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 March 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12252 (Equity Residential)
Commission File Number: 0-24920 (ERP Operating Limited Partnership)
EQUITY RESIDENTIAL
ERP OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Maryland (Equity Residential)
13-3675988 (Equity Residential)
Illinois (ERP Operating Limited Partnership)
36-3894853 (ERP Operating Limited Partnership)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Two North Riverside Plaza, Chicago, Illinois 60606
(312) 474-1300
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares of Beneficial Interest,$0.01 Par Value (Equity Residential)
EQR
New York Stock Exchange
7.57% Notes due August 15, 2026(ERP Operating Limited Partnership)
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Equity Residential Yes ☒ No ☐
ERP Operating Limited Partnership Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Equity Residential:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
l
ERP Operating Limited Partnership:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Equity Residential ☐
ERP Operating Limited Partnership ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Equity Residential Yes ☐ No ☒
ERP Operating Limited Partnership Yes ☐ No ☒
The number of EQR Common Shares of Beneficial Interest, $0.01 par value, outstanding on April 22, 2022 was 376,041,849.
EXPLANATORY NOTE
This report combines the reports on Form 10-Q for the quarterly period ended March 31, 2022 of Equity Residential and ERP Operating Limited Partnership. Unless stated otherwise or the context otherwise requires, references to “EQR” mean Equity Residential, a Maryland real estate investment trust (“REIT”), and references to “ERPOP” mean ERP Operating Limited Partnership, an Illinois limited partnership. References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. The following chart illustrates the Company’s and the Operating Partnership’s corporate structure:
EQR is the general partner of, and as of March 31, 2022 owned an approximate 96.7% ownership interest in, ERPOP. The remaining 3.3% interest is owned by limited partners. As the sole general partner of ERPOP, EQR has exclusive control of ERPOP’s day-to-day management. Management operates the Company and the Operating Partnership as one business. The management of EQR consists of the same members as the management of ERPOP.
The Company is structured as an umbrella partnership REIT (“UPREIT”) and EQR contributes all net proceeds from its various equity offerings to ERPOP. In return for those contributions, EQR receives a number of OP Units (see definition below) in ERPOP equal to the number of Common Shares it has issued in the equity offering. The Company may acquire properties in transactions that include the issuance of OP Units as consideration for the acquired properties. Such transactions may, in certain circumstances, enable the sellers to defer in whole or in part, the recognition of taxable income or gain that might otherwise result from the sales. This is one of the reasons why the Company is structured in the manner shown above. Based on the terms of ERPOP’s partnership agreement, OP Units can be exchanged with Common Shares on a one-for-one basis because the Company maintains a one-for-one relationship between the OP Units of ERPOP issued to EQR and the outstanding Common Shares.
The Company believes that combining the reports on Form 10-Q of EQR and ERPOP into this single report provides the following benefits:
•
enhances investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
The Company believes it is important to understand the few differences between EQR and ERPOP in the context of how EQR and ERPOP operate as a consolidated company. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR’s primary function is acting as the general partner of ERPOP. EQR also issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by EQR (which are contributed to the capital of ERPOP in exchange for additional partnership interests in ERPOP (“OP Units”) (on a one-for-one Common Share per OP Unit basis) or additional preference units in ERPOP (on a one-for-one preferred share per preference unit basis)), the Operating Partnership generates all remaining capital required by the Company’s business. These sources include the Operating Partnership’s working capital, net cash provided by operating activities, borrowings under its revolving credit facility and/or commercial paper program, the issuance of secured and unsecured debt and partnership interests, and proceeds received from disposition of certain properties and joint venture interests.
Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The limited partners of the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in the Company’s financial statements. The noncontrolling interests in the Operating Partnership’s financial statements include the interests of unaffiliated partners in various consolidated partnerships. The noncontrolling interests in the Company’s financial statements include the same noncontrolling interests at the Operating Partnership level and limited partner OP Unit holders of the Operating Partnership. The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at the Company and Operating Partnership levels.
To help investors understand the differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s debt, noncontrolling interests and shareholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity.
This report also includes separate Part I, Item 4, Controls and Procedures, sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership.
As general partner with control of ERPOP, EQR consolidates ERPOP for financial reporting purposes, and EQR essentially has no assets or liabilities other than its investment in ERPOP. Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Financial Statements of Equity Residential:
Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
2
Consolidated Statements of Operations and Comprehensive Income for the quarters ended March 31, 2022 and 2021
3
Consolidated Statements of Cash Flows for the quarters ended March 31, 2022 and 2021
5
Consolidated Statements of Changes in Equity for the quarters ended March 31, 2022 and 2021
8
Financial Statements of ERP Operating Limited Partnership:
10
11
13
Consolidated Statements of Changes in Capital for the quarters ended March 31, 2022 and 2021
16
Notes to Consolidated Financial Statements of Equity Residential and ERP Operating Limited Partnership
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3. Quantitative and Qualitative Disclosures about Market Risk
45
Item 4. Controls and Procedures
PART II.
Item 1. Legal Proceedings
46
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
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share amounts)
(Unaudited)
March 31,
December 31,
2022
2021
ASSETS
Land
$
5,836,951
5,814,790
Depreciable property
22,496,307
22,370,811
Projects under development
36,718
24,307
Land held for development
66,980
62,998
Investment in real estate
28,436,956
28,272,906
Accumulated depreciation
(8,578,131
)
(8,354,282
Investment in real estate, net
19,858,825
19,918,624
Investments in unconsolidated entities
150,092
127,448
Cash and cash equivalents
41,140
123,832
Restricted deposits
70,560
236,404
Right-of-use assets
471,667
474,713
Other assets
237,953
288,220
Total assets
20,830,237
21,169,241
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net
2,193,199
2,191,201
Notes, net
5,836,957
5,835,222
Line of credit and commercial paper
129,995
315,030
Accounts payable and accrued expenses
157,681
107,013
Accrued interest payable
56,876
69,510
Lease liabilities
311,293
312,335
Other liabilities
303,654
353,102
Security deposits
67,515
66,141
Distributions payable
242,574
233,502
Total liabilities
9,299,744
9,483,056
Commitments and contingencies
Redeemable Noncontrolling Interests – Operating Partnership
495,760
498,977
Equity:
Shareholders' equity:
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares
authorized; 745,600 shares issued and outstanding as of March 31, 2022 and
December 31, 2021
37,280
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares
authorized; 375,974,070 shares issued and outstanding as of March 31, 2022 and
375,527,195 shares issued and outstanding as of December 31, 2021
3,760
3,755
Paid in capital
9,142,969
9,121,122
Retained earnings
1,661,705
1,827,063
Accumulated other comprehensive income (loss)
(31,847
(34,272
Total shareholders’ equity
10,813,867
10,954,948
Noncontrolling Interests:
Operating Partnership
217,451
214,094
Partially Owned Properties
3,415
18,166
Total Noncontrolling Interests
