UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12252 (Equity Residential)
Commission File Number: 0-24920 (ERP Operating Limited Partnership)
EQUITY RESIDENTIAL
ERP OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Maryland (Equity Residential)
13-3675988 (Equity Residential)
Illinois (ERP Operating Limited Partnership)
36-3894853 (ERP Operating Limited Partnership)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Two North Riverside Plaza, Chicago, Illinois 60606
(312) 474-1300
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of Beneficial Interest,$0.01 Par Value (Equity Residential)
EQR
New York Stock Exchange
7.57% Notes due August 15, 2026(ERP Operating Limited Partnership)
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Equity Residential Yes ☒ No ☐
ERP Operating Limited Partnership Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Equity Residential:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
l
ERP Operating Limited Partnership:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Equity Residential ☐
ERP Operating Limited Partnership ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Equity Residential Yes ☐ No ☒
ERP Operating Limited Partnership Yes ☐ No ☒
The number of EQR Common Shares of Beneficial Interest, $0.01 par value, outstanding on October 21, 2022 was 377,918,920.
EXPLANATORY NOTE
This report combines the reports on Form 10-Q for the quarterly period ended September 30, 2022 of Equity Residential and ERP Operating Limited Partnership. Unless stated otherwise or the context otherwise requires, references to “EQR” mean Equity Residential, a Maryland real estate investment trust (“REIT”), and references to “ERPOP” mean ERP Operating Limited Partnership, an Illinois limited partnership. References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. The following chart illustrates the Company’s and the Operating Partnership’s corporate structure:
EQR is the general partner of, and as of September 30, 2022 owned an approximate 96.7% ownership interest in, ERPOP. The remaining 3.3% interest is owned by limited partners. As the sole general partner of ERPOP, EQR has exclusive control of ERPOP’s day-to-day management. Management operates the Company and the Operating Partnership as one business. The management of EQR consists of the same members as the management of ERPOP.
The Company is structured as an umbrella partnership REIT (“UPREIT”) and EQR contributes all net proceeds from its various equity offerings to ERPOP. In return for those contributions, EQR receives a number of OP Units (see definition below) in ERPOP equal to the number of Common Shares it has issued in the equity offering. The Company may acquire properties in transactions that include the issuance of OP Units as consideration for the acquired properties. Such transactions may, in certain circumstances, enable the sellers to defer in whole or in part, the recognition of taxable income or gain that might otherwise result from the sales. This is one of the reasons why the Company is structured in the manner shown above. Based on the terms of ERPOP’s partnership agreement, OP Units can be exchanged with Common Shares on a one-for-one basis because the Company maintains a one-for-one relationship between the OP Units of ERPOP issued to EQR and the outstanding Common Shares.
The Company believes that combining the reports on Form 10-Q of EQR and ERPOP into this single report provides the following benefits:
•enhances investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
•creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
The Company believes it is important to understand the few differences between EQR and ERPOP in the context of how EQR and ERPOP operate as a consolidated company. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR’s primary function is acting as the general partner of ERPOP. EQR also issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by EQR (which are contributed to the capital of ERPOP in exchange for additional partnership interests in ERPOP (“OP Units”) (on a one-for-one Common Share per OP Unit basis) or additional preference units in ERPOP (on a one-for-one preferred share per preference unit basis)), the Operating Partnership generates all remaining capital required by the Company’s business. These sources include the Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its revolving credit facility and/or commercial paper program, the issuance of secured and unsecured debt and partnership interests, and proceeds received from disposition of certain properties and joint venture interests.
Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The limited partners of the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in the Company’s financial statements. The noncontrolling interests in the Operating Partnership’s financial statements include the interests of unaffiliated partners in various consolidated partnerships. The noncontrolling interests in the Company’s financial statements include the same noncontrolling interests at the Operating Partnership level and limited partner OP Unit holders of the Operating Partnership. The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at the Company and Operating Partnership levels.
To help investors understand the differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s debt, noncontrolling interests and shareholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity.
This report also includes separate Part I, Item 4, Controls and Procedures, sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership.
As general partner with control of ERPOP, EQR consolidates ERPOP for financial reporting purposes, and EQR essentially has no assets or liabilities other than its investment in ERPOP. Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Financial Statements of Equity Residential:
Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021
2
Consolidated Statements of Operations and Comprehensive Income for the nine months and quarters ended September 30, 2022 and 2021
3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021
5
Consolidated Statements of Changes in Equity for the nine months and quarters ended September 30, 2022 and 2021
8
Financial Statements of ERP Operating Limited Partnership:
10
11
13
Consolidated Statements of Changes in Capital for the nine months and quarters ended September 30, 2022 and 2021
16
Notes to Consolidated Financial Statements of Equity Residential and ERP Operating Limited Partnership
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3. Quantitative and Qualitative Disclosures about Market Risk
46
Item 4. Controls and Procedures
PART II.
Item 1. Legal Proceedings
47
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
1
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share amounts)
(Unaudited)
September 30,
December 31,
2022
2021
ASSETS
Land
$
5,580,878
5,814,790
Depreciable property
22,251,673
22,370,811
Projects under development
89,347
24,307
Land held for development
60,165
62,998
Investment in real estate
27,982,063
28,272,906
Accumulated depreciation
(8,813,578
)
(8,354,282
Investment in real estate, net
19,168,485
19,918,624
Investments in unconsolidated entities
256,311
127,448
Cash and cash equivalents
44,788
123,832
Restricted deposits
76,679
236,404
Right-of-use assets
465,814
474,713
Other assets
253,328
288,220
Total assets
20,265,405
21,169,241
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net
1,967,827
2,191,201
Notes, net
5,340,807
5,835,222
Line of credit and commercial paper
189,557
315,030
Accounts payable and accrued expenses
175,843
107,013
Accrued interest payable
49,652
69,510
Lease liabilities
309,548
312,335
Other liabilities
287,955
353,102
Security deposits
69,247
66,141
Distributions payable
242,695
233,502
Total liabilities
8,633,131
9,483,056
Commitments and contingencies
Redeemable Noncontrolling Interests – Operating Partnership
370,537
498,977
Equity:
Shareholders' equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 745,600 shares issued and outstanding as of September 30, 2022 and December 31, 2021
37,280
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 376,169,253 shares issued and outstanding as of September 30, 2022 and 375,527,195 shares issued and outstanding as of December 31, 2021
3,762
3,755
Paid in capital
9,267,450
9,121,122
Retained earnings
1,737,107
1,827,063
Accumulated other comprehensive income (loss)
(872
(34,272
Total shareholders’ equity
11,044,727
10,954,948
Noncontrolling Interests:
Operating Partnership
218,577
214,094
Partially Owned Properties
(1,567
18,166
Total Noncontrolling Interests
217,010
232,260
Total equity
11,261,737
11,187,208
Total liabilities and equity
See accompanying notes
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands except per share data)
Nine Months Ended September 30,
Quarter Ended September 30,
REVENUES
Rental income
2,035,477
1,818,867
695,099
623,206
EXPENSES
Property and maintenance
365,277
341,261
124,048
116,461
Real estate taxes and insurance
302,899
297,780
100,361
96,909
Property management
83,035
74,357
25,729
23,772
General and administrative
47,033
43,102
13,372
13,041
Depreciation
667,896
616,032
214,129
215,397
Total expenses
1,466,140
1,372,532
477,639
465,580
Net gain (loss) on sales of real estate properties
304,346
587,623
196,551
363,928
Operating income
873,683
1,033,958
414,011
521,554
Interest and other income
4,844
25,293
720
973
Other expenses
(9,191
(10,908
(3,755
(3,456
Interest:
Expense incurred, net
(217,093
(202,733
(72,412
(68,251
Amortization of deferred financing costs
(6,421
(6,172
(2,220
(2,048
Income before income and other taxes, income (loss) from investments in unconsolidated entities and net gain (loss) on sales of land parcels
645,822
839,438
336,344
448,772
Income and other tax (expense) benefit
(725
(679
(152
(284
Income (loss) from investments in unconsolidated entities
(3,028
(1,027
(1,156
Net gain (loss) on sales of land parcels
—
Net income
641,641
835,736
335,165
447,332
Net (income) loss attributable to Noncontrolling Interests:
(21,024
(27,903
(10,997
(14,847
(2,726
(1,957
(1,143
(534
Net income attributable to controlling interests
617,891
805,876
323,025
