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EQUITY RESIDENTIAL - Quarter Report: 2020 June (Form 10-Q)

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to

Commission File Number: 1-12252 (Equity Residential)

Commission File Number: 0-24920 (ERP Operating Limited Partnership)

EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

Maryland (Equity Residential)

 

13-3675988 (Equity Residential)

Illinois (ERP Operating Limited Partnership)

 

36-3894853 (ERP Operating Limited Partnership)

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

Two North Riverside Plaza, Chicago, Illinois 60606

 

(312) 474-1300

(Address of principal executive offices) (Zip Code)

 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Shares of Beneficial Interest,
$0.01 Par Value (Equity Residential)

 

EQR

 

New York Stock Exchange

7.57% Notes due August 15, 2026
(ERP Operating Limited Partnership)

 

N/A

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Equity Residential  Yes   No

ERP Operating Limited Partnership  Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Equity Residential  Yes   No

ERP Operating Limited Partnership  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Equity Residential:

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

l

ERP Operating Limited Partnership:

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Equity Residential  

ERP Operating Limited Partnership  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Equity Residential  Yes   No

ERP Operating Limited Partnership  Yes   No

 

The number of EQR Common Shares of Beneficial Interest, $0.01 par value, outstanding on July 28, 2020 was 372,210,138.

 

 


 

Table of Contents

 

EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the quarterly period ended June 30, 2020 of Equity Residential and ERP Operating Limited Partnership.  Unless stated otherwise or the context otherwise requires, references to “EQR” mean Equity Residential, a Maryland real estate investment trust (“REIT”), and references to “ERPOP” mean ERP Operating Limited Partnership, an Illinois limited partnership.  References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP.  References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP.  The following chart illustrates the Company’s and the Operating Partnership’s corporate structure:

EQR is the general partner of, and as of June 30, 2020 owned an approximate 96.4% ownership interest in, ERPOP.  The remaining 3.6% interest is owned by limited partners.  As the sole general partner of ERPOP, EQR has exclusive control of ERPOP’s day-to-day management.  Management operates the Company and the Operating Partnership as one business.  The management of EQR consists of the same members as the management of ERPOP.

The Company is structured as an umbrella partnership REIT (“UPREIT”) and EQR contributes all net proceeds from its various equity offerings to ERPOP.  In return for those contributions, EQR receives a number of OP Units (see definition below) in ERPOP equal to the number of Common Shares it has issued in the equity offering.  The Company may acquire properties in transactions that include the issuance of OP Units as consideration for the acquired properties.  Such transactions may, in certain circumstances, enable the sellers to defer in whole or in part, the recognition of taxable income or gain that might otherwise result from the sales.  This is one of the reasons why the Company is structured in the manner shown above.  Based on the terms of ERPOP’s partnership agreement, OP Units can be exchanged with Common Shares on a one-for-one basis because the Company maintains a one-for-one relationship between the OP Units of ERPOP issued to EQR and the outstanding Common Shares.

The Company believes that combining the reports on Form 10-Q of EQR and ERPOP into this single report provides the following benefits:

 

enhances investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

 

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and

 

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.


 

Table of Contents

 

The Company believes it is important to understand the few differences between EQR and ERPOP in the context of how EQR and ERPOP operate as a consolidated company.  All of the Companys property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP.  EQRs primary function is acting as the general partner of ERPOP.  EQR also issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP.  EQR does not have any indebtedness as all debt is incurred by the Operating Partnership.  The Operating Partnership holds substantially all of the assets of the Company, including the Companys ownership interests in its joint ventures.  The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.  Except for the net proceeds from equity offerings by EQR (which are contributed to the capital of ERPOP in exchange for additional partnership interests in ERPOP (“OP Units”) (on a one-for-one Common Share per OP Unit basis) or additional preference units in ERPOP (on a one-for-one preferred share per preference unit basis)), the Operating Partnership generates all remaining capital required by the Company’s business.  These sources include the Operating Partnerships working capital, net cash provided by operating activities, borrowings under its revolving credit facility and/or commercial paper program, the issuance of secured and unsecured debt and partnership interests, and proceeds received from disposition of certain properties and joint venture interests.

Shareholders equity, partners capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership.  The limited partners of the Operating Partnership are accounted for as partners capital in the Operating Partnerships financial statements and as noncontrolling interests in the Companys financial statements.  The noncontrolling interests in the Operating Partnerships financial statements include the interests of unaffiliated partners in various consolidated partnerships.  The noncontrolling interests in the Companys financial statements include the same noncontrolling interests at the Operating Partnership level and limited partner OP Unit holders of the Operating Partnership.  The differences between shareholders equity and partners capital result from differences in the equity issued at the Company and Operating Partnership levels.

To help investors understand the differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entitys debt, noncontrolling interests and shareholders equity or partners capital, as applicable; and a combined Managements Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity.

This report also includes separate Part I, Item 4, Controls and Procedures, sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership.  In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company.  Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership.

As general partner with control of ERPOP, EQR consolidates ERPOP for financial reporting purposes, and EQR essentially has no assets or liabilities other than its investment in ERPOP.  Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements.  The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.

 

 


 

Table of Contents

 

TABLE OF CONTENTS

 

 

PAGE

 

 

PART I.

 

 

 

Item 1. Financial Statements of Equity Residential:

 

 

 

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

2

 

 

Consolidated Statements of Operations and Comprehensive Income for the six months and quarters ended June 30, 2020 and 2019

3

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

5

 

 

Consolidated Statements of Changes in Equity for the six months and quarters ended June 30, 2020 and 2019

8

 

 

Financial Statements of ERP Operating Limited Partnership:

 

 

 

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

10

 

 

Consolidated Statements of Operations and Comprehensive Income for the six months and quarters ended June 30, 2020 and 2019

11

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

13

 

 

Consolidated Statements of Changes in Capital for the six months and quarters ended June 30, 2020 and 2019

16

 

 

Notes to Consolidated Financial Statements of Equity Residential and ERP Operating Limited Partnership

18

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

52

 

 

Item 4. Controls and Procedures

52

 

 

PART II.

 

 

Item 1. Legal Proceedings

53

 

Item 1A. Risk Factors

53

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

54

 

Item 3. Defaults Upon Senior Securities

55

 

Item 4. Mine Safety Disclosures

55

 

Item 5. Other Information

55

 

 

Item 6. Exhibits

55

 

 


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except for share amounts)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Land

 

$

5,789,307

 

 

$

5,936,188

 

Depreciable property

 

 

20,997,903

 

 

 

21,319,101

 

Projects under development

 

 

274,825

 

 

 

181,630

 

Land held for development

 

 

102,361

 

 

 

96,688

 

Investment in real estate

 

 

27,164,396

 

 

 

27,533,607

 

Accumulated depreciation

 

 

(7,537,713

)

 

 

(7,276,786

)

Investment in real estate, net

 

 

19,626,683

 

 

 

20,256,821

 

Investments in unconsolidated entities

 

 

55,310

 

 

 

52,238

 

Cash and cash equivalents

 

 

187,416

 

 

 

45,753

 

Restricted deposits

 

 

58,117

 

 

 

71,246

 

Right-of-use assets

 

 

505,077

 

 

 

512,774

 

Other assets

 

 

282,348

 

 

 

233,937

 

Total assets

 

$

20,714,951

 

 

$

21,172,769

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgage notes payable, net

 

$

2,340,757

 

 

$

1,941,610

 

Notes, net

 

 

6,081,102

 

 

 

6,077,513

 

Line of credit and commercial paper

 

 

 

 

 

1,017,833

 

Accounts payable and accrued expenses

 

 

109,776

 

 

 

94,350

 

Accrued interest payable

 

 

67,589

 

 

 

66,852

 

Lease liabilities

 

 

330,135

 

 

 

331,334

 

Other liabilities

 

 

315,208

 

 

 

346,963

 

Security deposits

 

 

64,005

 

 

 

70,062

 

Distributions payable

 

 

232,208

 

 

 

218,326

 

Total liabilities

 

 

9,540,780

 

 

 

10,164,843

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interests – Operating Partnership

 

 

336,695

 

 

 

463,400

 

Equity:

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares

   authorized; 745,600 shares issued and outstanding as of June 30, 2020 and

   December 31, 2019

 

 

37,280

 

 

 

37,280

 

Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares

   authorized; 372,209,012 shares issued and outstanding as of June 30, 2020 and

   371,670,884 shares issued and outstanding as of December 31, 2019

 

 

3,722

 

 

 

3,717

 

Paid in capital

 

 

9,118,332

 

 

 

8,965,577

 

Retained earnings

 

 

1,505,694

 

 

 

1,386,495

 

Accumulated other comprehensive income (loss)

 

 

(67,355

)

 

 

(77,563

)

Total shareholders’ equity

 

 

10,597,673

 

 

 

10,315,506

 

Noncontrolling Interests:

 

 

 

 

 

 

 

 

Operating Partnership

 

 

235,169

 

 

 

227,837

 

Partially Owned Properties

 

 

4,634

 

 

 

1,183

 

Total Noncontrolling Interests

 

 

239,803

 

 

 

229,020

 

Total equity

 

 

10,837,476

 

 

 

10,544,526

 

Total liabilities and equity

 

$

20,714,951

 

 

$

21,172,769

 

 

See accompanying notes

 

 

2


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amounts in thousands except per share data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

1,335,837

 

 

$

1,331,676

 

 

$

653,532

 

 

$

669,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and maintenance

 

 

220,268

 

 

 

223,531

 

 

 

104,452

 

 

 

108,461

 

Real estate taxes and insurance

 

 

192,770

 

 

 

182,888

 

 

 

95,038

 

 

 

91,446

 

Property management

 

 

51,317

 

 

 

50,765

 

 

 

23,608

 

 

 

24,369

 

General and administrative

 

 

26,353

 

 

 

29,710

 

 

 

11,835

 

 

 

14,329

 

Depreciation

 

 

418,398

 

 

 

404,723

 

 

 

205,976

 

 

 

200,508

 

Total expenses

 

 

909,106

 

 

 

891,617

 

 

 

440,909

 

 

 

439,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on sales of real estate properties

 

 

352,243

 

 

 

138,835

 

 

 

144,266

 

 

 

138,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

778,974

 

 

 

578,894

 

 

 

356,889

 

 

 

369,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

3,471

 

 

 

1,925

 

 

 

1,511

 

 

 

1,152

 

Other expenses

 

 

(4,227

)

 

 

(8,392

)

 

 

(1,694

)

 

 

(5,117

)

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense incurred, net

 

 

(167,475

)

 

 

(203,840

)

 

 

(81,885

)

 

 

(108,902

)

Amortization of deferred financing costs

 

 

(4,152

)

 

 

(5,783

)

 

 

(2,111

)

 

 

(3,647

)

Income before income and other taxes, income (loss) from investments in

   unconsolidated entities and net gain (loss) on sales of land parcels

 

 

606,591

 

 

 

362,804

 

 

 

272,710

 

 

 

252,603

 

Income and other tax (expense) benefit

 

 

(240

)

 

 

(484

)

 

 

(187

)

 

 

(246

)

Income (loss) from investments in unconsolidated entities

 

 

(2,199

)

 

 

68,058

 

 

 

(1,042

)

 

 

68,765

 

Net gain (loss) on sales of land parcels

 

 

 

 

 

178

 

 

 

 

 

 

177

 

Net income

 

 

604,152

 

 

 

430,556

 

 

 

271,481

 

 

 

321,299

 

Net (income) loss attributable to Noncontrolling Interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Partnership

 

 

(21,248

)

 

 

(15,429

)

 

 

(9,713

)

 

 

(11,510

)

Partially Owned Properties

 

 

(13,410

)

 

 

(1,620

)

 

 

(880

)

 

 

(821

)

Net income attributable to controlling interests

 

 

569,494

 

 

 

413,507

 

 

 

260,888

 

 

 

308,968

 

Preferred distributions

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

Net income available to Common Shares

 

$

567,949

 

 

$

411,962

 

 

$

260,116

 

 

$

308,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to Common Shares

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

Weighted average Common Shares outstanding

 

 

371,689

 

 

 

369,952

 

 

 

371,795

 

 

 

370,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to Common Shares

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

Weighted average Common Shares outstanding

 

 

386,272

 

 

 

385,644

 

 

 

385,913

 

 

 

386,107

 

 

See accompanying notes

3


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)

(Amounts in thousands except per share data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

604,152

 

 

$

430,556

 

 

$

271,481

 

 

$

321,299

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) – derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(1,190

)

 

 

(33,765

)

 

 

(223

)

 

 

(19,345

)

Losses reclassified into earnings from other comprehensive

   income

 

 

11,398

 

 

 

8,902

 

 

 

5,764

 

 

 

4,509

 

Other comprehensive income (loss)

 

 

10,208

 

 

 

(24,863

)

 

 

5,541

 

 

 

(14,836

)

Comprehensive income

 

 

614,360

 

 

 

405,693

 

 

 

277,022

 

 

 

306,463

 

Comprehensive (income) attributable to Noncontrolling Interests

 

 

(35,026

)

 

 

(16,150

)

 

 

(10,792

)

 

 

(11,797

)

Comprehensive income attributable to controlling interests

 

$

579,334

 

 

$

389,543

 

 

$

266,230

 

 

$

294,666

 

 

See accompanying notes

4


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

604,152

 

 

$

430,556

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

418,398

 

 

 

404,723

 

Amortization of deferred financing costs

 

 

4,152

 

 

 

5,783

 

Amortization of above/below market lease intangibles

 

 

(35

)

 

 

(35

)

Amortization of discounts and premiums on debt

 

 

2,553

 

 

 

17,795

 

Amortization of deferred settlements on derivative instruments

 

 

11,392

 

 

 

8,896

 

Amortization of right-of-use assets

 

 

5,892

 

 

 

6,952

 

Write-off of pursuit costs

 

 

3,278

 

 

 

2,987

 

(Income) loss from investments in unconsolidated entities

 

 

2,199

 

 

 

(68,058

)

Distributions from unconsolidated entities – return on capital

 

 

100

 

 

 

2,387

 

Net (gain) loss on sales of real estate properties

 

 

(352,243

)

 

 

(138,835

)

Net (gain) loss on sales of land parcels

 

 

 

 

 

(178

)

Realized/unrealized (gain) loss on derivative instruments

 

 

25

 

 

 

 

Compensation paid with Company Common Shares

 

 

13,475

 

 

 

16,782

 

Other operating activities, net

 

 

1,805

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) decrease in other assets

 

 

(61,422

)

 

 

1,610

 

Increase (decrease) in accounts payable and accrued expenses

 

 

5,954

 

 

 

22,435

 

Increase (decrease) in accrued interest payable

 

 

737

 

 

 

1,536

 

Increase (decrease) in lease liabilities

 

 

(1,199

)

 

 

(1,171

)

Increase (decrease) in other liabilities

 

 

(18,070

)

 

 

(25,161

)

Increase (decrease) in security deposits

 

 

(6,057

)

 

 

1,769

 

Net cash provided by operating activities

 

 

635,086

 

 

 

690,773

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Investment in real estate – acquisitions

 

 

 

 

 

(653,132

)

Investment in real estate – development/other

 

 

(95,215

)

 

 

(93,210

)

Capital expenditures to real estate

 

 

(61,265

)

 

 

(81,528

)

Non-real estate capital additions

 

 

(15,536

)

 

 

(1,466

)

Interest capitalized for real estate under development

 

 

(4,102

)

 

 

(2,679

)

Proceeds from disposition of real estate, net

 

 

747,600

 

 

 

393,439

 

Investments in unconsolidated entities

 

 

(5,626

)

 

 

(8,572

)

Distributions from unconsolidated entities – return of capital

 

 

 

 

 

78,262

 

Purchase of investment securities and other investments

 

 

(509

)

 

 

(269

)

Net cash provided by (used for) investing activities

 

 

565,347

 

 

 

(369,155

)

 

See accompanying notes

5


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Debt financing costs

 

$

(2,907

)

 

$

(6,069

)

Mortgage notes payable, net:

 

 

 

 

 

 

 

 

Proceeds

 

 

495,145

 

 

 

295,620

 

Lump sum payoffs

 

 

(91,500

)

 

 

(95,500

)

Scheduled principal repayments

 

 

(3,873

)

 

 

(3,110

)

Notes, net:

 

 

 

 

 

 

 

 

Proceeds

 

 

 

 

 

597,480

 

Line of credit and commercial paper:

 

 

 

 

 

 

 

 

Line of credit proceeds

 

 

1,870,000

 

 

 

1,995,000

 

Line of credit repayments

 

 

(1,890,000

)

 

 

(1,995,000

)

Commercial paper proceeds

 

 

6,726,167

 

 

 

7,775,817

 

Commercial paper repayments

 

 

(7,724,000

)

 

 

(8,275,000

)

Proceeds from (payments on) settlement of derivative instruments

 

 

(1,215

)

 

 

(41,616

)

Proceeds from Employee Share Purchase Plan (ESPP)

 

 

2,359

 

 

 

1,652

 

Proceeds from exercise of options

 

 

11,322

 

 

 

48,487

 

Payment of offering costs

 

 

 

 

 

(155

)

Other financing activities, net

 

 

(31

)

 

 

(49

)

Contributions – Noncontrolling Interests – Partially Owned Properties

 

 

341

 

 

 

4,594

 

Contributions – Noncontrolling Interests – Operating Partnership

 

 

12

 

 

 

 

Distributions:

 

 

 

 

 

 

 

 

Common Shares

 

 

(435,427

)

 

 

(409,943

)

Preferred Shares

 

 

(1,545

)

 

 

(773

)

Noncontrolling Interests – Operating Partnership

 

 

(16,478

)

 

 

(14,728

)

Noncontrolling Interests – Partially Owned Properties

 

 

(10,269

)

 

 

(5,170

)

Net cash provided by (used for) financing activities

 

 

(1,071,899

)

 

 

(128,463

)

Net increase (decrease) in cash and cash equivalents and restricted deposits

 

 

128,534

 

 

 

193,155

 

Cash and cash equivalents and restricted deposits, beginning of period

 

 

116,999

 

 

 

116,313

 

Cash and cash equivalents and restricted deposits, end of period

 

$

245,533

 

 

$

309,468

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and restricted deposits, end of period

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

187,416

 

 

$

251,273

 

Restricted deposits

 

 

58,117

 

 

 

58,195

 

Total cash and cash equivalents and restricted deposits, end of period

 

$

245,533

 

 

$

309,468

 

 

See accompanying notes

6


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

148,164

 

 

$

171,116

 

Net cash paid (received) for income and other taxes

 

$

428

 

 

$

754

 

Amortization of deferred financing costs:

 

 

 

 

 

 

 

 

Investment in real estate, net

 

$

(120

)

 

$

 

Other assets

 

$

1,169

 

 

$

1,206

 

Mortgage notes payable, net

 

$

876

 

 

$

2,344

 

Notes, net

 

$

2,227

 

 

$

2,233

 

Amortization of discounts and premiums on debt:

 

 

 

 

 

 

 

 

Mortgage notes payable, net

 

$

1,191

 

 

$

16,426

 

Notes, net

 

$

1,362

 

 

$

1,369

 

Amortization of deferred settlements on derivative instruments:

 

 

 

 

 

 

 

 

Other liabilities

 

$

(6

)

 

$

(6

)

Accumulated other comprehensive income

 

$

11,398

 

 

$

8,902

 

Write-off of pursuit costs:

 

 

 

 

 

 

 

 

Investment in real estate, net

 

$

3,122

 

 

$

2,947

 

Other assets

 

$

140

 

 

$

37

 

Accounts payable and accrued expenses

 

$

16

 

 

$

3

 

(Income) loss from investments in unconsolidated entities:

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

1,554

 

 

$

(68,735

)

Other liabilities

 

$

645

 

 

$

677

 

Realized/unrealized (gain) loss on derivative instruments:

 

 

 

 

 

 

 

 

Other assets

 

$

 

 

$

2,002

 

Notes, net

 

$

 

 

$

2,253

 

Other liabilities

 

$

1,215

 

 

$

29,510

 

Accumulated other comprehensive income

 

$

(1,190

)

 

$

(33,765

)

Investments in unconsolidated entities:

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

(4,726

)

 

$

(6,472

)

Other liabilities

 

$

(900

)

 

$

(2,100

)

Debt financing costs:

 

 

 

 

 

 

 

 

Other assets

 

$

(215

)

 

$

145

 

Mortgage notes payable, net

 

$

(2,692

)

 

$

(2,237

)

Notes, net

 

$

 

 

$

(5,213

)

