Table of Contents
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 June 30, 2023
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 July 26, 2023 was 379,032,411.
EXPLANATORY NOTE
This report combines the reports on Form 10-Q for the quarterly period ended June 30, 2023 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 June 30, 2023 owned an approximate 96.8% ownership interest in, ERPOP. The remaining 3.2% 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 June 30, 2023 and December 31, 2022
2
Consolidated Statements of Operations and Comprehensive Income for the six months and quarters ended June 30, 2023 and 2022
3
Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022
5
Consolidated Statements of Changes in Equity for the six months and quarters ended June 30, 2023 and 2022
8
Financial Statements of ERP Operating Limited Partnership:
10
11
13
Consolidated Statements of Changes in Capital for the six months and quarters ended June 30, 2023 and 2022
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
36
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)
June 30,
December 31,
2023
2022
ASSETS
Land
$
5,579,211
5,580,878
Depreciable property
22,697,597
22,334,369
Projects under development
50,916
112,940
Land held for development
61,334
60,567
Investment in real estate
28,389,058
28,088,754
Accumulated depreciation
(9,428,549
)
(9,027,850
Investment in real estate, net
18,960,509
19,060,904
Investments in unconsolidated entities
304,710
279,024
Cash and cash equivalents
35,701
53,869
Restricted deposits
88,941
83,303
Right-of-use assets
463,704
462,956
Other assets
292,164
278,206
Total assets
20,145,729
20,218,262
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net
1,913,069
1,953,438
Notes, net
5,345,373
5,342,329
Line of credit and commercial paper
184,474
129,955
Accounts payable and accrued expenses
118,316
96,028
Accrued interest payable
66,238
66,310
Lease liabilities
313,866
308,748
Other liabilities
294,263
306,941
Security deposits
69,427
68,940
Distributions payable
258,841
244,621
Total liabilities
8,563,867
8,517,310
Commitments and contingencies
Redeemable Noncontrolling Interests – Operating Partnership
355,319
318,273
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 June 30, 2023 and December 31, 2022
37,280
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 379,032,722 shares issued and outstanding as of June 30, 2023 and 378,429,708 shares issued and outstanding as of December 31, 2022
3,790
3,784
Paid in capital
9,472,628
9,476,085
Retained earnings
1,506,460
1,658,837
Accumulated other comprehensive income (loss)
3,708
(2,547
Total shareholders’ equity
11,023,866
11,173,439
Noncontrolling Interests:
Operating Partnership
207,405
209,961
Partially Owned Properties
(4,728
(721
Total Noncontrolling Interests
202,677
209,240
Total equity
11,226,543
11,382,679
Total liabilities and equity
See accompanying notes
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands except per share data)
Six Months Ended June 30,
Quarter Ended June 30,
REVENUES
Rental income
1,422,397
1,340,378
717,309
687,030
EXPENSES
Property and maintenance
262,350
241,229
124,771
116,355
Real estate taxes and insurance
209,749
202,538
103,080
101,850
Property management
62,145
57,306
30,679
26,559
General and administrative
35,041
33,661
18,876
16,423
Depreciation
437,185
453,767
221,355
223,806
Total expenses
1,006,470
988,501
498,761
484,993
Net gain (loss) on sales of real estate properties
100,122
107,795
(87
107,897
Operating income
516,049
459,672
218,461
309,934
Interest and other income
3,669
4,124
2,131
596
Other expenses
(15,559
(5,436
(6,564
(2,380
Interest:
Expense incurred, net
(131,991
(144,681
(65,590
(71,889
Amortization of deferred financing costs
(3,996
(4,201
(2,017
(2,124
Income before income and other taxes, income (loss) from investments in unconsolidated entities and net gain (loss) on sales of land parcels
368,172
309,478
146,421
234,137
Income and other tax (expense) benefit
(634
(573
(336
(291
Income (loss) from investments in unconsolidated entities
(2,605
(2,429
(1,223
(1,168
Net income
364,933
306,476
144,862
232,678
Net (income) loss attributable to Noncontrolling Interests:
(11,613
(10,027
(4,554
(7,633
(2,082
(1,583
(1,105
(944
Net income attributable to controlling interests
351,238
294,866
139,203
224,101
Preferred distributions
(1,545
(773
Net income available to Common Shares
349,693
293,321
138,430
223,328
Earnings per share – basic:
0.92
0.78
0.37
0.59
Weighted average Common Shares outstanding
378,492
375,640
378,642
375,769
Earnings per share – diluted:
391,063
389,463
391,187
389,363
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
4,054
(1,259
13,834
Losses reclassified into earnings from other comprehensive income
2,201
4,881
1,106
2,456
Other comprehensive income (loss)
6,255
3,622
14,940
1,197
Comprehensive income
371,188
310,098
159,802
233,875
Comprehensive (income) attributable to Noncontrolling Interests
(13,890
(11,730
(6,135
(8,617
Comprehensive income attributable to controlling interests
357,298
298,368
153,667
225,258
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:
3,996
4,201
Amortization of discounts and premiums on debt
1,740
2,891
Amortization of deferred settlements on derivative instruments
2,195
4,875
Amortization of right-of-use assets
6,357
6,103
Write-off of pursuit costs
1,993
2,515
(Income) loss from investments in unconsolidated entities
2,605
2,429
Distributions from unconsolidated entities – return on capital
290
164
Net (gain) loss on sales of real estate properties
