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EQR's FFO Meets, Revenues Lag

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Equity Residential’s (EQR - Free Report) core funds from operations (FFO) per share in the fourth quarter of 2012 reached 75 cents, in line the Zacks Consensus Estimate and surged 15.4% from the prior-year quarter. Quarterly result was primarily driven by higher net operating income and lower total debt costs.

Moreover, on a year-over-year basis, core FFO per share escalated 13.6% to $2.76 from $2.43 last year. However, it missed the Zacks Consensus Estimate of $2.81.

Equity Residential’s reported FFO per share, for the quarter under review, jumped 46.9% to 94 cents from 64 cents recorded in the year-ago quarter. The substantial increase was primarily due to a gain of termination fee worth $80 million or 24 cents per share, related to Archstone acquisition. Notably, Equity Residential inked a deal in November to acquire 60% of Archstone’s assets and liabilities. In addition, FFO per share for 2012 jumped 29.0% to $3.11 from $2.41 in 2011.

Total revenue during the reported quarter increased 11.2% year over year to $547.7 million, but missed the Zacks Consensus Estimate of $553 million. For full year 2012, total revenue advanced 12.8% from a year ago to $2.12 billion but fell short of the Zacks Consensus Estimate of $2.18 billion.

Quarter in Detail

Same-store quarterly revenues increased 5.4% to $505.3 million from $479.3 million. In addition, Occupancy surged 40 bps (basis points) to 95.4% from 95.0% for the same-store portfolio.

Same-store net operating income (NOI), during the quarter, increased 8.1% year over year to $337.3 million, primarily due to a 5.0% increase in average rental rates to $1,707 per apartment unit.

The Archstone Deal and Its Financing

In November, Equity Residential, along with AvalonBay Communities Inc. (AVB - Free Report) , inked a deal with Lehman Brothers Holdings Inc. to acquire the entire ownership stake of Archstone Enterprise LP. The deal will entitle Equity Residential to acquire 60% of Archstone’s assets and liabilities, while the remainder will be acquired by Avalonbay. The transaction is expected to be accomplished by late February this year.

During the quarter, Equity Residential closed the public offering of 21.9 million common shares at $54.75 per share. Subsequent to the quarter end, the company disclosed further new financing activities for the accomplishment of the Archstone deal. These included securing a new $2.5 billion line of credit and $750 million of term loan. These financing measures, coupled with sale of over $3.0 billion of non-core assets, positioned the company well to fund its Archstone acquisition and pay off the debts. It also terminated the $2.5 billion bridge loan facility pledge that it obtained simultaneously while inking the Archstone deal.

Other Notable Transactions

During the fourth quarter, Equity Residential did not acquire any assets. However, the company purchased 4 adjacent land parcels, worth $79.0 million, in Los Angeles for proposed development of around 970 apartment units. Also, the company divested 15 properties (comprising 3,675 apartment units) for a total price of $444.4 million. The transaction generated an unlevered internal rate of return (inclusive of management costs,) of 10.4%.

In 2012, the company bought 9 properties (comprising 1,896 apartment units) for total price of $906.3 million and 6 land parcels for $141.2 million. Also, Equity Residential divested 35 properties (comprising 9,012 apartment units) for a total value of $1.06. The sales transaction (excluding two leveraged, partially-owned assets sold during the third quarter) generated an unlevered internal rate of return, inclusive of management costs, of 10.6%.

Of the previously announced sale of approximately $4.0 billion of the non-core assets in 2013, Equity Residential sold many assets and lessened the execution risk of the Archstone acquisition to a great extent. The company now expects around $2.8 billion of these asset sales to occur before the end of the first quarter.


At the end of 2012, Equity Residential had cash and cash equivalents of $612.6 million compared to $383.9 million in 2011.

2013 Outlook

For first quarter 2013, Equity Residential expects core FFO per share in the range of 62–66 cents. The company expects the 2013 core FFO per share in the range of $2.80–$2.90. The core FFO per share is expected to bear an adverse impact of 13 cents from the planned asset sale.

Our Viewpoint

We believe Equity Residential’s focus on expansion in the high barrier-to-entry regions of the U.S will drive its top-line growth. The Archstone deal can be regarded as a big move towards strengthening its presence in the upscale regions.

Also, the company has a strong balance sheet with adequate liquidity and limited debt maturities. Consequently, it has funds to capitalize on potential acquisition opportunities, which augurs well for its top-line expansion.

Equity Residential currently holds a Zacks Rank #3 (Hold). Other REITs that are performing better and are worth a look include Ventas Inc. (VTR - Free Report) and Simon Property Group Inc. (SPG - Free Report) , both carrying 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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