431,951
Preferred distributions
(2,318
(773
Net income available to Common Shares
615,573
803,558
322,252
431,178
Earnings per share – basic:
1.64
2.15
0.86
1.15
Weighted average Common Shares outstanding
375,710
373,474
375,850
374,308
Earnings per share – diluted:
1.63
2.14
389,394
387,642
389,300
388,374
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)
Comprehensive income:
Other comprehensive income (loss):
Other comprehensive income (loss) – derivative instruments:
Unrealized holding gains (losses) arising during the period
23,413
24,672
Losses reclassified into earnings from other comprehensive income
9,987
7,000
5,106
2,363
Other comprehensive income (loss)
33,400
29,778
Comprehensive income
675,041
842,736
364,943
449,695
Comprehensive (income) attributable to Noncontrolling Interests
(24,853
(30,100
(13,123
(15,459
Comprehensive income attributable to controlling interests
650,188
812,636
351,820
434,236
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
6,421
6,172
Amortization of above/below market lease intangibles
(154
Amortization of discounts and premiums on debt
4,123
3,934
Amortization of deferred settlements on derivative instruments
9,978
6,991
Amortization of right-of-use assets
9,123
10,286
Write-off of pursuit costs
3,296
3,557
(Income) loss from investments in unconsolidated entities
3,456
3,028
Distributions from unconsolidated entities – return on capital
251
Net (gain) loss on sales of real estate properties
(304,346
(587,623
Net (gain) loss on sales of land parcels
(5
Realized (gain) loss on sale of investment securities
(2,061
(23,432
Compensation paid with Company Common Shares
24,559
21,919
Changes in assets and liabilities:
(Increase) decrease in other assets
20,734
16,269
Increase (decrease) in accounts payable and accrued expenses
76,274
69,170
Increase (decrease) in accrued interest payable
(19,858
(9,119
Increase (decrease) in lease liabilities
(1,166
(4,112
Increase (decrease) in other liabilities
(23,199
5,427
Increase (decrease) in security deposits
3,106
4,137
Net cash provided by operating activities
1,120,228
978,213
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions
(113,046
(1,022,275
Investment in real estate – development/other
(81,889
(172,850
Capital expenditures to real estate
(141,707
(107,706
Non-real estate capital additions
(2,232
(1,251
Interest capitalized for real estate and unconsolidated entities under development
(4,181
(12,365
Proceeds from disposition of real estate, net
720,302
1,014,328
Investments in unconsolidated entities – acquisitions
(49,330
(21,787
Investments in unconsolidated entities – development/other
(87,129
(9,294
Distributions from unconsolidated entities – return of capital
9
Purchase of investment securities and other investments
(1,045
(167,791
Proceeds from sale of investment securities
3,584
191,398
Net cash provided by (used for) investing activities
243,336
(309,589
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs
(373
(6,447
Mortgage notes payable, net:
Proceeds
37,429
51,298
Lump sum payoffs
(260,874
(59,880
Scheduled principal repayments
(3,186
(5,570
Notes, net:
497,470
(500,000
Line of credit and commercial paper:
Commercial paper proceeds
5,140,685
4,305,170
Commercial paper repayments
(5,266,158
(4,690,000
Finance ground lease principal payments
(1,845
(349
Proceeds from Employee Share Purchase Plan (ESPP)
3,280
3,455
Proceeds from exercise of options
21,021
68,807
Payment of offering costs
(739
(267
Other financing activities, net
(31
Acquisition of Noncontrolling Interests – Partially Owned Properties
(32,178
Contributions – Noncontrolling Interests – Partially Owned Properties
603
Contributions – Noncontrolling Interests – Operating Partnership
Distributions:
Common Shares
(696,679
(674,531
Preferred Shares
Noncontrolling Interests – Operating Partnership
(22,735
(23,949
Noncontrolling Interests – Partially Owned Properties
(18,236
(4,461
Net cash provided by (used for) financing activities
(1,602,333
(541,603
Net increase (decrease) in cash and cash equivalents and restricted deposits
(238,769
127,021
Cash and cash equivalents and restricted deposits, beginning of period
360,236
99,728
Cash and cash equivalents and restricted deposits, end of period
121,467
226,749
39,707
187,042
Total cash and cash equivalents and restricted deposits, end of period
6
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized
221,218
199,799
Net cash paid (received) for income and other taxes
728
1,040
Amortization of deferred financing costs:
(380
(227
1,754
1,620
1,702
3,427
2,943
Amortization of discounts and premiums on debt:
1,865
2,069
2,258
Amortization of deferred settlements on derivative instruments:
(9
Accumulated other comprehensive income
Write-off of pursuit costs:
948
3,000
2,197
151
533
24
(Income) loss from investments in unconsolidated entities:
2,517
2,062
939
966
Realized/unrealized (gain) loss on derivative instruments:
(23,413
Interest capitalized for real estate and unconsolidated entities under development:
(1,312
(12,260
(2,869
(105
Investments in unconsolidated entities – development/other:
967
(85,839
(8,251
(1,290
(2,010
Debt financing costs:
(45
228
(228
(2,344
(100
(4,331
Right-of-use assets and lease liabilities initial measurement and reclassifications:
(224
11,308
224
(11,308
Non-cash share distribution and other transfers from unconsolidated entities:
4,201
1,430
(4,201
(1,430
7
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
SHAREHOLDERS’ EQUITY
PREFERRED SHARES
Balance, beginning of period
Balance, end of period
COMMON SHARES, $0.01 PAR VALUE
3,723
3,761
3,744
Conversion of OP Units into Common Shares
Exercise of share options
14
Employee Share Purchase Plan (ESPP)
Share-based employee compensation expense:
Restricted shares
3,750
PAID IN CAPITAL
9,128,599
9,229,738
9,110,121
Common Share Issuance:
1,680
68,246
196
1,597
21,017
68,793
2,093
29,178
3,279
3,454
901
788
9,524
6,571
2,165
1,758
Share options
1,856
2,541
466
565
ESPP discount
637
798
217
165
Offering costs
(252
Supplemental Executive Retirement Plan (SERP)
(269
(1,335
722
(27,383
(28
Change in market value of Redeemable Noncontrolling Interests – Operating Partnership
127,570
(119,237
29,430
(17,271
Adjustment for Noncontrolling Interests ownership in Operating Partnership
9,156
(27,085
2,524
3,722
9,131,078
RETAINED EARNINGS
1,399,715
1,649,960
1,321,875
Common Share distributions
(705,529
(676,158
(235,105
(225,938
Preferred Share distributions
1,527,115
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(43,666
(30,650
(39,029
Accumulated other comprehensive income (loss) – derivative instruments:
(36,666
DISTRIBUTIONS
Distributions declared per Common Share outstanding
1.875
1.8075
0.625
0.6025
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
NONCONTROLLING INTERESTS
OPERATING PARTNERSHIP
233,162
216,326
205,691
Issuance of restricted units to Noncontrolling Interests
Conversion of OP Units held by Noncontrolling Interests into OP Units held by General Partner
(1,680
(68,257
(196
(1,597
Equity compensation associated with Noncontrolling Interests
16,502
14,173
3,343
3,642
Net income attributable to Noncontrolling Interests
21,024
27,903
10,997
14,847
Distributions to Noncontrolling Interests
(23,078
(23,366
(7,590
(7,367
Change in carrying value of Redeemable Noncontrolling Interests – Operating Partnership
870
(1,745
(1,779
(2,539
(9,156
27,085
(2,524
(3,722
208,955
PARTIALLY OWNED PROPERTIES
4,673
(1,734
2,365
2,726
1,957
1,143
534
Contributions by Noncontrolling Interests
(18,267
(4,492
(1,004
(761
(4,795
28
2,138
LIABILITIES AND CAPITAL
Redeemable Limited Partners
Capital:
Partners’ Capital:
Preference Units
General Partner
11,008,319
10,951,940
Limited Partners
Total partners’ capital
11,263,304
11,169,042
Total capital
Total liabilities and capital
(Amounts in thousands except per Unit data)
Net (income) loss attributable to Noncontrolling Interests – Partially Owned Properties
638,915
833,779
334,022
446,798
ALLOCATION OF NET INCOME:
2,318
773
Net income available to Units
636,597
831,461
333,249
446,025
Earnings per Unit – basic:
Weighted average Units outstanding
387,603
385,841
387,745
386,327
Earnings per Unit – diluted:
Comprehensive (income) attributable to Noncontrolling Interests – Partially Owned Properties
672,315
840,779
363,800
449,161
12
Proceeds from EQR’s Employee Share Purchase Plan (ESPP)
Proceeds from exercise of EQR options
Contributions – Limited Partners
OP Units – General Partner
OP Units – Limited Partners
15
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
PARTNERS’ CAPITAL
PREFERENCE UNITS
GENERAL PARTNER
10,532,037
10,883,459
10,435,740
OP Unit Issuance:
Conversion of OP Units held by Limited Partners into OP Units held by General Partner
68,257
Exercise of EQR share options
29,184
EQR’s Employee Share Purchase Plan (ESPP)
902
EQR restricted shares
9,526
6,572
EQR share options
EQR ESPP discount
Net income available to Units – General Partner
OP Units – General Partner distributions
Change in market value of Redeemable Limited Partners
Adjustment for Limited Partners ownership in Operating Partnership
10,661,943
LIMITED PARTNERS
Issuance of restricted units to Limited Partners
Equity compensation associated with Units – Limited Partners
Net income available to Units – Limited Partners
Units – Limited Partners distributions
Change in carrying value of Redeemable Limited Partners
Distributions declared per Unit outstanding
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (Continued)
NONCONTROLLING INTERESTS – PARTIALLY OWNED PROPERTIES
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Residential (“EQR”) is an S&P 500 company focused on the acquisition, development and management of residential properties located in and around dynamic cities that attract affluent long-term renters, a business that is conducted on its behalf by ERP Operating Limited Partnership (“ERPOP”). EQR is a Maryland real estate investment trust (“REIT”) formed in March 1993 and ERPOP is an Illinois limited partnership formed in May 1993. References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. Unless otherwise indicated, the notes to consolidated financial statements apply to both the Company and the Operating Partnership.
