In the history of Equity Residential, there have only been two quarters when the Chicago-based REIT didn't buy any assets. One of those two quarters just ended—the third quarter of 2008.
With credit markets in the tank and an uncertain economic outlook, Equity chose to protect its own liquidity rather than chase new apartments. That meant selling off assets to the tune of $328.5 million at an average cap rate of 5.9 percent. Those sales generated an unlevered internal rate of return (IRR) of 10.8 percent. It also canned two development projects and stopped $880,000 in the development pipeline, according to the firm's third quarter conference call and SEC filing. Still, the company's sales volume fell off from 2007. That's the main reason its reported earnings of $0.64 per share fell from $1.62 per share in the third quarter of 2007. If Fannie Mae and Freddie Mac continue to provide capital to borrowers, Equity intends to continue selling (despite seeing cap rates tick up 50 to 100 basis points recently).
After closing a $550 million secured loan originated by Wells Fargo for repurchase by Fannie Mae, the company has about $450 million of cash and cash equivalents and roughly $1.3 billion available on its unsecured revolving credit facility. It anticipates having approximately $660 million in cash by the end of 2008.
"From a liquidity standpoint, we are in very good shape," said David J. Neithercut, Equity's president and CEO during the conference call.
This cash could be very helpful as Equity enters 2009. "We do expect 2009 to be a challenging year," Neithercut said.
Operationally, the third quarter of 2008 was still fairly healthy. Equity's third quarter funds from operations (FFO) rose 10 percent to $189.1 million, or 65 cents per share, up from $172.4 million, or 58 cents per share, the prior year.
In many markets, Equity's occupant retention is still good, but rental growth is difficult. In New York, for instance, the REIT is seeing demand for smaller one-bedroom and efficiency units as renters look to downsize, as well demand for larger two-bedroom units where renters can double up. But demand for larger one-bedroom units is softening.
Nationally, rent increases on both vacant units and renewals are also proving challenging. "New prospects are resisting high rental rates," Neithercut said.