EQUITY RESIDENTIAL 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 theOperating Partnership's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 (see below
for further discussion). 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, many of which are unknown, including the duration and
severity of the pandemic, the extent of the adverse health impact on the general
population and on our residents, customers and employees in particular, its
impact on the employment rate and the economy and the corresponding impact on
our residents' and tenants' ability to pay their rent on time or at all, the
extent and impact of governmental responses and the impact of operational
changes we have implemented and may implement in response to the pandemic.
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, 2019 , particularly those under Item 1A, Risk
Factors. Additional factors are also included in Part II, Item 1A, Risk Factors,
of this Quarterly Report on Form 10-Q.
Forward-looking statements and related uncertainties are also included in the Notes to Consolidated Financial Statements in this report.
Due to the inherent uncertainty surrounding the social and economic disruption resulting from the COVID-19 pandemic, the Company withdrew its full-year 2020 guidance earlier this year. The Company is also suspending issuing guidance in future periods until there is greater certainty surrounding the impact of the ongoing pandemic. OverviewEquity 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 rental apartment properties located in urban and high-density suburban communities where today's renters want to live, work and play.ERP Operating Limited Partnership ("ERPOP") is focused on conducting the multifamily property business of EQR. EQR is aMaryland real estate investment trust ("REIT") formed inMarch 1993 and ERPOP is anIllinois limited partnership formed inMay 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. EQR is the general partner of, and as ofJune 30, 2020 owned an approximate 96.4% ownership interest in, ERPOP. All of the Company's property ownership, development and related business operations are conducted through theOperating 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 theOperating 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. The Company's corporate headquarters is located inChicago, Illinois and the Company also operates regional property management offices in each of its markets. As ofJune 30, 2020 , the Company had approximately 2,600 employeeswho provided real estate operations, leasing, legal, financial, accounting, acquisition, disposition, development and other support functions. 36 --------------------------------------------------------------------------------
Table of Contents 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 and any amendments to any of those reports we file with theSecurities and Exchange Commission ("SEC") free of charge on our website, www.equityapartments.com. These reports are made available on our website as soon as reasonably practicable after we file them with theSEC . 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 theOperating Partnership's overall business objectives and operating and investing strategies have not changed from the information included in the Company's and theOperating Partnership's Annual Report on Form 10-K for the year endedDecember 31, 2019 , though the Company and theOperating Partnership will continue to be focused on its response to the COVID-19 pandemic in the near-term. As more fully discussed in the Company's and theOperating Partnership's Annual Report on Form 10-K, it continues to be the Company's intention over time to diversify its portfolio into new markets that have characteristics similar to its current markets and to optimize the mix of the Company's properties located in urban vs. dense suburban submarkets.
COVID-19 Impact
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic. The continued rapid development and fast-changing nature of the COVID-19 pandemic creates many unknowns that could have a future material impact on the Company. Its duration and severity and the extent of the adverse health impact on the general population, our residents and our employees, as well as the potential changes in customer preferences for living in the urban and dense suburban locations in which many of the Company's properties are located, are among the unknowns. These, among other items, will likely impact the economy, the unemployment rate and our operations and could materially affect our future consolidated results of operations, financial condition, liquidity, investments and overall performance. For additional details, see Item 1A, Risk Factors. The Company continues to support its residents and employees during the COVID-19 pandemic. The Company is utilizing technology to allow our property teams to interact remotely with current and prospective residents, including a touchless new leasing process and a service process designed to limit contact. The Company also successfully implemented changes to the physical layout of its properties and remains focused on further enhancing its existing commitment to health and safety during the pandemic. We also continue to provide additional paid leave for employees impacted by the pandemic and paid special bonuses to certain on-site employees during the second quarter of 2020 in recognition of their significant efforts. In addition, the Company continues to support its corporate and regional employees by allowing them to work remotely during the pandemic. Among other resident support efforts, we have an extensive outreach process for residents financially impacted by the pandemic and have created payment plans to assist them. We see good demand for our apartments, both urban and suburban, but with increased customer price sensitivity, especially in the urban cores ofNew York City ,San Francisco andBoston /Cambridge, MA. Looking forward, we believe the rate of improvement in our business will be dictated by how effectively the COVID-19 pandemic can be controlled and more normal economic activity restored. In the meantime, we believe our strong balance sheet, state of the art operating platform and opportunistic mindset leaves us well positioned to weather the storm and to take advantage should conditions allow.
