Equity Residential’s (EQR) normalized funds from operations (FFO) per share in third-quarter 2013 reached 73 cents, in line with the Zacks Consensus Estimate and the prior-year quarter figure.
Quarterly results at this apartment real estate investment trust (REIT) were primarily driven by higher same store net operating income (NOI) and the benefit from stabilized Archstone properties. However, the positives were offset by the negative impact from disposition activity, common share issuance for the Archstone deal and elevated interest expense.
Equity Residential’s reported FFO per share, as defined by the National Association of Real Estate Investment Trusts (NAREIT), for the quarter under review, was 71 cents, down from 92 cents in the prior-year quarter.
Total revenue during the reported quarter increased 39.4% year over year to $629.4 million. However, it fell short of the Zacks Consensus Estimate of $642 million.
Quarter in Detail
Same-store revenues (that includes 82,553 apartment units) increased 4.1% year over year to $463.6 million, while expenses moved up 3.1% to $159.3 million. While the company experienced a 4.2 % increase in average rental rates to $1,957 per apartment unit, occupancy fell slightly year over year (down 20 basis points) to 95.7% for the same-store portfolio. As a result, same-store NOI during the quarter, increased 4.5% year over year to $304.3 million.
Acquisitions & Dispositions
During the reported quarter, Equity Residential made no acquisition of any properties or land sites.
On the other hand, the company reaped $657.6 million from selling 10 apartment properties (4,131 apartment units) at a weighted average cap rate of 5.9%. Notably, these dispositions, leaving aside one Archstone asset that was sold during the quarter, resulted in an unlevered internal rate of return (IRR), inclusive of management costs, of 11.1%. In addition, two land parcels were sold by the company for $44.3 million.
In the first three quarters, 77 properties (22,103 apartment units) were acquired by the company and it has no plans to purchase any operating assets in the fourth quarter. On the other side, 92 apartment properties (28,328 apartment units) were sold for $4.36 billion at a weighted average cap rate of 6.0%.
Capital Markets Moves
In October, Equity Residential repaid a $963.5 million secured loan (assumed with the Archstone buyout and maturity in Nov 2014) with cash in hand from dispositions.
Moreover, the company plans to close a new $800 million secured loan from an insurance company in fourth-quarter 2013. It has a 10-year term, with an interest only option and bears a fixed interest rate of 4.21%. With the loan proceeds, the company intends to repay $825 million of a $1.27 billion secured loan assumed as part of the Archstone deal.
As a result, cash prepayment expenses of around $150 million and a charge to earnings and FFO of about $43 million will be incurred by Equity Residential in the fourth quarter. This has already been accounted into the company’s full-year 2013 outlook.
Liquidity
Equity Residential exited the quarter with cash and cash equivalents of $972.8 million, compared with $612.6 million at the end of 2012.
Outlook
Equity Residential expects normalized FFO per share to range between 75 cents – 77 cents in fourth quarter 2013.
For full-year 2013, Equity Residential raised the lower end of its normalized FFO guidance range and now expects it in the range of $2.83–$2.85 (prior range being $2.80 – $2.85).
The full-year projections are based on same store revenue growth of 4.5% (previously expected 4.4% – 4.6%), expense change of 3.3% (previously 3.0% to 3.5%) and NOI increase of 5.1% (previously 5.0% to 5.25%). The company expects a slight increase in occupancy to 95.4% from 95.3% projected earlier.
Our Viewpoint
Going forward, we believe Equity Residential’s focus on expansion in the high barrier-to-entry regions in the U.S. will drive its top-line growth. The Archstone acquisition, which the company along with AvalonBay Communities Inc. (AVB) closed in February, further reinforces that.
Also, the echo boomers population continues to raise the demand for apartments. Alongside, with a decent balance sheet position, the company is well poised to capitalize on this favorable trend through acquisitions and developments.
However, the company also has a decent exposure to the Washington DC market, which is expected to experience a rise in new supply, leading to a challenge for base rent growth in the near term.
Equity Residential currently holds a Zacks Rank #4 (Sell). The other apartment REITs that are performing well and deserve a look include Equity LifeStyle Properties, Inc. (ELS), having a Zacks Rank #1 (Strong Buy) and BRE Properties Inc. (BRE), carrying a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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