| Maryland | (Equity Residential) | 13-3675988 (Equity Residential) |
| Illinois (ERP Operating Limited Partnership) | 36-3894853 (ERP Operating Limited Partnership) | |
| (State or | organization) | (I.R.S. Employer Identification No.) |
| Two North Riverside Plaza, Chicago, Illinois | (312) 474-1300 | |
| (Address of | ( | |
Securities registered pursuant to Section 12(b) of the Act:
| Common Shares of Beneficial Interest, $0.01 Par Value | (Equity Residential) | New York Stock Exchange |
| Preferred Shares of Beneficial Interest, $0.01 Par Value (Equity Residential) | New York Stock Exchange | |
| 7.57% Notes due August 15, 2026 (ERP Operating Limited Partnership) | New York Stock Exchange | |
| (Title of | each class) | (Name of |
Securities registered pursuant to Section 12(g) of the Act:None
None (Equity Residential)
Units of Limited Partnership Interest (ERP Operating Limited Partnership)
(Title of each class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Equity Residential Yes x No ¨ | ERP Operating Limited Partnership Yes x No o |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Equity Residential Yes ¨ No x | ERP Operating Limited Partnership Yes ¨ No x |
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. Yes x No o
Equity Residential Yes x No ¨ | ERP Operating Limited Partnership Yes x 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 ofRegulation 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). Yes x No o
Equity Residential Yes x No ¨ | ERP Operating Limited Partnership Yes x No ¨ |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.x
Equity Residential x | ERP Operating Limited Partnership x |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
| Equity Residential: | ||
Large accelerated filer x | Accelerated filer | |
Non-accelerated filer | Smaller reporting company | |
| ERP Operating Limited Partnership: | |
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No x
Equity Residential Yes ¨ No x | ERP Operating Limited Partnership Yes ¨ No x |
The aggregate market value of Common Shares held by non-affiliates of the Registrant was approximately $11.4$18.4 billion based upon the closing price on June 30, 20102012 of $41.64$62.36 using beneficial ownership of shares rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting shares owned by Trustees and Executive Officers, some of who may not be held to be affiliates upon judicial determination.
The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on February 16, 201115, 2013 was 293,981,029.325,462,816.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information that will be contained in the Company’sEquity Residential's Proxy Statement relating to our 2011its 2013 Annual Meeting of Shareholders, which the CompanyEquity Residential intends to file no later than 120 days after the end of its fiscal year ended December 31, 2010,2012, and thus these items have been omitted in accordance with General Instruction G(3) toForm 10-K. Equity Residential is the general partner and 95.9% owner of ERP Operating Limited Partnership.
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EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2012 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 December 31, 2012 owned an approximate 95.9% ownership interest in ERPOP. The remaining 4.1% interest is owned by limited partners. As the sole general partner of ERPOP, EQR has exclusive control of ERPOP's day-to-day management.
The Company is structured as an umbrella partnership REIT (“UPREIT”) and contributes all net proceeds from its various equity offerings to the Operating Partnership. In return for those contributions, the Company receives a number of OP Units (see definition below) in the Operating Partnership equal to the number of Common Shares it has issued in the equity offering. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units in the Operating Partnership, which 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. The Company maintains a one-for-one relationship between the OP Units of the Operating Partnership issued to EQR and the Common Shares.
The Company believes that combining the reports on Form 10-K 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.
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 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 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 the Company, which are contributed
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to the capital of the Operating Partnership in exchange for additional limited partnership interests in the Operating Partnership (“OP Units”) (on a one-for-one Common Share per OP Unit basis), the Operating Partnership generates all remaining capital required by the Company's business. These sources include the Operating Partnership's working capital, net cash provided by operating activities, borrowings under its revolving credit facility, the issuance of secured and unsecured debt and equity securities and proceeds received from disposition of certain properties and joint ventures.
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 and development joint venture partners. 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 significant 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 the Operating Partnership, the Company consolidates the Operating Partnership 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.
