Why You Should Hold On To Equity Residential Stock Now
Zacks Investment Research | Dec 28, 2017 08:48PM ET
Equity Residential’s (NYSE:EQR) efforts to reposition its portfolio in high barrier-to-entry markets amid favorable demographic trends will stoke growth. However, elevated level of new supply across its markets is anticipated to adversely affect revenue growth in the coming quarters.
In fact, this multi-family real estate investment trust (REIT) is currently focusing on concentrating its footprint in the high-density suburban coastal gateway markets in close proximity to public transportation, dining and education facilities. Such strategic locations will enable the company to enjoy higher demand at its properties.
Further, high home ownership cost in most markets of Equity Residential relative to the national average has also driven demand for rental apartments. As this trend is likely to continue, we anticipate demand for the company’s properties to keep rising.
Equity Residential has a return on equity (ROE) of 7.22%, significantly higher than the industry’s average of 2.78%. This highlights the company’s ability to raise shareholder value and the optimal utilization of equity.
In fact, in 2016, using proceeds from property sales, the company paid its shareholders’ special dividend of around $4 billion, or $11 per share. Also, the average 10-year dividend yield for Equity Residential is 3.7%. Such moves boost investors’ confidence in the stock.
However, new supply across Equity Residential’s markets remains a concern. This elevated supply is likely to put pressure on rental rates and mar revenue growth. Further, high concession activity amid rising supply also crushes the company’s profitability.
Also, the company has opted for substantial sale out of its portfolio in recent times. Its sale of the Starwood portfolio, together with the other 2016 dispositions, resulted in the company's exit from the South Florida, Denver and New England (excluding Boston) markets. While non-core asset disposition would assist the company focus exclusively on high-density suburban coastal gateway markets, the earnings-dilution impact from such a move might be difficult to avoid in the near term.
Moreover, shares of the company have underperformed its Zacks Investment Research
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