Headline: Best Idea Long EQR announced 3Q21 earnings with Core FFO of $0.77/share coming in a little light (-3.5%) relative to our $0.80/share estimate driven mostly by below-NOI items, but above the Street at $0.75/share (+1.8%). Important to remember that deal activity skews the results a bit here, namely eight properties acquired and five sold in the quarter which alters the composition of the same store pool and shifts NOI around relative to post-2Q. As can be seen below, we were $0.02/share light in the same store portfolio but picked up a penny from non-same store assets, so on-balance about a ~$3 million or one penny NOI "miss" relative to our model. Perhaps more importantly (1) the guidance range moved up and narrowed to Core FFO of $2.96/share at the midpoint ($2.95 to $2.97) from $2.85 to $2.95, which is less than we would have expected and we wonder if there is some conservatism baked in here to provide cushion to the upside. Regardless, it seems unlikely that EQR hits our $3.05 number this year so we need to dial that in a bit. On the plus side blended 3Q leasing spreads at +7.6% were higher than our +5% number and spreads accelerated further into October at +9.8% (including +9% on renewals which is really good news for EQR), meaning that our forward growth forecasts needs to come up and FY22 looks better, all else the same. Some further thoughts:
- -$0.03/share variance comprised of a penny of lower NOI and -$0.02/share of higher interest expense than our model, with some rounding items adding +/-.
- SSNOI is now expected at -7% on the year for FY21, above the prior high-end of -8.5% to -7.5% and trending in the right direction. We think SSNOI moves into the double-digit positive range in FY22.
- The cap rates on acquisitions/dispositions were the same in the quarter, so all else the same EQR is picking up about ~$5 million of incremental annual NOI going forward from the deal activity. All five sold assets were located in San Francisco and Los Angeles, while the company picked up 2 assets each in Austin, Dallas/Ft. Worth and Atlanta. The remaining two assets acquired are located in Seattle and Boston, so the portfolio movements tell you towards which regions the company is tipping on the margin.
- We have to revisit our model, but the 4Q21 Core FFO guidance of $0.78 to $0.80 seems very conservative to us at first glance, perhaps driven mostly by the non-same store pool of assets.
Figure 1: EQR 3Q21 Earnings Variances
Please e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