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EQUITY RESIDENTIAL
ERP OPERATING LIMITED PARTNERSHIP
TABLE OF CONTENTS
| PAGE | ||||||
| PART I. | ||||||
| Item 1. | ||||||
| Item 1A. | ||||||
| Item 1B. | ||||||
| Item 2. | ||||||
| Item 3. | ||||||
| Item 4. | ||||||
| PART II. | ||||||
| Item 5. | ||||||
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of | ||||||
| Item 6. | ||||||
| Item 7. | ||||||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||
| Item 7A. | ||||||
| Quantitative and Qualitative Disclosures about Market Risk | ||||||
| Item 8. | ||||||
| Financial Statements and Supplementary Data | ||||||
| Item 9. | ||||||
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||||
| Item 9A. | ||||||
| Item 9B. | ||||||
| PART III. | ||||||
| Item 10. | ||||||
| Trustees, Executive Officers and Corporate Governance | ||||||
| Item 11. | ||||||
| Item 12. | ||||||
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||||||
| Item 13. | ||||||
| Certain Relationships and Related Transactions, and Trustee Independence | ||||||
| Item 14. | ||||||
| Principal Accounting Fees and Services | ||||||
| PART IV. | ||||||
| Item 15. | ||||||
| Exhibits and Financial Statement Schedules | ||||||
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PART I
Item 1. | Business |
General
Equity Residential (“EQR”), a Maryland real estate investment trust (“REIT”) formed in March 1993, is an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top United States growth markets. ERP Operating Limited Partnership (“ERPOP”), an Illinois limited partnership, was formed in May 1993 to conduct the multifamily residential property business of Equity Residential. EQR has elected to be taxed as a REIT. 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.
As of December 31, 2012, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 403 properties located in 13 states and is the largest publicly traded ownerDistrict of multifamily properties in the United States (based on the aggregate market valueColumbia consisting of its outstanding Common Shares, the number of115,370 apartment units wholly owned and total revenues earned).units. The Company’sownership breakdown includes (table does not include various uncompleted development properties):
| Properties | Apartment Units | |||||
| Wholly Owned Properties | 382 | 106,856 | ||||
| Partially Owned Properties – Consolidated | 19 | 3,475 | ||||
| Military Housing | 2 | 5,039 | ||||
| 403 | 115,370 | |||||
The Company's corporate headquarters are located in Chicago, Illinois and the Company also operates property management offices in each of its markets.
| Properties | Apartment Units | |||||||
| Wholly Owned Properties | 425 | 119,634 | ||||||
| Partially Owned Properties – Consolidated | 24 | 5,232 | ||||||
| Military Housing | 2 | 4,738 | ||||||
| 451 | 129,604 | |||||||
Certain capitalized terms used herein are defined in the Notes to Consolidated Financial Statements. See also Note 1917 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s segment disclosures.
Available Information
You may access our Annual Report onForm 10-K, our Quarterly Reports onForm 10-Q, our Current Reports onForm 8-K and any amendments to any of those reports we file with the SEC free of charge at our website,www.equityresidential.com. These reports are made available at our website as soon as reasonably practicable after we file them with the SEC.
Business Objectives and Operating and Investing Strategies
The Company invests in high quality apartment communities located in strategically targeted markets with the goal of maximizing our risk adjusted total return (operating income plus capital appreciation) on invested capital.
