Equity residential reports first quarter 2018
results
Chicago--(business wire)--equity residential (nyse: eqr) today reported results for the quarter ended march 31, 2018. all per share results are reported as available to common shares/units on a diluted basis. earnings per share (eps) was $0.57, funds from operations (ffo) was $0.71 per share and normalized ffo was $0.77 per share for the first quarter of 2018, each as described in further detail below. “the demand for rental housing across the nation’s coastal, gateway cities remains very strong but, like last year, new apartment supply continues to limit growth in new lease rates,” said david j. neithercut, equity residential’s president and ceo. “we are pleased to have delivered first quarter results in line with our expectations driven by strong renewal rate growth of 4.6%. as we approach our primary leasing season with occupancy of 96.3% and a company-wide focus on resident retention, we remain well positioned to meet our operating goals for the year.” highlights increased same store revenues by 2.2% over the first quarter of 2017. achieved same store physical occupancy of 96.0% and a 1.9% increase in average rental rate. increased the company’s 2018 annualized common share dividend by 7.2%. issued $500.0 million of 10-year unsecured notes at a coupon of 3.5%, representing the lowest credit spread (80 basis points) of any 10-year reit benchmark offering in history. first quarter 2018 eps for the first quarter of 2018 was $0.57 compared to $0.39 in the first quarter of 2017. the difference is due primarily to higher property sale gains in the first quarter of 2018, the various adjustment items listed on page 22 of this release and the items described below. ffo as defined by the national association of real estate investment trusts (nareit) was $0.71 per share for the first quarter of 2018 compared to $0.76 per share in the first quarter of 2017. the difference is due primarily to the various adjustment items listed on page 22 of this release and the items described below. normalized ffo for the first quarter of 2018 was $0.77 per share compared to $0.74 per share in the first 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 $0.02 per share from lease-up noi; and a negative impact of approximately $0.01 per share from other items including higher corporate overhead (property management and general and administrative expenses). the company has a glossary of defined terms and related reconciliations of non-gaap financial measures on pages 24 through 28 of this release. reconciliations and definitions of ffo and normalized ffo are provided on pages 5, 25 and 26 of this release and the company has included guidance for normalized ffo on page 23 and ffo and eps on page 26 of this release. same store results on a same store first quarter to first quarter comparison, which includes 72,204 apartment units, revenues increased 2.2%, expenses increased 3.9% and noi increased 1.5%. average rental rate increased 1.9% and physical occupancy increased by 0.1% to 96.0%. investment activity during the first quarter of 2018, the company acquired a 117-unit consolidated apartment property located in seattle for a purchase price of approximately $53.7 million and an acquisition capitalization rate of 4.6%. during the quarter, the company sold a consolidated apartment property in each of new york city, the new york suburbs, suburban seattle and suburban los angeles, totaling 786 apartment units, for an aggregate sale price of approximately $290.0 million, at a weighted average disposition yield of 4.4%, generating an unlevered irr of 8.1%. also during the quarter, the company completed 855 brannan, a 449-unit apartment development project in san francisco, for a total cost of approximately $322.2 million and an anticipated development yield of 5.1%. capital markets activity on february 7, 2018, the company issued $500.0 million of 10-year unsecured notes maturing march 1, 2028 at a coupon of 3.5% and an all-in effective rate of 3.61% including the effect of underwriters’ fees and the termination of certain interest rate hedges. the company used the proceeds from this offering to prepay a $550.0 million secured debt pool maturing in 2020. the company anticipates issuing $300.0 million to $500.0 million of additional debt to prepay a $500.0 million secured debt pool that matures in 2019 but is pre-payable at par in late 2018 (see page 14 for details). the company anticipates incurring approximately $23.7 million in debt extinguishment costs/prepayment penalties in connection with all of its debt repayment activities in 2018, of which $23.5 million was incurred in the first quarter of 2018, which will not be included in the company’s normalized ffo. second quarter 2018 guidance the company has established an eps guidance range of $0.36 to $0.40 for the second quarter of 2018. the difference between the company’s first quarter 2018 eps of $0.57 and the midpoint of the second quarter 2018 guidance range of $0.38 is due primarily to lower expected gains on property sales, partially offset by lower expected debt extinguishment costs and the items described below. the company has established an ffo guidance range of $0.77 to $0.81 per share for the second quarter of 2018. the difference between the company’s first quarter 2018 ffo of $0.71 per share and the midpoint of the second quarter 2018 guidance range of $0.79 per share is due primarily to lower expected debt extinguishment costs and the items described below. the company has established a normalized ffo guidance range of $0.77 to $0.81 per share for the second quarter of 2018. the difference between the company’s first quarter 2018 normalized ffo of $0.77 per share and the midpoint of the second quarter 2018 guidance range of $0.79 per share is due primarily to: a positive impact of approximately $0.01 per share from increased same store noi; and a positive impact of approximately $0.01 per share from other items including lower corporate overhead (property management and general and administrative expenses). second quarter 2018 earnings and conference call equity residential expects to announce its second quarter 2018 results on tuesday, july 24, 2018 and host a conference call to discuss those results at 10:00 a.m. ct on wednesday, july 25, 2018. about equity residential equity residential is an s&p 500 company focused on the acquisition, development and management of rental apartment properties in urban and high-density suburban coastal gateway markets where today’s renters want to live, work and play. equity residential owns or has investments in 303 properties consisting of 78,399 apartment units, primarily located in boston, new york, washington, d.c., seattle, san francisco and southern california. 