01—Abstract
Summary
Summary of the 10-K filed February 16, 2023. Cited figures are marked; the original filing is the authoritative source.
Equity Residential (EQR) closed 2022 with a stronger earnings and cash flow profile than its 2021 results, driven by same-store performance rather than asset sales.
Same-store NOI rose 14.1% to $1.73 billiona on 72,872 units, with same-store revenue up 10.6%, average rental rate up 10.4% to $2,898, and physical occupancy of 96.4%. Diluted EPS fell to $2.05 from $3.54, mainly because 2021 included roughly $1.07 billion of property sale gains versus $304 million in 2022. Normalized FFO was $1.37 billion, or about $3.52 per diluted share/unit on roughly 389 million weighted shares, based on the filing's totals.
The balance sheet is conservative. Total debt was $7.4 billionb, with 93.6% fixed-rate and a weighted average interest rate of 3.46% on mortgages and 3.61% on unsecured notes. Liquidity was about $2.4 billion, the $2.5 billion revolver matures in 2027, and 2023 maturities are roughly $1.0 billion.
Management reports 87.1% of the $28.1 billionc gross real estate investment is unencumbered. Credit ratings are A-/A3 at the operating partnership level. The dividend rose 3.7% to $0.625 per quarter, with total 2022 declared distributions of $2.50 per share.
Key risks include a concentration in coastal markets such as Los Angeles, San Francisco, New York, and Washington D.C., rising interest rates that pressure refinancing and valuations, and growing rent-control activity. The Ernst & Young audit reported no material weaknesses, and the critical audit matter concerned impairment of long-lived assets. Pricing growth moderated in late 2022 after an unusually strong first half, and transaction activity slowed as rates rose.
02—Key points
Key Highlights
- Same-store NOI grew 14.1% to $1.73 billion, driven by 10.4% higher average rental rates and 96.4% physical occupancy
- Diluted EPS declined to $2.05 from $3.54, primarily because 2022 property sale gains of $304 million were well below 2021's $1.07 billion
- Total debt of $7.4 billion is 93.6% fixed-rate, with a weighted average rate of about 3.5% and roughly $2.4 billion of available liquidity
- Operating cash flow rose to $1.45 billion from $1.26 billion, and common dividends were increased 3.7% to $0.625 per quarter
- Portfolio of 308 properties and 79,597 units is concentrated in coastal established markets, which account for 95.1% of stabilized NOI
- Ratings are A-/A3 for senior debt, and 87.1% of real estate investment is unencumbered, supporting financial flexibility
- Ernst & Young issued an unqualified opinion with no material weaknesses; a critical audit matter covered long-lived asset impairment
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2022filed February 16, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Operating Expenses | $1.92B$1.84B | +4.3% |
| Operating Income | $1.12B$1.68B | −33.4% |
| Interest Expense | $282.92M$272.47M | +3.8% |
| Net Income | $807.00M$1.40B | −42.2% |
| EPS (Basic) | $2.06$3.56 | −42.1% |
| EPS (Diluted) | $2.05$3.54 | −42.1% |
| Shares Outstanding (Basic) | 376.21M373.83M | +0.6% |
| Shares Outstanding (Diluted) | 389.45M388.09M | +0.4% |
05—Questions
Frequently Asked Questions
How did Equity Residential's core operations perform in 2022?
Core operations were strong. Same-store revenue rose 10.6% and same-store NOI rose 14.1%, driven by higher pricing (average rent up 10.4% to $2,898) and steady occupancy of 96.4%. Operating expense growth was held to 3.6%, and turnover fell to a record-low 42.8%.
Why did reported earnings per share fall so sharply in 2022?
The decline is mostly due to lower gains on property sales. Net gains were $304 million in 2022 versus $1.07 billion in 2021, when the company sold 14 properties compared with 3 in 2022. Excluding these gains, the operating earnings trend was positive.
How safe is the balance sheet and debt maturity profile?
The balance sheet is conservative. About 94% of debt is fixed-rate, the revolving credit facility is undrawn and matures in 2027, and the company holds about $2.4 billion of liquidity. 2023 maturities are about $1.0 billion, including $130 million of commercial paper, and the company has hedged the refinancing with $450 million of forward-starting swaps.
What are the main risks to the investment thesis?
Key risks include geographic concentration in coastal markets, which are exposed to local regulation and economic conditions; rising interest rates, which increase refinancing costs and can pressure asset valuations; growing rent-control legislation; and the slowdown in pricing that began in late 2022. Development and joint-venture exposure also adds risk, as do cyber threats and insurance costs for earthquakes and climate events.
Is the dividend secure?
The dividend appears well covered. Dividends of $2.50 per share in 2022 compare with normalized FFO of about $3.52 per diluted share, implying a payout ratio of roughly 71%. The board has raised the dividend and the REIT distribution requirement is met, though future dividends remain at the board's discretion.
06—Continue