We seek to maximize the income and capital appreciation of our properties by investing in markets (our core markets) that are characterized by conditions favorable to multifamily property appreciation. We are focused primarily on the six core coastal, high barrier to entry markets of Boston, New York, Washington DC, Southern California, San Francisco and Seattle. These markets generally feature one or more of the following characteristics that allow us to increase rents:
| ▪ | High barriers to entry where, because of land scarcity or government regulation, it is difficult or costly to build new apartment properties, creating limits on new supply; |
| ▪ | High home ownership costs; |
| ▪ | Strong economic growth leading to household formation and job growth, which in turn leads to high demand |
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for our apartments;
| ▪ | Urban core locations with an attractive quality of life and higher wage job categories leading to high resident demand and retention; and |
| ▪ | Favorable demographics contributing to a larger pool of target residents with a high propensity to rent apartments. |
Our operating focus is on balancing occupancy and rental rates to maximize our revenue while exercising tight cost control to generate the highest possible return to our shareholders. Revenue is maximized by drivingattracting qualified resident prospects to our properties, cost-effectively converting this traffic cost-effectivelythese prospects into new leases at the highest rent possible,residents and keeping our residents satisfied and renewingso they will renew their leases at yet higher rents.upon expiration. While we believe that it is our high-quality, well-located assets that bring our customers to us, it is ourthe customer service and superior value provided by our on-site personnel that keeps them renting with us and recommending us to their friends.
We use technology to engage our customers in the way that they want to be engaged. Many of our residents utilize our web-based resident portal which allows them to sign their leases, review their accountaccounts and make payments, provide feedback and make service requests on-line.
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Acquisitions and developments may be financed from various sources of capital, which may include retained cash flow, issuance of additional equity and debt, securities, sales of properties and joint venture agreements and collateralized and uncollateralized borrowings.agreements. In addition, the Company may acquire properties in transactions that include the issuance of limited partnership interests in the Operating Partnership (“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. EQRThe Company may also acquire land parcels to holdand/or sell based on market opportunities. The Company may also seek to acquire properties by purchasing defaulted or distressed debt that encumbers desirable properties in the hope of obtaining title to property through foreclosure ordeed-in-lieu of foreclosure proceedings. The Company has also, in the past, converted some of its properties and sold them as condominiums but is not currently active in this line of business.
As part of its strategy, the Company purchases completed and fully occupied apartment properties, partially completed or partially unoccupiedoccupied properties or land on which apartment properties can be constructed. We intend to hold a diversified portfolio of assets across our target markets. Currently,As of December 31, 2012, no single metropolitan area accountsaccounted for more than 17%15.9% of our NOI, though no guarantee can be made that NOI concentration may not increase in the future.
We endeavor to attract and retain the best employees by providing them with the education, resources and opportunities to succeed. We provide many classroom and on-line training courses to assist our employees in interacting with prospects and residents as well as extensively train our customer service specialists in maintaining the property and its improvements, equipment and appliances on our property sites.appliances. We actively promote from within and many senior corporate and property leaders have risen from entry level or junior positions. We monitor our employees’employees' engagement by surveying them annually and have consistently received high engagement scores.
We have a commitment to sustainability and consider the environmental impacts of our business activities. We have a dedicated in-house team that initiates and applies sustainable practices in all aspects of our business, including investment activities, development, property operations and property management activities. With its high density, multifamily housing is, by its nature, an environmentally friendly property type. Our recent acquisition and development activities have been primarily concentrated in pedestrian-friendly urban locations near public transportation. When developing and renovating our properties, we strive to reduce energy and water usage by investing in energy saving technology while positively impacting the experience of our residents and the value of our assets. We continue to implement a combination of irrigation, lighting, HVAC and HVACrenewable energy improvements at our properties that will reduce energy and water consumption.
Competition
All of the Company's properties are located in developed areas that include other multifamily properties. The number of competitive multifamily properties in a particular area could have a material effect on the Company's ability to lease apartment
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units at its properties and on the rents charged. The Company may be competing with other entities that have greater resources than the Company and whose managers have more experience than the Company's managers. In addition, other forms of rental properties and single family housing provide housing alternatives to potential residents of multifamily properties. See Item 1A. Risk Factors for additional information with respect to competition.
Debt and Equity Activity
EQR issues public equity from time to time and guarantees certain debt of ERPOP. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. In addition, ERPOP issues OP Units and preference interests ("Preference Units") from time to time.