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, april 25, 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. (amounts in thousands except per share data) (unaudited) (amounts in thousands except per share data) (unaudited) note: see page 22 for additional detail regarding the adjustments from ffo to normalized ffo. see pages 24 through 28 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. (amounts in thousands except for share amounts) (unaudited) note: projects under development are not included in the portfolio summary until construction has been completed. note: effective february 1, 2018, the company took over management of one of its master-leased properties containing 94 apartment units located in boston. ($ in thousands) purchase price yield $ in thousands (except for average rental rate) $ in thousands (except for average rental rate) note: see page 27 for reconciliations from operating income. units % of actual noi average rental rate q1 2018 weighted average physical occupancy % turnover rental rate occupancy (1) quarter over quarter same store revenues in boston were positively impacted by non-residential related income. residential-only same store revenues in boston increased 1.7% quarter over quarter. units % of actual noi average rental rate weighted average physical occupancy % turnover rental rate occupancy (1) sequential same store revenues in boston were negatively impacted by non-residential related income. residential-only same store revenues in boston decreased 0.4% sequentially. $ in thousands ($ in thousands) note: the company capitalized interest of approximately $1.7 million and $8.2 million during the quarters ended march 31, 2018 and 2017, respectively. ($ in thousands) rate (1) rate (1) average rates on fixed rate debt (1) average rates on total debt (1) note: these selected covenants relate to erp operating limited partnership's ("erpop") outstanding unsecured public debt, which represent the company's most restrictive covenants. equity residential is the general partner of erpop. selected credit ratios note: see page 21 for the normalized ebitdare reconciliations. equity residential (amounts in thousands except for share/unit and per share amounts) (amounts in thousands except for share and per share amounts) (amounts in thousands except for property and apartment unit amounts) (amounts in thousands except for project and apartment unit amounts) apartment units budgeted capital cost book value to date value not placed in service debt completed leased occupied completion date stabilization date projects under development: completed not stabilized (1): completed and stabilized during the quarter: note: all development projects are wholly owned by the company. (amounts in thousands except for apartment unit and per apartment unit amounts) (amounts in thousands) balance sheet items: (amounts in thousands) note: see pages 24 through 28 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 normalized ffo guidance and assumptions 2018 normalized ffo guidance (per share diluted) 2018 same store assumptions note: approximately 25 basis point change in noi percentage = $0.01 per share change in eps/ffo per share/normalized ffo per share. 2018 transaction assumptions 2018 debt assumptions note: all 2018 debt assumptions are shown on a normalized ffo basis and therefore exclude an approximately $23.7 million impact from anticipated debt extinguishment costs/prepayment penalties described on page 2. 2018 capital expenditures to real estate assumptions note: during 2018, the company expects to spend approximately $60.0 million for apartment unit renovation expenditures on approximately 4,500 same store apartment units at an average cost of approximately $13,300 per apartment unit renovated, which is included in the total capital expenditures to real estate amounts noted above. 2018 other guidance assumptions equity residential additional reconciliations and definitions of non-gaap financial measures and other terms acquisition capitalization rate or 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. capital expenditures to real estate: 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. renovation expenditures – apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets. replacements – includes appliances, mechanical equipment, fixtures and flooring (including hardwood and carpeting). debt covenant compliance – our 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 notes payable or the credit agreement for our line of credit. the debt covenant compliance ratios that are provided show the company's compliance with certain covenants governing our public unsecured debt. these covenants generally reflect our most restrictive financial covenants. the company was in compliance with its unsecured debt covenants for all years presented (the ratios should not be used for any other purpose, including without limitation, to evaluate the company's financial condition or results of operations, nor do they indicate the company's covenant compliance as of any other date or for any other period). 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 sale 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. earnings per share ("eps") – net income per share calculated in accordance with gaap. expected eps is calculated on a basis consistent with actual eps. due to the uncertain timing and extent of property dispositions and the resulting gains/losses on sales, actual eps could differ materially from expected eps. equity residential additional reconciliations and definitions of non-gaap financial measures and other terms – continued ebitda for real estate and normalized ebitda for real estate: earnings before interest, taxes, depreciation and amortization for real estate (“ebitdare”) – the national association of real estate investment trusts (“nareit”) defines ebitdare (september 2017 white paper) as net income (computed in accordance with gaap) before interest expense, income taxes, depreciation and amortization expense, and further adjusted for gains and losses from sales of depreciated operating properties, impairment write-downs of depreciated operating properties, impairment write-downs of investments in unconsolidated entities caused by a decrease in value of depreciated operating properties within the joint venture