01—Abstract
Summary
Summary of the 10-K filed February 26, 2015. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) and its operating partnership ERP Operating Limited Partnership filed a combined FY2014 10-K reporting a portfolio of 391 properties and 109,225 apartment units, concentrated in six core coastal markets (Washington DC, New York, San Francisco, Los Angeles/Southern California, Boston, Seattle).
Total revenues from continuing operations rose 9.5% to $2.61 billiona, and net income available to common shares fell to $627 million from $1.83 billion in 2013, which was inflated by large 2013 Archstone-related property sale gains. Diluted EPS was $1.73 versus $5.16 a year earlier, so the comparison is distorted by one-time items rather than an operating decline. Underlying operating performance improved.
Same-store revenue grew 4.3% and same-store NOI grew 5.6%, with occupancy at 95.8% for the same-store pool. Management guided 2015 same-store revenue growth of 3.75% to 4.5% and NOI growth of 4.0% to 5.5%. Normalized FFO available to common shares and units rose 13.2% to $1.196 billionb.
The company also began a flexible dividend policy tied to 65% of Normalized FFO guidance, with 2015 dividends expected at $2.21c per share. The balance sheet is conservative. Total debt was $10.8 billion, the consolidated debt-to-total market capitalization ratio was 28.5%, and 69.1% of real estate was unencumbered.
Management highlighted the 2014 issuance of $450 milliond 2.375% five-year notes and $750 million 4.50% thirty-year notes, the repayment of a $750 million term loan, and a new $500 million commercial paper program. Risks to watch include Washington DC supply and government-related weakness, rising real estate taxes, development exposure of about $1.2 billion, a pending housing discrimination lawsuit, and reliance on the GSEs for multifamily financing.
02—Key points
Key Highlights
- Same-store revenue rose 4.3% and same-store NOI rose 5.6% in 2014, with same-store expenses up only 1.8%, above guidance on revenue and below guidance on expenses.
- Total revenues from continuing operations increased to $2.61 billion in 2014 from $2.39 billion in 2013; net gain on sales of real estate properties of $212.7 million supported 2014 income.
- Net income available to common shares fell to $627 million ($1.74 basic EPS) from $1.83 billion ($5.16) in 2013, mainly because 2013 included roughly $1.8 billion of higher property sale gains tied to the Archstone transaction.
- Normalized FFO available to common shares and units grew 13.2% to $1.196 billion, and 2015 guidance calls for a $2.21 annual dividend under the new 65%-of-Normalized-FFO payout policy.
- Balance sheet is conservative: total debt of $10.8 billion, a 28.5% debt-to-total-market-cap ratio, and 69.1% of real estate ($19.1 billion) unencumbered; the company's $2.5 billion revolver had about $2.12 billion available at year-end.
- Portfolio is 95.1% occupied overall, with 97.5% of stabilized NOI in core markets and no single market exceeding 17.5% of NOI; Washington DC is the largest market and is showing signs of stress from new supply and government budget cuts.
- Development pipeline of 4,917 units under construction (about $1.2 billion of remaining commitments) and 2015 guidance for roughly $700 million of development spend and $500 million each of acquisitions and dispositions.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 26, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $2.61B$2.39B | +9.5% |
| Operating Expenses | $1.69B$1.88B | −9.7% |
| Operating Income | $921.64M$512.32M | +79.9% |
| Interest Expense | $457.46M$586.85M | −22.0% |
| Net Income | $658.68M$1.83B | −63.9% |
| EPS (Basic) | $1.74$5.16 | −66.3% |
| EPS (Diluted) | $1.73$5.16 | −66.5% |
| Shares Outstanding (Basic) | 361.18M354.31M | +1.9% |
| Shares Outstanding (Diluted) | 377.74M354.31M | +6.6% |
05—Questions
Frequently Asked Questions
Why did EPS drop so sharply in 2014 even though operations improved?
Diluted EPS fell to $1.73 from $5.16 mainly because 2013 included roughly $1.8 billion more in property sale gains, largely from disposing of Archstone-related assets and non-core properties. Operating results improved in 2014, with same-store NOI up 5.6% and normalized FFO up 13.2%, so the decline reflects non-recurring 2013 gains rather than weaker operations.
How is the dividend determined going forward?
Beginning in 2014, the company pays an annual dividend based on 65% of the midpoint of its Normalized FFO guidance. The 2014 payout was $2.00 per share, and management expects a 2015 payout of $2.21 per share, paid as quarterly dividends of $0.5525. The company notes that this policy makes over-distribution less likely but means dividends can be cut more quickly if results weaken.
What are the main risks for investors in this filing?
Key risks include concentration in six coastal core markets, with Washington DC facing new supply and government budget pressures; rising real estate taxes (expected around 5% in 2015); about $1.2 billion of remaining development spending; exposure to Fannie Mae and Freddie Mac policy changes that affect multifamily financing; tax protection agreements from the Archstone transaction that limit disposition flexibility; and a pending Fair Housing and ADA lawsuit covering roughly 300 properties, for which no loss has been accrued.
How is the company's debt structured and how is it managed?
At year-end 2014, total debt was $10.8 billion, with 46.9% secured and 53.1% unsecured, at a weighted average rate of 4.52% and weighted average maturity of 7.6 years. Floating-rate debt was 14.0% of the total. The company refinanced its $750 million term loan with fixed-rate notes in 2014 and added a $500 million commercial paper program in February 2015 to lower borrowing costs. EQR itself carries no debt; all debt sits in the operating partnership, which EQR guarantees for the revolver.
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