Equity Residential (EQR) Q4 FFO Beats on Solid NOI Growth

Equity Residential EQR reported fourth-quarter 2017 normalized funds from operations (FFO) per share of 83 cents, beating the Zacks Consensus Estimate of 81 cents. The figure also came in higher than 79 cents reported in the year-ago quarter.

Results mirror enhanced same-store net operating income (NOI) and lease-up NOI. However, the company incurred higher corporate overhead in the quarter.

Moreover, total revenues in the reported quarter came in at $630.7 million, indicating 4.2% growth from the prior-year period. In addition, the figure surpassed the Zacks Consensus Estimate of $623.7 million.

Per management, solid and steady rental demand across the company’s markets was supported by favorable demographics, low unemployment level and rising wages. However, 2018 is anticipated to witness high levels of new supply, leading to decreased pricing power as well as decelerating revenue growth.

For full-year 2017, normalized FFO per share came in at $3.13, ahead of the prior-year tally of $3.09. This was backed by 1.9% year-over-year growth in total revenues to nearly $2.5 billion.

Quarter in Detail

Same-store revenues (includes 72,529 apartment units) were up 2.2% year over year to $590.4 million, while expenses climbed 2.5% year over year to $169.6 million. As a result, same-store NOI advanced 2.1% year over year to $420.7 million.

The company experienced 2.0% growth in average rental rate to $2,709. Physical occupancy remained flat year over year at 96.0% for same-store portfolio.

The company exited the fourth quarter with cash and cash equivalents of around $50.6 million, up from $46.6 million recorded at the end of the prior quarter.

Portfolio Activity

During the reported quarter, Equity Residential did not purchase any consolidated apartment properties. On the other hand, the company sold one consolidated apartment property in southern New Jersey (170 apartment units) for around $35.3 million. Further, the company completed Cascade — a 477-unit apartment development project — in Seattle for a total cost of about $176.4 million.

Outlook

For first-quarter 2018, Equity Residential projects normalized FFO per share in the range of 74-78 cents. The Zacks Consensus Estimate for the same is currently pegged at 79 cents.

For full-year 2018, the company projects normalized FFO per share in the $3.17-$3.27 band. The Zacks Consensus Estimate of $3.25 lies within this range. The company’s full-year outlook is backed by same-store portfolio revenue growth of 1.0-2.25%, physical occupancy of 96.0% and NOI change of 0.0-1.5%. Also, expense is projected to flare up 3.5-4.5%.

Dividend Update

Currently, Equity Residential expects to declare first quarter common share dividend of 54 cents per share. This reflects an annualized hike of 7.2% from the amount paid in 2017.

Our Viewpoint

Equity Residential’s better-than-expected performance in the fourth quarter is impressive. The company is anticipated to benefit from its efforts to reposition the portfolio in high barrier-to-entry/core markets, favorable demographics, lifestyle transformation and creation of new households. The company’s current focus is on the acquisition and development of assets primarily in the six core coastal metropolitan areas — Boston, New York, Washington D.C., Southern California, San Francisco and Seattle. However, elevated supply in a number of its markets is likely to put pressure on rental rates and result in high concessions. Furthermore, rate hike add to its woes.

Equity Residential currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We now look forward to the earnings releases of other residential REITs like Apartment Investment and Management Company AIV, UDR Inc. UDR and Essex Property Trust Inc. ESS. Apartment Investment and Management Company and UDR Inc. are scheduled to release results on Feb 1 and Feb 6, while Essex Property is slated to report its numbers on Feb 7.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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