This REIT Presents 12% Total Return
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Equity Residential (NYSE: EQR) came into existence in 1993 with the objective of investing and managing in quality apartment properties in top US growth markets. The company is part of the S&P 500 and has a market cap of $18.7 billion. The stock is trading at 72 times its earnings and yields 5.4%.
Recent Quarter’s Review
Equity Residential reported stronger than expected FFO per share (a key earnings measure) on revenues that remained behind their estimates. While FFO per share of $0.94 for the fourth quarter was $0.17 ahead of estimates, revenues of $547.6 million remained $4 million behind expectations. The key earnings measure rose 19% from the linked quarter, on higher rent and better expense controls. Recent quarter results were also supported by growth in same store revenues and same store net operating income.
Revenues during the recent quarter surged 13% from a year ago. Much of the improvement in the revenues was attributed to the major contributor, rental income. Rental income grew 13% from a year ago.
The recent quarter’s expenses of $1.45 billion were up 8% from a year ago. Much of the surge in expense was a result of the hike in property and maintenance costs and depreciation cost. Depreciation cost during the prior year surged 8%, while property and maintenance costs increased 7.2% over the same time period.
Interest and other income of $150.5 million increased significantly from a year ago. Therefore, the operating income of $667 million increased 23% over the prior year. As a result, income from continuing operations of $312 million surged four-fold over a year.
Acquisitions & Dispositions
During the fourth quarter, the company did not acquire any operating properties, however it did purchase four adjacent land parcels in Los Angeles at a cost of $79 million for future development of as many as 970 apartment units. Nine other properties with a total of 1,896 apartment units were also purchased during the quarter. The company also sold 15 properties, consisting of 3,675 apartment units during the quarter.
The company expects normalized FFO guidance of $2.85 per share. This is compared to 2012 normalized FFO of $2.76 per share. The growth is associated with a positive impact of NOI from ten months of income from the Archstone stabilized properties. Besides, a positive impact from NOI from 2012 acquisition activity is also expected to support the growth in 2013 normalized FFO.
Besides, the company expects physical occupancy during 2013 to hover around 95.3%, while revenues are expected to surge within the range of 4% - 5%, while at the same time expense are expected to increase by 2.5% to 3.5%. Net operating income is expected to grow by 4.5% to 6%.
AvalonBay Communities (NYSE: AVB) owns and invests in multifamily apartments in similar high barrier to entry locations of the United States. AVB reported its fourth quarter performance on Jan. 30. The FFO per share increased 6.7% to $1.27 from a year. The company expects projected FFO for the year 2013 to be within the range of $4.11 to $4.47, representing a 19.4% decrease from the full year 2012 FFO per share of $5.32. The company expects rental revenue to grow, operating expense to increase 3.5%, while a 4.75% surge in NOI is expected during the full year 2013.
UDR (NYSE: UDR) is another equity giant that competes with EQR. UDR has a well diversified apartment portfolio both in terms of asset types and geographical distribution. The company’s reported funds from operations (FFO) of $0.35 remained $0.02 behind what the Street was expecting. Both the bottom line and rental income surged 2.3% and 7% compared to the prior year. According to the company’s guidance, the three year outlook remains solid.
I recommend investors buy EQR and benefit from its decent dividend yield of 5.4% and 6.3% potential for capital appreciation, as analysts have a consensus mean price target of $61.15 for EQR, which is currently exchanging hands at $57.51.
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