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_20180630.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, 2018

☐	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 27, 2018 was 368,281,975.

Table of Contents

EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the quarterly period ended June 30, 2018 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, 2018 owned an approximate 96.3% ownership interest in, ERPOP. The remaining 3.7% 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 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

Table of Contents

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.

Table of Contents

TABLE OF CONTENTS

	PAGE

PART I.

Item 1. Financial Statements of Equity Residential:

Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	2

Consolidated Statements of Operations and Comprehensive Income for the six months and quarters ended June 30, 2018 and 2017	3 to 4

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	5 to 7

Consolidated Statement of Changes in Equity for the six months ended June 30, 2018	8 to 9

Financial Statements of ERP Operating Limited Partnership:

Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	10

Consolidated Statements of Operations and Comprehensive Income for the six months and quarters ended June 30, 2018 and 2017	11 to 12

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	13 to 15

Consolidated Statement of Changes in Capital for the six months ended June 30, 2018	16 to 17

Notes to Consolidated Financial Statements of Equity Residential and ERP Operating Limited Partnership	18 to 39

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 to 54

Item 3. Quantitative and Qualitative Disclosures about Market Risk	54

Item 4. Controls and Procedures	54 to 55

PART II.

Item 1. Legal Proceedings	56

Item 1A. Risk Factors	56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3. Defaults Upon Senior Securities	56

Item 4. Mine Safety Disclosures	56

Item 5. Other Information	56

Item 6. Exhibits	56

Table of Contents

EQUITY RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands except for share amounts)

(Unaudited)

	June 30,			December 31,
	2018			2017
ASSETS
Investment in real estate
Land	$	5,986,329		$	5,996,024
Depreciable property		19,946,606			19,768,362
Projects under development		145,564			163,547
Land held for development		86,098			98,963
Investment in real estate		26,164,597			26,026,896
Accumulated depreciation		(6,338,043	)		(6,040,378	)
Investment in real estate, net		19,826,554			19,986,518
Cash and cash equivalents		34,507			50,647
Investments in unconsolidated entities		58,124			58,254
Restricted deposits		54,370			50,115
Other assets		433,027			425,065
Total assets	$	20,406,582		$	20,570,599

LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net	$	2,894,325		$	3,618,722
Notes, net		5,532,637			5,038,812
Line of credit and commercial paper		345,807			299,757
Accounts payable and accrued expenses		146,415			114,766
Accrued interest payable		63,341			58,035
Other liabilities		344,159			341,852
Security deposits		66,800			65,009
Distributions payable		206,829			192,828
Total liabilities		9,600,313			9,729,781

Commitments and contingencies

Redeemable Noncontrolling Interests – Operating Partnership		366,483			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 June 30, 2018 and December 31, 2017		37,280			37,280
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 368,278,336 shares issued and outstanding as of June 30, 2018 and 368,018,082 shares issued and outstanding as of December 31, 2017		3,683			3,680
Paid in capital		8,905,184			8,886,586
Retained earnings		1,329,600			1,403,530
Accumulated other comprehensive income (loss)		(67,310	)		(88,612	)
Total shareholders’ equity		10,208,437			10,242,464
Noncontrolling Interests:
Operating Partnership		232,995			226,691
Partially Owned Properties		(1,646	)		4,708
Total Noncontrolling Interests		231,349			231,399
Total equity		10,439,786			10,473,863
Total liabilities and equity	$	20,406,582		$	20,570,599

See accompanying notes

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,
	2018			2017			2018			2017
REVENUES
Rental income	$	1,272,451		$	1,216,219		$	639,620		$	612,299
Fee and asset management		373			361			188			181
Total revenues		1,272,824			1,216,580			639,808			612,480
EXPENSES
Property and maintenance		211,946			201,924			103,744			99,316
Real estate taxes and insurance		181,396			169,231			89,482			87,503
Property management		46,928			43,841			23,484			21,589
General and administrative		28,780			27,799			12,502			13,626
Depreciation		389,251			358,864			192,942			179,896
Total expenses		858,301			801,659			422,154			401,930

