Equity Residential - Growth & Income

By Zacks | August 13, 2012 AAA

Shares of Equity Residential (EQR) are on the rise thanks to strengthening fundamentals for the rental housing market and superior execution of pricing & expense control measures. With a dividend yield of 2.2%, this apartment REIT (real estate investment trust) promises to be a solid pick for investors seeking both growth and income.

Solid second quarter 2012 results, including a 10.3% year-over-year jump in funds from operations (FFO), further support this Zacks #2 Rank (Buy). Earnings are presently expected to grow 12.9% and 9.9% for 2012 and 2013, respectively.

Strong Second Quarter

Equity Residential reported strong second quarter results on July 25, with a 13.2% year-over-year growth in total revenues to approximately $543.8 million. Same-store quarterly revenues increased 5.5% to $489.9 million. Same-store net operating income (NOI) advanced 7.5% year over year to $319.7 million, primarily due to a 5.7% increase in average rental rates to $1,626 per apartment unit.

Reported FFO came in at 64 cents per share, which were up from the year-ago FFO of 58 cents. Recurring FFO of 68 cents per share surpassed the year-ago tally of 68 cents and was in line with the Zacks Consensus Estimate.

For the third quarter of 2012, recurring FFO is expected between 70 cents and 74 cents per share. For full year 2012, Equity Residential expects recurring FFO of $2.73 to $2.78.

Surge in Earnings Momentum

Analysts have revised their earnings estimates higher for both 2012 and 2013, driving the stock to a Zacks #2 Rank (Buy). Over the past 30 days, the Zacks Consensus Estimate for 2012 increased 0.7% to $2.74, implying a year-over-year growth of 12.9%. For 2013, the Zacks Consensus Estimate has increased 0.3% to $3.01 over the same time period, representing year-over-year growth of 9.9%.

Dividend Payout

Equity Residential paid a dividend of 33.75 cents per share in the second quarter of 2012. Over the years, the company has paid a regular quarterly dividend, and even paid two special dividends in December 2010 and December 2011. The current dividend payment affirms a yield of 2.2%.

Premium Valuation

Equity Residential's valuation metrics are at a premium on a price-to-earnings (P/E) and price-to-sales (P/S) basis. Shares of Equity Residential are currently trading at a forward P/E of 21.97x, versus the peer group average of 18.61x. On a P/S basis, shares are trading at 8.61x versus 8.11x for the peer group average. A healthy earnings growth prospect warrants the premium valuation of the company.

Since March 5, 2012, Equity Residential shares have fared relatively better than the simple moving average for 200 days or SMA (200). In addition, the stock has outperformed the S&P 500 index since April 13, 2011. On a 5-year basis, the return for the stock is phenomenal at 55.20% compared to an S&P 500 tally of -2.10%.

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With a favorable supply/demand relationship, rising earnings estimates, robust growth projections and a healthy dividend yield, Equity Residential offers an enticing upside potential going forward. In addition, a continued focus on some of the premium markets of the country augurs well for its long-term growth.

Based in Chicago, Illinois, Equity Residential is the largest fully integrated publicly traded multi-family REIT in the U.S. The company has a portfolio of high-quality assets in some of the most desirable markets across the country, which includes New York, Boston, Washington D.C., Seattle, San Francisco and Los Angeles. As of June 30, 2012, Equity Residential owned 421 properties in 14 states in the U.S. and the District of Columbia, consisting of 120,355 apartment units. The company presently has a market cap of $18.3 billion.

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