220,866
232,260
Total equity
11,034,733
11,187,208
Total liabilities and equity
See accompanying notes
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands except per share data)
Quarter Ended March 31,
REVENUES
Rental income
653,348
597,602
EXPENSES
Property and maintenance
124,874
117,054
Real estate taxes and insurance
100,688
103,470
Property management
30,747
26,130
General and administrative
17,238
15,383
Depreciation
229,961
199,962
Total expenses
503,508
461,999
Net gain (loss) on sales of real estate properties
(102
(43
Operating income
149,738
135,560
Interest and other income
3,528
216
Other expenses
(3,056
(4,110
Interest:
Expense incurred, net
(72,792
(67,358
Amortization of deferred financing costs
(2,077
(2,185
Income before income and other taxes, income (loss) from investments in
unconsolidated entities and net gain (loss) on sales of land parcels
75,341
62,123
Income and other tax (expense) benefit
(282
(153
Income (loss) from investments in unconsolidated entities
(1,261
(1,611
Net gain (loss) on sales of land parcels
—
Net income
73,798
60,364
Net (income) loss attributable to Noncontrolling Interests:
(2,394
(2,143
(639
(682
Net income attributable to controlling interests
70,765
57,539
Preferred distributions
(772
(773
Net income available to Common Shares
69,993
56,766
Earnings per share – basic:
0.19
0.15
Weighted average Common Shares outstanding
375,509
372,280
Earnings per share – diluted:
389,628
386,916
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)
Comprehensive income:
Other comprehensive income (loss):
Other comprehensive income (loss) – derivative instruments:
Losses reclassified into earnings from other comprehensive income
2,425
2,303
Other comprehensive income (loss)
Comprehensive income
76,223
62,667
Comprehensive (income) attributable to Noncontrolling Interests
(3,113
(2,909
Comprehensive income attributable to controlling interests
73,110
59,758
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:
2,077
2,185
Amortization of above/below market lease intangibles
(18
Amortization of discounts and premiums on debt
1,358
1,294
Amortization of deferred settlements on derivative instruments
2,422
2,301
Amortization of right-of-use assets
3,046
2,980
Write-off of pursuit costs
1,463
1,331
(Income) loss from investments in unconsolidated entities
1,261
1,611
Distributions from unconsolidated entities – return on capital
79
Net (gain) loss on sales of real estate properties
102
43
Net (gain) loss on sales of land parcels
(5
Realized (gain) loss on sale of investment securities
(2,066
133
Compensation paid with Company Common Shares
9,203
8,678
Changes in assets and liabilities:
(Increase) decrease in other assets
30,174
20,746
Increase (decrease) in accounts payable and accrued expenses
54,553
59,116
Increase (decrease) in accrued interest payable
(12,634
(10,407
Increase (decrease) in lease liabilities
(902
(868
Increase (decrease) in other liabilities
(27,213
(3,852
Increase (decrease) in security deposits
1,374
459
Net cash provided by operating activities
368,056
346,053
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions
(113,046
Investment in real estate – development/other
(24,255
(64,599
Capital expenditures to real estate
(35,285
(28,679
Non-real estate capital additions
(971
(589
Interest capitalized for real estate and unconsolidated entities under development
(1,017
(3,769
Investments in unconsolidated entities – other
(24,897
(2,378
Distributions from unconsolidated entities – return of capital
9
Purchase of investment securities and other investments
(1,009
(26,335
Proceeds from sale of investment securities
3,434
Net cash provided by (used for) investing activities
(197,037
(126,345
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs
(318
Mortgage notes payable, net:
Proceeds
2,689
37,492
Lump sum payoffs
(59,880
Scheduled principal repayments
(1,933
(1,871
Line of credit and commercial paper:
Commercial paper proceeds
1,424,086
1,184,923
Commercial paper repayments
(1,609,121
(1,170,000
Finance ground lease principal payments
(140
(116
Proceeds from Employee Share Purchase Plan (ESPP)
969
1,731
Proceeds from exercise of options
14,344
22,882
Payment of offering costs
(114
Contributions – Noncontrolling Interests – Partially Owned Properties
446
Contributions – Noncontrolling Interests – Operating Partnership
1
Distributions:
Common Shares
(226,639
(224,308
Preferred Shares
Noncontrolling Interests – Operating Partnership
(7,535
(8,479
Noncontrolling Interests – Partially Owned Properties
(15,836
(2,883
Net cash provided by (used for) financing activities
(419,555
(221,600
Net increase (decrease) in cash and cash equivalents and restricted deposits
(248,536
(1,892
Cash and cash equivalents and restricted deposits, beginning of period
360,236
99,728
Cash and cash equivalents and restricted deposits, end of period
111,700
97,836
35,453
62,383
Total cash and cash equivalents and restricted deposits, end of period
6
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized
81,391
74,058
Net cash paid (received) for income and other taxes
350
752
Amortization of deferred financing costs:
(127
(60
585
557
703
1,062
957
Amortization of discounts and premiums on debt:
685
684
673
610
Amortization of deferred settlements on derivative instruments:
(3
(2
Accumulated other comprehensive income
Write-off of pursuit costs:
375
1,209
1,070
114
(Income) loss from investments in unconsolidated entities:
946
1,282
315
329
Interest capitalized for real estate and unconsolidated entities under development:
(307
(710
Investments in unconsolidated entities – other:
(1,778
(600
Debt financing costs:
Right-of-use assets and lease liabilities initial measurement and reclassifications:
11,308
(11,308
Non-cash share distribution from unconsolidated entities:
859
(859
7
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
SHAREHOLDERS’ EQUITY
PREFERRED SHARES
Balance, beginning of period
Balance, end of period
COMMON SHARES, $0.01 PAR VALUE
3,723
Exercise of share options
Share-based employee compensation expense:
Restricted shares
3,729
PAID IN CAPITAL
9,128,599
Common Share Issuance:
Conversion of OP Units into Common Shares
174
14,341
22,877
Employee Share Purchase Plan (ESPP)
3,609
2,273
Share options
876
988
ESPP discount
171
444
Offering costs
Supplemental Executive Retirement Plan (SERP)
(163
(1,229
Change in market value of Redeemable Noncontrolling Interests – Operating Partnership
939
(72,956
Adjustment for Noncontrolling Interests ownership in Operating Partnership
1,045
619
9,083,346
RETAINED EARNINGS
1,399,715
Common Share distributions
(235,351
(224,673
Preferred Share distributions
1,231,808
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(43,666
Accumulated other comprehensive income (loss) – derivative instruments:
(41,363
DISTRIBUTIONS
Distributions declared per Common Share outstanding
0.625
0.6025
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)
NONCONTROLLING INTERESTS
OPERATING PARTNERSHIP
233,162
Issuance of restricted units to Noncontrolling Interests
Conversion of OP Units held by Noncontrolling Interests into OP Units held by
General Partner
(174
Equity compensation associated with Noncontrolling Interests
7,798
6,488
Net income attributable to Noncontrolling Interests
2,394
2,143
Distributions to Noncontrolling Interests
(7,895
(8,589
Change in carrying value of Redeemable Noncontrolling Interests – Operating Partnership
2,278
2,384
(1,045
(619
234,969
PARTIALLY OWNED PROPERTIES
4,673
639
682
Contributions by Noncontrolling Interests
2,472
LIABILITIES AND CAPITAL
Redeemable Limited Partners
Capital:
Partners’ Capital:
Preference Units
10,808,434
10,951,940
Limited Partners
Total partners’ capital
11,031,318
11,169,042
Total capital
Total liabilities and capital
(Amounts in thousands except per Unit data)
Net (income) loss attributable to Noncontrolling Interests – Partially Owned
Properties
73,159
59,682
ALLOCATION OF NET INCOME:
772
773
Net income available to Units
72,387
58,909
Earnings per Unit – basic:
Weighted average Units outstanding
387,397
385,330
Earnings per Unit – diluted:
Comprehensive (income) attributable to Noncontrolling Interests –
75,584
61,985
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
15
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
PARTNERS’ CAPITAL
PREFERENCE UNITS
GENERAL PARTNER
10,532,037
OP Unit Issuance:
Conversion of OP Units held by Limited Partners into OP Units held by General Partner
Exercise of EQR share options
EQR’s Employee Share Purchase Plan (ESPP)
EQR restricted shares
3,611
2,274
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
10,318,883
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
1.
