Equity Residential(EQR) - 2022 Q4 - Annual Report

PART I Item 1. Business EQR is an S&P 500 REIT focused on managing high-quality residential properties in dynamic U.S. cities, operating through its 96.8%-owned subsidiary ERPOP - Equity Residential (EQR) is a REIT focused on the acquisition, development, and management of residential properties in affluent urban and suburban markets[19] - EQR operates as an UPREIT, with all property ownership and business operations conducted through ERP Operating Limited Partnership (ERPOP), in which EQR held a 96.8% ownership interest as of December 31, 2022[8][20] - The company's core markets include Boston, New York, Washington, D.C., Southern California, San Francisco, and Seattle, with expansion efforts in Denver, Atlanta, Dallas/Ft. Worth, and Austin[23][26] - EQR's investment strategy targets markets with large economic drivers, strong high-quality job growth, and balanced apartment supply and demand, catering to key demographics[26] - The company emphasizes ESG initiatives, having issued two green bonds to support sustainable projects and incorporating ESG goals into executive compensation[30][32][34] - As of 2022, the company's workforce of approximately 2,400 employees is 63.0% ethnically diverse and 36.0% female, achieving a strong employee engagement score of 78% favorability[36][38] Item 1A. Risk Factors The company faces risks from real estate illiquidity, geographic concentration, competition, capital market disruptions, regulatory changes, and potential uninsured losses - The company's property portfolio is predominantly concentrated in established coastal markets, making it vulnerable to unfavorable local economic conditions or rent control laws[46] - The short-term nature of apartment leases exposes the company more quickly to the effects of declining market rents, potentially increasing operational volatility[49] - The adoption or expansion of rent control, rent stabilization, or eviction moratoriums could limit the company's ability to raise rents and adversely impact property values[73] - Failure to qualify as a REIT would subject the company to U.S. federal income tax at regular corporate rates, significantly reducing funds available for distribution[79][80] - The company faces significant general risks including pandemics, substantial inflation, and cybersecurity incidents that could disrupt operations and compromise information[91][93][94] - Insurance policies carry substantial deductibles and may not cover all losses from catastrophic events, potentially exposing the company to significant uninsured losses[104][106][108] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[112] Item 2. Properties As of year-end 2022, the company's portfolio comprised 308 properties with 79,597 apartment units, concentrated in key established and expansion markets Portfolio Summary as of December 31, 2022 | Ownership Type | Properties | Apartment Units | | :--- | :--- | :--- | | Wholly Owned Properties | 293 | 76,483 | | Partially Owned Properties – Consolidated | 15 | 3,114 | | Total | 308 | 79,597 | Portfolio Breakdown by Market (as of Dec 31, 2022) | Market/Metro Area | Properties | Apartment Units | % of Stabilized Budgeted NOI | Average Rental Rate ($) | | :--- | :--- | :--- | :--- | :--- | | Established Markets | 289 | 73,902 | 95.1% | 3,016 | | Southern California | 91 | 22,165 | 27.4% | 2,772 | | San Francisco | 44 | 11,790 | 15.9% | 3,229 | | Washington, D.C. | 47 | 14,716 | 15.3% | 2,531 | | New York | 34 | 8,536 | 14.0% | 4,378 | | Boston | 27 | 7,170 | 11.5% | 3,373 | | Seattle | 46 | 9,525 | 11.0% | 2,575 | | Expansion Markets | 19 | 5,695 | 4.9% | 2,153 | | Denver | 8 | 2,498 | 2.7% | 2,372 | | Atlanta | 4 | 1,215 | 1.1% | 2,120 | | Dallas/Ft. Worth | 4 | 1,241 | 0.7% | 1,904 | | Austin | 3 | 741 | 0.4% | 1,853 | | Total | 308 | 79,597 | 100.0% | 2,956 | - The Same Store portfolio consisted of 283 properties and 72,872 apartment units at year-end 2022[119] - As of December 31, 2022, the company had 8 total development projects, including 2 consolidated projects with a total budgeted cost of $260.6 million and 6 unconsolidated projects with a total budgeted cost of $610.9 million[122] Item 3. Legal Proceedings The company does not believe any pending or threatened litigation would materially affect its financial condition - As of December 31, 2022, the Company does not believe there is any litigation pending or threatened that would have a material adverse effect on the Company[123] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[123] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities EQR's Common Shares trade on the NYSE, and the company details share count, holders, and recent share-for-unit exchanges - The Company's Common Shares trade on the NYSE under the symbol EQR, with 378,602,684 Common Shares outstanding as of February 10, 2023[124] - In Q4 2022, EQR issued 414,871 Common Shares in exchange