For further information including definitions for capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company's and the
Operating Partnership'sAnnual Report on Form 10-K for the year ended December 31, 2020. In addition, please refer to the Definitions section below for various capitalized terms not immediately defined in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, projections and assumptions made by management. While the Company's management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, which could cause actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Many of these uncertainties and risks are difficult to predict and beyond management's control, such as the current novel coronavirus ("COVID-19") pandemic (see below for further discussion). Forward-looking statements are not guarantees of future performance, results or events. The forward-looking statements contained herein are made as of the date hereof and the Company undertakes no obligation to update or supplement these forward-looking statements. In addition, these forward-looking statements are subject to risks related to the COVID-19 pandemic and its accompanying variants, many of which are unknown, including the duration, severity and the extent of the adverse health impact on the general population, our residents and employees, the rate of vaccine distribution and effectiveness of vaccinations, the overall reopening progress in the cities in which we operate, the potential long-term changes in customer preferences for living in our communities and the impact of operational changes we have implemented and may implement in response to the pandemic. Additional factors that might cause such differences are discussed in Part I of the Company's and the
Operating Partnership'sAnnual Report on Form 10-K for the year ended December 31, 2020, particularly those under Item 1A, Risk Factors. Forward-looking statements and related uncertainties are also included in the Notes to Consolidated Financial Statements in this report. The 2021 guidance assumptions disclosed throughout this Item 2 are based on current expectations and are forward-looking. Overview Equity Residential("EQR") is committed to creating communities where people thrive. The Company, a member of the S&P 500, is focused on the acquisition, development and management of residential properties located in and around dynamic cities that attract high quality long-term renters. ERP Operating Limited Partnership("ERPOP") is focused on conducting the multifamily property business of EQR. EQR is a Marylandreal estate investment trust ("REIT") formed in March 1993and ERPOP is an Illinoislimited partnership formed in May 1993. 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. EQR is the general partner of, and as of September 30, 2021owned an approximate 96.7% ownership interest in, ERPOP. All of the Company's property ownership, development and related business operations are conducted through the Operating Partnershipand EQR has no material assets or liabilities other than its investment in ERPOP. EQR issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP, but does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnershipholds substantially all of the assets of the Company, including the Company's ownership interests in its joint ventures. The Operating Partnershipconducts the operations of the business and is structured as a partnership with no publicly traded equity.
The registered office of the Company is located at
Table of Contents Available Information You may access our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and any amendments to any of those reports/statements we file with the
Securities and Exchange Commission("SEC") free of charge on our website, www.equityapartments.com. These reports/statements are made available on our website as soon as reasonably practicable after we file them with the SEC. The information contained on our website, including any information referred to in this report as being available on our website, is not a part of or incorporated into this report.
Business objectives and operating and investment strategies
The Company's and the
Operating Partnership'soverall business objectives and operating and investing strategies have not changed from the information included in the Company's and the Operating Partnership'sAnnual Report on Form 10-K for the year ended December 31, 2020. As more fully discussed in the Company's and the Operating Partnership'sAnnual Report on Form 10-K, it continues to be the Company's intention over time, through varying degrees of both acquisitions and new wholly-owned and joint venture development projects, to further diversify its portfolio into select new expansion markets that share similar characteristics as its current established markets and to optimize the mix of the Company's properties located in urban vs. dense suburban submarkets within its markets. COVID-19 Impact The overall impact from the COVID-19 pandemic on the Company and the Operating Partnershiphas not changed materially from the information included in the Company's and the Operating Partnership'sAnnual Report on Form 10-K for the year ended December 31, 2020. As more fully discussed in the Company's and the Operating Partnership'sAnnual Report on Form 10-K, despite the impact of COVID-19, we continue to believe that the long-term prospects for our business remain strong. See the Results of Operations discussion below for additional information on how the ongoing recovery from the COVID-19 pandemic is currently impacting our markets and operations.
Results of operations
In conjunction with our business objectives and our operating and investment strategies, the following table provides an overview of the transactions that took place during the nine months ended.
