Equity Residential EQR is likely to benefit from its high-quality, diversified portfolio targeting affluent renters. The strategic portfolio repositioning and technological enhancements are likely to aid the company. However, the elevated supply of residential rental units in some of its markets is a concern.
In September 2024, EQR reported that it witnessed healthy demand and pricing for its apartment units during the primary leasing season. The company reiterated its earlier guidance of blended rate growth between 2% and 3% for the third quarter of 2024 and a physical occupancy level of 96.2% for the full year 2024.
EQR added that its same-store revenue growth would be able to meet its previous guided range, as per its second-quarter earnings release.
What’s Aiding Equity Residential?
EQR is targeting places where affluent renters who are not rent-burdened prefer to live, yielding stable revenues. In its strategy, the company is taking into consideration the hybrid working environment and the recent migration trends of affluent renters. In this consideration, EQR is 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.
Equity Residential is banking on technology and organizational capabilities to drive rent growth and improve the efficiency of its operating platform. Such efforts are likely to provide EQR with a competitive edge over others and drive growth in net operating income (NOI) in the upcoming period. We estimate the same-store NOI to increase by 3.3% for 2024.
EQR is making efforts toward repositioning its portfolio, selling older properties and acquiring newer properties in submarkets with high numbers of affluent renters, favorable long-term demand drivers and manageable forward supply. In the first half of 2024, the company acquired a 160-apartment unit property in suburban Boston. Following the conclusion of the second quarter, EQR purchased two properties with 644 apartment units located in Atlanta and Dallas/Ft. Worth. During the first half of 2024, the company disposed of five properties consisting of 831 apartment units. Such efforts are likely to drive the company’s growth over the long term.
Equity Residential has a healthy balance sheet with ample liquidity and financial flexibility. As of June 30, 2024, the company had nearly $2.3 billion of liquidity. It has a well-laddered debt maturity schedule with no significant debt maturities until 2025. EQR ended the second quarter of 2024 with a net debt to normalized EBITDAre of 3.92X, and the unencumbered NOI percentage was 89.6%, rendering the company access to the debt market at favorable rates.
Solid dividend payouts remain the biggest attraction for REIT investors, and Equity Residential remains committed to this purpose. 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%. We estimate the FFO to grow by 2.5% for 2024. Given EQR’s solid operating platform, FFO growth projections and balance sheet strength, this dividend is expected to be sustainable in the near term.
What’s Hurting Equity Residential?
The struggle to lure renters for residential REITs, including AvalonBay AVB, Essex Property ESS and Equity Residential, will persist as the supply volume of residential units is expected to remain elevated in some markets where they operate.
With the ongoing construction standing at a high level, a sizeable number of apartment deliveries are anticipated in the upcoming period. This is likely to weigh on the company’s ability to increase the rent, restricting its growth momentum to a certain extent.
Rent-control regulations in some major markets might curb the company’s growth tempo. The adoption of or changes in rent control or rent stabilization regulations and eviction restrictions are likely to have an adverse effect on its operations and property values. As a result, Equity Residential may find it difficult to raise rents or charge certain fees.
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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