for an equal number of OP Units from various limited partners of ERPOP[125] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Strong fundamentals drove a 14.1% increase in same-store NOI, though lower property sale gains caused a decrease in diluted EPS to $2.05 Results of Operations Diluted EPS decreased to $2.05 in 2022 from $3.54 in 2021, primarily due to lower gains on property sales, while total NOI grew 15.5% Portfolio Rollforward 2021-2022 | Period | Activity | Properties | Apartment Units | Value ($ in thousands) | Cap Rate/Yield | | :--- | :--- | :--- | :--- | :--- | :--- | | 2021 | Acquisitions | 17 | 4,747 | $1,709,379 | 3.7% - 4.0% | | | Dispositions | (14) | (3,053) | ($1,716,775) | (3.7%) | | 2022 | Acquisitions | 1 | 172 | $113,000 | 3.5% | | | Dispositions | (3) | (945) | ($746,150) | (3.4%) | Reconciliation of Diluted EPS (2021 to 2022) | Description | Per Share/Unit Impact ($) | | :--- | :--- | | Diluted EPS for full year 2021 | 3.54 | | Property NOI | 0.60 | | Interest expense | (0.02) | | Corporate overhead | (0.03) | | Net gain/loss on property sales | (1.95) | | Non-operating asset gains/losses | (0.07) | | Impairment – non-operating real estate assets | 0.04 | | Depreciation expense | (0.11) | | Other | 0.05 | | Diluted EPS for full year 2022 | 2.05 | NOI Comparison (2022 vs 2021, $ in thousands) | Category | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Same store NOI | 1,731,286 | 1,517,100 | 214,186 | 14.1% | | Non-same store/other NOI | 131,617 | 96,260 | 35,357 | 36.7% | | Total NOI | 1,862,903 | 1,613,360 | 249,543 | 15.5% | 2022 Same Store Operating Statistics (vs. 2021) | Metric | 2022 | Change from 2021 | | :--- | :--- | :--- | | Total Revenues | $2,533,577 (in thousands) | +10.6% | | Total Expenses | $802,291 (in thousands) | +3.6% | | NOI | $1,731,286 (in thousands) | +14.1% | | Average Rental Rate | $2,898 | +10.4% | | Physical Occupancy | 96.4% | +0.3% | | Turnover | 42.8% | (1.9%) | Liquidity and Capital Resources The company maintains a strong liquidity position with approximately $2.4 billion available, supported by a healthy capital structure and ample financial flexibility - The company reports approximately $2.4 billion in readily available liquidity, a strong balance sheet, and limited near-term maturities[163] Statements of Cash Flows Summary ($ in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Operating activities | $1,454,756 | $1,260,184 | | Investing activities | $107,792 | ($434,620) | | Financing activities | ($1,785,612) | ($565,056) | Capital Structure as of December 31, 2022 ($ in thousands) | Component | Amount | % of Total | | :--- | :--- | :--- | | Total Debt | $7,425,722 | 24.3% | | Total Equity | $23,097,987 | 75.7% | | Total Market Capitalization | $30,523,709 | 100.0% | - As of December 31, 2022, 87.1% of the company's investment in real estate, valued at $24.5 billion, was unencumbered, providing significant flexibility[176] Credit Ratings as of February 10, 2023 | Entity/Security | Standard & Poor's | Moody's | | :--- | :--- | :--- | | ERPOP's long-term senior debt | A- | A3 | | ERPOP's short-term commercial paper | A-2 | P-2 | | EQR's long-term preferred equity | BBB | Baa1 | Critical Accounting Policies and Estimates The company identifies impairment of long-lived assets and allocation of purchase price for acquisitions as its two critical accounting policies - The company's evaluation of its long-lived assets for impairment is a critical accounting policy, involving significant judgments about operational performance and market conditions[201] - The allocation of purchase price for acquired investment properties is another critical policy, using relative fair values to allocate the price to tangible and intangible assets[202] Funds From Operations and Normalized Funds From Operations For 2022, FFO available to Common Shares and Units increased to $1.37 billion, with Normalized FFO also rising to $1.37 billion FFO and Normalized FFO Reconciliation ($ in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net income available to Common Shares and Units | $800,131 | $1,375,660 | $944,556 | | FFO available to Common Shares and Units | $1,373,917 | $1,150,632 | $1,238,145 | | Normalized FFO available to Common Shares and Units | $1,371,828 | $1,161,364 | $1,256,368 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate changes, which affect debt costs and fair values, with a hypothetical 100 bps rate increase adding $4.7 million to annual interest expense - The company's main market risk is from changes in interest rates, impacting debt refinancing, floating-rate debt, and derivatives[206] - As of December 31, 2022, total variable rate debt was $0.5 billion, or 6.4% of total debt, and a 100 basis point rate increase would have increased annual interest expense by an estimated $4.7 million[209] - The fair value of the company's $7.0 billion in fixed-rate debt is sensitive to interest rate changes; a 