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, 2020 . 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 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 rate of vaccine
distribution and effectiveness of vaccinations, 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, 2020 , 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. The 2021 guidance
assumptions disclosed throughout this Item 2 are based on current expectations
and are forward-looking.
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 high quality 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.
EQR is the general partner of, and as of June 30, 2021 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.
The Company's corporate headquarters is located in
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--------------------------------------------------------------------------------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, our proxy statements and any amendments to any of those reports/statements we file with theSecurities 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 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, 2020 . 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, through varying degrees of both acquisitions and new wholly-owned and joint venture development projects, to further diversify its portfolio into select new expansion markets that share similar characteristics as its current established markets and to optimize the mix of the Company's properties located in urban vs. dense suburban submarkets within its markets. COVID-19 Impact The Company's and theOperating Partnership's overall impact from the COVID-19 pandemic has not changed materially from the information included in the Company's and theOperating Partnership's Annual Report on Form 10-K for the year endedDecember 31, 2020 . As more fully discussed in the Company's and theOperating Partnership's Annual Report on Form 10-K, despite the impact of COVID-19, we continue to believe that the long-term prospects for our business remain strong. See the Results of Operations discussion below for additional information on how the ongoing recovery from the COVID-19 pandemic is currently impacting our markets and operations.
Results of Operations
2021 Transactions
In conjunction with our business objectives and operating and investing
strategies, the following table provides a rollforward of the transactions that
occurred during the six months ended
Portfolio Rollforward
($ in thousands)
Apartment Acquisition
Properties Units Purchase Price Cap Rate
12/31/2020 304 77,889
Acquisitions:
Consolidated Rental Properties 2 533 $ 185,000 3.9 %
Consolidated Rental Properties - Not
Stabilized (1) 1 280 $ 95,200 4.1 %
Disposition
Sales Price Yield
Dispositions:
Consolidated Rental Properties (5 ) (795 ) $ (409,500 ) (3.7 )%
Completed Developments - Consolidated 1 200
6/30/2021 303 78,107
(1) The Company acquired one property in the
of 2021 that is in lease-up and is expected to stabilize in its second year
of ownership at the Acquisition Cap Rate listed above.
The consolidated properties acquired were located in theDenver ,Washington D.C. andAtlanta markets. TheAtlanta acquisition marked the Company's re-entry into theAtlanta market. The consolidated properties disposed of were located in theNew York ,Los Angeles andSeattle markets and the sales generated an Unlevered IRR of 8.8%. The consolidated property development completion was located in theSan Francisco market. See Note 4 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company's real estate transactions. 36 --------------------------------------------------------------------------------
Table of Contents The Company's guidance assumes consolidated rental acquisitions of$1.5 billion and consolidated rental dispositions of$1.5 billion and expects that the Acquisition Cap Rate will be approximately equal to the Disposition Yield for the full year endingDecember 31, 2021 . We currently anticipate spending approximately$260.0 million on development costs during the year endingDecember 31, 2021 , of which approximately$125.2 million was spent during the six months endedJune 30, 2021 , primarily for properties currently under construction. Certain of these costs are expected to be funded by joint venture partner obligations and third-party construction mortgages. Work at all of our development projects continues with no material delays or cost overruns notwithstanding some brief disruptions from governmental construction moratoriums due to COVID-19.
Same Store Results
Properties that the Company owned and were stabilized (see definition below) for all of both of the six months endedJune 30, 2021 and 2020 (the "Six-Month 2021Same Store Properties "), which represented 76,335 apartment units, drove the Company's results of operations. The Six-Month 2021Same 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, 2021 : Six Months Ended June 30, 2021 Apartment Properties Units Same Store Properties at December 31, 2020 285 73,585 2019 acquisitions stabilized 12 3,323 2021 dispositions (5 ) (795 ) Lease-up properties stabilized 1
222
Same Store Properties at June 30, 2021 293 76,335
Six Months Ended June 30, 2021
Apartment
Properties Units
Same Store 293 76,335
Non-Same Store:
2021 acquisitions 3 813
2020 acquisitions 1 158
2019 acquisitions not yet stabilized 1 217
Master-Leased properties (1) 1
162
Lease-up properties not yet stabilized (2) 3 421 Other 1 1Total Non-Same Store 10 1,772Total Properties and Apartment Units 303 78,107
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.
