Will High Supply Impact Equity Residential (EQR) Q4 Results?

Equity Residential (NYSE:EQR) is slated to report fourth-quarter 2017 results after the market closes on Jan 30.

Last quarter, this Chicago, IL-based residential real estate investment trust (REIT) delivered a better-than-expected performance in terms of funds from operations (FFO) per share. Results mirrored enhanced same-store and lease-up net operating income (NOI). However, the company experienced adverse impact on NOI, primarily stemming from its 2016 and 2017 transaction activity. Also, it incurred elevated interest expenses and higher corporate overhead in the quarter.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in one occasion and met in the rest three. It delivered an average positive surprise of around 0.3% during this period. The graph below depicts this surprise history:

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

Factors to Consider

Per a study by the real estate technology and analytics firm, RealPage, Inc. (NASDAQ:RP) , the U.S. apartment market reported moderate rent growth for the calendar year and seasonal pricing cuts in the fourth quarter. While U.S. apartment rents increased at a modest rate of 2.5% in 2017, effective rents for new leases fell 0.9% during the quarter. Admittedly, the levels of rent growth have moderated from the earlier years. However, national apartment occupancy came in at 95.1% at the end of fourth-quarter 2017, remaining stable year over year.

For Equity Residential, things appear mixed in the to-be-reported quarter. The company is making concerted efforts to reposition its portfolio in high barrier-to-entry/core markets. It is anticipated to benefit from favorable demographics, lifestyle transformation and creation of new households. In fact, the company’s FFO per share performance is likely to benefit from solid lease-up NOI as well as elevated NOI from its 2017 acquisition activity.

However, 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 and adversely affect revenue growth in the to-be-reported quarter. In addition, there is high concession activity amid higher supply, which remains a concern.

For fourth-quarter 2017, Equity Residential projects normalized FFO per share in the range of 79-83 cents.The Zacks Consensus Estimate for the same is currently pegged at 81 cents.

Equity Residential’s activities during the quarter failed to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate remained unchanged over the last 60 days.

Additionally, over the past three months, shares of Equity Residential have declined 6.5%, underperforming its industry’s descend of 6.0%.

Earnings Whispers

Our proven model does not conclusively show that Equity Residential is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a bullish 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: Equity Residential has an Earnings ESP of -0.55%, representing the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Equity Residential’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident about an earnings surprise.

Stocks That Warrant a Look

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

CubeSmart (NYSE:CUBE) , slated to release fourth-quarter results on Feb 15, has an Earnings ESP of +1.10% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

EPR Properties (NYSE:EPR) , expected to report quarterly numbers around Feb 27, has an Earnings ESP of +0.69% and a Zacks Rank of 3.

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

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