EQUITY RESIDENTIAL The following discussion and analysis of the results of operations and financial condition of the Company and theOperating Partnership should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company's ability to control theOperating Partnership and its subsidiaries, theOperating Partnership and each such subsidiary entity has been consolidated with the Company for financial reporting purposes, except for any unconsolidated properties/entities. Capitalized terms used herein and not defined are as defined elsewhere in this Annual Report on Form 10-K. In addition, please refer to the Definitions section below for various capitalized terms not immediately defined in this Item 7, 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 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 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 this Annual Report on Form 10-K, 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
See Item 1, Business, for discussion regarding the Company's overview.
Business Objectives and Operating and Investing Strategies
See Item 1, Business, for discussion regarding the Company's business objectives and operating and investing strategies.
COVID-19 Impact
The Company continues to monitor and respond to the ongoing effects of the
COVID-19 pandemic. Its duration, severity and the extent of its adverse health
impact on the general population, our residents and employees, along with the
distribution, effectiveness and acceptance of vaccines and testing and pace and
degree of recovery from the pandemic are among the many unknowns that have had
or could continue to have a significant impact on the Company. These, among
other items, have impacted 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. Despite the
impact of COVID-19, we continue to believe that the long-term prospects for our
business remain strong. For additional details, see Item 1A, Risk Factors.
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Table of Contents Results of Operations 2020 and 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 years ended
Portfolio Rollforward
($ in thousands)
Apartment Acquisition
Properties Units Purchase Price Cap Rate
12/31/2019 309 79,962
Acquisitions:
Consolidated Rental Properties - Not
Stabilized (1) 1 158 $ 48,860 4.7 %
Disposition
Sales Price Yield
Dispositions:
Consolidated Rental Properties (6 ) (2,231 ) $ (1,066,861 ) (4.5 )%
12/31/2020 304 77,889
Acquisition
Purchase Price Cap Rate
Acquisitions:
Consolidated Rental Properties 13 3,533 $ 1,249,679 3.7 %
Consolidated Rental Properties - Not
Stabilized (2) 4 1,214 $ 459,700 4.0 %
Disposition
Sales Price Yield
Dispositions:
Consolidated Rental Properties (14 ) (3,053 ) $ (1,716,775 ) (3.7 )%
Completed Developments - Consolidated 3 824
12/31/2021 310 80,407
(1) The Company acquired one property during the year ended
the
second year of ownership.
(2) The Company acquired four properties during the year ended
one each in the
are in lease-up and are expected to stabilize in their second year of
ownership at the combined Acquisition Cap Rate listed above.
Acquisitions
• The consolidated property acquired in 2020 was located in the
• The consolidated properties acquired in 2021 are located in the
(4), Austin (3), Boston , Dallas/Ft. Worth (4), Denver (3), Seattle and
Washington D.C. markets. The Atlanta , Austin and Dallas/Ft. Worth
acquisitions marked the Company's re-entry into these markets;
• Approximately
was in expansion markets; and
• The Company funded the 2021 acquisitions by selling older assets located
within established markets that no longer met our long-term investment
criteria.
Dispositions
• The consolidated properties disposed of in 2020 were located in the
sales generated an Unlevered IRR of 10.2%; and
• The consolidated properties disposed of in 2021 were located in the Los
Angeles (6), New York , San Francisco (5), Seattle and Washington D.C.
markets and the sales generated an Unlevered IRR of 10.4%.
Developments
• The Company completed construction on three consolidated apartment
properties during 2021, located in the
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• The Company commenced construction on one consolidated and three
unconsolidated apartment properties during 2021, located in the
(2),
units totaling approximately $452.7 million of expected development costs.
Investments in Unconsolidated Entities
• The Company entered into six separate unconsolidated joint ventures during
2021 for the purpose of developing vacant land parcels in Texas (3),
Colorado (2) and New York . The Company's total investment in these six
joint ventures is approximately $72.2 million as of December 31 ,2021. Three of the projects are related to the Company's joint venture
development program with Toll Brothers, Inc. ("Toll") discussed below; and
• Pursuant to our strategic partnership with Toll, the Company and Toll
entered into three separate joint venture agreements during 2021. The
projects have not yet started but are expected to do so in 2022. Toll will
act as managing member of each project overseeing approvals, design and
construction. See Notes 6 and 16 in the Notes to Consolidated Financial
Statements for additional discussion.
