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Q4 2016 Earnings Summary: Equity Residential (NYSE: EQR) Has Dire Prospects For NYC Rental Market In 2017, Blackstone (NYSE: BX) Optimistic Even Among Political Uncertainty

February 22, 2017 – By Spencer Kiely, Analyst, Ariel Property Advisors

After the fourth quarter of 2016 came to a close, executives from various Real Estate Investment Trusts (REITs) and public companies got on the phone to discuss their company’s recent performance. This is what we learned from those calls.

Blackstone Group L.P. (NYSE:BX) Q4 2016 Earnings Release

Blackstone, the world’s largest alternative investment firm, reported better than expected fourth-quarter earnings. Wall Street largely considered this to be a blockbuster quarter, as the firm reported $811.6 million in net profit, an 86% increase from the year before. Assets under management grew to an all-time high of $366.6 billion, and dry powder increased 27% year-over-year to $101.3 billion.

CEO Steve Schwarzman said he was quite optimistic about the future of Blackstone’s investments in the wake of a new president even after the enormous rally in equities, specifically pointing to a rise in the ability of the United States to attract international capital. He also said, ”after the new reform agenda is implemented, we could see a divergence between winners and losers in the United States, which we're extremely well-positioned to anticipate”. Further, he remarked that international markets may see a similar adjustment period, where significant opportunities arise from market inefficiencies. Finally, Schwarzman said that Blackstone has used the recent period of record low-interest rates both domestically and abroad, to sell assets at a significant profit.

The tone of the call was noticeably confident about the long-term investment landscape, while it was noted that the short-term will be hard to predict and may be volatile.

Equity Residential (NYSE:EQR) Q4 2016 Earnings Release

Equity Residential reported fourth quarter earnings that were relatively in line with analyst expectations, but they offered a dire outlook that sent ripple effects through the stock prices of REITs with significant exposure to the NYC rental market.

The earnings call began with CEO David Neithercut discussing the completion of a multiyear process to sell roughly 30,000 units, but the call quickly shifted tone, as Equity saw an abrupt breakdown in fundamentals after 5 years of strength. He also said, “we expect revenue growth to continue to weaken in 2017 with nearly all of our markets expected to deliver same-store revenue growth for this year below 2016 actual performance with Washington, DC being the lone exception.”

Each market was discussed in detail by COO David Santee, and his comments for New York were generally negative as they see “New York as the market that has the highest potential for volatility to the downside with an increased amount of high end units being delivered into an environment where job growth is relatively mediocre and the biggest gains are in the lower paying sectors of education, leisure and hospitality.” New York stands as the only market where Equity Residential has significant concessions built into pricing models. While some players in the market are offering 3 or 4 months rent free, Equity has not needed too yet. Ultimately, Santee said that ”there continues to be strong demand for high quality apartments in great locations. Occupancy remains above historic norms. However, near-term supply will create geographic pockets that will lose pricing power on new leases in the short-term.”

Vornado Realty Trust (NYSE: VNO) Q4 2016 - Earnings Release

The spinoff of its Washington D.C. business and the merge with JBG Companies was a focus of the Q4 earnings call, however they also did provide some key insights into the New York City office and retail market.

Chairman and Chief Executive Officer, Steven Roth said that their New York business was strong. Specifically he said “our New York office portfolio ended the year at 96.3% occupancy, said another way, we are full. And our New York retail portfolio also continues to perform very well. Fourth quarter same-store EBITDA increased 16.6% GAAP and 23% cash.” He went on to discuss their strategy for Penn Plaza, both the future developments slated for completion in 2020 including Moynihan Station, and the present performance specifically the fact that “over the last five years, rents at one and two Penn Plaza have increased 30%”.

Later, President of Vornado’s New York Division David Greenbaum indicated they are noticeably bullish on the long term prospects of New York City, citing Federal policy, infrastructure projects and the low crime rate. Going so far as to say “our confidence in the continued economic vibrancy of New York has never been greater”. However, when Greenbaum drilled down specific employment statistics his confidence in the near-term market was less clear, stating that “while overall job creation in New York remain positive in 2016, the rate of growth slowed to the national average after consecutive years where the city outpaced the rest of the country. The key metric that we look at office using employment grew by 5,000 jobs in 2016, reaching a new record high of 1,373,000 jobs. However, the increase was below the blistering pace of some 35,000 new office sector jobs added per annum in recent years”.

Finally, Greenbaum discussed what he called “perhaps the biggest story of the New York market in 2016”, which is the divergence between new or renovated buildings and more dated office stock. He revealed that “a disproportionately large percentage of the top 20 leases signed during the year were for new and renovated buildings. That’s a trend, those observers expect to continue and that bodes exceptionally well for our fleet”.

More information is available from Spencer Kiely at 212.544.9500 ext.52 or e-mail skiely@arielpa.com.

INSIGHTS ARCHIVE

The information contained herein has either been given to us by the owner of the property or obtained from sources that we deem reliable. We have no reason to doubt its accuracy but we do not guarantee the accuracy of any information provided herein. As an example, all zoning information, buildable footage estimates and indicated uses must be independently verified. Vacancy factors used herein are an arbitrary percentage used only as an example, and does not necessarily relate to actual vacancy, if any. The value of this prospective investment is dependent upon these estimates and assumptions made above, as well as the investment income, the tax bracket, and other factors which your tax advisor and/or legal counsel should evaluate. The prospective buyer should carefully verify each item of income, and all other information contained herein.