Is a Beat in Store for Equity Residential (EQR) in Q2 Earnings?
Equity Residential EQR is slated to report second-quarter 2023 results on Jul 27 after the closing bell. The company’s quarterly results are likely 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’s (REIT) normalized FFO per share of 87 cents narrowly missed the Zacks Consensus Estimate of 88 cents. Higher expenses due to repair and maintenance work resulting from severe California rain storms, coupled with increased property-related legal and administrative expenditures, acted as a dampener.
Over the trailing four quarters, Equity Residential surpassed the Zacks Consensus Estimate on two occasions, met on one and missed the same on the other, the average surprise being 1.17%. The graph below depicts this surprise history:
Equity Residential Price and EPS Surprise
Equity Residential price-eps-surprise | Equity Residential Quote
As we approach the release of Equity Residential's second-quarter 2023 earnings report, it is important to examine how this residential REIT is likely to have performed amid the current market conditions.
US Residential Real Estate Market in Q2
Despite cooling rent growth, apartment demand is showing signs of a solid rebound, with net absorption in the second quarter of 2023 nearing surging new supply levels. This stabilizes occupancy rates after a steep decline in 2022.
Per RealPage data, in the second quarter, net demand registered at 83,449 units, and this marked a five-quarter high. While this is still below the record numbers seen during the 2021 boom, it indicates a normalization of apartment demand. This demand rebound coincides with a 50-year high in apartment construction starting to convert into peak completions, with more than 107,000 units completed in the second quarter of this year itself.
However, despite the supply surge, this solid demand is aiding in the mitigation of vacancy spikes in most markets, with U.S. apartment occupancy coming at 94.7% as of June, marking only a 0.1 percentage point decline since January. It marks a notable improvement compared to the occupancy fall of 1.2 percentage points in the first half of 2022 and then an additional 1.4 percentage points in the second half of the year.
However, rent growth remains below normal in 2023, with year-over-year effective asking rent growth at just 1.5%. This is due to apartment operators prioritizing occupancy rates over rents, leading to more options for renters and putting downward pressure on rent growth. Same-store effective asking rents increased only 0.46% between May and June 2023.
Amid this rebound in demand, Equity Residential’s quarterly performance is likely to have been supported by its portfolio diversification efforts in the urban and suburban markets. It has a healthy balance sheet and banks on technology, scale and organizational capabilities to drive growth. EQR’s target resident is more affluent, with lower unemployment and favorable prospects ahead.
In the second quarter, Equity Residential bolstered its 2023 earnings guidance, citing continued strong demand in its markets, particularly New York, and lower-than-expected delinquency rates, mainly in Southern California. The revision reflected optimism from the company’s leadership. President and CEO Mark J. Parrell noted limited new apartment supply in most of EQR's markets as well as high prices and the low availability of single-family homes as favorable factors for their outlook.
Per its May Investor Update presentation, leasing spreads, both for new leases and renewals, have been increasing up until May, setting the stage for a healthy summer leasing season. The blended rate has been showing improvement, with New York showing particularly strong momentum.
Furthermore, Bad Debt, Net, has meaningfully improved beyond expectations due to an improvement in delinquency and an increase in move-outs from residents with high delinquent balances.
We expect second-quarter same-store revenue growth of 5.9% year over year, while expenses are expected to increase by 2.9%. Consequently, same-store net operating income (NOI) is estimated to expand 7.2%. Physical occupancy is expected at 96.2%, suggesting a 30-basis point increase sequentially.
Currently, the Zacks Consensus Estimate for the company’s quarterly revenues stands at $714.8 million, indicating a 4.04% increase year over year.
Before the second-quarter earnings release, the company’s activities were not adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the quarterly normalized FFO per share has remained unchanged in the past month at 94 cents. However, it suggests year-over-year growth of 5.6%.
Here Is What Our Quantitative Model Predicts
Our proven model predicts a 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 chances of an FFO beat, which is the case here.
Equity Residential currently carries a Zacks Rank of 2 and has an Earnings ESP of +0.85%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Other Stocks That Warrant a Look
Here are two stocks from the residential REIT sector — Invitation Homes Inc. INVH and American Homes 4 Rent AMH — you may also want to consider as our model shows that these also have the right combination of elements to report a surprise this quarter.
Invitation Homes, scheduled to report quarterly numbers on Jul 26, has an Earnings ESP of +0.90% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
American Homes 4 Rent is slated to report quarterly numbers on Jul 27. AMH has an Earnings ESP of +3.24% and carries a Zacks Rank of 3 presently.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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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Equity Residential (EQR) : Free Stock Analysis Report
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