Business
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 March 31, 2022 owned an approximate 96.7% ownership interest in, ERPOP. All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP, but does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.
As of March 31, 2022, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 311 properties located in 10 states and the District of Columbia consisting of 80,581 apartment units. The ownership breakdown includes (table does not include various uncompleted development properties):
Apartment Units
Wholly Owned Properties
295
77,035
Partially Owned Properties – Consolidated
3,546
311
80,581
2.
Summary of Significant Accounting Policies
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 quarter ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
In preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The balance sheets at December 31, 2021 have been derived from the audited financial statements at that date but do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
Income and Other Taxes
EQR has elected to be taxed as a REIT. This, along with the nature of the operations of its operating properties, resulted in no provision for federal income taxes at the EQR level. In addition, ERPOP generally is not liable for federal income taxes as the partners recognize their allocable share of income or loss in their tax returns; therefore no provision for federal income taxes has been made at the ERPOP level. Historically, the Company has generally only incurred certain state and local income, excise and franchise taxes. The Company has elected taxable REIT subsidiary (“TRS”) status for certain of its corporate subsidiaries and, as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses.
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued an amendment to the debt and equity financial instruments standards which simplifies the accounting for convertible instruments and accounting for contracts in an entity’s own equity. The Company adopted the standard when effective on January 1, 2022 and it had no impact on its consolidated results of operations and financial position.
In March 2020, the FASB issued an amendment to the reference rate reform standard which provides the option for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on contract modifications and hedge accounting. An example of such reform is the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. Entities that make this optional expedient election would not have to remeasure the contracts at the modification date or reassess the accounting treatment if certain criteria are met and would continue applying hedge accounting for relationships affected by reference rate reform. The new standard was effective for the Company upon issuance and elections can be made through December 31, 2022. The Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. 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.
3.
Equity, Capital and Other Interests
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 quarters ended March 31, 2022 and 2021:
19
Common Shares outstanding at January 1,
375,527,195
372,302,000
Common Shares Issued:
Conversion of OP Units
6,756
269,665
506,342
13,374
32,572
Restricted share grants, net
157,080
76,499
Common Shares outstanding at March 31,
375,974,070
372,917,413
Units
Units outstanding at January 1,
12,659,027
13,858,073
Restricted unit grants, net
220,333
184,301
Conversion of OP Units to Common Shares
(6,756
Units outstanding at March 31,
12,872,604
14,042,374
Total Common Shares and Units outstanding at March 31,
388,846,674
386,959,787
Units Ownership Interest in Operating Partnership
3.3
%
3.6
The following table presents the changes in the Operating Partnership’s issued and outstanding General Partner Units and Limited Partner Units for the quarters ended March 31, 2022 and 2021:
General and Limited Partner Units
General and Limited Partner Units outstanding at January 1,
388,186,222
386,160,073
Issued to General Partner:
EQR’s restricted share grants, net
Issued to Limited Partners:
General and Limited Partner Units outstanding at March 31,
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 March 31,
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.
20
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 March 31, 2022 and December 31, 2021.
The carrying value of the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners is allocated based on the number of Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners in proportion to the number of Noncontrolling Interests – Operating Partnership/Limited Partners Capital in total. Such percentage of the total carrying value of Units/Limited Partner Units which is ascribed to the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners is then adjusted to the greater of carrying value or fair market value as described above. As of March 31, 2022 and 2021, the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners have a redemption value of approximately $495.8 million and $409.5 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.
The following table presents the changes in the redemption value of the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners for the quarters ended March 31, 2022 and 2021, respectively (amounts in thousands):
Balance at January 1,
338,951
Change in market value
(939
72,956
Change in carrying value
(2,278
(2,384
Balance at March 31,
409,523
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 March 31, 2022 and December 31, 2021:
Amounts in thousands
Annual
Call
Dividend Per
Date (1)
Share/Unit (2)
Preferred Shares/Preference Units of beneficial interest, $0.01 par value;
100,000,000 shares authorized:
8.29% Series K Cumulative Redeemable Preferred Shares/Preference
Units; liquidation value $50 per share/unit; 745,600 shares/units issued
and outstanding as of March 31, 2022 and December 31, 2021
12/10/26
4.145
(1)
On or after the call date, redeemable Preferred Shares/Preference Units may be redeemed for cash at the option of the Company or the Operating Partnership, respectively, in whole or in part, at a redemption price equal to the liquidation price per share/unit, plus accrued and unpaid distributions, if any.
21
(2)
Dividends on Preferred Shares/Preference Units are payable quarterly.
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 June 2019 and expires in June 2022. 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 June 2022 and gives EQR the authority to issue up to 13.0 million shares, of which approximately 11.3 million shares remain available for issuance under the program as of March 31, 2022. Forward sale agreements under the ATM program allow the Company, at its election, to settle the agreements by issuing Common Shares in exchange for net proceeds at the then-applicable forward sale price specified by the agreement or, alternatively, to settle the agreements in whole or in part through the delivery or receipt of Common Shares or cash. Issuances of shares under these forward sale agreements are classified as equity transactions. Accordingly, no amounts relating to the forward sale agreements are recorded in the consolidated financial statements until settlement occurs. Prior to any settlements, the only impact to the consolidated financial statements is the inclusion of incremental shares, if any, within the calculation of diluted net income per share using the treasury stock method (see Note 11 for additional discussion). The actual forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current overnight federal funds rate and the amount of dividends paid to holders of the Company’s Common Shares over the term of the forward sale agreement.
As of March 31, 2022, the Company had entered into forward sale agreements under this program for a total of approximately 1.7 million Common Shares at a weighted average initial forward price per share of $83.25. All of these forward sale agreements were entered into during the quarter ended September 30, 2021. As of March 31, 2022, these forward sale agreements have not been settled and must be settled by March 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, and no repurchases of any kind have occurred since February 2014. As of March 31, 2022, EQR has remaining authorization to repurchase up to 13.0 million of its shares.
4.
Real Estate
The following table summarizes the carrying amounts for the Company’s investment in real estate (at cost) as of March 31, 2022 and December 31, 2021 (amounts in thousands):
March 31, 2022
Depreciable property:
Buildings and improvements
19,723,056
19,632,284
Furniture, fixtures and equipment
2,252,146
2,220,203
In-Place lease intangibles
521,105
518,324
Projects under development:
Construction-in-progress
Land held for development:
49,360
46,160
17,620
16,838
22
During the quarter ended March 31, 2022, the Company acquired the following from unaffiliated parties (purchase price in thousands):
Purchase Price
Rental Properties – Consolidated (1)
172
113,000
Total
Purchase price includes an allocation of approximately $25.3 million to land and $87.7 million to depreciable property (inclusive of capitalized closing costs).
5.
Commitments to Acquire/Dispose of Real Estate
The Company has not entered into any agreements to acquire rental properties or land parcels as of the date of filing.
The Company has entered into separate agreements to dispose of the following (sales price and net book value in thousands):
Sales Price
Net Book Value at
Rental Properties - Consolidated
591
480,500
270,189
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 March 31, 2022.
