of stocks Equity Residential (NYSE:EQR) currently carries a Zacks Rank #3 (Hold) and has risen 10.3% year-to-date, outperforming the industry’s growth of 3.2%.
Equity Residential boasts a portfolio of high-quality apartment units in some of the nation’s top markets with an affluent tenant base.
Equity Residential expects normalized FFO per share to be in the range of $3.80 to $3.90 for 2024. The company’s full-year guidance incorporates projections for same-store sales growth of 2% to 3%, expenses growth of 3.5% to 4.5%, and NOI growth of 1% to 2.6%. It also expects occupancy to be 95.9%.
Image source: Zacks Investment Research
EQR announced in May that it expects same-store sales, net operating income (NOI) and normalized FFO per share performance to be near the high end of its existing guidance ranges in 2024. The updated forecast comes as the residential REIT is experiencing sustained high demand across markets and better-than-expected actual occupancy rates, as well as strong pricing power in East Coast markets and a continued recovery in West Coast markets.
Analysts appear to be bullish on this Zacks Rank #3 (Hold) company, as the Zacks Consensus Estimate for the company’s 2024 and 2025 FFO per share has increased slightly over the past two months to $3.88 and $4.00, respectively.
So let’s unravel what’s driving the stock price surge and see if the trend will continue.
Equity Residential has a strong presence in Boston, New York, Washington DC, Seattle, San Francisco and Southern California. The residential REIT also has a growing presence in Denver, Colorado, Atlanta, Georgia, Dallas/Fort Worth and Austin, Texas. It specifically targets locations where affluent renters prefer to live, work and play. The company’s affluent residents work in the highest-earning sectors of the economy and are rent-free, allowing it to more easily raise rents during good times and reduce risk during economic downturns.
EQR’s strategy is to take into account the hybrid workforce and recent migration trends of affluent renters, choosing to acquire and develop properties in the suburbs of existing markets while adding select new markets, such as entering Atlanta, Georgia, and Austin, Texas. Additionally, given the high cost of homeownership, especially relative to rent, the transition from renter to homeowner is difficult in its markets, making apartment rentals a viable option.
Equity Residential is also focusing on technology and organizational capabilities to drive rent growth and improve the efficiency of its operating platform, which are expected to give Equity Residential a competitive advantage over its competitors and drive its Net Operating Income (NOI) growth in future periods.
Equity Residential noted that physical occupancy in May (preliminary data as of May 24, 2024) reached 96.5%, up from 96.3% in Q1 2024 and 95.8% in Q4 2023. The blended rate for May was 2.9%, improving from 1.6% in Q1 and 0.7% in Q4. Notably, new lease modifications were down 0.4% in May compared to a decrease of 2.2% in Q1 2024 and a decrease of 4.6% in Q4 2023.
The company has been restructuring its portfolio by selling older properties, properties in jurisdictions with challenging regulatory environments, or submarkets in which it is overly concentrated, and acquiring new properties in submarkets with more affluent renters, favorable long-term demand drivers, and manageable future supply. Such efforts should drive EQR’s long-term growth.
Equity Residential has a promising development pipeline: Over the next few years, ongoing developments are expected to provide significant net operating income (NOI) accretion once completed and stabilized, driving FFO and NAV growth.
Equity Residential has a strong balance sheet with ample liquidity and financial flexibility, which allows it to pursue growth opportunities and enjoy greater liquidity in its day-to-day operations. As of March 31, 2024, the company had approximately $2.3 billion in liquidity through cash and cash equivalents and the available borrowing capacity of its revolving credit facility. Its debt maturity schedule is appropriately stratified, with no significant debt maturities through 2025.
EQR ended the first quarter of 2024 with a net debt to normalized EBITDA ratio of 3.97x. Unencumbered NOI as a percentage of total NOI for the quarter was 89.6%. Additionally, its A-rated balance sheet allows the company to access the debt markets at favorable rates.
With manageable debt maturities, solid credit metrics, significant unencumbered assets and ample access to capital markets at favorable interest rates, Equity Residential appears well positioned to meet future obligations and ride its growth curve.
Solid dividend payments remain a top attraction for REIT investors, and Equity Residential remains committed to this objective. Over the past decade, the residential REIT has delivered solid dividend growth while maintaining a conservative payout ratio. According to its June investor update, the company’s dividend is expected to achieve a compound annual growth rate of 6% from 2011 to 2024.
Therefore, given the company’s solid fundamentals, projected FFO per share growth, and balance sheet strength relative to industry peers, we expect this dividend growth rate to be sustainable over the long term.
But an oversupply of apartments in some markets is acting as a deterrent to Equity Residential, as rent growth is expected to slow. High interest rates also add to the company’s concerns.
Stocks to consider
Top stocks in the REIT sector include: Invitation Home (NYSE:INVH) and Essex Property Trust Co. (NYSE:ESS). Invitation Homes and Essex Property Trust each carry a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for Invitation Home’s FFO per share for the current fiscal year has moved slightly higher over the past two months to $1.88.
The Zacks Consensus Estimate for Essex Property Trust’s 2024 FFO per share has moved slightly higher over the past month to $15.40.
Notes: All references to revenue in this article represent earnings from operations (FFO), a widely used metric to measure REIT performance.
To read this article on Zacks.com click here.