Other liabilities

 

$

 

 

$

1,236

 

Right-of-use assets and lease liabilities initial measurement and reclassifications:

 

 

 

 

 

 

 

 

Right-of-use assets

 

$

 

 

$

(438,705

)

Other assets

 

$

 

 

$

184,116

 

Lease liabilities

 

$

 

 

$

282,791

 

Other liabilities

 

$

 

 

$

(28,202

)

 

See accompanying notes

7


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in thousands except per share data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PREFERRED SHARES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

Balance, end of period

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

COMMON SHARES, $0.01 PAR VALUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

3,717

 

 

$

3,694

 

 

$

3,721

 

 

$

3,705

 

Conversion of OP Units into Common Shares

 

 

1

 

 

 

2

 

 

 

1

 

 

 

 

Exercise of share options

 

 

2

 

 

 

10

 

 

 

 

 

 

3

 

Share-based employee compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted shares

 

 

2

 

 

 

2

 

 

 

 

 

 

 

Balance, end of period

 

$

3,722

 

 

$

3,708

 

 

$

3,722

 

 

$

3,708

 

PAID IN CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

8,965,577

 

 

$

8,935,453

 

 

$

9,092,441

 

 

$

8,925,882

 

Common Share Issuance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of OP Units into Common Shares

 

 

3,855

 

 

 

4,869

 

 

 

2,011

 

 

 

84

 

Exercise of share options

 

 

11,320

 

 

 

48,477

 

 

 

171

 

 

 

18,624

 

Employee Share Purchase Plan (ESPP)

 

 

2,359

 

 

 

1,652

 

 

 

1,490

 

 

 

526

 

Share-based employee compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted shares

 

 

7,252

 

 

 

7,980

 

 

 

3,231

 

 

 

3,404

 

Share options

 

 

1,293

 

 

 

1,682

 

 

 

623

 

 

 

889

 

ESPP discount

 

 

416

 

 

 

365

 

 

 

263

 

 

 

98

 

Offering costs

 

 

 

 

 

(155

)

 

 

 

 

 

(155

)

Supplemental Executive Retirement Plan (SERP)

 

 

(506

)

 

 

(1,539

)

 

 

(655

)

 

 

(937

)

Change in market value of Redeemable Noncontrolling Interests –

   Operating Partnership

 

 

128,753

 

 

 

(56,974

)

 

 

17,304

 

 

 

(1,953

)

Adjustment for Noncontrolling Interests ownership in Operating

   Partnership

 

 

(1,987

)

 

 

7,771

 

 

 

1,453

 

 

 

3,119

 

Balance, end of period

 

$

9,118,332

 

 

$

8,949,581

 

 

$

9,118,332

 

 

$

8,949,581

 

RETAINED EARNINGS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,386,495

 

 

$

1,261,763

 

 

$

1,469,821

 

 

$

1,155,032

 

Net income attributable to controlling interests

 

 

569,494

 

 

 

413,507

 

 

 

260,888

 

 

 

308,968

 

Common Share distributions

 

 

(448,750

)

 

 

(420,916

)

 

 

(224,243

)

 

 

(210,419

)

Preferred Share distributions

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

Balance, end of period

 

$

1,505,694

 

 

$

1,252,809

 

 

$

1,505,694

 

 

$

1,252,809

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(77,563

)

 

$

(64,986

)

 

$

(72,896

)

 

$

(75,013

)

Accumulated other comprehensive income (loss) – derivative

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(1,190

)

 

 

(33,765

)

 

 

(223

)

 

 

(19,345

)

Losses reclassified into earnings from other comprehensive

   income

 

 

11,398

 

 

 

8,902

 

 

 

5,764

 

 

 

4,509

 

Balance, end of period

 

$

(67,355

)

 

$

(89,849

)

 

$

(67,355

)

 

$

(89,849

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per Common Share outstanding

 

$

1.205

 

 

$

1.135

 

 

$

0.6025

 

 

$

0.5675

 

 

See accompanying notes

8


 

Table of Contents

 

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)

(Amounts in thousands except per share data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING PARTNERSHIP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

227,837

 

 

$

228,738

 

 

$

235,580

 

 

$

225,081

 

Issuance of restricted units to Noncontrolling Interests

 

 

12

 

 

 

 

 

 

 

 

 

 

Conversion of OP Units held by Noncontrolling Interests into OP

   Units held by General Partner

 

 

(3,856

)

 

 

(4,871

)

 

 

(2,012

)

 

 

(84

)

Equity compensation associated with Noncontrolling Interests

 

 

7,026

 

 

 

10,829

 

 

 

1,959

 

 

 

2,926

 

Net income attributable to Noncontrolling Interests

 

 

21,248

 

 

 

15,429

 

 

 

9,713

 

 

 

11,510

 

Distributions to Noncontrolling Interests

 

 

(17,037

)

 

 

(15,079

)

 

 

(7,961

)

 

 

(7,474

)

Change in carrying value of Redeemable Noncontrolling Interests –

   Operating Partnership

 

 

(2,048

)

 

 

45

 

 

 

(657

)

 

 

(1,520

)

Adjustment for Noncontrolling Interests ownership in Operating

   Partnership

 

 

1,987

 

 

 

(7,771

)

 

 

(1,453

)

 

 

(3,119

)

Balance, end of period

 

$

235,169

 

 

$

227,320

 

 

$

235,169

 

 

$

227,320

 

PARTIALLY OWNED PROPERTIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,183

 

 

$

(2,293

)

 

$

4,739

 

 

$

(5,462

)

Net income attributable to Noncontrolling Interests

 

 

13,410

 

 

 

1,620

 

 

 

880

 

 

 

821

 

Contributions by Noncontrolling Interests

 

 

341

 

 

 

4,594

 

 

 

 

 

 

4,594

 

Distributions to Noncontrolling Interests

 

 

(10,300

)

 

 

(5,219

)

 

 

(985

)

 

 

(1,251

)

Balance, end of period

 

$

4,634

 

 

$

(1,298

)

 

$

4,634

 

 

$

(1,298

)

 

See accompanying notes

9


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Land

 

$

5,789,307

 

 

$

5,936,188

 

Depreciable property

 

 

20,997,903

 

 

 

21,319,101

 

Projects under development

 

 

274,825

 

 

 

181,630

 

Land held for development

 

 

102,361

 

 

 

96,688

 

Investment in real estate

 

 

27,164,396

 

 

 

27,533,607

 

Accumulated depreciation

 

 

(7,537,713

)

 

 

(7,276,786

)

Investment in real estate, net

 

 

19,626,683

 

 

 

20,256,821

 

Investments in unconsolidated entities

 

 

55,310

 

 

 

52,238

 

Cash and cash equivalents

 

 

187,416

 

 

 

45,753

 

Restricted deposits

 

 

58,117

 

 

 

71,246

 

Right-of-use assets

 

 

505,077

 

 

 

512,774

 

Other assets

 

 

282,348

 

 

 

233,937

 

Total assets

 

$

20,714,951

 

 

$

21,172,769

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND CAPITAL

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgage notes payable, net

 

$

2,340,757

 

 

$

1,941,610

 

Notes, net

 

 

6,081,102

 

 

 

6,077,513

 

Line of credit and commercial paper

 

 

 

 

 

1,017,833

 

Accounts payable and accrued expenses

 

 

109,776

 

 

 

94,350

 

Accrued interest payable

 

 

67,589

 

 

 

66,852

 

Lease liabilities

 

 

330,135

 

 

 

331,334

 

Other liabilities

 

 

315,208

 

 

 

346,963

 

Security deposits

 

 

64,005

 

 

 

70,062

 

Distributions payable

 

 

232,208

 

 

 

218,326

 

Total liabilities

 

 

9,540,780

 

 

 

10,164,843

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Limited Partners

 

 

336,695

 

 

 

463,400

 

Capital:

 

 

 

 

 

 

 

 

Partners’ Capital:

 

 

 

 

 

 

 

 

Preference Units

 

 

37,280

 

 

 

37,280

 

General Partner

 

 

10,627,748

 

 

 

10,355,789

 

Limited Partners

 

 

235,169

 

 

 

227,837

 

Accumulated other comprehensive income (loss)

 

 

(67,355

)

 

 

(77,563

)

Total partners’ capital

 

 

10,832,842

 

 

 

10,543,343

 

Noncontrolling Interests – Partially Owned Properties

 

 

4,634

 

 

 

1,183

 

Total capital

 

 

10,837,476

 

 

 

10,544,526

 

Total liabilities and capital

 

$

20,714,951

 

 

$

21,172,769

 

 

See accompanying notes

10


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amounts in thousands except per Unit data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

1,335,837

 

 

$

1,331,676

 

 

$

653,532

 

 

$

669,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and maintenance

 

 

220,268

 

 

 

223,531

 

 

 

104,452

 

 

 

108,461

 

Real estate taxes and insurance

 

 

192,770

 

 

 

182,888

 

 

 

95,038

 

 

 

91,446

 

Property management

 

 

51,317

 

 

 

50,765

 

 

 

23,608

 

 

 

24,369

 

General and administrative

 

 

26,353

 

 

 

29,710

 

 

 

11,835

 

 

 

14,329

 

Depreciation

 

 

418,398

 

 

 

404,723

 

 

 

205,976

 

 

 

200,508

 

Total expenses

 

 

909,106

 

 

 

891,617

 

 

 

440,909

 

 

 

439,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on sales of real estate properties

 

 

352,243

 

 

 

138,835

 

 

 

144,266

 

 

 

138,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

778,974

 

 

 

578,894

 

 

 

356,889

 

 

 

369,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

3,471

 

 

 

1,925

 

 

 

1,511

 

 

 

1,152

 

Other expenses

 

 

(4,227

)

 

 

(8,392

)

 

 

(1,694

)

 

 

(5,117

)

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense incurred, net

 

 

(167,475

)

 

 

(203,840

)

 

 

(81,885

)

 

 

(108,902

)

Amortization of deferred financing costs

 

 

(4,152

)

 

 

(5,783

)

 

 

(2,111

)

 

 

(3,647

)

Income before income and other taxes, income (loss) from investments in

   unconsolidated entities and net gain (loss) on sales of land parcels

 

 

606,591

 

 

 

362,804

 

 

 

272,710

 

 

 

252,603

 

Income and other tax (expense) benefit

 

 

(240

)

 

 

(484

)

 

 

(187

)

 

 

(246

)

Income (loss) from investments in unconsolidated entities

 

 

(2,199

)

 

 

68,058

 

 

 

(1,042

)

 

 

68,765

 

Net gain (loss) on sales of land parcels

 

 

 

 

 

178

 

 

 

 

 

 

177

 

Net income

 

 

604,152

 

 

 

430,556

 

 

 

271,481

 

 

 

321,299

 

Net (income) loss attributable to Noncontrolling Interests – Partially Owned

   Properties

 

 

(13,410

)

 

 

(1,620

)

 

 

(880

)

 

 

(821

)

Net income attributable to controlling interests

 

$

590,742

 

 

$

428,936

 

 

$

270,601

 

 

$

320,478

 

ALLOCATION OF NET INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preference Units

 

$

1,545

 

 

$

1,545

 

 

$

772

 

 

$

772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Partner

 

$

567,949

 

 

$

411,962

 

 

$

260,116

 

 

$

308,196

 

Limited Partners

 

 

21,248

 

 

 

15,429

 

 

 

9,713

 

 

 

11,510

 

Net income available to Units

 

$

589,197

 

 

$

427,391

 

 

$

269,829

 

 

$

319,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Unit – basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to Units

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

Weighted average Units outstanding

 

 

384,702

 

 

 

382,854

 

 

 

384,818

 

 

 

383,227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Unit – diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to Units

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

Weighted average Units outstanding

 

 

386,272

 

 

 

385,644

 

 

 

385,913

 

 

 

386,107

 

 

See accompanying notes

11


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)

(Amounts in thousands except per Unit data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

604,152

 

 

$

430,556

 

 

$

271,481

 

 

$

321,299

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) – derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(1,190

)

 

 

(33,765

)

 

 

(223

)

 

 

(19,345

)

Losses reclassified into earnings from other comprehensive

   income

 

 

11,398

 

 

 

8,902

 

 

 

5,764

 

 

 

4,509

 

Other comprehensive income (loss)

 

 

10,208

 

 

 

(24,863

)

 

 

5,541

 

 

 

(14,836

)

Comprehensive income

 

 

614,360

 

 

 

405,693

 

 

 

277,022

 

 

 

306,463

 

Comprehensive (income) attributable to Noncontrolling Interests –

   Partially Owned Properties

 

 

(13,410

)

 

 

(1,620

)

 

 

(880

)

 

 

(821

)

Comprehensive income attributable to controlling interests

 

$

600,950

 

 

$

404,073

 

 

$

276,142

 

 

$

305,642

 

 

See accompanying notes

12


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

604,152

 

 

$

430,556

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

418,398

 

 

 

404,723

 

Amortization of deferred financing costs

 

 

4,152

 

 

 

5,783

 

Amortization of above/below market lease intangibles

 

 

(35

)

 

 

(35

)

Amortization of discounts and premiums on debt

 

 

2,553

 

 

 

17,795

 

Amortization of deferred settlements on derivative instruments

 

 

11,392

 

 

 

8,896

 

Amortization of right-of-use assets

 

 

5,892

 

 

 

6,952

 

Write-off of pursuit costs

 

 

3,278

 

 

 

2,987

 

(Income) loss from investments in unconsolidated entities

 

 

2,199

 

 

 

(68,058

)

Distributions from unconsolidated entities – return on capital

 

 

100

 

 

 

2,387

 

Net (gain) loss on sales of real estate properties

 

 

(352,243

)

 

 

(138,835

)

Net (gain) loss on sales of land parcels

 

 

 

 

 

(178

)

Realized/unrealized (gain) loss on derivative instruments

 

 

25

 

 

 

 

Compensation paid with Company Common Shares

 

 

13,475

 

 

 

16,782

 

Other operating activities, net

 

 

1,805

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) decrease in other assets

 

 

(61,422

)

 

 

1,610

 

Increase (decrease) in accounts payable and accrued expenses

 

 

5,954

 

 

 

22,435

 

Increase (decrease) in accrued interest payable

 

 

737

 

 

 

1,536

 

Increase (decrease) in lease liabilities

 

 

(1,199

)

 

 

(1,171

)

Increase (decrease) in other liabilities

 

 

(18,070

)

 

 

(25,161

)

Increase (decrease) in security deposits

 

 

(6,057

)

 

 

1,769

 

Net cash provided by operating activities

 

 

635,086

 

 

 

690,773

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Investment in real estate – acquisitions

 

 

 

 

 

(653,132

)

Investment in real estate – development/other

 

 

(95,215

)

 

 

(93,210

)

Capital expenditures to real estate

 

 

(61,265

)

 

 

(81,528

)

Non-real estate capital additions

 

 

(15,536

)

 

 

(1,466

)

Interest capitalized for real estate under development

 

 

(4,102

)

 

 

(2,679

)

Proceeds from disposition of real estate, net

 

 

747,600

 

 

 

393,439

 

Investments in unconsolidated entities

 

 

(5,626

)

 

 

(8,572

)

Distributions from unconsolidated entities – return of capital

 

 

 

 

 

78,262

 

Purchase of investment securities and other investments

 

 

(509

)

 

 

(269

)

Net cash provided by (used for) investing activities

 

 

565,347

 

 

 

(369,155

)

 

See accompanying notes

13


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Debt financing costs

 

$

(2,907

)

 

$

(6,069

)

Mortgage notes payable, net:

 

 

 

 

 

 

 

 

Proceeds

 

 

495,145

 

 

 

295,620

 

Lump sum payoffs

 

 

(91,500

)

 

 

(95,500

)

Scheduled principal repayments

 

 

(3,873

)

 

 

(3,110

)

Notes, net:

 

 

 

 

 

 

 

 

Proceeds

 

 

 

 

 

597,480

 

Line of credit and commercial paper:

 

 

 

 

 

 

 

 

Line of credit proceeds

 

 

1,870,000

 

 

 

1,995,000

 

Line of credit repayments

 

 

(1,890,000

)

 

 

(1,995,000

)

Commercial paper proceeds

 

 

6,726,167

 

 

 

7,775,817

 

Commercial paper repayments

 

 

(7,724,000

)

 

 

(8,275,000

)

Proceeds from (payments on) settlement of derivative instruments

 

 

(1,215

)

 

 

(41,616

)

Proceeds from EQR’s Employee Share Purchase Plan (ESPP)

 

 

2,359

 

 

 

1,652

 

Proceeds from exercise of EQR options

 

 

11,322

 

 

 

48,487

 

Payment of offering costs

 

 

 

 

 

(155

)

Other financing activities, net

 

 

(31

)

 

 

(49

)

Contributions – Noncontrolling Interests – Partially Owned Properties

 

 

341

 

 

 

4,594

 

Contributions – Limited Partners

 

 

12

 

 

 

 

Distributions:

 

 

 

 

 

 

 

 

OP Units – General Partner

 

 

(435,427

)

 

 

(409,943

)

Preference Units

 

 

(1,545

)

 

 

(773

)

OP Units – Limited Partners

 

 

(16,478

)

 

 

(14,728

)

Noncontrolling Interests – Partially Owned Properties

 

 

(10,269

)

 

 

(5,170

)

Net cash provided by (used for) financing activities

 

 

(1,071,899

)

 

 

(128,463

)

Net increase (decrease) in cash and cash equivalents and restricted deposits

 

 

128,534

 

 

 

193,155

 

Cash and cash equivalents and restricted deposits, beginning of period

 

 

116,999

 

 

 

116,313

 

Cash and cash equivalents and restricted deposits, end of period

 

$

245,533

 

 

$

309,468

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and restricted deposits, end of period

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

187,416

 

 

$

251,273

 

Restricted deposits

 

 

58,117

 

 

 

58,195

 

Total cash and cash equivalents and restricted deposits, end of period

 

$

245,533

 

 

$

309,468

 

 

See accompanying notes

14


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

148,164

 

 

$

171,116

 

Net cash paid (received) for income and other taxes

 

$

428

 

 

$

754

 

Amortization of deferred financing costs:

 

 

 

 

 

 

 

 

Investment in real estate, net

 

$

(120

)

 

$

 

Other assets

 

$

1,169

 

 

$

1,206

 

Mortgage notes payable, net

 

$

876

 

 

$

2,344

 

Notes, net

 

$

2,227

 

 

$

2,233

 

Amortization of discounts and premiums on debt:

 

 

 

 

 

 

 

 

Mortgage notes payable, net

 

$

1,191

 

 

$

16,426

 

Notes, net

 

$

1,362

 

 

$

1,369

 

Amortization of deferred settlements on derivative instruments:

 

 

 

 

 

 

 

 

Other liabilities

 

$

(6

)

 

$

(6

)

Accumulated other comprehensive income

 

$

11,398

 

 

$

8,902

 

Write-off of pursuit costs:

 

 

 

 

 

 

 

 

Investment in real estate, net

 

$

3,122

 

 

$

2,947

 

Other assets

 

$

140

 

 

$

37

 

Accounts payable and accrued expenses

 

$

16

 

 

$

3

 

(Income) loss from investments in unconsolidated entities:

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

1,554

 

 

$

(68,735

)

Other liabilities

 

$

645

 

 

$

677

 

Realized/unrealized (gain) loss on derivative instruments:

 

 

 

 

 

 

 

 

Other assets

 

$

 

 

$

2,002

 

Notes, net

 

$

 

 

$

2,253

 

Other liabilities

 

$

1,215

 

 

$

29,510

 

Accumulated other comprehensive income

 

$

(1,190

)

 

$

(33,765

)

Investments in unconsolidated entities:

 

 

 

 

 

 

 

 

Investments in unconsolidated entities

 

$

(4,726

)

 

$

(6,472

)

Other liabilities

 

$

(900

)

 

$

(2,100

)

Debt financing costs:

 

 

 

 

 

 

 

 

Other assets

 

$

(215

)

 

$

145

 

Mortgage notes payable, net

 

$

(2,692

)

 

$

(2,237

)

Notes, net

 

$

 

 

$

(5,213

)

Other liabilities

 

$

 

 

$

1,236

 

Right-of-use assets and lease liabilities initial measurement and reclassifications:

 

 

 

 

 

 

 

 

Right-of-use assets

 

$

 

 

$

(438,705

)

Other assets

 

$

 

 

$

184,116

 

Lease liabilities

 

$

 

 

$

282,791

 

Other liabilities

 

$

 

 

$

(28,202

)

 

