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Equity Residential (EQR) Up 12% in 6 Months: Will the Trend Last?

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In the peak leasing season, residential real estate investment trusts (REITs) like Equity Residential (EQR - Free Report) have benefited from the healthy demand for residential properties. Also, EQR’s focus on technological advancements to drive margin expansion and a rise in rental revenue have enabled it to ride the growth curve.

Backed by continued strong market demand, particularly in New York, and lower-than-expected delinquency rates, mainly in Southern California, EQR raised its 2023 earnings guidance this May. It now expects normalized funds from operations (FFO) per share in the range of $3.73-$3.83, up from its previous outlook of $3.70-$3.80. Same-store revenue projection was revised upward to 5.5-6.25% from 4.5-6% guided earlier.

Shares of this Zacks Rank #3 (Hold) company have gained 12% in the past six months compared with the industry's growth of 5.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Equity Residential has a dominating presence in the markets of Boston, New York, Washington, DC, Seattle, San Francisco and Southern California, which generally command the highest rents. This has aided stable rental revenue generation over the years.

Keeping in line with the recent migration trends of affluent renters, EQR has made concerted efforts to expand its footprint in the suburban markets, especially in Denver, Atlanta and Austin. Its efforts to capture the renter demand in these growing markets are likely to have had a favorable impact.

In addition, high interest rates and limited single-family home inventory have acted as catalysts, making home ownership costlier and renting apartments a more viable option.

The company is leveraging technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of its operating platform. This is likely to provide EQR competitive edge over others. The company expects to capture incremental net operating income (NOI) in the upcoming period through its operating model. Our estimate for current-year NOI indicates an increase of 4.2% year over year.

Also, Equity Residential’s encouraging development pipeline gears it up for long-term growth.  As of Mar 31, 2023, it had eight projects (consolidated and unconsolidated) under development, comprising 2,519 apartment units.

This residential REIT had $2.5 billion of available liquidity and net debt to normalized EBITDAre of 4.17X as of Mar 31, 2023. Its limited near-term debt maturities and ample financial flexibility have positioned it well to capitalize on growth opportunities.

Moreover, EQR’s trailing 12-month return on equity is 8.17% compared with the industry’s average of 4.62%, indicating that it is more efficient in using shareholders’ funds than its peers.

Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Equity Residential remains committed to the same. 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. Such efforts boost investors’ confidence in the stock.

Nonetheless, the lack of rental relief payments and regulatory issues in 2023 may weigh on EQR’s revenue growth to a certain extent in some regions and markets. Elevated supply in some markets and a high interest rate environment raise concerns.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are Sun Communities (SUI - Free Report) , Invitation Home (INVH - Free Report) and BRT Apartments (BRT - Free Report) . While Sun Communities and Invitation Home carry a Zacks Rank #2 (Buy), BRT Apartment sports a Zacks Rank #1.

The Zacks Consensus Estimate for Sun Communities’ current-year FFO per share has been raised marginally over the past month to $7.34.

The Zacks Consensus Estimate for Invitation Home’s 2023 FFO per share has moved 1.1% northward over the past month to $1.78.

The Zacks Consensus Estimate for BRT Apartments’ ongoing-year’s FFO per share has moved 33.6% upward in the past two months to $1.55.

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

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