What's in Store for Equity Residential's (EQR) Q3 Earnings?

Equity Residential EQR is slated to report third-quarter 2020 results on Oct 27, after market close. The company’s results will likely reflect year-over-year declines in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Chicago, IL-based residential real estate investment trust (REIT) delivered a positive surprise of 3.61% in terms of FFO per share. Results reflected a decline in same-store expenses on impressive expense control and continued enhancements in its operating platform.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on three occasions and met in the other, the average surprise being 2.32%. The graph below depicts this surprise history:

Equity Residential Price and EPS Surprise

Equity Residential Price and EPS Surprise

Equity Residential price-eps-surprise | Equity Residential Quote

Let’s see how things have shaped up for Equity Residential prior to this announcement.

Key Factors

The U.S. apartment leasing rebounded in the third quarter. This bouncing back was mainly driven by increase in leasing activity in the Sun Belt region. It also indicated occurrence of job growth after the slump earlier in the year, which facilitated new household formation reappearance in a number of markets.

Per the latest report from real estate technology and analytics firm RealPage RP, across the 150 largest U.S. markets, the occupied apartment count increased by 146,517 units, on net, during the third quarter. This marks the largest third quarter demand figure since before the Great Recession. Moreover, product absorption pace in the third quarter was more than four times the minimal demand for about 34,000 apartments recorded in the second quarter, according to that report.

However, this bouncing back was not uniform. Though the Sun Belt markets staged a recovery, a number of gateway markets suffered net move-outs during the to-be-reported quarter, and urban core neighborhoods struggled the most.

Amid these, Equity Residential, which focuses on rental apartment properties in urban and high-density suburban communities, is banking on technology and organizational capabilities to drive innovation and improve efficiency of its operating platform. This included adoption of new technologies for both sales and service. Such technological enhancements have become all the more essential in this social-distancing era, as the virus outbreak required a quick shift to virtual operations for the continuity of normal business operations. This is likely to have provided Equity Residential a competitive edge over others in the quarter under review.

However, the coronavirus outbreak and the work-from-home trend has been resulting in a shift of some renter demand away from higher cost and urban/infill markets. In addition, record-low mortgage rates and the desire for space are driving home sales and adversely impacting rental demand. The pandemic is also affecting the rent-paying capabilities of residential tenants. Furthermore, use of concessions is likely to be rampant amid a slowdown in demand and these negatives are likely to have affected Equity Residential in the quarter under review.

Amid these, the Zacks Consensus Estimate for the company’s quarterly revenues is pinned at $638.4 million, indicating a 6.8% decline year on year. Physical occupancy rate is expected to be around 94%.

Moreover, prior to the third-quarter earnings release, there is lack of any solid catalyst for being optimistic about the company’s business activities and prospects. The Zacks Consensus Estimate for the third-quarter FFO per share remained unrevised at 82 cents over the past month. The figure also suggests a year-over-year decrease of 9.9%.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Equity Residential this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Equity Residential currently carries a Zacks Rank #3 (Hold) and has an Earnings ESP of -0.08%.

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 these have the right combination of elements to report a positive surprise this quarter:

National Storage Affiliates Trust NSA, scheduled to report quarterly numbers on Nov 5, currently has an Earnings ESP of +2.44% and carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

EastGroup Properties, Inc. EGP, slated to release third-quarter earnings on Oct 27, has an Earnings ESP of +0.80% and carries a Zacks Rank of 3, at present.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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