(100,122
(107,795
Realized (gain) loss on sale of investment securities
87
(2,064
Compensation paid with Company Common Shares
20,845
18,600
Changes in assets and liabilities:
(Increase) decrease in other assets
(13,258
(2,096
Increase (decrease) in accounts payable and accrued expenses
25,424
22,615
Increase (decrease) in accrued interest payable
(72
(473
Increase (decrease) in lease liabilities
(658
(817
Increase (decrease) in other liabilities
(8,047
(23,985
Increase (decrease) in security deposits
487
3,468
Net cash provided by operating activities
745,980
690,874
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions
(186,676
(113,046
Investment in real estate – development/other
(46,815
(55,491
Capital expenditures to real estate
(135,247
(83,304
Non-real estate capital additions
(1,043
(981
Interest capitalized for real estate and unconsolidated entities under development
(6,979
(2,267
Proceeds from disposition of real estate, net
133,916
255,922
Investments in unconsolidated entities – acquisitions
(989
—
Investments in unconsolidated entities – development/other
(25,413
(48,577
Distributions from unconsolidated entities – return of capital
15
9
Purchase of investment securities and other investments
(2,500
(1,034
Proceeds from sale of investment securities
452
3,434
Net cash provided by (used for) investing activities
(271,279
(45,335
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs
(228
Mortgage notes payable, net:
Proceeds
22,896
14,586
Lump sum payoffs
(64,722
(260,874
Scheduled principal repayments
(54
(2,985
Line of credit and commercial paper:
Commercial paper proceeds
2,382,619
2,836,037
Commercial paper repayments
(2,328,100
(2,966,121
Finance ground lease principal payments
(1,329
(1,229
Proceeds from Employee Share Purchase Plan (ESPP)
2,124
2,378
Proceeds from exercise of options
11,358
18,928
Payment of offering costs
(487
Other financing activities, net
(31
Acquisition of Noncontrolling Interests – Partially Owned Properties
(3,737
(32,178
Contributions – Noncontrolling Interests – Partially Owned Properties
603
Contributions – Noncontrolling Interests – Operating Partnership
Distributions:
Common Shares
(487,483
(461,605
Preferred Shares
(2,319
Noncontrolling Interests – Operating Partnership
(15,233
(15,142
Noncontrolling Interests – Partially Owned Properties
(3,230
(17,232
Net cash provided by (used for) financing activities
(487,231
(887,124
Net increase (decrease) in cash and cash equivalents and restricted deposits
(12,530
(241,585
Cash and cash equivalents and restricted deposits, beginning of period
137,172
360,236
Cash and cash equivalents and restricted deposits, end of period
124,642
118,651
45,010
73,641
Total cash and cash equivalents and restricted deposits, end of period
6
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized
125,518
136,787
Net cash paid (received) for income and other taxes
911
687
Amortization of deferred financing costs:
(211
(253
1,392
1,170
895
1,159
1,920
2,125
Amortization of discounts and premiums on debt:
616
1,545
1,124
1,346
Amortization of deferred settlements on derivative instruments:
(6
Accumulated other comprehensive income
Write-off of pursuit costs:
316
761
1,111
1,637
566
117
(Income) loss from investments in unconsolidated entities:
1,972
1,797
633
632
Realized/unrealized (gain) loss on derivative instruments:
(3,359
(695
1,259
Interest capitalized for real estate and unconsolidated entities under development:
(2,988
(675
(3,991
(1,592
Investments in unconsolidated entities – development/other:
(24,633
(47,887
(780
(690
Debt financing costs:
Right-of-use assets and lease liabilities initial measurement and reclassifications:
(7,105
(224
7,105
224
Non-cash share distribution and other transfers from unconsolidated entities:
539
4,048
(539
(4,048
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
3,755
3,789
3,760
Conversion of OP Units into Common Shares
Exercise of share options
Share-based employee compensation expense:
Restricted shares
3,761
PAID IN CAPITAL
9,121,122
9,488,320
9,142,969
Common Share Issuance:
4,657
1,484
986
1,310
11,356
18,924
3,246
4,583
Employee Share Purchase Plan (ESPP)
672
1,409
7,943
7,359
4,290
3,750
Share options
3,125
1,390
1,628
514
ESPP discount
398
420
138
249
Offering costs
(373
Supplemental Executive Retirement Plan (SERP)
148
(269
(343
(106
(900
(27,355
Change in market value of Redeemable Noncontrolling Interests – Operating Partnership
(39,123
98,140
(33,177
97,201
Adjustment for Noncontrolling Interests ownership in Operating Partnership
6,815
6,632
7,768
5,587
9,229,738
RETAINED EARNINGS
1,827,063
1,619,131
1,661,705
Common Share distributions
(502,070
(470,424
(251,101
(235,073
Preferred Share distributions
1,649,960
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(34,272
(11,232
(31,847
Accumulated other comprehensive income (loss) – derivative instruments:
(30,650
DISTRIBUTIONS
Distributions declared per Common Share outstanding
1.325
1.25
0.6625
0.625
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
NONCONTROLLING INTERESTS
OPERATING PARTNERSHIP
214,094
211,718
217,451
Issuance of restricted units to Noncontrolling Interests
Conversion of OP Units held by Noncontrolling Interests into OP Units held by General Partner
(4,659
(1,484
(986
(1,310
Equity compensation associated with Noncontrolling Interests
10,867
13,159
6,213
5,361
Net income attributable to Noncontrolling Interests
11,613
10,027
4,554
7,633
Distributions to Noncontrolling Interests
(15,640
(15,488
(7,736
(7,593
