Equity residential reports first quarter 2017
results
Chicago--(business wire)--equity residential (nyse: eqr) today reported results for the quarter ended march 31, 2017. all per share results are reported as available to common shares/units on a diluted basis. “rental demand remains very strong across the nation’s coastal, gateway cities but new apartment supply continues to pressure new lease rates,” said david j. neithercut, equity residential’s president and ceo. “nevertheless, we achieved renewal rates of 4.3% in the first quarter and, as we approach our primary leasing season with occupancy of 96%, we are well positioned to meet our operating goals for the year.” first quarter 2017 earnings per share (eps) for the first quarter of 2017 was $0.39 compared to $9.76 in the first quarter of 2016. the difference is due primarily to $9.64 per share in higher property sale gains as a result of the company’s significant property sales activity in 2016, the various adjustment items listed on page 22 of this release and the items described below. ffo (funds from operations), as defined by the national association of real estate investment trusts (nareit), was $0.76 per share for the first quarter of 2017 compared to $0.47 per share in the first quarter of 2016. 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 2017 was $0.74 per share compared to $0.76 per share in the first quarter of 2016. the following items impacted normalized ffo per share in the quarter: a positive impact of approximately $0.02 per share from increased same store net operating income (noi); a positive impact of approximately $0.03 per share from lease-up noi; a positive impact of approximately $0.01 per share from lower corporate overhead (property management and general and administrative expenses); and a negative impact of approximately $0.08 per share of lower noi primarily as a result of the company’s 2016 disposition activity. 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 71,000 apartment units, revenues increased 2.6%, expenses increased 3.9% and noi increased 2.1%. average rental rate increased 2.6% and occupancy was flat at 95.9%. investment activity the company sold one consolidated apartment property, consisting of 304 apartment units, for a sale price of $47.6 million at a disposition yield of 6.7% and generating an unlevered irr of 17.1%. the company also sold one land parcel located in new york city for a sale price of approximately $33.5 million. the company did not acquire any properties during the first quarter of 2017. also during the quarter, the company stabilized its 453 unit potrero 1010 development in san francisco at a development yield of 5.9%. second quarter 2017 guidance the company has established an eps guidance range of $0.51 to $0.55 for the second quarter of 2017. the difference between the company’s first quarter 2017 eps of $0.39 and the midpoint of the second quarter 2017 guidance range of $0.53 is due primarily to higher expected gains on property sales and the items described below. the company has established an ffo guidance range of $0.75 to $0.79 per share for the second quarter of 2017. the difference between the company’s first quarter 2017 ffo of $0.76 per share and the midpoint of the second quarter 2017 guidance range of $0.77 per share is due primarily to lower expected debt extinguishment costs, lower expected gains on land parcel sales and the items described below. the company has established a normalized ffo guidance range of $0.75 to $0.79 per share for the second quarter of 2017. the difference between the company’s first quarter 2017 normalized ffo of $0.74 per share and the midpoint of the second quarter 2017 guidance range of $0.77 per share is due primarily to: a positive impact of approximately $0.02 per share from increased same store noi; a positive impact of approximately $0.01 per share from lease-up noi; a positive impact of approximately $0.01 per share from lower total interest expense; and a negative impact of approximately $0.01 per share of lower noi primarily as a result of the company’s disposition activity. glossary of terms and definitions to improve comparability and enhance disclosure, the company has a glossary of defined terms and related reconciliations of non-gaap financial measures on pages 24 through 27 of this release. second quarter 2017 earnings and conference call equity residential expects to announce second quarter 2017 results on tuesday, july 25, 2017 and host a conference call to discuss those results at 10:00 a.m. ct on wednesday, july 26, 2017. 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 302 properties consisting of 77,498 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 26, 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) unconsolidated entities, net gain on sales of real estate properties and land parcels and discontinued operations (amounts in thousands except per share data) (unaudited) share redemptions and non-cash convertible debt discounts expense (benefit) note: see page 22 for additional detail regarding the adjustments from ffo to normalized ffo. see pages 24 through 27 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. 