01—Abstract
Summary
Summary of the 10-K filed February 24, 2011. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) closed 2010 with improving operating fundamentals after a difficult 2009.
Total revenues rose to $1.996 billiona from $1.857 billion, and same-store NOI declined 0.8% to $1.074 billion, while same-store revenues fell 0.1% and occupancy rose to 94.8%. Net income available to common shares was $269.2 million, or $0.95 per diluted share, down from $1.27 in 2009, mainly due to lower property sale gains and a $45.4 million land impairment. Management reports that Normalized FFO available to common shares and units rose 3.2% to $682.4 million, and the new dividend policy targets roughly 65% of Normalized FFO, with 2011 dividends guided at $1.56 to $1.62 per share.
Balance sheet and liquidity are the key investor themes. Total debt was $9.95 billionb with a 38.4% debt-to-total-market-capitalization ratio, and about 82.5% of debt is fixed rate at a weighted average of 5.73%. The company issued $600 million of 4.75% ten-year notes and raised roughly $292 million through its ATM equity program in 2010, plus about $155 million in early 2011.
Cash rose to $431 millionc, and the $1.425 billion revolver had about $1.28 billion available at year end. Near-term maturities are substantial, with $1.67 billion due in 2011 including a $500 million term loan, which management expects to fund from dispositions, new borrowings and equity. Management expects net dispositions in 2011 after a 2010 in which it was a net buyer, with guidance for 4% to 5% same-store revenue growth, 5% to 7.5% same-store NOI growth, and 1% to 2% expense growth.
Risks include the pending Fair Housing/ADA class action covering about 300 properties, the Prospect Towers garage collapse costs, and concentration in coastal markets. Dependence on Samuel Zell and significant shareholder influence are also noted.
02—Key points
Key Highlights
- Total revenues increased 7.5% to $1.996 billion in 2010, but diluted EPS fell to $0.95 from $1.27 due to lower gains on property sales and a $45.4 million land impairment.
- Same-store NOI declined 0.8% to $1.074 billion while same-store occupancy improved to 94.8%, and management guides to 5.0% to 7.5% same-store NOI growth for 2011.
- Normalized FFO available to common shares and units grew 3.2% to $682.4 million, and the dividend policy targets about 65% of Normalized FFO, with 2011 payouts guided to $1.56 to $1.62 per share.
- Total debt of $9.95 billion gives a 38.4% debt-to-total-market-cap ratio, with 82.5% fixed rate debt at a 5.73% weighted average rate and a 5.9-year average fixed maturity.
- The company issued $600 million of 4.75% ten-year unsecured notes at a 5.09% all-in rate and raised about $292 million via ATM equity in 2010, with cash of $431 million and $1.28 billion available on the revolver at year-end.
- Heavy 2011 maturities of $1.67 billion, including a $500 million term loan extendable to 2012, are a refinancing and liquidity watch item.
- Management expects to be a net seller in 2011, with $1.25 billion of targeted dispositions versus $1.0 billion of acquisitions, and notes a pending Fair Housing/ADA lawsuit covering about 300 properties.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Vivmark Residential kept $0.15.
- Revenue$2.00B100.0%
- Cost of revenue−$816.0M40.9%
- Gross profit$1.18B59.1%
- Operating costs−$831.4M41.7%
- Operating income$348.2M17.4%
- Interest, other & tax−$52.2M2.6%
- Net income$296.0M14.8%
Where FY2010 revenue went
$2.00B- Operating costs: $831.4M, 42% of revenue
- Cost of revenue: $816.0M, 41% of revenue
- Net income: $296.0M, 15% of revenue
- Interest, other & tax: $52.2M, 2.6% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 24, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $2.00B$1.86B | +7.5% |
| Gross Profit | $1.18B$1.10B | +6.9% |
| Operating Expenses | $1.33B$1.21B | +9.8% |
| Operating Income | $348.21M$432.64M | −19.5% |
| Interest Expense | $460.75M$493.28M | −6.6% |
| Net Income | $295.98M$382.03M | −22.5% |
| EPS (Basic) | $0.95$1.27 | −25.1% |
| EPS (Diluted) | $0.95$1.27 | −25.1% |
| Shares Outstanding (Basic) | 282.89M273.61M | +3.4% |
| Shares Outstanding (Diluted) | 282.89M273.61M | +3.4% |
05—Questions
Frequently Asked Questions
Why did EQR's EPS decline in 2010 even though revenue grew?
Diluted EPS fell to $0.95 from $1.27 mainly because 2010 gains on property sales were $37.3 million lower than in 2009, and impairment charges rose $34.3 million to $45.4 million on two land parcels held for development. Higher depreciation, which rose about $97 million, also weighed on net income, while property revenue growth from acquisitions and lease-up partially offset these effects.
Is the dividend sustainable at the current level?
The company now targets an annual dividend of about 65% of Normalized FFO, which it says makes over-distribution less likely. Normalized FFO available to common shares and units was $682.4 million in 2010, and the 2011 dividend is guided to $1.56 to $1.62 per share. Management also warns that the policy could cause quicker dividend cuts if operating results weaken.
How much refinancing risk does EQR face in the next few years?
Debt maturities total $1.67 billion in 2011 and $816 million in 2012, and the company's $1.425 billion revolver matures in February 2012. Management believes cash, revolver availability, disposition proceeds and 2011 equity issuance will cover funding needs through 2011, and it has about $12.6 billion of unencumbered real estate that could support secured borrowing if needed.
What are the main legal and operating risks disclosed?
The company faces a housing discrimination lawsuit filed in 2006 alleging about 300 properties violate Fair Housing Act and ADA accessibility rules, with no loss accrued. Other risks include concentration in high-cost coastal markets, insurance deductibles and exclusions, dependence on key executives such as Samuel Zell and David Neithercut, and significant influence by Zell-affiliated security holders.
06—Continue