Change in carrying value of Redeemable Noncontrolling Interests – Operating Partnership
2,077
2,649
371
(6,815
(6,632
(7,768
(5,587
216,326
PARTIALLY OWNED PROPERTIES
18,166
(2,553
3,415
2,082
1,583
1,105
944
Contributions by Noncontrolling Interests
157
(3,261
(17,263
(452
(1,427
(2,837
(4,823
(1,734
LIABILITIES AND CAPITAL
Redeemable Limited Partners
Capital:
Partners’ Capital:
Preference Units
General Partner
10,982,878
11,138,706
Limited Partners
Total partners’ capital
11,231,271
11,383,400
Total capital
Total liabilities and capital
(Amounts in thousands except per Unit data)
Net (income) loss attributable to Noncontrolling Interests – Partially Owned Properties
362,851
304,893
143,757
231,734
ALLOCATION OF NET INCOME:
773
Net income available to Units
361,306
303,348
142,984
230,961
Earnings per Unit – basic:
Weighted average Units outstanding
389,942
387,531
390,032
387,664
Earnings per Unit – diluted:
Comprehensive (income) attributable to Noncontrolling Interests – Partially Owned Properties
369,106
308,515
158,697
232,931
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
14
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
PARTNERS’ CAPITAL
PREFERENCE UNITS
GENERAL PARTNER
10,951,940
11,111,240
10,808,434
OP Unit Issuance:
Conversion of OP Units held by Limited Partners into OP Units held by General Partner
4,659
Exercise of EQR share options
4,584
EQR’s Employee Share Purchase Plan (ESPP)
EQR restricted shares
7,945
7,361
4,291
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
10,883,459
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 June 30, 2023 owned an approximate 96.8% 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 June 30, 2023, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 304 properties located in 10 states and the District of Columbia consisting of 80,212 apartment units. The ownership breakdown includes (table does not include any uncompleted development properties):
Properties
Apartment Units
Wholly Owned Properties
289
76,986
Partially Owned Properties – Consolidated
3,226
304
80,212
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 six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
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, 2022 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, 2022.
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 could be made through 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 six months ended June 30, 2023 and 2022:
Common Shares outstanding at January 1,
378,429,708
375,527,195
Common Shares Issued:
Conversion of OP Units
180,629
31,089
232,317
348,510
40,346
35,669
Restricted share grants, net
149,722
175,970
Common Shares outstanding at June 30,
379,032,722
376,118,433
Units
Units outstanding at January 1,
12,429,737
12,659,027
Restricted unit grants, net
166,344
223,242
Conversion of OP Units to Common Shares
(180,629
(31,089
Units outstanding at June 30,
12,415,452
12,851,180
Total Common Shares and Units outstanding at June 30,
391,448,174
388,969,613
Units Ownership Interest in Operating Partnership
3.2
%
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 six months ended June 30, 2023 and 2022:
General and Limited Partner Units
General and Limited Partner Units outstanding at January 1,
390,859,445
388,186,222
Issued to General Partner:
EQR’s restricted share grants, net
Issued to Limited Partners:
General and Limited Partner Units outstanding at June 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 June 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 June 30, 2023 and December 31, 2022.
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 June 30, 2023 and 2022, the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners have a redemption value of approximately $355.3 million and $398.2 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 six months ended June 30, 2023 and 2022, respectively (amounts in thousands):
Balance at January 1,
498,977
Change in market value
39,123
(98,140
Change in carrying value
(2,077
(2,649
Balance at June 30,
398,188
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 June 30, 2023 and December 31, 2022:
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 June 30, 2023 and December 31, 2022
12/10/2026
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. The current program matures in May 2025 and gives us the authority to issue up to 13.0 million shares, all of which remain available for issuance as of June 30, 2023.
The Company may repurchase up to 13.0 million Common Shares under its share repurchase program. No open market repurchases have occurred since 2008. As of June 30, 2023, EQR has remaining authorization to repurchase up to 13.0 million of its shares.
ERPOP issued $0.9 million of 3.00% Series Q Cumulative Redeemable Preference Units (the "Series Q Preference Units") in the second quarter of 2023 in connection with the buyout of the noncontrolling interest in a consolidated operating property (see Note 6 for additional discussion). The 933,454 Series Q Preference Units have a liquidation value of $1.00 per unit and pay distributions quarterly
21
at the annual rate of $0.03 per unit. The Series Q Preference Units can be redeemed for, at EQR's/ERPOP's option, Common Shares, OP Units and/or cash upon the occurrence of specific events laid out in the agreement. If redeemed for Common Shares or OP Units, the number of shares/units issued is based on the Common Share price. The Series Q Preference Units increased the balance of Noncontrolling Interests - Partially Owned Properties in the consolidated balance sheets.