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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,
2021 2020
Operating income $ 512,404 $ 778,974
Adjustments:
Property management 50,585 51,317
General and administrative 30,061 26,353
Depreciation 400,635 418,398
Net (gain) loss on sales of real estate properties (223,695 ) (352,243 )
Total NOI $ 769,990 $ 922,799
Rental income:
Same store $ 1,174,563 $ 1,288,732
Non-same store/other 21,098 47,105
Total rental income 1,195,661 1,335,837
Operating expenses:
Same store 410,940 395,952
Non-same store/other 14,731 17,086
Total operating expenses 425,671 413,038
NOI:
Same store 763,623 892,780
Non-same store/other 6,367 30,019
Total NOI $ 769,990 $ 922,799 The following table provides comparative total same store results and statistics
for the Six-Month 2021
June YTD 2021 vs. June YTD 2020
Same Store Results/Statistics Including 76,335 Same Store Apartment Units
$ in thousands (except for Average Rental Rate)
June YTD 2021 June YTD 2020
% Non- % % Non-
Residential Change Residential Change Total Change Residential Residential Total
Revenues
Expenses
NOI $ 732,890 (15.4 %) $ 30,733 14.5 % $ 763,623 (14.5 %) NOI $ 865,942 Average Rental Rate$ 2,588 (9.4 %) Average Rental Rate$ 2,857 Physical Occupancy 95.5 % (0.1 %) Physical Occupancy 95.6 % Turnover 21.3 % (0.3 %) Turnover 21.6 %
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) Changes in same store Non-Residential revenues are primarily driven by lower
bad debt and higher parking income.
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The following table provides results and statistics related to our Residential
same store operations for the six months ended
June YTD 2021 vs. June YTD 2020
Same Store Residential Results/Statistics by Market
Increase (Decrease) from Prior Year
June YTD 2021
June YTD 2021 June YTD 2021 Weighted
% of Average Average Average
Apartment Actual Rental Physical June YTD 2021 Rental Physical
Markets/Metro Areas Units NOI Rate Occupancy % Turnover Revenues Expenses NOI Rate Occupancy Turnover
Los Angeles 16,193 20.4 % $ 2,402 96.1 % 20.7 % (6.5 %) 1.8 % (10.2 %) (7.3 %) 0.7 % (2.4 %)
Orange County 4,028 5.5 % 2,230 97.4 % 16.1 % (1.0 %) 3.1 % (2.2 %) (1.8 %) 0.8 % (2.7 %)
San Diego 2,706 3.9 % 2,392 97.7 % 20.5 % 1.5 % 1.7 % 1.5 % 0.5 % 1.0 % (1.2 %)
Subtotal - Southern California 22,927 29.8 % 2,370 96.5 % 19.9 % (4.7 %) 1.9 % (7.4 %) (5.5 %) 0.8 % (2.3 %)
San Francisco 12,707 19.4 % 2,864 94.6 % 22.8 % (15.1 %) 4.3 % (21.6 %) (14.0 %) (1.2 %) 1.4 %
Washington D.C. 14,569 17.8 % 2,320 96.1 % 21.6 % (5.1 %) 3.5 % (8.9 %) (5.5 %) 0.3 % 1.7 %
New York 9,343 11.2 % 3,453 93.2 % 18.4 % (15.1 %) 4.0 % (30.4 %) (13.2 %) (2.1 %) (0.6 %)
Seattle 8,819 10.5 % 2,244 95.7 % 24.7 % (10.3 %) 4.4 % (16.0 %) (9.8 %) (0.5 %) 1.8 %
Boston 6,346 9.5 % 2,839 95.6 % 20.6 % (9.7 %) 5.0 % (15.5 %) (10.7 %) 0.9 % (2.1 %)
Denver 1,624 1.8 % 2,000 96.6 % 27.5 % (0.6 %) 5.3 % (3.0 %) (2.5 %) 1.8 % (4.0 %)
Total 76,335 100.0 % $ 2,588 95.5 % 21.3 % (9.5 %) 3.6 % (15.4 %) (9.4 %) (0.1 %) (0.3 %)
Note: The above table reflects Residential same store results only. Residential
operations account for approximately 96.2% of total revenues for the six months
ended June 30, 2021 .