Please refer to Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the Company’s and the Operating Partnership's Capital Structure chartcharts as of December 31, 2010.2012.
Major Debt and Equity Activities for the Years Ended December 31, 2010, 20092012, 2011 and 20082010
During 2012:
The Company repaid its $500.0 million term loan at maturity.
The Company issued 21,850,000 Common Shares at a price of $54.75 per share for total consideration of approximately $1.2 billion, after deducting underwriting commissions of $35.9 million. See Note 3 in the Notes to Consolidated Financial Statements for further discussion.
| ▪ | The Company issued 3,173,919 Common Shares at an average price of $60.59 per share for total consideration of $192.3 million pursuant to its At-The-Market (“ATM”) share offering program. See Note 3 in the Notes to Consolidated Financial Statements for further discussion. |
| The |
| ▪ | The Company issued 1,081,797 OP Units having a value of $66.6 million (based on the closing price for Common Shares of $61.57 on such date) as partial consideration for the acquisition of one rental property. |
| ▪ | The Company issued 110,054 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $5.4 million. |
| ▪ | The Company redeemed its Series N Cumulative Redeemable Preferred Shares for cash consideration of $150.0 million plus accrued dividends through the redemption date. |
During 2011:
| ▪ | The Company redeemed $482.5 million of its 3.85% unsecured notes with a final maturity of 2026 at par and no premium was paid and repaid $93.1 million of 6.95% unsecured notes at maturity. |
| ▪ | The Company issued $1.0 billion of ten-year 4.625% fixed rate public notes in a public offering, receiving net proceeds of $996.2 million before underwriting fees and other expenses. The notes have an all-in effective interest rate of approximately 6.2% after termination of various forward starting swaps in conjunction with the issuance (see Note 8 in the Notes to Consolidated Financial Statements for further discussion). |
| ▪ | The Company issued 3,866,666 Common Shares at an average price of $52.23 per share for total consideration of $201.9 million pursuant to its ATM share offering program. See Note 3 in the Notes to Consolidated Financial Statements for further discussion. |
| ▪ | The Company issued 2,945,948 Common Shares pursuant to its Share Incentive Plans and received net proceeds of approximately $95.3 million. |
| ▪ | The Company issued 113,107 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $5.3 million. |
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During 2010:
| ▪ | The Company issued $600.0 million of ten-year 4.75% fixed rate public notes in a public offering at an all-in effective interest rate of 5.09%, receiving net proceeds of $595.4 million before underwriting fees and other expenses. |
| ▪ |
| ▪ | The Company issued 2,506,645 Common Shares pursuant to its Share Incentive Plans and received net proceeds of approximately $71.6 million. |
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| The Company issued 157,363 Common Shares pursuant to its Employee Share Purchase Plan and received net proceeds of approximately $5.1 million. |
| The Company repurchased and retired 58,130 of its Common Shares at an average price of $32.46 per share for total consideration of $1.9 million (all related to the vesting of employee restricted shares). See Note 3 in the Notes to Consolidated Financial Statements for further discussion. |
6
OP Units or Preference Units.
An unlimited amount of equity and debt securities remains available for issuance by EQR and the Operating PartnershipERPOP under effective shelf registration statements filed with the SEC. Most recently, EQR and the Operating Partnership filed a universal shelf registration statement for an unlimited amount of equity and debt securities that automatically became automatically effective upon filing with the SEC in October 2010 (under SEC regulations enacted in 2005, the registration statement automaticallyand expires on October 14, 2013 and does not contain a maximum issuance amount).15, 2013. However, as of February 16, 2011,15, 2013, issuances under the ATM share offering program are limited to 10,000,0006.0 million additional shares. Per the terms of ERPOP's partnership agreement, EQR contributes the net proceeds of all equity offerings to the capital of ERPOP in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis) or preference units (on a one-for-one preferred share per preference unit basis).