The following table summarizes the carrying amounts for the Company’s investment in real estate (at cost) as of June 30, 2023 and December 31, 2022 (amounts in thousands):
June 30, 2023
December 31, 2022
Depreciable property:
Buildings and improvements
19,702,354
19,471,503
Furniture, fixtures and equipment
2,479,945
2,352,050
In-Place lease intangibles
515,298
510,816
Projects under development:
3,200
3,201
Construction-in-progress
47,716
109,739
Land held for development:
46,160
15,174
14,407
During the six months ended June 30, 2023, the Company acquired the following from unaffiliated parties (purchase price in thousands):
Purchase Price
Rental Properties – Consolidated (1)
549
186,600
Total
During the six months ended June 30, 2023, the Company disposed of the following to unaffiliated parties (sales price and net gain in thousands):
Sales Price
Net Gain
Rental Properties – Consolidated
247
135,300
The Company has entered into an agreement to acquire the following (purchase price in thousands):
93,000
The Company has entered into an agreement to dispose of the following (sales price and net book value in thousands):
Net Book Value at June 30, 2023
Rental Properties - Consolidated
166
60,100
31,305
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 June 30, 2023.
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 June 30, 2023:
Operating Properties (1), (2)
Consolidated Joint Ventures (VIE)
The following table provides consolidated assets and liabilities related to the Company's VIEs as of June 30, 2023 and December 31, 2022 (amounts in thousands):
Consolidated Assets
579,832
691,880
Consolidated Liabilities
107,228
158,932
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 June 30, 2023 (aggregate and amounts borrowed under loan commitments in thousands):
Recently Completed Operating Property
Number of joint ventures with debt financing
Aggregate loan commitments
73,344
Amounts borrowed under loan commitments (1)
67,876
Maturity dates
2025
23
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.
The following table and information summarizes the Company’s investments in unconsolidated entities as of June 30, 2023 and December 31, 2022 (amounts in thousands except for ownership percentage):
Ownership Percentage
Investments in Unconsolidated Entities:
Various Real Estate Holdings (VIE)
36,873
35,974
Varies
Projects Under Development and Land Held for Development (VIE)
242,391
218,043
62% - 95% (1)
Real Estate Technology Funds/Companies (VIE)
25,695
25,249
(249
(242
The following table summarizes the Company’s unconsolidated joint ventures that were deemed to be VIEs as of June 30, 2023:
Real Estate Holdings (1)
Projects Under Development (2), (5)
Projects Held for Development (2), (3)
Entities
Projects
Apartment Units (4)
Unconsolidated Joint Ventures (VIE)
1,982
1,334
New Development Joint Ventures
The following table provides information on total unconsolidated development joint ventures entered into during the six months ended June 30, 2023 (amounts in thousands except for number of unconsolidated joint ventures and apartment units):
Number of unconsolidated joint ventures (1)
Apartment units (2)
368
989
24
The following table presents the Company’s restricted deposits as of June 30, 2023 and December 31, 2022 (amounts in thousands):
Mortgage escrow deposits:
Replacement reserves
13,440
12,549
Mortgage principal reserves/sinking funds
28,802
25,304
Mortgage escrow deposits
42,242
37,853
Restricted cash:
Earnest money on pending acquisitions
4,000
4,500
Restricted deposits on real estate investments
225
229
Resident security and utility deposits
39,504
38,432
2,970
2,289
Restricted cash
46,699
45,450
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 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 six months ended June 30, 2023 and 2022 (amounts in thousands):
Six Months Ended June 30, 2023
Six Months Ended June 30, 2022
Income Type
Residential Leases
Non-Residential Leases
Residential and non-residential rent
1,276,338
31,973
1,308,311
1,194,087
32,095
1,226,182
Utility recoveries (RUBS income) (1)
42,786
419
43,205
39,583
369
39,952
Parking rent
21,893
22,118
21,706
202
21,908
Other lease revenue (2)
(13,420
734
(12,686
(889
(197
(1,086
Total lease revenue
1,327,597
33,351
1,360,948
1,254,487
32,469
1,286,956
Parking revenue
20,395
18,431
Other revenue
41,054
34,991
Total other rental income (3)
61,449
53,422
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 June 30, 2023 and 2022 (amounts in thousands):
Quarter Ended June 30, 2023
Quarter Ended June 30, 2022
641,586
15,987
657,573
606,307
16,221
622,528
21,403
212
21,615
19,985
188
20,173
11,011
116
11,127
10,923
104
11,027
(5,831
65
(5,766
5,412
(154
5,258
668,169
16,380
684,549
642,627
16,359
658,986
10,192
9,623
22,568
18,421
32,760
28,044
The following table presents residential and non-residential accounts receivable and straight-line receivable balances for the Company’s properties as of June 30, 2023 and December 31, 2022 (amounts in thousands):
Residential
Non-Residential
Balance Sheet (Other assets):
Resident/tenant accounts receivable balances
27,098
35,688
2,382
2,820
Allowance for doubtful accounts
(22,609
(31,405
(1,383
(2,152
Net receivable balances
4,489
4,283
999
668
Straight-line receivable balances
7,072
4,398
13,562
13,795
The following table presents residential bad debt for the Company’s properties for the six months and quarters ended June 30, 2023 and 2022 (amounts in thousands):
