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Equity Residential (EQR) Prospects Defy High Interest Rates

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Equity Residential (EQR - Free Report) has a dominating presence in Boston, New York, Washington, DC, Seattle, San Francisco and Southern California. The residential REIT is also growing its presence in Denver, Atlanta and Austin. It is particularly targeting places where affluent renters prefer to live, work and play.

The company’s strategic buyouts and encouraging development pipeline bode well for growth. However, the lack of governmental rental assistance in 2023 can impair its revenue growth to some extent. Elevated supply in certain markets and rising interest rates add to its woes.

Given the high cost of homeownership, the transition from renter to homeowner is difficult in its markets, making renting apartment units a viable option. For 2023, we estimate total rental income to grow 3.9% year over year.

EQR is banking on technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of its operating platform. It is focused on centralizing certain on-site activities. Per its February Investor Presentation, the company expects to capture an additional $30-$35 million of net operating income (NOI) in the upcoming period.

Equity Residential has a strong balance sheet, ample liquidity and financial flexibility. Net debt to normalized EBITDAre was 4.17X in the first quarter of 2023. Also, unencumbered NOI, as a percentage of total NOI, was 88.3% as of Mar 31, 2023. Hence, with $2.5 billion in available liquidity as of Mar 31, 2023, limited near-term debt maturities, solid credit metrics and sufficient access to capital markets at favorable rates, the company is well-poised to meet its obligations.

Solid dividend payouts remain the biggest attraction for REIT investors and Equity Residential is committed to this purpose. In March 2023, the residential REIT increased its quarterly cash dividend on its common stock to 66.25 cents from 62.50 cents per share paid out earlier, marking a hike of 6% on its annualized dividend. Backed by healthy operating fundamentals, we expect normalized FFO to increase 6% in 2023. Given the company’s solid operating platform, our FFO growth projections and balance sheet strength compared with industry counterparts, this dividend rate is expected to be sustainable.

However, Equity Residential faces challenges in attracting renters due to high supply volumes in multiple markets. Construction activity is elevated, resulting in a significant number of upcoming apartment deliveries. Particularly, the Sunbelt markets, including the Denver, Dallas Fort Worth, Austin and Atlanta markets, in which the company is expanding, are likely to witness higher supply than its coastal established markets.

A hike in interest rate is concerning for Equity Residential. Rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. It has a substantial debt burden and its total debt as of Mar 31, 2023, was $7.3 billion. Also, the dividend payout may become less attractive than the yields on fixed-income and money market accounts.

With no governmental rental assistance expected in 2023, revenue growth will depend on the payment behavior of its residents. An expected slowdown in job growth can hurt leasing volume in the upcoming period.

Currently, EQR carries a Zacks Rank #3 (Hold). Shares of the company have declined 2.1% over the past six months compared with the 3.1% fall recorded by the industry.


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Stocks Worth Considering

Some better-ranked stocks from the REIT sector are AvalonBay Communities (AVB - Free Report) and BRT Apartments (BRT - Free Report) .

The Zacks Consensus Estimate for AvalonBay Communities’ current-year FFO per share is pegged at $10.43. In the past six months, AVB’s shares have gained 4.6%. Currently, the company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for BRT Apartments’ current-year FFO per share is pegged at $1.55. In the past six months, BRT’s shares have gained 11.8%. Currently, the company flaunts a Zacks Rank #1.

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

See More Zacks Research for These Tickers

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AvalonBay Communities, Inc. (AVB) - free Zacks report >>

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