EQR is the general partner of, and as of September 30, 2022 owned an approximate 96.7% ownership interest in, ERPOP. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP, but does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.
As of September 30, 2022, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 308 properties located in 10 states and the District of Columbia consisting of 79,594 apartment units. The ownership breakdown includes (table does not include any uncompleted development properties):
Properties
Apartment Units
Wholly Owned Properties
293
76,480
Partially Owned Properties – Consolidated
3,114
308
79,594
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
In preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The balance sheets at December 31, 2021 have been derived from the audited financial statements at that date but do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
Income and Other Taxes
EQR has elected to be taxed as a REIT. This, along with the nature of the operations of its operating properties, resulted in no provision for federal income taxes at the EQR level. In addition, ERPOP generally is not liable for federal income taxes as the partners recognize their allocable share of income or loss in their tax returns; therefore no provision for federal income taxes has been made at the ERPOP level. Historically, the Company has generally only incurred certain state and local income, excise and franchise taxes. The Company has elected taxable REIT subsidiary (“TRS”) status for certain of its corporate subsidiaries and, as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses.
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued an amendment to the debt and equity financial instruments standards which simplifies the accounting for convertible instruments and accounting for contracts in an entity’s own equity. The Company adopted the standard when effective on January 1, 2022 and it had no impact on its consolidated results of operations and financial position.
In March 2020, the FASB issued an amendment to the reference rate reform standard which provides the option for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on contract modifications and hedge accounting. The new standard was effective for the Company upon issuance and elections can be made through December 31, 2022, subject to a proposed extension to December 31, 2024. The Company elected to apply the hedge accounting expedients and application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
The Company refers to “Common Shares” and “Units” (which refer to both OP Units and restricted units) as equity securities for EQR and “General Partner Units” and “Limited Partner Units” as equity securities for ERPOP. To provide a streamlined and more readable presentation of the disclosures for the Company and the Operating Partnership, several sections below refer to the respective terminology for each with the same financial information and separate sections are provided, where needed, to further distinguish any differences in financial information and terminology.
The following table presents the changes in the Company’s issued and outstanding Common Shares and Units for the nine months ended September 30, 2022 and 2021:
Common Shares outstanding at January 1,
375,527,195
372,302,000
Common Shares Issued:
Conversion of OP Units
37,661
1,153,963
381,384
1,401,755
49,662
59,297
Restricted share grants, net
173,351
85,573
Common Shares outstanding at September 30,
376,169,253
375,002,588
Units
Units outstanding at January 1,
12,659,027
13,858,073
Restricted unit grants, net
223,242
155,638
Conversion of OP Units to Common Shares
(37,661
(1,153,963
Units outstanding at September 30,
12,844,608
12,859,748
Total Common Shares and Units outstanding at September 30,
389,013,861
387,862,336
Units Ownership Interest in Operating Partnership
3.3
%
19
The following table presents the changes in the Operating Partnership’s issued and outstanding General Partner Units and Limited Partner Units for the nine months ended September 30, 2022 and 2021:
General and Limited Partner Units
General and Limited Partner Units outstanding at January 1,
388,186,222
386,160,073
Issued to General Partner:
EQR’s restricted share grants, net
Issued to Limited Partners:
General and Limited Partner Units outstanding at September 30,
Limited Partner Units
Limited Partner Units outstanding at January 1,
Limited Partner restricted unit grants, net
Conversion of Limited Partner OP Units to EQR Common Shares
Limited Partner Units outstanding at September 30,
Limited Partner Units Ownership Interest in Operating Partnership
The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units, as well as the equity positions of the holders of restricted units, are collectively referred to as the “Noncontrolling Interests – Operating Partnership” and “Limited Partners Capital,” respectively, for the Company and the Operating Partnership. Subject to certain exceptions (including the “book-up” requirements of restricted units), the Noncontrolling Interests – Operating Partnership/Limited Partners Capital may exchange their Units with EQR for Common Shares on a one-for-one basis. The carrying value of the Noncontrolling Interests – Operating Partnership/Limited Partners Capital (including redeemable interests) is allocated based on the number of Noncontrolling Interests – Operating Partnership/Limited Partners Capital in total in proportion to the number of Noncontrolling Interests – Operating Partnership/Limited Partners Capital in total plus the total number of Common Shares/General Partner Units. Net income is allocated to the Noncontrolling Interests – Operating Partnership/Limited Partners Capital based on the weighted average ownership percentage during the period.
The Operating Partnership has the right but not the obligation to make a cash payment instead of issuing Common Shares to any and all holders of Noncontrolling Interests – Operating Partnership/Limited Partners Capital requesting an exchange of their Noncontrolling Interests – Operating Partnership/Limited Partners Capital with EQR. Once the Operating Partnership elects not to redeem the Noncontrolling Interests – Operating Partnership/Limited Partners Capital for cash, EQR is obligated to deliver Common Shares to the exchanging holder of the Noncontrolling Interests – Operating Partnership/Limited Partners Capital.
The Noncontrolling Interests – Operating Partnership/Limited Partners Capital are classified as either mezzanine equity or permanent equity. If EQR is required, either by contract or securities law, to deliver registered Common Shares, such Noncontrolling Interests – Operating Partnership/Limited Partners Capital are differentiated and referred to as “Redeemable Noncontrolling Interests – Operating Partnership” and “Redeemable Limited Partners,” respectively. Instruments that require settlement in registered shares cannot be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered shares. Therefore, settlement in cash is assumed and that responsibility for settlement in cash is deemed to fall to the Operating Partnership as the primary source of cash for EQR, resulting in presentation in the mezzanine section of the balance sheet. The Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners are adjusted to the greater of carrying value or fair market value based on the Common Share price of EQR at the end of each respective reporting period. EQR has the ability to deliver unregistered Common Shares for the remaining portion of the Noncontrolling Interests – Operating Partnership/Limited Partners Capital that are classified in permanent equity at September 30, 2022 and December 31, 2021.
The carrying value of the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners is allocated based on the number of Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners in proportion to the number of Noncontrolling Interests – Operating Partnership/Limited Partners Capital in total. Such percentage of the total carrying value of Units/Limited Partner Units which is ascribed to the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners is then adjusted to the greater of carrying value or fair market value as described above. As of September 30, 2022 and 2021, the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners have a redemption value of approximately $370.5 million and $459.9 million, respectively, which represents the value of Common Shares that would be issued in exchange for the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners.
20
The following table presents the changes in the redemption value of the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners for the nine months ended September 30, 2022 and 2021, respectively (amounts in thousands):
Balance at January 1,
338,951
Change in market value
(127,570
119,237
Change in carrying value
(870
1,745
Balance at September 30,
459,933
Net proceeds from EQR Common Share and Preferred Share (see definition below) offerings and proceeds from exercise of options for Common Shares are contributed by EQR to ERPOP. In return for those contributions, EQR receives a number of OP Units in ERPOP equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in ERPOP equal in number and having the same terms as the Preferred Shares issued in the equity offering). As a result, the net proceeds from Common Shares and Preferred Shares are allocated for the Company between shareholders’ equity and Noncontrolling Interests – Operating Partnership and for the Operating Partnership between General Partner’s Capital and Limited Partners Capital to account for the change in their respective percentage ownership of the underlying equity.
The Company’s declaration of trust authorizes it to issue up to 100,000,000 preferred shares of beneficial interest, $0.01 par value per share (the “Preferred Shares”), with specific rights, preferences and other attributes as the Board of Trustees may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company’s Common Shares.
The following table presents the Company’s issued and outstanding Preferred Shares/Preference Units as of September 30, 2022 and December 31, 2021:
Amounts in thousands
Annual
Call
Dividend Per
Date (1)
Share/Unit (2)
Preferred Shares/Preference Units of beneficial interest, $0.01 par value; 100,000,000 shares authorized:
8.29% Series K Cumulative Redeemable Preferred Shares/Preference Units; liquidation value $50 per share/unit; 745,600 shares/units issued and outstanding as of September 30, 2022 and December 31, 2021
12/10/26
4.145
Other
EQR and ERPOP currently have an active universal shelf registration statement for the issuance of equity and debt securities that automatically became effective upon filing with the SEC in May 2022 and expires in May 2025. Per the terms of ERPOP’s partnership agreement, EQR contributes the net proceeds of all equity offerings to the capital of ERPOP in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis) or preference units (on a one-for-one preferred share per preference unit basis).
The Company has an At-The-Market (“ATM”) share offering program which allows EQR to issue Common Shares from time to time into the existing trading market at current market prices or through negotiated transactions, including under forward sale arrangements. In May 2022, the Company replaced the prior program with a new program with the authority to issue up to 13.0 million shares as of September 30, 2022 and which extended the program maturity to May 2025. Forward sale agreements under the ATM program allow the Company, at its election, to settle the agreements by issuing Common Shares in exchange for net proceeds at the then-applicable forward sale price specified by the agreement or, alternatively, to settle the agreements in whole or in part through the delivery or receipt of Common Shares or cash. Issuances of shares under these forward sale agreements are classified as equity transactions. Accordingly, no amounts relating to the forward sale agreements are recorded in the consolidated financial statements until settlement occurs. Prior to any settlements, the only impact to the consolidated financial statements is the inclusion of incremental shares, if any, within the calculation of diluted net income per share using the treasury stock method (see Note 11 for additional discussion). The actual forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current overnight federal funds rate and the amount of dividends paid to holders of the Company’s Common Shares over the term of the forward sale agreement.
21
As of September 30, 2022, the Company had entered into forward sale agreements under the prior program for a total of approximately 1.7 million Common Shares at a weighted average initial forward price per share of $83.25. All of these forward sale agreements were entered into during the quarter ended September 30, 2021. As of September 30, 2022, these forward sale agreements have not been settled and must be settled by March 2023. See Note 14 for additional discussion.
The Company may repurchase up to 13.0 million Common Shares under its share repurchase program. No open market repurchases have occurred since 2008, and no repurchases of any kind have occurred since February 2014. As of September 30, 2022, EQR has remaining authorization to repurchase up to 13.0 million of its shares.
The following table summarizes the carrying amounts for the Company’s investment in real estate (at cost) as of September 30, 2022 and December 31, 2021 (amounts in thousands):
September 30, 2022
December 31, 2021
Depreciable property:
Buildings and improvements
19,445,470
19,632,284
Furniture, fixtures and equipment
2,295,387
2,220,203
In-Place lease intangibles
510,816
518,324
Projects under development:
3,201
Construction-in-progress
86,146
Land held for development:
46,160
14,005
16,838
During the nine months ended September 30, 2022, the Company acquired the following from unaffiliated parties (purchase price in thousands):
Purchase Price
Rental Properties – Consolidated (1)
172
113,000
Total
During the nine months ended September 30, 2022, the Company disposed of the following to unaffiliated parties (sales price in thousands):
Sales Price
Rental Properties – Consolidated
945
746,150
The Company recognized a net gain on sales of real estate properties of approximately $304.3 million on the above sales.
The Company has not entered into any agreements to acquire rental properties or land parcels as of the date of filing.
The Company has entered into an agreement to dispose of the following (sales price and net book value in thousands):
Net Book Value at September 30, 2022
Land Parcels (one)
5,500
3,930
22
The closing of pending transactions is subject to certain conditions and restrictions; therefore, there can be no assurance that the transactions will be consummated or that the final terms will not differ in material respects from any agreements summarized above. See Note 14 for discussion of the properties acquired or disposed of, if any, subsequent to September 30, 2022.
The Company has invested in various entities with unrelated third parties which are either consolidated or accounted for under the equity method of accounting (unconsolidated).
Consolidated Variable Interest Entities (“VIEs”)
In accordance with accounting standards for consolidation of VIEs, the Company consolidates ERPOP on EQR’s financial statements. As the sole general partner of ERPOP, EQR has exclusive control of ERPOP’s day-to-day management. The limited partners are not able to exercise substantive kick-out or participating rights. As a result, ERPOP qualifies as a VIE. EQR has a controlling financial interest in ERPOP and, thus, is ERPOP’s primary beneficiary. EQR has the power to direct the activities of ERPOP that most significantly impact ERPOP’s economic performance as well as the obligation to absorb losses or the right to receive benefits from ERPOP that could potentially be significant to ERPOP.
The Company has various equity interests in certain joint ventures that have been deemed to be VIEs, and the Company is the VIEs’ primary beneficiary. As a result, the joint ventures are required to be consolidated on the Company’s financial statements. The following table summarizes the Company’s consolidated joint ventures as of September 30, 2022:
Operating Properties (1)
Project Under Development (2)
Project
Consolidated Joint Ventures (VIE)
312
The following table provides consolidated assets and liabilities related to the VIEs discussed above as of September 30, 2022 and December 31, 2021 (amounts in thousands):
Consolidated Assets
675,974
912,955
Consolidated Liabilities
148,071
251,424
Certain consolidated joint ventures in which we have investments obtained mortgage debt to finance a portion of their activities. The following table and information summarizes the variable rate construction mortgage debt that is non-recourse to the Company at September 30, 2022 (aggregate and amounts borrowed under loan commitments in thousands):
Recently Completed Operating Property (1)
Project Under Development
Number of joint ventures with debt financing
Aggregate loan commitments
67,589
73,344
Amounts borrowed under loan commitments (2)
64,816
34,356
Maturity dates
2023
2025
Investments in Unconsolidated Entities
The Company has various equity interests in certain joint ventures that are unconsolidated and accounted for using the equity method of accounting. Most of these have been deemed to be VIEs and the Company is not the VIEs' primary beneficiary. The remaining have been deemed not to be VIEs and the Company does not have a controlling voting interest.
23
The following table and information summarizes the Company’s investments in unconsolidated entities as of September 30, 2022 and December 31, 2021 (amounts in thousands except for ownership percentage):
Ownership Percentage
Investments in Unconsolidated Entities:
Various Real Estate Holdings (VIE)
36,372
36,024
Varies
Projects Under Development and Land Held for Development (VIE)
195,974
72,488
62% - 95% (1)
Real Estate Technology Funds/Companies (VIE)
24,206
19,347
(241
(411
The following table summarizes the Company’s unconsolidated joint ventures that were deemed to be VIEs as of September 30, 2022:
Real Estate Holdings (1)
Projects Under Development (2), (5)
Land Held for Development (2), (3)
Entities
Projects
Apartment Units (4)
Unconsolidated Joint Ventures (VIE)
1,982
745
New Development Joint Ventures
The following table provides information on total unconsolidated development joint ventures entered into during the nine months ended September 30, 2022 (amounts in thousands except for number of unconsolidated joint ventures):
Number of unconsolidated joint ventures (1)
Apartment units (2)
797
49,330
The following table presents the Company’s restricted deposits as of September 30, 2022 and December 31, 2021 (amounts in thousands):
Mortgage escrow deposits:
Replacement reserves
12,213
11,156
Mortgage principal reserves/sinking funds
23,484
19,104
Mortgage escrow deposits
35,697
30,260
Restricted cash:
Tax-deferred (1031) exchange proceeds
166,362
Earnest money on pending acquisitions
2,000
Restricted deposits on real estate investments
235
284
Resident security and utility deposits
38,458
35,663
2,289
1,835
Restricted cash
40,982
206,144
Lessor Accounting
The Company is the lessor for its residential and non-residential leases and these leases are accounted for as operating leases under the lease standard.
The Company generates the majority of its lease revenue from residential apartment leases that are generally twelve months or less in length. The residential apartment leases may include lease income related to such items as utility recoveries, parking rent, storage rent and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.
The Company also generates lease revenue from non-residential leases that are generally for terms ranging between five to ten years. The non-residential leases generally consist of ground floor retail spaces and master-leased parking garages that serve as additional amenities for our residents. The non-residential leases may include lease income related to such items as utility recoveries, parking rent and storage rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis. Non-residential leases are renewable with market-based renewal options.
The following table presents the lease income types relating to lease payments for residential and non-residential leases along with the total other rental income for the nine months ended September 30, 2022 and 2021 (amounts in thousands):
Nine Months Ended September 30, 2022
Nine Months Ended September 30, 2021
Income Type
Residential Leases
Non-Residential Leases
Residential and non-residential rent
1,812,928
48,279
1,861,207
1,629,778
45,680
1,675,458
Utility recoveries (RUBS income) (1)
59,826
596
60,422
55,331
519
55,850
Parking rent
32,546
322
32,868
30,403
465
30,868
Other lease revenue (2)
(4,016
(568
(4,584
(19,442
2,914
(16,528
Total lease revenue
1,901,284
48,629
1,949,913
1,696,070
49,578
1,745,648
Parking revenue
27,701
18,455
Other revenue
57,863
54,764
Total other rental income (3)
85,564
73,219
25
The following table presents the lease income types relating to lease payments for residential and non-residential leases along with the total other rental income for the quarters ended September 30, 2022 and 2021 (amounts in thousands):
Quarter Ended September 30, 2022
Quarter Ended September 30, 2021
620,880
16,184
637,064
551,474
14,443
565,917
20,243
227
20,470
18,798
189
18,987
10,840
120
10,960
10,513
103
10,616
(3,127
(371
(3,498
(472
1,776
1,304
648,836
16,160
664,996
580,313
16,511
596,824
9,270
6,883
20,833
19,499
30,103
26,382
The following table presents residential and non-residential accounts receivable and straight-line receivable balances for the Company’s properties as of September 30, 2022 and December 31, 2021 (amounts in thousands):
Residential
Non-Residential
Balance Sheet (Other assets):
Resident/tenant accounts receivable balances
34,939
37,959
3,951
3,218
Allowance for doubtful accounts
(30,543
(33,121
(2,767
(2,365
Net receivable balances
4,396
(1)
4,838
1,184
853
Straight-line receivable balances
3,466
7,460
13,792
13,021
The following table presents residential bad debt for the Company’s properties for the nine months and quarters ended September 30, 2022 and 2021 (amounts in thousands):
Income Statement (Rental income):
Bad debt, net (1)
14,854
29,751
6,707
3,979
% of rental income
0.8
1.7
1.0
0.7
EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. Weighted average interest rates noted below for the nine months ended September 30, 2022 include the effect of any derivative instruments and amortization of premiums/discounts/OCI (other comprehensive income) on debt and derivatives.
26
Mortgage Notes Payable
The following table summarizes the Company’s mortgage notes payable activity for the nine months ended September 30, 2022 (amounts in thousands):
Mortgage notes payable, net as of December 31, 2021
Amortization of premiums/discounts
Amortization of deferred financing costs, net (1)
Mortgage notes payable, net as of September 30, 2022
Fixed Rate Debt:
Secured – Conventional
1,896,472
(3,147
935
956
1,634,342
Floating Rate Debt:
59,890
(2)
(39
331
97,611
Secured – Tax Exempt
234,839
930
105
235,874
Floating Rate Debt
294,729
436
333,485
1,392
The following table summarizes certain interest rate and maturity date information as of and for the nine months ended September 30, 2022:
Interest Rate Ranges
0.10% - 4.21%
Weighted Average Interest Rate
3.39%
Maturity Date Ranges
2023-2061
As of September 30, 2022, the Company had $250.0 million of secured debt (primarily tax-exempt bonds) subject to third-party credit enhancement.
Notes
The following table summarizes the Company’s notes activity for the nine months ended September 30, 2022 (amounts in thousands):
Notes, net as of December 31, 2021
Notes, net as of September 30, 2022
Unsecured – Public
3,327
1.85% - 7.57%
3.65%
2025-2047
The Company’s unsecured public notes contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios. The Company was in compliance with its unsecured public debt covenants for the nine months ended September 30, 2022.
27
Line of Credit and Commercial Paper
The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024. The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans. The interest rate on advances under the facility will generally be LIBOR plus a spread (currently 0.775%), or based on bids received from the lending group, and the Company pays an annual facility fee (currently 0.125%). Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating. The Company did not borrow any amounts under its revolving credit facility during the nine months ended September 30, 2022.
The Company has an unsecured commercial paper note program under which it may borrow up to a maximum of $1.0 billion subject to market conditions. The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness. The notes bear interest at various floating rates with a weighted average interest rate of 1.18% for the nine months ended September 30, 2022 and a weighted average maturity of 28 days as of September 30, 2022. The weighted average amount outstanding for the nine months ended September 30, 2022 was approximately $177.9 million.
The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations. The following table presents the availability on the Company’s unsecured revolving credit facility as of September 30, 2022 (amounts in thousands):
Unsecured revolving credit facility commitment
2,500,000
Commercial paper balance outstanding
(190,000
Unsecured revolving credit facility balance outstanding
Other restricted amounts
(3,463
Unsecured revolving credit facility availability
2,306,537
The following table summarizes the Company’s total debt extinguishment costs recorded as additional interest expense for the nine months and quarters ended September 30, 2022 and 2021 (amounts in thousands):
Write-offs of unamortized deferred financing costs
369
264
277
Write-offs of unamortized (premiums)/discounts/OCI
3,947
3,570
4,316
3,847
The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments on listed market prices and third-party quotes. Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.
In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company may seek to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments. The Company may also use derivatives to manage commodity prices in the daily operations of the business.
A three-level valuation hierarchy exists for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
The Company’s derivative positions are valued using models developed by the respective counterparty as well as models applied internally by the Company that use as their inputs readily observable market parameters (such as forward yield curves and credit default swap data). The following table summarizes the inputs to the valuations for each type of fair value measurement:
Fair Value Measurement Type
Valuation Inputs
Employee holdings (other than Common Shares) within the supplemental executive retirement plan (the “SERP”)
Quoted market prices for identical assets. These holdings are included in other assets and other liabilities on the consolidated balance sheets.
Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners
Quoted market price of Common Shares.
Mortgage notes payable and private unsecured debt (including its commercial paper and line of credit, if applicable)
Indicative rates provided by lenders of similar loans.
Public unsecured notes
Quoted market prices for each underlying issuance.
The fair values of the Company’s financial instruments (other than mortgage notes payable, unsecured notes, commercial paper, line of credit and derivative instruments), including cash and cash equivalents and other financial instruments, approximate their carrying or contract value. The following table provides a summary of the carrying and fair values for the Company’s mortgage notes payable and unsecured debt (including its commercial paper and line of credit, if applicable) at September 30, 2022 and December 31, 2021, respectively (amounts in thousands):
Carrying Value
Estimated FairValue (Level 2)
1,811,596
2,193,689
Unsecured debt, net
5,530,364
4,893,686
6,150,252
6,798,309
Total debt, net
7,498,191
6,705,282
8,341,453
8,991,998
The following table summarizes the Company’s consolidated derivative instruments at September 30, 2022 (dollar amounts are in thousands):
Forward StartingSwaps (1)
Current Notional Balance
350,000
Lowest Interest Rate
2.447
Highest Interest Rate
2.972
Maturity Date
2033
29
The following tables provide a summary of the fair value measurements for each major category of assets and liabilities measured at fair value on a recurring basis and the location within the accompanying consolidated balance sheets at September 30, 2022 and December 31, 2021, respectively (amounts in thousands):
Fair Value Measurements at Reporting Date Using
Description
Balance SheetLocation
9/30/2022
Quoted Prices inActive Markets forIdentical Assets/Liabilities(Level 1)
Significant OtherObservable Inputs(Level 2)
SignificantUnobservable Inputs(Level 3)
Assets
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Forward Starting Swaps
Other Assets
Supplemental Executive Retirement Plan
125,585
148,998
Liabilities
Other Liabilities
Redeemable Noncontrolling Interests –
Operating Partnership/Redeemable
Mezzanine
12/31/2021
Significant Other Observable Inputs (Level 2)
Significant UnobservableInputs(Level 3)
164,650
The following tables provide a summary of the effect of cash flow hedges on the Company’s accompanying consolidated statements of operations and comprehensive income for the nine months ended September 30, 2022 and 2021, respectively (amounts in thousands):
September 30, 2022Type of Cash Flow Hedge
Amount ofGain/(Loss) Recognized in OCI on Derivative
Location ofGain/(Loss) Reclassified from Accumulated OCI into Income
Amount ofGain/(Loss) Reclassified from Accumulated OCI into Income
Interest expense
(9,987
September 30, 2021Type of Cash Flow Hedge
Amount of Gain/(Loss) Recognized in OCI on Derivative
(7,000
30
As of September 30, 2022 and December 31, 2021, there were approximately $0.9 million and $34.3 million in deferred losses, net, included in accumulated other comprehensive income (loss), respectively, related to previously settled and unsettled derivative instruments, of which an estimated $3.8 million may be recognized as additional interest expense during the twelve months ending September 30, 2023.