Income Statement (Rental income):
Bad debt, net (1)
19,820
8,147
9,065
(1,748
% of rental income
1.4
0.6
1.3
(0.3
%)
EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. Weighted average interest rates noted below for the six months ended June 30, 2023 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 six months ended June 30, 2023 (amounts in thousands):
Mortgage notes payable, net as of December 31, 2022
Amortization of premiums/discounts
Amortization of deferred financing costs, net (1)
Mortgage notes payable, net as of June 30, 2023
Fixed Rate Debt:
Secured – Conventional
1,608,838
460
1,609,298
Floating Rate Debt:
108,378
(2)
365
66,863
Secured – Tax Exempt
236,222
70
236,908
Floating Rate Debt
344,600
435
303,771
The following table summarizes certain interest rate and maturity date information as of and for the six months ended June 30, 2023:
Interest Rate Ranges
0.10% - 7.91%
Weighted Average Interest Rate
3.63%
Maturity Date Ranges
2023-2061
As of June 30, 2023, the Company had $250.0 million of secured tax-exempt bonds subject to third-party credit enhancement.
Notes
The following table summarizes the Company’s notes activity for the six months ended June 30, 2023 (amounts in thousands):
Notes, net as of December 31, 2022
Notes, net as of June 30, 2023
Unsecured – Public
1.85% - 7.57%
3.54%
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 six months ended June 30, 2023.
27
Line of Credit and Commercial Paper
The Company has a $2.5 billion unsecured revolving credit facility maturing on October 26, 2027. 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 Secured Overnight Financing Rate ("SOFR") plus a spread (currently 0.725%), 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 six months ended June 30, 2023.
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 following table summarizes certain weighted average interest rate, maturity and amount outstanding information for the commercial paper program as of and for the six months ended June 30, 2023:
Weighted Average Interest Rate (1)
5.12%
Weighted Average Maturity (in days)
Weighted Average Amount Outstanding
$164.5 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 June 30, 2023 (amounts in thousands):
Unsecured revolving credit facility commitment
2,500,000
Commercial paper balance outstanding
(185,187
Unsecured revolving credit facility balance outstanding
Other restricted amounts
(3,484
Unsecured revolving credit facility availability
2,311,329
The following table summarizes the Company's total debt extinguishment costs recorded as additional expense for the six months and quarters ended June 30, 2023 and 2022 (amounts in thousands):
Write-offs of unamortized deferred financing costs
92
Write-offs of unamortized (premiums)/discounts/OCI
377
469
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.
28
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 June 30, 2023 and December 31, 2022, respectively (amounts in thousands):
Carrying Value
Estimated FairValue (Level 2)
1,773,555
1,803,525
Unsecured debt, net
5,529,847
4,975,013
5,472,284
4,874,490
Total debt, net
7,442,916
6,748,568
7,425,722
6,678,015
The following table summarizes the Company’s consolidated derivative instruments at June 30, 2023 (dollar amounts are in thousands):
Forward StartingSwaps (1)
Current Notional Balance
450,000
Lowest Interest Rate
2.4470
Highest Interest Rate
3.6995
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 June 30, 2023 and December 31, 2022, respectively (amounts in thousands):
Fair Value Measurements at Reporting Date Using
Description
Balance SheetLocation
6/30/2023
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
25,224
Supplemental Executive Retirement Plan
130,135
155,359
Liabilities
Other Liabilities
515
130,650
Redeemable Noncontrolling Interests –
Operating Partnership/Redeemable
Mezzanine
12/31/2022
Significant Other Observable Inputs (Level 2)
Significant UnobservableInputs(Level 3)
21,864
133,245
155,109
1,210
134,455
30
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 six months ended June 30, 2023 and 2022, respectively (amounts in thousands):
June 30, 2023Type 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
(2,201
June 30, 2022Type of Cash Flow Hedge
Amount of Gain/(Loss) Recognized in OCI on Derivative
(4,881
As of June 30, 2023 and December 31, 2022, there were approximately $3.7 million in deferred gains, net, and $2.5 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 $2.4 million may be recognized as additional interest expense during the twelve months ending June 30, 2024.
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
11,450
11,891
11,390
11,895
Long-term compensation shares/units
1,121
1,863
1,155
1,698
ATM forward sales
69
Denominator for net income per share – diluted
Net income per share – basic
Net income per share – diluted
31
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
Commitments
Real Estate Development Commitments
As of June 30, 2023, 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 June 30, 2023 (total project costs remaining in thousands):
Total Project Costs Remaining (1)
Projects Under Development
Consolidated
101,705
Unconsolidated
243,293
Total Projects Under Development
2,207
344,998
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. As of June 30, 2023, the Company has invested in nine separate such investments totaling $36.9 million with aggregate remaining commitments of approximately $16.1 million.