During the second quarter of 2020, the Company also:
• Experienced a recovery in demand by late
and applications continue to be in-line with the same time last year;
• Collected on average 97% of its total monthly Residential rental
income.
months; and
• Had the highest resident retention for the second quarter in the Company's
history.
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Table of Contents Results of Operations 2020 Transactions In conjunction with our business objectives and operating strategy, the Company continued to invest in apartment properties located primarily in our urban and high-density suburban communities and sell apartment properties that we believe will have inferior long-term returns. The following table provides a rollforward of the transactions that occurred during the six months endedJune 30, 2020 : Portfolio Rollforward ($ in thousands) Apartment Disposition Properties Units Sales Price Yield 12/31/2019 309 79,962 Dispositions: Consolidated Rental Properties (5 ) (1,552 )$ (754,361 ) (4.7 )% 6/30/2020 304 78,410
The consolidated properties disposed of were located in the
We currently budget spending approximately$225.0 million on development costs during the year endingDecember 31, 2020 , of which approximately$95.2 million was spent during the six months endedJune 30, 2020 , primarily for properties currently under construction. Certain of these costs will be funded by third party construction mortgages and joint venture partner obligations. Work at our development project inBoston resumed after a nine-week suspension due to the city's COVID-19-related temporary construction moratorium, and our projects inBethesda, MD andAlameda, CA continue under construction. The expected spending noted above could change as a result of COVID-19 related impacts.
Same Store Results
Properties that the Company owned and were stabilized (see definition below) for all of both of the six months endedJune 30, 2020 and 2019 (the "Six-Month 2020Same Store Properties "), which represented 74,264 apartment units, impacted the Company's results of operations. The Six-Month 2020Same Store Properties are discussed in the following paragraphs. 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 provide a rollforward of the apartment units included inSame Store Properties and a reconciliation of apartment units included inSame Store Properties to those included inTotal Properties for the six months endedJune 30, 2020 : Six Months Ended June 30, 2020 Apartment Properties Units Same Store Properties at December 31, 2019 279 71,830 2017 acquisitions 2 510 2018 acquisitions 5 1,461 2019 acquisitions - - 2020 dispositions (5 ) (1,552 ) Lease-up properties stabilized 5
2,015
Same Store Properties at June 30, 2020 286 74,264
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Six Months Ended June 30, 2020
Apartment
Properties Units
Same Store 286 74,264
Non-Same Store :
2019 acquisitions 13 3,540
Master-Leased properties (1) 1 162
Lease-up properties not yet stabilized (2) 3 443
Other 1 1
Total Non-Same Store 18 4,146
Total Properties and Apartment Units 304 78,410
Note: 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.
(1) Consists of one property containing 162 apartment units that is wholly owned
by the Company where the entire project is master-leased to a third party
corporate housing provider.
(2) Consists of properties in various stages of lease-up and properties where
lease-up has been completed but the properties were not stabilized for the
comparable periods presented.
