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Will Equity Residential (EQR) Disappoint in Q1 Earnings?

Zacks

Equity Residential EQR is slated to report first-quarter 2017 results after the market closes on Apr 25.

Last quarter, this Chicago, IL-based residential real estate investment trust (“REIT”) reported an in-line result. Results reflected the adverse impact on net operating income (NOI), stemming from the company’s 2016 huge disposition activity. However, the negative was partly mitigated by enhanced NOI from same-store properties and lease-up NOI.

Moreover, the company met estimates in three occasions and missed in the other, over the trailing four quarters. This resulted in an average negative surprise of 0.33%. The graph below depicts the surprise history of the company.

Equity Residential Price and EPS Surprise

Equity Residential Price and EPS Surprise | Equity Residential Quote


Will Equity Residential be able to overcome challenges this time and post a surprise? Or will a challenging backdrop hurt its financials this earnings season? Let’s see how things have shaped up for this announcement.

Factors to Consider

Equity Residential is poised to benefit from its portfolio-repositioning efforts, household growth, favorable demographics, lifestyle transformation and low unemployment. The company made concerted efforts toward repositioning the portfolio from low barrier-to-entry/non-core markets to high barrier-to-entry/core markets, and opted for substantial sale out of its portfolio in 2016.

However, increasing new apartment supply in majority of the company’s markets, along with declining growth in high-paying jobs, is likely to put pressure on rental rates, thereby adversely affecting the company’s revenue growth this year. In fact, according to the company, the slowdown in same-store revenue growth, which started in 2016, is likely to weaken in 2017 as well. There is also high concession activity amid increased supply.

Moreover, though the assets sale might help the company focus exclusively on its core, high-density urban markets over the long term, the earnings dilution impact from such a move cannot be bypassed in the near term. These issues are anticipated to affect the company’s net operating income in the to-be-reported quarter.

For first-quarter 2017, Equity Residential projects normalized funds from operations (FFO) per share in the range of 71–75 cents.

The Zacks Consensus Estimate for first-quarter FFO per share is currently pegged at 74 cents. However, Equity Residential’s activities during the quarter could not gain analysts’ confidence. Consequently, the Zacks Consensus Estimate remained unchanged over the last 30 days.

Moreover, over the past three months, shares of Equity Residential underperformed the Zacks categorized REIT and Equity Trust – Residential industry. The shares logged in a return of 2.0%, against 3.0% growth of the industry.



Earnings Whispers

Our proven model does not conclusively show that Equity Residential will beat on estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate of 73 cents and the Zacks Consensus Estimate of 74 cents, is -1.35%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Equity Residential’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

We caution against stocks with Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that they have the right combination of elements to report a positive surprise this quarter:

Piedmont Office Realty Trust, Inc. PDM, slated to release first-quarter results on May 2, has an Earnings ESP of +2.33% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

HCP Inc. HCP, scheduled to release earnings on May 2, has an Earnings ESP of +2.08% and a Zacks Rank #3.

EPR Properties EPR, slated to release earnings on May 2, has an Earnings ESP of +0.84% and a Zacks Rank #3.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. 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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