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What's in Store for Equity Residential's (EQR) Q4 Earnings?

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Equity Residential (EQR - Free Report) is slated to report fourth-quarter and full-year 2019 results on Jan 28, after market close. The company’s quarterly performance is likely to reflect growth in both revenues and funds from operations (FFO) per share.

In the last reported quarter, this Chicago, IL-based residential real estate investment trust (REIT) posted a positive surprise of 3.41% in terms of FFO per share. Results reflected higher same-store net operating income (NOI) and lease-up NOI, and other non-same store NOI.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate thrice and missed in the other occasion, the average positive surprise being 1.16%. 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 latest figures from real estate technology and analytics firm RealPage, Inc. RP suggest that following a robust prime leasing season in 2019, the U.S. apartment rental market put up a decent show in the December-end quarter, amid demand for apartments generally slowing down during the colder months as renters usually prefer less to move in winters.

Occupancy at the end of fourth-quarter 2019 remained as high as 95.8%, reflecting a 40-basis-point expansion, year on year. Moreover, rents for new-resident leases were up 2.8% in 2019, hovering around the 3% level that the apartment market has been witnessing since late 2016.

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

Moreover, in November, Equity Residential fortified its financial position by entering into a $2.5-billion multi-currency revolving credit facility, replacing the prior $2-billion credit agreement. The company has also raised the maximum size for its unsecured commercial paper note program from $500 million to $1 billion. Such strategic measures provide enhanced financial flexibility.

However, Equity Residential has been witnessing high new supply across a number of its markets. This elevated supply level will likely keep straining lease rates, occupancy as well as retention, and impede revenue growth. Furthermore, occupancy and same-store revenues are likely to moderate in sync with the usual seasonal activity.

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.  

For the fourth quarter, Equity Residential projects normalized FFO per share at 87-89 cents. For full-year 2019, the company expects normalized FFO per share of $3.46-$3.48, backed by same-store portfolio revenue growth of 3.3%, physical occupancy of 96.4%, and NOI change of 3.1%.
The Zacks Consensus Estimate for the fourth-quarter FFO per share is currently pegged at 89 cents, indicating a 6% year-over-year improvement, backed by solid revenues. The Zacks Consensus Estimate for the company’s quarterly revenues is pinned at $685 million, suggesting anticipated growth of around 5% year on year.

However, Equity Residential’s activities during the October-December quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for the quarter’s FFO per share remained unchanged over the past 30 days.

Also, the Zacks Consensus Estimate for the 2019 FFO per share is currently pinned at $3.47, unaltered for the past 60 days. Full-year revenues are projected at $2.7 billion.

Here is what our quantitative model predicts:

Equity Residential does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: The Earnings ESP for Equity Residential is 0.00%.

Zacks Rank: Equity Residential currently carries a Zacks Rank of 2 (Buy), which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

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:

Apartment Investment and Management Company AIV, slated to release fourth-quarter earnings on Jan 30, has an Earnings ESP of +0.77% and carries a Zacks Rank of 2, at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boston Properties, Inc. BXP, set to report quarterly numbers on Jan 28, has an Earnings ESP of +1.08% and carries a Zacks Rank of 2, currently.

AvalonBay Communities, Inc. AVB, scheduled to release October-December quarter results on Feb 5, has an Earnings ESP of +0.46% and currently holds a Zacks Rank #3.

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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