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What's in Store for Equity Residential's (EQR) Q3 Earnings?

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Equity Residential EQR is slated to report third-quarter results on Oct 22, after market closes. The company’s results are expected to reflect growth in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Chicago, IL-based residential real estate investment trust (REIT) posted positive surprise of 1.18% in terms of FFO per share. Results displayed improved same-store net operating income (NOI) and lease-up NOI.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate twice, met in another and missed in the other occasion, recording an average positive surprise of 0.31%. The graph below depicts this surprise history:

Equity Residential Price and EPS Surprise

Equity Residential Price and EPS Surprise

Equity Residential price-eps-surprise | Equity Residential Quote

Let’s see how things are shaping up for Equity Residential prior to this announcement.

Factors at Play

The U.S. apartment market has put up an impressive performance in the past few months, successfully banking on the stellar rental-unit demand. While occupancy is hovering at a near-record level, rents continue to register a steady rise.

Per the latest report from real estate technology and analytics firm, RealPage, occupancy reached 96.3% as of third-quarter 2019, with an impressive leasing activity. The figure is not only up from the prior-year period’s 95.9%, but is also close to the all-time high of 96.4% attained almost two decades ago in late 2000. The warmer months definitely witness an uptick in apartment leasing activity. However, this year, the performance was robust, as demand was particularly strong.

With an uptick in occupancy, rent growth also seems to be steady. For new leases, rents were up 1.2% during the third quarter, driving the annual rent growth pace to 3% and monthly rents averaging $1,416. This comes after a solid performance in the April-June quarter.

Equity Residential too is expected to have benefited from its efforts to reposition the company’s portfolio in high barrier-to-entry/core markets. In the to-be-reported quarter, the company is likely to have witnessed healthy demand for its properties amid solid job market and household formation. The company is also likely to have gained from high home-ownership costs in several markets which hinder transition from renter to homeowner.

However, Equity Residential has been experiencing high new supply across a number of its markets. This elevated supply level will likely keep putting pressure on new lease rates, occupancy as well as retention, and affect revenue growth in the upcoming period. Furthermore, concession activity remains high amid higher supply, which remains another concern.

This apart, as Equity Residential is repositioning its portfolio to focus on key markets, the company continues to acquire as well as dispose assets. At times, such transactions lead to dilutive impact in the near term, which cannot be bypassed.  

In fact, for the third quarter, Equity Residential projects normalized FFO per share at 87-91 cents. Results are primarily anticipated to reflect positive impact of higher same-store NOI, together with 2019 and 2018 transaction activities.

The Zacks Consensus Estimate for the third-quarter FFO per share is currently pegged at 88 cents, indicating a projected increase of 6% year over year, backed by healthy revenues. The Zacks Consensus Estimate for the company’s quarterly revenues is pinned at $678.1 million, highlighting anticipated growth of around 3.9% year over year.

In addition to the above, Equity Residential’s activities during the July-September quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for FFO per share for the quarter under review slipped slightly by a cent in the past week.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Equity Residential this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Equity Residential carries a Zacks Rank of 2, its Earnings ESP of -1.02% makes surprise prediction difficult.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Mid-America Apartment Communities, Inc. MAA, scheduled to release earnings on Oct 30, has an Earnings ESP of +1.45% and currently carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Digital Realty Trust, Inc. (DLR - Free Report) , slated to report third-quarter results on Oct 29, has an Earnings ESP of +0.78% and currently carries a Zacks Rank of 3.

Public Storage PSA, set to report quarterly results on Oct 29, has an Earnings ESP of +1.50% and carries a Zacks Rank of 3, currently.

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

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