and adjustments to reflect the company’s share of ebitdare of investments in unconsolidated entities. normalized earnings before interest, taxes, depreciation and amortization for real estate (“normalized ebitdare”) – represents net income (computed in accordance with gaap) before interest expense, income taxes, depreciation and amortization expense, and further adjusted for non-comparable items. normalized ebitdare, total debt to normalized ebitdare and net debt to normalized ebitdare are important metrics in evaluating the credit strength of the company and its ability to service its debt obligations. the company believes that normalized ebitdare, total debt to normalized ebitdare, and net debt to normalized ebitdare are useful to investors, creditors and rating agencies because they allow investors to compare the company’s credit strength to prior reporting periods and to other 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 credit quality. economic gain – economic gain is calculated as the net gain (loss) on sales of real estate properties in accordance with gaap, excluding accumulated depreciation. the company generally considers economic gain to be an appropriate supplemental measure to net gain (loss) on sales of real estate properties in accordance with gaap because it is one indication of the gross value created by the company's acquisition, development, rehab, management and ultimate sale of a property and because it helps investors to understand the relationship between the cash proceeds from a sale and the cash invested in the sold property. the following table presents a reconciliation of net gain (loss) on sales of real estate properties in accordance with gaap to economic gain: ffo and normalized ffo: funds from operations (“ffo”) – nareit defines ffo (april 2002 white paper) as net income (computed in accordance with gaap), excluding gains (or losses) from sales and impairment write-downs of depreciated operating properties, plus depreciation and amortization expense, and after adjustments for unconsolidated partnerships and joint ventures. adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. the april 2002 white paper states that gain or loss on sales of property is excluded from ffo for previously depreciated operating properties only. expected ffo per share is calculated on a basis consistent with actual ffo per share and is considered an appropriate supplemental measure of expected operating performance when compared to expected eps. normalized funds from operations ("normalized ffo") – normalized ffo begins with ffo and excludes: • the impact of any expenses relating to non-operating asset impairment and valuation allowances; • pursuit cost write-offs; • gains and losses from early debt extinguishment and preferred share redemptions; equity residential additional reconciliations and definitions of non-gaap financial measures and other terms – continued • gains and losses from non-operating assets; and • other miscellaneous items. lease-up noi – represents noi for development properties: (i) in various stages of lease-up; and (ii) where lease-up has been completed but the properties were not stabilized (defined as having achieved 90% occupancy for three consecutive months) for all of the current and comparable periods presented. net operating income (“noi”) – noi is the company’s primary financial measure for evaluating each of its apartment properties. noi is defined as 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. noi does not include an allocation of property management expenses either in the current or comparable periods. rental income for all leases and operating expense for ground leases (for both same store and non-same store properties) are reflected on a straight-line basis in accordance with gaap for the current and comparable periods. 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/other results (see page 9): equity residential additional reconciliations and definitions of non-gaap financial measures and other terms – continued non-same store properties – for annual comparisons, primarily includes all properties acquired during 2017 and 2018, plus any properties in lease-up and not stabilized as of january 1, 2017. 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. same store properties – for annual comparisons, primarily includes all properties acquired or completed that are stabilized prior to january 1, 2017, less properties subsequently sold. properties are included in same store when they are stabilized for all of the current and comparable periods presented. % of stabilized noi – represents budgeted 2018 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. total budgeted capital cost – estimated cost for projects under development and/or developed and all capitalized costs incurred to date plus any estimates of costs remaining to be funded for all projects, including land acquisition costs, construction costs, capitalized real estate taxes and insurance, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, all in accordance with gaap. total market capitalization – the aggregate of the market value of the company’s outstanding common shares, including restricted shares, the market value of the company’s operating partnership units outstanding, including restricted units (based on the market value of the company’s common shares) and the outstanding principal balance of debt. the company believes this is a useful measure of a real estate operating company’s long-term liquidity and balance sheet strength, because it shows an approximate relationship between a company’s total debt and the current total market value of its assets based on the current price at which the company’s common shares trade. however, because this measure of leverage changes with fluctuations in the company’s share price, which occur regularly, this measure may change even when the company’s earnings, interest and debt levels remain stable. turnover – total residential move-outs divided by total residential apartment units, including inter-property and intra-property transfers. unencumbered noi % – represents noi generated by consolidated real estate assets unencumbered by outstanding secured debt as a percentage of total noi generated by all of the company's consolidated real estate assets. equity residential additional reconciliations and definitions of non-gaap financial measures and other terms – continued 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. each of the items (i) through (v) is calculated in accordance with gaap.
