Will Equity Residential (EQR) Earnings Disappoint In Q3?

Equity Residential (NYSE:EQR) is slated to report third-quarter 2016 earnings after the market closes on Oct 25.

Last quarter, this Chicago, IL-based residential real estate investment trust (“REIT”) reported a negative surprise of 1.30%. Moreover, the company has met estimates in two and missed on the other two occasions, over the trailing four quarters. This resulted in an average negative surprise of 0.61%

The graph below depicts the surprise history of the company.

Will Equity Residential be able to overcome challenges this time and post a surprise? Or will a challenging backdrop hurt its financials this earnings season? Let’s see how things have shaped up for this announcement.

Factors to Consider

Equity Residential has recently reaffirmed its 2016 same store revenue growth projections of 3.5%–4.0%. Notably, in July, the company had lowered the revenue growth assumption to this range of 3.5%–4.0%, from 4.0%–4.5% guided earlier, citing an elevated new supply and slowdown in high-paying jobs in San Francisco and New York.

The company also announced that though it is presently meeting revised expectations with respect to occupancy and base rent for its overall markets, there is normal seasonal reduction for renewals, aggravated by the San Francisco & New York rent declines. Further, according to the company, the current inventory expansion in San Francisco is historic. However, Equity Residential declared that despite slowing rents in existing properties, lease-ups remain solid.

Moreover, Equity Residential has been repositioning its portfolio to focus on high-barrier markets. In fact, the company opted for substantial sale out of its portfolio in recent times. 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 third-quarter 2016, Equity Residential had earlier declared projections of normalized funds from operations (“FFO”) per share of 75–79 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: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 78 cents. This leads to an Earnings ESP of 0.00% for Equity Residential.

Zacks Rank: Equity Residential currently has a Zacks Rank #4.

This combination of Zacks Rank #4 and zero ESP makes us skeptical of any surprise this quarter.

In fact, 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:

PS Business Parks Inc. (NYSE:PSB) , slated to release earnings results on Oct 25, has an Earnings ESP of +1.43% and a Zacks Rank #2.

Post Properties Inc. (NYSE:PPS) , slated to release earnings results on Oct 31, has an Earnings ESP of +1.24% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Essex Property Trust Inc. (NYSE:ESS) , slated to release earnings results on Oct 27, has an Earnings ESP of +0.36% and a Zacks Rank #3.


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.

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