Credit Facilities
In July 2011, the Company replaced its then existing $1.425 billion unsecured revolving credit facility which was scheduled to mature in February 2012 with a $1.425new $1.25 billion (net of $75.0 million which had been committed by a now bankrupt financial institution and is not available for borrowing) unsecured revolving credit facility maturing on February 28, 2012, withJuly 13, 2014, subject to a one-year extension option exercisable by the Company. The Company had the ability to increase available borrowings by an additional $500.0$500.0 million by adding additional banks to the facility or obtaining the agreement of existing banks to increase their commitments. AdvancesOn January 6, 2012, the Company amended this credit facility to increase available borrowings by an additional $500.0 million to $1.75 billion with all other terms, including the July 13, 2014 maturity date, remaining the same. The interest rate on advances under the credit facility bearwas generally LIBOR plus a spread (1.15%) and the Company paid an annual facility fee of 0.2%. Both the spread and the facility fee were dependent on the credit rating of the Company's long-term debt. On January 11, 2013, the Company replaced its existing $1.75 billion credit facility with a new $2.5 billion unsecured revolving credit facility maturing April 1, 2018. The interest at variable rates based uponrate on advances under the new credit facility will be LIBOR at various interest periods plus a spread (currently 0.50%1.05%) and an annual facility fee (currently 15 basis points). Both the spread and the facility fee are dependent uponon the Operating Partnership’s credit rating or based on bids received from the lending group. EQR has guaranteed the Operating Partnership’s credit facility up to the maximum amount and for the full term of the facility.Company's long-term debt.
As of December 31, 2010,February 15, 2012, the amount available on the $2.5 billion credit facility was $1.28$2.47 billion (net of $147.3$30.2 million which was restricted/dedicated to support letters of credit) and there was no amount outstanding. As of December 31, 2012, the amount available on the $1.75 billion credit and netfacility was $1.72 billion (net of the $75.0$30.2 million discussed above) which was restricted/dedicated to support letters of credit) and there was no amount outstanding. During the year ended December 31, 2010,2012, the weighted average interest rate was 0.66%1.35%. As of December 31, 2009,2011, the amount available on the $1.25 billion credit facility was $1.37$1.22 billion (net of $56.7$31.8 million which was restricted/dedicated to support letters of creditcredit) and netthere was no amount outstanding. During the year ended December 31, 2011, the weighted average interest rate was 1.42%.
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Archstone Transaction
On November 26, 2012, the Company and AvalonBay Communities, Inc. ("AvalonBay" or "AVB") (NYSE:AVB) entered into a contract with Lehman Brothers Holdings Inc. ("Lehman") to acquire the assets and liabilities of Archstone Enterprise LP ("Archstone"), which consists principally of a portfolio of high-quality apartment properties in major markets in the United States. Under the terms of the $75.0 million discussed above)agreement, the Company will acquire approximately 60% of Archstone's assets and liabilities and AvalonBay will acquire approximately 40% of Archstone's assets and liabilities. The Company will acquire approximately 75 operating properties, four properties under development and several land parcels to be held for future development for approximately $8.9 billion which will consist of cash of approximately $2.0 billion, 34,468,085 Common Shares and the assumption of the Company's portion of the liabilities related to the Archstone assets (other than certain liabilities owed to Lehman and certain transaction expenses). The Company did not draw and had no balance outstanding on its revolving credit facility at any time during the year ended December 31, 2009.
Environmental Considerations
See Item 1A.Risk Factorsfor additional information with respect to competition.
Item 1A. |
General
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. Unless otherwise indicated, when used in this section, the terms “we”“Company,” “we,” “us” or “our” mean collectively EQR, ERPOP and “us” refer to Equity Residentialthose entities/subsidiaries owned or controlled by EQR and/or ERPOP and its the term “Operating Partnership” means collectively ERPOP and those entities/subsidiaries including ERP Operating Limited Partnership.owned or controlled by ERPOP. This Item 1A. includes forward-looking statements. You should refer to our discussion of the qualifications and limitations on forward-looking statements included in Item 7.
