Chicago Illinois Real Estate Blog

Equity Residential, benefiting from the moribund housing market, reported surging third-quarter results Wednesday evening.

The Chicago-based real estate investment trust, which owns more than 400 U.S. apartment properties, said funds from operations climbed 18 percent to $200 million, or 63 cents per diluted share, from $169.7 million, or 55 cents per share, in the year-earlier period.

Funds from operations, or FFO, is the preferred measure of profitability of a REIT because it strips out real estate-related depreciation and other factors that skew results.

“We are extremely pleased with the operating performance of the company thus far,”  President and CEO David J. Neithercut told analysts in a conference call. “We have come an awfully long way in the last year.”

Equity Residential’s profit upswing is a byproduct of the bleak outlook for the struggling U.S. housing market.

When the housing bubble burst in 2007, many homeowners defaulted on their mortgages, leading to a jump in foreclosures. As banks and mortgage servicers flooded the market with foreclosures and short sales, they drove down prices, diminishing the equity in homes whose owners were up-to-date with their mortgage payments. The median sales price of an existing U.S. home has fallen 16.5 percent to $165,400 from $198,100 in 2008.

As a result, there is little incentive to buy a home because many consumers fear its value will only continue to decline until the market turns around. And that means more demand for rental housing.

“Somebody who maybe moved into their parents’ basement [during the recession] has gotten a job and feels comfortable enough with their financial situation to move out on their own,” said John Sheehan, an analyst with Edward Jones in St. Louis. But instead of investing in a home, many of those who have gotten back on their feet are opting for a safer route and renting an apartment instead, he added.

Although the U.S. economy appears to be recovering, another downturn would likely spell trouble for Equity Residential, the analyst noted.

“If people start to become concerned like they did three years ago and start shrinking their households again or deciding they need to downsize their living arrangements, that could have a negative impact on demand,” Sheehan said.

The high demand for apartments has spurred many landlords to raise rents, boosting profits for REITS like Equity Residential, but also raising  questions about how long  the rising profits can be sustained.
Landlords may come to a point “ where they start getting some pushback from tenants who have seen pretty strong growth in rental rates,” Sheehan said.

For the year to date period, Equity Residential’s  funds from operations strengthened by a solid 13 percent to  $561.2 million, or $1.77 per diluted share,  from $497.2 million, or $1.63 per share.

“Fundamentals continue to be positive and we remain confident that increasing demand for apartment living combined with limited new supply will produce strong results next year and for years to come despite concerns about weakening economic growth,” Neithercut said.

Equity Residential’s latest earnings of 63 cents per diluted share slightly topped analyst forecasts of 62 cents.
On a day when the broad market enjoyed a significant upturn, shares of the REIT rose $2.95, or 5.2 percent, to close on the New York Stock Exchange at $59.96.

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