See Note 4 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company's real estate transactions.
Future Outlook
• The Company's guidance assumes consolidated rental acquisitions of
approximately
approximately
• We currently anticipate spending approximately
development costs during the year ending
consolidated and unconsolidated properties currently under construction
(amount only includes our share of development costs).
The above 2022 guidance assumptions are based on current expectations and are forward-looking.
Comparison of the year ended
The following table presents a reconciliation of diluted earnings per share/unit
for the year ended
Year Ended
December 31 Diluted earnings per share/unit for full year 2020
(0.35 )
Interest expense 0.14
Debt extinguishment costs 0.10
Corporate overhead (1) (0.03 )
Net gain/loss on property sales 1.38
Non-operating asset gains/losses (0.02 )
Impairment - non-operating assets (0.04 )
Depreciation expense (0.04 )
Other (0.05 )
Diluted earnings per share/unit for full year 2021
(1) Corporate overhead includes property management and general and
administrative expenses.
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.
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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):
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Operating income $ 1,675,841 $ 1,317,990 $ 357,851 27.2 %
Adjustments:
Property management 98,155 93,825 4,330 4.6 %
General and administrative 56,506 48,305 8,201 17.0 %
Depreciation 838,272 820,832 17,440 2.1 %
Net (gain) loss on sales of real
estate properties (1,072,183 ) (531,807 ) (540,376 ) 101.6 %
Impairment 16,769 - 16,769 -
Total NOI $ 1,613,360 $ 1,749,145 $ (135,785 ) (7.8 )%
Rental income:
Same store $ 2,342,257 $ 2,425,025 $ (82,768 ) (3.4 )%
Non-same store/other 121,740 146,680 (24,940 ) (17.0 )%
Total rental income 2,463,997 2,571,705 (107,708 ) (4.2 )%
Operating expenses:
Same store 803,995 780,381 23,614 3.0 %
Non-same store/other 46,642 42,179 4,463 10.6 %
Total operating expenses 850,637 822,560 28,077 3.4 %
NOI:
Same store 1,538,262 1,644,644 (106,382 ) (6.5 )%
Non-same store/other 75,098 104,501 (29,403 ) (28.1 )%
Total NOI $ 1,613,360 $ 1,749,145 $ (135,785 ) (7.8 )%
Note: See Note 17 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 2020 and 2021, operations from the
Company's development properties and operations prior to disposition from 2020
and 2021 sold properties.
• The decrease in same store rental income is due primarily to the negative
cumulative impact of leasing activity at lower Average Rental Rates,
particularly in late 2020 and early 2021.
• The increase in same store operating expenses is due primarily to:
• Utilities - A
(approximately 65% of total) increasing as a result of both higher usage
and rate, as well as increases in natural gas and electric charges
(approximately 35% of total) due to higher commodity prices;
• Real estate taxes - A
partially offset by reduced assessed values in certain locations; and
• Repairs and maintenance - A
comparable period expense growth due to the pandemic along with increases
in minimum wage on contract services and maintenance repairs in 2021.
• The decrease in non-same store/other NOI is due primarily to a negative
impact of lost NOI from 2020 and 2021 dispositions of $50.2 million ,
partially offset by a positive impact of higher NOI from non-stabilized
properties acquired between 2019 and 2021 of $21.1 million .
• The decrease in consolidated total 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.