Portfolio Rollforward ($ in thousands) Apartment Acquisition Properties Units Purchase Price Cap Rate 12/31/2020 304 77,889 Acquisitions: Consolidated Rental Properties 8 2,128
$ 684,7253.9 % Consolidated Rental Properties- Not Stabilized (1) 3 793 $ 335,7004.1 % Unconsolidated Land Parcels (2) - - $ 55,409 Disposition Sales Price Yield Dispositions: Consolidated Rental Properties (10 ) (1,842 ) $ (1,021,800 )(3.8 )% Completed Developments - Consolidated 2 354 9/30/2021 307 79,322
(1) The Company acquired three properties during the nine months ended September
30, 2021, one each in the
rental and are expected to stabilize in their second year of ownership at
the combined acquisition ceiling rate indicated above.
(2) The Company has entered into separate unconsolidated joint ventures for the
aim to develop vacant plots in
the closing of the respective joint ventures. The Company’s total investment
in these two joint ventures is approximately
30, 2021. See Notes 6 and 12 in the Notes to Consolidated Financial Statements for additional discussion. 37
Table of Contents The consolidated properties acquired are located in the
Atlanta(3), Austin(2), Boston, Dallas/Ft. Worth(2), Denver, Seattleand Washington D.C.markets. The Atlanta, Austinand Dallas/Ft. Worthacquisitions marked the Company's re-entry into these markets. The unconsolidated land parcels acquired were located in the Denverand suburban New Yorkmarkets. The consolidated properties disposed of were located in the Los Angeles, New York, San Franciscoand Seattlemarkets and the sales generated an Unlevered IRR of 9.2%. The consolidated property development completions were located in the San Franciscoand Washington D.C.markets. Finally, the Company commenced construction on one consolidated and two unconsolidated new apartment properties, located in the Denver, New Yorkand Washington D.C.markets, consisting of 971 apartment units totaling approximately $372.7 millionof expected development costs. See Note 4 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company's real estate transactions. The Company's guidance assumes consolidated rental acquisitions of $1.5 billionand consolidated rental dispositions of $1.5 billionand expects that the Acquisition Cap Rate will be approximately equal to the Disposition Yield for the full year ending December 31, 2021. We currently anticipate spending approximately $300.0 millionon development costs during the year ending December 31, 2021, of which approximately $197.7 millionwas spent during the nine months ended September 30, 2021, primarily for consolidated and unconsolidated properties currently under construction. Certain of these costs are expected to be funded by joint venture partner obligations and third-party construction mortgages. Work at all of our development projects continues with no material delays or cost overruns notwithstanding some brief disruptions from governmental construction moratoriums due to COVID-19.
August 2021, the Company entered into a strategic partnership with Toll Brothers, Inc. (NYSE: TOL) to develop apartment communities in key markets. The partnership will focus on selectively acquiring and developing sites for apartment rental communities in seven metro markets where both parties have a significant or growing presence: Atlanta, Austin, Boston, Dallas/Ft. Worth, Denver, Orange County/ San Diegoand Seattle. Toll Brothers will act as managing member of each project overseeing approvals, design and construction. See Notes 12 and 14 in the Notes to Consolidated Financial Statements for additional discussion.
Same store results
Properties that the Company owned and were stabilized (see definition below) for all of both of the nine months ended
September 30, 2021and 2020 (the "Nine-Month 2021 Same Store Properties"), which represented 75,288 apartment units, drove the Company's results of operations. The Nine-Month 2021 Same Store Propertiesare discussed in the following paragraphs. The Company's primary financial measure for evaluating each of its apartment communities is net operating income ("NOI"). NOI represents 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. The following tables provide a rollforward of the apartment units included in Same Store Propertiesand a reconciliation of apartment units included in Same Store Propertiesto those included in Total Propertiesfor the nine months ended September 30, 2021: Nine Months Ended September 30, 2021 Apartment Properties Units Same Store Properties at December 31, 2020 285 73,585 2019 acquisitions stabilized 12 3,323 2021 dispositions (10 ) (1,842 ) Lease-up properties stabilized 1 222 Same Store Properties at September 30, 2021 288 75,288 38
Table of Contents Nine Months Ended September 30, 2021 Apartment Properties Units Same Store 288 75,288
Non-Same Store: 2021 acquisitions 11 2,921 2020 acquisitions 1 158 2019 acquisitions not yet stabilized 1 217 Lease-up properties not yet stabilized (1) 5 737 Other 1 1 Total Non-Same Store19 4,034 Total Propertiesand Apartment Units 307 79,322
Note: Properties are considered âstabilizedâ when they have reached 90% occupancy for three consecutive months. Properties are included in the same store when stabilized for all current and comparable periods presented.
