Zacks_Analysts' Blog : Equity Residential Reports in Line - Analyst Blog

Equity Residential (EQR), a leading real estate investment trust (REIT), reported fiscal 2011 fourth quarter funds from operations (FFO) of $201.4 million or 64 cents per share, compared to $136.4 million or 45 cents per share in the year-ago quarter. Fund from operations, 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.

The fourth quarter 2011 FFO included certain non-recurring items, excluding which FFO for the quarter was $204.6 million or 65 cents per share compared to $184.5 million or 61 cents per share in the year-earlier quarter. The recurring FFO for fourth quarter 2011 was in line with the Zacks Consensus Estimate.

For full year 2011, Equity Residential reported FFO of $752.2 million or $2.41 per share, compared to $623.3 million or $2.07 per share in 2010. Excluding certain non-recurring items, FFO for fiscal 2011 was $759.7 million or $2.43 per share compared to $682.9 million or $2.27 per share in the previous year. The recurring FFO for fiscal 2011 was also in line with the Zacks Consensus Estimate.

Total revenues during the quarter were $519.3 million compared to $460.7 million in the year-earlier period. Total revenues during the reported quarter were in line with the Zacks Consensus Estimate. Total revenues during the year were $2.0 billion, compared to $1.8 billion in 2010. The company 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 2012 as well.

Same-store (fourth quarter 2011 vs. fourth quarter 2010 comparison, which includes 105,861 apartment units) quarterly revenues increased 5.8%. Same-store net operating income (NOI) during the quarter increased 7.6% year over year. For full year 2011, same-store revenues increased 5.0%, while same-store NOI increased 7.7%.

During the quarter, Equity Residential acquired 11 properties totaling 3,669 apartment units for $681.3 million at a weighted average cap rate of 5.2%. The company also acquired four land parcels for future development – one in New York City, one in San Francisco, one in Seattle and one in Southern California, for an aggregate purchase price of $183.9 million. During 2011, the company acquired 20 properties totaling 6,103 apartment units for $1.3 billion at a weighted average cap rate of 5.2%.

Equity Residential sold two consolidated properties during fourth quarter 2011 (817 apartment units) for $98.8 million at a weighted average cap rate of 6.2%. For full year 2011, the company sold 47 consolidated properties totaling 14,345 apartment units for $1.5 billion at a weighted average cap rate of 6.5%.

During the quarter, Equity Residential decided to acquire approximately 26.5% ownership interests in Archstone – a privately held owner, operator and developer of multifamily apartment properties, for $1.325 billion. Archstone was owned by a consortium of financial institutions that include Bank of America Corporation (BAC), Barclays PLC (BCS), and the bankruptcy estate of Lehman Brothers Holdings Inc. 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 this 26.5% interest, Equity Residential’s contract with the banks was terminated.

Presently, Equity Residential has the exclusive right to purchase the remaining 26.5% interests in Archstone owned by the banks for $1.325 billion or higher. Lehman would also have the ‘right to first offer’ for this purchase bid, which if exercised, would entitle Equity Residential to claim a break-up fee of up to $80 million.

During the reported quarter, under its At-the-Market (ATM) share offering program, Equity Residential issued 827,686 shares at $57.31 each for total consideration of approximately $47.4 million. Subsequent to the quarter-end, the company also issued 201,284 shares at an average price of $57.87 per share for total consideration of approximately $11.6 million. The proceeds were primarily utilized to repay debt. At year-end 2011, the company had cash and cash equivalents of $265.2 million and total debt of $9.7 billion.

Equity Residential amended its $1.25 billion unsecured revolving credit facility during the quarter to increase the borrowing capacity by $500 million to $1.75 billion. At the same time, the company entered into a new senior unsecured $500 million delayed draw term loan facility. The strategic moves were intended to partly fund the acquisition of Archstone.

For full-year 2012, Equity Residential expects recurring FFO in the range of $2.68 to $2.78 per share. For first quarter 2012, recurring FFO is expected to be in the range of 58 cents to 62 cents 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.