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):
Six Months Ended June 30,
2020 2019
Operating income $ 778,974 $ 578,894
Adjustments:
Property management 51,317 50,765
General and administrative 26,353 29,710
Depreciation 418,398 404,723
Net (gain) loss on sales of real estate properties (352,243 ) (138,835 )
Total NOI $ 922,799 $ 925,257
Rental income:
Same store $ 1,260,825 $ 1,258,261
Non-same store/other 75,012 73,415
Total rental income 1,335,837 1,331,676
Operating expenses:
Same store 386,742 382,188
Non-same store/other 26,296 24,231
Total operating expenses 413,038 406,419
NOI:
Same store 874,083 876,073
Non-same store/other 48,716 49,184
Total NOI $ 922,799 $ 925,257
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The following table provides comparative total same store results and statistics
for the Six-Month 2020
June YTD 2020 vs. June YTD 2019
Same Store Results/Statistics Including 74,264 Same Store Apartment Units
$ in thousands (except for Average Rental Rate)
June YTD 2020 June YTD 2019
% Non- % % Non-
Residential Change Residential Change Total Change ResidentialResidential Total
Revenues
Expenses
NOI $ 847,651 0.9 % $ 26,432 (27.3 %) $ 874,083 (0.2 %) NOI $ 839,693 $ 36,380 $ 876,073
Average Rental Rate $ 2,871 1.8 % Average Rental Rate $ 2,821
Physical Occupancy 95.7 % (0.7 %) Physical Occupancy 96.4 %
Turnover 21.4 % (1.9 %) Turnover 23.3 %
Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.
(1) Non-Residential operations have been more significantly impacted by the
COVID-19 pandemic than the Company's core Residential business. The decline
in Non-Residential revenues is primarily driven by lower public parking
income, deferral/abatement of rent and higher bad debt expense.
The following table provides results and statistics related to our Residential
same store operations for the six months ended
June YTD 2020 vs. June YTD 2019
Same Store Residential Results/Statistics by Market
Increase (Decrease) from Prior Year
June YTD
June YTD June YTD 2020
2020 2020 Weighted
% of Average Average June YTD Average
Apartment Actual Rental Physical 2020 Rental Physical
Markets/Metro Areas Units NOI Rate Occupancy % Turnover Revenues Expenses NOI Rate Occupancy TurnoverLos Angeles 15,968 19.7 %$ 2,615 95.3 % 23.2 % 0.1 % (0.3 %) 0.2 % 1.0 % (0.9 %) (2.6 %)Orange County 4,028 4.8 % 2,272 96.6 % 18.8 % 2.2 % 0.2 % 2.8 % 2.0 % 0.2 % (5.4 %)San Diego 3,385 4.2 % 2,435 96.4 % 23.7 % 1.9 % 2.1 % 1.9 % 2.0 % 0.0 % (2.7 %) Subtotal -Southern California 23,381 28.7 % 2,529 95.7 % 22.5 % 0.7 % 0.1 % 0.9 % 1.3 % (0.6 %) (3.1 %)San Francisco 12,183 20.7 % 3,334 95.8 % 21.1 % 1.1 % 2.9 % 0.5 % 1.7 % (0.6 %) (1.9 %)Washington DC 13,711 16.0 % 2,463 95.9 % 19.8 % 1.3 % (0.1 %) 1.9 % 2.1 % (0.7 %) (0.8 %)New York 9,475 14.0 % 3,930 95.4 % 18.7 % (0.3 %) 2.4 % (2.4 %) 1.1 % (1.3 %) 0.4 %Seattle 8,442 10.2 % 2,469 96.3 % 22.9 % 3.8 % 2.7 % 4.2 % 3.9 % (0.1 %) (5.1 %)Boston 6,346 9.7 % 3,178 94.7 % 22.7 % 1.0 % (1.9 %) 2.2 % 2.6 % (1.4 %) 1.2 %Denver 726 0.7 % 2,133 94.5 % 30.6 % (1.2 %) (0.3 %) (1.5 %) 0.6 % (1.9 %) 0.0 % Total 74,264 100.0 %$ 2,871 95.7 % 21.4 % 1.0 % 1.1 % 0.9 % 1.8 % (0.7 %) (1.9 %)
Note: The above table reflects Residential same store results only, which historically account for approximately 96.0% of total revenues.
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We continue to work with our residents and tenants on payment plans and collections and our allowance policies remain consistent. We expect our reserves and bad debt charge-offs to remain elevated for the remainder of this year.
