On Sep 27, 2013, we reaffirmed our long-term recommendation on Equity Residential (EQR) at Neutral. Going forward, we believe that the company’s results would benefit from its solid fundamentals, expansion efforts in high barrier-to-entry regions in the U.S. and a favorable demographic trend that continue to positively impact the demand of apartments.
Yet, the company’s substantial exposure to the Washington DC market that is exhibiting signs of stress as well as cut throat competition and rising interest rates remain matters of concern.
Why Neutral?
Equity Residential’s core funds from operations (FFO) per share in second-quarter 2013 reached 71 cents, in line with the Zacks Consensus Estimate and up 3 cents year over year. Quarterly results at this apartment real estate investment trust (REIT) were primarily driven by higher same store net operating income and the benefit from stabilized Archstone properties, partly offset by the negative impact from disposition activity, common share issuance for the Archstone deal and elevated interest expense.
Going forward, we believe Equity Residential’s focus on expansion in the high barrier-to-entry regions in the U.S. will drive its top-line growth. The Archstone acquisition, which the company along with AvalonBay Communities Inc. (AVB) closed in February, further reinforces that.
Also, the echo boomers population continues to raise the demand for apartments. Alongside, with a decent balance sheet position, the company is well poised to capitalize on this favorable trend through acquisitions and developments.
However, this continuous acquisition spree involves significant upfront expenses that drag down near-term profitability till the properties get established. The company also has a decent exposure to the Washington DC market that is expected to experience a rise in new supply in the quarters ahead leading to a challenge for base rent growth going forward.
Over the last 30 days, the Zacks Consensus Estimate for 2013 FFO per share increased 0.4% to $2.77. However, for 2014 it moved south 0.3% to $3.08 per share. The stock currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Other REIT stocks that look promising are Sotherly Hotels Inc. (SOHO) and Campus Crest Communities Inc. (CCG). While Sotherly Hotels carries a Zacks Rank #1 (Strong Buy), Campus Crest has a Zacks Rank #2 (Buy).
Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.
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