6.
Investments in Partially Owned Entities
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 March 31, 2022:
Operating Properties
Project Under Development (1)
Project
Consolidated Joint Ventures (VIE)
312
The land under this project is subject to a long-term ground lease.
The following table provides consolidated assets and liabilities related to the VIEs discussed above as of March 31, 2022 and December 31, 2021 (amounts in thousands):
Consolidated Assets
819,692
912,955
Consolidated Liabilities
255,326
251,424
23
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 March 31, 2022 (aggregate and amounts borrowed under loan commitments in thousands):
Recently Completed Operating Property
Project Under Development
Number of joint ventures with debt financing
Aggregate loan commitments
67,589
73,344
Amounts borrowed under loan commitments (1)
64,333
140
Maturity dates
2025
See Note 9 for the current period proceeds of secured conventional floating rate debt under Mortgage Notes Payable.
Investments in Unconsolidated Entities
The following table and information summarizes the Company’s investments in unconsolidated entities, which are accounted for under the equity method of accounting as the requirements for consolidation are not met, as of March 31, 2022 and December 31, 2021 (amounts in thousands except for ownership percentage):
Ownership Percentage
Investments in Unconsolidated Entities:
Operating Property (VIE) (1)
35,496
36,024
33.3%
Unconsolidated Development Joint Ventures (VIE) (2)
89,680
72,488
62% - 90% (4)
Real Estate Technology (3)
25,147
19,347
Varies
(231
(411
Represents an unconsolidated interest in an entity that owns the land underlying one of the consolidated joint venture properties noted above and owns and operates a related parking facility. The consolidated joint venture entity, as a limited partner, does not have substantive kick-out or participating rights in the entity. As a result, the entity qualifies as a VIE, but the consolidated joint venture entity does not have a controlling financial interest in the VIE and is not the VIE’s primary beneficiary. As a result, the entity that owns the land and owns and operates the parking facility is unconsolidated and recorded using the equity method of accounting.
Represents unconsolidated interests in projects under development and land held for development. See further discussion below.
(3)
Represents unconsolidated investments in real estate technology funds/companies.
(4)
In certain instances, the joint venture agreements contain provisions for promoted interests in favor of our joint venture partner. If the terms of the promoted interest are attained, then our share of the proceeds from a sale or other capital event of the unconsolidated entity may be less than the indicated ownership percentage.
The following table summarizes the Company’s unconsolidated joint ventures that were deemed to be VIEs as of March 31, 2022:
Operating Property (1)
Projects Under Development (2)
Land Held for Development (2), (3)
Entity
Projects
Apartment Units (4)
Unconsolidated Joint Ventures (VIE)
929
1,005
Represents the operating property that owns and operates a related parking facility noted in the table above.
Represents separate unconsolidated joint ventures for the purpose of developing multifamily rental properties.
Represents separate unconsolidated joint ventures that have not yet started but are expected to start construction in 2022. One parcel is subject to a long-term ground lease.
Represents the intended number of apartment units to be developed.
24
7.
Restricted Deposits
The following table presents the Company’s restricted deposits as of March 31, 2022 and December 31, 2021 (amounts in thousands):
Mortgage escrow deposits:
Replacement reserves
11,489
11,156
Mortgage principal reserves/sinking funds
20,409
19,104
Mortgage escrow deposits
31,898
30,260
Restricted cash:
Tax-deferred (1031) exchange proceeds
166,362
Earnest money on pending acquisitions
2,000
Restricted deposits on real estate investments
279
284
Resident security and utility deposits
36,559
35,663
1,824
1,835
Restricted cash
38,662
206,144
8.
Leases
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.
For the quarter ended March 31, 2022, approximately 97% of the Company’s total lease revenue is generated from residential apartment leases that are generally twelve months or less in length. The residential apartment leases may include lease income related to such items as utility recoveries, parking rent, storage rent and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis. Residential leases are renewable upon consent of both parties on an annual or monthly basis.
For the quarter ended March 31, 2022, approximately 3% of the Company’s total lease revenue is generated by non-residential leases that are generally for terms ranging between five to ten years. The non-residential leases generally consist of ground floor retail spaces and master-leased parking garages that serve as additional amenities for our residents. The non-residential leases may include lease income related to such items as utility recoveries, parking rent and storage rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis. Non-residential leases are renewable with market-based renewal options.
The following table presents the lease income types relating to lease payments for residential and non-residential leases along with the total other rental income for the quarters ended March 31, 2022 and 2021 (amounts in thousands):
Quarter Ended March 31, 2022
Quarter Ended March 31, 2021
Income Type
Residential
Non-Residential
Residential and non-residential rent
586,890
15,874
602,764
539,655
15,839
555,494
Utility recoveries (RUBS income) (1)
19,598
181
19,779
17,954
178
18,132
Parking rent
10,783
98
10,881
9,734
267
10,001
Other lease revenue (2)
(6,301
(6,344
(10,262
609
(9,653
Total lease revenue
610,970
16,110
627,080
557,081
16,893
573,974
Parking revenue
8,808
5,433
Other revenue
17,460
18,195
Total other rental income (3)
26,268
23,628
RUBS income primarily consists of variable payments representing the recovery of utility costs from residents.
25
Other lease revenue consists of the revenue adjustment related to bad debt and other miscellaneous lease revenue.
Other rental income is accounted for under the revenue recognition standard.
The following table presents residential and non-residential accounts receivable and straight-line receivable balances for the Company’s properties as of March 31, 2022 and December 31, 2021 (amounts in thousands):
Balance Sheet (Other assets):
Resident/tenant accounts receivable balances
43,267
37,959
3,639
3,218
Allowance for doubtful accounts
(38,774
(33,121
(2,379
(2,365
Net receivable balances
4,493
4,838
1,260
853
Straight-line receivable balances
5,542
7,460
13,301
13,021
The Company held residential security deposits approximating 56.5% of the net receivable balance at March 31, 2022.
The following table presents residential bad debt for the Company’s properties for the quarters ended March 31, 2022 and 2021 (amounts in thousands):
Income Statement (Rental income):
Bad debt, net (1)
9,895
13,693
% of rental income
1.6
2.4
Bad debt, net benefited from additional resident payments due to governmental rental assistance programs of approximately $9.8 million for the quarter ended March 31, 2022.
9.
Debt
EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. Weighted average interest rates noted below for the quarter ended March 31, 2022 include the effect of any derivative instruments and amortization of premiums/discounts/OCI (other comprehensive income) on debt and derivatives.
Mortgage Notes Payable
The following table summarizes the Company’s mortgage notes payable activity for the quarter ended March 31, 2022 (amounts in thousands):
Mortgage notes
payable, net as of
Lump sum
payoffs
Scheduled
principal
repayments
Amortization
of premiums/
discounts
of deferred
financing
costs, net (1)
Fixed Rate Debt:
Secured – Conventional
1,896,472
378
334
1,895,251
Floating Rate Debt:
59,890
188
62,767
Secured – Tax Exempt
234,839
307
235,181
Floating Rate Debt
294,729
223
297,948
Represents amortization of deferred financing costs, net of debt financing costs.
See Note 6 for additional discussion of the variable rate construction mortgage debt.
26
The following table summarizes certain interest rate and maturity date information as of and for the quarter ended March 31, 2022:
Interest Rate Ranges
0.10% - 4.21%
Weighted Average Interest Rate
3.33%
Maturity Date Ranges
2022-2061
As of March 31, 2022, the Company had $250.0 million of secured debt (primarily tax-exempt bonds) subject to third-party credit enhancement.
