Equity Residential's Same-Store Revenues Up 3.4%

On Tuesday, Equity Residential reported earnings that showed growth in its same store portfolio. It performed strongest in Seattle and Orange County and weakest in New York and Washington.

Here's EQR's earning's release:

CHICAGO--(BUSINESS WIRE)--Equity Residential (NYSE: EQR) yesterday reported results for the quarter and nine months ended September 30, 2016. All per share results are reported as available to common shares/units on a diluted basis.

“Renter demand in urban and high density, close-in suburban markets remains extraordinarily strong as demonstrated by 96% occupancy across our portfolio,” said David J. Neithercut, Equity Residential’s President and CEO. “However, new apartment supply and slowing growth of higher paying jobs have combined to constrain rental rates causing our revenue growth this year to revert more in line with historical trends.”

Highlights

• Increased same store revenues 3.4% in the third quarter.
• Paid a special cash dividend of $3.00 per share, or approximately $1.1 billion, to its shareholders on October 14, 2016, which, when combined with the special cash dividend of $8.00 per share paid in March 2016, resulted in total capital returned to EQR’s shareholders of more than $4.0 billion in 2016.
• On October 12, 2016, completed a $500 million unsecured debt offering at a coupon of 2.85%, the lowest ever for an EQR 10-year and the third lowest of any REIT 10-year.
• Named the 2016 Global Residential Listed Sector Leader in Sustainability by GRESB.

Third Quarter 2016

Earnings per Share (EPS) for the third quarter of 2016 was $0.56 compared to $0.53 in the third quarter of 2015. The difference is due primarily to a higher amount of property sale gains due to more property sales in the third quarter of 2016, lower depreciation expense in the third quarter of 2016 as a direct result of the Company’s significant sales activity in 2016 and the items described below.

FFO (Funds from Operations), as defined by the National Association of Real Estate Investment Trusts (NAREIT), was $0.77 per share for the third quarter of 2016 compared to $0.87 per share in the third quarter of 2015. The difference is due primarily to the various adjustment items listed on page 25 of this release and the items described below.

Normalized FFO for the third quarter of 2016 was $0.78 per share compared to $0.89 per share in the third quarter of 2015. The following items impacted Normalized FFO per share in the quarter:

• A positive impact of approximately $0.02 per share from increased same store net operating income (NOI);
• A positive impact of approximately $0.03 per share from NOI from non-same store properties currently in lease-up;
• A positive impact of approximately $0.07 per share from lower total interest expense due to lower debt balances;
• A negative impact of approximately $0.22 per share of lower NOI primarily as a result of the Company’s 2016 disposition activity; and
• A negative impact of approximately $0.01 per share from other items including lower fee and asset management income.

Reconciliations and definitions of FFO and Normalized FFO are provided on pages 7, 28 and 29 of this release and the Company has included guidance for Normalized FFO on page 26 and FFO and EPS on page 29 of this release.

Nine Months Ended September 30, 2016

EPS for the nine months ended September 30, 2016 was $10.92 compared to $1.80 for the same period of 2015. The difference is due primarily to a higher amount of property sale gains due to significantly more property sales in the first nine months of 2016 and the various adjustment items listed on page 25 of this release.

FFO for the nine months ended September 30, 2016 was $2.14 per share compared to $2.56 per share in the same period of 2015. The difference is due primarily to the various adjustment items listed on page 25 of this release and the items described below.

Normalized FFO for the nine months ended September 30, 2016 was $2.29 per share compared to $2.54 per share for the same period of 2015. The difference is due primarily to:

• A positive impact of approximately $0.14 per share from increased same store NOI;
• A positive impact of approximately $0.09 per share from NOI from non-same store properties currently in lease-up;
• A positive impact of approximately $0.16 per share from lower total interest expense due to lower debt balances;
• A negative impact of approximately $0.60 per share of lower NOI primarily as a result of the Company’s 2016 disposition activity; and
• A negative impact of approximately $0.04 per share from higher general and administrative expense, lower fee and asset management income and other items.

Same Store Results

On a same store third quarter to third quarter comparison, which includes 72,229 apartment units, revenues increased 3.4%, expenses increased 5.9% and NOI increased 2.4%. Average Rental Rate increased 3.4% and occupancy decreased 0.2%. The Company’s same store expenses in the quarter were impacted by an adverse legal decision regarding the calculation of real estate taxes for several of the Company’s properties in Jersey City, New Jersey, higher property payroll costs due to fuller property-level employment and increased wage rates, and increased leasing and advertising expenses due primarily to spending on promotional and incentive efforts in San Francisco and New York.

