) core funds from operations (FFO) per share in the first quarter
of 2013 reached 64 cents, a penny short of the Zacks Consensus
Estimate. This however, went up 3 cents from the year-ago FFO per
AVALONBAY CMMTY (AVB): Free Stock Analysis
EQUITY RESIDENT (EQR): Free Stock Analysis
PLUM CREEK TMBR (PCL): Free Stock Analysis
SIMON PROPERTY (SPG): Free Stock Analysis
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Quarterly results at this real estate investment trust (REIT)
were primarily driven by higher same store net operating income
(NOI) and the benefit from stabilized Archstone properties.
However, the positives were offset partially by the negative
impact from other transaction activity and common share issuance
for the Archstone deal.
Equity Residential's reported FFO per share, for the quarter
under review was 22 cents per share, well below 60 cents in the
prior-year quarter. The downfall was due to merger-related
expenses and prepayment penalties related to the Archstone
Total revenue during the reported quarter increased 20.8% year
over year to $539.2 million, but missed the Zacks Consensus
Estimate of $575 million.
Quarter in Detail
Same-store revenues (that includes 90,350 apartment units)
increased 5.1% year over year to $465.7 million from $443.2
million, while expenses increased 2.9% to $166.5 million. In
addition, occupancy surged 30 bps (basis points) to 95.0% from
94.7% for the same-store portfolio.
Same-store net operating income (NOI), during the quarter,
increased 6.3% year over year to $299.2 million, primarily
reflecting a 4.7% increase in average rental rates to $1,809 per
In November, Equity Residential, along with
AvalonBay Communities Inc.
), inked a deal with Lehman Brothers Holdings Inc. to acquire the
entire ownership stake of Archstone Enterprise LP. The deal
envisaged Equity Residential acquiring 60% of Archstone's assets
and liabilities, while the remainder by Avalonbay. The
transaction was accomplished by late February this year.
Equity Residential closed the $9 billion acquisition of about 60%
of the assets and liabilities of Archstone. This included
approximately 22,000 apartment units mainly in Boston, New York,
Washington, D.C., Seattle, San Francisco and Southern Calif.
Also, the deal included 14 land sites for future development. Of
these, 6 sites are in the company's key markets, which it plans
to retain for development in the future while it intends to sell
the remaining 8 sites.
Equity Residential paid $2.016 billion in cash and issued
34,468,085 common shares to the seller of the Archstone assets.
Also, $2.0 billion of Archstone secured mortgage principal was
paid off in concurrence with the closure.
The deal was financed through around $575.0 million of cash in
hand, $1.6 billion of available borrowings under its revolving
credit facility, $1.1 billion of proceeds from the disposition of
non-core assets and $750.0 million of bank term debt.
Furthermore, the company assumed about $2.9 billion of
consolidated secured debt, including $2.2 billion of Fannie Mae
Other Notable Transactions
Except the Archstone assets, Equity Residential did not acquire
any operating properties in the reported quarter. Subsequent to
the end of the first quarter, the company purchased a property in
Redmond, Wash. for $91.5 million and a capitalization (cap) rate
of 4.7%. The property comprised 322 apartment units.
Also, Equity Residential divested 63 properties (comprising
18,452 apartment units) for a total value of $2.98 billion. The
sales transaction (excluding one Archstone asset that was sold
shortly after its acquisition) generated an unlevered internal
rate of return, inclusive of management costs, of 9.4%.
Subsequent to the quarter end, the company sold 8 properties
(comprising of 2,786 apartment units) for a total of around
$374.4 million and one land parcel for $29.0 million.
At the end of first-quarter 2013, Equity Residential had cash and
cash equivalents of $56.1 million, compared with $612.6 million
at the end of 2012.
In March, Equity Residential prepaid in full $543.0 million of
secured debt with an interest rate of 5.7% that would have
matured in Jan 1, 2017. As a result, the company incurred a
penalty of $70.3 million, which it had previously apprehended to
incur in the second quarter of 2013.
Subsequent to the quarter end, Equity Residential completed a
$500 million unsecured note offering due Apr 15, 2023 with a
coupon of 3.0%. Proceeds are being used for repaying debts and
other corporate purposes.
For second-quarter 2013, Equity Residential expects core FFO per
share in the range of 67-71 cents.
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 toward
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 augur
well for its top-line expansion.
Yet, the continuous acquisition spree of the company involves
significant upfront expenses, which drag down the near-term
profitability till the properties get established.
Equity Residential currently holds a Zacks Rank #3 (Hold). Other
REITs that are performing better and are worth a look include
Plum Creek Timber Co. Inc.
Simon Property Group Inc.
), both carrying a Zacks Rank #2 (Buy).
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.