01—Abstract
Summary
Summary of the 10-K filed March 8, 2006. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) closed 2005 as the largest publicly traded owner of multifamily apartments, with 926 properties and 197,404 units across 31 states and D.C. as of December 31, 2005.
Net income rose to $861.8 milliona from $472.3 million, but most of that jump came from non-recurring gains: $697.7 million on discontinued-operation property and condominium sales. Income from continuing operations was a more modest $152.5 million, up from $117.8 million. Same-store NOI grew 2.8% on 3.9% revenue growth, with same-store occupancy at 94.1%.
The balance sheet shows total assets of $14.1 billionb and total debt of $7.6 billion, giving a 37% consolidated debt-to-total market capitalization ratio. Debt is mostly fixed rate (about $5.7 billion at a 6.32% weighted average). Management also flagged near-term maturities of $774 million in 2006 and $1.2 billion in 2008, plus a $1.0 billion revolver and an additional $400 million unsecured note issued in January 2006.
Subsequent events include a $148.7 millionc acquisition and $230.2 million of dispositions, and a possible sale of the Lexford division, which has 299 properties and 27,390 units. For investors, the key takeaways are that reported net income is heavily inflated by one-time asset sale gains, that underlying operating growth is steady but modest, and that leverage and refinancing needs remain meaningful. Management guided 2006 same-store NOI growth of 4.5% to 6.5% and said 2006 G&A would be about $50 million.
02—Key points
Key Highlights
- Net income of $861.8M in 2005 (vs. $472.3M in 2004), driven mainly by $697.7M in gains on sales of discontinued operations; income from continuing operations was $152.5M.
- Same-store NOI grew 2.8% in 2005 (revenue +3.9%, expenses +5.6%), with same-store occupancy improving to 94.1% from 93.5%.
- Portfolio of 926 properties and 197,404 units in 31 states and D.C.; 834 wholly owned properties account for 175,501 units.
- Total debt of $7.59B at a 5.76% weighted average rate; consolidated debt-to-total market capitalization of 37%; interest coverage of 2.84x under the most restrictive unsecured covenant.
- Disposed of $2.05B in assets (50 rental properties, 2,241 condos, and land) and acquired $2.5B of apartment properties in 2005, a heavy recycling year.
- 2006 guidance: same-store NOI growth of 4.5% to 6.5%, same-store revenue growth of 4.75% to 5.75%, and G&A near $50M.
- Possible sale of the Lexford division (299 properties, 27,390 units) announced March 2, 2006; no transaction approved by the Board yet.
03—Questions
Frequently Asked Questions
Why is net income so much higher than income from continuing operations?
Net income includes $697.7 million of gains on sales of discontinued operations, mostly from selling 50 rental properties and condominium units in 2005. Those gains are one-time in nature. Income from continuing operations, which reflects the ongoing apartment business, was $152.5 million, or $0.51 per diluted share before gains.
How leveraged is EQR and when does its debt come due?
Total debt was $7.59 billion at year-end 2005, equal to 37% of total market capitalization. About $774 million matures in 2006 and $1.18 billion in 2008, including $554 million on the long-term revolver. Management stated it expects to meet short-term needs through operating cash flow and its revolving credit facilities. Refinancing risk and higher variable rates are noted as risks in the filing.
What drove same-store performance and what is expected for 2006?
Same-store revenue rose 3.9% on lower resident concessions and modestly higher rents and occupancy. Expenses rose 5.6% on payroll, utilities, and real estate taxes, so same-store NOI grew only 2.8%. For 2006, management forecasts same-store revenue growth of 4.75% to 5.75%, expense growth of 4.25% to 5.25%, and NOI growth of 4.5% to 6.5%.
What are the key governance and structural risks for shareholders?
Chairman Samuel Zell and affiliates hold significant common shares and OP Units, and their consent is required for certain amendments to the partnership agreement, giving them influence over the company. The Board opted out of Maryland's business combination restrictions for transactions involving Zell and his affiliates. A 5% ownership limit and preferred share authority can deter takeovers. EQR also relies on REIT status, and failure to maintain it would trigger significant corporate taxes.
04—Continue