Edgar Filing: EQUITY RESIDENTIAL

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a small reporting company)

Small reporting company

Emerging growth company

eqr-10q_20170630.htm

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, 2017

☐	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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, 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:

ERP Operating Limited Partnership:

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, 2017 was 367,313,257.

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EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the quarterly period ended June 30, 2017 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, 2017 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.

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 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's 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, and guarantees certain debt of ERPOP, as disclosed in this report. 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 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. Except for the net proceeds from

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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 Partnership's 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 equity securities 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 Partnership's financial statements and as noncontrolling interests in the Company's financial statements. The noncontrolling interests in the Operating Partnership's financial statements include the interests of unaffiliated partners in various consolidated partnerships. The noncontrolling interests in the Company's 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 entity's debt, noncontrolling interests and shareholders' equity or partners' capital, as applicable; and a combined Management's 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 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.

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TABLE OF CONTENTS

	PAGE

PART I.

Item 1. Financial Statements of Equity Residential:

Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	2

Consolidated Statements of Operations and Comprehensive Income for the six months and quarters ended June 30, 2017 and 2016	3 to 4

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	5 to 7

Consolidated Statement of Changes in Equity for the six months ended June 30, 2017	8 to 9

Financial Statements of ERP Operating Limited Partnership:

Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	10

Consolidated Statements of Operations and Comprehensive Income for the six months and quarters ended June 30, 2017 and 2016	11 to 12

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	13 to 15

Consolidated Statement of Changes in Capital for the six months ended June 30, 2017	16 to 17

Notes to Consolidated Financial Statements of Equity Residential and ERP Operating Limited Partnership	18 to 41

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	42 to 61

Item 3. Quantitative and Qualitative Disclosures about Market Risk	61

Item 4. Controls and Procedures	61 to 62

PART II.

Item 1. Legal Proceedings	63

Item 1A. Risk Factors	63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3. Defaults Upon Senior Securities	63

Item 4. Mine Safety Disclosures	63

Item 5. Other Information	63

Item 6. Exhibits	63

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EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except for share amounts)

(Unaudited)

	June 30,			December 31,
	2017			2016
ASSETS
Investment in real estate
Land	$	5,927,949		$	5,899,862
Depreciable property		19,123,571			18,730,579
Projects under development		325,823			637,168
Land held for development		112,474			118,816
Investment in real estate		25,489,817			25,386,425
Accumulated depreciation		(5,671,510	)		(5,360,389	)
Investment in real estate, net		19,818,307			20,026,036
Cash and cash equivalents		37,719			77,207
Investments in unconsolidated entities		59,246			60,141
Deposits – restricted		254,378			76,946
Escrow deposits – mortgage		21,016			64,935
Other assets		445,909			398,883
Total assets	$	20,636,575		$	20,704,148

LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net	$	3,743,363		$	4,119,181
Notes, net		4,456,365			4,848,079
Line of credit and commercial paper		764,361			19,998
Accounts payable and accrued expenses		137,920			147,482
Accrued interest payable		48,823			60,946
Other liabilities		324,002			350,466
Security deposits		63,648			62,624
Distributions payable		191,717			192,296
Total liabilities		9,730,199			9,801,072

Commitments and contingencies

Redeemable Noncontrolling Interests – Operating Partnership		380,519			442,092
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, 2017 and December 31, 2016		37,280			37,280
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 367,298,765 shares issued and outstanding as of June 30, 2017 and 365,870,924 shares issued and outstanding as of December 31, 2016		3,673			3,659
Paid in capital		8,838,804			8,758,422
Retained earnings		1,511,899			1,543,626
Accumulated other comprehensive (loss)		(101,151	)		(113,909	)
Total shareholders’ equity		10,290,505			10,229,078
Noncontrolling Interests:
Operating Partnership		229,049			221,297
Partially Owned Properties		6,303			10,609
Total Noncontrolling Interests		235,352			231,906
Total equity		10,525,857			10,460,984
Total liabilities and equity	$	20,636,575		$	20,704,148

See accompanying notes

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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,
	2017			2016			2017			2016
REVENUES
Rental income	$	1,216,219		$	1,211,104		$	612,299		$	594,939
Fee and asset management		361			3,133			181			215
Total revenues		1,216,580			1,214,237			612,480			595,154
EXPENSES
Property and maintenance		201,924			205,472			99,316			96,307
Real estate taxes and insurance		169,231			157,611			87,503			77,415
Property management		43,841			44,486			21,589			20,991
General and administrative		27,799			35,013			13,626			18,296
Depreciation		358,864			349,012			179,896			176,127
Total expenses		801,659			791,594			401,930			389,136

