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Equity Residential Reports Full Year 2018 Results

CHICAGO--(BUSINESS WIRE)--

Provides Outlook for 2019

Equity Residential (EQR) today reported results for the quarter and year ended December 31, 2018. All per share results are reported as available to common shares/units on a diluted basis. Earnings Per Share (EPS), Funds From Operations (FFO) per share and Normalized FFO per share for the fourth quarter and full years of 2018 and 2017 are detailed below.

  Quarter Ended December 31,     Year Ended December 31,
2018   2017 2018   2017
EPS $ 0.31 $ 0.34 $ 1.77 $ 1.63
FFO per share $ 0.84 $ 0.82 $ 3.14 $ 3.15
Normalized FFO per share $ 0.84 $ 0.83 $ 3.25 $ 3.13
 

“We are pleased to have delivered same store revenue growth at the top end of our original guidance range and solid Normalized FFO growth in 2018. We saw a modest acceleration in our same store revenue results in the fourth quarter of 2018 and expect that to continue into 2019. Our outlook for 2019 is based on an expectation that continued economic growth will create the demand to absorb the elevated levels of new supply in many of our markets,” said Mark J. Parrell, Equity Residential’s President and CEO.

“Our markets continue to be attractive places for employers to locate and expand their businesses to draw on a diverse and talented pool of workers, resulting in strong demand for our product,” Mr. Parrell continued. “We expect that our outstanding people and well-positioned portfolio will deliver a superior customer experience to our residents and excellent risk adjusted returns to our shareholders.”

Highlights

  • The Company produced same store revenue growth of 2.3% for the full year 2018, with Physical Occupancy of 96.2% and renewal rate growth of 4.9%. The Company also produced the highest resident retention in its history.
  • The Company produced same store revenue growth of 2.6% in the fourth quarter of 2018 with Physical Occupancy of 96.2% and renewal rate growth of 5.2%.
  • During the fourth quarter of 2018, the Company completed the development of its 100K property in Washington, D.C. and completed the stabilization of its Cascade development property in Seattle.
  • During the fourth quarter of 2018, the Company issued $400.0 million of 10-year unsecured notes at a coupon of 4.15%. These were issued as “green” bonds and are the first green bond issuance from an apartment REIT.

Fourth Quarter 2018

EPS for the fourth quarter of 2018 was $0.31 compared to $0.34 in the fourth quarter of 2017. The difference is due primarily to lower property sale gains in the fourth quarter of 2018, the various adjustment items listed on page 24 of this release and the items described below.

FFO as defined by Nareit (National Association of Real Estate Investment Trusts) was $0.84 per share for the fourth quarter of 2018 compared to $0.82 per share in the fourth quarter of 2017. The difference is due primarily to the various adjustment items listed on page 24 of this release and the items described below.

Normalized FFO for the fourth quarter of 2018 was $0.84 per share compared to $0.83 per share in the fourth quarter of 2017. The difference is due primarily to:

  • A positive impact of approximately $0.02 per share from increased same store net operating income (NOI);
  • A positive impact of approximately $0.01 per share from Lease-Up NOI offset by a negative impact of approximately $0.01 per share from other non-same store NOI primarily driven by the casualty losses described below;
  • A positive impact of approximately $0.01 per share from lower total interest expense;
  • A negative impact of approximately $0.01 per share from lower NOI as a result of the Company’s 2018 and 2017 transaction activity; and
  • A negative impact of approximately $0.01 per share from higher corporate overhead (property management and general and administrative expenses).

The Company’s fourth quarter 2018 financial results had a negative impact of approximately $0.01 per share primarily from certain casualty losses driven by rainstorm damage to assets in its Washington, D.C. area portfolio.

The Company has a glossary of defined terms and related reconciliations of Non-GAAP financial measures on pages 26 through 30 of this release. Reconciliations and definitions of FFO and Normalized FFO are provided on pages 7, 27 and 28 of this release and the Company has included guidance for 2019 Normalized FFO per share on page 25 and 2019 FFO per share and 2019 EPS on page 28 of this release.

Year Ended December 31, 2018

EPS for the year ended December 31, 2018 was $1.77 compared to $1.63 in the year ended December 31, 2017. The difference is due primarily to higher property sale gains offset by higher depreciation expense in the year ended December 31, 2018, the various adjustment items listed on page 24 of this release and the items described below.

FFO was $3.14 per share for the year ended December 31, 2018 compared to $3.15 per share in the year ended December 31, 2017. The difference is due primarily to the various adjustment items listed on page 24 of this release and the items described below.

