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 October and November. Usually demand for apartments slows down during colder months as renters usually prefer less to move in the winter.
Occupancy remained as high as 95.7% in November, reflecting rise of 40 basis points (bps) year over year but fall of 20 bps sequentially. This also marks the highest rate in any November on record. Moreover, annual U.S. rent growth remained decent in the month at 2.9%, same as October.
Amid healthy industry fundamentals, Equity Residential EQR appears to be a promising pick as it is poised for growth with job market gains and favorable demographics. Further, it is anticipated to benefit from portfolio-repositioning efforts in high barrier-to-entry/core markets.
Equity Residential not only beat estimates for funds from operations (FFO) per share in the last reported quarter, but has also been witnessing upward estimate revisions, reflecting analysts’ optimism. Over the past 30 days, the Zacks Consensus Estimate for 2019 and 2020 FFO per share has moved north marginally.
Further, shares of Equity Residential have outperformed the industry it belongs to over the past six months. This Zacks Rank #2 (Buy) company’s shares have gained 6.8% compared with the industry’s 6.5% growth.
Here’s What Might Drive the Stock Higher
Strategic Efforts: Equity Residential focuses on the acquisition and development of residential assets primarily in key markets like Boston, New York, Washington DC, Southern California, San Francisco, Seattle and Denver. The company emphasizes more on the acquisition, development and management of rental apartment properties in urban and high-density suburban markets, which are close to public transportation, dining, culture and education, as these have scope for greater demand. Also, Equity Residential is undertaking efforts to reposition its portfolio from low barrier-to-entry/non-core markets to high barrier-to-entry/core markets. Apart from the buyouts, the company is resorting to timely dispositions. Such efforts are likely to drive its growth over the long term.
Resilient Economy and Favorable Demographic Growth: Decent consumer confidence on the back of a healthy labor market is likely to drive demand for the Equity Residential’s properties. Moreover, demographic growth continues to be strong in the young-adult age cohort, who have a higher propensity to rent. Also, high home-ownership costs in several of the company’s markets are hindering the transition from renter to homeowner. Thus, demand for rental housing units is likely to be high, boosting the company’s prospects.
Healthy Capital Position: On the capital front, Equity Residential is actively taking advantage of the favorable environment. During the third quarter, the company issued $600 million of unsecured notes at a coupon rate of 2.5% and a yield of 2.56%, marking the lowest 10-year yield in the company’s and the REIT industry’s histories. Also, in November, it entered into a $2.5-billion multi-currency revolving credit facility, replacing its prior $2-billion credit agreement. Further, the company has raised the maximum size for its unsecured commercial paper note program from $500 million to $1 billion. Such initiatives are aimed at strengthening the company’s balance sheet, improving liquidity and enhancing financial flexibility.
Consistent Dividend Payer: Solid dividend payouts remain the biggest enticement for REIT investors, and Equity Residential remains committed to boosting shareholder wealth through dividend hikes. In each of the first, second and third quarters of 2019, Equity Residential had paid a dividend of 56.75 cents per share, marking 5.1% hike from the amount paid in 2018. This move was backed by the company’s solid growth in property operations following the economic downturn and considerable upsurge in its available cash flows. Such trends are likely to continue and support its dividend payouts.
Superior Return on Equity (ROE): Equity Residential’s ROE of 7.73% compares favorably with the industry average of 4.39%. This highlights the company’s commendable position over its peers in using shareholders’ funds.
Other Key Picks
Other top-ranked stocks in the REIT space include Spirit Realty Capital, Inc. SRC and Sun Communities, Inc. SUI, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Spirit Realty Capital’s Zacks Consensus Estimate for 2019 FFO per share has moved marginally upward to $3.33 over the past 60 days. Moreover, the stock has surged 48.8% in the year-to-date period.
Sun Communities’ FFO per share estimates for the current year has moved slightly north to $4.89 over the 60 days. Also, the stock has gained 34.2% so far this year.
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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