Equity Residential (EQR), a leading real estate investment trust (REIT), reported fiscal 2012 first quarter funds from operations (FFO) of $191.8 million or 60 cents per share, compared to $176.9 million or 56 cents per share in the year-ago quarter. Funds 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.
Excluding certain one-time items, recurring FFO for the reported quarter was $191.9 million or 61 cents per share, compared to $175.2 million or 56 cents per share in the year-earlier quarter. Recurring FFO for first quarter 2012 marginally missed the Zacks Consensus Estimate by a penny.
Total revenues during the quarter were $527.7 million, compared to $466.4 million in the year-earlier period. Total revenues during the reported quarter were in line with the Zacks Consensus Estimate of $528 million.
Equity Residential 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 (first quarter 2012 vs. first quarter 2011 comparison, which includes 105,612 apartment units) quarterly revenues increased 5.5%. Same-store net operating income (NOI) during the quarter increased 7.8% year-over-year, primarily due to a 5.5% increase in average rental rates.
During the quarter, Equity Residential acquired 3 properties totaling 544 apartment units for $159.1 million at a weighted average cap rate of 4.4%. The company also acquired two land parcels in Seattle and South Florida for $23.7 million. Equity Residential sold 3 consolidated properties during first quarter 2012 (1,522 apartment units) for $206.4 million at a weighted average cap rate of 6.2%.
During fourth quarter 2011, 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 originally owned by a consortium of financial institutions that include Bank of America Corporation (BAC), Barclays PLC (BCS), and 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 till May 21, 2012 to purchase the remaining 26.5% interests in Archstone owned by the banks for $1.5 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 2.1 million shares at $59.47 each for total consideration of approximately $123.6 million. The proceeds were primarily utilized to repay debt. At quarter-end, the company had cash and cash equivalents of $219.6 million, and total debt of $9.4 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. At quarter-end, the company had about $1.7 billion available on its revolving credit facility, and $500 million available on its delayed draw term loan.
For second quarter 2012, recurring FFO is expected in the range of 65 cents to 69 cents per share. We maintain our Neutral recommendation on the stock, which presently has a Zacks #3 Rank, which translates into a short-term Hold rating.
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