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$4.3 million or 4.6% during the year endedDecember 31, 2021 as compared to 2020. This increase is primarily attributable to increases in payroll-related costs, legal and professional fees and information technology-related costs specifically for various operating initiatives such as sales-focused improvements and service enhancements. The expenses in 2020 were lower than normal due to the impact of COVID-19. General and administrative expenses, which include corporate operating expenses, increased approximately$8.2 million or 17.0% during the year endedDecember 31, 2021 as compared to 2020, primarily due to increases in payroll-related costs, partially offset by decreases in office rent as a result of the consolidation of space at the Company's corporate headquarters. The expenses in 2020 were lower than normal due to the impact of COVID-19. Depreciation expense, which includes depreciation on non-real estate assets, increased approximately$17.4 million or 2.1% during the year endedDecember 31, 2021 as compared to 2020, primarily as a result of additional depreciation expense on properties acquired in 2020 and 2021 and development properties placed in service during 2021, partially offset by in-place leases for 2019 acquisitions being fully depreciated as ofDecember 31, 2020 and the Company being a net seller during 2020, which resulted in lower depreciation in the current period.
Net gain on sales of real estate properties increased approximately
Impairment increased approximately$16.8 million during the year endedDecember 31, 2021 as compared to 2020, due to an impairment charge in 2021 on one land parcel held for development compared to no impairment charges taken during 2020. Interest and other income increased approximately$19.7 million during the year endedDecember 31, 2021 as compared to 2020. The increase is primarily due to a gain of$23.4 million on the sale of various investment securities that occurred during 2021 but not during 2020, partially offset by decreases in insurance/litigation settlement proceeds and other non-comparable items that occurred during 2020 but not during 2021. Other expenses increased approximately$1.8 million or 10.1% during the year endedDecember 31, 2021 as compared to 2020, primarily due to an increase in various litigation and environmental reserves/settlements and an increase in ground lease finance charges, partially offset by a decrease in advocacy contributions. Interest expense, including amortization of deferred financing costs, decreased approximately$92.8 million or 24.8% during the year endedDecember 31, 2021 as compared to 2020. The decrease is primarily due to lower debt extinguishment costs as well as lower overall interest rates and debt balances in 2021 as compared to 2020. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the year endedDecember 31, 2021 was 3.52% as compared to 3.94% in 2020. The Company capitalized interest of approximately$15.9 million and$10.2 million during the years endedDecember 31, 2021 and 2020, respectively. Net gain on sales of land parcels decreased approximately$34.2 million during the year endedDecember 31, 2021 as compared to 2020, primarily as a result of the sale of two land parcels in 2020 as compared to no sales in 2021. Net (income) loss attributable to Noncontrolling Interests in partially owned properties increased approximately$3.1 million or 20.9% during the year endedDecember 31, 2021 as compared to 2020, primarily as a result of higher noncontrolling interest allocations from higher gains on the sale of one partially owned apartment property in 2021 as compared to the sale of one partially owned apartment property in 2020. For comparison of the year endedDecember 31, 2020 to the year endedDecember 31, 2019 , refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's and theOperating Partnership's Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Same Store Results
Properties that the Company owned and were stabilized for all of both 2021 and 2020 (the "2021Same Store Properties "), which represented 74,077 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. 30
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The following table provides comparative total same store results and statistics
for the 2021
2021 vs. 2020
Same Store Results/Statistics Including 74,077 Same Store Apartment Units
$ in thousands (except for Average Rental Rate)
2021 2020
% Non- % % Non-
Residential Change Residential Change Total Change ResidentialResidential Total
Revenues
Expenses
9.7 %
NOI $ 1,473,339 (8.1 %) $ 64,923 56.3 % $ 1,538,262 (6.5 %) NOI $ 1,603,102 Average Rental Rate$ 2,640 (5.6 %) Average Rental Rate$ 2,797 Physical Occupancy 96.1 % 1.1 % Physical Occupancy 95.0 % Turnover 44.4 % (8.5 %) Turnover 52.9 %
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 the
write-off of Non-Residential straight-line lease receivables in 2020 and
lower bad debt in 2021.
