01—Abstract
Summary
Summary of the 10-K filed February 21, 2019. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) closed 2018 with a solid operating year: diluted EPS of $1.77a (vs. $1.63 in 2017), total revenues of $2.58 billion (up about 4.3% in rental income), and consolidated NOI up 3.5% to $1.79 billion.
Same-store revenue grew 2.3%b, same-store NOI grew 1.7%, and same-store physical occupancy was 96.2%. Management's 2019 same-store guidance calls for revenue growth of 2.2% to 3.2%, expense growth of 3.5% to 4.5%, and NOI growth of 1.5% to 3.0%, reflecting elevated new supply in many markets, particularly Seattle and Orange County. Key sources of growth were the 2017 and 2018 acquisitions and lease-up of development properties, partly offset by dispositions.
The balance sheet remains conservative. Total debt was $8.8 billionc at a 4.12% weighted average rate with an 8.6-year weighted average maturity, and 83.5% of the $26.5 billion real estate investment was unencumbered. Ratings are A- (S&P) and A3 (Moody's) at the operating partnership level.
Liquidity was about $1.4 billiond on the revolver at year-end. The company also issued $900 million of unsecured notes in 2018, including a $400 million 'green' bond, and prepaid $1.4 billion of mortgage debt, reducing the secured share of debt to 27%. The company moved to a more conventional dividend policy in 2018, no longer tying payouts to a fixed share of Normalized FFO.
The quarterly dividend was $0.54 per share, up 7.2% from 2017, and the $2.16 annual total was supported by operating cash flow of $1.36 billion. Investors should watch the 2019 maturity schedule (about $975 million, including $500 million that management intends to prepay), the 2018 development pipeline of about $523 million, and the pace of new supply in coastal urban markets. The filing also reports no material pending litigation and an unqualified audit opinion from Ernst & Young on both financial statements and internal controls.
02—Key points
Key Highlights
- Diluted EPS rose to $1.77 from $1.63, driven mainly by higher gains on property sales and property NOI growth; FFO available to common shares and units was roughly flat at $1.20 billion.
- Same-store revenue grew 2.3% and same-store NOI grew 1.7%, with renewal rate growth of 4.9% and same-store turnover down 2.3%.
- 2019 guidance: same-store revenue +2.2% to +3.2%, expenses +3.5% to +4.5%, NOI +1.5% to +3.0%, with Seattle and Orange County expected to lag.
- Balance sheet strength: $8.8 billion of debt at a 4.12% average rate, 83.5% of real estate unencumbered, and A-/A3 credit ratings at the operating partnership.
- Financing activity: issued $500 million of 3.50% and $400 million of 4.15% ten-year unsecured notes, including the first 'green' bond from an apartment REIT, and repaid $1.4 billion of mortgage debt.
- Dividend increased 7.2% to $0.54 per quarter, with the board shifting to a discretionary policy not tied to a fixed share of Normalized FFO.
- Portfolio of 79,482 apartment units across 307 properties, concentrated in high-barrier urban and close-in suburban markets such as Los Angeles, San Francisco, Washington D.C., and New York.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 21, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $2.58B$2.47B | +4.3% |
| Operating Expenses | $1.72B$1.62B | +6.0% |
| Operating Income | $1.11B$1.00B | +11.0% |
| Interest Expense | $413.36M$383.89M | +7.7% |
| Net Income | $685.19M$628.38M | +9.0% |
| EPS (Basic) | $1.78$1.64 | +8.5% |
| EPS (Diluted) | $1.77$1.63 | +8.6% |
| Shares Outstanding (Basic) | 368.05M366.97M | +0.3% |
| Shares Outstanding (Diluted) | 383.69M382.68M | +0.3% |
05—Questions
Frequently Asked Questions
How much did EQR's same-store NOI grow in 2018, and what is it guiding for 2019?
Same-store NOI grew 1.7% in 2018 on 2.3% revenue growth and 3.6% expense growth. For 2019, management guides to same-store NOI growth of 1.5% to 3.0%, based on revenue growth of 2.2% to 3.2% and expense growth of 3.5% to 4.5%. Expense pressure is expected from real estate taxes (partly from lower appeal refunds and New York 421-a abatement roll-off) and on-site payroll.
How is EQR's debt structured, and what are the near-term maturities?
Total debt was $8.82 billion at year-end 2018: 27.1% secured and 72.9% unsecured, with a weighted average rate of 4.12% and an average maturity of 8.6 years. Floating-rate exposure was about 16.4%, so a 25 basis point rate increase would raise annual interest expense by roughly $3.6 million. Scheduled 2019 maturities total about $975 million, including $450 million of 2.375% notes and $500 million of commercial paper. The company also intends to prepay a $500 million 5.78% mortgage loan (due 2020) on July 1, 2019.
Is the dividend sustainable, and how did the dividend policy change?
The quarterly dividend was $0.54 per share in 2018, a 7.2% increase over 2017. Management said operating cash flow of $1.36 billion covered both capital expenditures and regular dividends in 2018. Beginning in 2018, the board moved from a fixed percentage of estimated Normalized FFO to a discretionary policy based on liquidity, operating results, and capital needs. Payouts remain subject to board discretion, and the filing notes that shortfalls in distribution coverage could force a reduction.
What are the main risks highlighted in the filing for investors?
Key risks include rent control and tenant-protection legislation in the company's markets, concentration in a few high-cost urban markets, elevated new apartment supply (especially in Seattle, Los Angeles, and Washington D.C.), rising interest rates and LIBOR's phase-out, and possible losses from development projects and joint ventures. The filing also flags cyber-security exposure, REIT qualification requirements, and the potential effects of Fannie Mae and Freddie Mac policy changes on multifamily financing.
06—Continue