(1) Includes properties at various stages of rental and properties where
the lease has been concluded but the properties have not been stabilized for the
comparable periods presented. Also includes an old third
main rented property that has not been stabilized.
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 (amounts in thousands): Nine Months Ended September 30, 2021 2020 Operating income
$ 1,033,958$ 961,384 Adjustments: Property management 74,357 71,513 General and administrative 43,102 37,212 Depreciation 616,032 619,003 Net (gain) loss on sales of real estate properties (587,623 ) (352,218 ) Total NOI $ 1,179,826 $ 1,336,894Rental income: Same store $ 1,758,176 $ 1,870,199Non-same store/other 60,691 88,071 Total rental income 1,818,867 1,958,270 Operating expenses: Same store 612,705 593,502 Non-same store/other 26,336 27,874 Total operating expenses 639,041 621,376 NOI: Same store 1,145,471 1,276,697 Non-same store/other 34,355 60,197 Total NOI $ 1,179,826 $ 1,336,89439
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The following table presents the comparative total of comparable store results and statistics for the nine months of 2021.
September YTD 2021 vs. September YTD 2020 Same Store Results/Statistics Including 75,288 Same Store Apartment Units $ in thousands (except for Average Rental Rate) September YTD 2021 September YTD 2020 % Non- % % Non- Residential Change Residential Change Total Change Residential
$ 1,098,267(12.1 %) $ 47,20473.3 % $ 1,145,471(10.3 %) NOI $ 1,249,460
Average Rental Rate
$ 2,607(7.8 %) Average Rental Rate $ 2,829Physical Occupancy 95.9 % 0.6 % Physical Occupancy 95.3 % Turnover 35.0 % (4.4 %) Turnover 39.4 %
Note: Comparable store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current period and comparable periods.
(1) The change in non-residential same-store sales is mainly due to the
write-off of linear non-residential rental receivables in the third
quarter 2020 and a decrease in bad debts in 2021.
The following table provides results and statistics related to our Residential same store operations for the nine months ended
September 30, 2021and 2020: September YTD 2021 vs. September YTD 2020 Same Store Residential Results/Statistics by Market
Increase (decrease) from previous year
September September September YTD 2021 YTD 2021 YTD 2021 Weighted % of Average Average September YTD Average Apartment Actual Rental Physical 2021 Rental Physical Markets/Metro Areas Units NOI Rate Occupancy % Turnover Revenues Expenses NOI Rate Occupancy Turnover
Los Angeles15,739 20.4 % $ 2,43996.5 % 32.2 % (3.2 %) 1.3 % (5.2 %) (4.1 %) 0.9 % (6.1 %) Orange County4,028 5.6 % 2,281 97.7 % 27.2 % 1.9 % 2.1 % 1.8 % 0.9 % 1.1 % (7.5 %) San Diego2,706 4.1 % 2,446 97.7 % 34.5 % 3.9 % 1.7 % 4.7 % 3.0 % 0.9 % (3.1 %) Subtotal - Southern California22,473 30.1 % 2,411 96.9 % 31.6 % (1.5 %) 1.5 % (2.7 %) (2.5 %) 1.0 % (5.9 %) San Francisco12,114 18.6 % 2,877 94.8 % 37.0 % (13.5 %) 3.4 % (19.4 %) (13.0 %) (0.5 %) (3.4 %) Washington D.C.14,569 17.8 % 2,326 96.3 % 36.4 % (4.6 %) 3.9 % (8.4 %) (5.2 %) 0.6 % (1.1 %) New York9,343 11.7 % 3,463 94.4 % 30.6 % (11.6 %) 2.9 % (23.8 %) (12.1 %) 0.5 % (8.8 %) Seattle8,819 10.5 % 2,251 95.8 % 39.1 % (8.8 %) 4.9 % (14.3 %) (9.0 %) 0.2 % (1.3 %) Boston6,346 9.5 % 2,853 95.7 % 37.5 % (7.9 %) 4.0 % (12.8 %) (9.3 %) 1.4 % (5.8 %) Denver1,624 1.8 % 2,031 96.7 % 45.9 % 1.1 % 4.1 % (0.2 %) (0.8 %) 1.8 % (8.2 %) Total 75,288 100.0 % $ 2,60795.9 % 35.0 % (7.3 %) 3.1 % (12.1 %) (7.8 %) 0.6 % (4.4 %) Note: The above table reflects Residential same store results only. Residential operations account for approximately 96.2% of total revenues for the nine months ended September 30, 2021.