The following table provides results and statistics related to our Residential
same store operations for the years ended
2021 vs. 2020
Same Store Residential Results/Statistics by Market
Increase (Decrease) from Prior Year
2021
2021 2021 Weighted
% of Average Average Average
Apartment Actual Rental Physical 2021 Rental Physical
Markets/Metro Areas Units NOI Rate Occupancy % Turnover Rate Occupancy Turnover Los Angeles 15,259 20.5 %$ 2,501 96.6 % 41.5 % (0.7 %) 1.0 % (10.4 %) Orange County 4,028 5.7 % 2,318 97.7 % 34.6 % 2.9 % 1.0 % (10.7 %) San Diego 2,706 4.1 % 2,484 97.6 % 43.1 % 4.6 % 0.6 % (5.9 %) Subtotal - Southern California 21,993 30.3 % 2,465 96.9 % 40.4 % 0.5 % 0.9 % (9.9 %) San Francisco 11,630 18.0 % 2,900 95.1 % 48.2 % (11.3 %) 0.6 % (8.7 %) Washington D.C. 14,322 17.5 % 2,332 96.5 % 45.3 % (4.3 %) 0.9 % (5.0 %) New York 9,343 12.1 % 3,497 95.2 % 37.5 % (9.6 %) 2.4 % (13.8 %) Seattle 8,819 10.6 % 2,274 95.6 % 50.6 % (7.1 %) 0.2 % (4.0 %) Boston 6,346 9.6 % 2,883 95.7 % 47.0 % (7.0 %) 1.5 % (9.3 %) Denver 1,624 1.9 % 2,066 96.6 % 60.2 % 1.4 % 1.7 % (9.8 %) Total 74,077 100.0 %$ 2,640 96.1 % 44.4 % (5.6 %) 1.1 % (8.5 %) Note: The above table reflects Residential same store results only. Residential operations account for approximately 96.1% of total revenues for the year endedDecember 31, 2021 . Despite the significant impact from the pandemic on our business, which is reflected in the results for the year endedDecember 31, 2021 , a strong recovery continues across our portfolio. Robust economic growth coupled with reopening of cities drove our operations to recover rapidly with significant demand for our apartments in all of our markets. This has led to high Physical Occupancy, increased pricing power and a material reduction in Leasing Concessions. Key operating drivers for this performance during 2021 include:
• Pricing - There has been significant improvement in pricing (net of
Leasing Concessions) since the end of the fourth quarter of 2020, with
pricing reaching or exceeding pre-pandemic levels. Monthly Residential
Leasing Concessions granted have also declined significantly from their
peak of
more normalized pre-pandemic levels.
• Physical Occupancy - Physical Occupancy was 96.6% for the fourth quarter
of 2021 and remained strong for the year ended
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• Percentage of Residents Renewing and Turnover - Our strategy of focusing
on resident renewals continued to deliver strong results. We reported the
lowest Turnover in our history for both the fourth quarter of 2021 (9.4%)
and the full year of 2021 (44.4%), which we believe reaffirms the demand
and desirability for our product. Results have been positive to date as
the Percentage of Residents Renewing continues to improve with the fourth
quarter of 2021 above 60%, which is higher than 2019 levels.
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 and Non-Residential tenants on meeting their financial obligations. During the year endedDecember 31, 2021 , the Company received governmental rental assistance payments paid on behalf of residents of approximately$34.7 million with approximately$16.3 million of that received in the fourth quarter of 2021. Despite receipt of these payments, our reserves and bad debt remained elevated in 2021. Our bad debt allowance policies remain consistent with those in place before the pandemic.
Liquidity and Capital Resources
With approximately$2.2 billion in readily available liquidity, a strong balance sheet, limited near-term maturities, very strong credit metrics and ample access to capital markets, the Company believes it is well positioned to meet its future obligations and opportunities. See further discussion below.
Statements of Cash Flows
The following table sets forth our sources and uses of cash flows for the years
ended
Year Ended December 31,
2021 2020 2019
Cash flow provided by (used for): Operating activities$ 1,260,184 $ 1,265,536 $ 1,456,984 Investing activities$ (434,620 ) $ 663,586 $ (771,824 ) Financing activities$ (565,056 ) $ (1,946,393 ) $ (684,474 )
The following provides information regarding the Company's cash flows from
operating, investing and financing activities for the year ended
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 year endedDecember 31, 2021 as compared to 2020, declined by approximately$5.4 million as a direct result of the NOI and other changes discussed above in Results of Operations.
