10-QPeriod: Q2 FY2017

EQUITY RESIDENTIAL Quarterly Report for Q2 Ended Jun 30, 2017

Filed August 4, 2017For Securities:EQR

Summary

Equity Residential (EQR) reported its Q2 2017 results, highlighting steady performance in its core coastal markets, though with some regional variations. The company is strategically repositioning its portfolio by acquiring properties in prime locations and disposing of less strategic assets, aiming for approximately $500 million in both acquisitions and dispositions for the full year 2017. Same-store revenue growth was 2.3% for the first half of the year, exceeding expectations and leading to an upward revision of full-year guidance. While overall rental income saw a slight increase, consolidated Net Operating Income (NOI) experienced a minor decrease primarily due to significant property dispositions in the prior year. However, the company's focus on resident retention, reflected in strong renewal rates and declining turnover, is a key positive. Management is also moderating development spending due to high land costs and lower projected returns, budgeting only $100 million for new development starts in 2017. The company maintained strong liquidity, with a significant revolving credit facility, and successfully completed a $700 million unsecured note offering in August 2017, further strengthening its capital position.

Financial Highlights

33 data points
Beta

Revenue

$612.48M

Net Income

$196.04M

32.0% Net Margin

EPS (Diluted)

$0.53

Total Assets

$20.64B

Cash & Equivalents

$37.72M

Free Cash Flow

$255.21M

Financial Statements
Beta
Revenue$612.48M
Operating Expenses$401.93M
Operating Income$210.55M
Interest Expense$91.22M
Net Income$196.04M
EPS (Basic)$0.53
EPS (Diluted)$0.53
Shares Outstanding (Basic)366.82M
Shares Outstanding (Diluted)382.69M

Key Highlights

  • 1Same-store revenue growth for the first half of 2017 was 2.3%, exceeding expectations and prompting an increase in full-year guidance to 1.75%-2.25%.
  • 2The company is actively managing its portfolio, with approximately $266.7 million in property dispositions and $57.0 million in acquisitions during the first half of 2017, targeting $500 million for each category annually.
  • 3Development spending is being curtailed, with only $100 million budgeted for new development starts in 2017, a decrease from previous levels due to market conditions and returns.
  • 4Focus on resident retention yielded strong renewal rates (4.8% in Q2 2017) and a decline in turnover, contributing to stable occupancy (95.9% for same-store properties).
  • 5The company strengthened its liquidity by completing a $400 million ten-year note offering and a $300 million thirty-year note offering in August 2017.
  • 6Same-store expense growth was 3.9% for the first half, driven by increases in real estate taxes and payroll costs, leading to a revised full-year expense growth forecast of 3.25%-4.0%.
  • 7Despite a slight dip in consolidated NOI due to prior year dispositions, same-store NOI saw a 1.7% increase, outperforming expectations.

Frequently Asked Questions

Equity Residential is strategically repositioning its portfolio by acquiring properties in urban and high-density suburban coastal gateway markets where demand is strong, and disposing of properties in less dense suburban markets or those that are functionally or locationally challenged. For the full year 2017, the company targets approximately $500 million in consolidated rental property acquisitions and $500 million in consolidated rental property dispositions.

The company has reduced its development spending and starts due to high land prices and lower projected returns. For the six months ended June 30, 2017, no new development projects were started, and the company has budgeted approximately $100 million for new development projects to start in the full year 2017. The majority of development spending is focused on projects currently under construction.

Same-store revenue growth for the first half of 2017 was 2.3%, exceeding expectations. The company now anticipates full-year same-store revenue increases ranging from 1.75% to 2.25%. Key drivers include an increase in average rental rates, a focus on resident retention leading to strong renewal rates (4.8% in Q2 2017), and declining turnover, which collectively support high occupancy levels (95.9% for same-store properties).

Same-store expenses increased by 3.9% for the first half of 2017, with an anticipated full-year increase of 3.25% to 4.0%. Major expense drivers include a 4.2% increase in real estate taxes (particularly in Boston and Seattle), a 6.3% increase in on-site payroll costs (due to increased staffing and competition), and higher utility and repair/maintenance costs. Some of these increases are partially offset by decreases in insurance costs.