Operating income		414,523			414,921			217,654			210,550

Interest and other income		6,996			1,763			1,116			1,162
Other expenses		(7,210	)		(2,132	)		(3,769	)		(1,042	)
Interest:
Expense incurred, net		(210,235	)		(197,434	)		(94,131	)		(91,224	)
Amortization of deferred financing costs		(5,778	)		(4,383	)		(2,099	)		(2,087	)
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		198,296			212,735			118,771			117,359
Income and other tax (expense) benefit		(487	)		(482	)		(274	)		(220	)
Income (loss) from investments in unconsolidated entities		(2,008	)		(1,755	)		(1,031	)		(682	)
Net gain (loss) on sales of real estate properties		142,162			124,433			(51	)		87,726
Net gain (loss) on sales of land parcels		995			19,170			995			(23	)
Net income		338,958			354,101			118,410			204,160
Net (income) loss attributable to Noncontrolling Interests:
Operating Partnership		(12,358	)		(12,765	)		(4,299	)		(7,354	)
Partially Owned Properties		(1,189	)		(1,553	)		(509	)		(765	)
Net income attributable to controlling interests		325,411			339,783			113,602			196,041
Preferred distributions		(1,545	)		(1,546	)		(772	)		(773	)
Net income available to Common Shares	$	323,866		$	338,237		$	112,830		$	195,268

Earnings per share – basic:
Net income available to Common Shares	$	0.88		$	0.92		$	0.31		$	0.53
Weighted average Common Shares outstanding		367,865			366,713			367,930			366,820

Earnings per share – diluted:
Net income available to Common Shares	$	0.88		$	0.92		$	0.31		$	0.53
Weighted average Common Shares outstanding		383,224			382,505			383,423			382,692

Distributions declared per Common Share outstanding	$	1.08		$	1.0075		$	0.54		$	0.50375

See accompanying notes

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,
	2018			2017			2018			2017
Comprehensive income:
Net income	$	338,958		$	354,101		$	118,410		$	204,160
Other comprehensive income (loss):
Other comprehensive income (loss) – derivative instruments:
Unrealized holding gains (losses) arising during the period		11,995			3,507			5,908			3,507
Losses reclassified into earnings from other comprehensive income		9,307			9,251			4,516			4,668
Other comprehensive income (loss)		21,302			12,758			10,424			8,175
Comprehensive income		360,260			366,859			128,834			212,335
Comprehensive (income) attributable to Noncontrolling Interests		(14,329	)		(14,782	)		(5,190	)		(8,416	)
Comprehensive income attributable to controlling interests	$	345,931		$	352,077		$	123,644		$	203,919

See accompanying notes

Table of Contents

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	338,958		$	354,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		389,251			358,864
Amortization of deferred financing costs		5,778			4,383
Amortization of above/below market lease intangibles		2,196			1,717
Amortization of discounts and premiums on debt		3,263			1,391
Amortization of deferred settlements on derivative instruments		9,302			9,246
Write-off of pursuit costs		2,066			1,546
(Income) loss from investments in unconsolidated entities		2,008			1,755
Distributions from unconsolidated entities – return on capital		1,188			1,345
Net (gain) loss on sales of real estate properties		(142,162	)		(124,433	)
Net (gain) loss on sales of land parcels		(995	)		(19,170	)
Net (gain) loss on debt extinguishment		22,110			12,258
Compensation paid with Company Common Shares		17,032			15,027
Changes in assets and liabilities:
(Increase) decrease in other assets		417			(39,845	)
Increase (decrease) in accounts payable and accrued expenses		25,396			24,503
Increase (decrease) in accrued interest payable		5,306			(12,123	)
Increase (decrease) in other liabilities		2,549			(32,476	)
Increase (decrease) in security deposits		1,791			1,024
Net cash provided by operating activities		685,454			559,113
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate – acquisitions		(200,546	)		(57,066	)
Investment in real estate – development/other		(76,635	)		(175,887	)
Capital expenditures to real estate		(85,987	)		(89,297	)
Non-real estate capital additions		(2,145	)		(654	)
Interest capitalized for real estate under development		(2,937	)		(16,626	)
Proceeds from disposition of real estate, net		287,173			297,298
Investments in unconsolidated entities		(3,099	)		(2,488	)
Distributions from unconsolidated entities – return of capital		—			113
Net cash provided by (used for) investing activities		(84,176	)		(44,607	)