100 basis point decrease would have increased its fair value by approximately $397.5 million[210] Item 8. Financial Statements and Supplementary Data This section refers to the Index to Consolidated Financial Statements and Schedule on page F-1 of the Form 10-K - This item directs the reader to the full financial statements and schedules beginning on page F-1 of the report[214] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - For both Equity Residential and ERP Operating Limited Partnership, management concluded that disclosure controls and procedures were effective as of December 31, 2022[215][220] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework, an assessment audited by Ernst & Young LLP[216][218][221] - No changes in internal control over financial reporting occurred during Q4 2022 that have materially affected, or are reasonably likely to materially affect, the company's internal controls[219][224] PART III Items 10-14. Corporate Governance, Compensation, and Related Matters Information for these items is incorporated by reference from the company's Proxy Statement, with equity compensation plan details provided - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's Proxy Statement[227] Equity Compensation Plan Information as of December 31, 2022 | Plan Category | Securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 4,061,360 | $62.60 | 11,407,237 | | Equity compensation plans not approved by shareholders | N/A | N/A | N/A | PART IV Item 15. Exhibit and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the report, directing readers to the relevant indices - This item lists the documents filed as part of the report, including financial statements and exhibits[233] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the financial statements and internal controls, identifying 'Impairment of Long-Lived Assets' as a Critical Audit Matter - The independent auditor, Ernst & Young LLP, issued an unqualified opinion, stating that the financial statements for both Equity Residential and ERP Operating Limited Partnership present fairly their financial position[252][262] - The auditor also issued an unqualified opinion on the effectiveness of each entity's internal control over financial reporting as of December 31, 2022[253][263] - A Critical Audit Matter was identified concerning the 'Impairment of Long-Lived Assets' due to the complex and subjective judgments required by management[256][257][266] Consolidated Financial Statements The consolidated financial statements show total assets of $20.2 billion and net income of $807.0 million for 2022, with net income decreasing due to lower gains on real estate sales Consolidated Balance Sheet Data (Equity Residential, $ in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Investment in real estate, net | $19,060,904 | $19,918,624 | | Total assets | $20,218,262 | $21,169,241 | | Total liabilities | $8,517,310 | $9,483,056 | | Total equity | $11,382,679 | $11,187,208 | Consolidated Statement of Operations Data (Equity Residential, $ in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Rental income | $2,735,180 | $2,463,997 | $2,571,705 | | Total expenses | $1,923,459 | $1,843,570 | $1,785,522 | | Net gain on sales of real estate | $304,325 | $1,072,183 | $531,807 | | Net income | $806,995 | $1,396,714 | $962,501 | Notes to Consolidated Financial Statements The notes detail key accounting policies, debt structure, equity changes, share incentive plans, and segment performance - The company's significant accounting policies include treating property acquisitions as asset acquisitions and evaluating long-lived assets for impairment quarterly (Note 2)[323][328] - As of Dec 31, 2022, the company had 378.4 million Common Shares and 12.4 million Units outstanding, with a redemption value of $318.3 million for Redeemable Noncontrolling Interests (Note 3)[364][368] - The company has a $2.5 billion unsecured revolving credit facility and a $1.0 billion commercial paper program, with $2.37 billion available on the credit facility at year-end (Note 9)[421][423] - The company recognized total compensation equity of $33.8 million in 2022 related to its share incentive plans, with 4.1 million options outstanding (Note 12)[466][471] Schedule III - Real Estate and Accumulated Depreciation This schedule details the company's $28.1 billion gross investment in real estate and $9.0 billion in accumulated depreciation as of year-end 2022 Real Estate Summary as of December 31, 2022 | Category | Investment in Real Estate, Gross | Accumulated Depreciation | Investment in Real Estate, Net | Encumbrances | | :--- | :--- | :--- | :--- | :--- | | Total Unencumbered Properties | $24,476,818,491 | ($7,904,362,412) | $16,572,456,079 | $— | | Total Encumbered Properties | $3,611,935,002 | ($1,123,487,437) | $2,488,447,565 | $1,953,438,085 | | Total Consolidated | $28,088,753,493 | ($9,027,849,849) | $19,060,903,644 | $1,953,438,085 |