The following table provides guidance for our expected comparable store operating performance for the full year 2021 (including residential and non-residential):
Revised Full Year 2021 Previous Full Year 2021 Physical Occupancy 96.0% 95.3% to 96.3% Revenue change (3.7%) (5.0%) to (4.0%) Expense change 3.25% 2.75% to 3.25% NOI change (7.0%) (8.5%) to (7.5%) 40
Table of Contents Despite the significant impact from the pandemic on our business, which is reflected in the results for the nine months ended
September 30, 2021, the recovery across our portfolio continues ahead of our prior expectations. Robust economic growth coupled with reopening of cities are driving our operations to recover rapidly with significant demand for our apartments in all our markets. This has led to high Physical Occupancy, increased pricing power and a material reduction in Leasing Concessions. Key operating drivers for this performance include:
â¢ Pricing – There has been a significant improvement in pricing (net of
Rental concessions) since the end of the fourth quarter of 2020, with
prices reaching or exceeding pre-pandemic levels. Portfolio-wide pricing
is now moderating in line with typical seasonal trends and is in line
with our previous expectations. Monthly residential rental concessions
granted also decreased significantly. Residential rental concessions
to be less than
$50,000, which is down from a peak of $6.1 millionper month in February 2021.
â¢ Physical occupancy – Physical occupancy was 96.6% in the third quarter of
2021 and is expected to remain strong for the remainder of 2021.
â¢ Percentage of residents renewing – Our strategy of focusing on residents
renewals continues to produce excellent results. We centralized the renewal
impacted in 2020 by the COVID-19 pandemic) in our off-site call
center. The results have been positive to date as the percentage of residents
Renewal continues to improve with
above 2019 levels. Negotiations in all our markets are expected
become more difficult given the material price improvements
compared to the previous year.
Despite strong rent collections throughout the pandemic, the financial impact from a small subset of our residents and Non-Residential tenants not paying has led to higher levels of bad debt than we have historically experienced. We continue to work with our residents and Non-Residential tenants on meeting their financial obligations. During the nine months ended
September 30, 2021, the Company received governmental rental assistance payments paid on behalf of residents of approximately $18.3 million. Despite receipt of these payments, we expect our reserves and bad debt to remain elevated in 2021. Our bad debt allowance policies remain consistent with those in place before the pandemic.
The following table shows comparative comparable store operating expenses for the nine-month period 2021.
September YTD 2021 vs. September YTD 2020 Total Same Store Operating Expenses Including 75,288 Same Store Apartment Units $ in thousands % of September YTD 2021 September September $ % Operating YTD 2021 YTD 2020 Change (5) Change Expenses Real estate taxes
$ 263,521 $ 259,603 $ 3,9181.5 % 43.0 % On-site payroll (1) 123,966 124,652 (686 ) (0.6 )% 20.3 % Utilities (2) 85,290 78,408 6,882 8.8 % 13.9 % Repairs and maintenance (3) 77,320 71,359 5,961 8.4 % 12.6 % Insurance 20,254 18,403 1,851 10.1 % 3.3 % Leasing and advertising 8,028 7,409 619 8.4 % 1.3 % Other on-site operating expenses (4) 34,326 33,668 658 2.0 % 5.6 % Total Same Store Operating Expenses (includes Residential and Non-Residential) $ 612,705 $ 593,502 $ 19,2033.2 % 100.0 %
(1) On-site payroll – Includes payroll and related expenses for on-site staff
including property managers, leasing consultants and maintenance staff.