Notes
The following table summarizes the Company’s notes activity for the quarter ended March 31, 2022 (amounts in thousands):
Notes, net as of
Unsecured – Public
1.85% - 7.57%
3.61%
2023-2047
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 quarter ended March 31, 2022.
Line of Credit and Commercial Paper
The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024. The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans. The interest rate on advances under the facility will generally be LIBOR plus a spread (currently 0.775%), or based on bids received from the lending group, and the Company pays an annual facility fee (currently 0.125%). Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating. The Company did not borrow any amounts under its revolving credit facility during the quarter ended March 31, 2022.
The Company has an unsecured commercial paper note program under which it may borrow up to a maximum of $1.0 billion subject to market conditions. The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness. The notes bear interest at various floating rates with a weighted average interest rate of 0.35% for the quarter ended March 31, 2022 and a weighted average maturity of 3 days as of March 31, 2022. The weighted average amount outstanding for the quarter ended March 31, 2022 was approximately $260.9 million.
27
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 March 31, 2022 (amounts in thousands):
Unsecured revolving credit facility commitment
2,500,000
Commercial paper balance outstanding
(130,000
Unsecured revolving credit facility balance outstanding
Other restricted amounts
(3,507
Unsecured revolving credit facility availability
2,366,493
10.
Fair Value Measurements
The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments on listed market prices and third-party quotes. Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.
In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company may seek to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments. The Company may also use derivatives to manage commodity prices in the daily operations of the business.
A three-level valuation hierarchy exists for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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 March 31, 2022 and December 31, 2021, respectively (amounts in thousands):
28
Carrying Value
Estimated Fair
Value (Level 2)
2,122,178
2,193,689
Unsecured debt, net
5,966,952
6,066,975
6,150,252
6,798,309
Total debt, net
8,160,151
8,189,153
8,341,453
8,991,998
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 March 31, 2022 and December 31, 2021, respectively (amounts in thousands):
Fair Value Measurements at Reporting Date Using
Description
Balance Sheet
Location
3/31/2022
Quoted Prices in
Active Markets for
Identical Assets/Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
Supplemental Executive Retirement Plan
Other Assets
144,732
Liabilities
Other Liabilities
Redeemable Noncontrolling Interests –
Operating Partnership/Redeemable
Mezzanine
12/31/2021
164,650
The following tables provide a summary of the effect of cash flow hedges on the Company’s accompanying consolidated statements of operations and comprehensive income for the quarters ended March 31, 2022 and 2021, respectively (amounts in thousands):
Type of Cash Flow Hedge
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
Location of
Reclassified from
Accumulated OCI
into Income
Accumulated
OCI into Income
Derivatives designated as hedging instruments:
Interest Rate Contracts:
Forward Starting Swaps
Interest expense
(2,425
29
March 31, 2021
(2,303
As of March 31, 2022 and December 31, 2021, there were approximately $31.8 million and $34.3 million in deferred losses, net, included in accumulated other comprehensive income (loss), respectively, related to previously settled derivative instruments, of which an estimated $10.2 million may be recognized as additional interest expense during the twelve months ending March 31, 2023.
11.
Earnings Per Share and Earnings Per Unit
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
Net (income) loss attributable to Noncontrolling
Interests – Partially Owned Properties
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
11,888
13,050
Long-term compensation shares/units
2,090
1,586
ATM forward sales
141
Denominator for net income per share – diluted
Net income per share – basic
Net income per share – diluted
30
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
12.
Commitments and Contingencies
Commitments
Real Estate Development Commitments
As of March 31, 2022, the Company has both consolidated and unconsolidated real estate projects under development. 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.
The following table summarizes the gross remaining total project costs for the Company’s projects under development at March 31, 2022 (total project costs remaining in thousands):
Total Project Costs Remaining (1)
Projects Under Development
Consolidated
71,309
Unconsolidated
247,498
Total Projects Under Development
1,241
318,807
The Company’s share of the $318.8 million in total project costs remaining approximates $25.0 million, with the balance funded by the Company’s joint venture partners (approximately $8.8 million) and/or applicable construction loans (approximately $285.0 million).
Real Estate Technology Fund Commitments
We have entered into, and may continue in the future to enter into, real estate technology fund investments. At March 31, 2022, the Company has invested in 10 real estate technology investment funds with remaining commitments of approximately $27.0 million.
Contingencies
Litigation and Legal Matters
The Company, as an owner of real estate, is subject to various federal, state and local laws. Compliance by the Company with
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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.
13.
Reportable Segments
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 quarter ended March 31, 2022 and is designed as an amenity for our residential residents. The chief operating decision maker evaluates the performance of each property on a consolidated residential and non-residential basis. The Company’s geographic consolidated same store operating segments represent its reportable segments.
The Company’s development activities are other business activities that do not constitute an operating segment and as such, have been aggregated in the “Other” category in the tables presented below.
All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the quarters ended March 31, 2022 and 2021, respectively.
The primary financial measure for the Company’s rental real estate segment is net operating income (“NOI”), which represents rental income less: 1) property and maintenance expense and 2) real estate taxes and insurance expense (all as reflected in the accompanying consolidated statements of operations and comprehensive income). The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties. Revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.
The following table presents a reconciliation of NOI from our rental real estate for the quarters ended March 31, 2022 and 2021, respectively (amounts in thousands):
Property and maintenance expense
(124,874
(117,054
Real estate taxes and insurance expense
(100,688
(103,470
Total operating expenses
(225,562
(220,524
Net operating income
427,786
377,078
The following tables present NOI from our rental real estate for each segment for the quarters ended March 31, 2022 and 2021, respectively, as well as total assets and capital expenditures at March 31, 2022 (amounts in thousands):
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Rental
Income
Operating
Expenses
NOI
Same store (1)
Los Angeles
115,353
36,775
78,578
106,418
35,693
70,725
Orange County
28,767
6,425
22,342
25,841
6,314
19,527
San Diego
20,940
4,929
16,011
18,740
4,633
14,107
Subtotal - Southern California
165,060
48,129
116,931
150,999
46,640
104,359
San Francisco
102,440
32,119
70,321
96,728
30,985
65,743
Washington D.C.
100,472
33,901
66,571
97,487
32,607
64,880
New York
110,086
53,071
57,015
98,034
51,854
46,180
Seattle
67,127
19,325
47,802
63,848
20,436
43,412
Boston
62,594
20,438
42,156
57,312
19,547
37,765
Denver
10,578
3,008
7,570
9,344
2,821
6,523
Total same store
618,357
209,991
408,366
573,752
204,890
368,862
Non-same store/other (2) (3)
Non-same store
34,694
14,182
20,512
58
(57
Other (3)
297
1,389
(1,092
23,849
15,576
8,273
Total non-same store/other
34,991
15,571
19,420
23,850
15,634
8,216
Totals
225,562
220,524
For the quarters ended March 31, 2022 and 2021, same store primarily includes all properties acquired or completed that were stabilized prior to January 1, 2021, less properties subsequently sold, which represented 74,675 apartment units.
For the quarters ended March 31, 2022 and 2021, non-same store primarily includes properties acquired after January 1, 2021, plus any properties in lease-up and not stabilized as of January 1, 2021.
Other includes development, other corporate operations and operations prior to disposition for properties sold.