Normalized FFO for the year ended December 31, 2018 was $3.25 per share compared to $3.13 per share in the year ended December 31, 2017. The difference is due primarily to:

  • A positive impact of approximately $0.07 per share from increased same store NOI;
  • A positive impact of approximately $0.10 per share from Lease-Up NOI and other non-same store NOI;
  • A negative impact of approximately $0.01 per share from lower NOI as a result of the Company’s 2018 and 2017 transaction activity;
  • A negative impact of approximately $0.01 per share from higher total interest expense; and
  • A negative impact of approximately $0.03 per share from other items including higher corporate overhead (property management and general and administrative expenses).

The Company’s full year 2018 financial results had a negative impact of approximately $0.01 per share primarily from certain casualty losses driven by rainstorm damage to assets in its Washington, D.C. area portfolio.

Same Store Results

The following table provides the increases for same store results/statistics for the fourth quarter 2018 to fourth quarter 2017 comparison, which includes 73,992 apartment units, and for the full year 2018 to full year 2017 comparison, which includes 71,721 apartment units. The Company’s Physical Occupancy was 96.2% for both the fourth quarter of 2018 and the full year of 2018.

  Fourth Quarter 2018 vs.     Full Year 2018 vs.
Fourth Quarter 2017   Full Year 2017
Revenues 2.6% 2.3%
Expenses 4.2% 3.6%
NOI 1.9% 1.7%
Average Rental Rate 2.5% 2.0%
 

Investment Activity

The Company did not acquire or sell any apartment properties during the fourth quarter of 2018.

During the full year 2018, the Company acquired five apartment properties consisting of 1,478 apartment units for an aggregate purchase price of approximately $707.0 million at a weighted average Acquisition Capitalization Rate of 4.4%. During the full year 2018, the Company sold five apartment properties consisting of 1,292 apartment units for an aggregate sale price of approximately $706.1 million at a weighted average Disposition Yield of 4.1%, generating an Unlevered IRR of 8.7%. During 2018, the Company sold a land parcel in suburban Maryland for approximately $2.7 million.

In January 2019, the Company acquired three apartment properties consisting of 579 apartment units for an aggregate purchase price of approximately $258.7 million at a weighted average Acquisition Capitalization Rate of 4.6%. The properties are located in Denver, Seattle and Jersey City, New Jersey.

Capital Markets Activity

On November 30, 2018, the Company issued $400.0 million of 10-year unsecured notes at a coupon of 4.15%. After the effect of the termination of certain interest rate hedges, underwriters’ fees and other costs associated with the offering, the all-in effective rate of the notes is approximately 3.85%. These notes were issued as “green” bonds and as a result, the Company will allocate an amount equal to the net proceeds of approximately $396.7 million from this issuance to one or more eligible green projects, such as its recently developed 855 Brannan community in San Francisco, which received LEED Home Platinum certification.

First Quarter 2019 Guidance

The Company has established guidance ranges for the first quarter of 2019 EPS, FFO per share and Normalized FFO per share as listed below:

  Q1 2019
Guidance
EPS $0.25 to $0.29
FFO per share $0.77 to $0.81
Normalized FFO per share $0.78 to $0.82
 

The difference between the fourth quarter 2018 EPS of $0.31 and the first quarter 2019 guidance midpoint of $0.27 is due primarily to the items described below.

The difference between the fourth quarter 2018 FFO of $0.84 per share and the first quarter 2019 guidance midpoint of $0.79 per share is due primarily to the items described below.

The difference between the fourth quarter 2018 Normalized FFO of $0.84 per share and the first quarter 2019 guidance midpoint of $0.80 per share is due primarily to:

  • A positive impact of approximately $0.01 per share from higher NOI as a result of the Company’s 2019 and 2018 transaction activity;
  • A negative impact of approximately $0.02 per share from lower same store NOI;
  • A negative impact of approximately $0.01 per share from higher total interest expense; and
  • A negative impact of approximately $0.02 per share from other items including higher corporate overhead (property management and general and administrative expenses).

