01—Abstract
Summary
Summary of the 10-K filed February 22, 2018. Cited figures are marked; the original filing is the authoritative source.
Equity Residential's FY2017 10-K (filed February 22, 2018, combined with ERP Operating Limited Partnership) shows a REIT concentrated entirely in six coastal gateway markets after a multi-year portfolio repositioning.
The 2016 Starwood sale ($5.365Ba) and other dispositions produced $11.00 per share/unit in special dividends and drove 2016 reported earnings far above 2017 (diluted EPS $11.68 in 2016 vs. $1.63 in 2017). Excluding gains and one-time items, 2017 Normalized FFO was $1,199.2 million, roughly flat versus $1,179.7 million in 2016 and down from $1,317.8 million in 2015 as dispositions diluted earnings. Operationally, same-store revenue grew 2.2%, same-store NOI grew 2.0%, and same-store occupancy held at 96.0%, with renewal rate growth of 4.6% and turnover down 1.8%.
The outlook is mixed by market. Management guided 2018 same-store revenue growth of 1.0%b to 2.25% and same-store NOI growth of 0.0% to 1.5%, with expense growth of 3.5% to 4.5%. New York faces elevated luxury supply and a projected 0.75% revenue decline, Washington D.C. is expected to grow about 1.0%, and Seattle is expected to slow to about 3.25%.
Southern California, the strongest market in 2017, is guided to 3.25%c to 4.0%. Balance sheet and capital allocation are conservative. Consolidated debt-to-total market capitalization was 26.9%, all debt sits at the Operating Partnership, and the company holds ratings of A- (S&P), A3 (Moody's) and A (Fitch) at the OP level.
Total debt was $8.96 billiond at a 4.24% weighted average rate, and 77.1% of real estate was unencumbered. Management also announced a shift away from a fixed FFO-payout dividend policy to a discretionary one, with a first-quarter 2018 dividend of $0.54 per share, a 7.2% annualized increase.
02—Key points
Key Highlights
- Portfolio concentrated in six coastal gateway markets (Boston, New York, Washington D.C., Southern California, San Francisco, Seattle) after exiting non-core markets, with 305 properties and 78,611 apartment units at year-end 2017.
- 2017 diluted EPS fell to $1.63 from $11.68 in 2016, reflecting the absence of approximately $4.0 billion in 2016 disposition gains tied largely to the $5.365 billion Starwood Portfolio sale; Normalized FFO was $1,199.2 million, roughly flat year over year.
- Same-store revenue rose 2.2%, same-store NOI rose 2.0%, same-store occupancy was 96.0%, and renewal rate growth was 4.6%, ahead of original expectations.
- 2018 guidance calls for same-store revenue growth of 1.0% to 2.25%, same-store NOI growth of 0.0% to 1.5%, and expense growth of 3.5% to 4.5%, with New York (-0.75%) and Washington D.C. (about +1.0%) the weakest markets.
- Dividend policy changed: the company will no longer pay a fixed 65%-of-Normalized-FFO payout. The Q1 2018 dividend was set at $0.54 per share, a 7.2% annualized increase over 2017's $0.50375 quarterly rate.
- Balance sheet is strong: debt-to-total market capitalization of 26.9%, 77.1% of real estate unencumbered, S&P A- / Moody's A3 / Fitch A ratings at ERPOP, and a $2.0 billion revolver plus commercial paper with about $1.67 billion of available capacity as of February 2018.
- Development pipeline is shrinking: $163.5 million remaining to be funded on four wholly owned projects (892 units), with 2018 development spend budgeted at roughly $150 million and only one new start planned.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 22, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $2.47B$2.43B | +1.9% |
| Operating Expenses | $1.62B$1.57B | +3.3% |
| Operating Income | $1.00B$856.09M | +17.3% |
| Interest Expense | $383.89M$482.25M | −20.4% |
| Net Income | $628.38M$4.48B | −86.0% |
| EPS (Basic) | $1.64$11.75 | −86.0% |
| EPS (Diluted) | $1.63$11.68 | −86.0% |
| Shares Outstanding (Basic) | 366.97M365.00M | +0.5% |
| Shares Outstanding (Diluted) | 382.68M381.99M | +0.2% |
05—Questions
Frequently Asked Questions
Why did reported earnings fall so sharply in 2017 compared with 2016?
The 2016 results included about $4.04 billion in gains on property sales, mainly from the Starwood Portfolio sale closed in January 2016. In 2017 the company sold only five consolidated properties, producing a $157.1 million gain. Net income therefore dropped from $4.48 billion to $628.4 million, and diluted EPS fell from $11.68 to $1.63. Operating metrics, measured by Normalized FFO, were broadly stable.
What are the main risks to 2018 same-store performance?
Management highlights new luxury apartment supply in New York and Boston, which limits rent growth and is expected to push New York same-store revenue down about 0.75% in 2018. Washington D.C. is expected to grow only about 1.0% due to political uncertainty. Expenses are also rising, with real estate taxes projected to increase 4.75% to 5.75%, largely from New York's 421-a abatement expiring, and payroll up about 5%.
Is the dividend at risk now that the payout policy has changed?
The company is moving from a formula-based payout (65% of the midpoint of Normalized FFO guidance) to a discretionary policy based on financial condition, liquidity, and projected cash needs. It expects operating cash flow to cover capital expenditures and regular dividends in 2018 and raised the Q1 2018 dividend to $0.54 per share. Future dividends remain at the Board's discretion, so the policy change adds flexibility but removes the explicit formula.
How leveraged is the company and how much flexibility does it have?
Total debt was $8.96 billion at year-end 2017, a 26.9% debt-to-total market capitalization ratio. About 59.6% of debt was unsecured and 84.6% was fixed rate, with a weighted average rate of 4.24% and an average maturity of 8.6 years. Covenant metrics were comfortably within limits, for example total debt to adjusted total assets of 34.6% against a 60% maximum. The company had about $1.67 billion available on its revolver as of February 2018.
What is the status of the development pipeline and capital spending?
The company had four wholly owned development projects (892 units) under construction with about $136.1 million of remaining commitments at year-end 2017, and it budgets about $150 million of development spend in 2018 with only one new start planned. Capital expenditures to real estate were $202.6 million in 2017 and are expected to rise to about $210 million in 2018, including roughly $60 million of unit renovations.
06—Continue