Total Assets
Capital Expenditures
2,773,359
6,880
367,316
919
230,718
849
3,371,393
8,648
3,165,308
5,330
3,149,802
5,681
3,851,201
6,232
2,123,848
2,867
1,724,548
4,034
487,546
208
17,873,646
33,000
2,413,693
542,898
2,956,591
2,285
35,285
Same store primarily includes all properties acquired or completed that were stabilized prior to January 1, 2021, less properties subsequently sold, which represented 74,675 apartment units.
Non-same store primarily includes properties acquired after January 1, 2021, plus any properties in lease-up and not stabilized as of January 1, 2021.
Other includes development, other corporate operations and capital expenditures for properties sold.
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14.
Subsequent Events
Subsequent to March 31, 2022, the Company:
Sold one property consisting of 354 apartment units for approximately $265.7 million; and
Acquired a third-party joint venture partner’s 25% interest in a consolidated operating property for approximately $32.2 million.
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For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021. In addition, please refer to the Definitions section below for various capitalized terms not immediately defined in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Forward-looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, projections and assumptions made by management. While the Company’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, which could cause actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Many of these uncertainties and risks are difficult to predict and beyond management’s control, such as the current novel coronavirus (“COVID-19”) pandemic. 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.
In addition, these forward-looking statements are subject to risks related to the COVID-19 pandemic and its accompanying variants, many of which are unknown, including the duration, severity and the extent of the adverse health impact on the general population, our residents and employees, the distribution, effectiveness and acceptance of vaccines and testing, the overall reopening progress in the cities in which we operate, the potential long-term changes in customer preferences for living in our communities and the impact of operational changes we have implemented and may implement in response to the pandemic.
Additional factors that might cause such differences are discussed in Part I of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021, particularly those under Item 1A, Risk Factors.
Forward-looking statements and related uncertainties are also included in the Notes to Consolidated Financial Statements in this report.
Overview
Equity Residential (“EQR”) is committed to creating communities where people thrive. The Company, a member of the S&P 500, is focused on the acquisition, development and management of residential properties located in and around dynamic cities that attract affluent long-term renters. ERP Operating Limited Partnership (“ERPOP”) is focused on conducting the multifamily property business of EQR. EQR is a Maryland real estate investment trust (“REIT”) formed in March 1993 and ERPOP is an Illinois limited partnership formed in May 1993. References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP.
The Company’s corporate headquarters is located in Chicago, Illinois and the Company also operates regional property management offices in most of its markets.
Available Information
You may access our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and any amendments to any of those reports/statements we file with or furnish to the Securities and Exchange Commission (“SEC”) free of charge on our website, www.equityapartments.com. These reports/statements are made available on our website as soon as reasonably practicable after we file them with or furnish them to the SEC. The information contained on our website, including any information referred to in this report as being available on our website, is not a part of or incorporated into this report.
Business Objectives and Operating and Investing Strategies
The Company’s and the Operating Partnership’s overall business objectives and operating and investing strategies have not changed from the information included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
Results of Operations
2022 Transactions
In conjunction with our business objectives and operating and investing strategies, the following table provides a rollforward of the transactions that occurred during the quarter ended March 31, 2022:
Portfolio Rollforward
($ in thousands)
Apartment
Acquisition
Cap Rate
310
80,407
Acquisitions:
Consolidated Rental Properties
3.5
Configuration Changes
Real Estate Transaction Highlights
The Company acquired one operating property in the first quarter of 2022, a 172-unit apartment property located in San Diego for a purchase price of $113.0 million;
The Company did not sell any properties during the first quarter of 2022, but subsequent to March 31, 2022, the Company sold a 354-unit apartment property located in New York City for approximately $265.7 million; and
The Company spent approximately $41.9 million during the quarter ended March 31, 2022, primarily for consolidated and unconsolidated development projects.
See Notes 4 and 14 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate transactions.
Comparison of the quarter ended March 31, 2022 to the quarter ended March 31, 2021
The following table presents a reconciliation of diluted earnings per share/unit for the quarter ended March 31, 2022 as compared to the same period in 2021:
Quarter Ended
March 31
Diluted earnings per share/unit for period ended 2021
Property NOI
0.12
(0.02
Depreciation expense
(0.06
Diluted earnings per share/unit for period ended 2022
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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 results (amounts in thousands):
$ Change
% Change
14,178
10.5
Adjustments:
4,617
17.7
1,855
12.1
29,999
15.0
59
137.2
Total NOI
50,708
13.4
Rental income:
Same store
44,605
7.8
Non-same store/other
11,141
46.7
Total rental income
55,746
9.3
Operating expenses:
5,101
2.5
(63
(0.4
)%
5,038
2.3
NOI:
39,504
10.7
11,204
136.4
Note: See Note 13 in the Notes to Consolidated Financial Statements for detail by reportable segment/market. Non-same store/other NOI results consist primarily of properties acquired in calendar years 2021 and 2022, operations from the Company’s development properties and operations prior to disposition from 2021 sold properties.
The increase in same store rental income is primarily driven by strong Physical Occupancy and significant growth in pricing.
The increase in same store operating expenses is due primarily to:
Utilities – A $3.7 million increase primarily from gas and electric due to higher commodity prices;
Repairs and maintenance – A $1.5 million increase primarily driven by volume and timing of maintenance repairs along with increases in minimum wage on contracted services; and
On-site payroll – A $1.4 million decrease due to improved sales and service staff utilization from various technology initiatives and higher than usual staffing vacancies during the current period.
The increase in non-same store/other NOI is due primarily to a positive impact of higher NOI from properties acquired during 2021 and 2022 of $17.0 million and higher NOI from development properties in lease-up of $2.4 million, partially offset by a negative impact of lost NOI from 2021 dispositions of $12.3 million and a negative impact of lower NOI from one former master-leased property of $0.6 million.
The increase in consolidated total NOI is primarily a result of the Company’s higher NOI from same store properties, largely due to improvement in same store revenues as noted above. Operating expense growth remains modest due to a combination of continued success in managing controllable expenses and modest growth in real estate tax expense (increased by only $0.5 million), leading to 10.7% same store NOI growth for the quarter ended March 31, 2022 as compared to the same period in 2021.
See the Same Store Results section below for additional discussion of those results.
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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 $4.6 million or 17.7% during the quarter ended March 31, 2022 as compared to the prior year period. This increase is primarily attributable to increases in payroll-related costs, training/conference costs and information technology-related costs. A portion of these costs are associated with the various operating initiatives such as sales-focused improvements and service enhancements that facilitate lower onsite expense growth.
General and administrative expenses, which includes corporate operating expenses, increased approximately $1.9 million or 12.1% during the quarter ended March 31, 2022 as compared to the prior year period, primarily due to increases in payroll-related costs, legal and professional fees and training/conference costs.
Depreciation expense, which includes depreciation on non-real estate assets, increased approximately $30.0 million or 15.0% during the quarter ended March 31, 2022 as compared to the prior year period, primarily as a result of additional depreciation expense on properties acquired in 2021 and 2022 and development properties placed in service during 2021, partially offset by lower depreciation from properties sold in 2021.
Interest and other income increased approximately $3.3 million during the quarter ended March 31, 2022 as compared to the prior year period. The increase is primarily due to a gain of $2.1 million on the sale of various investment securities and $1.2 million of litigation settlement proceeds that occurred during 2022 but not during 2021.
