On Jan 7, 2014, we reiterated our long-term recommendation on Equity Residential (EQR) at Neutral. The decision is based on this apartment real estate investment trust’s (REIT) fundamentals and the current market environment.
Why Neutral?
Equity Residential’s normalized FFO per share in third-quarter 2013 reached 73 cents, in line with the Zacks Consensus Estimate and the prior-year quarter figure. Higher same store net operating income and the benefit from stabilized Archstone properties were offset by the negative impact from disposition activity, common share issuance for the Archstone deal and elevated interest expense.
Equity Residential expects normalized FFO per share to range between 75 cents – 77 cents in fourth-quarter 2013. For full-year 2013, the company raised the lower end of its normalized FFO guidance range and now expects it in the range of $2.83–$2.85 (prior range being $2.80 – $2.85).
Going forward, we believe Equity Residential’s focus on expansion in the high barrier-to-entry regions in the U.S. will drive top-line growth. The Archstone acquisition, which the company along with AvalonBay Communities Inc. (AVB) closed last 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.
Yet, the company has a decent exposure to the Washington D.C. market, which has started experiencing a rise in new supply, thus posing a challenge for base rent growth in the near term. Hence, we believe that the risk/reward profile for the company currently remains balanced and therefore, reaffirmed our Neutral stance.
Over the last 60 days, the Zacks Consensus Estimate for 2013 and 2014 FFO remained stable at $2.84 and $3.10 per share, respectively. Equity Residential now carries a Zacks Rank #3 (Hold).
Other Stock to Consider
Investors interested in the REIT-Equity Trust – Residential industry may consider stocks like BRE Properties Inc. (BRE) and UDR, Inc. (UDR). Both these stocks carry a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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