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Here's Why Equity Residential (EQR) is an Apt Portfolio Pick
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Equity Residential (EQR - Free Report) is well-poised to benefit from the healthy apartment demand in its markets with an affluent tenant base and portfolio diversification efforts. It has a solid balance sheet and is banking on technology, scale and organizational capabilities to drive growth. However, elevated supply, the lack of rent relief and the high interest rate scenario are concerns.
Along with its dominating presence in Boston, New York, Washington, D.C., Seattle, San Francisco and Southern California, Equity Residential is growing its presence in Denver, Atlanta and Austin. It is particularly targeting places where affluent renters prefer to live, work and play. Moreover, 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 4.6% year over year.
Equity Residential is also banking on technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of its operating platform. It is expected to provide the company with a competitive edge over others. It anticipates gaining $30-$35 million of net operating income (NOI) through its operating model. We expect the current-year NOI to increase 4.2% year over year.
Equity Residential has been making efforts toward repositioning its portfolio by disposing of older properties and acquiring newer properties in submarkets with high numbers of affluent renters and favorable long-term demand drivers. Equity Residential also has an encouraging development pipeline.
On the balance sheet front, Equity Residential exited the first quarter of 2023 with $2.5 billion of liquidity and net debt to normalized EBITDAre of 4.17X. Its limited near-term debt maturities and solid credit metrics poise it well to capitalize on growth opportunities.
Equity Residential has been consistent in paying dividends to its shareholders, which remains a solid attraction for REIT investors. 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.
The company’s dividend rate is expected to be sustainable, given its solid operating platform, our funds from operations (FFO) growth projections of 6.1% for 2023 and better balance-sheet strength than the industry counterparts.
Shares of this Zacks Rank #2 (Buy) company have rallied 11% compared with the industry’s growth of 3.4% in the past three months.
Image Source: Zacks Investment Research
However, the struggle to attract renters remains consistent as the supply volumes is expected to remain elevated in a number of its markets. Moreover, the lack of governmental rental assistance in 2023 and rent-control regulations in some of the major markets may weigh on Equity Residential’s revenue growth to a certain extent.
Further, high interest rates are likely to increase the company's borrowing costs, affecting its ability to purchase or develop real estate.
The Zacks Consensus Estimate for AvalonBay Communities’ current-year FFO per share has been revised marginally upward over the last 30 days to $10.47. In the past three months, AVB shares have rallied 12.5%.
The Zacks Consensus Estimate for Centerspace’s current-year FFO per share has been revised upward by 1.7% over the last 60 days to $4.30. In the past three months, CSR shares have rallied 4.6%.
Note: Anything related to earnings presented in this write-up represent FFO — a widely used metric to gauge the performance of REITs.
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Here's Why Equity Residential (EQR) is an Apt Portfolio Pick
Equity Residential (EQR - Free Report) is well-poised to benefit from the healthy apartment demand in its markets with an affluent tenant base and portfolio diversification efforts. It has a solid balance sheet and is banking on technology, scale and organizational capabilities to drive growth. However, elevated supply, the lack of rent relief and the high interest rate scenario are concerns.
Along with its dominating presence in Boston, New York, Washington, D.C., Seattle, San Francisco and Southern California, Equity Residential is growing its presence in Denver, Atlanta and Austin. It is particularly targeting places where affluent renters prefer to live, work and play. Moreover, 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 4.6% year over year.
Equity Residential is also banking on technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of its operating platform. It is expected to provide the company with a competitive edge over others. It anticipates gaining $30-$35 million of net operating income (NOI) through its operating model. We expect the current-year NOI to increase 4.2% year over year.
Equity Residential has been making efforts toward repositioning its portfolio by disposing of older properties and acquiring newer properties in submarkets with high numbers of affluent renters and favorable long-term demand drivers. Equity Residential also has an encouraging development pipeline.
On the balance sheet front, Equity Residential exited the first quarter of 2023 with $2.5 billion of liquidity and net debt to normalized EBITDAre of 4.17X. Its limited near-term debt maturities and solid credit metrics poise it well to capitalize on growth opportunities.
Equity Residential has been consistent in paying dividends to its shareholders, which remains a solid attraction for REIT investors. 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.
The company’s dividend rate is expected to be sustainable, given its solid operating platform, our funds from operations (FFO) growth projections of 6.1% for 2023 and better balance-sheet strength than the industry counterparts.
Shares of this Zacks Rank #2 (Buy) company have rallied 11% compared with the industry’s growth of 3.4% in the past three months.
Image Source: Zacks Investment Research
However, the struggle to attract renters remains consistent as the supply volumes is expected to remain elevated in a number of its markets. Moreover, the lack of governmental rental assistance in 2023 and rent-control regulations in some of the major markets may weigh on Equity Residential’s revenue growth to a certain extent.
Further, high interest rates are likely to increase the company's borrowing costs, affecting its ability to purchase or develop real estate.
Other Stocks to Consider
A couple of other residential REITs worth considering are AvalonBay Communities (AVB - Free Report) and Centerspace (CSR - Free Report) , each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for AvalonBay Communities’ current-year FFO per share has been revised marginally upward over the last 30 days to $10.47. In the past three months, AVB shares have rallied 12.5%.
The Zacks Consensus Estimate for Centerspace’s current-year FFO per share has been revised upward by 1.7% over the last 60 days to $4.30. In the past three months, CSR shares have rallied 4.6%.
Note: Anything related to earnings presented in this write-up represent FFO — a widely used metric to gauge the performance of REITs.