See accompanying notes

15


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL

(Amounts in thousands except per Unit data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PREFERENCE UNITS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

Balance, end of period

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

 

$

37,280

 

GENERAL PARTNER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

10,355,789

 

 

$

10,200,910

 

 

$

10,565,983

 

 

$

10,084,619

 

OP Unit Issuance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of OP Units held by Limited Partners into OP Units

   held by General Partner

 

 

3,856

 

 

 

4,871

 

 

 

2,012

 

 

 

84

 

Exercise of EQR share options

 

 

11,322

 

 

 

48,487

 

 

 

171

 

 

 

18,627

 

EQR’s Employee Share Purchase Plan (ESPP)

 

 

2,359

 

 

 

1,652

 

 

 

1,490

 

 

 

526

 

Share-based employee compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EQR restricted shares

 

 

7,254

 

 

 

7,982

 

 

 

3,231

 

 

 

3,404

 

EQR share options

 

 

1,293

 

 

 

1,682

 

 

 

623

 

 

 

889

 

EQR ESPP discount

 

 

416

 

 

 

365

 

 

 

263

 

 

 

98

 

Net income available to Units – General Partner

 

 

567,949

 

 

 

411,962

 

 

 

260,116

 

 

 

308,196

 

OP Units – General Partner distributions

 

 

(448,750

)

 

 

(420,916

)

 

 

(224,243

)

 

 

(210,419

)

Offering costs

 

 

 

 

 

(155

)

 

 

 

 

 

(155

)

Supplemental Executive Retirement Plan (SERP)

 

 

(506

)

 

 

(1,539

)

 

 

(655

)

 

 

(937

)

Change in market value of Redeemable Limited Partners

 

 

128,753

 

 

 

(56,974

)

 

 

17,304

 

 

 

(1,953

)

Adjustment for Limited Partners ownership in Operating Partnership

 

 

(1,987

)

 

 

7,771

 

 

 

1,453

 

 

 

3,119

 

Balance, end of period

 

$

10,627,748

 

 

$

10,206,098

 

 

$

10,627,748

 

 

$

10,206,098

 

LIMITED PARTNERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

227,837

 

 

$

228,738

 

 

$

235,580

 

 

$

225,081

 

Issuance of restricted units to Limited Partners

 

 

12

 

 

 

 

 

 

 

 

 

 

Conversion of OP Units held by Limited Partners into OP Units held

   by General Partner

 

 

(3,856

)

 

 

(4,871

)

 

 

(2,012

)

 

 

(84

)

Equity compensation associated with Units – Limited Partners

 

 

7,026

 

 

 

10,829

 

 

 

1,959

 

 

 

2,926

 

Net income available to Units – Limited Partners

 

 

21,248

 

 

 

15,429

 

 

 

9,713

 

 

 

11,510

 

Units – Limited Partners distributions

 

 

(17,037

)

 

 

(15,079

)

 

 

(7,961

)

 

 

(7,474

)

Change in carrying value of Redeemable Limited Partners

 

 

(2,048

)

 

 

45

 

 

 

(657

)

 

 

(1,520

)

Adjustment for Limited Partners ownership in Operating Partnership

 

 

1,987

 

 

 

(7,771

)

 

 

(1,453

)

 

 

(3,119

)

Balance, end of period

 

$

235,169

 

 

$

227,320

 

 

$

235,169

 

 

$

227,320

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(77,563

)

 

$

(64,986

)

 

$

(72,896

)

 

$

(75,013

)

Accumulated other comprehensive income (loss) – derivative

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(1,190

)

 

 

(33,765

)

 

 

(223

)

 

 

(19,345

)

Losses reclassified into earnings from other comprehensive

   income

 

 

11,398

 

 

 

8,902

 

 

 

5,764

 

 

 

4,509

 

Balance, end of period

 

$

(67,355

)

 

$

(89,849

)

 

$

(67,355

)

 

$

(89,849

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per Unit outstanding

 

$

1.205

 

 

$

1.135

 

 

$

0.6025

 

 

$

0.5675

 

 

See accompanying notes

16


 

Table of Contents

 

ERP OPERATING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (Continued)

(Amounts in thousands except per Unit data)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONCONTROLLING INTERESTS – PARTIALLY OWNED

   PROPERTIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,183

 

 

$

(2,293

)

 

$

4,739

 

 

$

(5,462

)

Net income attributable to Noncontrolling Interests

 

 

13,410

 

 

 

1,620

 

 

 

880

 

 

 

821

 

Contributions by Noncontrolling Interests

 

 

341

 

 

 

4,594

 

 

 

 

 

 

4,594

 

Distributions to Noncontrolling Interests

 

 

(10,300

)

 

 

(5,219

)

 

 

(985

)

 

 

(1,251

)

Balance, end of period

 

$

4,634

 

 

$

(1,298

)

 

$

4,634

 

 

$

(1,298

)

 

See accompanying notes

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EQUITY RESIDENTIAL

ERP OPERATING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Business

Equity Residential (“EQR”) is an S&P 500 company focused on the acquisition, development and management of rental apartment properties located in urban and high-density suburban communities, a business that is conducted on its behalf by ERP Operating Limited Partnership (“ERPOP”).  EQR is a Maryland real estate investment trust (“REIT”) formed in March 1993 and ERPOP is an Illinois limited partnership formed in May 1993.  References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP.  References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP.  Unless otherwise indicated, the notes to consolidated financial statements apply to both the Company and the Operating Partnership.

EQR is the general partner of, and as of June 30, 2020 owned an approximate 96.4% ownership interest in, ERPOP.  All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP.  EQR issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP, but does not have any indebtedness as all debt is incurred by the Operating Partnership.  The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures.  The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.  

As of June 30, 2020, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 304 properties located in 9 states and the District of Columbia consisting of 78,410 apartment units.  The ownership breakdown includes (table does not include various uncompleted development properties):

 

 

 

Properties

 

 

Apartment Units

 

Wholly Owned Properties

 

 

287

 

 

 

74,849

 

Master-Leased Property – Consolidated

 

 

1

 

 

 

162

 

Partially Owned Properties – Consolidated

 

 

16

 

 

 

3,399

 

 

 

 

304

 

 

 

78,410

 

 

2.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included.  Operating results for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

In preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  In response to the novel coronavirus (“COVID-19”) pandemic, management evaluated whether its estimates, such as lease collectibility (see discussion below) and impairment, required revised approaches and generally concluded that no revisions were necessary at this time.

The balance sheets at December 31, 2019 have been derived from the audited financial statements at that date but do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

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For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.

Income and Other Taxes

EQR has elected to be taxed as a REIT.  This, along with the nature of the operations of its operating properties, resulted in no provision for federal income taxes at the EQR level.  In addition, ERPOP generally is not liable for federal income taxes as the partners recognize their allocable share of income or loss in their tax returns; therefore no provision for federal income taxes has been made at the ERPOP level.  Historically, the Company has generally only incurred certain state and local income, excise and franchise taxes.  The Company has elected taxable REIT subsidiary (“TRS”) status for certain of its corporate subsidiaries and, as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses.

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The CARES Act was enacted to provide economic relief to companies and individuals in response to the COVID-19 pandemic.  Included in the CARES Act are tax provisions which increase allowable interest expense deductions for 2019 and 2020 and increase the ability for taxpayers to use net operating losses.  While we do not expect these provisions to result in a material impact to the Company’s taxable income or tax liabilities, the Company will continue to analyze the provisions of the CARES Act and related guidance as it is published.  

The CARES Act also allows corporations to request accelerated refunds of their alternative minimum tax (“AMT”) credit.  Prior to enactment of this provision, the remaining credits would have been refunded in installments in 2020, 2021 and 2022.  We have filed a claim and expect to receive a refund of our remaining $1.6 million of AMT credit in 2020.

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued an amendment to the reference rate reform standard which provides the option for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on contract modifications and hedge accounting.  An example of such reform is the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates.  Entities that make this optional expedient election would not have to remeasure the contracts at the modification date or reassess the accounting treatment if certain criteria are met and would continue applying hedge accounting for relationships affected by reference rate reform. The new standard was effective for the Company upon issuance and elections can be made through December 31, 2022.  The Company is currently evaluating its options with regards to existing contracts and hedging relationships and the impact of adopting this update on its consolidated results of operations and financial position.

Recently Adopted Accounting Pronouncements

In April 2020, a FASB staff question and answer document was issued which intended to reduce the challenges of evaluating the enforceable rights and obligations of leases for concessions granted to lessees in response to the COVID-19 pandemic.  We elected not to evaluate whether qualifying concessions provided by the Company in response to the COVID-19 pandemic are a lease modification, subject to the criteria that the total payments under the amended lease cannot result in a substantial increase in the rights of the lessor or obligations of the lessee.  We also elected to treat the concessions as though they were contemplated as part of the existing contracts and therefore will not apply lease modification rules to the qualifying lease concession amendments.  As such, deferrals deemed collectible are recorded as rental receivables with no change to timing of rental revenues and deferrals deemed non-collectible and abatements reduce rental revenues in the deferral/abatement period and cause rental revenues to effectively follow a cash basis related to the changes.  The accounting elections provided by the FASB mainly apply to the Company’s non-residential leases and the majority of the amendments will not require a straight-line adjustment.  During the quarter ended June 30, 2020, we have granted rent payment deferrals/abatements to our non-residential tenants of $4.5 million, of which $4.1 million reduced rental revenues.

In June 2016, the FASB issued a standard which requires companies to adopt a new approach for estimating credit losses on certain types of financial instruments, such as trade and other receivables and loans.  The standard requires entities to estimate a lifetime expected credit loss for most financial instruments, including trade receivables. In November 2018, the FASB issued an amendment excluding operating lease receivables accounted for under the leases standard from the scope of the credit losses standard.  The Company adopted this standard as required effective January 1, 2020 and it did not have a material effect on its consolidated results of operations and financial position.

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In February 2016, the FASB issued a lease standard which sets out principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessors and lessees).  The Company adopted this standard as required effective January 1, 2019 using a modified retrospective method and the Company applied the guidance as of the adoption date and elected certain practical expedients, as described below.  The standard impacted our consolidated balance sheets but did not impact our consolidated statements of operations. Right-of-use (“ROU”) assets and lease liabilities where the Company is the lessee were recognized for various corporate office leases and ground leases.  The Company recorded ROU assets and related lease liabilities to its opening balance sheet upon adoption on January 1, 2019 of $434.2 million and $278.3 million, respectively.

The Company elected the practical expedient to not reassess the classification of existing operating leases.  As of January 1, 2019, any new or modified ground leases may be classified as financing leases unless they meet certain conditions. When there is a material lease modification, the Company is required to reassess the classification and remeasure the lease liability.  The Company also elected the practical expedient to account for both its lease and non-lease components as a single component under the leases standard. See Note 8 for additional discussion regarding the lease standard.

In August 2017, the FASB issued a final standard which makes changes to the hedge accounting model to enable entities to better portray their risk management activities in the financial statements.  The standard expands an entity’s ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk and eases certain documentation and assessment requirements.  The standard also eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of any hedging instrument to be presented in the same income statement line as the hedged instrument.  The Company adopted this standard as required effective January 1, 2019 and it did not have a material effect on its consolidated results of operations and financial position.

 

3.

Equity, Capital and Other Interests

The Company refers to “Common Shares” and “Units” (which refer to both OP Units and restricted units) as equity securities for EQR and “General Partner Units” and “Limited Partner Units” as equity securities for ERPOP.  To provide a streamlined and more readable presentation of the disclosures for the Company and the Operating Partnership, several sections below refer to the respective terminology for each with the same financial information and separate sections are provided, where needed, to further distinguish any differences in financial information and terminology.

The following table presents the changes in the Company’s issued and outstanding Common Shares and Units for the six months ended June 30, 2020 and 2019:

 

 

 

2020

 

 

2019

 

Common Shares

 

 

 

 

 

 

 

 

Common Shares outstanding at January 1,

 

 

371,670,884

 

 

 

369,405,161

 

Common Shares Issued:

 

 

 

 

 

 

 

 

Conversion of OP Units

 

 

97,363

 

 

 

188,406

 

Exercise of share options

 

 

217,935

 

 

 

1,059,674

 

Employee Share Purchase Plan (ESPP)

 

 

44,110

 

 

 

27,131

 

Restricted share grants, net

 

 

178,720

 

 

 

158,438

 

Common Shares outstanding at June 30,

 

 

372,209,012

 

 

 

370,838,810

 

Units

 

 

 

 

 

 

 

 

Units outstanding at January 1,

 

 

13,731,315

 

 

 

13,904,035

 

Restricted unit grants, net

 

 

245,999

 

 

 

140,055

 

Conversion of OP Units to Common Shares

 

 

(97,363

)

 

 

(188,406

)

Units outstanding at June 30,

 

 

13,879,951

 

 

 

13,855,684

 

Total Common Shares and Units outstanding at June 30,

 

 

386,088,963

 

 

 

384,694,494

 

Units Ownership Interest in Operating Partnership

 

 

3.6

%

 

 

3.6

%

 

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The following table presents the changes in the Operating Partnership’s issued and outstanding General Partner Units and Limited Partner Units for the six months ended June 30, 2020 and 2019:

 

 

 

2020

 

 

2019

 

General and Limited Partner Units

 

 

 

 

 

 

 

 

General and Limited Partner Units outstanding at January 1,

 

 

385,402,199

 

 

 

383,309,196

 

Issued to General Partner:

 

 

 

 

 

 

 

 

Exercise of EQR share options

 

 

217,935

 

 

 

1,059,674

 

EQR’s Employee Share Purchase Plan (ESPP)

 

 

44,110

 

 

 

27,131

 

EQR’s restricted share grants, net

 

 

178,720

 

 

 

158,438

 

Issued to Limited Partners:

 

 

 

 

 

 

 

 

Restricted unit grants, net

 

 

245,999

 

 

 

140,055

 

General and Limited Partner Units outstanding at June 30,

 

 

386,088,963

 

 

 

384,694,494

 

Limited Partner Units

 

 

 

 

 

 

 

 

Limited Partner Units outstanding at January 1,

 

 

13,731,315

 

 

 

13,904,035

 

Limited Partner restricted unit grants, net

 

 

245,999

 

 

 

140,055

 

Conversion of Limited Partner OP Units to EQR Common Shares

 

 

(97,363

)

 

 

(188,406

)

Limited Partner Units outstanding at June 30,

 

 

13,879,951

 

 

 

13,855,684

 

Limited Partner Units Ownership Interest in Operating Partnership

 

 

3.6

%

 

 

3.6

%

 

The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units, as well as the equity positions of the holders of restricted units, are collectively referred to as the “Noncontrolling Interests – Operating Partnership” and “Limited Partners Capital,” respectively, for the Company and the Operating Partnership.  Subject to certain exceptions (including the “book-up” requirements of restricted units), the Noncontrolling Interests – Operating Partnership/Limited Partners Capital may exchange their Units with EQR for Common Shares on a one-for-one basis.  The carrying value of the Noncontrolling Interests – Operating Partnership/Limited Partners Capital (including redeemable interests) is allocated based on the number of Noncontrolling Interests – Operating Partnership/Limited Partners Capital in total in proportion to the number of Noncontrolling Interests – Operating Partnership/Limited Partners Capital in total plus the total number of Common Shares/General Partner Units.  Net income is allocated to the Noncontrolling Interests – Operating Partnership/Limited Partners Capital based on the weighted average ownership percentage during the period.

The Operating Partnership has the right but not the obligation to make a cash payment instead of issuing Common Shares to any and all holders of Noncontrolling Interests – Operating Partnership/Limited Partners Capital requesting an exchange of their Noncontrolling Interests – Operating Partnership/Limited Partners Capital with EQR.  Once the Operating Partnership elects not to redeem the Noncontrolling Interests – Operating Partnership/Limited Partners Capital for cash, EQR is obligated to deliver Common Shares to the exchanging holder of the Noncontrolling Interests – Operating Partnership/Limited Partners Capital.

The Noncontrolling Interests – Operating Partnership/Limited Partners Capital are classified as either mezzanine equity or permanent equity.  If EQR is required, either by contract or securities law, to deliver registered Common Shares, such Noncontrolling Interests – Operating Partnership/Limited Partners Capital are differentiated and referred to as “Redeemable Noncontrolling Interests – Operating Partnership” and “Redeemable Limited Partners,” respectively.  Instruments that require settlement in registered shares cannot be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered shares.  Therefore, settlement in cash is assumed and that responsibility for settlement in cash is deemed to fall to the Operating Partnership as the primary source of cash for EQR, resulting in presentation in the mezzanine section of the balance sheet.  The Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners are adjusted to the greater of carrying value or fair market value based on the Common Share price of EQR at the end of each respective reporting period.  EQR has the ability to deliver unregistered Common Shares for the remaining portion of the Noncontrolling Interests – Operating Partnership/Limited Partners Capital that are classified in permanent equity at June 30, 2020 and December 31, 2019.

The carrying value of the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners is allocated based on the number of Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners in proportion to the number of Noncontrolling Interests – Operating Partnership/Limited Partners Capital in total.  Such percentage of the total carrying value of Units/Limited Partner Units which is ascribed to the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners is then adjusted to the greater of carrying value or fair market value as described above.  As of June 30, 2020 and 2019, the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners have a redemption value of approximately $336.7 million and $436.0 million, respectively, which represents the value of Common Shares that would be issued in exchange for the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners.

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The following table presents the changes in the redemption value of the Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners for the six months ended June 30, 2020 and 2019 (amounts in thousands):

 

 

 

2020

 

 

2019

 

Balance at January 1,

 

$

463,400

 

 

$

379,106

 

Change in market value

 

 

(128,753

)

 

 

56,974

 

Change in carrying value

 

 

2,048

 

 

 

(45

)

Balance at June 30,

 

$

336,695

 

 

$

436,035

 

 

Net proceeds from EQR Common Share and Preferred Share (see definition below) offerings and proceeds from exercise of options for Common Shares are contributed by EQR to ERPOP.  In return for those contributions, EQR receives a number of OP Units in ERPOP equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in ERPOP equal in number and having the same terms as the Preferred Shares issued in the equity offering).  As a result, the net proceeds from Common Shares and Preferred Shares are allocated for the Company between shareholders’ equity and Noncontrolling Interests – Operating Partnership and for the Operating Partnership between General Partner’s Capital and Limited Partners Capital to account for the change in their respective percentage ownership of the underlying equity.

The Company’s declaration of trust authorizes it to issue up to 100,000,000 preferred shares of beneficial interest, $0.01 par value per share (the “Preferred Shares”), with specific rights, preferences and other attributes as the Board of Trustees may determine, which may include preferences, powers and rights that are senior to the rights of holders of the Company’s Common Shares.

The following table presents the Company’s issued and outstanding Preferred Shares/Preference Units as of June 30, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

Amounts in thousands

 

 

 

 

 

Annual

 

 

 

 

 

 

 

 

 

 

 

Call

 

Dividend Per

 

 

June 30,

 

 

December 31,

 

 

 

Date (1)

 

Share/Unit (2)

 

 

2020

 

 

2019

 

Preferred Shares/Preference Units of beneficial interest, $0.01 par value;

   100,000,000 shares authorized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.29% Series K Cumulative Redeemable Preferred Shares/Preference

   Units; liquidation value $50 per share/unit; 745,600 shares/units issued

   and outstanding as of June 30, 2020 and December 31, 2019

 

12/10/26

 

$

4.145

 

 

$

37,280

 

 

$

37,280

 

 

 

 

 

 

 

 

 

$

37,280

 

 

$

37,280

 

 

(1)

On or after the call date, redeemable Preferred Shares/Preference Units may be redeemed for cash at the option of the Company or the Operating Partnership, respectively, in whole or in part, at a redemption price equal to the liquidation price per share/unit, plus accrued and unpaid distributions, if any.

(2)

Dividends on Preferred Shares/Preference Units are payable quarterly.

Other

EQR and ERPOP currently have an active universal shelf registration statement for the issuance of equity and debt securities that automatically became effective upon filing with the SEC in June 2019 and expires in June 2022.  Per the terms of ERPOP’s partnership agreement, EQR contributes the net proceeds of all equity offerings to the capital of ERPOP in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis) or preference units (on a one-for-one preferred share per preference unit basis).