Investing Activities
Our investing cash flows are primarily impacted by our transaction activity (acquisitions/dispositions), development spend and capital expenditures. For 2021, key drivers were:
• Acquired seventeen consolidated rental properties for approximately
billion in cash;
• Disposed of fourteen consolidated rental properties, receiving net
proceeds of approximately
• Invested in six separate unconsolidated development joint ventures for
approximately $48.5 million in cash;
• Invested $206.4 million primarily in development projects;
• Purchased
investments;
• Sold various investment securities, receiving net proceeds of
million; and
• Invested
in the table below.
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For the year endedDecember 31, 2021 , our actual capital expenditures to real estate included the following (amounts in thousands except for apartment unit and per apartment unit amounts): Capital Expenditures to Real Estate For the Year Ended December 31, 2021 Same Store Avg. Same Store Non-Same Store Per Properties Properties/Other Total Apartment Unit Total Apartment Units 74,077 6,330
80,407
Building Improvements$ 87,456 $ 1,570$ 89,026 $ 1,181 Renovation Expenditures (1) 28,558 297 28,855 385 Replacements 31,374 1,764 33,138 424 Total Capital Expenditures to Real Estate$ 147,388 $ 3,631$ 151,019 $ 1,990
(1) Renovation Expenditures - Amounts for 1,347 same store apartment units
approximated
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. In 2021, key drivers were:
• Obtained
1, 2031;
• Obtained
non-recourse to the Company maturing on June 25, 2022 ;
• Issued $500.0 million of ten-year 1.85% unsecured notes due 2031,
receiving net proceeds of approximately
fees and other expenses. This was the Company's second ever green bond
offering;
• Repaid
repayments);
• Issued Common Shares related to share option exercises and ESPP purchases
and received net proceeds of
capital of the
(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
Short-Term Liquidity and Cash Proceeds
The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under the Company's revolving credit facility and commercial paper program. Currently, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The following table presents the Company's balances for cash and cash equivalents, restricted deposits and the available borrowing capacity on its revolving credit facility as ofDecember 31, 2021 and 2020 (amounts in thousands): December 31, 2021 December 31, 2020 Cash and cash equivalents $ 123,832 $ 42,591 Restricted deposits $ 236,404 $ 57,137 Unsecured revolving credit facility availability $ 2,181,372 $ 1,984,051
Credit Facility and Commercial Paper Program
The Company has a$2.5 billion unsecured revolving credit facility maturingNovember 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 33
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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. See Item 7A for additional information with respect to the LIBOR transition.
The Company may borrow up to a maximum of
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 ofFebruary 11, 2022 (amounts in thousands):February 11 ,
2022
Unsecured revolving credit facility commitment $
2,500,000
Commercial paper balance outstanding (300,000 ) Unsecured revolving credit facility balance outstanding - Other restricted amounts
(3,507 ) Unsecured revolving credit facility availability $ 2,196,493
Dividend Policy The Company determines its dividends/distributions based on actual and projected financial conditions, the Company's actual and projected liquidity and operating results, the Company's projected cash needs for capital expenditures and other investment activities and such other factors as the Company'sBoard of Trustees deems relevant. The Company declared a dividend/distribution for each quarter in 2021 of$0.6025 per share/unit, consistent with the amount paid in 2020. All future dividends/distributions remain subject to the discretion of the Company'sBoard of Trustees .
