01—Abstract
Summary
Summary of the 10-K filed February 24, 2012. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) and its operating partnership, ERP Operating Limited Partnership (ERPOP), report a strong 2011 driven by portfolio repositioning and rising apartment fundamentals.
Diluted EPS was $2.95a versus $0.95 in 2010, largely due to $1.5 billion of consolidated property dispositions (47 properties, 14,345 units) that produced an $826.5 million gain on sale. Underlying operations also improved: same-store revenue rose 5.0% and same-store NOI rose 7.7%, with average occupancy of about 94.2%. Normalized FFO available to common shares and units grew 11.3% to $759.7 million, and the company expects 2012 same-store revenue growth of 5.0% to 6.0% and NOI growth of 6.5% to 8.5%.
The balance sheet is conservatively structured for the sector. Total debt was $9.7 billionb at a 5.01% weighted average rate, with 86.2% fixed-rate. The debt-to-total market capitalization ratio was 35.1%, and about 68.3% of the $20.4 billion real estate investment was unencumbered.
The company issued $1.0 billionc of 10-year 4.625% notes, raised $201.9 million through its at-the-market equity program, and expanded its revolver to $1.75 billion. Liquidity appears ample, with roughly $1.22 billion available under the revolver at year-end and about $384 million of cash. The key forward-looking item is the pending Archstone acquisition.
EQR has the exclusive right, through April 19, 2012, to buy the remaining 26.5% interest in Archstone for at least $1.485 billiond, and it has arranged a $1.0 billion bridge facility (since replaced by the revolver increase and a $500 million delayed-draw term loan). Investors should weigh the growth potential of this deal against leverage and execution risk. Other risks include dependence on coastal and high-barrier markets, New York City 421a tax abatement burn-off that raises real estate taxes 4% to 5% in 2012, a pending Fair Housing/ADA lawsuit covering about 300 properties, and general REIT-qualification and interest-rate exposure.
02—Key points
Key Highlights
- FFO and earnings: Diluted EPS of $2.95 (vs. $0.95 in 2010) was driven mainly by a $826.5 million gain on property sales; Normalized FFO available to common shares and units rose 11.3% to $759.7 million.
- Same-store performance: Same-store revenues rose 5.0% and same-store NOI rose 7.7% in 2011, with average rental rates up 4.5% and occupancy at 95.2% for the same-store pool.
- Portfolio repositioning: The company sold 47 consolidated properties for $1.5 billion and acquired 21 properties for $1.4 billion, moving capital from non-core to high-barrier-to-entry core markets.
- Capital structure: Total debt of $9.7 billion at a 5.01% weighted average rate, 86.2% fixed-rate, 35.1% debt-to-total market capitalization, and 68.3% of real estate unencumbered.
- Capital raising: Issued $1.0 billion of 4.625% ten-year notes (about 6.2% all-in effective rate after swap terminations) and $201.9 million of common equity through the ATM program, with a further $123.6 million raised in early 2012.
- 2012 guidance: Same-store revenue growth of 5.0% to 6.0%, NOI growth of 6.5% to 8.5%, expenses up 1.5% to 2.5%, and a dividend of $1.74 to $1.81 per share (about 65% of Normalized FFO).
- Archstone pursuit: Exclusive right to buy the remaining 26.5% Archstone interest for at least $1.485 billion through April 19, 2012, with an $80.0 million break-up fee exposure if Lehman exercises its right of first offer.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 24, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $1.53B$2.00B | −23.6% |
| Operating Expenses | $1.12B$1.33B | −15.7% |
| Operating Income | $406.51M$348.21M | +16.7% |
| Interest Expense | $460.17M$460.75M | −0.1% |
| Net Income | $935.20M$295.98M | +216.0% |
| EPS (Basic) | $2.98$0.95 | +213.4% |
| EPS (Diluted) | $2.98$0.95 | +213.4% |
| Shares Outstanding (Basic) | 294.86M282.89M | +4.2% |
| Shares Outstanding (Diluted) | 294.86M282.89M | +4.2% |
05—Questions
Frequently Asked Questions
Why did EPS jump so much in 2011?
Most of the increase came from a one-time $826.5 million gain on the sale of discontinued operations, which lifted net income to $935.2 million. Underlying operations improved too, with higher same-store NOI and the absence of the $45.4 million 2010 impairment charge, but those effects were partly offset by dilution from acquisitions and dispositions.
How strong is the company's balance sheet and liquidity?
Leverage is moderate, with a 35.1% debt-to-total market capitalization ratio and a 2011 interest coverage ratio of 2.59x against a 1.5x covenant. About 86% of debt is fixed-rate, and the company had roughly $1.22 billion of revolver availability plus $384 million of cash at year-end. Available revolver capacity rose to about $1.72 billion by mid-February 2012 after an amendment.
What is the Archstone opportunity, and what are the risks?
EQR may buy the remaining 26.5% interest in Archstone, a private multifamily owner, for at least $1.485 billion before April 19, 2012. The deal is contingent and could add substantial scale, but it would require significant new financing and carries the risk of an $80.0 million break-up fee if Lehman exercises its right of first offer. The company has arranged bridge and term financing to fund it.
What could pressure earnings in 2012?
Key pressures include New York City 421a tax abatement roll-off, which the company expects to push real estate taxes up 4% to 5%, and potential interest rate increases on the floating-rate portion of debt (about 13.8% of total). Other risks include concentration in a few high-cost coastal markets, the GSE (Fannie Mae and Freddie Mac) reform uncertainty, and a pending Fair Housing and ADA lawsuit covering about 300 properties, which the company believes will not be material.
How does the dividend policy work, and is it sustainable?
The board adopted a policy in late 2010 to pay about 65% of Normalized FFO annually. In 2011 total distributions were $1.58 per share, and 2012 is guided to $1.74 to $1.81. The company says operating cash flow covers capex and distributions, but the policy means dividends can fall quickly if operating results weaken.
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