The Company has an At-The-Market (“ATM”) share offering program which allows EQR to sell Common Shares from time to time into the existing trading market at current market prices as well as through negotiated transactions.  In June 2019, the Company extended the program maturity to June 2022.  In connection with the extension, the Company may now also sell Common Shares under forward sale agreements.  The use of a forward sale agreement would allow the Company to lock in a price on the sale of Common Shares at the time the agreement is executed, but defer receiving the proceeds from the sale until a later date.  EQR has the authority to issue 13.0 million shares but has not issued any shares under this program since September 2012.

The Company may repurchase up to 13.0 million Common Shares under its share repurchase program.  No open market repurchases have occurred since 2008, and no repurchases of any kind have occurred since February 2014.  As of June 30, 2020, EQR

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has remaining authorization to repurchase up to 13.0 million of its shares.  

4.

Real Estate

The following table summarizes the carrying amounts for the Company’s investment in real estate (at cost) as of June 30, 2020 and December 31, 2019 (amounts in thousands):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Land

 

$

5,789,307

 

 

$

5,936,188

 

Depreciable property:

 

 

 

 

 

 

 

 

Buildings and improvements

 

 

18,574,877

 

 

 

18,904,686

 

Furniture, fixtures and equipment

 

 

1,936,039

 

 

 

1,916,458

 

In-Place lease intangibles

 

 

486,987

 

 

 

497,957

 

Projects under development:

 

 

 

 

 

 

 

 

Land

 

 

23,531

 

 

 

23,531

 

Construction-in-progress

 

 

251,294

 

 

 

158,099

 

Land held for development:

 

 

 

 

 

 

 

 

Land

 

 

64,460

 

 

 

64,460

 

Construction-in-progress

 

 

37,901

 

 

 

32,228

 

Investment in real estate

 

 

27,164,396

 

 

 

27,533,607

 

Accumulated depreciation

 

 

(7,537,713

)

 

 

(7,276,786

)

Investment in real estate, net

 

$

19,626,683

 

 

$

20,256,821

 

 

During the six months ended June 30, 2020, the Company disposed of the following to unaffiliated parties (sales price in thousands):

 

 

 

Properties

 

 

Apartment Units

 

 

Sales Price

 

Rental Properties – Consolidated

 

 

5

 

 

 

1,552

 

 

$

754,361

 

Total

 

 

5

 

 

 

1,552

 

 

$

754,361

 

 

The Company recognized a net gain on sales of real estate properties of approximately $352.2 million on the above sales. 

 

5.

Commitments to Acquire/Dispose of Real Estate

The Company has not entered into any agreements to acquire rental properties or land parcels as of the date of filing.

The Company has entered into separate agreements to dispose of the following (sales price and net book value in thousands):

 

 

 

Properties

 

 

Apartment Units

 

 

Sales Price

 

 

Net Book Value

 

Land Parcels (two)

 

 

 

 

 

 

 

$

55,150

 

 

$

19,445

 

Total

 

 

 

 

 

 

 

$

55,150

 

 

$

19,445

 

 

The closing of pending transactions is subject to certain conditions and restrictions; therefore, there can be no assurance that the transactions will be consummated or that the final terms will not differ in material respects from any agreements summarized above.  See Note 14 for discussion of the properties acquired or disposed of, if any, subsequent to June 30, 2020.

 

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6.

Investments in Partially Owned Entities

The Company has co-invested in various properties with unrelated third parties which are either consolidated or accounted for under the equity method of accounting (unconsolidated).  

Consolidated Variable Interest Entities (“VIEs”)

In accordance with accounting standards for consolidation of VIEs, the Company consolidates ERPOP on EQR’s financial statements.  As the sole general partner of ERPOP, EQR has exclusive control of ERPOP’s day-to-day management.  The limited partners are not able to exercise substantive kick-out or participating rights.  As a result, ERPOP qualifies as a VIE.  EQR has a controlling financial interest in ERPOP and, thus, is ERPOP’s primary beneficiary.  EQR has the power to direct the activities of ERPOP that most significantly impact ERPOP’s economic performance as well as the obligation to absorb losses or the right to receive benefits from ERPOP that could potentially be significant to ERPOP.  

The Company has various equity interests in certain joint ventures owning 16 properties containing 3,399 apartment units.  The Company is the general partner or managing member of these joint ventures and is responsible for managing the operations and affairs of the joint ventures as well as making all decisions regarding the businesses of the joint ventures.  The limited partners or non-managing members are not able to exercise substantive kick-out or participating rights.  As a result, the joint ventures qualify as VIEs.  The Company has a controlling financial interest in the VIEs and, thus, is the VIEs’ primary beneficiary.  The Company has both the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs.  As a result, the joint ventures are required to be consolidated on the Company’s financial statements.  

The Company also has entered into two separate consolidated joint ventures which each own land parcels that are being/will be developed into multifamily rental properties.  These joint ventures have been deemed to be VIEs and are consolidated due to the Company being the primary beneficiary.

The consolidated assets and liabilities related to the VIEs discussed above were approximately $753.7 million and $236.6 million, respectively, at June 30, 2020 and approximately $754.7 million and $323.1 million, respectively, at December 31, 2019.

Investments in Unconsolidated Entities

The following table and information summarizes the Company’s investments in unconsolidated entities, which are accounted for under the equity method of accounting as the requirements for consolidation are not met, as of June 30, 2020 and December 31, 2019 (amounts in thousands except for ownership percentage):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

Ownership Percentage

 

Investments in Unconsolidated Entities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating Property (VIE) (1)

 

$

39,385

 

 

$

40,361

 

 

33.3%

 

Real Estate Technology/Other

 

 

15,925

 

 

 

11,877

 

 

Varies

 

Investments in Unconsolidated Entities

 

$

55,310

 

 

$

52,238

 

 

 

 

 

 

(1)

Represents an unconsolidated interest in an entity that owns the land underlying one of the consolidated joint venture properties noted above and owns and operates a related parking facility.  The joint venture, as a limited partner, does not have substantive kick-out or participating rights in the entity.  As a result, the entity qualifies as a VIE.  The joint venture does not have a controlling financial interest in the VIE and is not the VIE’s primary beneficiary.  The joint venture does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance or the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.  As a result, the entity that owns the land and owns and operates the parking facility is unconsolidated and recorded using the equity method of accounting.

 

 

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7.

Restricted Deposits

The following table presents the Company’s restricted deposits as of June 30, 2020 and December 31, 2019 (amounts in thousands):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Mortgage escrow deposits:

 

 

 

 

 

 

 

 

Replacement reserves

 

$

9,233

 

 

$

8,543

 

Mortgage principal reserves/sinking funds

 

 

11,895

 

 

 

9,689

 

Mortgage escrow deposits

 

 

21,128

 

 

 

18,232

 

Restricted cash:

 

 

 

 

 

 

 

 

Tax-deferred (1031) exchange proceeds

 

 

 

 

 

14,232

 

Restricted deposits on real estate investments

 

 

747

 

 

 

658

 

Resident security and utility deposits

 

 

34,869

 

 

 

37,140

 

Other

 

 

1,373

 

 

 

984

 

Restricted cash

 

 

36,989

 

 

 

53,014

 

Restricted deposits

 

$

58,117

 

 

$

71,246

 

 

 

8.

Leases

Lessor Accounting

The Company is the lessor for its residential and non-residential leases and these leases will continue to be accounted for as operating leases under the standard as described in Note 2.  

For the six months ended June 30, 2020, approximately 97.6% of the Company’s total lease revenue is generated from residential apartment leases that are generally twelve months or less in length.  The residential apartment leases may include lease income related to such items as utility recoveries, parking, storage and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same.  The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis.  Residential leases are renewable upon consent of both parties on an annual or monthly basis.

For the six months ended June 30, 2020, approximately 2.4% of the Company’s total lease revenue is generated by non-residential leases that are generally for terms ranging between five to ten years.  The non-residential leases generally consist of ground floor retail spaces and master-leased parking garages that serve as additional amenities for our residents.  The non-residential leases may include lease income related to such items as utility recoveries, parking rent and storage rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same.  The collection of lease payments at lease commencement is probable and therefore the Company subsequently recognizes lease income over the lease term on a straight-line basis.  Non-residential leases are renewable with market-based renewal options.

The following table presents the lease income types relating to lease payments for residential and non-residential leases along with the total other rental income for the six months and quarter ended June 30, 2020 (amounts in thousands):

 

 

 

Six Months Ended June 30, 2020

 

 

Quarter Ended June 30, 2020

 

Income Type

 

Residential

Leases

 

 

Non-Residential

Leases

 

 

Total

 

 

Residential

Leases

 

 

Non-Residential

Leases

 

 

Total

 

Residential and non-residential rent

 

$

1,207,106

 

 

$

30,221

 

 

$

1,237,327

 

 

$

594,626

 

 

$

12,127

 

 

$

606,753

 

Utility recoveries (RUBS income) (1)

 

 

35,232

 

 

 

375

 

 

 

35,607

 

 

 

17,814

 

 

 

147

 

 

 

17,961

 

Parking rent

 

 

19,460

 

 

 

223

 

 

 

19,683

 

 

 

9,627

 

 

 

126

 

 

 

9,753

 

Storage rent

 

 

1,913

 

 

 

40

 

 

 

1,953

 

 

 

951

 

 

 

21

 

 

 

972

 

Pet rent

 

 

5,740

 

 

 

 

 

 

5,740

 

 

 

2,839

 

 

 

 

 

 

2,839

 

Total lease revenue

 

$

1,269,451

 

 

$

30,859

 

 

 

1,300,310

 

 

$

625,857

 

 

$

12,421

 

 

 

638,278

 

Total other rental income (2)

 

 

 

 

 

 

 

 

 

 

35,527

 

 

 

 

 

 

 

 

 

 

 

15,254

 

Rental income

 

 

 

 

 

 

 

 

 

$

1,335,837

 

 

 

 

 

 

 

 

 

 

$

653,532

 

 

(1)

RUBS income primarily consists of variable payments representing the recovery of utility costs from residents.

(2)

Other rental income is accounted for under the revenue recognition standard.

 

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The following table presents the lease income types relating to lease payments for residential and non-residential leases along with the total other rental income for the six months and quarter ended June 30, 2019 (amounts in thousands):

 

 

 

 

Six Months Ended June 30, 2019

 

 

Quarter Ended June 30, 2019

 

Income Type

 

Residential

Leases

 

 

Non-Residential

Leases

 

 

Total

 

 

Residential

Leases

 

 

Non-Residential

Leases

 

 

Total

 

Residential and non-residential rent

 

$

1,190,729

 

 

$

36,163

 

 

$

1,226,892

 

 

$

598,209

 

 

$

17,693

 

 

$

615,902

 

Utility recoveries (RUBS income) (1)

 

 

33,303

 

 

 

412

 

 

 

33,715

 

 

 

16,858

 

 

 

209

 

 

 

17,067

 

Parking rent

 

 

18,469

 

 

 

159

 

 

 

18,628

 

 

 

9,332

 

 

 

87

 

 

 

9,419

 

Storage rent

 

 

1,856

 

 

 

32

 

 

 

1,888

 

 

 

937

 

 

 

(12

)

 

 

925

 

Pet rent

 

 

5,798

 

 

 

 

 

 

5,798

 

 

 

2,911

 

 

 

 

 

 

2,911

 

Total lease revenue

 

$

1,250,155

 

 

$

36,766

 

 

 

1,286,921

 

 

$

628,247

 

 

$

17,977

 

 

 

646,224

 

Total other rental income (2)

 

 

 

 

 

 

 

 

 

 

44,755

 

 

 

 

 

 

 

 

 

 

 

23,150

 

Rental income

 

 

 

 

 

 

 

 

 

$

1,331,676

 

 

 

 

 

 

 

 

 

 

$

669,374

 

 

(1)

RUBS income primarily consists of variable payments representing the recovery of utility costs from residents.

(2)

Other rental income is accounted for under the revenue recognition standard.

  

9.

Debt

EQR does not have any indebtedness as all debt is incurred by the Operating Partnership.  Weighted average interest rates noted below for the six months ended June 30, 2020 include the effect of any derivative instruments and amortization of premiums/discounts/OCI (other comprehensive income) on debt and derivatives.

Mortgage Notes Payable

The following table summarizes the Company’s mortgage notes payable activity for the six months ended June 30, 2020 (amounts in thousands):

 

 

 

Mortgage notes

payable, net as of

December 31, 2019

 

 

Proceeds

 

 

Lump sum

payoffs

 

 

Scheduled

principal

repayments

 

 

Amortization

of premiums/

discounts

 

 

Amortization

of deferred

financing

costs, net (1)

 

 

Mortgage notes

payable, net as of

June 30, 2020

 

Fixed Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured – Conventional

 

$

1,574,699

 

 

$

495,000

 

(2)

$

(91,500

)

 

$

(3,873

)

 

$

571

 

 

$

(2,035

)

 

$

1,972,862

 

Floating Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured – Conventional

 

 

7,050

 

 

 

145

 

 

 

 

 

 

 

 

 

 

 

 

120

 

 

 

7,315

 

Secured – Tax Exempt

 

 

359,861

 

 

 

 

 

 

 

 

 

 

 

 

620

 

 

 

99

 

 

 

360,580

 

Floating Rate Debt

 

 

366,911

 

 

 

145

 

 

 

 

 

 

 

 

 

620

 

 

 

219

 

 

 

367,895

 

Total

 

$

1,941,610

 

 

$

495,145

 

 

$

(91,500

)

 

$

(3,873

)

 

$

1,191

 

 

$

(1,816

)

 

$

2,340,757

 

 

(1)

Represents amortization of deferred financing costs, net of debt financing costs.  

(2)

Obtained a 2.60% fixed rate mortgage loan pool maturing on May 1, 2030.

 

The following table summarizes the Company’s debt extinguishment costs on mortgages recorded as additional interest expense during the six months ended June 30, 2020 (amounts in thousands):

 

Description

 

Amount

 

Write-offs of unamortized deferred financing costs

 

$

32

 

 

The following table summarizes certain interest rate and maturity date information as of and for the six months ended June 30, 2020:

 

 

 

June 30, 2020

 

Interest Rate Ranges

 

0.07% - 5.29%

 

Weighted Average Interest Rate

 

3.51%

 

Maturity Date Ranges

 

2020-2061

 

 

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As of June 30, 2020, the Company had $281.7 million of secured debt (primarily tax-exempt bonds) subject to third party credit enhancement.

Notes

The following table summarizes the Company’s notes activity for the six months ended June 30, 2020 (amounts in thousands):

 

 

 

Notes, net as of

December 31, 2019

 

 

Proceeds

 

 

Lump sum

payoffs

 

 

Amortization

of premiums/

discounts

 

 

Amortization

of deferred

financing

costs, net (1)

 

 

Notes, net as of

June 30, 2020

 

Fixed Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured – Public

 

$

6,077,513

 

 

$

 

 

$

 

 

$

1,362

 

 

$

2,227

 

 

$

6,081,102

 

 

(1)

Represents amortization of deferred financing costs, net of debt financing costs.

 

The following table summarizes certain interest rate and maturity date information as of and for the six months ended June 30, 2020:

 

 

 

June 30, 2020

 

Interest Rate Ranges

 

2.50% - 7.57%

 

Weighted Average Interest Rate

 

4.06%

 

Maturity Date Ranges

 

2021-2047

 

 

The Company’s unsecured public notes contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios.  The Company was in compliance with its unsecured public debt covenants for the six months ended June 30, 2020.

Line of Credit and Commercial Paper

On November 1, 2019, the Company replaced its existing $2.0 billion facility with a $2.5 billion unsecured revolving credit facility maturing November 1, 2024.  The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans.  The interest rate on advances under the facility will generally be LIBOR plus a spread (currently 0.775%), or based on bids received from the lending group, and the Company pays an annual facility fee (currently 0.125%).  Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating.  The weighted average interest rate on the revolving credit facility was 1.47% for the six months ended June 30, 2020.

The Company has an unsecured commercial paper note program in the United States.  On November 4, 2019, the Company increased the maximum aggregate amount outstanding for the commercial paper program from $500.0 million to $1.0 billion.  The notes will be sold under customary terms in the United States commercial paper note market subject to market conditions and will rank pari passu with all of the Company’s other unsecured senior indebtedness.  The notes bear interest at various floating rates with a weighted average interest rate of 1.81% for the six months ended June 30, 2020.  The weighted average amount outstanding for the six months ended June 30, 2020 was approximately $522.7 million.

The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations.  The following table presents the availability on the Company’s unsecured revolving credit facility as of June 30, 2020 (amounts in thousands):

 

 

 

June 30, 2020

 

Unsecured revolving credit facility commitment

 

$

2,500,000

 

Commercial paper balance outstanding

 

 

 

Unsecured revolving credit facility balance outstanding

 

 

 

Other restricted amounts

 

 

(100,949

)

Unsecured revolving credit facility availability

 

$

2,399,051

 

 

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10.

Derivative and Other Fair Value Instruments

The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments.  The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes.  Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.

In the normal course of business, the Company is exposed to the effect of interest rate changes.  The Company may seek to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.  The Company may also use derivatives to manage commodity prices in the daily operations of the business.

A three-level valuation hierarchy exists for disclosure of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The three levels are defined as follows:

 

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s derivative positions are valued using models developed by the respective counterparty as well as models applied internally by the Company that use as their inputs readily observable market parameters (such as forward yield curves and credit default swap data).  Employee holdings other than Common Shares within the supplemental executive retirement plan (the “SERP”) are valued using quoted market prices for identical assets and are included in other assets and other liabilities on the consolidated balance sheets.  Redeemable Noncontrolling Interests – Operating Partnership/Redeemable Limited Partners are valued using the quoted market price of Common Shares.  The fair values disclosed for mortgage notes payable and unsecured debt (including its commercial paper and line of credit, if applicable) were calculated using indicative rates provided by lenders of similar loans in the case of mortgage notes payable and the private unsecured debt (including its commercial paper and line of credit, if applicable) and quoted market prices for each underlying issuance in the case of the public unsecured notes.

The fair values of the Company’s financial instruments (other than mortgage notes payable, unsecured notes, commercial paper, line of credit and derivative instruments), including cash and cash equivalents and other financial instruments, approximate their carrying or contract value.  The following table provides a summary of the carrying and fair values for the Company’s mortgage notes payable and unsecured debt (including its commercial paper and line of credit, if applicable) at June 30, 2020 and December 31, 2019, respectively (amounts in thousands):

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Carrying Value

 

 

Estimated Fair

Value (Level 2)

 

 

Carrying Value

 

 

Estimated Fair

Value (Level 2)

 

Mortgage notes payable, net

 

$

2,340,757

 

 

$

2,370,036

 

 

$

1,941,610

 

 

$

1,930,710

 

Unsecured debt, net

 

 

6,081,102

 

 

 

7,012,755

 

 

 

7,095,346

 

 

 

7,677,289

 

Total debt, net

 

$

8,421,859

 

 

$

9,382,791

 

 

$

9,036,956

 

 

$

9,607,999

 

 

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Table of Contents

 

The following tables provide a summary of the fair value measurements for each major category of assets and liabilities measured at fair value on a recurring basis and the location within the accompanying consolidated balance sheets at June 30, 2020 and December 31, 2019, respectively (amounts in thousands):

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

Balance Sheet

Location

 

6/30/2020

 

 

Quoted Prices in

Active Markets for

Identical Assets/Liabilities

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Executive Retirement Plan

 

Other Assets

 

$

139,649

 

 

$

139,649

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Executive Retirement Plan

 

Other Liabilities

 

$

139,649

 

 

$

139,649

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interests –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Partnership/Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited Partners

 

Mezzanine

 

$

336,695

 

 

$

 

 

$

336,695

 

 

$

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

Description

 

Balance Sheet

Location

 

12/31/2019

 

 

Quoted Prices in

Active Markets for

Identical Assets/Liabilities

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Executive Retirement Plan

 

Other Assets

 

$

151,889

 

 

$

151,889

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Executive Retirement Plan

 

Other Liabilities

 

$

151,889

 

 

$

151,889

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interests –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Partnership/Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited Partners

 

Mezzanine

 

$

463,400

 

 

$

 

 

$

463,400

 

 

$

 

 

The following tables provide a summary of the effect of fair value hedges on the Company’s accompanying consolidated statements of operations and comprehensive income for the six months ended June 30, 2020 and 2019, respectively (amounts in thousands):

 

June 30, 2020

Type of Fair Value Hedge

 

Location of

Gain/(Loss)

Recognized in

Income on

Derivative

 

Amount of

Gain/(Loss)

Recognized in

Income on

Derivative

 

 

Hedged Item

 

Income Statement

Location of

Hedged Item

Gain/(Loss)

 

Amount of

Gain/(Loss)

Recognized in

Income

on Hedged Item

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

N/A

 

$

 

 

N/A

 

N/A

 

$

 

Total

 

 

 

$

 

 

 

 

 

 

$

 

 

June 30, 2019

Type of Fair Value Hedge

 

Location of

Gain/(Loss)

Recognized in

Income on

Derivative

 

Amount of

Gain/(Loss)

Recognized in

Income on

Derivative

 

 

Hedged Item

 

Income Statement

Location of

Hedged Item

Gain/(Loss)

 

Amount of

Gain/(Loss)

Recognized in

Income

on Hedged Item

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

Interest expense

 

$

2,253

 

 

Fixed rate debt

 

Interest expense

 

$

(2,253

)

Total

 

 

 

$

2,253

 

 

 

 

 

 

$

(2,253

)

 

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The following tables provide a summary of the effect of cash flow hedges on the Company’s accompanying consolidated statements of operations and comprehensive income for the six months ended June 30, 2020 and 2019, respectively (amounts in thousands):

 

 

 

Effective Portion

 

June 30, 2020

Type of Cash Flow Hedge

 

Amount of

Gain/(Loss)

Recognized in OCI

on Derivative

 

 

Location of

Gain/(Loss)

Reclassified from

Accumulated OCI

into Income

 

Amount of

Gain/(Loss)

Reclassified from

Accumulated

OCI into Income

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest Rate Contracts:

 

 

 

 

 

 

 

 

 

 

Forward Starting Swaps

 

$

(1,190

)

 

Interest expense

 

$

(11,398

)

Total

 

$

(1,190

)

 

 

 

$

(11,398

)

 

 

 

Effective Portion

 

June 30, 2019

Type of Cash Flow Hedge

 

Amount of

Gain/(Loss)

Recognized in OCI

on Derivative

 

 

Location of

Gain/(Loss)

Reclassified from

Accumulated OCI

into Income

 

Amount of

Gain/(Loss)

Reclassified from

Accumulated

OCI into Income

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest Rate Contracts:

 

 

 

 

 

 

 

 

 

 

Forward Starting Swaps

 

$

(33,765

)

 

Interest expense

 

$

(8,902

)

Total

 

$

(33,765

)

 

 

 

$

(8,902

)

 

As of June 30, 2020 and December 31, 2019, there were approximately $67.4 million and $77.6 million in deferred losses, net, included in accumulated other comprehensive income (loss), respectively, related to derivative instruments, of which an estimated $25.7 million may be recognized as additional interest expense during the twelve months ending June 30, 2021.

