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Can In-Line Q1 FFO Drive Equity Residential (EQR) Stock?

Equity Residential EQR reported normalized funds from operations (“FFO”) per share for first-quarter 2016 of 76 cents, in line with the Zacks Consensus Estimate but down from the prior-year quarter figure of 79 cents. We expect the earnings release to lead to stock movement.

Quarterly results at this residential real estate investment trust (“REIT”) were primarily driven by higher same store net operating income (“NOI”) and NOI from non-same store properties presently in lease up. However, the positives were marred by the dilution impact from the company’s 2016 asset sales.

Total revenue generated during the reported quarter was $619.1 million, reflecting a decline of 7.1% from the prior-year period. The figure also missed the Zacks Consensus Estimate of $648 million.

Quarter in Detail

Same-store revenues (includes 73,222 apartment units) increased 4.6% year over year to $547.7 million, while expenses remained flat at $162.7 million. As a result, same-store NOI grew 6.6% year over year to $385.0 million.

The company experienced a 4.6% increase in average rental rates to $2,500 per apartment unit, while occupancy edged down 10 basis points year over year to 95.9% for the same-store portfolio.

Equity Residential exited first-quarter 2016 with cash and cash equivalents of $368.0 million, up from $42.3 million at 2015-end.

Portfolio Activity

Importantly, during the first quarter, Equity Residential accomplished the sale of 23,262 apartment units to controlled affiliates of Starwood Capital Group for $5.365 billion. The move helped the company to generate an economic gain of around $2.0 billion and an unlevered internal rate of return (Unlevered IRR) of 11.3%.

Moreover, the company sold eight other consolidated apartment properties (2,900 apartment units) for a total of around $950.0 million. Together, these dispositions led to an economic gain of $2.4 million and unlevered IRR of 11.8%.

The assets sales led the company to pay a special dividend to shareholders of $8 per common share, aggregating around $3.0 billion, in the first quarter. Moreover, the company used the proceeds from asset sales to retire around $2.0 billion of existing debt, a large part of which was slated to mature in 2016 and 2017.

On the other hand, Equity Residential purchased a property each in Seattle, Los Angeles and Brooklyn, NY for a total of $204.1 million.

2016 Outlook

For second-quarter 2016, Equity Residential expects normalized FFO per share in a range of 74–78 cents. The Zacks Consensus Estimate is currently pegged at 78 cents.

For full-year 2016, Equity Residential projects its normalized FFO per share in a range of $3.05–$3.15 against the prior guidance of $3.00–$3.20. The Zacks Consensus Estimate of $3.12 falls within this range.

Full-year 2016 guidance is backed by physical occupancy of 95.9% (prior guidance was 96.0%), revenue change of 4.5–5.0% (4.5–5.25% guided earlier) and NOI change of 5.0–6.0% (against the prior projection of 5.0–6.5%) at its same-store properties.

Our Viewpoint

For Equity Residential, the assets sales are expected to help in focusing exclusively on its core, high-density urban markets. However, the earnings dilution impact from such a move is impossible to avoid in the near term. Moreover, the rise in supply in the East Coast remains a concern.

Equity Residential currently carries a Zacks Rank #3 (Hold). Investors interested in the apartment REIT industry may consider stocks like Essex Property Trust Inc. ESS, Mid-America Apartment Communities Inc. MAA and Select Income REIT SIR. All these stocks carry 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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