Total dividends/distributions paid in
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$28.3 billion in investment in real estate on the Company's balance sheet atDecember 31, 2021 ,$24.5 billion or 86.7% was unencumbered. However, there can be no assurances that these sources of capital will be available to the Company in the future on acceptable terms or otherwise. EQR issues equity and guarantees certain debt of theOperating Partnership from time to time. EQR does not have any indebtedness as all debt is incurred by theOperating Partnership . 34
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The Company's total debt summary schedule as ofDecember 31, 2021 is as follows: Debt Summary as of December 31, 2021 ($ in thousands) Debt Balances % of Total Secured$ 2,191,201 26.3 % Unsecured 6,150,252 73.7 % Total$ 8,341,453 100.0 % Fixed Rate Debt: Secured - Conventional$ 1,896,472 22.8 % Unsecured - Public 5,835,222 69.9 % Fixed Rate Debt 7,731,694 92.7 % Floating Rate Debt: Secured - Conventional 59,890 0.7 % Secured - Tax Exempt 234,839 2.8 % Unsecured - Revolving Credit Facility - - Unsecured - Commercial Paper Program 315,030 3.8 % Floating Rate Debt 609,759 7.3 % Total$ 8,341,453 100.0 %
The following table summarizes the Company's debt maturity schedule as of
Debt Maturity Schedule as of December 31, 2021
($ in thousands)
Fixed Floating
Year Rate Rate Total % of Total
2022 $ 264,185 $ 376,904 (1) $ 641,089 7.6 %
2023 1,325,588 3,500 1,329,088 15.8 %
2024 - 6,100 6,100 0.1 %
2025 450,000 8,200 458,200 5.4 %
2026 592,025 9,000 601,025 7.1 %
2027 400,000 9,800 409,800 4.9 %
2028 900,000 10,700 910,700 10.8 %
2029 888,120 11,500 899,620 10.7 %
2030 1,095,000 12,600 1,107,600 13.2 %
2031 528,500 39,700 568,200 6.7 %
2032+ 1,350,850 138,900 1,489,750 17.7 %
Subtotal 7,794,268 626,904 8,421,172 100.0 %
Deferred Financing Costs and
Unamortized (Discount) (62,574 ) (17,145 ) (79,719 ) N/A
Total $ 7,731,694 $ 609,759 $ 8,341,453 100.0 %
(1) Includes
paper program.
Interest expected to be incurred on the Company's secured and unsecured debt based on obligations outstanding atDecember 31, 2021 , inclusive of capitalized interest, approximates$225.0 million annually for the next five years, with total remaining obligations of approximately$2.5 billion . For floating rate debt, the current rate in effect for the most recent payment throughDecember 31, 2021 is assumed to be in effect through the respective maturity date of each instrument.
See Note 9 in the Notes to Consolidated Financial Statements for additional
discussion of debt at
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Table of Contents Capital Structure The Company's "Consolidated Debt-to-Total Market Capitalization Ratio" as ofDecember 31, 2021 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all Units at the equivalent market value of the closing price of the Company's Common Shares on theNew York Stock Exchange and (ii) the liquidation value of all perpetual preferred shares outstanding.Equity Residential Capital Structure as ofDecember 31, 2021
(Amounts in thousands except for share/unit and per share amounts)Secured Debt$ 2,191,201 26.3 % Unsecured Debt 6,150,252 73.7 % Total Debt 8,341,453 100.0 % 19.2 % Common Shares (includes Restricted Shares) 375,527,195 96.7 % Units (includes OP Units and Restricted Units) 12,659,027 3.3 % Total Shares and Units 388,186,222 100.0 % Common Share Price at December 31, 2021$ 90.50 35,130,853 99.9 % Perpetual Preferred Equity 37,280 0.1 % Total Equity 35,168,133 100.0 % 80.8 % Total Market Capitalization$ 43,509,586 100.0 %The Operating Partnership's "Consolidated Debt-to-Total Market Capitalization Ratio" as ofDecember 31, 2021 is presented in the following table.The Operating Partnership calculates the equity component of its market capitalization as the sum of (i) the total outstanding Units at the equivalent market value of the closing price of the Company's Common Shares on theNew York Stock Exchange and (ii) the liquidation value of all perpetual preference units outstanding. ERP Operating Limited Partnership Capital Structure as of December 31, 2021
(Amounts in thousands except for unit and per unit amounts)Secured Debt$ 2,191,201 26.3 % Unsecured Debt 6,150,252 73.7 % Total Debt 8,341,453 100.0 % 19.2 % Total Outstanding Units 388,186,222
Common Share Price at
35,130,853 99.9 %
Perpetual Preference Units 37,280 0.1 %
Total Equity 35,168,133 100.0 % 80.8 %
Total Market Capitalization $ 43,509,586 100.0 %
Financial Flexibility
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, all of which remain
outstanding as of December 31, 2021 , pending the settlement of the outstanding
forward sale agreements. These forward sale agreements 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
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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 in the Notes to Consolidated Financial Statements 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 ofFebruary 11, 2022 , the Company had entered into such 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 . As ofFebruary 11, 2022 , no shares under the forward sale agreements had been settled. These forward sale agreements must be settled byMarch 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 sinceFebruary 2014 . As ofFebruary 11, 2022 , EQR has remaining authorization to repurchase up to 13.0 million of its shares.