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The occurrence of the events discussed in the following risk factors could adversely affect, possibly in a material manner, our business, financial condition or results of operations, which could adversely affect the value of our common shares of beneficial interest or preferred shares of beneficial interest (which we refer to collectively as “Shares”), limited partnership interests in the Operating Partnership (“Preference Units, OP Units”) and Long TermUnits, Long-Term Incentive Plan Units (“LTIP Units”). and our public unsecured debt. In this section, we refer to the Shares, preference units, OP Units, and LTIP Units and public unsecured debt together as our “securities” and the investors who own Sharesand/orShares/Units, OP/LTIP Units and public unsecured debt as our “security holders”.
Our Performance and Securities Value are Subject to Risks Associated with the Real Estate Industry
General
Real property investments are subject to varying degrees of risk and are relatively illiquid. Numerous factors may adversely affect the economic performance and value of our properties and the ability to realize that value. These factors include changes in the global, national, regional and local economic climates, local conditions such as an oversupply of multifamily properties or a reduction in demand for our multifamily properties, the attractiveness of our properties to residents, competition from other multifamily properties and single family homes and changes in market rental rates. Our performance also depends on our ability to collect rent from residents and to pay for adequate maintenance, insurance and other operating costs, including real estate taxes, all of which could increase over time. Sources of labor and materials required for maintenance, repair, capital expenditure or development may be more expensive than anticipated. Also, the expenses of owning and operating a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property.
We May Not Have Sufficient Cash Flows From Operations After Capital Expenditures to Cover Our Distributions and Our New Dividend Policy May Lead to Quicker Dividend Reductions
We generally consider our cash flows provided by operating activities after capital expenditures to be adequate to meet operating requirements and payment of distributions to our security holders. However, there may be times when we experience shortfalls in our coverage of distributions, which may cause us to consider reducing our distributionsand/or using the proceeds
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from property dispositions or additional financing transactions to make up the difference. Should these shortfalls occur for lengthy periods of time or be material in nature, our financial condition may be adversely affected and we may not be able to maintain our current distribution levels. While our new dividend policy makes it less likely we will over distribute, it will also lead to a dividend reduction more quickly than in the pasta fixed dividend policy should operating results deteriorate. See Item 7 for additional discussion regarding our new dividend policy.
We May Be Unable to Renew Leases or Relet Apartment Units as Leases Expire
When our residents decide to leave our apartments, whether because they decide not to renew their leases uponor they leave prior to their lease expiration date, we may not be able to relet their apartment units. Even if the residents do renew or we can relet the apartment units, the terms of renewal or reletting may be less favorable than current lease terms. If we are unable to promptly renew the leases or relet the apartment units, or if the rental rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected. If residents do not experience increases in their income, we may be unable to increase rent and/or delinquencies may increase. Occupancy levels and market rents may be adversely affected by national and local economic and market conditions including, without limitation, new construction and excess inventory of multifamily and single family housing, rental housing subsidized by the government, other government programs that favor single family rental housing or owner occupied housing over multifamily rental housing, slow or negative employment growth and household formation, the availability of low interest mortgages for single family home buyers, changes in social preferences and the potential for geopolitical instability, all of which are beyond the Company’sCompany's control. In addition, various state and local municipalities are considering and may continue to consider rent control legislation which could limit our ability to raise rents. Finally, the federal government’sgovernment's policies, many of which may encourage home ownership, can increase competition and possibly limit our ability to raise rents. Consequently, our cash flow and ability to service debt and make distributions to security holders could be reduced.