 

In April 2020, the Company paid approximately $1.2 million to settle two forward starting swaps in conjunction with the issuance of $495.0 million of ten-year secured conventional mortgage notes.  The entire $1.2 million was initially deferred as a component of accumulated other comprehensive income (loss) and will be recognized as an increase to interest expense over the first five years of the mortgage notes.

 

 

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11.

Earnings Per Share and Earnings Per Unit

Equity Residential

The following tables set forth the computation of net income per share basic and net income per share diluted for the Company (amounts in thousands except per share amounts):

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator for net income per share – basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

604,152

 

 

$

430,556

 

 

$

271,481

 

 

$

321,299

 

Allocation to Noncontrolling Interests – Operating Partnership

 

 

(21,248

)

 

 

(15,429

)

 

 

(9,713

)

 

 

(11,510

)

Net (income) loss attributable to Noncontrolling

   Interests – Partially Owned Properties

 

 

(13,410

)

 

 

(1,620

)

 

 

(880

)

 

 

(821

)

Preferred distributions

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

Numerator for net income per share – basic

 

$

567,949

 

 

$

411,962

 

 

$

260,116

 

 

$

308,196

 

Numerator for net income per share – diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

604,152

 

 

$

430,556

 

 

$

271,481

 

 

$

321,299

 

Net (income) loss attributable to Noncontrolling

   Interests – Partially Owned Properties

 

 

(13,410

)

 

 

(1,620

)

 

 

(880

)

 

 

(821

)

Preferred distributions

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

Numerator for net income per share – diluted

 

$

589,197

 

 

$

427,391

 

 

$

269,829

 

 

$

319,706

 

Denominator for net income per share – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for net income per share – basic

 

 

371,689

 

 

 

369,952

 

 

 

371,795

 

 

 

370,342

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OP Units

 

 

13,013

 

 

 

12,902

 

 

 

13,023

 

 

 

12,885

 

Long-term compensation shares/units

 

 

1,570

 

 

 

2,790

 

 

 

1,095

 

 

 

2,880

 

Denominator for net income per share – diluted

 

 

386,272

 

 

 

385,644

 

 

 

385,913

 

 

 

386,107

 

Net income per share – basic

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

Net income per share – diluted

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

 

ERP Operating Limited Partnership

The following tables set forth the computation of net income per Unit – basic and net income per Unit – diluted for the Operating Partnership (amounts in thousands except per Unit amounts):

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator for net income per Unit – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

604,152

 

 

$

430,556

 

 

$

271,481

 

 

$

321,299

 

Net (income) loss attributable to Noncontrolling

   Interests – Partially Owned Properties

 

 

(13,410

)

 

 

(1,620

)

 

 

(880

)

 

 

(821

)

Allocation to Preference Units

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

Numerator for net income per Unit – basic and diluted

 

$

589,197

 

 

$

427,391

 

 

$

269,829

 

 

$

319,706

 

Denominator for net income per Unit – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for net income per Unit – basic

 

 

384,702

 

 

 

382,854

 

 

 

384,818

 

 

 

383,227

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilution for Units issuable upon assumed exercise/vesting

   of the Company’s long-term compensation shares/units

 

 

1,570

 

 

 

2,790

 

 

 

1,095

 

 

 

2,880

 

Denominator for net income per Unit – diluted

 

 

386,272

 

 

 

385,644

 

 

 

385,913

 

 

 

386,107

 

Net income per Unit – basic

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

Net income per Unit – diluted

 

$

1.53

 

 

$

1.11

 

 

$

0.70

 

 

$

0.83

 

 

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12.

Commitments and Contingencies

The Company, as an owner of real estate, is subject to various Federal, state and local laws, including, but not limited to, rent regulations and environmental laws.  Compliance by the Company with existing laws has not had a material adverse effect on the Company.  However, the Company cannot predict the impact of new or changed laws or regulations, whether related to COVID-19 or otherwise, on its current properties or on properties that it may acquire in the future.  

The Company does not believe there is any litigation pending or threatened against it that, individually or in the aggregate, may reasonably be expected to have a material adverse effect on the Company.

As of June 30, 2020, the Company has two wholly owned projects and one partially owned project totaling 824 apartment units in various stages of development with remaining commitments to fund of approximately $328.0 million (inclusive of applicable construction mortgage and joint venture partner obligations) and estimated completion dates ranging through September 30, 2021. Estimated completion dates and budgeted capital costs for projects under development currently remain unchanged from the Company’s estimates in the fourth quarter of 2019.  The Company will reevaluate these dates and costs as the impact of COVID-19 becomes clearer.  The Company has two projects that were completed and stabilized during the quarter ended June 30, 2020.

As of June 30, 2020, the Company has two joint venture agreements with third party partners for the consolidated development of multifamily rental properties, one of which is currently under construction as noted above.  The development commitment to fund the project under construction is included in the development funding totals above for one of the joint ventures.  The joint venture agreements with each partner include a buy-sell provision that provides the right, but not the obligation, for the Company to acquire each respective partner’s interests or sell its interests at any time following the occurrence of certain pre-defined events described in the joint venture agreements.  See Note 6 for additional discussion.

13.

Reportable Segments

Operating segments are defined as components of an enterprise that engage in business activities from which they may earn revenues and incur expenses and about which discrete financial information is available that is evaluated regularly by the chief operating decision maker.  The chief operating decision maker decides how resources are allocated and assesses performance on a recurring basis at least quarterly.

The Company’s primary business is the acquisition, development and management of multifamily residential properties, which includes the generation of rental and other related income through the leasing of apartment units to residents.  The chief operating decision maker evaluates the Company’s operating performance geographically by market and both on a same store and non-same store basis.  While the Company does maintain a non-residential presence, it historically has accounted for approximately 4.0% of total revenues and is designed as an amenity for our residential residents.  The chief operating decision maker evaluates the performance of each property on a consolidated residential and non-residential basis.  The Company’s geographic same store operating segments located in urban and high-density suburban communities represent its reportable segments.

The Company’s development activities are other business activities that do not constitute an operating segment and as such, have been aggregated in the “Other” category in the tables presented below.

All revenues are from external customers and there is no customer who contributed 10% or more of the Company’s total revenues during the six months and quarters ended June 30, 2020 and 2019, respectively.

The primary financial measure for the Company’s rental real estate segment is net operating income (“NOI”), which represents rental income less: 1) property and maintenance expense and 2) real estate taxes and insurance expense (all as reflected in the accompanying consolidated statements of operations and comprehensive income).  The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties.  Revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.

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The following table presents a reconciliation of NOI from our rental real estate for the six months and quarters ended June 30, 2020 and 2019, respectively (amounts in thousands):

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Rental income

 

$

1,335,837

 

 

$

1,331,676

 

 

$

653,532

 

 

$

669,374

 

Property and maintenance expense

 

 

(220,268

)

 

 

(223,531

)

 

 

(104,452

)

 

 

(108,461

)

Real estate taxes and insurance expense

 

 

(192,770

)

 

 

(182,888

)

 

 

(95,038

)

 

 

(91,446

)

Total operating expenses

 

 

(413,038

)

 

 

(406,419

)

 

 

(199,490

)

 

 

(199,907

)

Net operating income

 

$

922,799

 

 

$

925,257

 

 

$

454,042

 

 

$

469,467

 

 

The following tables present NOI for each segment from our rental real estate for the six months and quarters ended June 30, 2020 and 2019, respectively, as well as total assets and capital expenditures at June 30, 2020 (amounts in thousands):

 

 

 

Six Months Ended June 30, 2020

 

 

Six Months Ended June 30, 2019

 

 

 

Rental

Income

 

 

Operating

Expenses

 

 

NOI

 

 

Rental

Income

 

 

Operating

Expenses

 

 

NOI

 

Same store (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

 

$

239,914

 

 

$

71,930

 

 

$

167,984

 

 

$

240,751

 

 

$

72,145

 

 

$

168,606

 

Orange County

 

 

53,013

 

 

 

12,167

 

 

 

40,846

 

 

 

51,887

 

 

 

12,142

 

 

 

39,745

 

San Diego

 

 

47,848

 

 

 

12,417

 

 

 

35,431

 

 

 

47,023

 

 

 

12,126

 

 

 

34,897

 

Subtotal - Southern California

 

 

340,775

 

 

 

96,514

 

 

 

244,261

 

 

 

339,661

 

 

 

96,413

 

 

 

243,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco

 

 

236,580

 

 

 

59,313

 

 

 

177,267

 

 

 

234,514

 

 

 

57,629

 

 

 

176,885

 

Washington D.C.

 

 

196,601

 

 

 

59,331

 

 

 

137,270

 

 

 

195,453

 

 

 

59,389

 

 

 

136,064

 

New York

 

 

227,179

 

 

 

98,581

 

 

 

128,598

 

 

 

230,808

 

 

 

96,067

 

 

 

134,741

 

Seattle

 

 

127,073

 

 

 

35,440

 

 

 

91,633

 

 

 

124,029

 

 

 

34,634

 

 

 

89,395

 

Boston

 

 

123,673

 

 

 

35,144

 

 

 

88,529

 

 

 

124,671

 

 

 

35,639

 

 

 

89,032

 

Denver

 

 

8,944

 

 

 

2,419

 

 

 

6,525

 

 

 

9,125

 

 

 

2,417

 

 

 

6,708

 

Total same store

 

 

1,260,825

 

 

 

386,742

 

 

 

874,083

 

 

 

1,258,261

 

 

 

382,188

 

 

 

876,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same store/other (2) (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same store

 

 

58,629

 

 

 

17,748

 

 

 

40,881

 

 

 

14,374

 

 

 

4,423

 

 

 

9,951

 

Other (3)

 

 

16,383

 

 

 

8,548

 

 

 

7,835

 

 

 

59,041

 

 

 

19,808

 

 

 

39,233

 

Total non-same store/other

 

 

75,012

 

 

 

26,296

 

 

 

48,716

 

 

 

73,415

 

 

 

24,231

 

 

 

49,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

1,335,837

 

 

$

413,038

 

 

$

922,799

 

 

$

1,331,676

 

 

$

406,419

 

 

$

925,257

 

 

(1)

For the six months ended June 30, 2020 and 2019, same store primarily includes all properties acquired or completed that were stabilized prior to January 1, 2019, less properties subsequently sold, which represented 74,264 apartment units.

(2)

For the six months ended June 30, 2020 and 2019, non-same store primarily includes properties acquired after January 1, 2019, plus any properties in lease-up and not stabilized as of January 1, 2019.

(3)

Other includes development, other corporate operations and operations prior to disposition for properties sold.

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Table of Contents

 

 

 

 

Quarter Ended June 30, 2020

 

 

Quarter Ended June 30, 2019

 

 

 

Rental

Income

 

 

Operating

Expenses

 

 

NOI

 

 

Rental

Income

 

 

Operating

Expenses

 

 

NOI

 

Same store (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

 

$

117,994

 

 

$

35,013

 

 

$

82,981

 

 

$

121,216

 

 

$

35,688

 

 

$

85,528

 

Orange County

 

 

26,318

 

 

 

5,953

 

 

 

20,365

 

 

 

26,058

 

 

 

5,966

 

 

 

20,092

 

San Diego

 

 

23,706

 

 

 

6,100

 

 

 

17,606

 

 

 

23,720

 

 

 

5,978

 

 

 

17,742

 

Subtotal - Southern California

 

 

168,018

 

 

 

47,066

 

 

 

120,952

 

 

 

170,994

 

 

 

47,632

 

 

 

123,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco

 

 

116,303

 

 

 

29,045

 

 

 

87,258

 

 

 

118,044

 

 

 

28,528

 

 

 

89,516

 

Washington D.C.

 

 

97,527

 

 

 

28,680

 

 

 

68,847

 

 

 

98,571

 

 

 

29,409

 

 

 

69,162

 

New York

 

 

111,949

 

 

 

48,130

 

 

 

63,819

 

 

 

117,457

 

 

 

47,626

 

 

 

69,831

 

Seattle

 

 

63,378

 

 

 

18,383

 

 

 

44,995

 

 

 

63,695

 

 

 

17,853

 

 

 

45,842

 

Boston

 

 

59,990

 

 

 

16,984

 

 

 

43,006

 

 

 

62,751

 

 

 

17,398

 

 

 

45,353

 

Denver

 

 

6,110

 

 

 

1,733

 

 

 

4,377

 

 

 

6,403

 

 

 

1,831

 

 

 

4,572

 

Total same store

 

 

623,275

 

 

 

190,021

 

 

 

433,254

 

 

 

637,915

 

 

 

190,277

 

 

 

447,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same store/other (2) (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same store

 

 

24,631

 

 

 

7,212

 

 

 

17,419

 

 

 

4,000

 

 

 

1,124

 

 

 

2,876

 

Other (3)

 

 

5,626

 

 

 

2,257

 

 

 

3,369

 

 

 

27,459

 

 

 

8,506

 

 

 

18,953

 

Total non-same store/other

 

 

30,257

 

 

 

9,469

 

 

 

20,788

 

 

 

31,459

 

 

 

9,630

 

 

 

21,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

653,532

 

 

$

199,490

 

 

$

454,042

 

 

$

669,374

 

 

$

199,907

 

 

$

469,467

 

 

(1)

For the quarters ended June 30, 2020 and 2019, same store primarily includes all properties acquired or completed that were stabilized prior to April 1, 2019, less properties subsequently sold, which represented 74,843 apartment units.

(2)

For the quarters ended June 30, 2020 and 2019, non-same store primarily includes properties acquired after April 1, 2019, plus any properties in lease-up and not stabilized as of April 1, 2019.

(3)

Other includes development, other corporate operations and operations prior to disposition for properties sold.

 

 

 

Six Months Ended June 30, 2020

 

 

 

Total Assets

 

 

Capital Expenditures

 

Same store (1)

 

 

 

 

 

 

 

 

Los Angeles

 

$

3,064,404

 

 

$

13,070

 

Orange County

 

 

397,148

 

 

 

3,458

 

San Diego

 

 

382,082

 

 

 

1,993

 

Subtotal - Southern California

 

 

3,843,634

 

 

 

18,521

 

 

 

 

 

 

 

 

 

 

San Francisco

 

 

3,288,932

 

 

 

6,940

 

Washington D.C.

 

 

3,120,074

 

 

 

10,534

 

New York

 

 

4,001,050

 

 

 

10,429

 

Seattle

 

 

1,838,484

 

 

 

4,334

 

Boston

 

 

1,790,996

 

 

 

8,631

 

Denver

 

 

251,427

 

 

 

245

 

Total same store

 

 

18,134,597

 

 

 

59,634

 

 

 

 

 

 

 

 

 

 

Non-same store/other (2) (3)

 

 

 

 

 

 

 

 

Non-same store

 

 

1,642,289

 

 

 

1,129

 

Other (3)

 

 

938,065

 

 

 

502

 

Total non-same store/other

 

 

2,580,354

 

 

 

1,631

 

 

 

 

 

 

 

 

 

 

Totals

 

$

20,714,951

 

 

$

61,265

 

 

(1)

Same store primarily includes all properties acquired or completed that were stabilized prior to January 1, 2019, less properties subsequently sold, which represented 74,264 apartment units.

(2)

Non-same store primarily includes properties acquired after January 1, 2019, plus any properties in lease-up and not stabilized as of January 1, 2019.

(3)

Other includes development, other corporate operations and capital expenditures for properties sold.

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14.

Subsequent Events

The continued rapid development and fast-changing nature of the COVID-19 pandemic creates many unknowns that could have a future material impact on the Company.  Its duration and severity and the extent of the adverse health impact on the general population, our residents and our employees, as well as the potential changes in customer preferences for living in the urban and dense suburban locations in which many of the Company’s properties are located, are among the unknowns.  These, among other items, will likely impact the economy, the unemployment rate and our operations and could materially affect our future consolidated results of operations, financial condition, liquidity, investments and overall performance.

Subsequent to June 30, 2020, the Company:

 

Repaid $19.7 million of mortgage debt at par prior to maturity.

 

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.  In addition, please refer to the Definitions section below for various capitalized terms not immediately defined in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

 

Forward-looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These statements are based on current expectations, estimates, projections and assumptions made by management.  While the Company’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, which could cause actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.  Many of these uncertainties and risks are difficult to predict and beyond management’s control, such as the current novel coronavirus (“COVID-19”) pandemic (see below for further discussion).  Forward-looking statements are not guarantees of future performance, results or events.  The forward-looking statements contained herein are made as of the date hereof and the Company undertakes no obligation to update or supplement these forward-looking statements.  

In addition, these forward-looking statements are subject to risks related to the COVID-19 pandemic, many of which are unknown, including the duration and severity of the pandemic, the extent of the adverse health impact on the general population and on our residents, customers and employees in particular, its impact on the employment rate and the economy and the corresponding impact on our residents’ and tenants’ ability to pay their rent on time or at all, the extent and impact of governmental responses and the impact of operational changes we have implemented and may implement in response to the pandemic.

Factors that might cause such differences are discussed in Part I of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019, particularly those under Item 1A, Risk Factors.  Additional factors are also included in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q.

Forward-looking statements and related uncertainties are also included in the Notes to Consolidated Financial Statements in this report.

Due to the inherent uncertainty surrounding the social and economic disruption resulting from the COVID-19 pandemic, the Company withdrew its full-year 2020 guidance earlier this year.  The Company is also suspending issuing guidance in future periods until there is greater certainty surrounding the impact of the ongoing pandemic.

Overview

 

Equity Residential (“EQR”) is committed to creating communities where people thrive.  The Company, a member of the S&P 500, is focused on the acquisition, development and management of rental apartment properties located in urban and high-density suburban communities where today’s renters want to live, work and play.  ERP Operating Limited Partnership (“ERPOP”) is focused on conducting the multifamily property business of EQR.  EQR is a Maryland real estate investment trust (“REIT”) formed in March 1993 and ERPOP is an Illinois limited partnership formed in May 1993.  References to the “Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP.  References to the “Operating Partnership” mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP.  

