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On Jul 4, 2013, we reiterated our long-term recommendation on Equity Residential (EQR - Analyst Report), a Chicago-based multi-family real estate investment trust (REIT), at Neutral. The decision is based on the company’s solid operating platform, the Archstone acquisition and repositioning moves. Yet, competitive pressures and the continuous acquisition spree involve significant upfront expenses that drag down near-term profitability.

Why Neutral?

Equity Residential’s core FFO per share in the first quarter of 2013 reached 64 cents, a penny short of the Zacks Consensus Estimate. This was, however, up 3 cents from the year-ago FFO per share.

Quarterly results were primarily driven by higher same-store net operating income (NOI) and the benefits from stabilized Archstone properties. However, the positives were partially offset by the negative impact from other transaction activities and common share issuance for the Archstone deal.

Going forward, we believe Equity Residential’s focus on expansion in the high barrier-to-entry regions of the U.S will drive its top-line growth. The Archstone deal reinforces that. Moreover, the echo boomers population continues to raise the demand for apartments and with a decent balance sheet position, the company is well poised to capitalize on this favorable trend through acquisitions and developments.

However, the company’s continuous acquisition spree involves significant upfront expenses that drag down near-term profitability till the properties get established. In addition, the company faces significant competitive pressure. Hence, we are not overtly optimistic on the stock and believe that the risk/reward profile is currently balanced.

For Equity Residential, the Zacks Consensus Estimates for 2013 FFO per share remained stable at $2.87, while for 2014, it went down a cent to $3.10, over the last 30 days. Therefore, the stock carries a Zacks Rank #3 (Hold).

Other REITs to Consider

Some better-performing REITs that are worth considering include Select Income REIT (SIR - Snapshot Report), which has a Zacks Rank # 1(Strong Buy) and Avalonbay Communities Inc. (AVB - Analyst Report) and Camden Property Trust (CPT - Snapshot Report), that carry a Zacks Rank # 2 (Buy).

Note: Funds from operations, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.
 

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