Lack Of High-Paying Job Growth Creates Headwind For Equity Residential

Equity Residential reported $0.02 miss relative to consensus and in line with Morgan Stanley's estimate, but the headline is that the REIT is revising its outlook to be more in line with historical trends.

Morgan Stanley also cut the forecast in the first quarter and again lowered it on June 1. The REIT sees a negative impact to normalize FFO of $0.06 per share from lower same-store NOI.

Meanwhile, the brokerage noted that Equity Residential's focus on A-quality exposure in urban core put its pricing power at risk compared to peers in the near term.

"Our analysis finds that EQR has the most exposure to San Francisco and NYC at nearly 40 percent as a percentage of NOI (and 50 percent of revenue)," analyst Richard Hill said.

However, the analyst is long-term positive on Equity Residential. He said, "We think there will come a time to own EQR, but today is too early given slowing job growth and near-term supply headwinds that are likely to continue weighing on the multiple."

In this scenario, Hill prefers REITs having more diversification across markets and property types, specifically having less exposure to San Francisco and NYC while having wider exposure to Class B quality apartments.

Shares of Equity Residential closed Tuesday's trading at $67.27; at time of writing, shares were down 1.58 percent at $66.21.

Full ratings data available on Benzinga Pro.