Equity Residential Sees More Gain From Conversions

The multifamily REIT closed out 2004 by selling 14,159 units for $788 million, at a 6.4% capitalization rate, while buying 6,182 units for $901 million at a 5.7% cap rate. The units sold had an average age of 20 years, Neithercut reports in this week's earnings conference call, while the units added to the portfolio are six years old on average.

Meanwhile, Equity Residential is becoming a major condominium converter. Neithercut notes the company sold 115 units as condominiums in 2002, 411 units in 2003, then doubled it last year to 811 units for its own account, and 167 units for joint venture partners. That added up to about $28 million in net gains before overhead costs. This year, Equity Residential is aiming to convert 1,500 units from its own portfolio to condominiums, plus 350 it owns with partners, Neithercut says. That is expected to add another $50 million to the REIT's bottom line.

"The conversion business is an opportunity to sell our assets at premium prices," Neithercut says. "Even if interest rates increase, we think we can sell a lot of product in this $150,000 to $200,000 level."

While Equity Residential officials expect to see about $30,000 per unit in gross profit from their condominium sales, competitors in Atlanta, Chicago, Seattle, Southern California, South Florida and Washington, DC can expect to see Equity Residential multifamily rental units affect local markets.

While older properties in those markets may become condominiums, some newer developments are headed for the same fate. For example, the company's 435-unit Watermarke project in Irvine, CA saw 45 units close in the fourth quarter of 2004, with sales totaling $17.5 million.

Closer to home, Equity Residential already has sold 310 units at Four Lakes Country Club Estates in west suburban Lisle for $41.8 million. All 774 units are expected to be sold by the end of this year.