The
following table provides Residential and Non-Residential accounts receivable and straight-line receivable balances for the Company's same store properties as ofJune 30, 2020 andMarch 31, 2020 (amounts in thousands): Same Store Resident/Tenant Accounts Receivable Balances Including 74,264 Same Store Apartment Units $ in thousands Residential Non-Residential March 31, March 31, June 30, 2020 2020 June 30, 2020 2020 Resident/tenant accounts receivable balances$ 18,175 $ 5,358$ 4,815 $ 2,270 Allowance for doubtful accounts (6,518 ) (1,850 ) (2,416 ) (1,532 ) Net receivable balances$ 11,657 (1) $ 3,508$ 2,399 $ 738 Straight-line receivable balances $ 2,990 $ 1,633$ 24,161 $ 26,154
(1) The Company held Residential security deposits approximating 20% of the net
receivable balance at
The following table provides preliminary information related to Residential same store operations for the month endedJuly 2020 compared to the actuals for the quarter endedJune 30, 2020 . July 2020 Second Quarter 2020 New Lease Change (8.3 %) (7.0 %) Renewal Rate Achieved (0.9 %) 0.7 % Blended Rate (1) (4.5 %) (2.7 %) Physical Occupancy 95.0 % 94.9 %
(1) Blended Rate after applying the effect of new move-in and renewal concessions
is approximately (5.5%) and (3.5%) for
2020, respectively, driven by higher usage in the urban cores of
The
We expected the negative impact on Physical Occupancy to be most pronounced in the second quarter and then stabilize at a new base level, which currently appears to be the case. The story is more mixed as it relates to Average Rental Rates, which remains more challenged in the urban cores ofNew York City ,San Francisco andBoston /Cambridge, MA. Use of new lease concessions during the second quarter of 2020 was concentrated in the submarkets noted above. Traffic and application activity improved throughout the quarter as Average Rental Rates were reduced in these submarkets. Meanwhile the rest of the portfolio is showing more stability in Average Rental Rates, though those rates are still lower than last year.
As a result of the differing impact that the COVID-19 pandemic is currently having on the operating performance of our markets and submarkets, we believe it is most helpful to discuss our portfolio as follows:
• First, our suburban properties, which represent approximately 45% of our
portfolio, have been more resilient during the pandemic with Physical
Occupancy declining to a low point of 95.2% during the second quarter of
2020 but since recovering fully to levels at or above the prior year. By
the middle of
properties stood at 96.6%. The percentage of suburban leases renewing was
very strong at 65% and continues to trend well above the prior year.
Average Rental Rates have slowly recovered since early May with limited
concession use, though those rates are still below the prior year level.
• Second, our properties that are located in the urban cores of New York
City,
our portfolio, have Physical Occupancy of 90.9% by the middle of July
2020. This group of properties has the highest use of concessions (about
50% of all new leases) and the most pressure on Average Rental Rates. For
the second quarter of 2020, these urban properties renewed 58% of
residents, which was 500 basis points lower than the second quarter of
2019 and was trending down throughout the quarter, ending at 53% in June2020. We believe these properties have the highest risk of volatility in
operations for the balance of the year.