See accompanying notes

Table of Contents

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2018			2017
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs	$	(4,354	)	$	(2	)
Mortgage notes payable, net:
Lump sum payoffs		(725,639	)		(370,420	)
Scheduled principal repayments		(3,273	)		(6,971	)
Net gain (loss) on debt extinguishment		(22,110	)		(12,258	)
Notes, net:
Proceeds		497,010			—
Lump sum payoffs		—			(394,077	)
Line of credit and commercial paper:
Line of credit proceeds		415,000			890,000
Line of credit repayments		(415,000	)		(625,000	)
Commercial paper proceeds		4,766,050			2,610,863
Commercial paper repayments		(4,720,000	)		(2,131,500	)
Proceeds from (payments on) settlement of derivative instruments		1,638			—
Proceeds from Employee Share Purchase Plan (ESPP)		2,181			2,111
Proceeds from exercise of options		2,617			8,143
Payment of offering costs		(27	)		(36	)
Other financing activities, net		(48	)		(40	)
Contributions – Noncontrolling Interests – Partially Owned Properties		125			125
Contributions – Noncontrolling Interests – Operating Partnership		1			—
Distributions:
Common Shares		(384,315	)		(369,244	)
Preferred Shares		(1,545	)		(2,318	)
Noncontrolling Interests – Operating Partnership		(13,854	)		(13,913	)
Noncontrolling Interests – Partially Owned Properties		(7,620	)		(5,944	)
Net cash provided by (used for) financing activities		(613,163	)		(420,481	)
Net increase (decrease) in cash and cash equivalents and restricted deposits		(11,885	)		94,025
Cash and cash equivalents and restricted deposits, beginning of period		100,762			219,088
Cash and cash equivalents and restricted deposits, end of period	$	88,877		$	313,113

Cash and cash equivalents and restricted deposits, end of period
Cash and cash equivalents	$	34,507		$	37,719
Restricted deposits		54,370			275,394
Total cash and cash equivalents and restricted deposits, end of period	$	88,877		$	313,113

See accompanying notes

Table of Contents

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2018			2017
SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized	$	188,913		$	197,336
Net cash paid for income and other taxes	$	644		$	624
Amortization of deferred financing costs:
Other assets	$	1,206		$	1,206
Mortgage notes payable, net	$	2,552		$	1,378
Notes, net	$	2,020		$	1,799
Amortization of discounts and premiums on debt:
Mortgage notes payable, net	$	1,963		$	195
Notes, net	$	1,300		$	1,196
Amortization of deferred settlements on derivative instruments:
Other liabilities	$	(5	)	$	(5	)
Accumulated other comprehensive income	$	9,307		$	9,251
Write-off of pursuit costs:
Investment in real estate, net	$	2,042		$	1,505
Other assets	$	10		$	21
Accounts payable and accrued expenses	$	14		$	20
(Income) loss from investments in unconsolidated entities:
Investments in unconsolidated entities	$	1,321		$	1,025
Other liabilities	$	687		$	730
Realized/unrealized (gain) loss on derivative instruments:
Other assets	$	(13,226	)	$	(2,877	)
Notes, net	$	(2,151	)	$	(630	)
Other liabilities	$	3,382		$	—
Accumulated other comprehensive income	$	11,995		$	3,507
Investments in unconsolidated entities:
Investments in unconsolidated entities	$	(2,379	)	$	(1,588	)
Other liabilities	$	(720	)	$	(900	)
Debt financing costs:
Notes, net	$	(4,354	)	$	(2	)
Proceeds from (payments on) settlement of derivative instruments:
Other assets	$	1,638		$	—

See accompanying notes

Table of Contents

EQUITY RESIDENTIAL

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Amounts in thousands)

(Unaudited)

	Six Months Ended
	June 30, 2018
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	$	3,680
Exercise of share options		1
Employee Share Purchase Plan (ESPP)		1
Share-based employee compensation expense:
Restricted shares		1
Balance, end of period	$	3,683
PAID IN CAPITAL
Balance, beginning of year	$	8,886,586
Common Share Issuance:
Conversion of OP Units into Common Shares		331
Exercise of share options		2,616
Employee Share Purchase Plan (ESPP)		2,180
Share-based employee compensation expense:
Restricted shares		5,162
Share options		8,536
ESPP discount		400
Offering costs		(27	)
Supplemental Executive Retirement Plan (SERP)		(538	)
Change in market value of Redeemable Noncontrolling Interests – Operating Partnership		(172	)
Adjustment for Noncontrolling Interests ownership in Operating Partnership		110
Balance, end of period	$	8,905,184
RETAINED EARNINGS
Balance, beginning of year	$	1,403,530
Net income attributable to controlling interests		325,411
Common Share distributions		(397,796	)