Equity Residential in Shift to Supply-Constrained Markets

CHICAGO-Equity Residential Properties Trust, based here, slightly beat market expectations for its third quarter earnings. Management has already met its full year goal of $600 million in dispositions, capital it is using to shift from markets where supply is plentiful to where supply is constrained.

Investors can expect to see the benefits of this shift into supply constrained markets in next year’s results, CEO Doug Crocker told analysts in this morning’s third quarter conference call. He said that the national apartment market, overall, continues to be “phenomenally strong”.

Management says that they have been exiting markets like Arizona, Las Vegas and Colorado Springs where there are “low barriers to entry” and shifting capital to markets where new supply is expected to be minimal. The trust reported that that it has disposed of $245 million worth of properties since the end of the third quarter, while the trust has acquired properties worth $160 million during the third quarter. Management said that 86% of acquisitions have been in markets it deems supply-constrained, which include markets in the Northeast and selected California markets.

The trust has met its $600 million disposition goal for the year already, not including the $400 million or so the trust expects to reap from joint venture activity within the existing portfolio. Management said it is becoming increasingly difficult to execute the recycling strategy because CAP rates are not moving in tandem with interest rates movements. Next years assumptions, management said, include a negative 150 basis point arbitrage between buy and sell prices to anticipate for these difficult conditions.

The trust’s strongest markets were San Francisco with a 17% same store rental rate rise and Boston with a 13% rental rate rise, while its worst performing market was Tulsa with a 1.2% rental rate decline.

For the third quarter, FFO grew a strong 20% from a year earlier to $186.2 million. On a per share basis, the gain was a less spectacular 12.4%. For the first nine months of the year, those gains are 18.8% and 11.7% respectively. Management earnings guidance for the current year is $4.99 per share and for 2001 is $5.35 to $5.40 per share.