(2) Utilities – Represents gross expenditure before any recovery under the
Resident Utility Billing System (âRUBSâ). Recoveries are reflected in the rental
(3) Repairs and maintenance – Includes general maintenance costs, apartment unit
turnover costs, including interior painting, routine landscaping, security,
extermination, fire protection, snow removal, elevator, roofing and parking
repairs and other miscellaneous building repair and maintenance costs. 41
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(4) Other operating costs on site – Includes ground lease costs and
administrative costs such as office supplies, telephone and data charges and
association and business license rights.
(5) The variations from one financial year to another are mainly due to the
â¢ Property taxes – The increase is lower than expected due to lower rates and
â¢ On-site Payroll – Improved utilization of sales and service personnel from
various technology initiatives and higher than usual vacancies
during the current period.
â¢ Utilities – Water, sewer and waste charges (about 65% of total)
increased due to both usage and rate. Natural gas and electricity costs
(about 35% of the total) increased due to rising commodity prices.
â¢ Repairs and maintenance – Increase mainly due to low
spending growth over the period due to the pandemic and minimum wage increases on
contractual services and maintenance repairs (including higher turnover
charges linked to strong rental activity) in 2021.
â¢ Insurance – Increase due to higher premiums when renewing property insurance
due to the difficult conditions in the insurance market.
â¢ Rental and advertising – Increase mainly due to the increase in digital
â¢ Other operating expenses on site – Increase due to higher ground
The Company now anticipates same store NOI to decline for the full year 2021 by approximately 7.0% (previously was anticipated to decline between 8.5% to 7.5%) primarily driven by the expected improvement in same store revenues. We now anticipate same store expenses to increase by approximately 3.25% (previously was anticipated to increase between 2.75% to 3.25%) for 2021 as compared to 2020, primarily driven by lower real estate taxes and on-site payroll.
See also note 13 of the notes to the consolidated financial statements for further analysis of the Company’s segment information.
Non-same store/other NOI results for the nine months ended
September 30, 2021decreased approximately $25.8 millioncompared to the same period of 2020. These results consist primarily of properties acquired in calendar years 2020 and 2021, operations from the Company's development properties and operations prior to disposition from 2020 and 2021 sold properties. This difference is due primarily to:
â¢ A negative impact of a weaker and newly stabilized development NOI
buildings under development for lease of
â¢ A positive impact of the increase in the NOI of non-stabilized buildings acquired in
2019, 2020 and 2021 of
â¢ A positive impact of a higher NOI from other non-comparable store properties
(including an old property rented by master) of
â¢ A negative impact of the lost NOI of the 2020 and 2021 disposals of
Comparison of the nine months and quarters ended
The following table presents a reconciliation of diluted earnings per share/unit for the nine months and quarter ended
September 30, 2021as compared to the same periods in 2020: Nine Months Ended Quarter Ended September 30 September 30 Diluted earnings per share/unit for period ended 2020 $ 1.77 $ 0.24 Property NOI (0.40 ) (0.02 ) Interest expense 0.12 0.03 Non-operating asset gains/losses 0.06 - Net gain/loss on property sales 0.63
Other (0.04 ) (0.04 ) Diluted earnings per share/unit for period ended 2021 $ 2.14 $ 1.15 42
Table of Contents The decrease in consolidated NOI is primarily a result of the Company's lower NOI from same store properties, largely due to the economic impact from the COVID-19 pandemic. The following table presents the changes in the components of consolidated NOI for the nine months and quarter ended
September 30, 2021as compared to the same periods in 2020:
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