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Equity Residential (EQR) Up 6.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Equity Residential (EQR). Shares have added about 6.4% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Equity Residential due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Equity Residential Lags Q3 FFO Estimates, Trims '23 View

Equity Residential’s third-quarter 2023 normalized FFO per share of 96 cents narrowly missed the Zacks Consensus Estimate of 97 cents. Also, rental income of $724.1 million lagged the consensus mark of $728 million. Results reflected a weak performance in its West Coast markets, along with the Rite Aid bankruptcy.

According to Mark J. Parrell, Equity Residential’s president and CEO, “While the East Coast outperformed our expectations, the San Francisco and Seattle markets underperformed due to lower recent job growth in our target affluent renter demographic and, together with the Rite Aid bankruptcy, led us to adjust guidance.”

Parrell also noted that with respect to delinquency, the legal process is lengthy and uneven and “we will likely end the year with modestly more delinquency than our previous goal.”

However, on a year-over-year basis, normalized FFO per share increased 4.3%, with rental income climbing 4.2%.

Quarter in Detail

Same-store revenues were up 4.1% year over year. Our estimate for same-store revenue growth was 4.2%. Same-store expenses flared up 3.1% and consequently, same-store NOI climbed 4.6% year over year.

The average rental rate increased 5% year over year to $3,048 in the quarter ended September. Meanwhile, the physical occupancy contracted 40 basis points (bps) to 96% for the same-store portfolio. Our estimate for the metric was 96.1%.

Same-store residential revenues were up 4.4% year over year, while expenses increased 3.1%. Consequently, same-store residential NOI expanded 5.1% year over year.

The new lease change for its residential same-store properties was up 0.5%, while the renewal rate achieved by Equity Residential was 5.5% for the third quarter. The blended rate for the quarter was 3.1%. The physical occupancy for this portfolio was 96%, up 10 bps sequentially.

In the third quarter, Equity Residential acquired two operating properties in suburban Atlanta. These included a recently completed 344-unit apartment property in Suwanee, currently in lease-up, for $98 million at a stabilized acquisition cap rate of 5.4% and a 290-unit property in Decatur built in 2019 for $81.7 million at an acquisition cap rate of 5.1%. Also, during the quarter, Equity Residential sold a 166-unit property in Seattle for $60.1 million at a disposition yield of 5.4%, generating an unlevered IRR of 7.5%.

Balance Sheet

Equity Residential exited the third quarter of 2023 with cash and cash equivalents of $39.3 million, down from the $53.9 million recorded at the end of 2022.

The net debt to normalized EBITDAre was 4.24X, which decreased from 4.27X in the previous quarter. The unencumbered NOI as a percentage of the total NOI was 89.8% in the quarter, up from 88.5% sequentially.

2023 Guidance

For the fourth quarter of 2023, Equity Residential projects normalized FFO per share in the band of 99 cents to $1.01.

For 2023, Equity Residential revised its outlook for normalized FFO per share to the $3.77-$3.79 band from its earlier guidance in the band of $3.77-$3.83, down 2 cents at the midpoint.

For the full year, EQR expects same-store revenue growth of 5.5%, indicating a decrease of 0.375% from the prior guidance at the midpoint, while same-store expense growth is reaffirmed at 4.25%. Consequently, the same-store NOI growth projection is revised to 6.2%, down 45 bps at the midpoint. Moreover, physical occupancy is now expected at 95.9%, down 10 bps from the prior projection of 96%.

2024 Guidance

The company anticipates overall revenue to witness solid growth led by the East Coast markets.

Management expects same-store expense growth to be slightly below 2023.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, Equity Residential has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Equity Residential has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Equity Residential belongs to the Zacks REIT and Equity Trust - Residential industry. Another stock from the same industry, Mid-America Apartment Communities (MAA), has gained 5.3% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.

Mid-America Apartment Communities reported revenues of $542.04 million in the last reported quarter, representing a year-over-year change of +4.1%. EPS of $0.94 for the same period compares with $2.19 a year ago.

Mid-America Apartment Communities is expected to post earnings of $2.30 per share for the current quarter, representing a year-over-year change of -0.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.5%.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Mid-America Apartment Communities. Also, the stock has a VGM Score of D.

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