Shares of Equity Residential (EQR 0.26%) have tumbled 18.8% from their peak this year. This sell-off has pushed the real estate investment trust's (REIT) dividend yield up over 3.3%, making it even more attractive to income-focused investors.
Adding to its investor appeal is the continued strength in apartment market conditions. That was evident in the REIT's second-quarter results and outlook for what's ahead.
An excellent quarter
Equity Residential's CEO Mark Parrell summed up the residential REIT's second-quarter results in the earnings press release. He stated, "We delivered outstanding results this quarter supported by favorable supply and-demand dynamics and a healthy labor market bolstering employment and wages."
The company posted a 23.6% year-over-year increase in its normalized funds from operations (FFO) in the period. Its same-store revenue leaped 13.6%, driven by strong physical occupancy of 96.7% and continued growth in pricing power, enabling it to increase rents by almost 10% since the beginning of the year.
Rent growth has been robust. COO Michael Manelis noted on the accompanying conference call that it "is well above the 6% range that it historically characterized a very good year."
Meanwhile, the company did an excellent job keeping expenses at bay, despite red-hot inflation. Costs rose 3.1%, well below the inflation rate, driven by favorable real estate tax and payroll expenses.
CFO Bob Garechana noted on the call that the company "remain[s] laser-focused on reducing or eliminating exposure to inflationary labor pressures." It's striving to do that through higher efficiency and better decision making, thanks partly to the utilization of technology to reduce the number of staffing hours it needs.
The good times should continue to roll
Demand for apartments remains incredibly strong. CEO Mark Parrell noted on the call that the company's "business continues to benefit from terrific supply and demand dynamics, including excellent job growth and household formation." He pointed out that:
Housing alternatives remain expensive and in low supply. Single-family home prices reached record levels in 2022, while rising mortgage rates have further stressed affordability, particularly for first-time homebuyers. Single-family housing starts are declining. Existing homeowners are more reluctant to sell due to low locked-in mortgage rates, along with minimal and expensive for-sale replacement options, and competition for homes from investors remains strong.
These factors are forcing people to continue renting instead of buying a home. Meanwhile, the "near-term apartment supply picture also remains favorable," according to Parrell. He noted that development starts near its properties in coastal markets are at or below their pre-pandemic levels. With inflation driving up construction costs and financing, developers seem likely to start fewer new apartment projects in the coming quarters.
Put everything together, and demand for apartments should stay strong while supplies remain limited. That suggests occupancy will stay high, driving continued rent growth.
Equity Residential's guidance reflects this view. The REIT maintained its occupancy projection at 96.5% for the year, despite concerns about a recession. Meanwhile, it boosted its outlook for revenue, net operating income, and normalized FFO growth.
It sees FFO coming in between $3.48 to $3.58 per share, an increase of $0.08 per share at the midpoint. With FFO rising while the stock price is falling, Equity's valuation has become even cheaper. It now trades at less than 22 times its 2022 FFO estimate. That's incredibly cheap, compared to other apartment REITs, especially given the company's sector-leading growth rate.
A great time to buy this dividend stock
Shares of Equity Residential have tumbled this year, even though the apartment REIT continues to deliver excellent results, driven by a strong apartment market. With those conditions unlikely to cool off anytime soon, Equity Residential expects its performance to continue improving.
These factors make it look like a great buy right now. It has lots of upside as rents continue growing and the market realizes it made a mistake marking down its valuation. Add in the attractive dividend, and Equity Residential could produce market-beating total returns from here.