100,000,000 shares authorized; 745,600 shares issued and outstanding as of march 31, 2017 and december 31, 2016 1,000,000,000 shares authorized; 367,137,757 shares issued and outstanding as of march 31, 2017 and 365,870,924 shares issued and outstanding as of december 31, 2016 equity residential portfolio summary as of march 31, 2017 note: projects under development are not included in the portfolio summary until construction has been completed. equity residential portfolio as of march 31, 2017 ($ in thousands) equity residential $ in thousands (except for average rental rate) rental rate occupancy $ in thousands (except for average rental rate) note: same store revenues for all leases are reflected on a straight-line basis in accordance with gaap for the current and comparable periods. see page 26 for reconciliations from operating income. same store results/statistics by market $ in thousands ($ in thousands) note: the company capitalized interest of approximately $8.2 million and $14.2 million during the quarters ended march 31, 2017 and 2016, respectively. ($ in thousands) 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 ebitda reconciliations. (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) projects under development: completed not stabilized (1): completed and stabilized during the quarter: cost noi note: all development projects listed are wholly owned by the company. (amounts in thousands except for apartment unit and per apartment unit amounts) apartment units (1) apartment unit apartment unit apartment unit (4) apartment unit improvements (5) apartment unit apartment unit total apartment unit (amounts in thousands) balance sheet items: (amounts in thousands) and non-cash convertible debt discounts note: see pages 24 through 27 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. the guidance/projections provided below are based on current expectations, are forward-looking and are consistent with the information provided in the fourth quarter 2016 earnings release. all guidance is given on a normalized ffo basis. therefore, certain items excluded from normalized ffo, such as debt extinguishment costs/prepayment penalties and the write-off of pursuit costs, are not included in the estimates provided on this page. see pages 24 through 27 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. 2017 normalized ffo guidance (per share diluted) q2 2017 2017 2017 same store assumptions (see note below) 2017 transaction assumptions 2017 debt assumptions 2017 other guidance assumptions note: normalized ffo guidance excludes a duplicative charge of approximately $0.4 million, which will be recorded to general and administrative expense, related to the overlap of accounting costs for the company's current and former executive compensation programs. 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. 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 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 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. economic gain – economic gain is calculated as the net gain 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 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 on sales of real estate properties in accordance with gaap to economic gain: equity residential additional reconciliations and definitions of non-gaap financial measures and other terms – continued funds from operations and normalized funds from operations: funds from operations (“ffo”) – the national association of real estate investment trusts (“nareit”) defines ffo (april 2002 white paper) as net income (computed in accordance with accounting principles generally accepted in the united states (“gaap”)), excluding gains (or losses) from sales and impairment write-downs of depreciable operating properties, plus depreciation and amortization, 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, including prepayment penalties, preferred share redemptions and the cost related to the implied option value of non-cash convertible debt discounts; • gains and losses on the sales of non-operating assets, including gains and losses from land parcel sales, net of the effect of income tax benefits or expenses; and • other miscellaneous items. equity residential additional reconciliations and definitions of non-gaap financial measures and other terms – continued per share per share q2 2017 per share 2017 per share penalties, preferred share redemptions and non-cash convertible debt discounts income and other tax expense (benefit) 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 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 2016 and 2017, plus any properties in lease-up and not stabilized as of january 1, 2016. normalized earnings before interest, income taxes, depreciation and amortization ("ebitda") – represents net income in accordance with gaap before interest expense, income taxes, depreciation expense and amortization expense and further adjusted for non-comparable items. normalized ebitda, total debt to normalized ebitda and net debt to normalized ebitda are important metrics in evaluating the credit strength of the company and its ability to service its debt obligations. the company believes that normalized ebitda, total debt to normalized ebitda and net debt to normalized ebitda 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. 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, 2016, 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 2017 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 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. 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.
