Here's Why Equity Residential (EQR) is an Apt Portfolio Pick
Equity Residential EQR, which has a dominating presence in Boston, New York, Washington, D.C., Seattle, San Francisco and Southern California and is growing its presence in Denver, Atlanta, Dallas/Ft. Worth and Austin, is poised to poised to benefit from its portfolio diversification. It is also banking on technology, scale and organizational capabilities to drive growth.
Late in July, Equity Residential reported second-quarter 2023 normalized funds from operations (FFO) per share of 94 cents, which increased 5.6% year over year and came in line with the Zacks Consensus Estimate. Its rental income of $717.3 million increased 4.4% year over year and also exceeded the consensus mark of $715.1 million.
Mark J. Parrell, Equity Residential’s president and CEO noted that the supply picture in the coastal markets where EQR mainly operates “remains favorable”, plus “demand is steady”, and there is “continued progress in mitigating delinquency in Southern California.”
Analysts also seem bullish on this Zacks Rank #2 (Buy) stock. The Zacks Consensus Estimate for the company’s 2023 FFO per share was revised marginally upward over the past month to $3.77. Shares of Equity Residential have gained 3.8% against the industry’s decline of 1.1% in the past three months.
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Factors That Make Equity Residential a Solid Pick
Strategic Portfolio Positioning and Technology Initiatives: Equity Residential is targeting locations within dynamic markets where affluent long-term renters want to live, work and play. Its portfolio comprises a mixture of urban and suburban properties in the knowledge centers of today’s economy and the resident demographic opts for rent for lifestyle reasons.
Equity Residential is also banking on technology and organizational capabilities to drive innovation, rent growth and improve the efficiency of its operating platform. These include the installation of smart home technology and smart access aimed at elevating customer experience. These efforts are likely to provide Equity Residential with a competitive edge over others.
Healthy Operating Performance: With an affluent tenant base and portfolio diversification efforts, EQR enjoys healthy operating performance. In the second quarter, EQR’s same-store residential revenues were up 5.5% year over year, while expenses increased 5.3%. Consequently, same-store residential net operating income (NOI) expanded 5.6% year over year. The new lease change for its residential same-store properties was up 2.3%, while the renewal rate achieved by EQR was 5.9% for the second quarter. The blended rate for the quarter was 4.3%. The physical occupancy for this portfolio was 95.9%, flat sequentially.
With 304 properties comprising 80,212 apartment units, EQR is likely to witness healthy operating performance in the upcoming period.
Balance Sheet Strength: Equity Residential has a strong balance sheet with ample liquidity and financial flexibility. The net debt to normalized EBITDAre was 4.27X, while the unencumbered NOI as a percentage of total NOI was 88.5% in the quarter, up from 88.3% reported in the prior quarter. Further, an A-rated balance sheet renders the company favorable access to the debt market.
In addition, its trailing 12-month return on equity (ROE) is 7.40% compared with the industry’s average of 4.35%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
With a well-laddered debt maturity schedule, a large pool of high-quality unencumbered assets and strong long-term credit ratings, EQR is well-positioned to capitalize on growth opportunities.
FFO Growth: FFO per share is expected to be up 6.25% in 2023 compared with the industry’s average of 5.01%.
Along with the second-quarter 2023 earnings release, Equity Residential updated the 2023 guidance due to pending favorable refinancing activity and second-half same-store expense projections lower than what was previously expected. EQR now expects 2023 normalized FFO per share in the $3.77-$3.83 band from its earlier guidance of $3.73 to $3.83, up 2 cents at the midpoint.
In the second half of the year, the company expects lower same-store expense growth and has reduced its full-year same-store expense guidance midpoint by 25 basis points to 4.0% from 4.5%. Consequently, the same-store NOI growth projection has been revised to 6.3-7%, up 15 basis points at the midpoint.
Dividend: Solid dividend payouts remain the biggest attraction for REIT investors and Equity Residential remains committed to this purpose. In March 2023, the residential REIT increased its quarterly cash dividend on its common stock to 66.25 cents from 62.50 cents per share paid out earlier, marking a hike of 6% on its annualized dividend.
Over the last decade, the residential REIT has delivered strong dividend growth, while maintaining a conservative payout ratio. For the 2011-2022 period, the company’s dividend witnessed a CAGR of 6.4%. Given the company’s solid operating platform and balance sheet strength compared with industry counterparts, this dividend rate is expected to be sustainable.
Other Stocks to Consider
Some other top-ranked stocks from the residential REIT sector are Invitation Home INVH and American Homes 4 Rent AMH. Both Invitation Home and American Homes 4 Rent carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Invitation Home’s current-year FFO per share has been raised marginally over the past month to $1.79.
The Zacks Consensus Estimate for American Homes 4 Rent’s 2023 FFO per share has moved 1.2% northward over the past month to $1.65.
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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