Operating income		414,921			422,643			210,550			206,018

Interest and other income		1,763			59,583			1,162			56,525
Other expenses		(2,132	)		(4,060	)		(1,042	)		(1,504	)
Interest:
Expense incurred, net		(197,434	)		(299,964	)		(91,224	)		(86,472	)
Amortization of deferred financing costs		(4,383	)		(7,739	)		(2,087	)		(2,345	)
Income before income and other taxes, (loss) from investments in unconsolidated entities, net gain (loss) on sales of real estate properties and land parcels and discontinued operations		212,735			170,463			117,359			172,222
Income and other tax (expense) benefit		(482	)		(763	)		(220	)		(413	)
(Loss) from investments in unconsolidated entities		(1,755	)		(1,904	)		(682	)		(800	)
Net gain on sales of real estate properties		124,433			3,780,835			87,726			57,356
Net gain (loss) on sales of land parcels		19,170			11,722			(23	)		—
Income from continuing operations		354,101			3,960,353			204,160			228,365
Discontinued operations, net		—			(122	)		—			35
Net income		354,101			3,960,231			204,160			228,400
Net (income) attributable to Noncontrolling Interests:
Operating Partnership		(12,765	)		(152,089	)		(7,354	)		(8,780	)
Partially Owned Properties		(1,553	)		(1,545	)		(765	)		(781	)
Net income attributable to controlling interests		339,783			3,806,597			196,041			218,839
Preferred distributions		(1,546	)		(1,545	)		(773	)		(772	)
Net income available to Common Shares	$	338,237		$	3,805,052		$	195,268		$	218,067
Earnings per share – basic:
Income from continuing operations available to Common Shares	$	0.92		$	10.43		$	0.53		$	0.60
Net income available to Common Shares	$	0.92		$	10.43		$	0.53		$	0.60
Weighted average Common Shares outstanding		366,713			364,820			366,820			365,047
Earnings per share – diluted:
Income from continuing operations available to Common Shares	$	0.92		$	10.36		$	0.53		$	0.59
Net income available to Common Shares	$	0.92		$	10.36		$	0.53		$	0.59
Weighted average Common Shares outstanding		382,505			382,012			382,692			382,065

Distributions declared per Common Share outstanding	$	1.0075		$	9.0075		$	0.50375		$	0.50375

See accompanying notes

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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,
	2017			2016			2017			2016
Comprehensive income
Net income	$	354,101		$	3,960,231		$	204,160		$	228,400
Other comprehensive income (loss):
Other comprehensive income (loss) – derivative instruments:
Unrealized holding gains (losses) arising during the period		3,507			(4,467	)		3,507			(1,561	)
Losses reclassified into earnings from other comprehensive income		9,251			32,922			4,668			4,268
Other comprehensive income (loss) – foreign currency:
Currency translation adjustments arising during the period		—			50			—			(25	)
Other comprehensive income		12,758			28,505			8,175			2,682
Comprehensive income		366,859			3,988,736			212,335			231,082
Comprehensive (income) attributable to Noncontrolling Interests		(14,782	)		(154,734	)		(8,416	)		(9,664	)
Comprehensive income attributable to controlling interests	$	352,077		$	3,834,002		$	203,919		$	221,418

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	354,101		$	3,960,231
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		358,864			349,012
Amortization of deferred financing costs		4,383			7,739
Amortization of above/below market leases		1,717			1,708
Amortization of discounts and premiums on debt		3,359			(19,010	)
Amortization of deferred settlements on derivative instruments		9,246			32,850
Write-off of pursuit costs		1,546			2,563
Loss from investments in unconsolidated entities		1,755			1,904
Distributions from unconsolidated entities – return on capital		1,345			1,482
Net (gain) on sales of investment securities and other investments		—			(55,156	)
Net (gain) on sales of real estate properties		(124,433	)		(3,780,835	)
Net (gain) on sales of land parcels		(19,170	)		(11,722	)
Net (gain) on sales of discontinued operations		—			(15	)
Compensation paid with Company Common Shares		15,027			20,729
Changes in assets and liabilities:
Decrease in deposits – restricted		310			9,121
Decrease (increase) in mortgage deposits		900			(840	)
(Increase) decrease in other assets		(39,845	)		29,944
Increase in accounts payable and accrued expenses		24,503			7,837
(Decrease) in accrued interest payable		(12,123	)		(27,046	)
(Decrease) in other liabilities		(32,476	)		(42,080	)
Increase (decrease) in security deposits		1,024			(13,340	)
Net cash provided by operating activities		550,033			475,076
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions		(57,066	)		(160,680	)
Investment in real estate – development/other		(175,887	)		(312,853	)
Capital expenditures to real estate		(89,297	)		(74,450	)
Non-real estate capital additions		(654	)		(3,259	)
Interest capitalized for real estate under development		(16,626	)		(28,386	)
Proceeds from disposition of real estate, net		297,298			6,415,181
Investments in unconsolidated entities		(2,488	)		(1,829	)
Distributions from unconsolidated entities – return of capital		113			524
Proceeds from sale of investment securities and other investments		—			68,528
(Increase) in deposits on real estate acquisitions and investments, net		(177,742	)		(30,815	)
(Increase) decrease in mortgage deposits		(4,108	)		46
Net cash (used for) provided by investing activities		(226,457	)		5,872,007