Equity Residential
The following tables set forth the computation of net income per share – basic and net income per share – diluted for the Company (amounts in thousands except per share amounts):
Numerator for net income per share – basic:
Allocation to Noncontrolling Interests – Operating Partnership
Numerator for net income per share – basic
Numerator for net income per share – diluted:
Numerator for net income per share – diluted
Denominator for net income per share – basic and diluted:
Denominator for net income per share – basic
Effect of dilutive securities:
OP Units
11,893
12,367
11,895
12,019
Long-term compensation shares/units
1,785
1,801
1,555
2,047
ATM forward sales
Denominator for net income per share – diluted
Net income per share – basic
Net income per share – diluted
ERP Operating Limited Partnership
The following tables set forth the computation of net income per Unit – basic and net income per Unit – diluted for the Operating Partnership (amounts in thousands except per Unit amounts):
Numerator for net income per Unit – basic and diluted:
Allocation to Preference Units
Numerator for net income per Unit – basic and diluted
Denominator for net income per Unit – basic and diluted:
Denominator for net income per Unit – basic
Dilution for Units issuable upon assumed exercise/vesting of the Company’s long-term compensation shares/units
Denominator for net income per Unit – diluted
Net income per Unit – basic
Net income per Unit – diluted
31
Commitments
Real Estate Development Commitments
As of September 30, 2022, the Company has both consolidated and unconsolidated real estate projects under development. The following table summarizes the gross remaining total project costs for the Company’s projects under development at September 30, 2022 (total project costs remaining in thousands):
Total Project Costs Remaining (1)
Projects Under Development
Consolidated
537
171,301
Unconsolidated
402,321
Total Projects Under Development
2,519
573,622
We have entered into, and may continue in the future to enter into, joint venture agreements with third-party partners for the development of multifamily rental properties. The joint venture agreements with each development partner include buy-sell provisions that provide the right, but not the obligation, for the Company to acquire each respective partner’s interests or sell its interests at any time following the occurrence of certain pre-defined events described in the joint venture agreements. See Note 6 for additional discussion.
Other Commitments
We have entered into, and may continue in the future to enter into, real estate technology and other real estate fund investments. At September 30, 2022, the Company has invested in eight real estate technology funds and one other real estate investment fund with aggregate remaining commitments of approximately $22.1 million.
Contingencies
Litigation and Legal Matters
The Company, as an owner of real estate, is subject to various federal, state and local laws. Compliance by the Company with existing laws has not had a material adverse effect on the Company. However, the Company cannot predict the impact of new or changed laws or regulations on its current properties or on properties that it may acquire in the future.
The Company does not believe there is any litigation pending or threatened against it that, individually or in the aggregate, may reasonably be expected to have a material adverse effect on the Company.
Operating segments are defined as components of an enterprise that engage in business activities from which they may earn revenues and incur expenses and about which discrete financial information is available that is evaluated regularly by the chief operating decision maker. The chief operating decision maker decides how resources are allocated and assesses performance on a recurring basis at least quarterly.
The Company’s primary business is the acquisition, development and management of multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents. The chief operating decision maker evaluates the Company’s operating performance geographically by market and both on a same store and non-same store basis. While the Company does maintain a non-residential presence, it accounts for approximately 3.7% of total revenues for the nine months ended September 30, 2022 and is designed as an amenity for our residential residents. The chief operating decision maker evaluates the performance of each property on a consolidated residential and non-residential basis. The Company’s geographic consolidated same store operating segments represent its reportable segments.
The Company’s development activities are other business activities that do not constitute an operating segment and as such, have been aggregated in the “Other” category in the tables presented below.
32
All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the nine months and quarters ended September 30, 2022 and 2021, respectively.
The primary financial measure for the Company’s rental real estate segment is net operating income (“NOI”), which represents rental income less: 1) property and maintenance expense and 2) real estate taxes and insurance expense (all as reflected in the accompanying consolidated statements of operations and comprehensive income). The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties. Revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.
The following table presents a reconciliation of NOI from our rental real estate for the nine months and quarters ended September 30, 2022 and 2021, respectively (amounts in thousands):
Property and maintenance expense
(365,277
(341,261
(124,048
(116,461
Real estate taxes and insurance expense
(302,899
(297,780
(100,361
(96,909
Total operating expenses
(668,176
(639,041
(224,409
(213,370
Net operating income
1,367,301
1,179,826
470,690
409,836
The following tables present NOI from our rental real estate for each segment for the nine months and quarters ended September 30, 2022 and 2021, respectively, as well as total assets and capital expenditures at September 30, 2022 (amounts in thousands):
Rental Income
Operating Expenses
NOI
Same store (1)
Los Angeles
351,896
103,121
248,775
316,206
99,837
216,369
Orange County
91,271
19,681
71,590
80,773
18,865
61,908
San Diego
64,540
14,574
49,966
58,210
13,892
44,318
Subtotal - Southern California
507,707
137,376
370,331
455,189
132,594
322,595
San Francisco
312,401
93,572
218,829
285,212
89,559
195,653
Washington, D.C.
306,161
102,564
203,597
290,255
97,407
192,848
New York
318,756
139,121
179,635
270,776
136,859
133,917
Seattle
210,011
59,222
150,789
190,386
61,092
129,294
Boston
194,640
60,003
134,637
173,953
57,478
116,475
Denver
32,505
9,129
23,376
28,732
8,482
20,250
Total same store
1,882,181
600,987
1,281,194
1,694,503
583,471
1,111,032
Non-same store/other
Non-same store (2)
131,693
54,236
77,457
31,305
15,256
16,049
Other (3)
21,603
12,953
8,650
93,059
40,314
52,745
Total non-same store/other
153,296
67,189
86,107
124,364
55,570
68,794
Totals
668,176
639,041
33
119,269
34,783
84,486
110,180
33,568
76,612
31,252
6,875
24,377
28,263
6,455
21,808
22,129
5,018
17,111
20,283
4,717
15,566
172,650
46,676
125,974
158,726
44,740
113,986
106,382
31,984
74,398
96,451
30,173
66,278
106,098
35,686
70,412
98,643
34,238
64,405
112,595
46,194
66,401
93,454
45,282
48,172
72,756
20,385
52,371
63,936
20,658
43,278
66,981
20,122
46,859
58,863
19,401
39,462
11,102
3,191
7,911
9,812
2,950
6,862
All Other Markets
2,148
794
1,354
1,933
697
1,236
650,712
205,032
445,680
581,818
198,139
383,679
42,707
17,068
25,639
15,702
7,736
7,966
2,309
(629
25,686
7,495
18,191
44,387
19,377
25,010
41,388
15,231
26,157
224,409
213,370
Total Assets
Capital Expenditures
2,604,866
21,459
358,574
4,170
227,344
4,206
3,190,784
29,835
3,090,195
21,988
3,057,549
22,596
3,424,747
17,365
2,089,219
16,569
1,692,529
16,349
477,354
17,022,377
125,641
2,517,480
15,524
725,548
542
3,243,028
16,066
141,707
34
Subsequent to September 30, 2022, the Company:
For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021. In addition, please refer to the Definitions section below for various capitalized terms not immediately defined in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Forward-looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, projections and assumptions made by management. While the Company’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, which could cause actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Many of these uncertainties and risks are difficult to predict and beyond management’s control, such as the current novel coronavirus (“COVID-19”) pandemic. Additional factors that might cause such differences are discussed in Part I of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021, particularly those under Item 1A, Risk Factors. Forward-looking statements and related uncertainties are also included in the Notes to Consolidated Financial Statements in this report. Forward-looking statements are not guarantees of future performance, results or events. The forward-looking statements contained herein are made as of the date hereof and the Company undertakes no obligation to update or supplement these forward-looking statements.
Overview
Equity Residential (“EQR”) is committed to creating communities where people thrive. The Company, a member of the S&P 500, is focused on the acquisition, development and management of residential properties located in and around dynamic cities that attract affluent long-term renters. ERP Operating Limited Partnership (“ERPOP”) is focused on conducting the multifamily property business of EQR. EQR is a Maryland real estate investment trust (“REIT”) formed in March 1993 and ERPOP is an Illinois limited partnership formed in May 1993. References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP.
The Company’s corporate headquarters is located in Chicago, Illinois and the Company also operates regional property management offices in most of its markets.
Available Information
You may access our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and any amendments to any of those reports/statements we file with or furnish to the Securities and Exchange Commission (“SEC”) free of charge on our website, www.equityapartments.com. These reports/statements are made available on our website as soon as reasonably practicable after we file them with or furnish them to the SEC. The information contained on our website, including any information referred to in this report as being available on our website, is not a part of or incorporated into this report.
Business Objectives and Operating and Investing Strategies
The Company’s and the Operating Partnership’s overall business objectives and operating and investing strategies have not changed from the information included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
Results of Operations
2022 Transactions
In conjunction with our business objectives and operating and investing strategies, the following table provides a rollforward of the transactions that occurred during the nine months ended September 30, 2022:
Portfolio Rollforward
($ in thousands)
ApartmentUnits
PurchasePrice
AcquisitionCap Rate
310
80,407
Acquisitions:
Consolidated Rental Properties
3.5
Unconsolidated Land Parcels (1)
56,886
DispositionYield
Dispositions:
(3
(945
(746,150
(3.4
%)
Configuration Changes
(40
Acquisitions
Dispositions
36
Developments
See Notes 4, 6 and 14 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate investments and investments in partially owned entities.
Future Outlook
The above 2022 assumptions are based on current expectations and are forward-looking.