We believe our ability to access capital markets is enhanced by ERPOP's
long-term senior debt ratings and short-term commercial paper ratings, as well
as EQR's long-term preferred equity ratings. As of
Standard & Poor's Moody's
ERPOP's long-term senior debt rating A- A3
ERPOP's short-term commercial paper rating A-2 P-2
EQR's long-term preferred equity rating BBB Baa1
See Note 18 in the Notes to Consolidated Financial Statements for discussion of
the events, if any, which occurred subsequent to
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
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.
•
mechanical equipment systems, exterior siding and painting, major
landscaping, furniture, fixtures and equipment for amenities and common
areas, vehicles and office and maintenance equipment.
• Disposition Yield - NOI that the Company anticipates giving up in the next
12 months 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
condition of the asset) divided by the gross sales price of the asset. The
weighted average Disposition Yield for sold properties is weighted based
on the projected NOI streams and the relative sales price for each
respective property.
• 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.
•
properties acquired during 2020 and 2021, plus any properties in lease-up
and not stabilized as of January 1, 2020 .
• Percentage of Residents Renewing - Leases renewed expressed as apercentage 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.
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• Renovation Expenditures - Apartment unit renovation costs (primarily
kitchens and baths) designed to reposition these units for higher rental
levels in their respective markets.
• Replacements - Includes appliances, mechanical equipment, fixtures and
flooring (including hardwood and carpeting).
• Residential - Consists of multifamily apartment revenues and expenses.
•
properties acquired or completed that are stabilized prior to
2020, less properties subsequently sold. Properties are included in Same
Store when they are stabilized for all of the current and comparable
periods presented.
• 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.
• % of Stabilized Budgeted NOI - Represents original budgeted 2022 NOI for
stabilized properties and projected annual NOI at stabilization (defined
as having achieved 90% occupancy for three consecutive months) for
properties that are in lease-up.
• Total Budgeted Capital Cost - Estimated remaining cost for projects under
development and/or developed plus all capitalized costs incurred to date,
including land acquisition costs, construction costs, capitalized realestate taxes and insurance, capitalized interest and loan fees, permits,
professional fees, allocated development overhead and other regulatory
fees, plus any estimates of costs remaining to be funded for all projects,
all in accordance with GAAP. Amounts for partially owned consolidated and
unconsolidated properties are presented at 100% of the project.
• Turnover - Total Residential move-outs (including inter-property and
intra-property transfers) divided by total Residential apartment units.
• Unlevered Internal Rate of Return ("IRR") - The Unlevered IRR on soldproperties is the compound annual rate of return calculated by the Company
based on the timing and amount of: (i) the gross purchase price of the
property plus any direct acquisition costs incurred by the Company; (ii)
total revenues earned during the Company's ownership period; (iii) total
direct property operating expenses (including real estate taxes andinsurance) incurred during the Company's ownership period; (iv) capital
expenditures incurred during the Company's ownership period; and (v) the
gross sales price of the property net of selling costs.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or different presentation of our financial statements.
