Residential REITs To Watch For Q2 Earnings: EQR, SIR, UDR

The Q2 earnings season is in full swing for the real estate investment trusts (REIT), with several companies in the residential REIT space like Equity Residential (NYSE:EQR) , Select Income REIT (NASDAQ:SIR) and UDR Inc. (NYSE:UDR) slated to report quarterly numbers on Jul 26.

So far, the big names of the broader REIT industry, including Prologis, Inc. (PLD) and SL Green Realty Corp. (SLG) have reported better-than-expected results. However, this does not assure an overall bright picture for the residential REIT industry, as these companies cater to an entirely different class of asset.

In spite of the benefits of a low-rate environment for their high debt-dependence nature, the performance of residential REITs depends largely on the demand-supply dynamics of this market. Therefore, it is imperative to examine the fundamentals of the sector to predict the odds of an earnings beat.

Per the early end-of-quarter apartment numbers given by Axiometrics, as new graduates enter the workforce and start looking for a place to live, along with renter families seeking settlement well ahead of the upcoming school year, rent growth was notably stronger in Q2, with quarterly effective rent growth coming in at 2.3% in the second quarter against 0.5% in the first.

However, delivery of new units in a number of markets moderated the annual effective rent growth rate, that clocked 3.7% in Q2, reflecting a 134-basis-point (bps) decrease from the solid year-ago growth rate of 5.1%.

New York and San Francisco have particularly been experiencing rising supply. This is a major concern as elevated supply of new units usually curtails landlords’ ability to command higher rents, thereby leading to lesser absorption.

Let’s take a look into how these three residential REITs are expected to perform, when they report their second-quarter 2016 results..

UDR has an Earnings ESP of 0.00% and a Zacks Rank #3 (Hold). Our proven model does not conclusively show that UDR is likely to beat on earnings this quarter. This is because the company lacks the right combination of the two key ingredients – a positive Earnings ESP (the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate) and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3.

UDR INC Price and EPS Surprise

UDR INC Price and EPS Surprise | UDR INC Quote

UDR is expected to benefit from the strengthening multi-family fundamentals and favorable demographic trends. But supply is increasing and the company has already started to feel its impact. This could lead to a pressure on occupancy while rent escalations might be limited. (Read: Is UDR Inc. Poised for a Beat This Earnings Season?)

Equity Residential has a Zacks Earnings ESP of -1.30%. The company’s Zacks Rank #4 (Sell) further lowers the predictive power of ESP. In fact, we caution against Sell-rated (Zacks Rank #4 or 5) stocks going into the earnings announcement, especially when they are seeing negative estimate revisions.

EQUITY RESIDENT Price and EPS Surprise

EQUITY RESIDENT Price and EPS Surprise | EQUITY RESIDENT Quote

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. Moreover, the company opted for substantial sellout of its portfolio in recent times. While asset sales might help the company focus on its core, high-density urban markets in the long term, the earnings dilution effect from such a move would be impossible to avoid in the near term. (Read: Will Equity Residential Earnings Disappoint in Q2?)

Select Income REIT has a Zacks Earnings ESP of 0.00%. The company has a Zacks Rank #2. While a favorable rank increases the predictive power of ESP, a 0.00% ESP makes surprise prediction difficult.

SELECT INCOME Price and EPS Surprise

SELECT INCOME Price and EPS Surprise | SELECT INCOME Quote

Stay tuned! Check back on our full write-up on earnings releases of these stocks.