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2017			2016
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs	$	(2	)	$	(437	)
Mortgage deposits		47,127			(3,971	)
Mortgage notes payable, net:
Lump sum payoffs		(370,420	)		(556,499	)
Scheduled principal repayments		(6,971	)		(4,740	)
Notes, net:
Lump sum payoffs		(394,077	)		(1,500,000	)
Line of credit and commercial paper:
Line of credit proceeds		890,000			246,000
Line of credit repayments		(625,000	)		(246,000	)
Commercial paper proceeds		2,608,895			1,324,784
Commercial paper repayments		(2,131,500	)		(1,712,472	)
Proceeds from Employee Share Purchase Plan (ESPP)		2,111			2,023
Proceeds from exercise of options		8,143			26,141
Payment of offering costs		(36	)	—
Other financing activities, net		(40	)		(33	)
Contributions – Noncontrolling Interests – Partially Owned Properties		125		—
Contributions – Noncontrolling Interests – Operating Partnership		—			1
Distributions:
Common Shares		(369,244	)		(3,306,704	)
Preferred Shares		(2,318	)		(1,545	)
Noncontrolling Interests – Operating Partnership		(13,913	)		(130,383	)
Noncontrolling Interests – Partially Owned Properties		(5,944	)		(27,681	)
Net cash (used for) financing activities		(363,064	)		(5,891,516	)
Net (decrease) increase in cash and cash equivalents		(39,488	)		455,567
Cash and cash equivalents, beginning of period		77,207			42,276
Cash and cash equivalents, end of period	$	37,719		$	497,843

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2017			2016
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized	$	197,336		$	313,480
Net cash paid for income and other taxes	$	624		$	1,166
Real estate acquisitions/dispositions/other:
Mortgage loans assumed	$	—		$	43,400
Amortization of deferred financing costs:
Other assets	$	1,206		$	1,527
Mortgage notes payable, net	$	1,378		$	2,617
Notes, net	$	1,799		$	3,595
Amortization of discounts and premiums on debt:
Mortgage notes payable, net	$	195		$	(21,476	)
Notes, net	$	1,196		$	2,054
Line of credit and commercial paper	$	1,968		$	412
Amortization of deferred settlements on derivative instruments:
Other liabilities	$	(5	)	$	(72	)
Accumulated other comprehensive income	$	9,251		$	32,922
Write-off of pursuit costs:
Investment in real estate, net	$	1,505		$	2,072
Other assets	$	21		$	390
Accounts payable and accrued expenses	$	20		$	101
Loss from investments in unconsolidated entities:
Investments in unconsolidated entities	$	1,025		$	1,122
Other liabilities	$	730		$	782
Realized/unrealized (gain) loss on derivative instruments:
Other assets	$	(2,877	)	$	(8,390	)
Notes, net	$	(630	)	$	8,390
Other liabilities	$	—		$	4,467
Accumulated other comprehensive income	$	3,507		$	(4,467	)
Investments in unconsolidated entities:
Investments in unconsolidated entities	$	(1,588	)	$	(929	)
Other liabilities	$	(900	)	$	(900	)
Debt financing costs:
Mortgage notes payable, net	$	—		$	(437	)
Notes, net	$	(2	)	$	—
Other:
Foreign currency translation adjustments	$	—		$	(50	)

See accompanying notes

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EQUITY RESIDENTIAL

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands)

(Unaudited)

	Six Months Ended
	June 30, 2017
SHAREHOLDERS’ EQUITY
PREFERRED SHARES
Balance, beginning of year	$	37,280
Balance, end of period	$	37,280
COMMON SHARES, $0.01 PAR VALUE
Balance, beginning of year	$	3,659
Conversion of OP Units into Common Shares		11
Exercise of share options		2
Share-based employee compensation expense: