With decent rent growth and increasing occupancy level, the current year’s prime leasing period was encouraging for the U.S. apartment market. Per the latest report from real estate technology and analytics firm RealPage, with an impressive leasing activity in 2019’s peak season, occupancy rate in July reached 96.2%. The figure is not only up 0.4 points year on year, but also marks the highest rate since 2000.
With occupancy pushing up, rent growth also seems to be steady at 3.1%. Annual rent growth this July was approximately 40 basis points (bps) higher year over year and apartment rents averaged $1,414 across the United States. This comes after a solid performance in the April-June quarter.
This came as a breather for residential REITs, including Equity Residential EQR, AvalonBay Communities, Inc. AVB, Essex Property Trust, Inc. ESS, UDR Inc. UDR, because high apartment deliveries had earlier curtailed landlords’ ability to command more rents, and resulted in aggressive rental concessions and moderate pricing power of landlords.
However, not all residential REITs are equally poised to excel now, as location of properties play a crucial role in determining demand for properties. Nonetheless, one such residential REIT stock, which has been displaying strength, is Equity Residential. This Zacks #2 (Buy) Ranked stock has gained around 9.9% over the past three months, outperforming 7.5% growth recorded by the industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, Equity Residential reported second-quarter 2019 normalized funds from operations (FFO) per share of 86 cents, surpassing the Zacks Consensus Estimate by a whisker. Improving results in the East Coast markets and Seattle, as well as strength in the California markets aided its quarterly performance. Backed by healthy demand for its apartment properties, the company raised the full-year guidance for same-store revenues, net operating income (NOI) and normalized FFO per share.
Why Equity Residential is an Attractive Pick
Healthy Market fundamentals: Equity Residential's current focus is on the acquisition, development and management of rental apartment properties in urban and high-density suburban markets which offers solid scope for greater demand. Though economic growth is likely to be less robust this year, the level will likely remain stable, supporting the industry. High consumer confidence, backed by a healthy labor market, is likely to spur demand for the company’s properties. With favorable demographics, a healthy job market, household formation and high home-ownership costs in several markets hindering transition from renter to homeowner, demand for rental housing units will likely be decent, promising solid prospects for Equity Residential.
Balance sheet Strength and High ROE: Equity Residential maintains a solid balance sheet and has financial flexibility. The company exited second-quarter 2019 with cash and cash equivalents of around $251.3 million, up from the $29.4 million recorded at the end of the previous quarter. Moreover, the company issued $600 million of unsecured notes at a coupon rate of 3%. Notably, its current cash-flow growth of 8.80% compares favorably with the 8.69% increase estimated for the industry. This healthy financial position is likely to help the company strengthen and expand its business. Additionally, Equity Residential’s trailing 12-month return on equity (ROE) of 7.21% compares favorably with the industry’s 3.76%. This indicates the company’s growth potential and reflects its superior efficiency in using shareholders’ funds.
Dividend Payouts: Solid dividend payouts remain arguably the biggest attraction for REIT investors and Equity Residential remains committed to this purpose. For the first and second quarters of 2019, the company announced a dividend of 56.75 cents per share in each quarter, reflecting an annualized increase of 5.1% from the amount paid in 2018. This is backed by the company’s solid growth in property operations following the recent economic downturn and a substantial reduction in its development activity, which led to a material upsurge in the available cash flows. Such trends are likely to continue and support the company’s dividend payouts.
Estimate revisions: In addition, the trend in current-year FFO per share estimate revisions indicates a favorable outlook for the company. In fact, the stock has seen the Zacks Consensus Estimate for 2019 FFO per share being revised 1.5% upward in a month’s time. Given its progress on fundamentals and positive estimate revisions, the stock is likely to keep performing well in the quarters ahead.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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