01—Abstract
Summary
Summary of the 10-K filed February 27, 2014. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) closed 2013 as a much larger company following the February 27, 2013 Archstone acquisition, which roughly doubled its scale: total assets rose to $22.8 billiona from $17.2 billion, total debt to $10.8 billion from $8.5 billion, and the portfolio to 390 properties and 109,855 units.
Reported diluted EPS of $5.16b was inflated by $2.0 billion of gains on property sales, while loss from continuing operations was $(168) million, reflecting $73.9 million of merger costs, $121.7 million of early debt extinguishment costs, and higher depreciation. Management's Normalized FFO rose to $1.06 billion (about $2.82 per share basis implied by the 2014 dividend policy), and the company guided to 2014 same-store revenue growth of 3.0%-4.0% and NOI growth of 3.50%-4.75%, with Washington D.C. expected to decline 1% as new supply peaks. The balance sheet remains conservative: debt-to-total market capitalization was 35.6%, unsecured covenant metrics were comfortably within limits, and $18.0 billion (67%) of real estate was unencumbered.
Liquidity was supported by a $2.5 billionc revolver with $2.35 billion available at year-end. The company also repositioned aggressively toward six core coastal markets (Boston, New York, Washington DC, Southern California, San Francisco, Seattle), with the largest single market at 18.6% of NOI, and is exiting Phoenix and Orlando.
Key forward-looking items for investors include the new dividend policy tied to 65% of Normalized FFO, which sets the 2014 dividend at $2.00d per share (four $0.50 quarterly payments) versus $1.85 paid in 2013; a planned step-up in development starts to about $750 million per year; and 2014 same-store expense growth of 2.0%-3.0%, driven by real estate taxes (+5.25%) and utilities (+7.5%+). Risks include GSE (Fannie Mae/Freddie Mac) reform, concentration in core markets, and an ongoing Fair Housing/ADA lawsuit covering about 300 properties, for which no accrual was recorded.
02—Key points
Key Highlights
- Archstone Acquisition (completed Feb 27, 2013): acquired ~60% of the Archstone Portfolio for ~$9.0 billion, including ~$4.0 billion cash, 34.5 million EQR shares (~$1.9 billion), and ~$3.1 billion assumed debt; the transaction roughly doubled the balance sheet.
- Diluted EPS of $5.16 vs. $2.70 in 2012, driven by $2.07 billion of discontinued-operations income (mostly gains on $4.6 billion of property sales); loss from continuing operations was $(168.2) million.
- Normalized FFO available to common shares and units was $1,057 million vs. $883 million in 2012 (+19.7%); FFO fell 12.2% to $872 million due to large 2012 termination fee income and merger/debt costs.
- 2014 guidance: same-store revenue +3.0% to +4.0%, same-store expenses +2.0% to +3.0%, same-store NOI +3.50% to +4.75%, and physical occupancy of 95.4%.
- Balance sheet: total debt $10.8 billion (35.6% debt-to-total market cap), 84.7% fixed-rate, weighted average rate 4.56% and maturity 6.3 years; $18.0 billion (67%) of real estate unencumbered; $2.35 billion available on the $2.5 billion revolver at year-end.
- Dividend reset: 2014 annual dividend guided to $2.00/share (four $0.50 payments), set at 65% of the midpoint of Normalized FFO guidance, up from $1.85 in 2013.
- Portfolio repositioning: 94 consolidated properties (29,180 units) sold in 2013 for $4.6 billion; core-market concentration rose to 94.9% of stabilized NOI, with Washington DC at 18.6% of NOI (largest single market) and facing new supply pressure.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 27, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $2.39B$1.75B | +36.6% |
| Operating Expenses | $1.88B$1.23B | +52.0% |
| Operating Income | $512.32M$514.09M | −0.3% |
| Interest Expense | $586.85M-$455.24M | +228.9% |
| Net Income | $1.83B$881.20M | +107.3% |
| EPS (Basic) | $5.16$2.73 | +89.1% |
| EPS (Diluted) | $5.16$2.71 | +90.8% |
| Shares Outstanding (Basic) | 354.31M302.70M | +17.0% |
| Shares Outstanding (Diluted) | 354.31M319.77M | +10.8% |
05—Questions
Frequently Asked Questions
Why did EPS jump to $5.16 when continuing operations posted a loss?
Most of the 2013 earnings came from discontinued operations, which generated $2.07 billion of net income, primarily from roughly $2.04 billion of gains on the sale of 94 consolidated properties. Loss from continuing operations was $(168.2) million after $73.9 million of Archstone merger expenses, $121.7 million of early debt extinguishment costs, and higher depreciation (up 74.6%) from acquired assets. Investors typically focus on Normalized FFO ($1.06 billion, up 19.7%) for recurring operating performance.
Is the 2014 dividend increase sustainable?
The 2014 dividend of $2.00 per share is set at roughly 65% of the midpoint of Normalized FFO guidance, a payout ratio the company describes as aligned with operating results. The policy makes over-distribution less likely but means dividends could be cut more quickly if results deteriorate. Management also notes that quarterly coverage can fall short at times, which could require dispositions or new financing to bridge the gap.
How exposed is EQR to Washington DC and other core markets?
Concentration increased after Archstone. Washington DC is the largest market at 18.6% of stabilized NOI, and the six core coastal markets together represent 94.9% of NOI. Management expects DC same-store revenue to decline about 1% in 2014 as supply peaks and federal sequestration and furloughs weigh on demand, which it estimates will reduce company-wide same-store revenue growth by about 1 percentage point. Concentration in fewer markets increases vulnerability to a regional downturn.
What are the main balance sheet risks and how well are they managed?
EQR does not carry debt directly; all debt sits at the ERP Operating Partnership. Total debt of $10.8 billion is 35.6% of total market capitalization, with 84.7% fixed-rate and an average maturity of 6.3 years. Unsecured covenants were met with room to spare (total debt to adjusted assets 40.0% vs. 60% limit; secured debt 19.2% vs. 40% limit; interest coverage 3.07x vs. 1.5x minimum). Near-term 2014 maturities are about $561 million, and $750 million of term-loan debt matures in January 2015. Floating-rate exposure is 15.3%, so a 100 basis point rise would add roughly $16 million of annual interest expense.
Are there material legal or regulatory exposures?
The main disclosed legal matter is a 2006 lawsuit by a non-profit civil rights group alleging about 300 properties violated Fair Housing Act and ADA accessibility requirements. The company is defending it vigorously, believes it has viable defenses (many properties predate the statutes), and has not accrued any amount because a loss cannot be estimated. Separately, a Fannie Mae and Freddie Mac reform could affect multifamily financing costs and asset sale values, since the GSEs are significant lenders to the company and to buyers of its properties.
06—Continue