Equity Residential’s (EQR) normalized funds from operations (FFO) per share in fourth-quarter 2013 reached 77 cents, a penny ahead of the Zacks Consensus Estimate and 2 cents above 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 benefit from the Archstone properties. However, the positives were partly offset by the negative impact from disposition activity and common share issuance for the Archstone deal.
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 67 cents, down from 94 cents in the prior-year quarter.
Total revenue during the reported quarter increased 41.3% year over year to $639.1 million. The revenue figure also surpassed the Zacks Consensus Estimate of $632 million.
For full-year 2013, Equity Residential’s normalized FFO came in at $2.85 per share on revenues of $2.4 billion. This came below the prior-year results when the company reported normalized FFO of $2.76 per share on revenues of $1.7 billion.
Quarter in Detail
Same-store revenues (that includes 82,352 apartment units) increased 4.0% year over year to $466.6 million, while expenses moved up 3.5% to $154.2 million. Though the company experienced a 3.9 % increase in average rental rates to $1,980 per apartment unit, occupancy remained flat at 95.4% for the same-store portfolio. As a result, same-store NOI during the quarter, increased 4.3% year over year to $312.4 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 $96.7 million from selling 2 apartment properties (852 apartment units). Moreover, a land parcel in Florida was sold by the company for $22.0 million. This land parcel was acquired as part of the Archstone deal.
In 2013, Equity Residential bought 77 properties (22,103 apartment units). Moreover, it acquired 15 land parcels for approximately $267.2 million in total. The company also sold 94 apartment properties (29,180 apartment units) for a total of $4.46 billion. Further, it sold 8 land parcels for $126.0 million in total and one office building for $30.7 million.
Liquidity
Equity Residential exited the quarter with cash and cash equivalents of $53.5 million, compared with $612.6 million at the end of 2012.
Lehman Stake Update
As part of the Archstone deal, Equity Residential and AvalonBay Communities Inc. (AVB) issued shares of common stock to Lehman Brothers Holdings, Inc. and its affiliates. In particular, Equity Residential issued around 34.5 million common shares, reflecting about 9.6% of the company’s outstanding shares at that time. Lehman continued to sell the stake as per a recent bankruptcy court filing. The company now believes that Lehman’s current stake is around 1.5% of its outstanding common shares.
Outlook
Equity Residential expects normalized FFO per share to range between 68 cents – 72 cents in first-quarter 2014. The mid point of this range is below the fourth-quarter FFO figure as well as the Zacks Consensus Estimate of 75 cents per share and primarily reflects the company’s anticipations of lower NOI owing to increased operating expenses.
For full-year 2014, Equity Residential projects normalized FFO per share to range $3.03 – $3.13. The Zacks Consensus Estimate of $3.11 per share lies towards the higher end of this range. The mid-point of this range reflects a rise from the 2013 level and incorporates the impact of the Archstone stabilized assets to the company’s same store pool and expectations of higher NOI and lower interest expenses.
Dividend Update
Starting 2014, Equity Residential’s dividend policy is to pay 65% of the midpoint of the range of normalized FFO guidance. Based on it, the company intends to make dividend payments of 50 cents per share per quarter, or $2.00 per share for the full year 2014, reflecting a hike of 8% from the prior-year dividend rate.
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 top-line growth. 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 favourable trend through acquisitions and developments.
Yet, the company has a decent exposure to the Washington D.C. market, which has started experiencing a rise in new supply, thus posing a challenge for base rent growth in the near term.
Equity Residential currently holds a Zacks Rank #3 (Hold). Investors interested in the apartment REIT industry may consider stocks like BRE Properties Inc. (BRE) and UDR, Inc. (UDR). Both these stocks carry 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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