Full Year 2019 Guidance

The Company is providing guidance for its full year 2019 same store operating performance, EPS, FFO per share, Normalized FFO per share, transactions and debt offerings as listed below:

Same Store:  
Physical Occupancy 96.2%
Revenue change 2.2% to 3.2%
Expense change 3.5% to 4.5%
NOI change 1.5% to 3.0%
 
EPS $1.88 to $1.98
FFO per share $3.26 to $3.36
Normalized FFO per share $3.34 to $3.44
 
Transactions:
Consolidated rental acquisitions $700.0 million
Consolidated rental dispositions $700.0 million
Transaction Accretion (Dilution) (25 basis points)
 
Debt Offerings $700.0 million to $900.0 million
 

The difference between the Company’s full year 2018 EPS of $1.77 and the midpoint of the full year 2019 guidance range of $1.93 is due primarily to lower expected property sale gains, lower expected debt extinguishment costs and the items described below.

The difference between the Company’s full year 2018 FFO of $3.14 per share and the midpoint of the full year 2019 guidance range of $3.31 per share is due primarily to lower expected debt extinguishment costs and the items described below.

The difference between the Company’s full year 2018 Normalized FFO of $3.25 per share and the midpoint of the full year 2019 guidance range of $3.39 per share is due primarily to:

  • A positive impact of approximately $0.10 per share from increased same store NOI;
  • A positive impact of approximately $0.04 per share from Lease-Up NOI and other non-same store NOI;
  • A positive impact of approximately $0.01 per share from higher NOI as a result of the Company’s 2019 and 2018 transaction activity; and
  • A negative impact of approximately $0.01 per share from higher total interest expense.

First Quarter 2019 Earnings and Conference Call

Equity Residential expects to announce its first quarter 2019 results on Tuesday, April 30, 2019 and host a conference call to discuss those results at 10:00 a.m. CT on Wednesday, May 1, 2019.

About Equity Residential

Equity Residential is an S&P 500 company focused on the acquisition, development and management of rental apartment properties located in urban and high-density suburban markets where today’s renters want to live, work and play. Equity Residential owns or has investments in 307 properties consisting of 79,482 apartment units, primarily located in Boston, New York, Washington, D.C., Seattle, San Francisco, Southern California and Denver. For more information on Equity Residential, please visit our website at www.equityapartments.com.

Forward-Looking Statements

In addition to historical information, this press release contains forward-looking statements and information within the meaning of the federal securities laws. These statements are based on current expectations, estimates, projections and assumptions made by management. While Equity Residential’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, including, without limitation, changes in general market conditions, including the rate of job growth and cost of labor and construction material, the level of new multifamily construction and development, competition and local government regulation. Other risks and uncertainties are described under the heading “Risk Factors” in our Annual Report on Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission (SEC) and available on our website, www.equityapartments.com. Many of these uncertainties and risks are difficult to predict and beyond management’s control. Forward-looking statements are not guarantees of future performance, results or events. Equity Residential assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

A live web cast of the Company’s conference call discussing these results will take place tomorrow, Wednesday, January 30, at 10:00 a.m. Central. Please visit the Investor section of the Company’s web site at www.equityapartments.com for the link. A replay of the web cast will be available for two weeks at this site.

Equity Residential
Consolidated Statements of Operations
(Amounts in thousands except per share data)
(Unaudited)
 
  Year Ended December 31,     Quarter Ended December 31,  
2018     2017   2018     2017  
REVENUES
Rental income $ 2,577,681 $ 2,470,689 $ 652,553 $ 630,519
Fee and asset management   753     717     190     185  
Total revenues   2,578,434     2,471,406     652,743     630,704  
 
EXPENSES
Property and maintenance 429,335 405,281 106,848 98,636
Real estate taxes and insurance 357,814 335,495 89,030 82,177
Property management 92,485 85,493 23,310 20,791
General and administrative 53,813 52,224 12,393 11,858
Depreciation 785,725 743,749 201,856 200,785
Impairment   702     1,693         1,693  
Total expenses   1,719,874     1,623,935     433,437     415,940  
 
