01—Abstract
Summary
Summary of the 10-K filed February 25, 2016. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) and its operating partnership ERP Operating Limited Partnership reported a transformative year in 2015 that sets up a major capital return in 2016.
Net income available to common shares rose to $863.3 milliona ($2.37 basic / $2.36 diluted EPS) from $627.2 million in 2014, helped by $335.1 million of gains on property sales, while Normalized FFO available to common shares and units grew about 10.1% to $1.318 billion. Same store revenues rose 5.1% and same store NOI rose 6.5%, with occupancy at 96.1% for the same store pool and 94.3% company-wide, and management guided to 2016 same store revenue growth of 4.5% to 5.25%. The defining event is the $5.365 billion sale of 72 properties (23,262 units) to Starwood Capital, closed January 26-27, 2016, as part of an exit from South Florida, Denver, Phoenix and certain New England submarkets.
The company plans to return most of the proceeds through special dividends of $10.00 to $12.00b per share/unit in aggregate, of which $8.00 was declared in February 2016, and to use remaining proceeds to cut debt; it has already retired about $1.7 billion of debt early and incurred roughly $112.4 million of prepayment penalties. Post-transaction, the portfolio is concentrated in six coastal core markets, and the regular 2016 dividend is guided lower by about 8.8%.
Balance sheet metrics remain solid: total debt of $10.97 billionc, a 26.2% debt-to-total market capitalization ratio, unsecured public debt ratings of A-/Baa1/A- for ERPOP, and $20.8 billion (72.9%) of real estate unencumbered. Investors should weigh the earnings and dividend implications of a smaller, more concentrated portfolio, the execution risk of the remaining 2016 dispositions, and the Washington D.C. supply and growth headwinds the company itself flagged.
02—Key points
Key Highlights
- Starwood Transaction: sold 72 properties with 23,262 apartment units for $5.365 billion, closed January 26-27, 2016, with the proceeds earmarked for special dividends and debt reduction.
- Special dividends: $8.00 per share/unit declared February 22, 2016 (paid March 10); an additional $2.00 to $4.00 is expected later in 2016, for $10 to $12 in aggregate.
- Regular dividend reset: the 2016 regular annual dividend is expected at $2.015 per share/unit, about 8.8% below 2015's $2.21, reflecting the portfolio sales.
- Operating momentum: 2015 same store revenue rose 5.1% and same store NOI rose 6.5%; 2016 guidance calls for same store revenue growth of 4.5% to 5.25% and NOI growth of 5.0% to 6.5%.
- Earnings and FFO: diluted EPS was $2.36 versus $1.73, driven by $335.1 million in property sale gains; Normalized FFO available to common shares and units was $1.318 billion, up about 10%.
- Balance sheet: total debt of $10.97 billion, 26.2% debt-to-total market capitalization, and $20.8 billion (72.9%) of real estate unencumbered; about $1.7 billion of debt was retired early in early 2016 at roughly $112.4 million in prepayment penalties.
- Concentration risk: following the dispositions, the portfolio is concentrated in six coastal core markets, and Washington D.C. faces substantial new supply and slower growth (guided at 1% to 1.3%).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 25, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $2.74B$2.61B | +5.0% |
| Operating Expenses | $1.74B$1.69B | +2.5% |
| Operating Income | $1.01B$921.64M | +9.5% |
| Interest Expense | $444.49M$457.46M | −2.8% |
| Net Income | $908.02M$658.68M | +37.9% |
| EPS (Basic) | $2.37$1.74 | +36.2% |
| EPS (Diluted) | $2.36$1.73 | +36.4% |
| Shares Outstanding (Basic) | 363.50M361.18M | +0.6% |
| Shares Outstanding (Diluted) | 380.62M377.74M | +0.8% |
05—Questions
Frequently Asked Questions
Why is the company selling so many properties, and what will it do with the proceeds?
The company is completing a roughly ten-year repositioning from low barrier-to-entry non-core markets into high barrier-to-entry core coastal markets. Management says the sold assets have lower long-term returns and that current bids for core assets are very strong. Most proceeds are planned for special dividends of $10 to $12 per share/unit in aggregate, with the remainder used to reduce debt so the transaction is leverage neutral.
Will the dividend go down after these sales?
The regular annual dividend is expected to fall to $2.015 per share/unit in 2016, roughly 8.8% below 2015's $2.21, because the dividend is set at 65% of Normalized FFO guidance and the portfolio is smaller. However, total cash returned in 2016 is expected to be much higher because of the special dividends of $10 to $12 per share/unit in aggregate, of which $8.00 was declared in February 2016.
How strong is the company's balance sheet and access to capital?
As of December 31, 2015, total debt was $10.97 billion with a 26.2% debt-to-total market capitalization ratio, and the company was in compliance with its unsecured debt covenants. ERPOP's senior debt is rated A- (S&P), Baa1 (Moody's, positive outlook) and A- (Fitch). As of February 19, 2016, $2.44 billion was available on the revolver with no borrowings outstanding, and $20.8 billion of real estate was unencumbered.
What are the main risks investors should watch?
Key risks include execution on the remaining 2016 dispositions (which are subject to closing conditions), higher NOI concentration in a few markets after the sales, substantial new multifamily supply in Washington D.C., Boston and Seattle, and the potential for rising real estate taxes (guided to about 5.25% growth in 2016). The company also disclosed a housing discrimination lawsuit under the Fair Housing Act and ADA, which management believes will not be materially adverse, and it relies on Lehman indemnities that may expire.
How is the company structured, and what is the difference between EQR and ERPOP for investors?
EQR is a Maryland REIT and the general partner of ERP Operating Limited Partnership, owning about 96.2% of ERPOP as of December 31, 2015. EQR holds no material assets other than its ERPOP interest and has no debt of its own; all debt is incurred by ERPOP, which holds substantially all the assets. Operating partnership units are exchangeable one-for-one into EQR common shares, and the 10-K combines both entities' reports into a single filing.
06—Continue