01—Abstract
Summary
Summary of the 10-K filed February 17, 2022. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) reported a 2021 that reflected a strong operating recovery from the COVID-19 downturn, though same-store NOI declined 6.5%a year over year as 2020 pandemic effects carried into the first part of the year.
Net income available to common shares rose to $1.33 billionb ($3.54 diluted EPS) from $910.5 million ($2.45) in 2020, driven primarily by $1.07 billion of net gains on property sales from the disposition of 14 consolidated properties. Total rental income fell 4.2% to $2.46 billion, and total NOI declined 7.8% to $1.61 billion, so the earnings improvement was largely non-operating and should be read with that in mind. FFO and Normalized FFO were $1.15 billion and $1.16 billion, respectively, down from 2020.
Management emphasized a sharp rebound in pricing and occupancy: physical occupancy was 96.1% for the year and 96.6% in Q4, leasing concessions returned to pre-pandemic levels, and turnover hit a record low of 44.4%. Same-store residential rental rates were down 5.6% for the full year, reflecting the lagged impact of late-2020 and early-2021 leasing at lower rents, so the recovery is most visible in the trajectory rather than the annual totals. Bad debt remained elevated at 1.3% of rental income, partially offset by $34.7 millionc of government rental assistance.
The balance sheet remains conservative, with total debt of $8.3 billiond, 92.7% fixed-rate, a weighted average interest rate of 3.18% on mortgages, and approximately $2.2 billion of available liquidity. Ratings are A- (S&P) and A3 (Moody's) at the operating partnership level. The company is pursuing a portfolio rotation out of established coastal markets into expansion markets (Denver, Atlanta, Dallas/Ft.
Worth, Austin), guided to roughly $2.0 billion of acquisitions and $2.0 billion of dispositions for 2022. Investors should weigh the strong operating momentum and balance sheet against the geographic concentration in high-cost coastal markets and the still-elevated bad debt.
02—Key points
Key Highlights
- Diluted EPS of $3.54 in 2021 vs. $2.45 in 2020, primarily due to $1.07 billion of net gains on sales of 14 consolidated properties
- Same-store NOI fell 6.5% to $1.54 billion, and same-store residential rental rate declined 5.6% to $2,640, reflecting lagged effects of late-2020 leasing
- Physical occupancy of 96.1% for 2021 (96.6% in Q4) with record-low turnover of 44.4%, and leasing concessions back to pre-pandemic levels
- Normalized FFO of $1.16 billion ($1,161 million available to common shares and units), down from $1.26 billion in 2020
- Total debt of $8.3 billion, 92.7% fixed-rate, weighted average mortgage rate of 3.18%, with approximately $2.2 billion of available liquidity
- Portfolio of 310 properties and 80,407 units; expansion markets accounted for 82% of 2021 acquisition volume (~$1.4 billion)
- 2022 guidance assumes ~$2.0 billion of acquisitions and ~$2.0 billion of dispositions, with ~$200 million of development spend
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2021filed February 17, 2022Financial Statements
FY2021 against FY2020
| Line item | FY2021FY2020 | Change |
|---|---|---|
| Operating Expenses | $1.84B$1.79B | +3.3% |
| Operating Income | $1.68B$1.32B | +27.2% |
| Interest Expense | $272.47M$365.07M | −25.4% |
| Net Income | $1.40B$962.50M | +45.1% |
| EPS (Basic) | $3.56$2.45 | +45.3% |
| EPS (Diluted) | $3.54$2.45 | +44.5% |
| Shares Outstanding (Basic) | 373.83M371.79M | +0.5% |
| Shares Outstanding (Diluted) | 388.09M385.87M | +0.6% |
05—Questions
Frequently Asked Questions
Why did net income rise sharply in 2021 if operating income declined?
Net income available to common shares increased to $1.33 billion from $910.5 million mainly because of a $1.07 billion net gain on sales of real estate, versus $532 million in 2020. Property NOI declined 7.8% to $1.61 billion, so the improvement came from asset sales rather than core operations. Investors should treat the gains as non-recurring when assessing run-rate earnings.
How strong is the recovery in pricing and occupancy?
Occupancy and pricing recovered quickly in late 2021, with Q4 physical occupancy at 96.6% and pricing reaching or exceeding pre-pandemic levels, according to management. Full-year same-store rental rates were still down 5.6%, however, because leases signed in late 2020 and early 2021 were at lower rents. The trend points to improving revenue growth, but the annual figures lag it.
How exposed is EQR to rising interest rates and refinancing?
Exposure is limited: 92.7% of debt is fixed-rate and variable-rate debt is 7.3% of the total, so a 100 basis point rise would add about $6.1 million of annual interest expense. Approximately $641 million of debt matures in 2022 and $1.33 billion in 2023, which will need refinancing at prevailing rates. Interest expense fell 24.8% in 2021, helped by lower rates and fewer debt extinguishment costs.
What are the main risks to the investment case?
The main risks are concentration in established coastal markets such as Los Angeles, San Francisco, New York, and Washington D.C., which face rent control and regulatory pressure. Elevated bad debt (1.3% of rental income) and reliance on government rental assistance add credit risk. The planned shift toward expansion markets also carries execution risk, since acquisitions in lease-up may take time to stabilize.
06—Continue