The Company's significant accounting policies are described in Note 2 in the
Notes to Consolidated Financial Statements. These policies were followed in
preparing the consolidated financial statements at and for the year ended
The Company has identified the significant accounting policies below as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the application of judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including its investment in real estate, for indicators of impairment at least quarterly. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, legal, regulatory and environmental concerns, the Company's intent and ability to hold the related asset, as well as any significant cost overruns on development properties. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted. Assessing impairment can be complex and involves a high degree of subjectivity in determining if indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset. In particular, these estimates are sensitive to significant assumptions, including the estimation of future rental revenues, operating expenses, discount and capitalization rates and our intent and ability to hold the related asset, all of which could be affected by our expectations about future market or economic conditions. Assumptions are primarily subject to property-specific characteristics, especially with respect to our intent and ability to hold the related asset. While these property-specific assumptions can have a significant impact on the undiscounted cash flows or estimated fair value of a particular asset, our evaluation of the reported carrying values of long-lived assets during the current year were not particularly sensitive to external or market assumptions.
Acquisition of Investment Properties
The Company allocates the purchase price of properties that meet the definition
of an asset acquisition to net tangible and identified intangible assets
acquired based on their relative fair values using assumptions primarily based
upon property-specific characteristics. In making estimates of relative fair
values for purposes of allocating purchase price, the Company utilizes a number
of sources, including independent appraisals that may be obtained in connection
with the acquisition or financing of the respective property, our own analysis
of recently acquired or developed and existing comparable properties in our
portfolio and other market data. The Company also considers information obtained
about each property as a result of its pre-acquisition due diligence, marketing
and leasing activities in estimating the relative fair value of the tangible and
intangible assets/liabilities acquired.
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Funds From Operations and Normalized Funds From Operations
The following is the Company's and theOperating 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 each of the three years endedDecember 31, 2021 : Funds From Operations and Normalized Funds From Operations
(Amounts in thousands)
Year Ended December 31,
2021 2020 2019
Net income $ 1,396,714 $ 962,501 $ 1,009,708
Net (income) loss attributable to Noncontrolling
Interests - Partially Owned Properties (17,964 ) (14,855 ) (3,297 )
Preferred/preference distributions (3,090 ) (3,090 ) (3,090 )
Net income available to Common Shares and Units /
Units 1,375,660 944,556 1,003,321
Adjustments:
Depreciation 838,272 820,832 831,083
Depreciation - Non-real estate additions (4,277 ) (4,564 ) (5,585 )
Depreciation - Partially Owned Properties (3,673 ) (3,345 ) (3,599 )
Depreciation - Unconsolidated Properties 2,487 2,454 2,997
Net (gain) loss on sales of unconsolidated entities - operating assets
(1,304 ) (1,636 ) (69,522 )
Net (gain) loss on sales of real estate properties (1,072,183 ) (531,807 ) (447,637 )
Noncontrolling Interests share of gain (loss) on
sales
of real estate properties 15,650 11,655 -
FFO available to Common Shares and Units / Units
(1) (3) (4) 1,150,632 1,238,145 1,311,058
Adjustments:
Impairment - non-operating assets 16,769 - -
Write-off of pursuit costs 6,526 6,869 5,529
Debt extinguishment and preferred share redemption (gains) losses
744 39,292 23,991
Non-operating asset (gains) losses (22,283 ) (32,590 ) (940 )
Other miscellaneous items 8,976 4,652 8,430
Normalized FFO available to Common Shares and Units
/ Units (2) (3) (4) $ 1,161,364 $ 1,256,368 $ 1,348,068
FFO (1) (3) $ 1,153,722 $ 1,241,235 $ 1,314,148
Preferred/preference distributions (3,090 ) (3,090 ) (3,090 )
FFO available to Common Shares and Units / Units
(1) (3) (4) $ 1,150,632 $ 1,238,145 $ 1,311,058
Normalized FFO (2) (3) $ 1,164,454 $ 1,259,458 $ 1,351,158
Preferred/preference distributions (3,090 ) (3,090 ) (3,090 )
Normalized FFO available to Common Shares and Units
/ Units (2) (3) (4) $ 1,161,364 $ 1,256,368 $ 1,348,068 (1)
funds from operations ("FFO") (
(computed in accordance with accounting principles generally accepted in the
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.
(2) 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.
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(3) 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 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.
(4) 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.
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