Comparison of the nine months and quarter ended September 30, 2022 to the nine months and quarter ended September 30, 2021
The following table presents a reconciliation of diluted earnings per share/unit for the nine months and quarter ended September 30, 2022 as compared to the same period in 2021:
Nine Months EndedSeptember 30
Quarter EndedSeptember 30
Diluted earnings per share/unit for period ended 2021
Property NOI
0.49
0.17
(0.03
Corporate overhead (1)
(0.01
Net gain/loss on property sales
(0.73
(0.43
Non-operating asset gains/losses
(0.06
Depreciation expense
(0.13
(0.02
Diluted earnings per share/unit for period ended 2022
The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”). NOI represents rental income less direct property operating expenses (including real estate taxes and insurance). The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties.
37
The following tables present reconciliations of operating income per the consolidated statements of operations to NOI, along with rental income, operating expenses and NOI per the consolidated statements of operations allocated between same store and non-same store results (amounts in thousands):
$ Change
% Change
(160,275
(15.5
)%
Adjustments:
8,678
11.7
3,931
9.1
51,864
8.4
283,277
(48.2
Total NOI
187,475
15.9
Rental income:
Same store
187,678
11.1
28,932
23.3
Total rental income
216,610
11.9
Operating expenses:
17,516
3.0
11,619
20.9
29,135
4.6
NOI:
170,162
15.3
17,313
25.2
Note: See Note 13 in the Notes to Consolidated Financial Statements for detail by reportable segment/market. Non-same store/other NOI results consist primarily of properties acquired in calendar years 2021 and 2022, operations from the Company’s development properties and operations prior to disposition from 2021 and 2022 sold properties.
See the Same Store Results section below for additional discussion of those results.
Property management expenses include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third-party management companies. These expenses increased approximately $8.7 million or 11.7% and approximately $2.0 million or 8.2% for the nine months and quarter ended September 30, 2022, respectively, as compared to the prior year periods. These increases are primarily attributable to increases in payroll-related costs, training/conference costs, temporary help/contractors costs, travel costs and employment expenses, partially offset by decreases in legal and professional fees.
General and administrative expenses, which includes corporate operating expenses, increased approximately $3.9 million or 9.1% and approximately $0.3 million or 2.5% for the nine months and quarter ended September 30, 2022, respectively, as compared to the prior year periods, primarily due to increases in payroll-related costs, legal and professional fees and training/conference costs.
38
Depreciation expense, which includes depreciation on non-real estate assets, increased approximately $51.9 million or 8.4% for the nine months ended September 30, 2022, as compared to the prior year period, primarily as a result of additional depreciation expense on properties acquired in 2021 and 2022 and development properties placed in service during 2021, partially offset by lower depreciation from properties sold in 2021 and 2022. Depreciation expense decreased approximately $1.3 million or 0.6% for the quarter ended September 30, 2022 as compared to the prior year period, primarily as a result of lower depreciation from properties sold in the fourth quarter of 2021 and 2022 and in-place leases for 2021 acquisitions being fully depreciated as of December 31, 2021, partially offset by additional depreciation expense on properties acquired in 2022 and development properties placed in service during 2021.
Net gain on sales of real estate properties decreased approximately $283.3 million or 48.2% and approximately $167.4 million or 46.0% for the nine months and quarter ended September 30, 2022, respectively, as compared to the prior year periods, primarily as a result of a lower sales volume with the sale of three consolidated apartment properties in 2022 as compared to the sale of ten consolidated apartment properties in the same period in 2021.
Interest and other income decreased approximately $20.4 million or 80.8% and approximately $0.3 million or 26.0% for the nine months and quarter ended September 30, 2022, respectively, as compared to the prior year periods. These decreases are primarily due to a gain of $23.6 million on the sale of various investment securities that occurred during 2021 but not during 2022, partially offset by increases in litigation settlement proceeds that occurred during 2022 but not during 2021.
Other expenses decreased approximately $1.7 million or 15.7% for the nine months ended September 30, 2022 as compared to the prior year period, primarily due to a decline in construction defect and litigation reserves recorded between 2022 and 2021, partially offset by increases in advocacy contributions and demolition/abatement costs. Other expenses increased approximately $0.3 million or 8.7% for the quarter ended September 30, 2022 as compared to the prior year period, primarily due to increases in advocacy contributions and demolition/abatement costs, partially offset by construction defect and litigation reserves that occurred during 2021 but not during 2022.
Interest expense, including amortization of deferred financing costs, increased approximately $14.6 million or 7.0% and approximately $4.3 million or 6.2% for the nine months and quarter ended September 30, 2022, respectively, as compared to the prior year periods. These increases are primarily due to higher overall interest rates and lower capitalized interest. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the nine months ended September 30, 2022 was 3.67% as compared to 3.51% for the prior year period, and for the quarter ended September 30, 2022 was 3.67% as compared to 3.46% for the prior year period. The Company capitalized interest of approximately $4.2 million and $12.4 million during the nine months ended September 30, 2022 and 2021, respectively, and $1.9 million and $4.2 million during the quarters ended September 30, 2022 and 2021, respectively.
Same Store Results
Properties that the Company owned and were stabilized for all of both of the nine months ended September 30, 2022 and 2021 (the “Nine-Month 2022 Same Store Properties”), which represented 72,869 apartment units, drove the Company’s results of operations. Properties are considered “stabilized” when they have achieved 90% occupancy for three consecutive months. Properties are included in same store when they are stabilized for all of the current and comparable periods presented.
The following table provides comparative total same store results and statistics for the Nine-Month 2022 Same Store Properties:
September YTD 2022 vs. September YTD 2021
Same Store Results/Statistics Including 72,869 Same Store Apartment Units
$ in thousands (except for Average Rental Rate)
September YTD 2022
September YTD 2021
Revenues
1,813,450
11.2
68,731
8.1
1,630,928
63,575
Expenses
583,185
17,802
3.1
566,210
17,261
1,230,265
15.5
50,929
10.0
1,064,718
46,314
Average Rental Rate
2,866
10.5
2,594
Physical Occupancy
96.5
0.6
95.9
Turnover
33.6
(1.6
35.2
Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.
39
The following table provides results and statistics related to our Residential same store operations for the nine months ended September 30, 2022 and 2021:
Same Store Residential Results/Statistics by Market
Increase (Decrease) from Prior Year
Markets/Metro Areas
Sept. YTD 22 % of Actual NOI
Sept. YTD 22 Average Rental Rate
Sept. YTD 22 Weighted Average Physical Occupancy %
Sept. YTD 22 Turnover
AverageRental Rate
PhysicalOccupancy
14,662
20.0
2,725
96.9
28.3
11.4
0.2
(3.8
4,028
5.8
2,591
97.1
25.8
13.6
(0.6
(1.4
2,706
4.1
2,737
97.0
29.3
(0.7
(5.2
Subtotal – Southern California
21,396
29.9
2,701
28.0
11.8
0.0
(3.5
11,366
17.6
3,127
96.3
32.1
8.0
1.6
14,186
16.2
2,432
33.8
4.7
(2.5
8,536
13.1
3,964
34.9
15.8
2.7
3.9
9,331
2,472
95.1
41.9
10.7
2.5
6,430
9.9
3,165
96.2
37.3
10.9
0.5
(0.4
1,624
1.9
2,275
48.4
12.0
72,869
100.0
Note: The above table reflects Residential same store results only. Residential operations account for approximately 96.3% of total revenues for the nine months ended September 30, 2022.
Despite geopolitical and economic uncertainties, demand to live in our apartment communities remained healthy, which our financial results reflected, as we continued to capture the gap between in-place rent levels and market rent levels. Demand for our apartments continues to support strong Physical Occupancy with pricing that is largely in-line with expectations, including modest use of Leasing Concessions. Key operating drivers for this performance during 2022 include:
In addition to these stronger fundamentals, bad debt, net has moderated during the nine months ended September 30, 2022 with improvement in resident collections primarily driven by receipt of governmental rental assistance payments on behalf of our residents.
Transaction activity has slowed as buyers and sellers adjust their expectations to a volatile economic climate and rising interest rates. While this type of environment can be challenging, the Company has traditionally found investment opportunities during periods of market dislocation as our ability to move quickly and our relatively low cost of capital creates flexibility that can provide us a competitive advantage.
Long-term, we expect elevated single family home ownership costs, positive household formation trends and the overall deficit in housing across the country to buffer the impact on our business from potential economic weakness. We also see our affluent resident base as being more resilient to rising inflation due to higher levels of disposable income and lower relative rent-to-income ratios.
40
Liquidity and Capital Resources
With approximately $2.3 billion in readily available liquidity, a strong balance sheet, limited near-term maturities, very strong credit metrics and ample access to capital markets, the Company believes it is well positioned to meet its future obligations and opportunities. See further discussion below and Note 14 in the Notes to Consolidated Financial Statements for discussion of events, if any, subsequent to September 30, 2022.
