10-QPeriod: Q3 FY2016

EQUITY RESIDENTIAL Quarterly Report for Q3 Ended Sep 30, 2016

Filed November 2, 2016For Securities:EQR

Summary

Equity Residential (EQR) reported its third-quarter 2016 results, marked by a significant strategic portfolio repositioning. The company has substantially completed its decade-long shift from lower-barrier to entry markets towards high-barrier, coastal gateway cities. This transition was largely driven by the sale of the substantial Starwood Portfolio and other 2016 dispositions, which generated significant proceeds. A substantial portion of these proceeds was returned to shareholders through two special dividends totaling $11.00 per share, and the remainder was used to reduce debt, maintaining a leverage-neutral transaction. Operationally, EQR's same-store revenue growth was positive, though moderating in some markets like New York due to increased supply and concessions. Expenses, particularly real estate taxes and on-site payroll, saw increases. The company continues to focus on balancing occupancy and rental rates in its core markets, leveraging its strong brand and resident service to maintain high occupancy levels despite new supply in certain submarkets. Looking ahead, EQR anticipates continued pressure on revenue growth in 2017 due to elevated new supply, but sees long-term demand supported by favorable demographics.

Financial Highlights

34 data points
Beta

Revenue

$606.07M

Net Income

$208.32M

34.4% Net Margin

EPS (Diluted)

$0.56

Total Assets

$21.30B

Cash & Equivalents

$517.59M

Free Cash Flow

$344.25M

Financial Statements
Beta
Revenue$606.07M
Operating Expenses$396.70M
Operating Income$209.37M
Interest Expense$86.35M
Net Income$208.32M
EPS (Basic)$0.57
EPS (Diluted)$0.56
Shares Outstanding (Basic)365.11M
Shares Outstanding (Diluted)382.37M

Key Highlights

  • 1Completed a major portfolio repositioning by selling approximately 27,831 units in 2016, including the substantial Starwood Portfolio, exiting markets like South Florida and Denver.
  • 2Returned approximately $4.1 billion to shareholders through two special dividends ($8.00 in March and $3.00 in October 2016).
  • 3Used significant sale proceeds to reduce debt by approximately $2.0 billion, enhancing credit metrics.
  • 4Same-store revenue growth for 2016 is projected between 3.6%-3.9%, with same-store Net Operating Income (NOI) growth projected between 3.8%-4.1%.
  • 5Experienced increased operating expenses, notably higher real estate taxes (estimated 6.0% increase for 2016) and on-site payroll costs (estimated 3.0% increase for 2016).
  • 6Average rental rates increased across the portfolio, with notable strength in Los Angeles and Seattle, while New York and San Francisco faced pricing pressures due to new supply and concessions.
  • 7Maintained high portfolio occupancy, with same-store occupancy at 96.3% and total portfolio occupancy at 94.7% as of September 30, 2016.

Frequently Asked Questions

The primary driver was the company's significant disposition activity, including the sale of the Starwood Portfolio. This resulted in substantial gains on property sales and a large decrease in consolidated rental income and NOI due to the reduced asset base, offset by debt reduction and special dividend payments to shareholders.

Equity Residential has completed a decade-long strategic shift to focus exclusively on high-barrier to entry, coastal gateway markets. This involved divesting assets in lower-barrier markets and reinvesting in properties in prime locations in cities like Boston, New York, Washington D.C., Southern California, San Francisco, and Seattle.

While overall occupancy remains strong (96.3% same-store as of Sept 30, 2016), the company anticipates lower revenue growth in 2017 compared to 2016. This is due to increased supply in many of its markets, which is expected to create pricing pressure. However, the company believes long-term demand in its core markets remains strong due to favorable demographics and increasing preference for rental housing.

Same-store operating expenses increased by 2.5% year-over-year for the nine months ended September 30, 2016. Key drivers of this increase included higher real estate taxes (up 6.0%), increased on-site payroll costs (up 2.8% due to staffing and wage competition), and higher leasing and advertising expenses, particularly in San Francisco and New York, to combat new supply. Utility costs, however, decreased by 5.9%.