Equity Residential EQR is well poised to gain from its high-quality, diversified portfolio in markets with an affluent tenant base. 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 is a key concern. Also, high-interest expenses add to its woes.

Over the past year, shares of this residential REIT, carrying a Zacks Rank #3 (Hold), have gained 15.7%, outperforming the industry's 5.1% growth.

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What’s Aiding Equity Residential?

Equity Residential focuses on locations favored by affluent renters for living, working and leisure. Its residents are well employed and better able to weather inflationary pressures, and are not financially strained by rent, allowing for easier rent increases during economic growth and minimizing risks during downturns. This strategy helps the company maintain stable revenue streams. 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 will increase by 3.2% for 2024.

EQR is making efforts toward repositioning its portfolio, selling older properties, properties in jurisdictions with challenging regulatory environments or in submarkets where the company is over concentrated, 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 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. Elevated rates imply high borrowing costs for the company, which can hinder its ability to acquire or develop its real estate holdings. 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 UMH Properties, Inc. UMH, 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 Equity Lifestyle Properties’ 2024 FFO per share has been raised marginally over the past three months to $2.92.

The Zacks Consensus Estimate for UMH Properties’ 2024 FFO per share of 93 cents suggests an increase of 8.1% year over year.

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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