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, 2021 . In addition, please refer to the Definitions section below for various capitalized terms not immediately defined in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Forward-looking statements are intended to be made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
statements are based on current expectations, estimates, projections and
assumptions made by management. While the Company's management believes the
assumptions underlying its forward-looking statements are reasonable, such
information is inherently subject to uncertainties and may involve certain
risks, which could cause actual results, performance or achievements of the
Company to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. Many of
these uncertainties and risks are difficult to predict and beyond management's
control, such as the current novel coronavirus ("COVID-19") pandemic. Additional
factors that might cause such differences are discussed in Part I of the
Company's and the Operating Partnership's Annual Report on Form 10-K for the
year ended December 31, 2021 , particularly those under Item 1A, Risk Factors.
Forward-looking statements and related uncertainties are also included in the
Notes to Consolidated Financial Statements in this report. Forward-looking
statements are not guarantees of future performance, results or events. The
forward-looking statements contained herein are made as of the date hereof and
the Company undertakes no obligation to update or supplement these
forward-looking statements.
Overview
Equity Residential ("EQR") is committed to creating communities where people
thrive. The Company, a member of the S&P 500, is focused on the acquisition,
development and management of residential properties located in and around
dynamic cities that attract affluent long-term renters. ERP Operating Limited
Partnership ("ERPOP") is focused on conducting the multifamily property business
of EQR. EQR is a Maryland real estate investment trust ("REIT") formed in March
1993 and ERPOP is an Illinois limited partnership formed in May 1993 . References
to the "Company," "we," "us" or "our" mean collectively EQR, ERPOP and those
entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the
"Operating Partnership" mean collectively ERPOP and those entities/subsidiaries
owned or controlled by ERPOP.
EQR is the general partner of, and as of September 30, 2022 owned an approximate
96.7% ownership interest in, ERPOP. All of the Company's property ownership,
development and related business operations are conducted through the Operating
Partnership and EQR has no material assets or liabilities other than its
investment in ERPOP. EQR issues equity from time to time, the net proceeds of
which it is obligated to contribute to ERPOP, but does not have any indebtedness
as all debt is incurred by the Operating Partnership . The Operating Partnership
holds substantially all of the assets of the Company, including the Company's
ownership interests in its joint ventures. The Operating Partnership conducts
the operations of the business and is structured as a partnership with no
publicly traded equity.
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 or furnish to 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 or furnish them to 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, 2021 .
Results of Operations
2022 Transactions
In conjunction with our business objectives and operating and investing
strategies, the following table provides a rollforward of the transactions that
occurred during the nine months ended
Portfolio Rollforward
($ in thousands)
Apartment Purchase Acquisition
Properties Units Price Cap Rate
12/31/2021 310 80,407
Acquisitions:
Consolidated Rental Properties 1 172 $ 113,000 3.5 %
Unconsolidated Land Parcels (1) - - $ 56,886
Disposition
Sales Price Yield
Dispositions:
Consolidated Rental Properties (3 ) (945 ) $ (746,150 ) (3.4 %)
Configuration Changes - (40 )
9/30/2022 308 79,594
(1)The purchase price listed represents the total consideration for the closing of the respective joint ventures.
Acquisitions
•
The consolidated property acquired during the nine months ended
•
During the nine months endedSeptember 30, 2022 , the Company acquired its joint venture partner's 25% interest in a 432-unit apartment property inChevy Chase, MD for$32.2 million , and the property is now wholly owned.
Dispositions
•
The consolidated properties disposed of during the nine months endedSeptember 30, 2022 were located inNew York City (2) andWashington, D.C. and the sales generated an Unlevered IRR of 5.3%. 36
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Table of Contents Developments • The Company commenced construction on one consolidated and three unconsolidated apartment properties during the nine months endedSeptember 30, 2022 , located inSanta Clara, CA ,Fort Worth, TX ,Frisco, TX andDallas, TX , consisting of 1,278 apartment units in the aggregate totaling approximately$417.7 million of expected development costs;
•
The Company stabilized one consolidated apartment property during the nine
months ended
•
The Company spent approximately
Investments in Unconsolidated Entities
•
The Company entered into two separate unconsolidated joint ventures during the nine months endedSeptember 30, 2022 for the purpose of developing vacant land parcels inFrisco, TX andWakefield, MA. The Company's total investment in these two joint ventures is approximately$63.2 million as ofSeptember 30, 2022 . One of the projects is related to the Company's joint venture development program with Toll Brothers, Inc. ("Toll"), which commenced construction during the first quarter of 2022 prior to our entrance into the joint venture.
