Demand for apartments in high-cost coastal cities took a hit during the early days of the pandemic. Many renters fled urban areas for cheaper suburbs because they could work remotely. However, with more companies starting to return to the office, renters are returning to major cities.
That's proving to be a boon for Equity Residential (EQR 2.99%), one of the largest real estate investment trusts (REITs) focused on apartments. The company sees robust growth in 2022, fueled by recovery in its core markets and its expansion into faster-growing cities.
Here's a look at what the REIT sees ahead.
A strong end to another challenging year
Equity Residential continued to face some pandemic-related headwinds in 2021. Overall, the apartment REIT's net operating income (NOI) declined by 8.1%, driven by lower lease rates and higher expenses, which more than offset improved occupancy. As a result, its normalized funds from operations (FFO) declined by $0.27 per share to $2.99 per share.
However, market conditions improved considerably during the second half of the year. The REIT reported a 6.1% year-over-year increase in NOI during the third quarter and a 5.6% rise in the fourth quarter, driven by higher rental rates and occupancy gains. That helped boost its FFO by $0.06 per share during the fourth quarter.
The company's CEO, Mark Parrell, noted that "robust demand in the fourth quarter drove high occupancy and the lowest resident turnover in our history, allowing us to continue to increase rents." Overall, Equity Residential raised rates on existing leases by 10.7% at renewal in the fourth quarter.
Set up for a strong year
Equity Residential anticipates that momentum continuing in 2022. Parrell stated in a press release:
We expect operations and cash flows in 2022 to accelerate further as we write new leases at significantly higher current market rent levels and benefit from continuing deep demand. Our target affluent renter demographic remains drawn to the attractive lifestyle that our high-quality urban and suburban properties and dedicated property teams provide.
Driven by high occupancy levels of 96.6% across its portfolio and a strong 61% renewal rate, the REIT was able to raise rents by 12.3% in January on expiring leases. Meanwhile, new leases on vacant units came in at 13.4% above the previous rate.
This significant improvement in rental rates has Equity Residential projecting a 9% increase in same-store revenue growth this year. That's a big factor driving its expectation that normalized FFO will rise by 15.4% in 2022.
The other big growth driver is the company's real estate investment strategy. Equity Residential spent $1.7 billion to purchase 17 properties last year. It fully funded those new investments by selling 14 older properties for $1.7 billion. It expects the new properties to deliver faster rental growth due to their locations across higher-growth suburban and Sun Belt markets. Roughly 82% of its acquisitions were in expansion markets like Denver; Austin, Texas; Dallas/Ft. Worth; and Atlanta.
Equity Residential also funded several new apartment development projects that will help drive growth in 2022 and beyond. Last year, the company completed three development projects, investing more than $600 million to add 824 apartment units. In addition, it started four developments in the fourth quarter, which will cost an estimated $450 million to add over 1,200 units. The company also entered four joint ventures to build another 1,275 units in Texas and Colorado, three of which are part of its strategic relationship with homebuilder Toll Brothers.
The company plans to continue building and buying apartment communities in its expansion markets and across the best suburbs. It believes this strategy will continue to pay dividends as more affluent renters move into areas where they can live, work, and play.
Pivoting toward growth
Last year was a transitional period for Equity Residential. Pandemic-related headwinds weighed on its results during the first half of the year. Meanwhile, it was in the early stages of its expansion market strategy.
However, with rental rates bouncing back and its expansion market shift paying off, the REIT expects to deliver robust growth in 2022 and beyond. That makes it an intriguing REIT for investors seeking a way to play the growing demand for apartments across the U.S.