Equity Residential: Earnings Preview

| About: Equity Residential (EQR)

Equity Residential (NYSE:EQR), a multi-family real estate investment trust (REIT), is scheduled to report its fiscal 2012 first quarter earnings results after the market closes on April 25. The current Zacks Consensus Estimate for the first quarter earnings is 62 cents, representing year-over-year growth of 10.5%.

Fourth Quarter Recap

Equity Residential reported fiscal 2011 fourth quarter funds from operations (FFO) of $201.4 million or 64 cents per share, compared to $136.4 million or 45 cents per share in the year-ago quarter. Funds 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.

The fourth quarter 2011 FFO included certain non-recurring items, excluding which FFO for the quarter was $204.6 million or 65 cents per share compared to $184.5 million or 61 cents per share in the year-earlier quarter. The recurring FFO for fourth quarter 2011 was in line with the Zacks Consensus Estimate.

For full year 2011, Equity Residential reported FFO of $752.2 million or $2.41 per share, compared to $623.3 million or $2.07 per share in 2010. Excluding certain non-recurring items, FFO for fiscal 2011 was $759.7 million or $2.43 per share compared to $682.9 million or $2.27 per share in the previous year. The recurring FFO for fiscal 2011 was also in line with the Zacks Consensus Estimate.

Total revenues during the quarter were $519.3 million compared to $460.7 million in the year-earlier period. Total revenues during the reported quarter were in line with the Zacks Consensus Estimate. Total revenues during the year were $2.0 billion, compared to $1.8 billion in 2010.

Agreement of Analysts

In the last 7 days, one out of 15 analysts covering the stock raised the earnings estimate for first quarter 2012, while none revised it in the opposite direction. However, there were no earnings estimate revisions for fiscal 2012 in the last 7 days, as none of the 19 analysts covering the stock has either increased or decreased. This signifies that the analysts are circumspect about the future outlook of the company.

Magnitude of Estimate Revisions

Earnings estimates have remained steady in the last 7 days for the first quarter at 62 cents. For fiscal 2012, earnings estimates have also remained stagnant at $2.74 per share during the same time period, meaning that analysts were overtly cautious about the long-term performance of the company.

Moving Forward

We presently have a Neutral recommendation on Equity Residential, which currently has a Zacks #3 Rank that translates into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #3 Rank for UDR Inc. (NYSE:UDR), one of the competitors of Equity Residential.

Based in Chicago, Illinois, Equity Residential is the largest fully integrated, publicly-traded multifamily 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.

With new supply remaining muted until late 2013 or 2014, we expect the multifamily sector to remain comparatively stable in the coming quarters, as renting has emerged as the only viable option for customers who could not get mortgage loans or are unwilling to buy a house at present.

However, the continuous acquisition spree of Equity Residential involves significant upfront operating expenses with limited near-term profitability. New properties usually take time to generate revenues, and will continue to drag down margins till they get established. Consequently, we remain neutral on the stock for the long-term.