32
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 3.8% of total revenues for the six months ended June 30, 2023 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.
All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the six months and quarters ended June 30, 2023 and 2022, 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 six months and quarters ended June 30, 2023 and 2022, respectively (amounts in thousands):
Property and maintenance expense
(262,350
(241,229
(124,771
(116,355
Real estate taxes and insurance expense
(209,749
(202,538
(103,080
(101,850
Total operating expenses
(472,099
(443,767
(227,851
(218,205
Net operating income
950,298
896,611
489,458
468,825
33
The following tables present NOI from our rental real estate for each segment for the six months and quarters ended June 30, 2023 and 2022, respectively, as well as total assets and capital expenditures at June 30, 2023 (amounts in thousands):
Rental Income
Operating Expenses
NOI
Same store (1)
Los Angeles
234,243
73,597
160,646
227,809
67,243
160,566
Orange County
63,904
14,372
49,532
60,018
13,013
47,005
San Diego
45,452
10,348
35,104
42,410
9,605
32,805
Subtotal - Southern California
343,599
98,317
245,282
330,237
89,861
240,376
San Francisco
216,121
66,067
150,054
206,019
61,753
144,266
Washington, D.C.
217,282
71,075
146,207
203,973
68,523
135,450
New York
237,830
97,859
139,971
206,162
93,941
112,221
Seattle
149,291
41,726
107,565
140,114
40,195
99,919
Boston
143,127
43,383
99,744
131,779
41,074
90,705
Denver
35,469
10,500
24,969
33,065
9,331
23,734
Other Expansion Markets
32,359
15,324
17,035
30,598
13,008
17,590
Total same store
1,375,078
444,251
930,827
1,281,947
417,686
864,261
Non-same store/other
Non-same store (2)
44,677
17,236
27,441
33,690
15,357
18,333
Other (3)
2,642
10,612
(7,970
24,741
10,724
14,017
Total non-same store/other
47,319
27,848
19,471
58,431
26,081
32,350
Totals
472,099
443,767
118,562
35,795
82,767
118,840
33,060
85,780
32,316
7,186
25,130
31,252
6,482
24,770
24,691
5,747
18,944
23,067
5,220
17,847
175,569
48,728
126,841
173,159
44,762
128,397
108,641
32,062
76,579
105,403
30,081
75,322
109,660
34,807
74,853
103,268
34,311
68,957
119,785
48,088
71,697
106,332
46,067
60,265
74,729
21,246
53,483
71,577
20,269
51,308
72,469
20,747
51,722
67,117
20,016
47,101
17,873
5,010
12,863
16,833
4,697
12,136
18,718
8,346
10,372
17,685
7,375
10,310
697,444
219,034
478,410
661,374
207,578
453,796
19,664
7,219
12,445
14,848
6,064
8,784
201
1,598
(1,397
10,808
4,563
6,245
19,865
8,817
11,048
25,656
10,627
15,029
227,851
218,205
34
Total Assets
Capital Expenditures
2,522,130
23,582
349,363
4,230
229,569
7,907
3,101,062
35,719
3,023,790
19,750
3,039,410
23,142
3,375,622
10,072
2,141,765
14,237
1,773,166
11,998
840,581
1,773
796,218
1,805
18,091,614
118,496
1,321,994
16,682
732,121
2,054,115
16,751
135,247
Subsequent to June 30, 2023, the Company:
35
For further information including definitions for capitalized terms not defined herein, refer to the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2022.
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. 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, 2022, 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.
On May 18, 2023, the Company announced that Samuel Zell, its Founder and Chairman of the Board of Trustees, had passed away earlier that same day. David J. Neithercut, the Company’s former Chief Executive Officer and a member of the Company’s Board of Trustees since 2006, has been appointed as Chairman.
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, 2022.
Results of Operations
2023 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 six months ended June 30, 2023:
Portfolio Rollforward
($ in thousands)
ApartmentUnits
PurchasePrice
AcquisitionCap Rate
308
79,597
Acquisitions:
Consolidated Rental Properties
287
108,000
5.0
Consolidated Rental Properties – Not Stabilized (1)
262
78,600
6.6
DispositionYield
Dispositions:
(7
(247
(135,300
(5.3
Completed Developments – Consolidated
312
Configuration Changes
Acquisitions
Dispositions
Developments
37
See Notes 4 and 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate investments and investments in partially owned entities.
Comparison of the six months and quarter ended June 30, 2023 to the six months and quarter ended June 30, 2022
The following table presents a reconciliation of diluted earnings per share/unit for the six months and quarter ended June 30, 2023 as compared to the same periods in 2022:
Six Months EndedJune 30
Quarter EndedJune 30
Diluted earnings per share/unit for period ended 2022
Property NOI
0.17
0.06
0.03
0.01
Corporate overhead (1)
(0.01
(0.02
Net gain/loss on property sales
(0.03
(0.28
Depreciation expense
0.05
0.02
(0.07
Diluted earnings per share/unit for period ended 2023
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.
