How did EQR's earnings and cash flow change in 1997?

Total revenues increased to $747.3 million from $478.4 million, and net income rose to $176.6 million from $101.6 million. Net income available to common shares was $117.6 million, or $1.76 per diluted share, versus $1.69 in 1996. FFO available to common shares and OP Units grew 69% to $270.8 million. Net cash from operating activities was $331.1 million, up from $210.9 million. Much of the increase came from acquisitions, particularly the Wellsford and EWR mergers, which were only partly included for the year due to their mid-year and late-year closing dates.

How leveraged is EQR, and is its debt manageable?

Total debt was about $2.95 billion at December 31, 1997, comprising $1.58 billion of mortgage notes and $1.13 billion of unsecured notes, plus a $235 million line of credit. Management estimates debt-to-total market capitalization at about 33%, below its 50% policy limit. About $912.7 million is floating rate, and roughly $723 million of mortgage debt is tax-exempt bond financing. The company has interest rate protection agreements on some notes, and its effective interest cost fell to 7.5% in 1997 from 7.87% in 1996. Floating-rate exposure remains a risk if rates rise.

What drove EQR's 1997 growth, and what is planned for 1998?

Growth came from the Wellsford Merger (about $1 billion, 72 properties) and the EWR Merger (about $1.2 billion, 53 properties), both paid largely in common shares, along with other acquisitions totaling about $4.1 billion for 252 properties in 1997. For 1998, management expects to acquire 10,000 to 15,000 units, with no assurance this will be achieved. It also plans to sell up to 2,500 units and has about $94.5 million budgeted for capital expenditures, including $29.7 million for improvements at recently acquired properties. Through mid-March 1998, the company had already bought 12 properties for about $158 million.

What risks could affect shareholders?

Key risks include substantial floating-rate and tax-exempt debt, which exposes EQR to rising interest costs, and refinancing risk on maturing debt. Control is concentrated among Samuel Zell and affiliates and Starwood-related holders, who together own roughly 6% of shares on a fully exchanged basis and whose consent is required for certain partnership agreement amendments. The 5% ownership limit, staggered board, and preferred share authorization could deter takeovers. Management also noted that lower medical insurance costs that helped 1997 results are not expected to be sustainable. Environmental liability and bond compliance requirements on certain properties are additional considerations.

Is EQR's dividend supported by its cash flow?

Distributions declared per common share were $2.55 in 1997, up from $2.40 in 1996, and management declared a $0.67 quarterly distribution for Q1 1998. The company considers cash from operations adequate to cover distributions, and FFO of $270.8 million comfortably exceeded the $174.1 million of common distributions declared in 1997. Tax treatment for 1997 was largely ordinary income ($2.24 per share), with $0.26 return of capital and $0.05 long-term capital gain. Future increases will depend on management's ability to grow FFO from existing properties and acquisitions.

VMRK 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 20, 1998. Cited figures are marked; the original filing is the authoritative source.

Equity Residential Properties Trust (EQR) closed 1997 as the largest publicly traded multifamily REIT, following two transformative mergers: Wellsford Residential (completed May 30, 1997, ~$1 billion^a) and Evans Withycombe Residential (completed December 23, 1997, ~$1.2 billion).

At year-end the portfolio comprised 463 controlled properties with 135,200 units across 34 states, plus 26 additional properties (5,267 units) held through mortgage and partnership investments. Average occupancy was 95% and the average rent was $696^b per unit per month. Total revenues rose 56% to $747.3 million, net income reached $176.6 million, and net income available to common shares was $117.6 million, or $1.79 per share basic and $1.76 diluted.

FFO available to common shares and OP Units grew 69% to $270.8 million^c. The balance sheet expanded sharply, with total assets rising to $7.09 billion from $2.99 billion and total debt reaching $2.95 billion. Management reports debt-to-total market capitalization of roughly 33%, well inside its stated 50% ceiling.

Growth was financed heavily with equity: 1997 saw substantial common share offerings, several preferred issuances (Series D, E, F, and G), and new unsecured notes. Early 1998 activity continued this pattern, including a $195.3 million^d January common offering, a $95 million February offering, and a $1 billion shelf registration for both equity and debt. Management guided to acquiring 10,000 to 15,000 units in 1998, and the company declared a $0.67 quarterly common distribution for Q1 1998, up from $0.625 earlier in 1997.

Investors should weigh the strong growth and rising FFO against several risks disclosed in the filing: a large proportion of floating-rate and tax-exempt debt ($912.7 million, including the $235 million line of credit), concentrated influence by Samuel Zell and Starwood-affiliated holders, the 5% ownership limit and staggered board provisions, and management's own statement that 1997's low medical insurance costs were not a sustainable trend. The Year 2000 issue was assessed as not material.