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• Our third category consists of urban properties in our other markets, such
as
30% of our portfolio. These properties reached a low point in Physical
Occupancy of 94.0% in the middle of
had Physical Occupancy of 95.2% by the middle of
Rental Rates have been stable since the middle of May, though they are
down year-over-year, and concessions are being used on about 15% of ournew leases. During the second quarter of 2020, 57% of residents renewed
at these properties, which is 300 basis points better than the second
quarter of 2019. Overall, this group of urban properties has had
consistent operations for the past two months, with a slight increase in
Physical Occupancy in the last couple of weeks of
The following table provides comparative total same store operating expenses for
the Six-Month 2020
June YTD 2020 vs. June YTD 2019
Total Same Store Operating Expenses Including 74,264 Same Store Apartment Units
$ in thousands
% of Actual
YTD 2020
Actual Actual $ % Operating
YTD 2020 YTD 2019 Change (5) Change Expenses
Real estate taxes $ 170,416 $ 164,075 $ 6,341 3.9 % 44.1 %
On-site payroll (1) 81,249 81,757 (508 ) (0.6 )% 21.0 %
Utilities (2) 50,654 49,787 867 1.7 % 13.1 %
Repairs and maintenance (3) 44,497 48,027 (3,530 ) (7.4 )% 11.5 %
Insurance 12,187 10,365 1,822 17.6 % 3.2 %
Leasing and advertising 4,385 4,917 (532 ) (10.8 )% 1.1 %
Other on-site operating expenses
(4) 23,354 23,260 94 0.4 % 6.0 %
Total Same Store Operating Expenses
(includes Residential and
Non-Residential) $ 386,742 $ 382,188 $ 4,554 1.2 % 100.0 %
(1) On-site payroll - Includes payroll and related expenses for on-site personnel
including property managers, leasing consultants and maintenance staff.
(2) Utilities - Represents gross expenses prior to any recoveries under the
Resident Utility Billing System ("RUBS"). Recoveries are reflected in rental
income.
(3) Repairs and maintenance - Includes general maintenance costs, apartment unit
turnover costs including interior painting, routine landscaping, security,
exterminating, fire protection, snow removal, elevator, roof and parking lot
repairs and other miscellaneous building repair and maintenance costs.
(4) Other on-site operating expenses - Includes ground lease costs and
administrative costs such as office supplies, telephone and data charges and
association and business licensing fees.
(5) The year-to-date over year-to-date changes are due primarily to:
• Real estate taxes - Higher rates and assessed values continue to drive
real estate tax growth across most markets with a slight improvement from
previous expectations caused by successful appeals activity and lower than
expected rate growth in
• On-site payroll - Results better than expectations due to faster than
anticipated progress in transition to enhanced operating platform, lower
than expected employee benefit-related costs and less overtime, partially
offset by one-time frontline worker bonuses.
• Utilities - Growth lower than expected due to warmer winter weather and
energy rate decreases.
• Repairs and maintenance - Decrease primarily driven by deferral and
cancellation of some projects as a result of COVID-19-related delays.
• Insurance - Increase due to higher premiums on property insurance renewalcaused by challenging conditions in the insurance market.
• Leasing and advertising - Decrease greater than expectations due in part
to suspension of resident activities.
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See also Note 13 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company's segment disclosures.
Non-same store/other NOI results for the six months endedJune 30, 2020 decreased approximately$0.5 million compared to the same period of 2019 and consist primarily of properties acquired in calendar year 2019, operations from the Company's development properties and operations prior to disposition from 2019 and 2020 sold properties. This difference is due primarily to:
• A positive impact of higher NOI from development and newly stabilized
development properties in lease-up of
• A positive impact of higher NOI from properties acquired in 2019 of
million; and
• A negative impact of lost NOI from 2019 and 2020 dispositions of
million.
Comparison of the six months and quarter ended
The following table presents a reconciliation of diluted earnings per share/unit for the six months and quarter endedJune 30, 2020 as compared to the same period in 2019: Six Months Quarter Ended Ended June 30 June 30 Diluted earnings per share/unit for period ended 2019 $ 1.11 $ 0.83 Property NOI (0.01 ) (0.04 ) Interest expense 0.06 0.03 Debt extinguishment costs 0.04 0.04 Net gain/loss on property sales 0.34 (0.17 ) Other (0.01 ) 0.01
Diluted earnings per share/unit for period ended 2020 $ 1.53 $ 0.70
The decrease in consolidated NOI is primarily a result of the Company's lower NOI from same store properties, largely due to the economic impact from the COVID-19 pandemic. The following table presents the changes in the components of consolidated NOI for the six months and quarter endedJune 30, 2020 as compared to the same periods in 2019:
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