Here’s What Drove Equity Residential’s Strong Q3 Results



Equity Residential beat estimates

Equity Residential (EQR) reported strong third-quarter 2018 results yesterday. Its top and bottom lines came in ahead of Wall Street estimates and marked a decent improvement from the year-ago quarter as well as sequentially.

The company posted normalized FFO (funds from operations) of $0.83 for the third quarter, beating Wall Street’s expectations by a penny and exceeding the management’s guidance range of $0.76–$0.80. The normalized FFO marked an improvement of $0.03 (or 3.8%) from $0.80 in Q3 2017 and $0.02 (or 2.5%) from $0.81 in Q2 2018.

Strong occupancy rates, higher rentals, and growth in new leases and renewal rates benefited its third-quarter bottom-line results. Third-quarter occupancy rates remained flat YoY at 96.2%, while average rental, new leases, and renewal rates grew 2.1%, 1.2%, and 5.1%, respectively.

The company stated that the $0.03 YoY rise in FFO per share was mainly due to a $0.02 benefit from improved same-store NOI (net operating income) and a $0.02 gain from increased lease-up NOI, partially offset by a negative impact of a penny from higher interest expenses.

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The company’s third-quarter rental revenues grew 4.6% YoY to $652.7 million and beat Wall Street’s estimate of $647.4 million. Apart from increased average rental rates, a reduction of 40 basis points in its same-store turnover rate also positively impacted rental revenues. The turnover rate refers to the number of residents moving to a new unit within the same community. An improving domestic economy and a robust job market are driving demand for rental properties, thus pushing average rental and occupancy rates higher.

Management commentary

In its third-quarter earnings press release, David Neithercut, Equity Residential’s CEO, stated that management expects “to see continued but modest improvement in revenue growth in 2019 as a strong economy and favorable job market continue to drive demand and support absorption of new supply across our markets.”

Buoyed by an encouraging third-quarter performance, the company raised its same-store revenue outlook for 2018. It now anticipates same-store revenues to grow at the higher end of its previous forecast of 1.9%–2.3%. Management also narrowed its guidance range for normalized FFO per share. The new mid-point of FFO per share is $3.26, which is higher than its earlier projection of $3.25.

AvalonBay Communities (AVB), Camden Property (CPT), and Essex Property (ESS) are expected to report adjusted FFO of $2.23, $1.19, and $3.14 per share, respectively, for the third quarter. Equity Residential and these peers make up ~24% of the iShares Residential Real Estate ETF (REZ).

The company projects normalized FFO per share of $0.84–$0.86 in the fourth quarter.


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