EQR is the general partner of, and as of June 30, 2020 owned an approximate 96.4% ownership interest in, ERPOP.  All of the Company’s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP.  EQR issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP, but does not have any indebtedness as all debt is incurred by the Operating Partnership.  The Operating Partnership holds substantially all of the assets of the Company, including the Company’s ownership interests in its joint ventures.  The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.

The Company’s corporate headquarters is located in Chicago, Illinois and the Company also operates regional property management offices in each of its markets.  As of June 30, 2020, the Company had approximately 2,600 employees who provided real estate operations, leasing, legal, financial, accounting, acquisition, disposition, development and other support functions.

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Available Information

You may access our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to any of those reports we file with the Securities and Exchange Commission (“SEC”) free of charge on our website, www.equityapartments.com.  These reports are made available on our website as soon as reasonably practicable after we file them with the SEC.  The information contained on our website, including any information referred to in this report as being available on our website, is not a part of or incorporated into this report.

Business Objectives and Operating and Investing Strategies

The Company’s and the Operating Partnership’s overall business objectives and operating and investing strategies have not changed from the information included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019, though the Company and the Operating Partnership will continue to be focused on its response to the COVID-19 pandemic in the near-term.  As more fully discussed in the Company’s and the Operating Partnership’s Annual Report on Form 10-K, it continues to be the Company’s intention over time to diversify its portfolio into new markets that have characteristics similar to its current markets and to optimize the mix of the Company’s properties located in urban vs. dense suburban submarkets.

COVID-19 Impact

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The continued rapid development and fast-changing nature of the COVID-19 pandemic creates many unknowns that could have a future material impact on the Company.  Its duration and severity and the extent of the adverse health impact on the general population, our residents and our employees, as well as the potential changes in customer preferences for living in the urban and dense suburban locations in which many of the Company’s properties are located, are among the unknowns.  These, among other items, will likely impact the economy, the unemployment rate and our operations and could materially affect our future consolidated results of operations, financial condition, liquidity, investments and overall performance.  For additional details, see Item 1A, Risk Factors.

The Company continues to support its residents and employees during the COVID-19 pandemic.  The Company is utilizing technology to allow our property teams to interact remotely with current and prospective residents, including a touchless new leasing process and a service process designed to limit contact.  The Company also successfully implemented changes to the physical layout of its properties and remains focused on further enhancing its existing commitment to health and safety during the pandemic.  We also continue to provide additional paid leave for employees impacted by the pandemic and paid special bonuses to certain on-site employees during the second quarter of 2020 in recognition of their significant efforts.  In addition, the Company continues to support its corporate and regional employees by allowing them to work remotely during the pandemic.  Among other resident support efforts, we have an extensive outreach process for residents financially impacted by the pandemic and have created payment plans to assist them.

We see good demand for our apartments, both urban and suburban, but with increased customer price sensitivity, especially in the urban cores of New York City, San Francisco and Boston/Cambridge, MA.  Looking forward, we believe the rate of improvement in our business will be dictated by how effectively the COVID-19 pandemic can be controlled and more normal economic activity restored.  In the meantime, we believe our strong balance sheet, state of the art operating platform and opportunistic mindset leaves us well positioned to weather the storm and to take advantage should conditions allow.

During the second quarter of 2020, the Company also:

 

Experienced a recovery in demand by late May 2020.  Initial leads, Traffic and applications continue to be in-line with the same time last year;

 

Collected on average 97% of its total monthly Residential rental income.  July 2020 collections continue to trend on a similar pace to prior months; and

 

Had the highest resident retention for the second quarter in the Company’s history.

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Results of Operations

2020 Transactions

In conjunction with our business objectives and operating strategy, the Company continued to invest in apartment properties located primarily in our urban and high-density suburban communities and sell apartment properties that we believe will have inferior long-term returns.  The following table provides a rollforward of the transactions that occurred during the six months ended June 30, 2020:

 

Portfolio Rollforward

($ in thousands)

 

 

 

Properties

 

 

Apartment

Units

 

 

Sales Price

 

 

Disposition

Yield

 

12/31/2019

 

 

309

 

 

 

79,962

 

 

 

 

 

 

 

 

 

Dispositions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Rental Properties

 

 

(5

)

 

 

(1,552

)

 

$

(754,361

)

 

 

(4.7

)%

6/30/2020

 

 

304

 

 

 

78,410

 

 

 

 

 

 

 

 

 

 

The consolidated properties disposed of were located in the Phoenix, San Francisco and Washington D.C. markets and the sales generated an Unlevered IRR of 10.8%.  See Note 4 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate transactions.

We currently budget spending approximately $225.0 million on development costs during the year ending December 31, 2020, of which approximately $95.2 million was spent during the six months ended June 30, 2020, primarily for properties currently under construction.  Certain of these costs will be funded by third party construction mortgages and joint venture partner obligations.  Work at our development project in Boston resumed after a nine-week suspension due to the city’s COVID-19-related temporary construction moratorium, and our projects in Bethesda, MD and Alameda, CA continue under construction.  The expected spending noted above could change as a result of COVID-19 related impacts.

Same Store Results

Properties that the Company owned and were stabilized (see definition below) for all of both of the six months ended June 30, 2020 and 2019 (the “Six-Month 2020 Same Store Properties”), which represented 74,264 apartment units, impacted the Company’s results of operations.  The Six-Month 2020 Same Store Properties are discussed in the following paragraphs.

The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”).  NOI represents rental income less direct property operating expenses (including real estate taxes and insurance).  The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties.

The following tables provide a rollforward of the apartment units included in Same Store Properties and a reconciliation of apartment units included in Same Store Properties to those included in Total Properties for the six months ended June 30, 2020:

 

 

 

Six Months Ended June 30, 2020

 

 

 

Properties

 

 

Apartment

Units

 

Same Store Properties at December 31, 2019

 

 

279

 

 

 

71,830

 

2017 acquisitions

 

 

2

 

 

 

510

 

2018 acquisitions

 

 

5

 

 

 

1,461

 

2019 acquisitions

 

 

 

 

 

 

2020 dispositions

 

 

(5

)

 

 

(1,552

)

Lease-up properties stabilized

 

 

5

 

 

 

2,015

 

Same Store Properties at June 30, 2020

 

 

286

 

 

 

74,264

 

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Six Months Ended June 30, 2020

 

 

 

Properties

 

 

Apartment

Units

 

Same Store

 

 

286

 

 

 

74,264

 

Non-Same Store:

 

 

 

 

 

 

 

 

2019 acquisitions

 

 

13

 

 

 

3,540

 

Master-Leased properties (1)

 

 

1

 

 

 

162

 

Lease-up properties not yet stabilized (2)

 

 

3

 

 

 

443

 

Other

 

 

1

 

 

 

1

 

Total Non-Same Store

 

 

18

 

 

 

4,146

 

Total Properties and Apartment Units

 

 

304

 

 

 

78,410

 

 

Note: Properties are considered stabilized when they have achieved 90% occupancy for three consecutive months.  Properties are included in same store when they are stabilized for all of the current and comparable periods presented.

(1)

Consists of one property containing 162 apartment units that is wholly owned by the Company where the entire project is master-leased to a third party corporate housing provider.  

(2)

Consists of properties in various stages of lease-up and properties where lease-up has been completed but the properties were not stabilized for the comparable periods presented.

The following tables present reconciliations of operating income per the consolidated statements of operations to NOI, along with rental income, operating expenses and NOI per the consolidated statements of operations allocated between same store and non-same store results (amounts in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Operating income

 

$

778,974

 

 

$

578,894

 

Adjustments:

 

 

 

 

 

 

 

 

Property management

 

 

51,317

 

 

 

50,765

 

General and administrative

 

 

26,353

 

 

 

29,710

 

Depreciation

 

 

418,398

 

 

 

404,723

 

Net (gain) loss on sales of real estate properties

 

 

(352,243

)

 

 

(138,835

)

Total NOI

 

$

922,799

 

 

$

925,257

 

Rental income:

 

 

 

 

 

 

 

 

Same store

 

$

1,260,825

 

 

$

1,258,261

 

Non-same store/other

 

 

75,012

 

 

 

73,415

 

Total rental income

 

 

1,335,837

 

 

 

1,331,676

 

Operating expenses:

 

 

 

 

 

 

 

 

Same store

 

 

386,742

 

 

 

382,188

 

Non-same store/other

 

 

26,296

 

 

 

24,231

 

Total operating expenses

 

 

413,038

 

 

 

406,419

 

NOI:

 

 

 

 

 

 

 

 

Same store

 

 

874,083

 

 

 

876,073

 

Non-same store/other

 

 

48,716

 

 

 

49,184

 

Total NOI

 

$

922,799

 

 

$

925,257

 

 

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The following table provides comparative total same store results and statistics for the Six-Month 2020 Same Store Properties:

 

June YTD 2020 vs. June YTD 2019

Same Store Results/Statistics Including 74,264 Same Store Apartment Units

$ in thousands (except for Average Rental Rate)

 

June YTD 2020

 

 

June YTD 2019

 

 

 

Residential

 

 

%

Change

 

 

Non-

Residential

 

 

%

Change

 

 

Total

 

 

%

Change

 

 

 

 

Residential

 

 

Non-

Residential

 

 

Total

 

Revenues

 

$

1,223,361

 

 

 

1.0

%

 

$

37,464

 

(1)

 

(20.4

%)

 

$

1,260,825

 

 

 

0.2

%

 

Revenues

 

$

1,211,210

 

 

$

47,051

 

 

$

1,258,261

 

Expenses

 

$

375,710

 

 

 

1.1

%

 

$

11,032

 

 

 

3.4

%

 

$

386,742

 

 

 

1.2

%

 

Expenses

 

$

371,517

 

 

$

10,671

 

 

$

382,188

 

NOI

 

$

847,651

 

 

 

0.9

%

 

$

26,432

 

 

 

(27.3

%)

 

$

874,083

 

 

 

(0.2

%)

 

NOI

 

$

839,693

 

 

$

36,380

 

 

$

876,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Rental Rate

 

$

2,871

 

 

 

1.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Rental Rate

 

$

2,821

 

 

 

 

 

 

 

 

 

Physical Occupancy

 

 

95.7

%

 

 

(0.7

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Physical Occupancy

 

 

96.4

%

 

 

 

 

 

 

 

 

Turnover

 

 

21.4

%

 

 

(1.9

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turnover

 

 

23.3

%

 

 

 

 

 

 

 

 

 

Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.

(1)

Non-Residential operations have been more significantly impacted by the COVID-19 pandemic than the Company’s core Residential business.  The decline in Non-Residential revenues is primarily driven by lower public parking income, deferral/abatement of rent and higher bad debt expense.

The following table provides results and statistics related to our Residential same store operations for the six months ended June 30, 2020 and 2019:

 

June YTD 2020 vs. June YTD 2019

Same Store Residential Results/Statistics by Market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) from Prior Year

 

Markets/Metro Areas

 

Apartment

Units

 

 

June YTD

2020

% of

Actual

NOI

 

 

June YTD

2020

Average

Rental

Rate

 

 

June YTD

2020

Weighted

Average

Physical

Occupancy %

 

 

June YTD

2020

Turnover

 

 

Revenues

 

 

Expenses

 

 

NOI

 

 

Average

Rental

Rate

 

 

Physical

Occupancy

 

 

Turnover

 

Los Angeles

 

 

15,968

 

 

 

19.7

%

 

$

2,615

 

 

 

95.3

%

 

 

23.2

%

 

 

0.1

%

 

 

(0.3

%)

 

 

0.2

%

 

 

1.0

%

 

 

(0.9

%)

 

 

(2.6

%)

Orange County

 

 

4,028

 

 

 

4.8

%

 

 

2,272

 

 

 

96.6

%

 

 

18.8

%

 

 

2.2

%

 

 

0.2

%

 

 

2.8

%

 

 

2.0

%

 

 

0.2

%

 

 

(5.4

%)

San Diego

 

 

3,385

 

 

 

4.2

%

 

 

2,435

 

 

 

96.4

%

 

 

23.7

%

 

 

1.9

%

 

 

2.1

%

 

 

1.9

%

 

 

2.0

%

 

 

0.0

%

 

 

(2.7

%)

Subtotal – Southern California

 

 

23,381

 

 

 

28.7

%

 

 

2,529

 

 

 

95.7

%

 

 

22.5

%

 

 

0.7

%

 

 

0.1

%

 

 

0.9

%

 

 

1.3

%

 

 

(0.6

%)

 

 

(3.1

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco

 

 

12,183

 

 

 

20.7

%

 

 

3,334

 

 

 

95.8

%

 

 

21.1

%

 

 

1.1

%

 

 

2.9

%

 

 

0.5

%

 

 

1.7

%

 

 

(0.6

%)

 

 

(1.9

%)

Washington DC

 

 

13,711

 

 

 

16.0

%

 

 

2,463

 

 

 

95.9

%

 

 

19.8

%

 

 

1.3

%

 

 

(0.1

%)

 

 

1.9

%

 

 

2.1

%

 

 

(0.7

%)

 

 

(0.8

%)

New York

 

 

9,475

 

 

 

14.0

%

 

 

3,930

 

 

 

95.4

%

 

 

18.7

%

 

 

(0.3

%)

 

 

2.4

%

 

 

(2.4

%)

 

 

1.1

%

 

 

(1.3

%)

 

 

0.4

%

Seattle

 

 

8,442

 

 

 

10.2

%

 

 

2,469

 

 

 

96.3

%

 

 

22.9

%

 

 

3.8

%

 

 

2.7

%

 

 

4.2

%

 

 

3.9

%

 

 

(0.1

%)

 

 

(5.1

%)

Boston

 

 

6,346

 

 

 

9.7

%

 

 

3,178

 

 

 

94.7

%

 

 

22.7

%

 

 

1.0

%

 

 

(1.9

%)

 

 

2.2

%

 

 

2.6

%

 

 

(1.4

%)

 

 

1.2

%

Denver

 

 

726

 

 

 

0.7

%

 

 

2,133

 

 

 

94.5

%

 

 

30.6

%

 

 

(1.2

%)

 

 

(0.3

%)

 

 

(1.5

%)

 

 

0.6

%

 

 

(1.9

%)

 

 

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

74,264

 

 

 

100.0

%

 

$

2,871

 

 

 

95.7

%

 

 

21.4

%

 

 

1.0

%

 

 

1.1

%

 

 

0.9

%

 

 

1.8

%

 

 

(0.7

%)

 

 

(1.9

%)

 

Note: The above table reflects Residential same store results only, which historically account for approximately 96.0% of total revenues.

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We continue to work with our residents and tenants on payment plans and collections and our allowance policies remain consistent.  We expect our reserves and bad debt charge-offs to remain elevated for the remainder of this year.  The following table provides Residential and Non-Residential accounts receivable and straight-line receivable balances for the Company’s same store properties as of June 30, 2020 and March 31, 2020 (amounts in thousands):

 

Same Store Resident/Tenant Accounts Receivable Balances

Including 74,264 Same Store Apartment Units

$ in thousands

 

 

 

Residential

 

 

Non-Residential

 

 

 

June 30, 2020

 

 

March 31, 2020

 

 

June 30, 2020

 

 

March 31, 2020

 

Resident/tenant accounts receivable balances

 

$

18,175

 

 

$

5,358

 

 

$

4,815

 

 

$

2,270

 

Allowance for doubtful accounts

 

 

(6,518

)

 

 

(1,850

)

 

 

(2,416

)

 

 

(1,532

)

Net receivable balances

 

$

11,657

 

(1)

$

3,508

 

 

$

2,399

 

 

$

738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line receivable balances

 

$

2,990

 

 

$

1,633

 

 

$

24,161

 

 

$

26,154

 

 

(1)

The Company held Residential security deposits approximating 20% of the net receivable balance at June 30, 2020.

The following table provides preliminary information related to Residential same store operations for the month ended July 2020 compared to the actuals for the quarter ended June 30, 2020.  

 

 

 

July 2020

 

 

Second Quarter 2020

 

New Lease Change

 

 

(8.3

%)

 

 

(7.0

%)

Renewal Rate Achieved

 

 

(0.9

%)

 

 

0.7

%

Blended Rate (1)

 

 

(4.5

%)

 

 

(2.7

%)

Physical Occupancy

 

 

95.0

%

 

 

94.9

%

 

(1)

Blended Rate after applying the effect of new move-in and renewal concessions is approximately (5.5%) and (3.5%) for July 2020 and the second quarter of 2020, respectively, driven by higher usage in the urban cores of New York, San Francisco and Boston.

The July 2020 results listed above are approximately equal to the Company's June 2020 results for New Lease Change, Renewal Rate Achieved and Blended Rate.  Concession use is higher in July 2020 than in June 2020.

We expected the negative impact on Physical Occupancy to be most pronounced in the second quarter and then stabilize at a new base level, which currently appears to be the case.  The story is more mixed as it relates to Average Rental Rates, which remains more challenged in the urban cores of New York City, San Francisco and Boston/Cambridge, MA.  Use of new lease concessions during the second quarter of 2020 was concentrated in the submarkets noted above.  Traffic and application activity improved throughout the quarter as Average Rental Rates were reduced in these submarkets.  Meanwhile the rest of the portfolio is showing more stability in Average Rental Rates, though those rates are still lower than last year.

As a result of the differing impact that the COVID-19 pandemic is currently having on the operating performance of our markets and submarkets, we believe it is most helpful to discuss our portfolio as follows:  

 

First, our suburban properties, which represent approximately 45% of our portfolio, have been more resilient during the pandemic with Physical Occupancy declining to a low point of 95.2% during the second quarter of 2020 but since recovering fully to levels at or above the prior year.  By the middle of July 2020, Physical Occupancy for this category of properties stood at 96.6%.  The percentage of suburban leases renewing was very strong at 65% and continues to trend well above the prior year.  Average Rental Rates have slowly recovered since early May with limited concession use, though those rates are still below the prior year level.  

 

Second, our properties that are located in the urban cores of New York City, San Francisco and Boston/Cambridge, MA, which represent about 25% of our portfolio, have Physical Occupancy of 90.9% by the middle of July 2020.  This group of properties has the highest use of concessions (about 50% of all new leases) and the most pressure on Average Rental Rates.  For the second quarter of 2020, these urban properties renewed 58% of residents, which was 500 basis points lower than the second quarter of 2019 and was trending down throughout the quarter, ending at 53% in June 2020.   We believe these properties have the highest risk of volatility in operations for the balance of the year.

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Our third category consists of urban properties in our other markets, such as Washington D.C., Seattle and Southern California, and constitutes about 30% of our portfolio.  These properties reached a low point in Physical Occupancy of 94.0% in the middle of May 2020, but quickly rebounded and had Physical Occupancy of 95.2% by the middle of July 2020Average Rental Rates have been stable since the middle of May, though they are down year-over-year, and concessions are being used on about 15% of our new leases.  During the second quarter of 2020, 57% of residents renewed at these properties, which is 300 basis points better than the second quarter of 2019. Overall, this group of urban properties has had consistent operations for the past two months, with a slight increase in Physical Occupancy in the last couple of weeks of July 2020.

The following table provides comparative total same store operating expenses for the Six-Month 2020 Same Store Properties:

 

June YTD 2020 vs. June YTD 2019

Total Same Store Operating Expenses Including 74,264 Same Store Apartment Units

$ in thousands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Actual

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YTD 2020

 

 

 

Actual

 

 

Actual

 

 

$

 

 

%

 

 

Operating

 

 

 

YTD 2020

 

 

YTD 2019

 

 

Change (5)

 

 

Change

 

 

Expenses

 

Real estate taxes

 

$

170,416

 

 

$

164,075

 

 

$

6,341

 

 

 

3.9

%

 

 

44.1

%

On-site payroll (1)

 

 

81,249

 

 

 

81,757

 

 

 

(508

)

 

 

(0.6

)%

 

 

21.0

%

Utilities (2)

 

 

50,654

 

 

 

49,787

 

 

 

867

 

 

 

1.7

%

 

 

13.1

%

Repairs and maintenance (3)

 

 

44,497

 

 

 

48,027

 

 

 

(3,530

)

 

 

(7.4

)%

 

 

11.5

%

Insurance

 

 

12,187

 

 

 

10,365

 

 

 

1,822

 

 

 

17.6

%

 

 

3.2

%

Leasing and advertising

 

 

4,385

 

 

 

4,917

 

 

 

(532

)

 

 

(10.8

)%

 

 

1.1

%

Other on-site operating expenses (4)

 

 

23,354

 

 

 

23,260

 

 

 

94

 

 

 

0.4

%

 

 

6.0

%

Total Same Store Operating Expenses

(includes Residential and Non-Residential)

 

$

386,742

 

 

$

382,188

 

 

$

4,554

 

 

 

1.2

%

 

 

100.0

%

 

(1)

On-site payroll – Includes payroll and related expenses for on-site personnel including property managers, leasing consultants and maintenance staff.