See Notes 4, 6 and 14 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company's real estate investments and investments in partially owned entities.
Future Outlook
•
The Company assumes consolidated rental acquisitions of approximately$113.0 million and consolidated rental dispositions of approximately$746.0 million during the year endingDecember 31, 2022 . Given current uncertainty in the transaction environment, the Company's acquisition and disposition assumptions reflect no additional activities beyond one land parcel sale for$5.5 million currently under contract and scheduled to close in the fourth quarter of 2022; and
•
We currently anticipate spending approximately$200.0 million on development costs during the year endingDecember 31, 2022 , primarily for consolidated and unconsolidated properties currently under construction (amount only includes our share of development costs).
The above 2022 assumptions are based on current expectations and are forward-looking.
Comparison of the nine months and quarter ended
The following table presents a reconciliation of diluted earnings per share/unit for the nine months and quarter endedSeptember 30, 2022 as compared to the same period in 2021: Nine Months Ended Quarter Ended September 30 September 30 Diluted earnings per share/unit for period ended 2021 $ 2.14 $ 1.15 Property NOI 0.49 0.17 Interest expense (0.03 ) - Corporate overhead (1) (0.03 ) (0.01 ) Net gain/loss on property sales (0.73 ) (0.43 ) Non-operating asset gains/losses (0.06 ) - Depreciation expense (0.13 ) - Other (0.02 ) (0.02 ) Diluted earnings per share/unit for period ended 2022 $ 1.63 $ 0.86 (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):
Nine Months Ended September 30,
2022 2021 $ Change % Change
Operating income $ 873,683 $ 1,033,958 $ (160,275 ) (15.5 )%
Adjustments:
Property management 83,035 74,357 8,678 11.7 %
General and administrative 47,033 43,102 3,931 9.1 %
Depreciation 667,896 616,032 51,864 8.4 %
Net (gain) loss on sales of real
estate properties (304,346 ) (587,623 ) 283,277 (48.2 )%
Total NOI $ 1,367,301 $ 1,179,826 $ 187,475 15.9 %
Rental income:
Same store $ 1,882,181 $ 1,694,503 $ 187,678 11.1 %
Non-same store/other 153,296 124,364 28,932 23.3 %
Total rental income 2,035,477 1,818,867 216,610 11.9 %
Operating expenses:
Same store 600,987 583,471 17,516 3.0 %
Non-same store/other 67,189 55,570 11,619 20.9 %
Total operating expenses 668,176 639,041 29,135 4.6 %
NOI:
Same store 1,281,194 1,111,032 170,162 15.3 %
Non-same store/other 86,107 68,794 17,313 25.2 %
Total NOI $ 1,367,301 $ 1,179,826 $ 187,475 15.9 %
Note: See Note 13 in the Notes to Consolidated Financial Statements for detail
by reportable segment/market. Non-same store/other NOI results consist primarily
of properties acquired in calendar years 2021 and 2022, operations from the
Company's development properties and operations prior to disposition from 2021
and 2022 sold properties.
•
The increase in same store rental income is primarily driven by strong Physical Occupancy and continued growth in pricing.
•
The increase in same store operating expenses is due primarily to:
•
Utilities - An
•
Repairs and maintenance - A
•
On-site payroll - A
•
The increase in non-same store/other NOI is due primarily to a positive impact of higher NOI from properties acquired during 2021 and 2022 of$45.2 million and higher NOI from development properties in lease-up of$14.6 million , partially offset by a negative impact of lost NOI from 2021 and 2022 dispositions of$41.1 million and a negative impact of$1.2 million in lower NOI from one former master-leased property and two properties that have been removed from same store while undergoing major renovations.
•
The increase in consolidated total NOI is primarily a result of the Company's higher NOI from same store properties, largely due to improvement in same store revenues as noted above. Operating expense growth remains modest due to a combination of continued success in managing controllable expenses and modest growth in real estate tax expense (increased by only$1.2 million ), leading to 15.3% same store NOI growth for the nine months endedSeptember 30, 2022 as compared to the prior year period.
See the Same Store Results section below for additional discussion of those results.
