Why did net income rise while operating performance weakened?

Net income increased to $543.8M from $421.3M mainly because of $310.7M in net gains on sales of discontinued operations, up about $206M year over year. Income from continuing operations actually declined to $211.6M from $246.8M, reflecting lower same-store revenue, higher operating expenses and higher depreciation. Investors focused on recurring earnings should look at FFO, which fell 11.0%.

How did the rental market environment affect EQR in 2003?

Management reported lower overall physical occupancy, increased concessions and lower rental rates for both new and renewal residents. The 10-K notes historically low mortgage rates and increased single-family home sales as competitive pressures, and the company says it has seen a trend of declining rents over the last two years. Management's 2004 same-store assumptions expect revenue to be roughly flat to slightly up, with NOI between a 4.0% decline and a 0.5% gain.

How strong is EQR's balance sheet and how much debt matures soon?

Debt to total market capitalization was 35% at year-end 2003, below the 50% policy limit. Total debt was $5.36B, of which $4.61B was fixed rate at 6.65% and $750M was floating rate at 2.24%. Scheduled maturities are $515M in 2004 and $605M in 2005, including $300M of unsecured notes putable in 2005. Floating-rate exposure is modest, with a 10% rate move affecting annual interest expense by about $1.7M.

What are the key legal and governance risks?

The company faces a Florida state class action alleging certain lease-breach fees were illegal. Management says it is contesting the case vigorously and believes it will not have a material adverse effect, though the outcome is uncertain. On governance, Chairman Samuel Zell and affiliates hold about 3.2% of common shares and have consent rights over certain partnership agreement amendments, giving them substantial influence over the company.

What is the outlook for distributions and capital allocation?

Distributions were $1.73 per common share in 2003, unchanged from 2002, and the company paid $510.7M in common and OP unit distributions. The company may repurchase up to $85M of common shares under an existing buyback authorization but did not buy back any shares in 2003. Capital spending is expected at about $160M for replacements and building improvements in 2004. Management anticipates $800M in both acquisitions and dispositions for 2004.

VMRK 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.

Equity Residential (EQR), the largest publicly traded multifamily REIT, closed fiscal 2003 with 968 properties and 207,506 units across 34 states, with 849 wholly owned properties.

Same-store performance weakened: same-store revenue fell 2.3%^a and same-store NOI fell 7.0% year over year, with same-store occupancy down to 93.0% from 93.7%. Management attributed the decline to lower occupancy, higher concessions and lower rental rates, while expenses rose 5.8%. For 2004, management guided to same-store NOI change of (4.0%) to 0.5%, a revenue change of (0.75%) to 1.50%, and expense growth of 3.0% to 4.0%.

Reported net income rose to $543.8 million^b from $421.3 million, but this was driven largely by $310.7 million of gains on property sales rather than operations. Income from continuing operations fell to $211.6 million from $246.8 million, and diluted FFO available to common shares and OP units declined 11.0% to $640.4 million. Management also reported $1.07 billion of disposition proceeds in 2003 against $595 million of acquisitions, reflecting a net portfolio shrinkage of 96 dispositions versus 17 acquisitions.

Balance sheet metrics remained conservative. Debt to total market capitalization was 35% against a policy ceiling of 50%, total debt was $5.36 billion^c at a weighted average rate of 6.08%, and 2004 scheduled maturities were $515 million.

Key risks include declining rents and increased concessions, a pending class action over resident lease-breach fees in Florida, a 2004 interest-rate sensitivity of roughly $1.7 million^d per 10% change in floating-rate debt, and significant influence by Chairman Samuel Zell's affiliates. Distributions were held flat at $1.73 per share.

02—Key points

Key Highlights

Same-store NOI declined 7.0% in 2003 on a 2.3% revenue decline, with same-store occupancy falling to 93.0% from 93.7%
Net income rose to $543.8M, but this was mainly driven by $310.7M in gains on property sales; income from continuing operations fell to $211.6M from $246.8M
FFO available to common shares and OP units decreased 11.0% to $640.4M, or about $1.73 per share in distributions held flat
The company sold 96 properties for about $1.1B in net proceeds and acquired 17 properties for $595M, shrinking the portfolio to 968 properties and 207,506 units
Leverage is conservative: debt to total market capitalization is 35% (policy below 50%), with total debt of $5.36B at a 6.08% weighted average rate
2004 guidance calls for same-store NOI between (4.0%) and +0.5%, with revenue change of (0.75%) to +1.50% and expense growth of 3.0% to 4.0%
Risks include a Florida class action over lease-breach fees, a $515M debt maturity in 2004, and significant influence by Chairman Samuel Zell's affiliates

03—Questions

Frequently Asked Questions

Why did net income rise while operating performance weakened?
Net income increased to $543.8M from $421.3M mainly because of $310.7M in net gains on sales of discontinued operations, up about $206M year over year. Income from continuing operations actually declined to $211.6M from $246.8M, reflecting lower same-store revenue, higher operating expenses and higher depreciation. Investors focused on recurring earnings should look at FFO, which fell 11.0%.
How did the rental market environment affect EQR in 2003?
Management reported lower overall physical occupancy, increased concessions and lower rental rates for both new and renewal residents. The 10-K notes historically low mortgage rates and increased single-family home sales as competitive pressures, and the company says it has seen a trend of declining rents over the last two years. Management's 2004 same-store assumptions expect revenue to be roughly flat to slightly up, with NOI between a 4.0% decline and a 0.5% gain.
How strong is EQR's balance sheet and how much debt matures soon?
Debt to total market capitalization was 35% at year-end 2003, below the 50% policy limit. Total debt was $5.36B, of which $4.61B was fixed rate at 6.65% and $750M was floating rate at 2.24%. Scheduled maturities are $515M in 2004 and $605M in 2005, including $300M of unsecured notes putable in 2005. Floating-rate exposure is modest, with a 10% rate move affecting annual interest expense by about $1.7M.
What are the key legal and governance risks?
The company faces a Florida state class action alleging certain lease-breach fees were illegal. Management says it is contesting the case vigorously and believes it will not have a material adverse effect, though the outcome is uncertain. On governance, Chairman Samuel Zell and affiliates hold about 3.2% of common shares and have consent rights over certain partnership agreement amendments, giving them substantial influence over the company.
What is the outlook for distributions and capital allocation?
Distributions were $1.73 per common share in 2003, unchanged from 2002, and the company paid $510.7M in common and OP unit distributions. The company may repurchase up to $85M of common shares under an existing buyback authorization but did not buy back any shares in 2003. Capital spending is expected at about $160M for replacements and building improvements in 2004. Management anticipates $800M in both acquisitions and dispositions for 2004.

04—Continue

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