(2)

Utilities – Represents gross expenses prior to any recoveries under the Resident Utility Billing System (“RUBS”).  Recoveries are reflected in rental income.

(3)

Repairs and maintenance – Includes general maintenance costs, apartment unit turnover costs including interior painting, routine landscaping, security, exterminating, fire protection, snow removal, elevator, roof and parking lot repairs and other miscellaneous building repair and maintenance costs.

(4)

Other on-site operating expenses – Includes ground lease costs and administrative costs such as office supplies, telephone and data charges and association and business licensing fees.

(5)

The year-to-date over year-to-date changes are due primarily to:

 

Real estate taxes – Higher rates and assessed values continue to drive real estate tax growth across most markets with a slight improvement from previous expectations caused by successful appeals activity and lower than expected rate growth in New York.

 

On-site payroll – Results better than expectations due to faster than anticipated progress in transition to enhanced operating platform, lower than expected employee benefit-related costs and less overtime, partially offset by one-time frontline worker bonuses.

 

Utilities – Growth lower than expected due to warmer winter weather and energy rate decreases.

 

Repairs and maintenance – Decrease primarily driven by deferral and cancellation of some projects as a result of COVID-19-related delays.

 

Insurance – Increase due to higher premiums on property insurance renewal caused by challenging conditions in the insurance market.

 

Leasing and advertising – Decrease greater than expectations due in part to suspension of resident activities.

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See also Note 13 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s segment disclosures.

Non-Same Store/Other Results

Non-same store/other NOI results for the six months ended June 30, 2020 decreased approximately $0.5 million compared to the same period of 2019 and consist primarily of properties acquired in calendar year 2019, operations from the Company’s development properties and operations prior to disposition from 2019 and 2020 sold properties.  This difference is due primarily to:

 

 

A positive impact of higher NOI from development and newly stabilized development properties in lease-up of $3.4 million;

 

A positive impact of higher NOI from properties acquired in 2019 of $27.6 million; and

 

A negative impact of lost NOI from 2019 and 2020 dispositions of $29.5 million.

Comparison of the six months and quarter ended June 30, 2020 to the six months and quarter ended June 30, 2019

The following table presents a reconciliation of diluted earnings per share/unit for the six months and quarter ended June 30, 2020 as compared to the same period in 2019:

 

 

 

Six Months Ended June 30

 

 

Quarter Ended June 30

 

Diluted earnings per share/unit for period ended 2019

 

$

1.11

 

 

$

0.83

 

Property NOI

 

 

(0.01

)

 

 

(0.04

)

Interest expense

 

 

0.06

 

 

 

0.03

 

Debt extinguishment costs

 

 

0.04

 

 

 

0.04

 

Net gain/loss on property sales

 

 

0.34

 

 

 

(0.17

)

Other

 

 

(0.01

)

 

 

0.01

 

Diluted earnings per share/unit for period ended 2020

 

$

1.53

 

 

$

0.70

 

 

The decrease in consolidated NOI is primarily a result of the Company’s lower NOI from same store properties, largely due to the economic impact from the COVID-19 pandemic.  The following table presents the changes in the components of consolidated NOI for the six months and quarter ended June 30, 2020 as compared to the same periods in 2019:

 

 

 

Six Months Ended June 30, 2020

 

 

Quarter Ended June 30, 2020

 

Consolidated rental income

 

 

0.3

%

 

 

(2.4

%)

Consolidated operating expenses (1)

 

 

1.6

%

 

 

(0.2

%)

Consolidated NOI

 

 

(0.3

%)

 

 

(3.3

%)

 

(1)

Consolidated operating expenses are comprised of property and maintenance and real estate taxes and insurance.

 

Property management expenses include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third party management companies.  These expenses increased approximately $0.6 million or 1.1% for the six months ended June 30, 2020 as compared to the prior year period.  The increase is primarily attributable to increases in information technology related costs specifically for various operating initiatives such as sales-focused improvements and service enhancements, partially offset by decreases in payroll-related costs, travel costs and training/conference costs.  These expenses decreased approximately $0.8 million or 3.1% for the quarter ended June 30, 2020 as compared to the prior year period, primarily due to a decrease in payroll-related costs, travel costs and training/conference costs.  The Company suspended the majority of all travel and training/conference activities as a result of the COVID-19 pandemic.

General and administrative expenses, which include corporate operating expenses, decreased approximately $3.4 million or 11.3% and approximately $2.5 million or 17.4% for the six months and quarter ended June 30, 2020, respectively, as compared to the prior year periods, primarily due to decreases in payroll-related costs as a result of the Company’s executive changes over the past two years.

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Depreciation expense, which includes depreciation on non-real estate assets, increased approximately $13.7 million or 3.4% and approximately $5.5 million or 2.7% for the six months and quarter ended June 30, 2020, respectively, as compared to the prior year periods, primarily as a result of additional depreciation expense on properties acquired in 2019 and development properties placed in service during 2019, offset by lower depreciation from properties sold in 2019 and 2020.

Net gain on sales of real estate properties increased approximately $213.4 million for the six months ended June 30, 2020 as compared to the prior year period, primarily as a result of a higher sales volume with the sale of five consolidated apartment properties during the first half of 2020 as compared to the sale of two consolidated apartment properties during the first half of 2019.  Net gain on sales of real estate properties increased approximately $5.4 million or 3.9% for the quarter ended June 30, 2020 as compared to the prior year period, primarily as a result of the sale of two consolidated apartment properties sold for a higher gain in the second quarter of 2020 as compared to the sale of two consolidated properties in the same period in 2019.

Interest and other income increased approximately $1.5 million or 80.3% and approximately $0.4 million or 31.2% for the six months and quarter ended June 30, 2020, respectively, as compared to the prior year periods.  These increases are primarily due to higher insurance/litigation settlement proceeds that did not occur in 2019, partially offset by decreases in short-term investment income on cash and restricted deposit accounts in 2020 as compared to 2019 due to a lower rate environment and lower overall balances.

Other expenses decreased approximately $4.2 million or 49.6% and approximately $3.4 million or 66.9% for the six months and quarter ended June 30, 2020, respectively, as compared to the prior year periods, primarily due to decreases in various consulting costs related to a data analytics project which was completed last year and litigation and environmental settlements, partially offset by increases in advocacy contributions in 2020 as compared to 2019.  

Interest expense, including amortization of deferred financing costs, decreased approximately $38.0 million or 18.1% and approximately $28.6 million or 25.4% for the six months and quarter ended June 30, 2020, respectively, as compared to the prior year periods.  The decrease is due primarily to lower debt extinguishment costs, lower overall debt balances outstanding between the periods as a result of deploying disposition proceeds to repay debt, as well as lower overall interest rates.  The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the six months ended June 30, 2020 was 3.95% as compared to 4.34% for the prior year period, and for the quarter ended June 30, 2020 was 3.96% as compared to 4.34% for the prior year period.  The Company capitalized interest of approximately $4.1 million and $2.7 million during the six months ended June 30, 2020 and 2019, respectively, and $2.3 million and $1.5 million during the quarters ended June 30, 2020 and 2019, respectively.

Income from investments in unconsolidated entities decreased approximately $70.3 million and $69.8 million for the six months and quarter ended June 30, 2020, respectively, as compared to the prior year periods, primarily as a result of a $69.5 million gain on the sale of two unconsolidated properties in 2019 that did not occur in the same periods in 2020.

Net (income) loss attributable to Noncontrolling Interests in partially owned properties decreased approximately $11.8 million for the six months ended June 30, 2020, as compared to the prior year period, primarily as a result of noncontrolling interest allocations related to the sale of one partially owned apartment property in 2020 as compared to no sales in the same period in 2019.

Liquidity and Capital Resources

 

The Company believes its current liquidity position is strong despite the impact of the COVID-19 pandemic.  With approximately $2.4 billion in readily available liquidity, limited near-term maturities, very strong credit metrics and ample access to capital markets at historically low rates, the Company believes it is well positioned to meet its future obligations.  See further discussion below.

Short-Term Liquidity and Cash Proceeds

The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under the Company’s revolving credit facility and commercial paper program.  Currently, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions.

The following table presents the Company’s balances for cash and cash equivalents, restricted deposits and the available borrowing capacity on its revolving credit facility as of June 30, 2020 and December 31, 2019 (amounts in thousands): 

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June 30,

2020

 

 

December 31,

2019

 

Cash and cash equivalents

 

$

187,416

 

 

$

45,753

 

Restricted deposits

 

$

58,117

 

 

$

71,246

 

Unsecured revolving credit facility availability

 

$

2,399,051

 

 

$

1,379,071

 

 

During the six months ended June 30, 2020, the Company generated proceeds from various transactions, which included the following:

 

Disposed of five consolidated rental properties, receiving net proceeds of approximately $747.6 million;

 

Obtained $495.0 million in a 2.60% fixed rate mortgage loan pool maturing on May 1, 2030; and

 

Issued Common Shares related to share option exercises and ESPP purchases and received net proceeds of $13.7 million, which were contributed to the capital of the Operating Partnership in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis).

During the six months ended June 30, 2020, the above proceeds along with net cash flow from operations and borrowings from the Company’s revolving line of credit and commercial paper program were primarily utilized to:

 

Invest $95.2 million primarily in development projects; and

 

Repay $95.4 million of mortgage loans (inclusive of scheduled principal repayments).

Subsequent to June 30, 2020, the Company prepaid at par $19.7 million of the $23.7 million in debt maturities remaining in 2020.  The Company has debt maturities of $834.9 million in 2021, $750.0 million of which is due on December 15, 2021.

Credit Facility and Commercial Paper Program

The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024.  The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans.  The interest rate on advances under the facility will generally be LIBOR plus a spread (currently 0.775%), or based on bids received from the lending group, and the Company pays an annual facility fee (currently 0.125%).  Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating.

The unsecured revolving credit agreement contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances, such as the anticipated phase-out of LIBOR by the end of 2021. At this time, it cannot be determined with certainty what interest rate(s) may succeed LIBOR, if any, and how any successor or alternative rates for LIBOR may affect borrowing costs or the availability of variable interest rate borrowings.

The Company has an unsecured commercial paper note program in the United States.  The Company may borrow up to a maximum of $1.0 billion under this program subject to market conditions.  The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness. While the COVID-19 pandemic caused a temporary disruption in the commercial paper market in March 2020, the Company has maintained access to such market and expects to continue to be able to do so in the future.

The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations.  The following table presents the availability on the Company’s unsecured revolving credit facility as of July 28, 2020 (amounts in thousands):

 

 

 

July 28, 2020

 

Unsecured revolving credit facility commitment

 

$

2,500,000

 

Commercial paper balance outstanding

 

 

 

Unsecured revolving credit facility balance outstanding

 

 

 

Other restricted amounts

 

 

(100,949

)

Unsecured revolving credit facility availability

 

$

2,399,051

 

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Dividend Policy

The Company determines its dividends/distributions based on actual and projected financial conditions, the Company’s actual and projected liquidity and operating results, the Company’s projected cash needs for capital expenditures and other investment activities and such other factors as the Company’s Board of Trustees deems relevant.  The Company declared a dividend/distribution for the first and second quarters of 2020 of $0.6025 per share/unit in each quarter, an annualized increase of 6.2% over the amount paid in 2019.  All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.

Total dividends/distributions paid in July 2020 amounted to $232.2 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended June 30, 2020.

Long-Term Financing and Capital Needs

The Company expects to meet its long-term liquidity requirements, such as lump sum unsecured note and mortgage debt maturities, property acquisitions and financing of development activities, through the issuance of secured and unsecured debt and equity securities (including additional OP Units), proceeds received from the disposition of certain properties and joint ventures, along with cash generated from operations after all distributions.  The Company has a significant number of unencumbered properties available to secure additional mortgage borrowings should unsecured capital be unavailable or the cost of alternative sources of capital be too high.  The value of and cash flow from these unencumbered properties are in excess of the requirements the Company must maintain in order to comply with covenants under its unsecured notes and line of credit.  Of the $27.2 billion in investment in real estate on the Company’s balance sheet at June 30, 2020, $23.0 billion or 84.7% was unencumbered.  However, there can be no assurances that these sources of capital will be available to the Company in the future on acceptable terms or otherwise.

EQR issues equity and guarantees certain debt of the Operating Partnership from time to time.  EQR does not have any indebtedness as all debt is incurred by the Operating Partnership.

The Company’s total debt summary and debt maturity schedules as of June 30, 2020 are as follows:

Debt Summary as of June 30, 2020

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

Debt

 

 

 

 

 

 

Average

 

 

Maturities

 

 

 

Balances

 

 

% of Total

 

 

Rates

 

 

(years)

 

Secured

 

$

2,340,757

 

 

 

27.8

%

 

 

3.51

%

 

 

7.0

 

Unsecured

 

 

6,081,102

 

 

 

72.2

%

 

 

3.85

%

 

 

10.3

 

Total

 

$

8,421,859

 

 

 

100.0

%

 

 

3.77

%

 

 

9.4

 

Fixed Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured – Conventional

 

$

1,972,862

 

 

 

23.4

%

 

 

3.94

%

 

 

5.4

 

Unsecured – Public

 

 

6,081,102

 

 

 

72.2

%

 

 

4.06

%

 

 

10.3

 

Fixed Rate Debt

 

 

8,053,964

 

 

 

95.6

%

 

 

4.03

%

 

 

9.1

 

Floating Rate Debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured – Conventional

 

 

7,315

 

 

 

0.1

%

 

 

3.35

%

 

 

2.0

 

Secured – Tax Exempt

 

 

360,580

 

 

 

4.3

%

 

 

1.49

%

 

 

15.5

 

Unsecured – Revolving Credit Facility

 

 

 

 

 

 

 

 

1.47

%

 

 

4.3

 

Unsecured – Commercial Paper Program

 

 

 

 

 

 

 

 

1.81

%

 

 

 

Floating Rate Debt

 

 

367,895

 

 

 

4.4

%

 

 

1.68

%

 

 

15.2

 

Total

 

$

8,421,859

 

 

 

100.0

%

 

 

3.77

%

 

 

9.4

 

 

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Table of Contents

 

Debt Maturity Schedule as of June 30, 2020

($ in thousands)

 

Year

 

Fixed

Rate

 

 

Floating

Rate

 

 

Total

 

 

% of Total

 

 

Weighted Average

Coupons on

Fixed Rate Debt

 

 

Weighted Average

Coupons on

Total Debt

 

2020

 

$

23,669

 

 

$

 

 

$

23,669

 

 

 

0.3

%

 

 

4.75

%

 

 

4.75

%

2021

 

 

834,904

 

(1)

 

 

 

 

834,904

 

 

 

9.8

%

 

 

4.63

%

 

 

4.63

%

2022

 

 

264,185

 

 

 

7,796

 

 

 

271,981

 

 

 

3.2

%

 

 

3.25

%

 

 

3.22

%

2023

 

 

1,325,588

 

 

 

3,500

 

 

 

1,329,088

 

 

 

15.6

%

 

 

3.74

%

 

 

3.73

%

2024

 

 

 

 

 

6,100

 

 

 

6,100

 

 

 

0.1

%

 

N/A

 

 

 

0.15

%

2025

 

 

450,000

 

 

 

8,200

 

 

 

458,200

 

 

 

5.4

%

 

 

3.38

%

 

 

3.32

%

2026

 

 

592,025

 

 

 

9,000

 

 

 

601,025

 

 

 

7.0

%

 

 

3.58

%

 

 

3.53

%

2027

 

 

400,000

 

 

 

9,800

 

 

 

409,800

 

 

 

4.8

%

 

 

3.25

%

 

 

3.18

%

2028

 

 

900,000

 

 

 

42,380

 

 

 

942,380

 

 

 

11.1

%

 

 

3.79

%

 

 

3.62

%

2029

 

 

888,120

 

 

 

11,500

 

 

 

899,620

 

 

 

10.6

%

 

 

3.30

%

 

 

3.26

%

2030+

 

 

2,445,850

 

 

 

288,135

 

 

 

2,733,985

 

 

 

32.1

%

 

 

3.56

%

 

 

3.21

%

Subtotal

 

 

8,124,341

 

 

 

386,411

 

 

 

8,510,752

 

 

 

100.0

%

 

 

3.67

%

 

 

3.51

%

Deferred Financing Costs and

   Unamortized (Discount)

 

 

(70,377

)

 

 

(18,516

)

 

 

(88,893

)

 

N/A

 

 

N/A

 

 

N/A

 

Total

 

$

8,053,964

 

 

$

367,895

 

 

$

8,421,859

 

 

 

100.0

%

 

 

3.67

%

 

 

3.51

%

 

(1)

$750.0 million of 4.625% unsecured notes will mature on December 15, 2021.

See Note 9 in the Notes to Consolidated Financial Statements for additional discussion of debt at June 30, 2020.

ERPOP’s long-term senior debt ratings and short-term commercial paper ratings, as well as EQR’s long-term preferred equity ratings, have recently been reaffirmed during the COVID-19 pandemic by all three rating agencies listed below and all continue to maintain a stable outlook. As of July 28, 2020, the ratings are as follows:

 

 

 

Standard & Poor’s

 

Moody’s

 

Fitch

ERPOP’s long-term senior debt rating

 

A-

 

A3

 

A

ERPOP’s short-term commercial paper rating

 

A-2

 

P-2

 

F-1

EQR’s long-term preferred equity rating

 

BBB

 

Baa1

 

BBB+

 

See Note 14 in the Notes to Consolidated Financial Statements for discussion of the events, if any, which occurred subsequent to June 30, 2020.

Debt Covenants

The Company’s unsecured debt includes certain financial and operating covenants including, among other things, maintenance of certain financial ratios.  These provisions are contained in the indentures applicable to each note payable or the credit agreement for our line of credit.  The Company was in compliance with its unsecured debt covenants for all periods presented. The following table presents the Company’s selected unsecured public debt covenants as of June 30, 2020, March 31, 2020 and December 31, 2019:

 

 

 

June 30,

2020

 

 

March 31,

2020

 

 

December 31,

2019

 

Debt to Adjusted Total Assets (not to exceed 60%)

 

31.8%

 

 

32.5%

 

 

33.8%

 

Secured Debt to Adjusted Total Assets (not to exceed 40%)

 

9.7%

 

 

8.2%

 

 

8.2%

 

Consolidated Income Available for Debt Service to

   Maximum Annual Service Charges

   (must be at least 1.5 to 1)

 

4.96

 

 

5.09

 

 

5.07

 

Total Unencumbered Assets to Unsecured Debt

   (must be at least 125%)

 

439.5%

 

 

408.3%

 

 

386.1%

 

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Note: These selected covenants represent the most restrictive financial covenants relating to ERPOP’s outstanding public debt securities and are defined in the indenture relating to such securities.  The Company maintains substantial additional borrowing capacity and, as reflected by the above selected covenant information, believes it could currently incur substantial additional debt before it would breach any of its debt covenants.

Capitalization of Fixed Assets and Improvements to Real Estate

The Company’s and the Operating Partnership’s capital expenditures policy has not changed from the information included in the Company’s and the Operating Partnerships Annual Report on Form 10-K for the year ended December 31, 2019.

For the six months ended June 30, 2020, our actual capital expenditures to real estate included the following (amounts in thousands except for apartment unit and per apartment unit amounts):

 

Capital Expenditures to Real Estate

For the Six Months Ended June 30, 2020

 

 

 

Same Store

Properties (4)

 

 

Non-Same Store

Properties/Other (5)

 

 

Total

 

 

Same Store Avg. Per

Apartment Unit

 

Total Apartment Units

 

 

74,264

 

 

 

4,146

 

 

 

78,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Improvements (1)

 

$

29,657

 

 

$

1,387

 

 

$

31,044

 

 

$

399

 

Renovation Expenditures (2)

 

 

15,022

 

 

 

6

 

 

 

15,028

 

 

 

202

 

Replacements (3)

 

 

14,955

 

 

 

238

 

 

 

15,193

 

 

 

202

 

Total Capital Expenditures to Real Estate

 

$

59,634

 

 

$

1,631

 

 

$

61,265

 

 

$

803

 

 

(1)

Building Improvements – Includes roof replacement, paving, building mechanical equipment systems, exterior siding and painting, major landscaping, furniture, fixtures and equipment for amenities and common areas, vehicles and office and maintenance equipment.