Property management expenses include off-site expenses associated with the self-management of the Company's properties as well as management fees paid to any third-party management companies. These expenses increased approximately$8.7 million or 11.7% and approximately$2.0 million or 8.2% for the nine months and quarter endedSeptember 30, 2022 , respectively, as compared to the prior year periods. These increases are primarily attributable to increases in payroll-related costs, training/conference costs, temporary help/contractors costs, travel costs and employment expenses, partially offset by decreases in legal and professional fees. General and administrative expenses, which includes corporate operating expenses, increased approximately$3.9 million or 9.1% and approximately$0.3 million or 2.5% for the nine months and quarter endedSeptember 30, 2022 , respectively, as compared to the prior year periods, primarily due to increases in payroll-related costs, legal and professional fees and training/conference costs. 38
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Depreciation expense, which includes depreciation on non-real estate assets, increased approximately$51.9 million or 8.4% for the nine months endedSeptember 30, 2022 , as compared to the prior year period, primarily as a result of additional depreciation expense on properties acquired in 2021 and 2022 and development properties placed in service during 2021, partially offset by lower depreciation from properties sold in 2021 and 2022. Depreciation expense decreased approximately$1.3 million or 0.6% for the quarter endedSeptember 30, 2022 as compared to the prior year period, primarily as a result of lower depreciation from properties sold in the fourth quarter of 2021 and 2022 and in-place leases for 2021 acquisitions being fully depreciated as ofDecember 31, 2021 , partially offset by additional depreciation expense on properties acquired in 2022 and development properties placed in service during 2021. Net gain on sales of real estate properties decreased approximately$283.3 million or 48.2% and approximately$167.4 million or 46.0% for the nine months and quarter endedSeptember 30, 2022 , respectively, as compared to the prior year periods, primarily as a result of a lower sales volume with the sale of three consolidated apartment properties in 2022 as compared to the sale of ten consolidated apartment properties in the same period in 2021. Interest and other income decreased approximately$20.4 million or 80.8% and approximately$0.3 million or 26.0% for the nine months and quarter endedSeptember 30, 2022 , respectively, as compared to the prior year periods. These decreases are primarily due to a gain of$23.6 million on the sale of various investment securities that occurred during 2021 but not during 2022, partially offset by increases in litigation settlement proceeds that occurred during 2022 but not during 2021. Other expenses decreased approximately$1.7 million or 15.7% for the nine months endedSeptember 30, 2022 as compared to the prior year period, primarily due to a decline in construction defect and litigation reserves recorded between 2022 and 2021, partially offset by increases in advocacy contributions and demolition/abatement costs. Other expenses increased approximately$0.3 million or 8.7% for the quarter endedSeptember 30, 2022 as compared to the prior year period, primarily due to increases in advocacy contributions and demolition/abatement costs, partially offset by construction defect and litigation reserves that occurred during 2021 but not during 2022. Interest expense, including amortization of deferred financing costs, increased approximately$14.6 million or 7.0% and approximately$4.3 million or 6.2% for the nine months and quarter endedSeptember 30, 2022 , respectively, as compared to the prior year periods. These increases are primarily due to higher overall interest rates and lower capitalized interest. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the nine months endedSeptember 30, 2022 was 3.67% as compared to 3.51% for the prior year period, and for the quarter endedSeptember 30, 2022 was 3.67% as compared to 3.46% for the prior year period. The Company capitalized interest of approximately$4.2 million and$12.4 million during the nine months endedSeptember 30, 2022 and 2021, respectively, and$1.9 million and$4.2 million during the quarters endedSeptember 30, 2022 and 2021, respectively.
Same Store Results
Properties that the Company owned and were stabilized for all of both of the nine months endedSeptember 30, 2022 and 2021 (the "Nine-Month 2022Same Store Properties "), which represented 72,869 apartment units, drove the Company's results of operations. Properties are considered "stabilized" when they have achieved 90% occupancy for three consecutive months. Properties are included in same store when they are stabilized for all of the current and comparable periods presented.
The following table provides comparative total same store results and statistics
for the Nine-Month 2022
September YTD 2022 vs. September YTD 2021
Same Store Results/Statistics Including 72,869 Same Store Apartment Units
$ in thousands (except for Average Rental Rate)
September YTD 2022 September YTD 2021
% Non- % % Non-
Residential Change Residential Change Total Change Residential Residential Total
Revenues $ 1,813,450 11.2 % $ 68,731 8.1 % $ 1,882,181 11.1 % Revenues $ 1,630,928 $ 63,575 $ 1,694,503
Expenses $ 583,185 3.0 % $ 17,802 3.1 % $ 600,987 3.0 % Expenses $ 566,210 $ 17,261 $ 583,471
NOI $ 1,230,265 15.5 % $ 50,929 10.0 % $ 1,281,194 15.3 % NOI $ 1,064,718 $ 46,314 $ 1,111,032
Average Average
Rental Rate $ 2,866 10.5 % Rental Rate $ 2,594
Physical Physical
Occupancy 96.5 % 0.6 % Occupancy 95.9 %
Turnover 33.6 % (1.6 %) Turnover 35.2 %
Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.
