What's in Store for Equity Residential's (EQR) Q2 Earnings?

Equity Residential EQR is slated to report second-quarter results on July 30, after market closes. The company is expected to witness growth in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Chicago, IL-based residential real estate investment trust (REIT) posted positive surprise of 1.23% in terms of FFO per share. Results displayed improved same-store net operating income (NOI) and lease-up NOI.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate twice, met in another and missed in the other occasion, recording an average positive surprise of 0.33%. The graph below depicts this surprise history:

Equity Residential Price and EPS Surprise

Equity Residential Price and EPS Surprise

Equity Residential price-eps-surprise | Equity Residential Quote

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

Factors at Play

The latest figures from real estate technology and analytics firm RealPage, Inc. (RP) suggest that during the current year’s prime leasing period, the U.S. apartment rental market was able to capitalize on stellar demand for rental units.

Per the RealPage report, from April through June, net move-ins aggregated 155,515 units, which came in 11% higher than the second-quarter 2018 product absorption, as well as touched a five-year high. Occupancy reached 95.8% during the second quarter, up from the prior-year quarter’s 95.4% despite steady delivery of new units. Moreover, the market has achieved a 3% increase in rents from the prior-year level, attaining an average of $1,390 per month.

Amid these, Equity Residential too is expected to benefit from its efforts to reposition the company’s portfolio in high barrier-to-entry/core markets. Particularly, in the to-be-reported quarter, the company is likely to have witnessed healthy demand for its properties amid stable economy, healthy job market, household formation and high home-ownership costs in several markets hindering transition from renter to homeowner.

However, Equity Residential has been experiencing high new supply across a number of its markets. This elevated supply level will likely keep putting pressure on new lease rates, occupancy as well as retention, and affect revenue growth. Furthermore, concession activity remains high amid higher supply, which remains another concern.

This apart, as Equity Residential is repositioning its portfolio to focus on key markets, the company continues to acquire as well as dispose assets. At times, such transactions lead to dilutive impact in the near term, which cannot be bypassed. 

In fact, for the second quarter, Equity Residential projects normalized FFO per share at 82-86 cents. Results are likely to reflect positive impact from higher same-store net operating income (NOI). Nonetheless, the company’s 2019 and 2018 transaction activities are likely to have an adverse impact on normalized FFO per share.

The Zacks Consensus Estimate for the second-quarter FFO per share is currently pegged at 85 cents, indicating a projected increase of 4.9% year over year on the back of healthy revenues. The Zacks Consensus Estimate for the company’s quarterly revenues is pinned at $667.5 million, highlighting anticipated growth of around 4.3% year over year.

In addition to the above, Equity Residential’s activities during the April-June quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for FFO per share for the quarter under review remained unchanged over the past month.

Here is what our quantitative model predicts:

Equity Residential does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Earnings ESP: The Earnings ESP for Equity Residential is +1.30%.

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

A positive Earnings ESP is a meaningful and leading indicator of a likely beat in terms of FFO per share. However, we also need a favorable Zacks rank for the stock to make us reasonably confident of a positive surprise, which is not the case here.

Stocks That Warrant a Look

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

Life Storage, Inc. LSI, scheduled to release earnings on Jul 31, has an Earnings ESP of +0.12% and currently carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Federal Realty Investment Trust FRT, slated to report second-quarter results on Aug 1, has an Earnings ESP of +0.57% and currently carries a Zacks Rank of 2.

Kimco Realty Corporation KIM, set to report quarterly results on Jul 25, has an Earnings ESP of +2.49% and currently carries a Zacks Rank of 3.

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

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Life Storage, Inc. (LSI) : Free Stock Analysis Report
 
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