Is It Wise to Retain Equity Residential (EQR) Stock for Now?

Equity Residential EQR owns a portfolio of high-quality apartment units in some of the key markets of the United States that have an affluent tenant base. The high costs of home ownership due to high interest rates are likely to keep renter demand up in its markets, benefiting the company. A focus on technology, scale and organizational capabilities to drive margin expansion and operational efficiency act as tailwinds. However, the elevated supply of rental units in some markets and high interest rates make us apprehensive.

What’s Aiding EQR?

Equity Residential has a dominating presence in Boston, New York, Washington, D.C., Seattle, San Francisco and Southern California. The residential REIT is also growing its presence in Denver, CO; Atlanta, GA; Dallas/Ft. Worth and Austin, TX. It is particularly targeting places where affluent renters prefer to live, work and play.

In its strategy, the company is taking into consideration the hybrid working environment and the recent migration trends of affluent renters and 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.

Moreover, given the high cost of homeownership, especially relative to rents, the transition from renter to homeowner is difficult in its markets, making renting apartment units a viable option. For 2024, we estimate the company’s total rental revenues to exhibit year-over-year growth of 2.3%.

Equity Residential is also banking on technology and organizational capabilities to drive rent growth and improve the efficiency of its operating platform. In recent years, the company has used technology and mobility to improve staffing and utilization, and its concerted efforts that are in the process include smart home, smart building, asset tagging, enhanced data and analytics, centralization expansion, outsourcing and building-wide Wi-Fi implementation.

Such efforts are likely to provide Equity Residential with a competitive edge over others and drive growth in net operating income (NOI) in the upcoming period. While our estimate indicates a marginal year-over-year rise in the company's NOI for 2024, the metric is further projected to increase 2.3% and 7.1% in 2025 and 2026, respectively.

On the balance sheet front, the company had nearly $2.1 billion of liquidity and a net debt to normalized EBITDAre of 4.12X as of Dec 31, 2023. Also, unencumbered NOI as a percentage of the total NOI was 89.8% in the quarter. An A-rated balance sheet renders the company access to the debt market at favorable rates. Hence, with manageable debt maturities, a large pool of high-quality unencumbered assets and solid credit metrics, EQR seems well-positioned to capitalize on growth opportunities.

Shares of this Zacks Rank #3 (Hold) company have rallied 5.4% in the past month, outperforming the industry’s rise of 4.3%.

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What’s Hurting EQR?

The struggle to lure renters remains consistent as the supply volume of residential apartment units is expected to remain elevated in some of the markets where the company operates. With the ongoing construction standing at a high level, a sizeable number of apartment deliveries are anticipated in the upcoming period. This will likely weigh on the company’s ability to increase rent, restricting its growth momentum to a certain extent. The company expects same-store revenue growth to be within 2.0-3.0% this year.

Further, given the prevailing high interest rate environment, Equity Residential may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are SL Green Realty SLG and Lamar Advertising LAMR, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for SLG’s 2024 funds from operations (FFO) per share is pegged at $6.06, which suggests year-over-year growth of 22.7%.

The Zacks Consensus Estimate for LAMR’s 2024 FFO per share stands at $7.74, which indicates an increase of 3.6% from a year ago.

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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