Expanding Rental Markets Will Improve Efficiency Despite Headwinds

Key Takeaways

• Anticipated long-term rental housing demand and undersupply should drive future revenue growth, with expansion into growing markets enhancing asset quality and margins.
  
• Strong cash flow and balance sheet position Equity Residential to capitalize on acquisition opportunities and enhance earnings amidst economic uncertainty.
  
• Macroeconomic uncertainty, competitive supply, and regional rent controls may challenge Equity Residential's revenue and earnings growth projections.

Catalysts

Equity Residential is committed to creating communities where people thrive.

• Equity Residential anticipates benefiting from long-term undersupply in rental housing, high costs and low inventory of single-family homes, and increasing demand for rental housing, which should positively impact future revenue growth.
  
• The company is leveraging strong cash flow and a solid balance sheet amid economic uncertainty, positioning itself to potentially capitalize on acquisition opportunities that could enhance earnings.
  
• Active management of leasing processes, such as centralized renewal efforts and the use of conversational AI, aims to enhance operating efficiency and customer experience, supporting margin improvements.
  
• A focus on expansion markets, despite short-term supply challenges, is expected to yield stronger revenue growth and higher-quality asset profiles, boosting future net margins.
  
• Positive trends in key markets like the Bay Area and Seattle, combined with improvements in urban occupancy and rent growth, are expected to drive forward revenue and earnings growth.

Equity Residential Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Equity Residential's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.7% today to 16.8% in 3 years time.
• Analysts expect earnings to reach $580.2 million (and earnings per share of $1.53) by about April 2028, down from $1.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $715.8 million in earnings, and the most bearish expecting $472 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 63.5x on those 2028 earnings, up from 25.6x today. This future PE is greater than the current PE for the US Residential REITs industry at 40.3x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

Equity Residential Future Earnings Per Share Growth

Risks

• Increased macroeconomic uncertainty, particularly relating to governmental actions like tariffs, may negatively impact Equity Residential's revenue and earnings projections.
  
• Future job growth projections are less certain, which could affect demand for rental units and thus impact revenue growth.
  
• The company faces challenges in Sunbelt markets due to competitive new supply, which might weaken pricing power and result in lower-than-expected revenue growth.
  
• Rent control measures in some markets, such as Maryland and impending in Washington State, could constrain the ability to increase rents, potentially impacting revenue and earnings growth.
  
• The slowdown in the entertainment industry and quality-of-life issues in Los Angeles may dampen demand and limit pricing power, affecting revenue from that market.

Valuation

• The analysts have a consensus price target of $77.511 for Equity Residential based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $87.0, and the most bearish reporting a price target of just $68.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $580.2 million, and it would be trading on a PE ratio of 63.5x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $69.53, the analyst price target of $77.51 is 10.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.