Headline beat
Operating as a REIT, Equity Residential (NYSE:EQR) acquires, develops and manages multi-family residential properties. These are then rented out to tenants in order to generate rental income for the company, which is later distributed among its investors in the form of dividends. The company surprised its investors and analysts when both its top and bottom lines beat their respective estimates at the end of the second quarter. The second quarter results beat is driven by lower interest expense.
Equity Residential (NYSE:EQR) reported Funds from Operations, or FFO, of $0.73 per share, compared to an estimate of $0.71. Reported FFO per share was 13% above the prior year figure. FFO is one of the most critical metrics for REITs. It is a measure of cash that the REIT generates that will be available for dividend distributions. Also, the reported revenue of $635 was $42.4 million ahead of the estimate.
Geographical footprint
For Equity Residential (NYSE:EQR), occupancy rates improved 50 basis points over the prior quarter to 95.5%, while rents were up 1.6% over the same time period. Since the company has operations across the US, it’s important to see which markets performed better than others. Boston remained the highest performing market, reporting both rent and occupancy growth. The Boston market accounts for around 5% of the total apartment units owned by Equity Residential (NYSE:EQR). The company has a large concentration in South Florida as it accounts for over 10.6% of the total apartments Equity Residential owns. South Florida’s housing markets are showing continuous strength for the past 17 months. Boston was followed by San Francisco while Phoenix remained the weakest in term of revenue growth.
Acquisitions
Rent growth, increase in occupancy and continued acquisition and development remain the key performance driving factors for Equity Residential. During the quarter, Equity Residential (NYSE:EQR) announced that it acquired an asset in Redmond for $91.5 million and some land in Seattle for $16.5 million. Addition of new properties in the portfolio will lead the company to report higher rental income in the coming quarters. Secondly, since the mortgage rates are climbing and owning a single-family residence is becoming expensive. This will further boost demand for multi-family, ultimately increasing the company’s rents and occupancies.
Peers analysis
Now, let’s look at a couple of Equity Residential’s peers. HCP, Inc. (NYSE:HCP) and UDR, Inc. (NYSE:UDR) are among the closest competitors of Equity Residential. Both have disclosed their performances for the second quarter. Let’s look at their performances and see how they will perform in the future.
UDR operates as a real estate investment trust that acquires, renovates and manages multifamily apartments, just like Equity Residential. UDR disclosed its performance for the second quarter, which beat estimates. The company reported an FFO of $0.37 per share, where analysts were expecting $0.34 per share. Much of the beat was associated with the hurricane-related recoveries. Further, the company reported occupancy rate of 96.1% after it increased 50 basis points over the first quarter. Over the same time period, rents jumped 1.4%.
Boston, Monterey Peninsula and San Diego are among the best performing regions for UDR, Inc. (NYSE:UDR). Going forward, UDR is expected to increase its rental income from the newly completed 583-unit redeveloped community in Marina de Rey. Further, the company announced more transactions related to property development and land purchases, which is why the management has also increased its 2013 FFO guidance.
HCP, Inc. (NYSE:HCP) is another real estate investment trust that acquires and develops properties for rental income purposes. However, it invests in properties that are not residential in nature. HCP acquires, develops and renovates facilities that provide healthcare. That means it has a different exposure compared to UDR and Equity Residential. That’s why HCP reported disappointing earnings for the second quarter. The reported FFO of $0.72 per share remained $0.01 per share behind expectation, while revenue of $516.3 million was $2.23 million behind estimate. The disappointment in the results was majorly due to a charge related to non-cash rents.
During the quarter, HCP was negatively impacted by the Fed’s comments, which impacted the near-term deal volumes. Going forward, HCP is expected to benefit from its 5 by 5 model, which allows it to invest across the spectrum of asset classes within the healthcare real estate sector of the US. Analysts at Barclays believe the company will experience a 5% year over year growth driven largely by continued new investments in healthcare real estate. During the quarter, the company also experienced a hike in its cost of financing. However, the financing environment is stabilizing, which means deal activity will re-start in the near future.
Conclusion
I am bullish on Equity Residential (NYSE:EQR). Beside reporting stronger-than-expected earnings for the second quarter, I believe the company has the potential for growth in the future as well. So, I recommend investors buy the stock.
The article Growth Drivers in Place for Equity Residential originally appeared on Fool.com and is written by Adnan Khan.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