The following table includes select operating metrics for Residential Same Store
Properties :
Q1 2021 Q2 2021 July 2021 (1)
Physical Occupancy (2) 95.6 % 96.3 % 96.4 %
Percentage of Residents Renewing by
quarter/month 52.9 % 53.2 % 55.0 %
New Lease Change (17.7 %) (5.3 %) 6.3 %
Renewal Rate Achieved (5.2 %) 0.2 % 3.6 %
Blended Rate (12.2 %) (2.7 %) 4.8 %
(1)
(2) Physical Occupancy is as of month-end March for Q1 2021, month-end June for
Q2 2021 and as of
The following table provides guidance for our expected full year 2021 same store operating performance (includes Residential and Non-Residential):
Revised Full Year 2021 Previous Full Year 2021
Physical Occupancy 95.3% to 96.3% 95.0% to 96.0%
Revenue change (5.0%) to (4.0%) (8.0%) to (6.0%)
Expense change 2.75% to 3.25% 3.0% to 4.0%
NOI change (8.5%) to (7.5%) (13.0%) to (11.0%)
Despite the significant impact from the pandemic on our business reflected in
the results for the six months ended June 30, 2021 , the pace of the recovery
across our portfolio continues to exceed our expectations. The accelerating
economy and reopening of cities is driving our operations to recover rapidly
with robust demand for our apartments in all our markets, leading to high
Physical Occupancy, increased pricing power and a significant reduction in
Leasing Concessions. Key operating drivers for this recovery include:
• Demand and Physical Occupancy - Strong demand is driving both improved
Physical Occupancy in all of our markets and a return of pricing
power. Across most of our markets, Physical Occupancy has recovered and
stabilized at or above pre-pandemic levels and is currently at 96.4% as of
July 22, 2021 . 39
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• Renewal Rates, Percentage of Residents Renewing and Pricing -Portfolio-wide Renewal Rate Achieved turned positive in the second quarter
of 2021. The Percentage of Residents Renewing steadily improved since the
end of the third quarter of 2020 and has now stabilized at approximately
55%, which is in line with historical averages but still below elevated
2019 and early 2020 levels. There has also been significant improvement in
pricing (net of Leasing Concessions) since the end of the fourth quarter
of 2020. Portfolio-wide pricing now exceeds pre-pandemic levels. We
continue to test price sensitivity in every market by raising rents and
reducing both the value and quantity of Leasing Concessions being granted.
• Leasing Concessions - Monthly Leasing Concessions granted continue to
decline significantly. Leasing Concessions granted in June and July
(preliminary) 2021 are
are down from their peak of
the end of the first quarter of 2021, about 20% of applications were
receiving on average four weeks in Leasing Concessions. As of July 2021 ,
less than 3% of our applications received on average just over two weeks
with further declines expected.
The following table provides Physical Occupancy by geographic market for the
Six-Month 2021
Markets/Metro Areas As of March 31, 2021 As of June 30, 2021 As of July 22, 2021 Boston 95.5 % 95.3 % 95.7 % New York 93.9 % 96.3 % 96.5 % Washington D.C. 95.9 % 96.2 % 96.3 % Seattle 95.5 % 95.8 % 96.0 % San Francisco 95.0 % 95.4 % 95.2 % Los Angeles 96.1 % 96.9 % 97.4 % Orange County 97.6 % 98.4 % 97.9 % San Diego 97.7 % 97.9 % 97.9 % Denver 96.5 % 97.0 % 96.7 % Total 95.6 % 96.3 % 96.4 %
In summary, the positive trends and favorable forward operating indicators described have positioned our portfolio well, driving the revision upward to our same store revenue and NOI guidance for the full year 2021. See below for specific discussion on operating performance by geographic market:
•
improvement is expected in the third quarter of 2021. Pricing continues to
improve and is now above pre-pandemic
•
leasing season with nine consecutive weeks of record application
volume. The use of Leasing Concessions in this market has declined
significantly with only 3% of July 2021 applications receiving a
concession at an average of two weeks compared to about 40% of
applications in May 2021 receiving an average concession of six
weeks. Physical Occupancy and pricing continue to improve into July 2021
with pricing crossing over pre-pandemic peaks from July 2019 .
• Washington, D.C. - Washington, D.C. has shown relatively steady
performance with good momentum through the second quarter and into July
2021 . Physical Occupancy has been relatively stable and pricing has
continued to improve.
•
employers regarding the return to office. Physical Occupancy is stable
while pricing has demonstrated strength in the second quarter of 2021 and
is now above peak 2019 levels.
•
originally anticipated but still lags the recovery in other markets likely
due to more uncertainty around the return to office from large technology
employers and a delayed re-opening of the city. Leasing Concession use
continues to decline with about 5% of
average concession of less than two weeks, down from 15% in May 2021
receiving an average concession of four weeks. Physical Occupancy isstable and pricing continues to recover but remains below pre-pandemic
levels.
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•
our portfolio during the pandemic. This market has shown resilience and
signs of strengthening as Physical Occupancy and pricing have been
relatively stable throughout the pandemic. Leasing Concession use islimited and primarily at urban assets. Bad debt in this market remains the
most elevated in our portfolio and we continue to work with our residents
to apply for federally sponsored rental assistance.
•
continue to stand out in terms of performance, providing additional
pricing opportunities. Physical Occupancy and pricing are performing well
above pre-pandemic levels.