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/other results (amounts in thousands):
$ Change
% Change
56,377
12.3
Adjustments:
4,839
8.4
1,380
4.1
(16,582
(3.7
)%
7,673
(7.1
Total NOI
53,687
6.0
Rental income:
Same store
93,131
7.3
(11,112
(19.0
Total rental income
82,019
6.1
Operating expenses:
26,565
6.4
1,767
6.8
28,332
NOI:
66,566
7.7
(12,879
(39.8
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 2022 and 2023, operations from the Company’s development properties and operations prior to disposition from 2022 and 2023 sold properties.
38
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 $4.8 million or 8.4% and approximately $4.1 million or 15.5% for the six months and quarter ended June 30, 2023, respectively, as compared to the prior year periods. These increases are primarily attributable to increases in payroll-related costs, workforce/contractors costs and legal and professional fees, partially offset by decreases in training/marketing costs and third-party management fees.
General and administrative expenses, which include corporate operating expenses, increased approximately $1.4 million or 4.1% and approximately $2.5 million or 14.9% for the six months and quarter ended June 30, 2023, respectively, as compared to the prior year periods, primarily due to increases in payroll-related costs, partially offset by legal and professional fees and training/marketing costs.
Depreciation expense, which includes depreciation on non-real estate assets, decreased approximately $16.6 million or 3.7% and approximately $2.5 million or 1.1% for the six months and quarter ended June 30, 2023, respectively, as compared to the prior year periods. These decreases are primarily due to in-place leases for 2021 and 2022 acquisitions being fully depreciated as of December 31, 2022 and lower depreciation from properties sold in 2022 and 2023.
Net gain on sales of real estate properties decreased approximately $7.7 million or 7.1% during the six months ended June 30, 2023 as compared to the prior year period, primarily as a result of the sale of seven consolidated apartment properties for a lower gain in 2023 as compared to the sale of one consolidated apartment property in the same period in 2022. Net gain on sales of real estate properties decreased approximately $108.0 million for the quarter ended June 30, 2023 as compared to the prior year period, primarily as a result of no consolidated property sales in the second quarter of 2023 as compared to the sale of one consolidated apartment property in the same period in 2022.
Other expenses increased approximately $10.1 million and approximately $4.2 million for the six months and quarter ended June 30, 2023, respectively, as compared to the prior year periods, primarily due to increases in litigation reserves and data transformation project costs that occurred during 2023 but not during 2022.
39
Interest expense, including amortization of deferred financing costs, decreased approximately $12.9 million or 8.7% and approximately $6.4 million or 8.7% for the six months and quarter ended June 30, 2023, respectively, as compared to the prior year periods. These decreases are primarily due to lower overall debt balances outstanding as compared to prior year periods and higher capitalized interest, partially offset by higher rates on floating debt. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the six months ended June 30, 2023 was 3.81% as compared to 3.66% for the prior year period, and for the quarter ended June 30, 2023 was 3.75% as compared to 3.68% for the prior year period. The Company capitalized interest of approximately $7.0 million and $2.3 million during the six months ended June 30, 2023 and 2022, respectively, and $3.6 million and $1.3 million during the quarters ended June 30, 2023 and 2022, respectively.
Same Store Results
Properties that the Company owned and were stabilized for all of both of the six months ended June 30, 2023 and 2022 (the “Six-Month 2023 Same Store Properties”), which represented 76,952 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 Six-Month 2023 Same Store Properties:
June YTD 2023 vs. June YTD 2022
Same Store Results/Statistics Including 76,952 Same Store Apartment Units
$ in thousands (except for Average Rental Rate)
June YTD 2023
June YTD 2022
Revenues
1,324,993
50,085
7.0
1,235,134
46,813
Expenses
430,638
6.2
13,613
11.6
405,484
12,202
894,355
7.8
36,472
5.4
829,650
34,611
Average Rental Rate
2,995
8.0
2,772
Physical Occupancy
95.9
(0.7
96.6
Turnover
20.6
0.4
20.2
Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.
40
The following table provides results and statistics related to our Residential same store operations for the six months ended June 30, 2023 and 2022:
Same Store Residential Results/Statistics by Market
Increase (Decrease) from Prior Year
Markets/Metro Areas
June YTD 23 % of Actual NOI
June YTD 23 Average Rental Rate
June YTD 23 Weighted Average Physical Occupancy %
June YTD 23 Turnover
AverageRental Rate
PhysicalOccupancy
14,415
17.8
2,818
95.2
21.1
4.6
(1.7
3.5
4,028
5.5
2,752
96.1
(1.1
2.7
2,706
3.9
2,931
95.6
19.1
8.8
(1.5
0.7
Subtotal – Southern California
21,149
27.2
95.4
5.7
(1.6
2.9
11,368
16.5
3,265
20.4
5.9
(1.0
1.6
14,400
16.0
2,555
96.7
17.9
6.7
(0.1
8,536
14.3
4,459
96.9
17.6
16.4
(0.2
(2.5
9,525
11.3
2,583
95.1
25.6
0.1
6,700
10.2
3,374
19.2
9.3
(0.5
2,498
2,402
96.3
28.3
0.0
2,776
1.8
1,984
94.7
25.4
(1.9
1.1
76,952
100.0
Note: The above table reflects Residential same store results only. Residential operations account for approximately 96.2% of total revenues for the six months ended June 30, 2023.
