Equity Residential (EQR - Analyst Report), a leading real estate investment trust (REIT), reported second quarter 2012 funds from operations (FFO) of $204.6 million or 64 cents per share, compared to $180.7 million or 58 cents in the year-ago quarter.
Excluding certain one-time items, recurring FFO for the reported quarter was $215.0 million or 68 cents per share, compared to $186.7 million or 60 cents in the year-earlier quarter. Recurring FFO for second quarter 2012 was in line with the Zacks Consensus Estimate.
Total revenues during the quarter were $543.8 million, compared to $480.4 million in the year-earlier period – an increase of 13.2%. Total revenues during the reported quarter exceeded the Zacks Consensus Estimate of $539 million.
Equity Residential benefited from strengthening apartment fundamentals and superior execution of pricing and expense control measures. Management further expects to continue delivering strong growth in operating income and earnings in the remainder of 2012 as well.
Same-store (second quarter 2012 vs. second quarter 2011 comparison, which includes 105,604 apartment units) quarterly revenues increased 5.5% to $489.9 million. Same-store net operating income (NOI) during the quarter increased 7.5% year over year to $319.7 million, primarily due to a 5.7% increase in average rental rates to $1,626 per apartment unit.
During the quarter, Equity Residential acquired two properties totaling 812 apartment units for $510.9 million at a weighted average cap rate of 5.0%. The company also sold nine consolidated properties during second quarter 2012 (1,662 apartment units) for $129.9 million at a weighted average cap rate of 6.7%.
Year-to-date, Equity Residential has acquired five properties (1,356 apartment units) for $670.0 million at a weighted average cap rate of 4.8% and two land parcels for $23.7 million. Also during the first half of 2012, the company sold 12 properties (3,184 apartment units) for $336.3 million at a weighted average cap rate of 6.4%.
As a part of the final settlement, Equity Residential received $150 million in termination fees during the quarter from Bank of America Corporation (BAC - Analyst Report), Barclays PLC (BCS - Analyst Report), and Lehman Brothers Holdings Inc. for being unable to acquire a 26.5% ownership interest in Archstone – a privately held owner, operator and developer of multifamily apartment properties.
Archstone was previously owned by Bank of America, Barclays, and Lehman Brothers. While the banks collectively held a 53% stake in the company, Lehman held the remaining 47%.
Equity Residential had entered into a contract with the affiliates of Bank of America and Barclays PLC to acquire half of their combined ownership interests. However, Lehman had the ‘right to first offer,’ under which the banks were obliged to present it with any offer they would like to accept and give the estate a chance to either match or beat it.
Subsequently, as Lehman exercised this right and acquired the bank’s ownership stake, Equity Residential’s contract was terminated. Equity Residential intends to recognize $70 million of the termination fees as interest and other income in the third quarter of 2012 and the balance $80 million as interest and other income in the following quarter.
During the reported quarter, the company did not issue any shares under its At-the-Market (ATM) share offering program. At quarter-end, the company had $75 million cash in hand, and $1.72 billion available on its revolving credit facility.
For third quarter 2012, recurring FFO is expected in the range of 70 cents to 74 cents per share. For full year 2012, Equity Residential expects recurring FFO in the range of $2.73 to $2.78. We maintain our Neutral recommendation on the stock, which presently has a Zacks #2 Rank that translates into a short-term Buy rating.
Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.