•
portfolio continues to deliver solid performance. Both Physical Occupancy
and pricing showed strong growth during the second quarter and into July
2021 . Demand remains strong across the market.
Despite strong rent collections throughout the pandemic, the financial impact
from a small subset of our residents and Non-Residential tenants not paying has
led to higher levels of bad debt than we have historically experienced. We
continue to work with our residents, including assisting them in applying for
federally sponsored rental assistance, and Non-Residential tenants on meeting
their financial obligations and our bad debt allowance policies remain
consistent with those in place before the pandemic. During the second quarter of
2021, we received our first payments from federally sponsored rental assistance
and expect this activity to increase over the remainder of the year. However, we
still expect our reserves and bad debt expense to remain elevated in 2021. See
Note 8 in the Notes to Consolidated Financial Statements for additional
discussion of leases at June 30, 2021 .
The following table provides comparative same store operating expenses for the
Six-Month 2021
June YTD 2021 vs. June YTD 2020
Total Same Store Operating Expenses Including 76,335 Same Store Apartment Units
$ in thousands
% of June
YTD 2021
June June $ % Operating
YTD 2021 YTD 2020 Change (5) Change Expenses
Real estate taxes $ 178,082 $ 174,980 $ 3,102 1.8 % 43.3 %
On-site payroll (1) 82,689 83,137 (448 ) (0.5 )% 20.1 %
Utilities (2) 56,575 51,786 4,789 9.2 % 13.8 %
Repairs and maintenance (3) 51,107 45,472 5,635 12.4 % 12.4 %
Insurance 13,758 12,510 1,248 10.0 % 3.4 %
Leasing and advertising 5,522 4,453 1,069 24.0 % 1.3 %
Other on-site operating expenses
(4) 23,207 23,614 (407 ) (1.7 )% 5.7 %
Total Same Store Operating Expenses
(includes Residential and
Non-Residential) $ 410,940 $ 395,952 $ 14,988 3.8 % 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 were primarily driven by the
following factors:
• Real estate taxes - Increase is lower than prior expectations due to lower
rates and assessed values.
• On-site payroll - Improved sales and service staff utilization from
various technology initiatives, lower than expected employee
benefit-related costs and higher than usual staffing vacancies during the
current period.
• Utilities - Increase driven by rate increases and higher usage of water,
sewer, trash, electric and gas.
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• Repairs and maintenance - Increase was driven by low comparable period
expense due to the pandemic along with greater snowfall on the
and higher turnover expense from accelerated leasing in 2021.
• Insurance - Increase due to higher premiums on property insurance renewal
due to challenging conditions in the insurance market.
• Leasing and advertising - Increase due primarily to low comparable period
expense due to the pandemic, increased digital advertising and selective
use of outside broker fees of approximately $0.4 million for the six
months ended June 30, 2021 , primarily in the New York market.
• Other on-site operating expenses - Decrease primarily driven by lower
ground lease costs due to a lease modification at one property.
The Company now anticipates same store NOI to decline for the full year 2021 by approximately 8.5% to 7.5% (previously was anticipated to decline by approximately 13.0% to 11.0%) primarily driven by the expected improvement in same store revenues discussed above. We now anticipate same store expenses to increase between 2.75% to 3.25% (previously was anticipated to increase between 3.0% to 4.0%) for 2021 as compared to 2020, primarily driven by lower real estate taxes and on-site payroll. Given the continued uncertainty resulting from the COVID-19 pandemic, we anticipate the possibility of greater variability around the midpoint, up or down, within these ranges than we would typically experience.
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, 2021 decreased approximately$23.7 million compared to the same period of 2020. These results consist primarily of properties acquired in calendar years 2020 and 2021, operations from the Company's development properties and operations prior to disposition from 2020 and 2021 sold properties. This difference is due primarily to:
• A negative impact of lower NOI from development and newly stabilized
development properties in lease-up of
• A positive impact of higher NOI from non-stabilized properties acquired in
2019, 2020 and 2021 of
• A negative impact of lower NOI from other non-same store properties
(including one master-leased property) of
• A negative impact of lost NOI from 2020 and 2021 dispositions of
million.
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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, 2021 as compared to the same periods in 2020: Six Months Ended Quarter Ended June 30 June 30 Diluted earnings per share/unit for period ended 2020 $ 1.53 $ 0.70 Property NOI (0.38 ) (0.16 ) Interest expense 0.08 0.04 Non-operating asset gains/losses 0.06
0.06
Net gain/loss on property sales (0.30 )
0.21
Other 0.01 (0.01 ) Diluted earnings per share/unit for period ended 2021 $ 1.00 $ 0.84 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, 2021 as compared to the same periods in 2020:
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