Equity Residential (EQR) Lags Q3 FFO Estimates, Trims '23 View
Equity Residential’s EQR third-quarter 2023 normalized funds from operations (FFO) per share of 96 cents narrowly missed the Zacks Consensus Estimate of 97 cents. Also, rental income of $724.1 million lagged the consensus mark of $728 million. Results reflect a weak performance in its West Coast markets, along with the Rite Aid bankruptcy.
According to Mark J. Parrell, Equity Residential’s president and CEO, “While the East Coast outperformed our expectations, the San Francisco and Seattle markets underperformed due to lower recent job growth in our target affluent renter demographic and, together with the Rite Aid bankruptcy, led us to adjust guidance.”
Parrell also noted that with respect to delinquency, the legal process is lengthy and uneven and “we will likely end the year with modestly more delinquency than our previous goal.”
However, on a year-over-year basis, normalized FFO per share increased 4.3%, with rental income climbing 4.2%.
Quarter in Detail
Same-store revenues were up 4.1% year over year. Our estimate for same-store revenue growth was 4.2%. Same-store expenses flared up 3.1%, and consequently, same-store net operating income (NOI) climbed 4.6% year over year.
The average rental rate increased 5% year over year to $3,048 in the quarter ended September. Meanwhile, the physical occupancy contracted 40 basis points (bps) to 96% for the same-store portfolio. Our estimate for the same was 96.1%.
Same-store residential revenues were up 4.4% year over year, while expenses increased 3.1%. Consequently, same-store residential NOI expanded 5.1% year over year.
The new lease change for its residential same-store properties was up 0.5%, while the renewal rate achieved by EQR was 5.5% for the third quarter. The blended rate for the quarter was 3.1%. The physical occupancy for this portfolio was 96%, up 10 basis points (bps) sequentially.
In the third quarter, Equity Residential acquired two operating properties in suburban Atlanta. These included a recently completed 344-unit apartment property in Suwanee, currently in lease-up, for $98 million at a stabilized acquisition cap rate of 5.4% and a 290-unit property in Decatur built in 2019 for $81.7 million at an acquisition cap rate of 5.1%. Also, during the quarter, EQR sold a 166-unit property in Seattle for $60.1 million at a disposition yield of 5.4%, generating an unlevered IRR of 7.5%.
Balance Sheet
Equity Residential exited the third quarter of 2023 with cash and cash equivalents of $39.3 million, down from the $53.9 million recorded at the end of 2022.
The net debt to normalized EBITDAre was 4.24X, which decreased from 4.27X in the previous quarter. The unencumbered NOI as a percentage of the total NOI was 89.8% in the quarter, up from 88.5% reported in the prior quarter.
Guidance
For the fourth quarter of 2023, EQR projects normalized FFO per share in the band of $0.99-$1.01. The Zacks Consensus Estimate is currently pegged at $1.00.
For 2023, Equity Residential revised its outlook for normalized FFO per share to the $3.77-$3.79 band from its earlier guidance in the band of $3.77-$3.83, down 2 cents at the midpoint. The Zacks Consensus Estimate is pegged at $3.79.
For the full year, EQR expects same-store revenue growth of 5.5%, reflecting a decrease of 0.375% from the prior guidance at the midpoint, while same-store expense growth is reaffirmed at 4.25%. Consequently, the same-store NOI growth projection is revised to 6.2%, down 45 bps at the midpoint. Moreover, physical occupancy is now expected at 95.9%, down 10 bps from the prior projection of 96%.
Equity Residential currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Equity Residential Price, Consensus and EPS Surprise
Equity Residential price-consensus-eps-surprise-chart | Equity Residential Quote
Performance of Other Residential REITs
AvalonBay Communities AVB reported a third-quarter 2023 core FFO per share of $2.66, beating the Zacks Consensus Estimate of $2.64. Moreover, the figure climbed 6.4% from the prior-year quarter’s tally. The quarterly results reflected a year-over-year increase in same-store residential rental revenues.
Mid-America Apartment Communities MAA reported a third-quarter 2023 core FFO per share of $2.29, which surpassed the Zacks Consensus Estimate by a penny. Moreover, the reported figure climbed 4.6% year over year. The quarterly results reflected a year-over-year increase in same-store residential rental revenues, driven by effective lease rates. AVB also raised its core FFO per share outlook for 2023.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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