowing down. Nevertheless, the first quarter marks a slow leasing period, thanks to the cold weather that inhibits shift of households and limits growth in demand.

Going by statistics, the annual rent growth shrunk to 2.3% in Q1. This marked moderation from the 2.6-2.9% growth rate experienced throughout 2017. Occupancy level of 94.5% this March edged down from the prior-year tally of 95%, with metros having subdued construction activity faring well and recording the strongest occupancy. Nevertheless, the overall occupancy level is still healthy.

Moreover, there is an increasing apartment supply in a number of the company’s markets. This high supply is likely to put pressure on rental rates in the to-be-reported quarter. In addition, there is high concession activity amid elevated supply, which remains a concern.

Furthermore, the company’s activities during the quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate remained unchanged over the last 30 days.

Here is what our quantitative model predicts:

Equity Residential has the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Equity Residential is +0.25%.

Zacks Rank: Equity Residential carries a Zacks Rank of 3.

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. This, when combined with a favorable Zacks rank, makes us reasonably confident of a positive surprise.

Stocks That Warrant a Look

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

PS Business Parks, Inc. (NYSE:PSB) , slated to release first-quarter results on Apr 24, has an Earnings ESP of +0.67% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Taubman Centers, Inc. (NYSE:TCO) , scheduled to release earnings on Apr 26, has an Earnings ESP of +0.47% and a Zacks Rank of 3.

Simon Property Group, Inc. (NYSE:SPG) , slated to release quarterly numbers on Apr 27, has an Earnings ESP of +0.32% and a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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