Operating income 858,560 847,471 219,306 214,764
 
Interest and other income 15,317 6,136 457 428
Other expenses (17,267 ) (5,186 ) (2,396 ) (2,026 )
Interest:
Expense incurred, net (413,360 ) (383,890 ) (91,906 ) (95,311 )
Amortization of deferred financing costs   (11,310 )   (8,526 )   (2,256 )   (2,079 )
Income before income and other taxes, income (loss) from
investments in unconsolidated entities and net gain (loss)
on sales of real estate properties and land parcels 431,940 456,005 123,205 115,776
Income and other tax (expense) benefit (878 ) (478 ) (111 ) 232
Income (loss) from investments in unconsolidated entities (3,667 ) (3,370 ) (674 ) (1,217 )
Net gain (loss) on sales of real estate properties 256,810 157,057 (24 ) 15,296
Net gain (loss) on sales of land parcels   987     19,167     (8 )   (3 )
Net income 685,192 628,381 122,388 130,084
Net (income) loss attributable to Noncontrolling Interests:
Operating Partnership (24,939 ) (22,604 ) (4,422 ) (4,673 )
Partially Owned Properties   (2,718 )   (2,323 )   (779 )   31  
Net income attributable to controlling interests 657,535 603,454 117,187 125,442
Preferred distributions   (3,090 )   (3,091 )   (772 )   (773 )
Net income available to Common Shares $ 654,445   $ 600,363   $ 116,415   $ 124,669  
 
Earnings per share – basic:
Net income available to Common Shares $ 1.78   $ 1.64   $ 0.32   $ 0.34  
Weighted average Common Shares outstanding   368,052     366,968     368,445     367,442  
 
Earnings per share – diluted:
Net income available to Common Shares $ 1.77   $ 1.63   $ 0.31   $ 0.34  
Weighted average Common Shares outstanding   383,695     382,678     384,296     383,105  
 
Distributions declared per Common Share outstanding $ 2.16   $ 2.015   $ 0.54   $ 0.50375  
 
Equity Residential
Consolidated Statements of Funds From Operations and Normalized Funds From Operations
(Amounts in thousands except per share data)
(Unaudited)
   
Year Ended December 31,   Quarter Ended December 31,  
2018     2017   2018     2017  
Net income $ 685,192 $ 628,381 $ 122,388 $ 130,084

Net (income) loss attributable to Noncontrolling Interests – Partially

 

Owned Properties (2,718 ) (2,323 ) (779 ) 31
Preferred distributions   (3,090 )   (3,091 )   (772 )   (773 )
Net income available to Common Shares and Units 679,384 622,967 120,837 129,342
 
Adjustments:
Depreciation 785,725 743,749 201,856 200,785
Depreciation – Non-real estate additions (4,561 ) (5,023 ) (1,164 ) (1,215 )
Depreciation – Partially Owned Properties (3,740 ) (4,526 ) (903 ) (2,026 )
Depreciation – Unconsolidated Properties 4,451 4,577 1,004 1,147
Net (gain) loss on sales of unconsolidated entities - operating
assets (73 ) (5 )
Net (gain) loss on sales of real estate properties (256,810 ) (157,057 ) 24 (15,296 )
Noncontrolling Interests share of gain (loss) on sales
of real estate properties (284 ) 290 290
Impairment – operating assets   702              
FFO available to Common Shares and Units 1,204,867 1,204,904 321,654 313,022
 
Adjustments (see page 24 for additional detail):
Impairment – non-operating assets 1,693 1,693
Write-off of pursuit costs 4,450 3,106 1,325 777
Debt extinguishment and preferred share redemption (gains)
losses 41,335 11,789 193
Non-operating asset (gains) losses (161 ) (18,884 ) 94 471
Other miscellaneous items   (1,781 )   (3,371 )   827     824  
Normalized FFO available to Common Shares and Units $ 1,248,710   $ 1,199,237   $ 324,093   $ 316,787  
 
FFO $ 1,207,957 $ 1,207,995 $ 322,426 $ 313,795
Preferred distributions   (3,090 )   (3,091 )   (772 )   (773 )
FFO available to Common Shares and Units $ 1,204,867   $ 1,204,904   $ 321,654   $ 313,022  
FFO per share and Unit – basic $ 3.16   $ 3.17   $ 0.84   $ 0.82  
FFO per share and Unit – diluted $ 3.14   $ 3.15   $ 0.84   $ 0.82  
 
Normalized FFO $ 1,251,800 $ 1,202,328 $ 324,865 $ 317,560
Preferred distributions   (3,090 )   (3,091 )   (772 )   (773 )
Normalized FFO available to Common Shares and Units $ 1,248,710   $ 1,199,237   $ 324,093   $ 316,787  
Normalized FFO per share and Unit – basic $ 3.28   $ 3.16   $ 0.85   $ 0.83  
Normalized FFO per share and Unit – diluted $ 3.25   $ 3.13   $ 0.84   $ 0.83  
 
Weighted average Common Shares and Units outstanding – basic   380,921     379,870     381,306     380,325  
Weighted average Common Shares and Units outstanding – diluted   383,695     382,678     384,296     383,105  

Note: See page 24 for additional detail regarding the adjustments from FFO to Normalized FFO. See pages 26 through 30 for the definitions of non-GAAP financial measures and other terms as well as the reconciliations of EPS to FFO per share and Normalized FFO per share.

