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Equity Residential (EQR - Analyst Report), a real estate investment trust (REIT), reported third quarter 2012 funds from operations (FFO) of $292.3 million or 92 cents per share, compared to $196.6 million or 63 cents in the year-ago quarter.

The steep rise in year over year FFO was primarily due to a termination fee of $70 million or $0.22 per share received by the company in correlation with its failed acquisition bid for Archstone. Reported FFO for third quarter 2012 well exceeded the Zacks Consensus Estimate of 76 cents.

Excluding certain one-time items, recurring FFO for the reported quarter was $232.5 million or 73 cents per share, compared to $193.1 million or 62 cents in the year-earlier quarter. Total revenues during the quarter were $556.1 million, compared to $493.9 million in the year-earlier period – an increase of 12.6%. Total revenues during the reported quarter exceeded the Zacks Consensus Estimate of $554 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.

Same-store (third quarter 2012 versus third quarter 2011 comparison, which includes 105,902 apartment units) quarterly revenues increased 5.8% to $508.1 million. Same-store net operating income (NOI) during the quarter increased 7.4% year over year to $330.6 million, primarily due to a 5.2% increase in average rental rates to $1,670 per apartment unit.

During the quarter, Equity Residential acquired four properties totaling 540 apartment units for $236.3 million at a weighted average cap rate of 4.3%. The company also acquired two land parcels for future development in Seattle and one in Southern California for a total of $38.5 million.

Equity Residential is likely to start construction in 2014 on the land parcels, erecting about 640 apartment units on the Seattle land parcels for $226.0 million, and 154 apartment units on the Southern California land parcel for $43.2 million.

The company sold eight consolidated properties during third quarter 2012 (2,153 apartment units) for $280.7 million at a weighted average cap rate of 6.0%. Year-to-date, Equity Residential has acquired nine properties (1,896 apartment units) for $906.3 million at a weighted average cap rate of 4.7% and five land parcels for $62.2 million. Also during the first nine months of 2012, the company sold 20 properties (5,337 apartment units) for $616.9 million at a weighted average cap rate of 6.2%.

As a part of the final settlement, Equity Residential received $150 million in termination fees during second quarter 2012 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 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 with the banks was terminated. Equity Residential recognized $70 million of the termination fees as interest and other income during the reported quarter and the balance $80 million would be recorded in the next quarter.

During the reported quarter, the company issued over 1 million shares under its At-the-Market (ATM) share offering program at $62.70 per share for total proceeds of approximately $68.7 million. Year-to-date, the company had issued approximately 3.2 million shares at $60.59 each for total proceeds of $192.3 million. The company currently has approximately 6.0 million shares available for offer under this ATM share offering program.

At quarter-end, the company had $45.6 million of cash and cash equivalents, and $870 million available on its revolving credit facility. For fourth quarter 2012, recurring FFO is expected in the range of 72 cents to 76 cents per share. For full year 2012, Equity Residential has revised its recurring FFO guidance in the range of $2.74 to $2.78 from the earlier range of $2.73 to $2.78 per share.

We maintain our Neutral recommendation on the stock, which presently has a Zacks #3 Rank that translates into a short-term Hold 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.

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