New Acquisitions and/or Development Projects May Fail to Perform as Expected and Competition for Acquisitions May Result in Increased Prices for Properties
We intend to actively acquireand/or develop multifamily properties for rental operations as market conditions dictate. We may also acquire multifamily properties that are unoccupied or in the early stages of lease up. We may be unable to lease up these apartment properties on schedule, resulting in decreases in expected rental revenuesand/or lower yields due to lower occupancy and rates as well as higher than expected concessions. We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or to complete a development property. Additionally, we expect that other major real estate investors with significant capital will compete with us for attractive investment opportunities or may also develop properties in markets where we focus our development and acquisition efforts. This competition (or lack thereof) may
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increase (or depress) prices for multifamily properties. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms. We have acquired in the past and intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios, that could increase our size and result in alterations to our capital structure. The total number of apartment units under development, units, costs of development and estimated completion dates are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation.
In connection with such government regulation, we may incur liability if our properties are not constructed and operated in compliance with the accessibility provisions of the Americans with Disabilities Act, the Fair Housing Act or other federal, state or local requirements. Noncompliance could result in fines, subject us to lawsuits and require us to remediate or repair the noncompliance.
Risks Involved in Real Estate Activity Through Joint Ventures
We have in the past and may in the future develop and acquire properties in joint ventures with other persons or entities when we believe circumstances warrant the use of such structures. Joint venture investments involve risks, including the possibility that our partners might refuse to make capital contributions when due; that we may be responsible to our partnerpartners for indemnifiable losses; that our partnerpartners might at any time have business or economic goals which are inconsistent with ours; and that our partnerpartners may be in a position to take action or withhold consent contrary to our instructions or requests. At times we have entered into agreements providing for joint and several liability with our partners. Frequently, we and our partnerpartners may each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner’spartners' interest, at a time when we otherwise would not have initiated such a transaction. In some instances, joint venture partners may have competing interests in our markets that could create conflicts of interest. Further, the Company’sCompany's joint venture partners may experience financial distress, including bankruptcy, and to the extent they do not meet their obligations to us or our joint ventures with them, we may be adversely
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affected.
Because Real Estate Investments Are Illiquid, We May Not Be Able to Sell Properties When Appropriate
Real estate investments generally cannot be sold quickly. We may not be able to reconfigure our portfolio promptly in response to economic or other conditions. This inability to reallocate our capital promptly could adversely affect our financial condition and ability to make distributions to our security holders.
The Value of Investment Securities Could Result In Losses to the Company
From time to time, the Company holds investment securities and/or cash investments that have a highervarious levels of repayment and liquidity risk, profile than theincluding government obligations and bond funds, money market funds or bank deposits in which we generally invest.deposits. On occasion we also may purchase securities of companies in our own industry as a means to invest funds. There may be times when we experience declines in the value of these investment securities, which may result in losses to the Company and our financial condition or results of operations could be adversely affected. Sometimes the cash we deposit at a bank substantially exceeds the FDIC insurance limit or we invest cash in money market or similar type funds with investment management institutions resulting in risk to the Company of loss of funds if these banks or institutions fail.
Changes in Market Conditions and Volatility of Share Prices Could Adversely Affect the Market Price of Our Common Shares
The stock markets, including the New York Stock Exchange, on which we list our Common Shares, have experienced significant price and volume fluctuations. As a result, the market price of our Common Shares could be similarly volatile, and investors in our Common Shares may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The market price of our Common Shares may decline or fluctuate significantly in response to many factors, including but not limited to the following:
| general market and economic conditions; | ||
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actual or anticipated variations in our guidance, quarterly operating results or dividends;
changes in our funds from operations, normalized funds from operations or earnings estimates;
difficulties or inability to access capital or extend or refinance debt;
large portfolio acquisitions or dispositions;
decreasing (or uncertainty in) real estate valuations;
rising crime rates in markets where our increasingly urban portfolio is concentrated;
a change in analyst ratings;
adverse market reaction to any additional debt we incur in the future;
governmental regulatory action, including changes or proposed changes to the mandates of Fannie Mae or Freddie Mac, and changes in tax laws;
the issuance of additional Common Shares, or the perception that such issuances might occur, including under EQR's ATM program; and
the resale of substantial amounts of our common shares, or the anticipation of the resale of such shares, by large holders of our securities.
