01—Abstract
Summary
Summary of the 10-K filed February 20, 2020. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) enters 2020 as one of the largest U.S. publicly traded owners of rental apartments, with 309 properties and 79,962 apartment units at December 31, 2019, concentrated in coastal markets such as Boston, New York, Washington D.C., Seattle, San Francisco and Southern California.
The filing is a combined 10-K for EQR and its operating partnership, ERP Operating Limited Partnership, in which EQR holds a roughly 96.4% general partner interest. FY2019 was a strong year: diluted EPS rose to $2.60a from $1.77, largely on $447.6 million of property sale gains and a $69.5 million gain on unconsolidated sales, while same-store NOI grew 3.0% and same-store revenue grew 3.2%. Normalized FFO available to common shares and units was $1,348.1 million, up from $1,248.7 million in 2018.
The balance sheet and capital allocation story is one of disciplined recycling. Management sold $1.1 billionb of net disposition proceeds and acquired about $1.5 billion of consolidated rental properties, while cutting development spending and repaying $1.1 billion of unsecured notes. Total debt was $9.04 billion at a weighted average rate of 4.02%, with 84.7% fixed rate, and the company holds $27.5 billion of real estate, 86.9% of it unencumbered.
Credit ratings are stable (S&P A-, Moody's A3, Fitch A). The board raised the quarterly dividend 5.1% for 2019 to $0.5675 and guided to $0.6025c for the first quarter of 2020, an annualized increase of 6.2%. The main risks flagged for 2020 are new rent control laws in New York and California, which management estimates will trim same-store revenue growth by about 20 basis points.
Guidance calls for same-store revenue growth of 2.3%d to 3.3%, expense growth of 3.0% to 4.0%, and NOI growth of 1.5% to 3.5%. Los Angeles is expected to be the most challenged market due to elevated new supply and rent regulation, while Seattle and New York are expected to improve. Investors should also weigh elevated new apartment supply in many markets, the geographic concentration of the portfolio, and the regulatory and political pressure on urban rental housing.
02—Key points
Key Highlights
- FY2019 diluted EPS of $2.60, up from $1.77 in 2018, driven mainly by $447.6 million in net gains on property sales (11 consolidated properties sold).
- Normalized FFO available to common shares and units of $1,348.1 million in 2019, up about 8% from $1,248.7 million in 2018.
- Same-store NOI grew 3.0% in 2019 on 3.2% revenue growth, with same-store occupancy of 96.1% at year-end and a 2020 same-store NOI guide of 1.5% to 3.5%.
- Total debt of $9.04 billion at a 4.02% weighted average rate, 84.7% fixed rate, with 8.6 years average maturity; $2.5 billion revolver and $1.0 billion commercial paper program.
- Quarterly dividend raised to $0.5675 for 2019 (up 5.1%), with first-quarter 2020 guidance of $0.6025 (up 6.2% annualized).
- New York (Housing Stability and Tenant Protection Act) and California (Tenant Protection Act) rent control laws are expected to reduce 2020 same-store revenue by about 20 basis points.
- Portfolio of 309 properties and 79,962 units, with 86.9% of real estate investment unencumbered and stable investment-grade credit ratings (S&P A-, Moody's A3, Fitch A).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 20, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $2.70B$2.58B | +4.8% |
| Operating Expenses | $1.79B$1.72B | +4.2% |
| Operating Income | $1.36B$1.11B | +21.7% |
| Interest Expense | $390.08M$413.36M | −5.6% |
| Net Income | $1.01B$685.19M | +47.4% |
| EPS (Basic) | $2.61$1.78 | +46.6% |
| EPS (Diluted) | $2.60$1.77 | +46.9% |
| Shares Outstanding (Basic) | 370.46M368.05M | +0.7% |
| Shares Outstanding (Diluted) | 386.33M383.69M | +0.7% |
05—Questions
Frequently Asked Questions
Why did EPS rise so sharply in 2019?
Diluted EPS rose to $2.60 from $1.77, mainly because of $447.6 million in net gains on sales of real estate, compared with $256.8 million in 2018. Property NOI added $0.25 per share and a $69.5 million gain on unconsolidated property sales added about $0.18. Depreciation was a $0.09 per share drag. Sale gains are non-recurring, so the underlying operating growth is better measured by same-store NOI and Normalized FFO.
How much is the company's dividend growing and is it covered by cash flow?
The company paid $0.5675 per quarter in 2019, an annual rate of $2.27 and a 5.1% increase over 2018. The first-quarter 2020 dividend is expected at $0.6025, a 6.2% annualized increase. Management says 2019 operating cash flow of $1.457 billion covered capital expenditures and regular distributions, and it describes the payout ratio as modest.
What is the impact of new rent control laws in New York and California?
Management expects the New York and California laws to reduce 2020 same-store revenue by about 20 basis points. In New York, roughly 3,100 of about 9,600 units are rent-stabilized and will be directly affected, and the rules limit certain fees across about 6,600 units. In California, about 24,400 of roughly 37,600 units fall under the new cap on renewal increases at CPI plus 5%. The company still expects New York revenue growth to improve in 2020 as new supply declines.
How leveraged is the company and how is its debt structured?
Total debt was $9.04 billion at year-end 2019, of which $1.94 billion was secured and $7.10 billion unsecured. About 84.7% is fixed rate, and the weighted average maturity is 8.6 years. Debt-to-total market capitalization was 22.4%. The company has no near-term liquidity concern, with $1.38 billion of revolver availability and cash of about $46 million. Debt maturities are $1.03 billion in 2020 and $926 million in 2021. The company also says EQR itself carries no debt, since all debt sits at the operating partnership.
Which markets are expected to be strongest and weakest in 2020?
Management expects Los Angeles to be the most challenged market in 2020, given elevated new supply, rent control implementation and short-term lease restrictions, with projected same-store revenue growth of 1.8% to 2.8%. Seattle is projected at 3.5% to 4.5%, the strongest outlook, supported by new lease pricing power. Boston is expected to slow to 2.6% to 3.6% because of competitive new supply. New York is projected at 2.1% to 3.1%, up from 2.3% in 2019.
06—Continue