01—Abstract
Summary
Summary of the 10-K filed February 21, 2013. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) reported a strong 2012 with diluted EPS of $2.70a (vs. $2.95 in 2011), with the year's results lifted by $150.0 million of Archstone termination fees booked in interest and other income.
Same-store NOI rose 7.6% and same-store revenue rose 5.5%, with average occupancy of 94.3% (95.0% same store). Normalized FFO available to common shares and units was $883.3 millionb, up 16.3% from 2011. Total debt fell to $8.5 billion from $9.7 billion, and the debt-to-total market capitalization ratio was 30.7%.
The company raised roughly $1.4 billionc of common equity in 2012, including a $1.2 billion public offering, and ended the year with $612.6 million of cash. The dominant forward-looking item is the pending Archstone acquisition, which EQR is pursuing jointly with AvalonBay (EQR takes about 60%). The deal is expected to cost approximately $8.9 billion, including about $2.0 billion of cash, 34.5 million common shares issued to Lehman, and roughly $3 billion of assumed consolidated debt.
EQR plans roughly $4.0 billiond of dispositions in 2013, with $3.5 billion expected in the first half, and management expects the deal to be dilutive to earnings initially. Investors should weigh the execution risk of the asset sales, the increase in leverage, the $800 million break-up fee exposure, and the dilution against management's guidance for 2013 same-store revenue growth of 4.0% to 5.0% and NOI growth of 4.5% to 6.0%. From a portfolio standpoint, the company owns 403 properties with 115,370 units, concentrated in six core coastal markets (Boston, New York, Washington DC, Southern California, San Francisco and Seattle).
It is actively exiting non-core markets such as Atlanta, Phoenix, Orlando and Jacksonville. The dividend policy targets about 65% of Normalized FFO, and the 2013 dividend guidance of $1.82 to $1.89 per share reflects a step-up from $1.78 in 2012. The report also discloses a pending housing discrimination lawsuit covering about 300 properties, for which no loss has been accrued.
02—Key points
Key Highlights
- Diluted EPS was $2.70 for 2012, down from $2.95 in 2011, mainly due to lower property sale gains; results include $150.0 million in Archstone-related termination fees.
- Normalized FFO available to common shares and units rose 16.3% to $883.3 million; FFO rose 32.0% to $993.2 million.
- Same-store revenue grew 5.5% and same-store NOI grew 7.6%, with average occupancy of 94.3% and renewal rate growth expected above 5.0% in 2013.
- The pending Archstone acquisition (about $8.9 billion, EQR's 60% share) is expected to close in Q1 2013 and will add roughly $3 billion of assumed debt and 34.5 million common shares issued to Lehman.
- Total debt fell to $8.5 billion from $9.7 billion, with a 30.7% debt-to-total market capitalization ratio; a new $2.5 billion revolver and $750 million delayed-draw term loan were arranged in January 2013.
- Management plans about $4.0 billion of 2013 dispositions (with $3.5 billion in the first half) to fund the Archstone purchase, and expects the transaction to be dilutive to earnings initially.
- The 2013 dividend is expected at $1.82 to $1.89 per share, up from $1.78 in 2012, targeting approximately 65% of Normalized FFO.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 21, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $1.75B$1.53B | +14.6% |
| Operating Expenses | $1.23B$1.12B | +10.3% |
| Operating Income | $514.09M$406.51M | +26.5% |
| Interest Expense | -$455.24M$460.17M | −198.9% |
| Net Income | $881.20M$935.20M | −5.8% |
| EPS (Basic) | $2.73$2.98 | −8.5% |
| EPS (Diluted) | $2.71$2.98 | −9.3% |
| Shares Outstanding (Basic) | 302.70M294.86M | +2.7% |
| Shares Outstanding (Diluted) | 319.77M294.86M | +8.4% |
05—Questions
Frequently Asked Questions
What is the Archstone transaction and how will it be financed?
EQR and AvalonBay agreed to acquire Archstone's assets from Lehman for about $8.9 billion, with EQR taking about 60%. EQR's share includes about $2.0 billion of cash, 34,468,085 common shares issued to Lehman, and assumption of roughly $3 billion of consolidated Archstone debt. EQR plans to fund the cash portion mainly through roughly $4.0 billion of 2013 property dispositions, supplemented by new debt, the January 2013 credit facility and term loan, and possibly further equity.
Why did 2012 EPS decline even though operations improved?
Diluted EPS fell to $2.70 from $2.95 mainly because 2011 included higher gains on property sales than 2012. Operating performance improved, with same-store NOI up 7.6% and total property NOI rising. The 2012 result was also helped by $150.0 million of Archstone termination fees, which were recorded in interest and other income.
How strong is EQR's balance sheet and liquidity position?
At year-end 2012, total debt was $8.5 billion, 92% of it fixed-rate, with a weighted average maturity of 6.1 years. The debt-to-total market capitalization ratio was 30.7%, and cash on hand was $612.6 million. About $1.72 billion was available under the revolver at year-end, and unsecured covenant ratios were comfortably within limits. Management believes liquidity is sufficient for 2013 funding needs, but the Archstone acquisition will significantly increase consolidated indebtedness.
What are the main risks the report highlights for investors?
Key risks include the execution of the large disposition program, the possibility the Archstone deal does not close or is delayed, dilution to earnings and per-share metrics, higher leverage and floating-rate exposure, reliance on Fannie Mae and Freddie Mac for financing and buyers, and a $800 million break-up fee exposure. Concentration in core coastal markets and the pending housing discrimination lawsuit are also noted.
What does the 2013 outlook imply for the core portfolio?
Management guides to 2013 same-store revenue growth of 4.0% to 5.0%, same-store expense growth of 2.5% to 3.5% (driven by real estate taxes expected to rise over 6%, including the burn-off of New York 421a abatements), and same-store NOI growth of 4.5% to 6.0%. Physical occupancy is expected to be about 95.3%, and base rent growth is expected to average 4.0% to 4.5%.
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