Equity Residential Stock Up 10.3% YTD: Will the Trend Last?

Shares of Equity Residential EQR, currently carrying a Zacks Rank #3 (Hold), have rallied 10.3% in the year-to-date period, outperforming the industry's growth of 3.2%.

Equity Residential boasts a portfolio of high-quality apartment units in some of the key markets of the United States that have an affluent tenant base.

For the full-year 2024, Equity Residential expects normalized FFO per share in the band of $3.80-$3.90. The company's full-year guidance incorporated projections for same-store revenue growth of 2-3%, an expense increase of 3.5-4.5% and an NOI expansion of 1-2.6%. Also, physical occupancy is expected at 95.9%.

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In May, EQR announced that it expects its 2024 same-store revenues, net operating income (NOI) and normalized FFO per share results toward the higher end of its existing guidance ranges. This latest projection came with the residential REIT experiencing sustained high demand across its market, which is pushing physical occupancy above expectations. Also, strong pricing power in its East Coast markets and continued recovery in its West Coast markets are tailwinds.

Analysts seem bullish on this Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for its 2024 and 2025 FFO per share has moved marginally upward over the past two months to $3.88 and $4.00, respectively.

Let us now decipher the factors behind the surge in the stock price and also check whether this trend will last.

Equity Residential has a dominating presence in Boston, New York, Washington, D.C., Seattle, San Francisco and Southern California. The residential REIT is also growing its presence in Denver, CO; Atlanta, GA; Dallas/Ft. Worth and Austin, TX. It is particularly targeting places 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 not rent-burdened, creating the ability to raise rents more readily in good economic times and reducing risk during downturns.

In its strategy, EQR is taking into consideration the hybrid working environment and the recent migration trends of affluent renters and opting for the acquisition and development of properties in suburban locations of its established markets and adding select new markets like its entry into Atlanta, GA, and Austin, TX. Moreover, given the high cost of homeownership, especially relative to rents, the transition from renter to homeowner is difficult in its markets, making renting apartment units a viable option.

Equity Residential is also banking on technology and organizational capabilities to drive rent growth and improve the efficiency of its operating platform. Such efforts are likely to provide Equity Residential with a competitive edge over others and drive growth in net operating income (NOI) in the upcoming period.

Equity Residential noted that in May (preliminary data as of May 24, 2024), physical occupancy reached 96.5%, up from 96.3% in the first quarter of 2024 and 95.8% in the fourth quarter of 2023. The blended rate for May is 2.9%, improving from 1.6% in the first quarter and 0.7% in the fourth quarter. Particularly, the new lease change was 0.4% in May against a decline of 2.2% in the first quarter of 2024 and a fall of 4.6% in the fourth quarter of 2023.

The company is making efforts toward repositioning its portfolio, selling older properties, properties in jurisdictions with challenging regulatory environments or in submarkets where the company is over-concentrated and acquiring newer properties in submarkets with high numbers of affluent renters, favorable long-term demand drivers and manageable forward supply. Such efforts are likely to drive EQR's growth over the long term.

Equity Residential has an encouraging development pipeline. Over the next few years, the developments underway are expected to deliver meaningful incremental net operating income (NOI) upon completion and stabilization and are expected to fuel FFO and NAV growth.

Equity Residential has a healthy balance sheet with ample liquidity and financial flexibility. This will help it pursue growth opportunities and enjoy greater liquidity for day-to-day operations. As of Mar 31, 2024, the company had nearly $2.3 billion of liquidity through cash and cash equivalents and the available borrowing capacity on its revolving credit facility. It has a well-laddered debt maturity schedule with no significant debt maturities until 2025.

EQR ended the first quarter of 2024 with a net debt to normalized EBITDAre of 3.97X. Unencumbered NOI as a percentage of the total NOI was 89.6% in the quarter. Further, an A-rated balance sheet renders the company access to the debt market at favorable rates.

With manageable debt maturities, solid credit metrics, significant unencumbered assets and sufficient access to capital markets at favorable rates, Equity Residential seems well-positioned to meet its future obligations as well as ride the growth curve.

Solid dividend payouts remain the biggest attraction for REIT investors, and Equity Residential remains committed to this purpose. Over the last decade, the residential REIT has delivered strong dividend growth while maintaining a conservative payout ratio. Per the June Investor Update, for the 2011-2024 period, the company's dividend is expected to witness a compound annual growth rate of 6%.

Therefore, given the company's solid operating platform, our FFO per share growth projections and balance sheet strength compared with industry counterparts, this dividend growth rate is expected to be sustainable over the long run.

However, the elevated supply of apartments in some of Equity Residential's markets and an expected moderation in rent growth act as deterrents. High interest rates add to the company's concerns.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Invitation Homes INVH and Essex Property Trust, Inc. ESS. Invitation Homes and Essex Property Trust each carry a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Invitation Home's current-year FFO per share has been raised marginally over the past two months to $1.88.

The Zacks Consensus Estimate for Essex Property Trust's 2024 FFO per share has moved marginally northward over the past month to $15.40.

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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