Statements of Cash Flows
The following table sets forth our sources and uses of cash flows for the nine months ended September 30, 2022 and 2021 (amounts in thousands):
Cash flow provided by (used for):
Operating activities
Investing activities
Financing activities
The following provides information regarding the Company’s cash flows from operating, investing and financing activities for the nine months ended September 30, 2022.
Operating Activities
Our operating cash flows are primarily impacted by NOI and its components, such as Average Rental Rates, Physical Occupancy levels and operating expenses related to our properties. Cash provided by operating activities for the nine months ended September 30, 2022 as compared to the prior year period, increased by approximately $142.0 million as a direct result of the NOI and other changes discussed above in Results of Operations.
Investing Activities
Our investing cash flows are primarily impacted by our transaction activity (acquisitions/dispositions), development spend, capital expenditures and unconsolidated joint venture activity. For the nine months ended September 30, 2022, key drivers were:
Financing Activities
Our financing cash flows primarily relate to our borrowing activity (debt proceeds or repayment), distributions/dividends to shareholders and other Common Share activity. For the nine months ended September 30, 2022, key drivers were:
41
Short-Term Liquidity and Cash Proceeds
The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under the Company’s revolving credit facility and commercial paper program. Currently, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions.
The following table presents the Company’s balances for cash and cash equivalents, restricted deposits and the available borrowing capacity on its revolving credit facility as of September 30, 2022 and December 31, 2021 (amounts in thousands):
2,181,372
Credit Facility and Commercial Paper Program
The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024. The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans. The interest rate on advances under the facility will generally be the London Interbank Offered Rate (“LIBOR”) plus a spread (currently 0.775%), or based on bids received from the lending group, and the Company pays an annual facility fee (currently 0.125%). Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating.
The unsecured revolving credit agreement contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances, such as the anticipated phase-out of LIBOR.
The Company may borrow up to a maximum of $1.0 billion under its commercial paper program subject to market conditions. The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness.
The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations. The following table presents the availability on the Company’s unsecured revolving credit facility as of October 21, 2022 (amounts in thousands):
October 21, 2022
(145,000
2,351,537
Dividend Policy
The Company declared a dividend/distribution for the first, second and third quarters of 2022 of $0.625 per share/unit in each quarter, an annualized increase of 3.7% over the amount paid in 2021. All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.
Total dividends/distributions paid in October 2022 amounted to $242.7 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended September 30, 2022.
42
Long-Term Financing and Capital Needs
The Company expects to meet its long-term liquidity requirements, such as lump sum unsecured note and mortgage debt maturities, property acquisitions and financing of development activities, through the issuance of secured and unsecured debt and equity securities (including additional OP Units), proceeds received from the disposition of certain properties and joint ventures, along with cash generated from operations after all distributions. The Company has a significant number of unencumbered properties available to secure additional mortgage borrowings should unsecured capital be unavailable or the cost of alternative sources of capital be too high. The value of and cash flow from these unencumbered properties are in excess of the requirements the Company must maintain in order to comply with covenants under its unsecured notes and line of credit. Of the $28.0 billion in investment in real estate on the Company’s balance sheet at September 30, 2022, $24.3 billion or 87.0% was unencumbered. However, there can be no assurances that these sources of capital will be available to the Company in the future on acceptable terms or otherwise.
EQR issues equity and guarantees certain debt of the Operating Partnership from time to time. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. The Company settled all of its outstanding forward sales agreements under its At-The-Market (“ATM”) share offering program subsequent to September 30, 2022. See Note 14 in the Notes to Consolidated Financial Statements for additional discussion.
The Company’s total debt summary schedule as of September 30, 2022 is as follows:
Debt Summary as of September 30, 2022
DebtBalances
% of Total
Secured
26.2
Unsecured
73.8
21.8
71.2
Fixed Rate Debt
6,975,149
93.0
1.3
Unsecured – Revolving Credit Facility
Unsecured – Commercial Paper Program
2.6
523,042
7.0
The Company’s long-term financing and capital needs and sources have not changed materially from the information included in the Company's and the Operating Partnership's Annual Report on Form 10-K for the year ended December 31, 2021.
Definitions
The definition of certain terms described above or below are as follows:
43
Critical Accounting Policies and Estimates
The Company’s and the Operating Partnership’s critical accounting policies and estimates have not changed from the information included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
44
Funds From Operations and Normalized Funds From Operations
The following is the Company’s and the Operating Partnership’s reconciliation of net income to FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units for the nine months and quarters ended September 30, 2022 and 2021:
Preferred/preference distributions
Net income available to Common Shares and Units / Units
Depreciation – Non-real estate additions
(3,189
(3,228
(1,075
(1,052
Depreciation – Partially Owned Properties
(2,097
(2,676
(543
(994
Depreciation – Unconsolidated Properties
1,897
1,867
657
634
Net (gain) loss on sales of unconsolidated entities - operating assets
(4
(196,551
(363,928
FFO available to Common Shares and Units / Units (1) (3) (4)
996,749
855,829
349,866
296,082
Impairment – non-operating assets
781
910
Debt extinguishment and preferred share redemption (gains) losses
Non-operating asset (gains) losses
(1,174
(23,014
156
294
Other miscellaneous items
1,832
4,520
2,017
1,179
Normalized FFO available to Common Shares and Units / Units (2) (3) (4)
1,005,019
841,156
356,667
298,465
FFO (1) (3)
999,067
858,147
350,639
296,855
Normalized FFO (2) (3)
1,007,337
843,474
357,440
299,238
•the impact of any expenses relating to non-operating asset impairment;
•pursuit cost write-offs;
•gains and losses from early debt extinguishment and preferred share redemptions;
•gains and losses from non-operating assets; and
•other miscellaneous items.
45
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s and the Operating Partnership’s market risk has not changed materially from the amounts and information reported in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
Effective as of September 30, 2022, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes to the internal control over financial reporting of the Company identified in connection with the Company’s evaluation referred to above that occurred during the third quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Effective as of September 30, 2022, the Operating Partnership carried out an evaluation, under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of EQR, of the effectiveness of the Operating Partnership’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Operating Partnership in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes to the internal control over financial reporting of the Operating Partnership identified in connection with the Operating Partnership’s evaluation referred to above that occurred during the third quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
PART II. OTHER INFORMATION
As of September 30, 2022, the Company does not believe there is any litigation pending or threatened against it that, individually or in the aggregate, may reasonably be expected to have a material adverse effect on the Company.
There have been no material changes to the risk factors that were discussed in Part I, Item 1A of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
During the quarter ended September 30, 2022, EQR issued 6,572 Common Shares in exchange for 6,572 OP Units held by various limited partners of ERPOP. OP Units are generally exchangeable into Common Shares on a one-for-one basis or, at the option of ERPOP, the cash equivalent thereof, at any time one year after the date of issuance. These shares were either registered under the Securities Act of 1933, as amended (the “Securities Act”), or issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder, as these were transactions by an issuer not involving a public offering. In light of the manner of the sale and information obtained by EQR from the limited partners in connection with these transactions, EQR believes it may rely on these exemptions.
None.
Not applicable.
Item 6. Exhibits – See the Exhibit Index.
EXHIBIT INDEX
The exhibits listed below are filed as part of this report. References to exhibits or other filings under the caption “Location” indicate that the exhibit or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference. The Commission file numbers for our Exchange Act filings referenced below are 1-12252 (Equity Residential) and 0-24920 (ERP Operating Limited Partnership).
Exhibit
Location
10.1
Amendment to the Equity Residential Supplemental Executive Retirement Plan, effective as of October 1, 2022.
Attached herein.
31.1
Equity Residential – Certification of Mark J. Parrell, Chief Executive Officer.
31.2
Equity Residential – Certification of Robert A. Garechana, Chief Financial Officer.
31.3
ERP Operating Limited Partnership – Certification of Mark J. Parrell, Chief Executive Officer of Registrant’s General Partner.
31.4
ERP Operating Limited Partnership – Certification of Robert A. Garechana, Chief Financial Officer of Registrant’s General Partner.
Equity Residential – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Mark J. Parrell, Chief Executive Officer of the Company.
32.2
Equity Residential – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Robert A. Garechana, Chief Financial Officer of the Company.
32.3
ERP Operating Limited Partnership – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Mark J. Parrell, Chief Executive Officer of Registrant’s General Partner.
32.4
ERP Operating Limited Partnership – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Robert A. Garechana, Chief Financial Officer of Registrant’s General Partner.
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
October 28, 2022
By:
/s/ Robert A. Garechana
Robert A. Garechana
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Ian S. Kaufman
Ian S. Kaufman
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
ERP OPERATING LIMITED PARTNERSHIP BY: EQUITY RESIDENTIAL
ITS GENERAL PARTNER