By Mindy Tan
Despite fourth quarter results that beat expectations, Equity Residential is expecting weaker growth in 2017 due to softness in its portfolio in New York City.
The real estate investment trust expects a 3.5 percent decline in rent on new leases and 2.1 increase for renewal rents. The REIT has budgeted $4 million for rent concessions in New York City this year and also set aside money for gift cards, which it said it will use only when “absolutely necessary.”
“The first line of defense is rates, second concessions and last gift cards,” said David Santee, chief operating officer, adding that he’s heard of lease agreements which offer three to four months rent-free for a 12-month commitment.
The REIT issued a FFO guidance range of 68 cents to 72 cents per share for the first quarter of 2017, below the analysts’ consensus forecast of 76 cents, according to Bloomberg.
The Chicago-based REIT, posted normalized funds from operations per share, a favored measure of performance for REITs, fell 14 percent to $302.6 million, or 79 cents per share, from $353.1 million, or 93 cents per share in the same period a year ago. Analysts polled by Bloomberg estimated FFO per share of 79.5 cents per share.
Revenue for the quarter fell 13.9 percent to $605.5 million from $703.2 million. This was below the analysts’ expectation of $609.1 million.
For the fourth quarter of 2016, Equity Residential’s average rental rate was up 3 percent and occupancy down 0.1 percent.
The REIT’s stock slid 87 cents, or 1.43 percent to close trading at $59.90.
The company is likely to benefit from its portfolio-repositioning efforts, growth in millennial population, lifestyle transformation and creation of new households, stated Zacks Equity Research on its analyst blog Wednesday.
“However, its performance over the recent quarters reflected the adverse impact stemming from the company’s 2016 huge disposition activity,” Zacks stated.
In January, 2016, Equity Residential sold more than 23,000 units to Starwood Capital. Remaining apartment units are primarily in Boston, New York, Washington, D.C., Seattle, San Francisco, and Southern California.
CEO David Neithercut said he expects 2017 will mark the peak in new apartment deliveries.
“It’s hard to say exactly what we think 2018’s supply will be, but we do think with land prices up and construction cost up, and more traditional construction lending sources winding down a bit there are lots of reasons to think 2018 deliveries will be below 2017,” said Neithercut.
“We operate in markets where the cost of single-family housing is very expensive, so we just believe we have a lot of residents that will stay with us and the demographic picture will bring more to the market.”
For the full year, the REIT reported FFO dropped 10.5 percent to $1.18 billion, or $3.09 per share, compared with $1.32 billion, or $3.46 per share, the previous year.
Revenue for the year was $2.43 billion, down 11.6 percent from $2.74 billion a year ago.