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. This steady demand for our apartments continues to support Physical Occupancy with pricing that is largely in-line with our improved expectations updated in May 2023, with our East Coast markets continuing to outperform our West Coast markets, as we expected. Key operating drivers for this performance during 2023 include:
In addition to these stronger fundamentals, the Company had increased move-out activity related to delinquent residents, especially in Los Angeles, during the six months ended June 30, 2023. This improved activity reduced bad debt, net, while putting modest pressure on Physical Occupancy during the six months ended June 30, 2023, but was not sufficient to offset the decline in governmental rental assistance payments received on behalf of our residents during the six months ended June 30, 2023 as compared to the prior year period.
Overall, the fundamentals of our business remain strong. Long-term, we expect elevated single family home ownership costs, positive household formation trends, favorable competitive new supply in most of our major markets and the overall deficit in housing across the country to buffer the impact on our business from the risks of 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.
41
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 take advantage of opportunities. See further discussion below.
Statements of Cash Flows
The following table sets forth our sources and uses of cash flows for the six months ended June 30, 2023 and 2022 (amounts in thousands):
Cash flows 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 six months ended June 30, 2023.
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 six months ended June 30, 2023 as compared to the prior year period, increased by approximately $55.1 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 and capital expenditures. For the six months ended June 30, 2023, key drivers were:
Financing Activities
Our financing cash flows primarily relate to our borrowing activity (debt proceeds or repayment), distributions/dividends to shareholders/unitholders and other Common Share activity. For the six months ended June 30, 2023, key drivers were:
42
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 June 30, 2023 and December 31, 2022 (amounts in thousands):
2,366,537
Credit Facility and Commercial Paper Program
The Company has a $2.5 billion unsecured revolving credit facility maturing October 26, 2027. 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 Secured Overnight Financing Rate (“SOFR”) plus a spread (currently 0.725%), 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. See Note 9 in the Notes to Consolidated Financial Statements for additional discussion of the Company’s credit facility.
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 July 26, 2023 (amounts in thousands):
July 26, 2023
(388,070
2,108,446
Dividend Policy
The Company declared a dividend/distribution for the first and second quarters of 2023 of $0.6625 per share/unit in each quarter, an annualized increase of 6.0% over the amount paid in 2022. All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.
Total dividends/distributions paid in July 2023 amounted to $258.8 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended June 30, 2023.
43
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 $28.4 billion in investment in real estate on the Company’s balance sheet at June 30, 2023, $24.9 billion or 87.6% 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. For additional details, see Item 1A, Risk Factors of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2022.
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’s total debt summary schedule as of June 30, 2023 is as follows:
Debt Summary as of June 30, 2023
DebtBalances
% of Total
Secured
25.7
Unsecured
74.3
21.6
71.8
Fixed Rate Debt
6,954,671
93.4
0.9
Unsecured – Revolving Credit Facility
Unsecured – Commercial Paper Program
2.5
488,245
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, 2022.
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, 2022.
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 six months and quarters ended June 30, 2023 and 2022:
Preferred/preference distributions
Net income available to Common Shares and Units / Units
Depreciation – Non-real estate additions
(2,259
(2,114
(1,103
(1,062
Depreciation – Partially Owned Properties
(1,055
(1,554
(510
(661
Depreciation – Unconsolidated Properties
1,226
1,240
594
620
Net (gain) loss on sales of unconsolidated entities - operating assets
(9
(107,897
FFO available to Common Shares and Units / Units (1) (3) (4)
696,281
646,883
363,407
345,767
661
1,052
Debt extinguishment and preferred share redemption (gains) losses
Non-operating asset (gains) losses
1,031
(1,330
317
Other miscellaneous items
11,343
(185
5,051
186
Normalized FFO available to Common Shares and Units / Units (2) (3) (4)
710,695
648,352
369,483
347,786
FFO (1) (3)
697,826
648,428
364,180
346,540
Normalized FFO (2) (3)
712,240
649,897
370,256
348,559
•the impact of any expenses relating to non-operating real estate 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, 2022.
Effective as of June 30, 2023, 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 second quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Effective as of June 30, 2023, 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 second quarter of 2023 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 June 30, 2023, 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, 2022.
During the quarter ended June 30, 2023, EQR issued 36,062 Common Shares in exchange for 36,062 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.
On June 15, 2023, Alexander Brackenridge, Executive Vice President and Chief Investment Officer of EQR, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act for the sale of up to 20,133 Common Shares and the exercise (and subsequent sale of underlying Common Shares) of up to 15,516 options through and including September 14, 2024.
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
3.1
Form of Preference Unit Term Sheet for 3.00% Series Q Cumulative Redeemable Preference Units.
Included as Exhibit 3.1 to ERP Operating Limited Partnership's Form 8-K dated April 13, 2023.
31.1
Equity Residential – Certification of Mark J. Parrell, Chief Executive Officer.
Attached herein.
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.
32.1
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.
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:
August 2, 2023
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