Other expenses decreased approximately $1.1 million or 25.6% during the quarter ended March 31, 2022 as compared to the prior year period, primarily due to a $1.5 million decline in construction defect and litigation reserves recorded between 2022 and 2021.
Interest expense, including amortization of deferred financing costs, increased approximately $5.3 million or 7.7% for the quarter ended March 31, 2022 as compared to the prior year period. The increase is primarily due to higher overall debt balances outstanding as compared to the prior year period, higher overall interest rates and lower capitalized interest. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the quarter ended March 31, 2022 was 3.65% as compared to 3.60% for the prior year period. The Company capitalized interest of approximately $1.0 million and $3.8 million during the quarters ended March 31, 2022 and 2021, respectively.
Same Store Results
Properties that the Company owned and were stabilized for all of both of the quarters ended March 31, 2022 and 2021 (the “First Quarter 2022 Same Store Properties”), which represented 74,675 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 First Quarter 2022 Same Store Properties:
First Quarter 2022 vs. First Quarter 2021
Same Store Results/Statistics Including 74,675 Same Store Apartment Units
$ in thousands (except for Average Rental Rate)
First Quarter 2022
First Quarter 2021
Change
Non-
Revenues
595,325
23,032
6.4
552,111
21,641
203,752
6,239
2.2
198,784
6,106
391,573
10.8
16,793
8.1
353,327
15,535
Average Rental Rate
2,757
6.2
2,597
Physical Occupancy
96.4
1.4
95.0
Turnover
8.7
(1.3
%)
10.0
Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.
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The following table provides results and statistics related to our Residential same store operations for the quarters ended March 31, 2022 and 2021:
Same Store Residential Results/Statistics by Market
Increase (Decrease) from Prior Year
Markets/Metro Areas
Q1 2022
% of
Actual
Average
Rate
Weighted
Physical
Occupancy %
Occupancy
15,259
19.9
2,584
96.7
8.3
7.6
0.9
(1.6
4,028
5.7
2,450
97.1
6.3
11.1
0.1
(1.5
2,706
4.1
2,662
96.9
8.9
(0.3
Subtotal – Southern California
21,993
29.7
2,569
96.8
8.0
8.8
0.6
11,630
3,004
9.5
2.9
2.8
(2.2
14,322
16.6
2,371
8.2
2.0
1.0
(1.4
9,345
13.0
3,741
97.0
6.8
(0.1
9,331
11.4
2,385
94.6
11.5
(1.0
0.3
6,430
9.7
3,054
95.9
7.0
1,624
1.9
2,207
97.4
11.2
1.3
(1.8
74,675
100.0
Note: The above table reflects Residential same store results only. Residential operations account for approximately 96.2% of total revenues for the quarter ended March 31, 2022.
Strong demand for our apartments in all of our markets has led to high Physical Occupancy, increased pricing power and a material reduction in Leasing Concessions. Key operating drivers for this performance during 2022 include:
Pricing – There has been significant growth in pricing (net of Leasing Concessions) compared to the same period of 2021 across all of our markets. The use of Leasing Concessions has also declined significantly from its peak in February 2021, outside of some elevated use in Seattle during the first quarter of 2022.
Physical Occupancy – Physical Occupancy of 96.4% for the first quarter of 2022 remained strong, exceeding first quarter of 2021 levels and contributing to growth in Same Store Residential Revenues.
Percentage of Residents Renewing and Turnover – Our continued strategy of focusing on resident renewals delivered strong results. We reported Turnover of 8.7% for the first quarter of 2022, the lowest in the Company’s history, reflecting a strong trend of historically high resident retention. Results have been positive to date with the Percentage of Residents Renewing of 60% for the first quarter of 2022.
Same Store Residential Revenues in the first quarter of 2022 were impacted by higher than expected delinquency in Southern California caused by residents that were previously in good standing failing to pay their rent as they applied for funds under the California rental assistance program as it was expanded and extended into 2022. The Company continues to actively pursue payment and is seeing early signs of improved resident payment behavior in April 2022 following the expiration of the program’s eligibility period on March 31, 2022.
Liquidity and Capital Resources
With approximately $2.4 billion in readily available liquidity, a strong balance sheet, limited near-term maturities, very strong credit metrics and ample access to capital markets, the Company believes it is well positioned to meet its future obligations and opportunities. See further discussion below.
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Statements of Cash Flows
The following table sets forth our sources and uses of cash flows for the quarters ended March 31, 2022 and 2021 (amounts in thousands):
Cash flow provided by (used for):
Operating activities
Investing activities
Financing activities
The following provides information regarding the Company’s cash flows from operating, investing and financing activities for the quarter ended March 31, 2022.
Operating Activities
Our operating cash flows are primarily impacted by NOI and its components, such as Average Rental Rates, Physical Occupancy levels and operating expenses related to our properties. Cash provided by operating activities for the quarter ended March 31, 2022 as compared to the prior year period, increased by approximately $22.0 million as a direct result of the NOI and other changes discussed above in Results of Operations.
Investing Activities
Our investing cash flows are primarily impacted by our transaction activity (acquisitions/dispositions), development spend, capital expenditures and unconsolidated joint venture activity. For the quarter ended March 31, 2022, key drivers were:
Acquired one consolidated rental property for approximately $113.0 million in cash;
Invested $24.3 million primarily in development projects;
Invested $35.3 million in capital expenditures to real estate; and
Invested $24.9 million primarily in unconsolidated development joint venture entities as well as unconsolidated investments in real estate technology funds/companies for various technology initiatives.
Financing Activities
Our financing cash flows primarily relate to our borrowing activity (debt proceeds or repayment), distributions/dividends to shareholders and other Common Share activity. For the quarter ended March 31, 2022, key drivers were:
Issued Common Shares related to share option exercises and ESPP purchases and received net proceeds of $15.3 million, which were contributed to the capital of the Operating Partnership in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis); and
Paid dividends/distributions on Common Shares, Preferred Shares, Units (including OP Units and restricted units) and noncontrolling interests in partially owned properties totaling approximately $250.8 million.
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.
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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 March 31, 2022 and December 31, 2021 (amounts in thousands):
2,181,372
Credit Facility and Commercial Paper Program
The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024. The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans. The interest rate on advances under the facility will generally be the London Interbank Offered Rate (“LIBOR”) plus a spread (currently 0.775%), or based on bids received from the lending group, and the Company pays an annual facility fee (currently 0.125%). Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating.
The unsecured revolving credit agreement contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances, such as the anticipated phase-out of LIBOR.
The Company may borrow up to a maximum of $1.0 billion under its commercial paper program subject to market conditions. The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness.
The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations. The following table presents the availability on the Company’s unsecured revolving credit facility as of April 22, 2022 (amounts in thousands):
April 22, 2022
(50,000
2,446,493
Dividend Policy
The Company declared a dividend/distribution for the first quarter of 2022 of $0.625 per share/unit, an annualized increase of 3.7% over the amount paid in 2021. All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.
Total dividends/distributions paid in April 2022 amounted to $242.6 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended March 31, 2022.
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 March 31, 2022, $24.6 billion or 86.4% 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.
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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 March 31, 2022 is as follows:
Debt Summary as of March 31, 2022
Balances
% of Total
Secured
26.9
Unsecured
73.1
23.2
71.5
Fixed Rate Debt
7,732,208
94.7
0.8
Unsecured – Revolving Credit Facility
Unsecured – Commercial Paper Program
427,943
5.3
The Company’s long-term financing and capital needs have not changed materially from the information included in the Company's and the Operating Partnership's Annual Report on Form 10-K for the year ended December 31, 2021.
