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Will Equity Residential (EQR) Surprise this Earnings Season?

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Equity Residential (EQR - Free Report) is slated to report third-quarter 2015 results on Oct 27 after the market closes.

Last quarter, this residential real estate investment trust (“REIT”) had reported in line results. However, Equity Residential beat estimates in two out of the trailing four quarters, with a positive average earnings surprise of 0.90%.

For third-quarter 2015, Equity Residential had earlier revealed expectations of normalized funds from operations (“FFO”) per share in the range of 85–89 cents. The Zacks Consensus Estimate for the third quarter FFO per share is currently pegged at 88 cents.

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

Factors to Consider

With assets in some of the leading apartment markets of the U.S., we believe that Equity Residential is well poised for growth in the third quarter. Also, echo boomers’ population and lifestyle transformation continue to raise the demand for apartments. In fact, we expect same-store net operating income to get a boost amid higher demand for rented apartments and disciplined expense management.

However, a number of the company’s markets are expected to witness elevated deliveries. As a result, new leasing is anticipated to face pressure in the to-be-reported quarter and pricing might be adversely impacted in such regions with elevated supply.

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. This is not the case here as you will see below.  

Zacks ESP: Since both the Most Accurate estimate and the Zacks Consensus Estimate stand at 88 cents, the Earnings ESP, which represents the difference between the two, is 0.00% for the third quarter.

Zacks Rank: Equity Residential has a Zacks Rank #2. While this increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks in the REIT industry that have the right combination of elements to post an earnings beat this quarter:

Essex Property Trust Inc. (ESS - Free Report) carries a Zacks Rank #2 and has an Earnings ESP of 0.82%. It is scheduled to report results on Oct 29.

Mid-America Apartment Communities Inc. (MAA - Free Report) has an Earnings ESP of 0.75% and a Zacks Rank #2. The company will report third-quarter results on Oct 28.

CubeSmart (CUBE - Free Report) has an Earnings ESP of 3.13% and a Zacks Rank #1. The company will report third-quarter results on Nov 5.

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.

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