Here's Why Equity Residential (EQR) is an Apt Portfolio Pick
Equity Residential EQR is one of the leading, fully integrated, publicly-traded multi-family real estate investment trusts (REITs) in the United States. It is well-positioned to benefit from the improving demand for apartment living, its portfolio rebalancing efforts in the urban and suburban markets and a strong balance sheet.
This residential REIT has a dominating presence in Boston, New York, Washington, DC, Seattle, San Francisco and Southern California and has been expanding its presence in Denver, Atlanta and Austin. The recent migration trends of affluent renters, who are opting for suburban locations, have made EQR diversify its portfolio and increase its reach to the suburban markets. Its efforts to capture the renter demand in these markets are likely to pay off well.
Analysts seem bullish on this Zacks Rank #2 (Buy) stock. The Zacks Consensus Estimate for the company’s 2022 funds from operations (FFO) per share indicates a favorable outlook, with estimates having been revised marginally upward over the past month to $3.51.
Shares of Equity Residential have gained 6.3% compared with its industry’s growth of 3.3% in the past three months.
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Factors That Make Equity Residential a Solid Pick
Healthy Operating Performance: With the pandemic’s impact waning, the demand for rental apartment units has again revived. Per Equity Residential’s August operating update, it concluded a strong leasing season driven by healthy demand and pricing for its apartment units. As a result, the same-store revenue growth is on track to either match or surpass EQR’s projections mentioned in its second-quarter 2022 earnings release.
Further, Equity Residential’s physical occupancy remained high through June and July at 96.7% and 96.5%, respectively. The preliminary physical occupancy rate for August was 96.6%.
With 310 properties comprising 80,227 apartment units, EQR is likely to witness healthy operating performance in the upcoming period.
Acquisitions & Development: Equity Residential has been taking steps toward repositioning its portfolio by disposing of properties that are old and over-concentrated in the submarkets. It is then replacing those properties by acquiring newer properties in the submarkets with higher affluent renters, favorable long-term demand drivers and manageable forward supply.
Recently, EQR and Toll Brothers, through the latter’s Toll Brothers Apartment Living (“TBAL”) rental division, unveiled plans to develop three new luxury rental communities in the Dallas/Ft. Worth metropolitan area. This move is part of the strategic relationship established in 2021 between both parties and will mark their first three joint ventures.
Further, in 2021, EQR acquired 17 properties consisting of 4,747 apartment units worth $1.7 billion. About 82% of these acquisitions were focused on the expansion markets.
Hence, amid the rising demand for rental apartment units, Equity Residential’s acquisition efforts and development initiatives bode well for its growth.
Balance Sheet Strength: Equity Residential has a strong balance sheet with ample liquidity and financial flexibility. The net debt to normalized EBITDAre was 5.01X compared with 5.38X in the first quarter, while unencumbered NOI as a percentage of the total NOI increased to 88.4% from 87.5%. 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 11.39% compared with the industry’s average of 5.52%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
With a well-laddered debt maturity schedule and a strong financial footing, EQR is well-positioned to capitalize on growth opportunities.
FFO Growth: The FFO per share is expected to be up 17.39% for 2022 compared with the industry’s average of 12.04%.
Moreover, backed by robust demand and continued strong cost controls, management increased the guidance for 2022. It expects normalized FFO per share in the band of $3.48-$3.58, indicating an 8-cent increase at the midpoint from the prior guidance.
Dividend: EQR has consistently paid dividends to its shareholders, which remains a huge attraction for REIT investors. In March 2022, the residential REIT announced an increase in its annualized dividend by 3.7% to $2.50 per share. Considering its robust balance sheet position compared with its peers and a recovery in business, the company is likely to maintain its dividend payout in the forthcoming quarters.
Other Stocks to Consider
Some other top-ranked stocks from the residential REIT sector are Independence Realty Trust IRT and BRT Apartments BRT.
The Zacks Consensus Estimate for Independence Realty Trust’s current-year FFO per share has moved 1.9% northward in the past two months to $1.08. IRT carries a Zacks Rank #2 at present.
The Zacks Consensus Estimate for BRT Apartments’ ongoing year’s FFO per share has been raised 5.8% over the past month to $1.63. Currently, BRT sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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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