Earnings Scorecard: Equity Residential

Feb.11.11 | About: Equity Residential (EQR)

Equity Residential (NYSE:EQR), a leading real estate investment trust (REIT), reported fiscal 2010 fourth quarter recurring funds from operations (FFO) of 61 cents per share, which beat the Zacks Consensus Estimate by 3 cents. Fund from operations, 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.

We cover below the results of the recent earnings announcement, as well as the subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook.

Earnings Report Review

Total revenues during the quarter were $517.1 million, compared to $461.3 million in the year-earlier period. Total revenues during the reported quarter missed the Zacks Consensus Estimate of $522 million.

Total revenues during the year were $2.0 billion, compared to $1.9 billion in 2009. Total revenues during fiscal 2010 were in line with the Zacks Consensus Estimate of $2.0 billion. The company benefited from strengthening apartment fundamentals and superior execution of pricing and expense control measures. Management further expects to continue delivering strong growth in operating income and earnings in 2011 as well.

Earnings Estimate Revisions: An Overview

Fiscal earnings estimates have moved up for Equity Residential since the earnings release, meaning that analysts are bullish about the long-term performance of the company. Let’s dig into the earnings estimate in detail.

Agreement of Estimate Revisions

In the last seven days, fiscal 2011 earnings estimates were raised by 10 analysts out of 24 covering the stock, while one had lowered the same. For fiscal 2012, five out of 21 analysts covering the stock have revised their estimates upward, while one has lowered it during the same time period. This indicates a clear positive directional movement for the fiscal year earnings.

Magnitude of Estimate Revisions

Earnings estimates for fiscal 2011 have increased by 2 cents in the last seven days to $2.46. For full-year 2011, Equity Residential expects recurring FFO in the range of $2.40 to $2.50 per share. For fiscal 2012, earnings estimates have increased by 2 cents to $2.73. Management felt that the company would benefit from the continued decline in the single-family homeownership rate across the U.S. Furthermore, as the overall economy continued to improve, management envisioned a positive outlook for 2011 and beyond for the multifamily space as a whole and the company in particular.

Moving Forward

The long-term earnings estimate picture for Equity Residential is optimistic. Equity Residential is the largest fully integrated publicly traded multi-family real estate company in the U.S., with assets in some of the best long-term apartment markets in the country. Furthermore, the company has a fully implemented state-of-the-art operating platform that enables it to manage the operations on a real-time basis and deliver a market-leading performance. The home ownership cost in most of the markets of Equity Residential is also significantly higher than the national average. This provides an upside potential for the company as multi-family fundamentals are expected to remain steady in the coming quarters.

However, Equity Residential is repositioning its portfolio to focus on high-barrier markets, which might cause near-term earnings dilution. In addition, the company has to continually invest in value-drivers that act as a hedge against tough competition. This might affect the short-term profitability of the company.

We maintain our "Neutral" rating on Equity Residential, which currently has a Zacks #3 Rank that translates into a short-term "Hold" rating, indicating that the stock is expected to perform in line with the overall U.S. equity market for the next 1-3 months. We also have a "Neutral" recommendation and a Zacks #3 Rank for UDR, Inc. (NYSE:UDR), a competitor of Equity Residential.