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Equity Residential (EQR) Q3 FFO Misses on Urban Core Struggles

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Equity Residential’s EQR third-quarter 2020 normalized funds from operations (FFO) per share of 77 cents missed the Zacks Consensus Estimate of 82 cents. The reported figure also declined 15.4% year over year.

Results reflect a decline in revenues amid the choppy environment in the residential real estate market. Total revenues in the third quarter came in at $622.4 million, down 9.1% year on year. The revenue figure also missed the Zacks Consensus Estimate of $638.4 million.

According to Equity Residential's president and CEO Mark J. Parrell, roughly 23% of the company’s portfolio positioned in the urban cores of New York, San Francisco and Boston continues to struggle amid pandemic-related reductions in economic activity. This has resulted in fall in occupancy, lower resident-renewal levels and an associated drop in rental rates.
 
Moreover, Parrell noted, "We anticipate that our financial results will weaken over subsequent quarters as the full effect of the pandemic is felt on our business.”

However, suburban portfolio provides some support, and according to Parrell, “suburban portfolio continues to fare relatively well with occupancy similar to last year, rates down only modestly and recovery under way in some markets.”

Also, in the third quarter, the company collected roughly 97% of its expected residential revenues.

Quarter in Detail

Residential same-store revenues (includes 75,596 apartment units) were down 5% year over year to $597.2 million, while expenses flared up 3% to $197.4 million. As a result, same-store net operating income (NOI) declined 8.4% to $399.8 million, year on year.

Average rental rate decreased 3.2% year on year to $2,781 during the September-end quarter, while physical occupancy contracted 170 basis points to 94.8% for the same-store portfolio.

Balance Sheet

Equity Residential exited third-quarter 2020 with cash and cash equivalents of $178.3 million, down from the $187.4 million recorded at the end of the second quarter. Notably, during 2020, the company reduced its total debt by more than $600 million by using proceeds from property dispositions. As of Sep 30, 2020, the company’s availability on its unsecured revolving credit facility amounted to $2.4 billion.

Portfolio Activity

During the reported quarter, Equity Residential acquired a 158-unit apartment property in suburban Seattle for $48.9 million at an acquisition capitalization rate of 4.7%. However, the company did not sell any assets during the said period.

In Conclusion

Equity Residential’s disappointing third-quarter results reflect the challenges faced by its urban portfolio. Nevertheless, the company’s sub-urban portfolio continues to fare relatively well and is likely to provide support in the near term. Its healthy balance sheet and technological initiatives are likely to help the company sail through the present challenging times.

Particularly, in its suburban portfolio (representing 44% of same store residential revenues), physical occupancy as of Oct 22 was 95.8%, compared with 95.9% on Sep 30 and 96.4% on Jun 30, 2020. Blended rate inclusive of leasing concessions was down 6% in October compared with September’s decline of 5.8% and down 4.8% in the third quarter.

Nonetheless, physical occupancy in the urban core portfolio declined to 88.9% as of Oct 22 from 89.2% on Sep 30 and 92.5% on Jun 30. Blended rate inclusive of leasing concessions was down 21.4% in October compared with the decline of 17.9% in September and down 14.7% in the third quarter.

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.

Equity Residential Price, Consensus and EPS Surprise

Equity Residential Price, Consensus and EPS Surprise

Equity Residential price-consensus-eps-surprise-chart | Equity Residential Quote

We now look forward to the earnings releases of other REITs like Apartment Investment and Management Company (AIV - Free Report) , American Tower Corporation AMT and UDR Inc. (UDR - Free Report) scheduled to release quarterly numbers on Oct 29.

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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