Will Equity Residential (EQR) Earnings Disappoint in Q1?

Equity Residential EQR is slated to report first-quarter 2016 earnings after the close of market on Apr 26.

Last quarter, this Chicago, IL-based residential real estate investment trust (“REIT”) reported in-line results. Over the trailing four quarters, the company met estimates only in two. This resulted in an average negative surprise of 0.60%

Let’s see how things are shaping up for this announcement.

Factors to Consider

Equity Residential is repositioning its portfolio. In recent months the company concluded non-core assets sale worth over $6 billion. While we believe that this sale will help the company to focus exclusively on its core, high-density urban markets, the earnings dilution impact from the move would be impossible to avoid in the near term. In fact, net operating income (NOI) is anticipated to bear the brunt of the 2016 transaction activity including the portfolio sale to Starwood.

Moreover, expenses are expected to escalate, primarily due to higher seasonal operating expenses in the first quarter, leading to an adverse impact on NOI. Also, a number of the company’s markets are expected to witness elevated deliveries. As a result, new leasing is anticipated to be under pressure in the to-be-reported quarter and with elevated supply, pricing might be adversely impacted in these regions.

Nevertheless, with assets in some of the leading apartment markets of the U.S., amid elevated demand resulting from the echo boomers’ population and lifestyle transformation, the company has the potential to fight back headwinds.

For first-quarter 2016, Equity Residential had earlier revealed expectations of normalized funds from operations (“FFO”) per share of 73–77 cents. The Zacks Consensus Estimate is currently pegged at 76 cents.

Equity Residential’s activities during the quarter could not gain adequate analyst confidence. Consequently, the Zacks Consensus Estimate for the first quarter has remained unchanged over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Equity Residential will beat estimates this quarter. That 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 currently stand at 76 cents, which translates into an Earnings ESP (the percentage difference between them) of 0.00%.

Zacks Rank: Equity Residential carries a Zacks Rank #4 (Sell).

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:

Essex Property Trust Inc. ESS has an Earnings ESP of +1.14% and a Zacks Rank #2. The company will report results on Apr 28.

Taubman Centers, Inc. TCO has an Earnings ESP of +3.53% and a Zacks Rank #3. The company will release results on May 2.

Vornado Realty Trust VNO has an Earnings ESP of +4.03% and a Zacks Rank #3. The company will report first-quarter 2016 results on May 2.

Note: 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. All earnings per share numbers presented in this write up represent FFO per share.

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