(2)

Renovation Expenditures – Apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets.  Amounts for 658 same store apartment units approximated $22,830 per apartment unit renovated.  

(3)

Replacements – Includes appliances, mechanical equipment, fixtures and flooring (including hardwood and carpeting).

(4)

Same Store Properties – Primarily includes all properties acquired or completed that are stabilized prior to January 1, 2019, less properties subsequently sold.  Properties are included in Same Store when they are stabilized for all of the current and comparable periods presented.

(5)

Non-Same Store Properties/Other – Primarily includes all properties acquired during 2019 and 2020, plus any properties in lease-up and not stabilized as of January 1, 2019.  Also includes capital expenditures for properties sold.

The COVID-19 pandemic has led us to temporarily slow our capital expenditures, including our renovation activities, to those deemed essential.  Governmental movement restrictions, social distancing requirements, and in some cases, difficulty in procuring materials make continuing these activities more difficult.

During the six months ended June 30, 2020, the Company’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company’s property management offices and its corporate offices, were approximately $15.5 million.  The Company expects to fund approximately $6.2 million in total non-real estate capital additions for the remainder of 2020. These year-to-date and anticipated fundings are significantly higher than 2019 and are primarily driven by corporate office renovations during 2020.

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Derivative Instruments

In the normal course of business, the Company is exposed to the effect of interest rate changes.  The Company may seek to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.  The Company may also use derivatives to manage commodity prices in the daily operations of the business.

The Company has a policy of only entering into derivative contracts with major financial institutions based upon their credit ratings and other factors.  When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from these instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives it currently has in place.

See Note 10 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at June 30, 2020.

Definitions

The definition of certain terms described above or below are as follows:

 

Acquisition Cap Rate – NOI that the Company anticipates receiving in the next 12 months (or the year two or three stabilized NOI for properties that are in lease-up at acquisition) less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross purchase price of the asset.  The weighted average Acquisition Cap Rate for acquired properties is weighted based on the projected NOI streams and the relative purchase price for each respective property.

 

Average Rental Rate – Total Residential rental revenues reflected on a straight-line basis in accordance with GAAP divided by the weighted average occupied apartment units for the reporting period presented.

 

Blended Rate – The weighted average of New Lease Change and Renewal Rate Achieved.

 

Development Yield – NOI that the Company anticipates receiving in the next 12 months following stabilization less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $50-$150 per apartment unit depending on the type of asset) divided by the Total Budgeted Capital Cost of the asset. The weighted average Development Yield for development properties is weighted based on the projected NOI streams and the relative Total Budgeted Capital Cost for each respective property.

 

Disposition Yield – NOI that the Company anticipates giving up in the next 12 months less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross sales price of the asset.  The weighted average Disposition Yield for sold properties is weighted based on the projected NOI streams and the relative sales price for each respective property.

 

New Lease Change – The change in rent for a lease with a new or transferring resident compared to the rent for the prior lease of the identical apartment unit, regardless of lease term and without concessions or discounts being applied.

 

Non-Residential – Consists of revenues and expenses from retail and public parking garage operations.

 

Physical Occupancy – The weighted average occupied apartment units for the reporting period divided by the average of total apartment units available for rent for the reporting period.

 

Renewal Rate Achieved – The change in rent for a new lease on an apartment unit where the lease has been renewed as compared to the rent for the prior lease of the identical apartment unit, regardless of lease term and without concessions or discounts being applied.

 

Residential – Consists of multifamily apartment revenues and expenses.

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% of Stabilized Budgeted NOIRepresents original budgeted 2020 NOI for stabilized properties and projected annual NOI at stabilization (defined as having achieved 90% occupancy for three consecutive months) for properties that are in lease-up.

 

Traffic – Consists of an expression of interest in an apartment by completing an in-person tour, self-guided tour or virtual tour that may result in an application to lease.

 

Turnover – Total Residential move-outs (including inter-property and intra-property transfers) divided by total Residential apartment units.

 

Unlevered Internal Rate of Return (“IRR”) – The Unlevered IRR on sold properties is the compound annual rate of return calculated by the Company based on the timing and amount of: (i) the gross purchase price of the property plus any direct acquisition costs incurred by the Company; (ii) total revenues earned during the Company’s ownership period; (iii) total direct property operating expenses (including real estate taxes and insurance) incurred during the Company’s ownership period; (iv) capital expenditures incurred during the Company’s ownership period; and (v) the gross sales price of the property net of selling costs.  

 

Weighted Average Coupons – Contractual interest rate for each debt instrument weighted by principal balances as of June 30, 2020. In case of debt for which fair value hedges are in place, the rate payable under the corresponding derivatives is used in lieu of the contractual interest rate.

 

Weighted Average Rates – Interest expense for each debt instrument for the six months ended June 30, 2020 weighted by its average principal balance for the same period. Interest expense includes amortization of premiums, discounts and other comprehensive income on debt and related derivative instruments. In case of debt for which derivatives are in place, the income or expense recognized under the corresponding derivatives is included in the total interest expense for the period.

 

 

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has various unconsolidated interests in certain joint ventures.  The Company does not believe that these unconsolidated investments have a materially different impact on its liquidity, cash flows, capital resources, credit or market risk than its consolidated operating and/or other activities.  See Note 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in partially owned entities.  See also Note 12 in the Notes to Consolidated Financial Statements for discussion regarding the Company’s development projects.

The Company’s contractual obligations for the next five years and thereafter have not changed materially from the amounts and disclosures included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.  See the updated debt maturity schedule included in Liquidity and Capital Resources for further discussion.

Critical Accounting Policies and Estimates

The Company’s and the Operating Partnership’s critical accounting policies and estimates have not changed from the information included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.

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Funds From Operations and Normalized Funds From Operations

The following is the Company’s and the Operating Partnership’s reconciliation of net income to FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units for the six months and quarters ended June 30, 2020 and 2019:

Funds From Operations and Normalized Funds From Operations

(Amounts in thousands)

 

 

 

Six Months Ended June 30,

 

 

Quarter Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

604,152

 

 

$

430,556

 

 

$

271,481

 

 

$

321,299

 

Net (income) loss attributable to Noncontrolling Interests – Partially Owned

   Properties

 

 

(13,410

)

 

 

(1,620

)

 

 

(880

)

 

 

(821

)

Preferred/preference distributions

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

Net income available to Common Shares and Units / Units

 

 

589,197

 

 

 

427,391

 

 

 

269,829

 

 

 

319,706

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

418,398

 

 

 

404,723

 

 

 

205,976

 

 

 

200,508

 

Depreciation – Non-real estate additions

 

 

(2,307

)

 

 

(2,303

)

 

 

(1,020

)

 

 

(1,121

)

Depreciation – Partially Owned Properties

 

 

(1,686

)

 

 

(1,802

)

 

 

(830

)

 

 

(899

)

Depreciation – Unconsolidated Properties

 

 

1,224

 

 

 

1,772

 

 

 

611

 

 

 

850

 

Net (gain) loss on sales of unconsolidated entities - operating assets

 

 

 

 

 

(69,522

)

 

 

 

 

 

(69,522

)

Net (gain) loss on sales of real estate properties

 

 

(352,243

)

 

 

(138,835

)

 

 

(144,266

)

 

 

(138,856

)

Noncontrolling Interests share of gain (loss) on sales

   of real estate properties

 

 

11,655

 

 

 

 

 

 

 

 

 

 

FFO available to Common Shares and Units / Units (1) (3) (4)

 

 

664,238

 

 

 

621,424

 

 

 

330,300

 

 

 

310,666

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment – non-operating assets

 

 

 

 

 

 

 

 

 

 

 

 

Write-off of pursuit costs

 

 

3,278

 

 

 

2,987

 

 

 

1,651

 

 

 

1,539

 

Debt extinguishment and preferred share redemption (gains) losses

 

 

32

 

 

 

16,647

 

 

 

32

 

 

 

16,647

 

Non-operating asset (gains) losses

 

 

670

 

 

 

252

 

 

 

229

 

 

 

23

 

Other miscellaneous items

 

 

(2,310

)

 

 

4,418

 

 

 

(1,392

)

 

 

2,843

 

Normalized FFO available to Common Shares and Units / Units (2) (3) (4)

 

$

665,908

 

 

$

645,728

 

 

$

330,820

 

 

$

331,718

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO (1) (3)

 

$

665,783

 

 

$

622,969

 

 

$

331,072

 

 

$

311,438

 

Preferred/preference distributions

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

FFO available to Common Shares and Units / Units (1) (3) (4)

 

$

664,238

 

 

$

621,424

 

 

$

330,300

 

 

$

310,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Normalized FFO (2) (3)

 

$

667,453

 

 

$

647,273

 

 

$

331,592

 

 

$

332,490

 

Preferred/preference distributions

 

 

(1,545

)

 

 

(1,545

)

 

 

(772

)

 

 

(772

)

Normalized FFO available to Common Shares and Units / Units (2) (3) (4)

 

$

665,908

 

 

$

645,728

 

 

$

330,820

 

 

$

331,718

 

 

(1)

The National Association of Real Estate Investment Trusts (“Nareit”) defines funds from operations (“FFO”) (December 2018 White Paper) as net income (computed in accordance with accounting principles generally accepted in the United States (“GAAP”)), excluding gains or losses from sales and impairment write-downs of depreciable real estate and land when connected to the main business of a REIT, impairment write-downs of investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and depreciation and amortization related to real estate.  Adjustments for partially owned consolidated and unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis.  

(2)

Normalized funds from operations (“Normalized FFO”) begins with FFO and excludes:

 

the impact of any expenses relating to non-operating asset impairment;

 

pursuit cost write-offs;

 

gains and losses from early debt extinguishment and preferred share redemptions;

 

gains and losses from non-operating assets; and

 

other miscellaneous items.

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(3)

The Company believes that FFO and FFO available to Common Shares and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures of performance by the real estate industry and by excluding gains or losses from sales and impairment write-downs of depreciable real estate and excluding depreciation related to real estate (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO and FFO available to Common Shares and Units / Units can help compare the operating performance of a company’s real estate between periods or as compared to different companies.  The Company also believes that Normalized FFO and Normalized FFO available to Common Shares and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company because they allow investors to compare the Company’s operating performance to its performance in prior reporting periods and to the operating performance of other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual operating results.  FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units do not represent net income, net income available to Common Shares / Units or net cash flows from operating activities in accordance with GAAP.  Therefore, FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units should not be exclusively considered as alternatives to net income, net income available to Common Shares / Units or net cash flows from operating activities as determined by GAAP or as a measure of liquidity.  The Company’s calculation of FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.  

(4)

FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units are calculated on a basis consistent with net income available to Common Shares / Units and reflects adjustments to net income for preferred distributions and premiums on redemption of preferred shares/preference units in accordance with GAAP.  The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units are collectively referred to as the “Noncontrolling Interests – Operating Partnership”.  Subject to certain restrictions, the Noncontrolling Interests – Operating Partnership may exchange their OP Units for Common Shares on a one-for-one basis.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company’s and the Operating Partnership’s market risk has not changed materially from the amounts and information reported in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, to the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.  See Note 10 in the Notes to Consolidated Financial Statements for additional discussion of derivative and other fair value instruments.

Item 4.  Controls and Procedures

Equity Residential

 

(a)

Evaluation of Disclosure Controls and Procedures:

Effective as of June 30, 2020, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

(b)

Changes in Internal Control over Financial Reporting:

There were no changes to the internal control over financial reporting of the Company identified in connection with the Company’s evaluation referred to above that occurred during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ERP Operating Limited Partnership

 

(a)

Evaluation of Disclosure Controls and Procedures:

Effective as of June 30, 2020, the Operating Partnership carried out an evaluation, under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of EQR, of the effectiveness of the Operating Partnership’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Operating Partnership in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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(b)

Changes in Internal Control over Financial Reporting:

There were no changes to the internal control over financial reporting of the Operating Partnership identified in connection with the Operating Partnership’s evaluation referred to above that occurred during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

PART II.  OTHER INFORMATION

As of June 30, 2020, the Company does not believe there is any litigation pending or threatened against it that, individually or in the aggregate, may reasonably be expected to have a material adverse effect on the Company.

Item 1A.  Risk Factors

The Company’s risk factor disclosures in Part I, Item 1A of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019 are hereby supplemented as follows:

Risk of Pandemics or Other Health Crisis.

A pandemic, epidemic or other health crisis, similar to the recent outbreak of COVID-19, affecting areas where our properties, corporate/regional offices or major service providers are located could have an adverse effect on our business, results of operations, cash flows and financial condition.

 

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, cash flows and financial condition.

 

In December 2019, COVID-19 was first reported in Wuhan, China, and in March 2020, the World Health Organization declared COVID-19 a pandemic.  The outbreak has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to control its spread, including restrictions on movement and business operations such as travel bans, border closings, business closures, quarantines, social distancing and shelter-in-place orders.  The COVID-19 pandemic has also caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide.  We cannot assure you conditions will not continue to deteriorate as a result of the pandemic.

 

The impact of the COVID-19 pandemic and measures to prevent its spread could materially negatively impact our business, results of operations, financial condition and liquidity in a number of ways, including:

 

A decrease in our rental revenues or increase in related reserves and write-offs as a potential result of:

 

Our residents’ and tenants’ ability to pay their rent on time or at all and the demand for multifamily properties within our markets;

 

Our geographic concentrations, especially in our dense urban submarkets which often makes social distancing more difficult, may experience longer periods of economic disruption due to delays in business re-openings and/or required re-closures, as a result of which we may be more susceptible to the impact of COVID-19;

 

Changes in resident preferences, including changes due to increased employer flexibility to work from home, making them less likely to want to live in dense urban centers where we own many of our properties or to want to live in denser forms of multifamily housing like the high-rise or mid-rise housing the Company owns;

 

The concessions made, and those that continue to be made, to residents’ rent obligations, which may not be on terms as favorable to us as those currently in place;

 

The deterioration of global economic conditions as a result of the pandemic may ultimately decrease occupancy levels and pricing across our portfolio as residents reduce or defer their spending;

 

Resident or tenant nonpayment, default or bankruptcy, as a result of which we may incur costs in protecting our investment and releasing our property;

 

The risk that local and national authorities may expand or extend certain measures imposing restrictions on our ability to enforce residents’ or tenants’ contractual rental obligations and limiting our ability to raise rents;

 

The risk that local and national authorities may not extend or may reduce the government stimulus and relief

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programs which may be providing benefits to our residents (or employers of our residents) and tenants;

 

Restrictions inhibiting our employees’ ability to meet with existing and potential residents has disrupted and could in the future further disrupt our ability to lease apartments which could adversely impact our rental rate and occupancy levels; and

 

Ground floor retail and parking garage operations in our apartment buildings are vulnerable to the effects from the COVID-19 pandemic, which we expect may adversely impact our retail tenants' and parking garage operations and, in turn, could result in an increase in tenant/garage operator defaults, rent deferrals/abatements and rent reductions.

 

The risk that our access to capital at attractive terms may be diminished due to, among other factors: (i) potential disruptions in the long-term debt and commercial paper markets; (ii) the risk that a prolonged economic slowdown or recession could negatively impact our lending counterparties; and (iii) reductions in the Company’s credit ratings as a result of a protracted increase in unemployment or reduced income of our residents and tenants;

 

The risk that we may lose our ability to borrow under our commercial paper program if our credit ratings were to fall below investment grade;

 

The risk of a prolonged outbreak and/or second wave of an outbreak causing long-term damage to economic conditions, which in turn could cause material declines in the fair value of our assets, leading to asset impairment charges;

 

A general decline in the real estate market or demand for real estate transactions could hinder our ability to acquire or dispose of properties, including through our joint ventures.  Also, a possible increase in distressed sales of real estate due to the impact of COVID-19 could decrease real estate values in our markets and limit our ability to sell our properties at advantageous prices or at all;

 

The risk of delays in our development and renovation projects due to construction moratoriums (such as what occurred with our Boston development project), governmental movement restrictions, social distancing requirements, the closure of many permitting and inspection agencies and disruptions in the supply of construction materials due to problems in the supply chain or otherwise;

 

A possible further decline in the price of our common shares due to a prolonged economic recession or other impacts described herein;

 

The risk of a prolonged outbreak which could cause an adverse impact on our future financial results, cash flows and financial condition and therefore our ability to pay dividends;

 

Increased risks of potential cyber attacks due to an increased reliance on remote working and other interactions with our current and prospective residents; and

 

Potential inability to maintain adequate staffing at our properties and corporate/regional offices due to shelter-in-place orders, an outbreak at one or more of our properties or corporate/regional offices and/or the continued duration or expansion of the pandemic.

The extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future developments including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict.  Due to the speed with which the situation is continuing to develop, we are not able at this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of operations, cash flows and financial condition could be material.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Common Shares Issued in the Quarter Ended June 30, 2020 - Equity Residential

During the quarter ended June 30, 2020, EQR issued 55,418 Common Shares in exchange for 55,418 OP Units held by various limited partners of ERPOP.  OP Units are generally exchangeable into Common Shares on a one-for-one basis or, at the option of ERPOP, the cash equivalent thereof, at any time one year after the date of issuance.  These shares were either registered under the Securities Act of 1933, as amended (the “Securities Act”), or issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder, as these were transactions by an issuer not involving a public offering.  In light of the manner of the sale and information obtained by EQR from the limited partners in connection with these transactions, EQR believes it may rely on these exemptions.

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Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits – See the Exhibit Index.

 

 

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EXHIBIT INDEX

The exhibits listed below are filed as part of this report.  References to exhibits or other filings under the caption “Location” indicate that the exhibit or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference.  The Commission file numbers for our Exchange Act filings referenced below are 1-12252 (Equity Residential) and 0-24920 (ERP Operating Limited Partnership).

 

Exhibit

 

Description

 

Location

3.1

 

Second Amendment to Eighth Amended and Restated Bylaws of Equity Residential, effective as of May 4, 2020.

 

Included as Exhibit 3.1 to Equity Residential's Form 8-K dated May 4, 2020, filed on May 8, 2020.

 

 

 

 

 

10.1

*

Amendment to the Equity Residential Supplemental Executive Retirement Plan, effective as of June 1, 2020.

 

Attached herein.

 

 

 

 

 

31.1

 

Equity Residential – Certification of Mark J. Parrell, Chief Executive Officer.

 

Attached herein.

 

 

 

 

 

31.2

 

Equity Residential – Certification of Robert A. Garechana, Chief Financial Officer.

 

Attached herein.

 

 

 

 

 

31.3

 

ERP Operating Limited Partnership – Certification of Mark J. Parrell, Chief Executive Officer of Registrant’s General Partner.

 

Attached herein.

 

 

 

 

 

31.4

 

ERP Operating Limited Partnership – Certification of Robert A. Garechana, Chief Financial Officer of Registrant’s General Partner.

 

Attached herein.

 

 

 

 

 

32.1

 

Equity Residential – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Mark J. Parrell, Chief Executive Officer of the Company.

 

Attached herein.

 

 

 

 

 

32.2

 

Equity Residential – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Robert A. Garechana, Chief Financial Officer of the Company.

 

Attached herein.

 

 

 

 

 

32.3

 

ERP Operating Limited Partnership – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Mark J. Parrell, Chief Executive Officer of Registrant’s General Partner.

 

Attached herein.

 

 

 

 

 

32.4

 

ERP Operating Limited Partnership – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Robert A. Garechana, Chief Financial Officer of Registrant’s General Partner.

 

Attached herein.

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

 

*Management contracts and compensatory plans or arrangements filed as exhibits to this report are identified by an asterisk.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

EQUITY RESIDENTIAL

 

 

 

 

 

Date:

August 3, 2020

By:

 

/s/ Robert A. Garechana

 

 

 

 

Robert A. Garechana

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

 

 

 

 

Date:

August 3, 2020

By:

 

/s/ Ian S. Kaufman

 

 

 

 

Ian S. Kaufman

 

 

 

 

Senior Vice President and Chief Accounting Officer

 

 

 

 

(Principal Accounting Officer)

 

 

 

ERP OPERATING LIMITED PARTNERSHIP
BY: EQUITY RESIDENTIAL

ITS GENERAL PARTNER

 

 

 

 

 

Date:

August 3, 2020

By:

 

/s/ Robert A. Garechana

 

 

 

 

Robert A. Garechana

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

 

 

 

 

Date:

August 3, 2020

By:

 

/s/ Ian S. Kaufman

 

 

 

 

Ian S. Kaufman

 

 

 

 

Senior Vice President and Chief Accounting Officer

 

 

 

 

(Principal Accounting Officer)