This Giant Residential REIT Just Posted A Strong Quarter. Is It Time For You To Invest?

Equity Residential EQR has just released a strong earnings report for Q2 2024. That will come as music to the ears of both Equity shareholders and observers of the multifamily residential real estate REIT sector. Although the multifamily REIT sector has traditionally offered strong performance for investors seeking passive income, the specter of increased borrowing costs has cast a shadow over the entire REIT sector.

However, Equity Residential's strong performance might be a sign that REITs have adjusted to elevated borrowing costs and are beginning to find their equilibrium going forward. That's not to say that REIT operators wouldn't welcome a rate cut, but Equity Residential's multifamily residential portfolio has some significant advantages working in its favor. First is the fact that Equity has something of a captive audience.

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It has a massive portfolio, and although it's heavily diversified, many of Equity Residential's assets are strategically located in cities with high rents and even higher home prices. Most of the 77,054 units in Equity's portfolio are in markets like Washington, D.C., Southern California, Northern California, New York City, and Boston. The high cost of housing in these markets, plus the fact that they are major population centers, creates a steady tenant base for Equity Residential.

Their report shows a portfolio-wide occupancy rate of 96.4%, which is an improvement of 0.5% over Q2 2023's occupancy rate of 95.9%. Many investors consider 96% occupancy the "Goldilocks zone" that allows assets to service their debts and generate income for investors. A portfolio-wide average of 96% means many of the assets in Equity Residential's portfolio performed well for their investors.

It certainly played a hand in Equity Residential's Earnings Per Share (EPS) increasing by an eye-opening 27% from $0.37 in Q2 2023 to $0.47 in Q2 2024. Rental income for the quarter was roughly $734,163,000, surpassing Q2 2023's $717,309,000. Net income also increased from Q2 2023's $144,862,000 to $183,555,000. Equity Residential's share price jumped to $71.29 on the news, and the 3.79% dividend yield is $2.70 per share.

Equity Residential also raised its expectations for several key metrics. The earnings report revealed the REIT had increased its EPS estimates for Q3 from $0.49 to $0.53. It also increased the FFO per share estimate from $0.94 to $0.98. It was a solid quarter by almost any measure. Data firm Alreits estimates that Equity Residential accounts for a massive 21% of the multifamily residential REIT sector, which makes these results even more encouraging for investors.

Equity Residential President and CEO Mark J. Parrell was understandably pleased with his REIT's performance. He released a statement praising Equity's performance and expressing optimism for the future, which said in part, “We are pleased to report results that exceeded our expectations and to be seeing positive forward momentum in our business which led us to significantly improve our guidance."

It's a safe bet that Equity Residential shareholders will be pleased with the REIT's quarterly results. This, of course, begs the question: Is an investment in Equity Residential right for you? Whether an individual offering is right for you always depends on a multitude of factors. With that said, if you were specifically looking for a residential REIT to invest in for both share value appreciation and passive income, Equity Residential is certainly one to consider.

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They have a very large portfolio spread across a diverse group of high-performing real estate markets. However, no offering is perfect, and potential threats loom on the horizon of every investment. In the case of multifamily REITs, one such threat is the proliferation of rent control laws and the growing popularity of enacting them where they don't exist.

President Biden recently proposed putting an annual 5% cap on rent increases for residential property owners who operate more than 50 units. That legislation is aimed directly at REIT profits and even if it doesn't pass, legislators will continue pushing for similar measures. The law of gravity is another potential threat to REIT profits. Residential REITs have remarkably raised rents over the last several decades.

That's been a boon to investors, but there is a resistance point in every business where consumers can't or won't pay above a certain price. The necessity of housing has made that resistance point harder to find for residential REITs, but if rents continue outgrowing tenant wages, rents will hit that resistance point. So, REITs may continue to deliver, but they may not be able to achieve 5%-10% annual rent increases in perpetuity.

Keep these factors in mind, but there can be no doubt that Equity Residential has been a solid performer for its investors. That's both in the last quarter and over the last several decades. This is a well-run REIT with a good asset mix. With the caveat that risk always exists in every investment, Equity Residential certainly has the potential to be a long-term winner in your portfolio.

Disclosure: Share prices and other data points change constantly due to numerous factors. Depending on when you read this article, there may be some variance between the most current information and the amounts quoted above. 

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