Will Equity Residential (EQR) Disappoint in Q4 Earnings?

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Equity ResidentialEQR is slated to report fourth-quarter 2016 earnings after the market closes on Jan 31.

Last quarter, this Chicago, IL-based residential real estate investment trust ("REIT") had reported an in-line result. Moreover, the company has met estimates in three and missed on the other occasion, for 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

Over the past six months, shares of Equity Residential declined 10.74%, which was comparatively higher than the REIT and Equity Trust - Residential industry's fall of 8.86%.

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

Supply issues in a number of markets have raised concerns for the residential REIT stocks. According to early apartment data from the AXIOMetrics, national effective rent growth was 2.3% for fourth-quarter 2016. This was over 2 percentage points lower than the 4.6% rent growth experienced a year ago. In addition, occupancy of 94.7% in the fourth quarter was down from 95.1% in the third quarter and 95.0% in fourth-quarter 2015.

For Equity Residential too, new apartment supply, along with a slowdown in high-paying jobs, is anticipated to put pressure on rental rates. As a result, revenue growth is likely to bear the brunt and move in tandem with historical trends. Particularly, elevated levels of new supply in both San Francisco and New York City remain a matter of concern.

Amid this, for the quarter to be reported, the company expects around 3% same-store revenue growth and roughly a 4.5% increase in the same-store expense figure.

Further, Equity Residential has been repositioning its portfolio to focus on high-barrier markets. The company opted for substantial sale out of its portfolio in 2016. While 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.

Nevertheless, the company is likely to benefit from its portfolio-repositioning efforts, growth in millennial population, lifestyle transformation and creation of new households, moving ahead.

For fourth-quarter 2016, Equity Residential projects normalized funds from operations (FFO) per share in the range of 77-81 cents.

The Zacks Consensus Estimate for fourth-quarter FFO per share is currently pegged at 79 cents. However, Equity Residential's activities during the quarter could not gain analysts' confidence. Consequently, the Zacks Consensus Estimate remained unchanged over the last seven days.

Earnings Whispers

Our proven model does not conclusively show that Equity Residential will beat 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 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 78 cents and the Zacks Consensus Estimate of 79 cents, is -1.27%. 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:

Ashford Hospitality Prime, Inc.AHP , slated to release earnings results on Feb 22, has an Earnings ESP of +16.67% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

CubeSmartCUBE , slated to release earnings results on Feb 16, has an Earnings ESP of +2.70% and a Zacks Rank #3.

STAG Industrial, Inc.STAG , scheduled to come up with its earnings release on Feb 16, has an Earnings ESP of +2.50% 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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Equity Residential (EQR): Free Stock Analysis Report

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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.

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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