   
Equity Residential
Consolidated Balance Sheets
(Amounts in thousands except for share amounts)
(Unaudited)
 
December 31, December 31,
2018   2017  
ASSETS
Land $ 5,875,803 $ 5,996,024
Depreciable property 20,435,901 19,768,362
Projects under development 109,409 163,547
Land held for development   89,909     98,963  
Investment in real estate 26,511,022 26,026,896
Accumulated depreciation   (6,696,281 )   (6,040,378 )
Investment in real estate, net 19,814,741 19,986,518
Investments in unconsolidated entities 58,349 58,254
Cash and cash equivalents 47,442 50,647
Restricted deposits 68,871 50,115
Other assets   404,806     425,065  
Total assets $ 20,394,209   $ 20,570,599  
 
LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net $ 2,385,470 $ 3,618,722
Notes, net 5,933,286 5,038,812
Line of credit and commercial paper 499,183 299,757
Accounts payable and accrued expenses 102,471 114,766
Accrued interest payable 62,622 58,035
Other liabilities 358,563 341,852
Security deposits 67,258 65,009
Distributions payable   206,601     192,828  
Total liabilities   9,615,454     9,729,781  
 
Commitments and contingencies
 
Redeemable Noncontrolling Interests – Operating Partnership   379,106     366,955  
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 December 31, 2018 and December 31, 2017 37,280 37,280
Common Shares of beneficial interest, $0.01 par value;
1,000,000,000 shares authorized; 369,405,161 shares issued
and outstanding as of December 31, 2018 and 368,018,082
shares issued and outstanding as of December 31, 2017 3,694 3,680
Paid in capital 8,935,453 8,886,586
Retained earnings 1,261,763 1,403,530
Accumulated other comprehensive income (loss)   (64,986 )   (88,612 )
Total shareholders’ equity 10,173,204 10,242,464
Noncontrolling Interests:
Operating Partnership 228,738 226,691
Partially Owned Properties   (2,293 )   4,708  
Total Noncontrolling Interests   226,445     231,399  
Total equity   10,399,649     10,473,863  
Total liabilities and equity $ 20,394,209   $ 20,570,599  
 
 
Equity Residential
Portfolio Summary
As of December 31, 2018
               
% of

Stabilized

Average
Apartment Budgeted Rental
Markets/Metro Areas Properties   Units   NOI   Rate
 
Los Angeles 70 15,968 18.5 % $ 2,551
Orange County 13 4,028 4.3 % 2,202
San Diego   12     3,385     3.8 %   2,376
Subtotal – Southern California 95 23,381 26.6 % 2,465
 
San Francisco 55 13,424 20.6 % 3,219
Washington DC 49 16,050 17.1 % 2,396
New York 37 9,741 15.2 % 3,848
Boston 25 6,641 10.2 % 3,061
Seattle 41 8,438 9.6 % 2,387
Denver 2 726 0.7 % 2,088
Other Markets   1     136     %   1,217
Total 305 78,537 100.0 % 2,789
 
Unconsolidated Properties   2     945        
 
Grand Total   307     79,482     100.0 % $ 2,789
 

Note: Projects under development are not included in the Portfolio Summary until construction has been completed.

 

Equity Residential

     

Portfolio as of December 31, 2018

 
Properties   Apartment Units
   
Wholly Owned Properties 287 74,840
Master-Leased Properties - Consolidated 1 162
Partially Owned Properties - Consolidated 17 3,535
Partially Owned Properties - Unconsolidated   2     945
 
  307     79,482
 
Portfolio Rollforward Q4 2018
($ in thousands)
    Properties     Apartment

Units

     
9/30/2018 306 79,260
 
 
Completed Developments - Consolidated 1 222
         
 
12/31/2018   307     79,482
 
Portfolio Rollforward 2018
($ in thousands)
 
    Properties     Apartment

Units

    Purchase Price     Acquisition

Cap Rate

 
     
12/31/2017 305 78,611
 
Acquisitions:
Consolidated:
Rental Properties 5 1,478 $ 707,005 4.4 %
 
Sales Price   Disposition

Yield

 
 
Dispositions:
Consolidated:
Rental Properties (5 ) (1,292 ) $ (706,120 ) (4.1 %)
Land Parcels $ (2,700 )
 
...