Shares of Residential Equity (EQR 0.11%) fell 20.2% in the first half of 2022, according to data provided by S&P Global Market Intelligence. It was a little less than the S&P500down 20.6% to start the year.
The same recession-related concerns that triggered the market sell-off were largely to blame for the real estate investment trust (REITs) collapse.
Equity Residential is having a financially strong year. The Residential REIT reported strong first-quarter results in late April, delivering double-digit growth in its funds from operations per share. This year, demand for apartments has been intense, keeping occupancy rates high and rental rates rising. Equity Residential recorded the lowest tenant turnover in its history as its tenants had few options but to keep their existing apartments due to soaring house prices.
The growth in the company’s rental income enabled it to increase its dividend by 3.7%. With the stock price down and the payout up, the REIT’s yield rose to 3.5%. In the meantime, the REIT continued its capital recycling program in order to improve its portfolio. Equity Residential acquired a newly built apartment complex in San Diego while agreeing to sell an older one in New York.
Despite all the positives, Equity Residential shares have been under pressure this year on fears that the US economy is slipping into a recession. This possibility has led several analysts to lower their price targets on this.
For example, Mizuho Securities’ Handel St. Juste lowered its company’s price target on the REIT from $84 to $79 per share in light of its reduced expectations for its rent growth in 2023. While St. Juste has a positive view of its outlook for 2022, it forecasts the opposite for 2023, especially if there is a recession. Meanwhile, Truist Analyst Michael Lewis cut the bank’s price target on Equity Residential from $85 to $79. The analyst sees a recession having a potential impact on household formation, which could affect demand for apartments.
However, while analysts see downside risk ahead, they noted that apartment REITs enter the next economic cycle from a position of strength.
The market is increasingly concerned that we could be heading into a recession, which could somewhat cool the current scorching demand for apartments. However, while this may slow rental growth, Equity Residential is in a good position to continue to grow its funds from operations and its dividend. Because of that and its higher dividend yield after this year’s liquidation, it’s a much more attractive option for income-seeking investors these days.
Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.