Definitions
The definition of certain terms described above or below are as follows:
Acquisition Cap Rate – NOI that the Company anticipates receiving in the next 12 months (or the year two or three stabilized NOI for properties that are in lease-up at acquisition) less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross purchase price of the asset. The weighted average Acquisition Cap Rate for acquired properties is weighted based on the projected NOI streams and the relative purchase price for each respective property.
Average Rental Rate – Total Residential rental revenues reflected on a straight-line basis in accordance with GAAP divided by the weighted average occupied apartment units for the reporting period presented.
Leasing Concessions – Reflects upfront discounts on both new move-in and renewal leases on a straight-line basis.
Non-Residential – Consists of revenues and expenses from retail and public parking garage operations.
Non-Same Store Properties – For annual comparisons, primarily includes all properties acquired during 2021 and 2022, plus any properties in lease-up and not stabilized as of January 1, 2021.
Percentage of Residents Renewing – Leases renewed expressed as a percentage of total renewal offers extended during the reporting period.
Physical Occupancy – The weighted average occupied apartment units for the reporting period divided by the average of total apartment units available for rent for the reporting period.
Residential – Consists of multifamily apartment revenues and expenses.
Same Store Properties – For annual comparisons, primarily includes all properties acquired or completed that are stabilized prior to January 1, 2021, less properties subsequently sold. Properties are included in Same Store when they are stabilized for all of the current and comparable periods presented.
42
Same Store Residential Revenues – Revenues from our same store properties presented on a GAAP basis which reflects the impact of Leasing Concessions on a straight-line basis.
Turnover – Total Residential move-outs (including inter-property and intra-property transfers) divided by total Residential apartment units.
Critical Accounting Policies and Estimates
The Company’s and the Operating Partnership’s critical accounting policies and estimates have not changed from the information included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
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 quarters ended March 31, 2022 and 2021:
Preferred/preference distributions
Net income available to Common Shares and Units / Units
Depreciation – Non-real estate additions
(1,052
(1,100
Depreciation – Partially Owned Properties
(893
(828
Depreciation – Unconsolidated Properties
620
617
Net (gain) loss on sales of unconsolidated entities - operating assets
(9
(4
FFO available to Common Shares and Units / Units (1) (3) (4)
301,116
257,599
Impairment – non-operating assets
Debt extinguishment and preferred share redemption (gains) losses
264
Non-operating asset (gains) losses
(1,642
854
Other miscellaneous items
(371
2,242
Normalized FFO available to Common Shares and Units / Units (2) (3) (4)
300,566
262,290
FFO (1) (3)
301,888
258,372
Normalized FFO (2) (3)
301,338
263,063
The National Association of Real Estate Investment Trusts (“Nareit”) defines funds from operations (“FFO”) (December 2018 White Paper) as net income (computed in accordance with accounting principles generally accepted in the United States (“GAAP”)), excluding gains or losses from sales and impairment write-downs of depreciable real estate and land when connected to the main business of a REIT, impairment write-downs of investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and depreciation and amortization related to real estate. Adjustments for partially owned consolidated and unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis.
Normalized funds from operations (“Normalized FFO”) begins with FFO and excludes:
the impact of any expenses relating to non-operating asset impairment;
pursuit cost write-offs;
gains and losses from early debt extinguishment and preferred share redemptions;
gains and losses from non-operating assets; and
other miscellaneous items.
The Company believes that FFO and FFO available to Common Shares and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures of performance by the real estate industry and by excluding gains or losses from sales and impairment write-downs of depreciable real estate and excluding depreciation related to real estate (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO and FFO available to Common Shares and Units / Units can help compare the operating performance of a company’s real estate between periods or as compared to different companies. The Company also believes that Normalized FFO and Normalized FFO available to Common Shares
44
and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company because they allow investors to compare the Company’s operating performance to its performance in prior reporting periods and to the operating performance of other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual operating results. FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units do not represent net income, net income available to Common Shares / Units or net cash flows from operating activities in accordance with GAAP. Therefore, FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units should not be exclusively considered as alternatives to net income, net income available to Common Shares / Units or net cash flows from operating activities as determined by GAAP or as a measure of liquidity. The Company’s calculation of FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.
FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units are calculated on a basis consistent with net income available to Common Shares / Units and reflects adjustments to net income for preferred distributions and premiums on redemption of preferred shares/preference units in accordance with GAAP. The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units are collectively referred to as the “Noncontrolling Interests – Operating Partnership”. Subject to certain restrictions, the Noncontrolling Interests – Operating Partnership may exchange their OP Units for Common Shares on a one-for-one basis.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s and the Operating Partnership’s market risk has not changed materially from the amounts and information reported in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021. See Note 10 in the Notes to Consolidated Financial Statements for additional discussion of fair value measurements.
(a)
Evaluation of Disclosure Controls and Procedures:
Effective as of March 31, 2022, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b)
Changes in Internal Control over Financial Reporting:
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 first quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Effective as of March 31, 2022, the Operating Partnership carried out an evaluation, under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of EQR, of the effectiveness of the Operating Partnership’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Operating Partnership in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes to the internal control over financial reporting of the Operating Partnership identified in connection with the Operating Partnership’s evaluation referred to above that occurred during the first quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
PART II. OTHER INFORMATION
As of March 31, 2022, the Company does not believe there is any litigation pending or threatened against it that, individually or in the aggregate, may reasonably be expected to have a material adverse effect on the Company.
There have been no material changes to the risk factors that were discussed in Part I, Item 1A of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
During the quarter ended March 31, 2022, EQR issued 6,756 Common Shares in exchange for 6,756 OP Units held by various limited partners of ERPOP. OP Units are generally exchangeable into Common Shares on a one-for-one basis or, at the option of ERPOP, the cash equivalent thereof, at any time one year after the date of issuance. These shares were either registered under the Securities Act of 1933, as amended (the “Securities Act”), or issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder, as these were transactions by an issuer not involving a public offering. In light of the manner of the sale and information obtained by EQR from the limited partners in connection with these transactions, EQR believes it may rely on these exemptions.
None.
Not applicable.
Item 6. Exhibits – See the Exhibit Index.
EXHIBIT INDEX
The exhibits listed below are filed as part of this report. References to exhibits or other filings under the caption “Location” indicate that the exhibit or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference. The Commission file numbers for our Exchange Act filings referenced below are 1-12252 (Equity Residential) and 0-24920 (ERP Operating Limited Partnership).
Exhibit
10.1
Form of 2022 Long-Term Incentive Plan Award Agreement.
Attached herein.
31.1
Equity Residential – Certification of Mark J. Parrell, Chief Executive Officer.
31.2
Equity Residential – Certification of Robert A. Garechana, Chief Financial Officer.
31.3
ERP Operating Limited Partnership – Certification of Mark J. Parrell, Chief Executive Officer of Registrant’s General Partner.
31.4
ERP Operating Limited Partnership – Certification of Robert A. Garechana, Chief Financial Officer of Registrant’s General Partner.
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.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
47
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:
April 29, 2022
By:
/s/ Robert A. Garechana
Robert A. Garechana
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Ian S. Kaufman
Ian S. Kaufman
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
ERP OPERATING LIMITED PARTNERSHIP BY: EQUITY RESIDENTIAL
ITS GENERAL PARTNER