Equity Residential EQR is likely to benefit from its high-quality, diversified portfolio targeting affluent renters. Healthy demand for rental units, 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 and high interest expenses are concerns.

Over the past six months, shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have gained 9.3%, outperforming the industry's 6% growth.

Analysts seem positive about this stock, with the Zacks Consensus Estimate for its 2024 funds from operations (FFO) per share revised marginally northward to $3.89 over the past month.

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What’s Aiding Equity Residential?

Equity Residential is particularly targeting places where affluent renters prefer to live, work and play. The company’s affluent residents work in the highest-earning sectors of the economy and are not rent-burdened, creating the ability to raise rents more readily in good economic times and reducing risk during downturns. This enables the company to generate stable revenues.  We estimate the 2024 total same-store revenues to grow by 3%.

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 3.2% 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 third quarter of 2024, the company acquired 14 properties with 4,418 apartment units worth $1.26 billion. During the first nine months of 2024, the company disposed of six properties, consisting of 969 apartment units, for an aggregate sale price of $365.5 million. 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 Sept. 30, 2024, the company had nearly $1.7 billion of liquidity. It has a well-laddered debt maturity schedule with no significant debt maturities in the near term. EQR ended the third quarter of 2024 with a net debt to normalized EBITDAre of 4.56x, and the unencumbered NOI percentage was 89.7%, 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%. Therefore, given the company’s solid operating platform, our 2024 normalized FFO per share growth projections of 2.5% and balance sheet strength compared with industry counterparts, this dividend growth rate is expected to be sustainable over the long run.

What’s Hurting Equity Residential?

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, weighing on its rent growth momentum.

Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for Equity Residential. The company has a substantial debt burden, and its total debt as of Sept. 30, 2024, was approximately $8.37 billion. We estimate 2024 interest expenses to rise by 5.7%.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are Equity Lifestyle Properties ELS and Veris Residential VRE, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Equity Lifestyle Properties’ current-year FFO per share has been raised marginally over the past two months to $2.92.

The Zacks Consensus Estimate for Veris Residential’s current-year FFO per share has been raised marginally over the past two months to 58 cents.

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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