02—Key points

Key Highlights

Scale: 463 controlled properties and 135,200 apartment units across 34 states at December 31, 1997, making EQR the largest publicly traded multifamily REIT by units and revenue.
Growth through mergers: The Wellsford (~$1.0B, 72 properties) and EWR (~$1.2B, 53 properties plus 3 in development) mergers roughly doubled the portfolio, with 252 properties and 68,830 units acquired in 1997 overall.
Earnings and FFO: Total revenues rose 56% to $747.3M; net income available to common shares was $117.6M ($1.79 basic EPS, $1.76 diluted); FFO available to common shares and OP Units rose 69% to $270.8M.
Balance sheet expansion: Total assets reached $7.09B (up from $2.99B) and total debt $2.95B, with debt-to-total market capitalization of approximately 33% against a 50% policy ceiling.
Capital raising: Issued roughly 11.9M common shares for $536.8M net in 1997, plus $473.1M in preferred offerings (Series D and G) and $345.9M in unsecured notes; early 1998 added about $195M and $95M in common equity offerings.
Operating metrics: Average occupancy of 95% and average rent of $696 per unit per month; management is pursuing 10,000 to 15,000 additional units in 1998 and declared a $0.67 Q1 1998 common distribution.
Key risks: About $912.7M of floating-rate debt (including the $235M line of credit at 6.46%), concentrated control by Samuel Zell and Starwood affiliates, REIT ownership limits and anti-takeover provisions, and management's view that 1997's medical cost savings are not sustainable.

03—Questions

Frequently Asked Questions

How did EQR's earnings and cash flow change in 1997?
Total revenues increased to $747.3 million from $478.4 million, and net income rose to $176.6 million from $101.6 million. Net income available to common shares was $117.6 million, or $1.76 per diluted share, versus $1.69 in 1996. FFO available to common shares and OP Units grew 69% to $270.8 million. Net cash from operating activities was $331.1 million, up from $210.9 million. Much of the increase came from acquisitions, particularly the Wellsford and EWR mergers, which were only partly included for the year due to their mid-year and late-year closing dates.
How leveraged is EQR, and is its debt manageable?
Total debt was about $2.95 billion at December 31, 1997, comprising $1.58 billion of mortgage notes and $1.13 billion of unsecured notes, plus a $235 million line of credit. Management estimates debt-to-total market capitalization at about 33%, below its 50% policy limit. About $912.7 million is floating rate, and roughly $723 million of mortgage debt is tax-exempt bond financing. The company has interest rate protection agreements on some notes, and its effective interest cost fell to 7.5% in 1997 from 7.87% in 1996. Floating-rate exposure remains a risk if rates rise.
What drove EQR's 1997 growth, and what is planned for 1998?
Growth came from the Wellsford Merger (about $1 billion, 72 properties) and the EWR Merger (about $1.2 billion, 53 properties), both paid largely in common shares, along with other acquisitions totaling about $4.1 billion for 252 properties in 1997. For 1998, management expects to acquire 10,000 to 15,000 units, with no assurance this will be achieved. It also plans to sell up to 2,500 units and has about $94.5 million budgeted for capital expenditures, including $29.7 million for improvements at recently acquired properties. Through mid-March 1998, the company had already bought 12 properties for about $158 million.
What risks could affect shareholders?
Key risks include substantial floating-rate and tax-exempt debt, which exposes EQR to rising interest costs, and refinancing risk on maturing debt. Control is concentrated among Samuel Zell and affiliates and Starwood-related holders, who together own roughly 6% of shares on a fully exchanged basis and whose consent is required for certain partnership agreement amendments. The 5% ownership limit, staggered board, and preferred share authorization could deter takeovers. Management also noted that lower medical insurance costs that helped 1997 results are not expected to be sustainable. Environmental liability and bond compliance requirements on certain properties are additional considerations.
Is EQR's dividend supported by its cash flow?
Distributions declared per common share were $2.55 in 1997, up from $2.40 in 1996, and management declared a $0.67 quarterly distribution for Q1 1998. The company considers cash from operations adequate to cover distributions, and FFO of $270.8 million comfortably exceeded the $174.1 million of common distributions declared in 1997. Tax treatment for 1997 was largely ordinary income ($2.24 per share), with $0.26 return of capital and $0.05 long-term capital gain. Future increases will depend on management's ability to grow FFO from existing properties and acquisitions.

04—Continue

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