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The following table provides results and statistics related to our Residential same store operations for the nine months endedSeptember 30, 2022 and 2021: September YTD 2022 vs. September YTD 2021 Same Store Residential Results/Statistics by Market Increase (Decrease) from Prior Year Sept. YTD 22 Sept. YTD 22 Sept. YTD 22 Weighted % of Average Average Average Apartment Actual Rental Physical Sept. YTD 22 Rental Physical Markets/Metro Areas Units NOI Rate Occupancy % Turnover Rate Occupancy Turnover Los Angeles 14,662 20.0 %$ 2,725 96.9 % 28.3 % 11.4 % 0.2 % (3.8 %) Orange County 4,028 5.8 % 2,591 97.1 % 25.8 % 13.6 % (0.6 %) (1.4 %) San Diego 2,706 4.1 % 2,737 97.0 % 29.3 % 11.9 % (0.7 %) (5.2 %) Subtotal - Southern California 21,396 29.9 % 2,701 97.0 % 28.0 % 11.8 % 0.0 % (3.5 %) San Francisco 11,366 17.6 % 3,127 96.3 % 32.1 % 8.0 % 1.6 % (5.2 %) Washington, D.C. 14,186 16.2 % 2,432 96.9 % 33.8 % 4.7 % 0.6 % (2.5 %) New York 8,536 13.1 % 3,964 97.0 % 34.9 % 15.8 % 2.7 % 3.9 % Seattle 9,331 11.4 % 2,472 95.1 % 41.9 % 10.7 % (0.7 %) 2.5 % Boston 6,430 9.9 % 3,165 96.2 % 37.3 % 10.9 % 0.5 % (0.4 %) Denver 1,624 1.9 % 2,275 96.9 % 48.4 % 12.0 % 0.2 % 2.5 % Total 72,869 100.0 %$ 2,866 96.5 % 33.6 % 10.5 % 0.6 % (1.6 %) Note: The above table reflects Residential same store results only. Residential operations account for approximately 96.3% of total revenues for the nine months endedSeptember 30, 2022 . Despite geopolitical and economic uncertainties, demand to live in our apartment communities remained healthy, which our financial results reflected, as we continued to capture the gap between in-place rent levels and market rent levels. Demand for our apartments continues to support strong Physical Occupancy with pricing that is largely in-line with expectations, including modest use of Leasing Concessions. Key operating drivers for this performance during 2022 include:
•
Pricing - Pricing (net of Leasing Concessions) in 2022 has been the strongest in the Company's history, driven by continued improvement across the portfolio, especially inNew York . After this unprecedented 2022 growth, pricing began to moderate in lateAugust 2022 , which is typical, with slightly greater than anticipated price sensitivity inSeattle andSan Francisco as of late. The use of Leasing Concessions has also declined significantly from its peak inFebruary 2021 .
•
Physical Occupancy - Physical Occupancy of 96.5% for the nine months ended
•
Percentage of Residents Renewing and Turnover - We continue to see a high
Percentage of Residents Renewing in our portfolio, which we believe reflects
both the strength of demand and quality of our product. The Percentage of
Residents Renewing has been strong at 53.8% for the third quarter of 2022.
Turnover remains low at 33.6% for the nine months ended
In addition to these stronger fundamentals, bad debt, net has moderated during
the nine months ended
Transaction activity has slowed as buyers and sellers adjust their expectations
to a volatile economic climate and rising interest rates. While this type of
environment can be challenging, the Company has traditionally found investment
opportunities during periods of market dislocation as our ability to move
quickly and our relatively low cost of capital creates flexibility that can
provide us a competitive advantage.
Long-term, we expect elevated single family home ownership costs, positive
household formation trends and the overall deficit in housing across the country
to buffer the impact on our business from potential economic weakness. We also
see our affluent resident base as being more resilient to rising inflation due
to higher levels of disposable income and lower relative rent-to-income ratios.
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Liquidity and Capital Resources
With approximately$2.3 billion in readily available liquidity, a strong balance sheet, limited near-term maturities, very strong credit metrics and ample access to capital markets, the Company believes it is well positioned to meet its future obligations and opportunities. See further discussion below and Note 14 in the Notes to Consolidated Financial Statements for discussion of events, if any, subsequent toSeptember 30, 2022 .
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