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Earnings Preview: Equity Residential

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Equity Residential (EQR - Free Report) , a multifamily real estate investment trust (REIT), is scheduled to report its fiscal 2011 third quarter earnings results after the market closes on October 26. The current Zacks Consensus Estimate for the third quarter is 62 cents per share, representing a year-over-year growth of 11.8%.

Second Quarter Recap

Equity Residential reported second quarter 2011 FFO (fund from operations) of 58 cents per share, which was in line with the Zacks Consensus Estimate. 'Fund from Operations' is a widely used metric to gauge the performance of REITs and is obtained after adding depreciation and amortization and other non-cash expenses to net income.

Total revenues during the reported quarter were $498.1 million compared with $447.4 million in the year-earlier period. Same-store quarterly revenues (which included 105,730 apartment units) increased 4.9% on a year-over-year basis. Same-store net operating income (NOI) during the quarter increased 7.4% year over year.

Agreement of Analysts

In the last 7 days, there were no earnings estimate revisions for the third quarter as none of the 20 analysts covering the stock has neither increased nor decreased the same. For fiscal 2011, the story is similar as none of the 17 analysts covering the stock has revised the earnings estimates in either direction. This demonstrates that the analysts are extremely circumspect about the outlook of the company.

Magnitude of Estimate Revisions

Earnings estimates have remained steady in the last 7 days for the third quarter at 62 cents. For fiscal 2011, earnings estimates have also remained stagnant at $2.42 per share during the same time period, meaning that analysts were overtly cautious about the long-term performance of the company. 

Moving Forward

We presently have a ‘Neutral’ recommendation on Equity Residential, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for UDR Inc. (UDR - Free Report) , one of the competitors of Equity Residential.

Based in Chicago, Illinois, Equity Residential is the largest fully integrated publicly traded multifamily REIT in the U.S. The company has a portfolio of high-quality assets in some of the most desirable markets across the country, which include New York, Boston, Washington D.C., Seattle, San Francisco and Los Angeles.

As "echo boomers" (children of the Baby Boomer generation) opt to move out on their own and more renters decide to part ways with family and roommates, single-family homeownership rates across the U.S. have witnessed a continuous decline and demand for multifamily rental apartments have surged.

With new supply remaining muted until late 2013 or 2014, we expect the multifamily sector to remain comparatively stable in the upcoming quarters, as renting has emerged as the only viable option for customers who could not get mortgage loans or are unwilling to buy a house at present.

However, Equity Residential's acquisition binge involves significant upfront operating expenses with limited near-term profitability. New properties usually take time to generate revenues, and will continue to drag margins till they get established. Consequently, we remain neutral on the stock for the long-term.

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