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Earnings Preview: Equity Residential

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Equity Residential, (EQR - Free Report) , a real estate investment trust (REIT), is scheduled to report its second quarter 2012 earnings results after the closing bell on July 25. The current Zacks Consensus Estimate of 68 cents for the quarter represents year-over-year growth of 13.1%. For second quarter 2012, Equity Residential expects recurring FFO in the range of 65 cents to 69 cents per share.

First Quarter Recap

Equity Residential reported funds from operations (FFO) of $191.8 million or 60 cents per share in the first quarter of 2012 compared to $176.9 million or 56 cents per share in the year-ago quarter. Funds from operations, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.

Total revenue during the quarter was $527.7 million versus $466.4 million in the year-earlier period. Total revenue during the reported quarter was almost in line with the Zacks Consensus Estimate.

Agreement of Analysts

In the last 7 days, none of the analysts have revised their earnings estimates for  2012 and  2013. This signifies that the analysts are cautious about both the short- and long-term earnings prospect of the company.

Magnitude of Estimate Revisions

For full year 2012 and 2013, the Zacks Consensus Estimates have remained constant over the last 7 days at $2.72 per share and $3.00, respectively, implying that the analysts are circumspect about the long-term performance of the company.

Our Recommendation

Based in Chicago, Illinois, Equity Residential has a portfolio of high-quality assets in some of the most desirable markets across the country like New York, Boston, Washington D.C., Seattle, San Francisco and Los Angeles.

The home ownership cost in most of the markets of Equity Residential is significantly higher than the national average. In addition, financing for new apartment construction has become relatively harder due to the challenging macroeconomic environment, leading to a dearth of new supply. This provides an upside potential for the company as multi-family fundamentals have comparatively held up during the economic downturn.

However, the continuous acquisition spree of Equity Residential involves significant upfront operating expenses with limited near-term profitability. New properties usually take time to generate revenues, and will continue to drag down margins till they get established.

Equity Residential currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Apartment Investment & Management Co (AIV - Free Report) carries a Zacks #3 Rank, implying a short-term Hold rating.

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