On a same store nine-month to nine-month comparison, which includes 71,488 apartment units, revenues increased 4.0%, expenses increased 2.5% and NOI increased 4.7%. Average Rental Rate increased 4.0% and occupancy remained flat at 96.1%.

Investment Activity

During the third quarter of 2016, the Company acquired a 94-unit apartment property in Los Angeles for a purchase price of approximately $45.2 million and an Acquisition Capitalization Rate of 4.5%. Also during the third quarter of 2016, the Company sold eight consolidated apartment properties, consisting of 941 apartment units, for an aggregate sale price of approximately $140.6 million at a weighted average Disposition Yield of 6.2% and generating an Unlevered Internal Rate of Return (Unlevered IRR) of 12.0%. During the quarter, the Company also sold a land parcel in Berkeley, California for $30.0 million and an unconsolidated property in Atlanta for which the Company received approximately $12.4 million for its 20% interest.

Also during the quarter, the Company stabilized three development properties: 170 Amsterdam in New York, Azure in San Francisco and Odin in Seattle, at a weighted average projected yield of 5.8%.

During the first nine months of 2016, the Company acquired four consolidated apartment properties, consisting of 573 apartment units, for an aggregate purchase price of approximately $249.3 million at a weighted average Acquisition Capitalization Rate of 4.8%. During the first nine months of 2016, the Company sold 91 consolidated apartment properties, consisting of 27,831 apartment units, for an aggregate sale price of approximately $6.57 billion, generating an Unlevered IRR of 11.8%. These sales produced a net gain on sales of real estate properties of approximately $3.87 billion and an Economic Gain of approximately $2.52 billion. The weighted average Disposition Yield on these sales is estimated at 5.3%. Also during the first nine months of 2016, the Company sold its entire interest in the management contracts and related rights associated with the military housing ventures at Joint Base Lewis McChord in Washington State, for approximately $63.3 million, generating a gain on sale of approximately $52.4 million. Also during the first nine months of 2016, the Company sold three land parcels for an aggregate sale price of approximately $57.5 million as well as the unconsolidated property in which it had a partial interest as described above.

Capital Markets Activity

On October 12, 2016, the Company closed a $500 million unsecured note offering maturing November 1, 2026 with a coupon of 2.85% and an all in effective rate of approximately 3.10% including the effect of underwriters’ fees and the termination of certain interest rate hedges. Proceeds from this issuance were used for working capital and general corporate purposes.

Fourth Quarter 2016 Guidance

The Company has established an EPS guidance range of $0.62 to $0.66 for the fourth quarter of 2016. The difference between the Company’s third quarter 2016 EPS of $0.56 and the midpoint of the fourth quarter 2016 guidance range of $0.64 is due primarily to higher expected gains on property sales and sales of non-operating assets and the items described below.

The Company has established an FFO guidance range of $0.82 to $0.86 per share for the fourth quarter of 2016. The difference between the Company’s third quarter 2016 FFO of $0.77 per share and the midpoint of the fourth quarter 2016 guidance range of $0.84 per share is due primarily to higher expected gains on sales of non-operating assets and the items described below.

The Company has established a Normalized FFO guidance range of $0.77 to $0.81 per share for the fourth quarter of 2016. The difference between the Company’s third quarter 2016 Normalized FFO of $0.78 per share and the midpoint of the fourth quarter 2016 guidance range of $0.79 per share is due primarily to:

• A positive impact of approximately $0.03 per share from increased same store NOI;
• A positive impact of approximately $0.01 per share from NOI from non-same store properties currently in lease-up;
• A negative impact of approximately $0.01 per share of lower NOI primarily as a result of the Company’s 2016 disposition activity; and
• A negative impact of approximately $0.02 per share from higher total interest expense due to lower capitalized interest as well as higher debt balances.

Full Year 2016 Guidance

The Company has revised its guidance for its full year 2016 same store operating performance, EPS, FFO per share, Normalized FFO per share and transactions as listed below:

The change in the full year EPS guidance range is due primarily to lower gains on property sales as a result of the Company’s reduced disposition guidance and the items described below.

The change in the full year FFO per share guidance range is due primarily to the items described below.

The midpoint of the Company’s full year Normalized FFO per share guidance range has not changed. The small reduction in expected same store NOI has been offset by the positive impact of an expected reduction in general and administrative expense.