Changes in Laws and Litigation Risk Could Affect Our Business
We are generally not able to pass through to our residents under existing leases any real estate or other federal, state or local taxes. Consequently, any such tax increases may adversely affect our financial condition and limit our ability to make distributions to our security holders.
We may become involved in legal proceedings, including but not limited to, proceedings related to consumer, shareholder, employment, environmental, development, condominium conversion, tort and commercial legal issues that, if decided adversely to or settled by us, could result in liability material to our financial condition or results of operations.
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Any Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have an Adverse Effect on Our Share Price
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. If we identify one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our share price.
Environmental Problems Are Possible and Can Be Costly
Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at such property. The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation andclean-up costs incurred by such parties in connection with the contamination. These laws typically imposeclean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of theclean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site.
Substantially all of our properties have been the subject of environmental assessments completed by qualified independent environmental consulting companies. While these environmental assessments have not revealed, nor are we aware of, any environmental liability that our management believes would have a material adverse effect on our business, results of operations, financial condition or liquidity, there can be no assurance that we will not incur such liabilities in the future.
There have been an increasing number of lawsuits against owners and managers of multifamily properties alleging personal injury and property damage caused by the presence of mold in residential real estate. As some of these lawsuits have resulted in substantial monetary judgments or settlements, insurance carriers have reacted by excluding mold-related claims from standard policies and pricing mold endorsements at prohibitively high rates. While we have adopted programs designed to minimize the existence of mold in any of our properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on our residents or the property, should mold become an issue in the future, our financial condition or results of operations may be adversely affected.
We cannot be assured that existing environmental assessments of our properties reveal all environmental liabilities, that any prior owner of any of our properties did not create a material environmental condition not known to us, or that a material environmental condition does not otherwise exist as to any of our properties.
Climate Change
To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for properties located in these areas or affected by these conditions. Should the impact of climate change be material in nature, including destruction of our properties, or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected.
In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing properties and could also require us to spend more on our new development properties without a corresponding increase in revenue.
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Insurance Policy Deductibles, Exclusions and Counterparties
As of December 31, 2010,2012, the Company’sCompany's property insurance policy provides for a per occurrence deductible of $250,000 and self-insured retention of $5.0 million per occurrence, subject to a maximum annual aggregate self-insured retention of $7.5 million, with approximately 80% of any excess losses being covered by insurance. Any earthquake and named windstorm losses in critical areas are subject to a deductible of 5% of the values of the buildings involved in the losses and are not subject to the aggregate self-insured retention. The Company’sCompany's general liability and worker’sworker's compensation policies at December 31, 20102012 provide for a $2.0 million and $1.0 million per occurrence deductible, respectively. These higher deductible and self-insured retention amounts do expose the Company to greater potential uninsured losses, but management has reviewed its claims history over the years and believes the savings in insurance premium expense justify this potential increased exposure over the long-term. However, the potential impact of climate change and increased severe weather could cause a significant increase in insurance premiums and
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deductibles, particularly for our coastal properties, or a decrease in the availability of coverage, either of which could expose the Company to even greater uninsured losses which may adversely affect our financial condition or results of operations.
As a result of the terrorist attacks of September 11, 2001, property insurance carriers created exclusions for losses from terrorism from our “all risk” property insurance policies. As of December 31, 2010,2012, under a separate terrorism insurance policy, the Company was insured for $500.0 million in terrorism insurance coverage, with a $100,000 deductible. This coverage excludes losses from nuclear, biological and chemical attacks. In the event of a terrorist attack impacting one or more of our properties, we could lose the revenues from the property, our capital investment in the property and possibly face liability claims from residents or others suffering injuries or losses. The Company has become more susceptible to large losses as it has transformed its portfolio, becoming more concentrated in fewer, more valuable assets over a smaller geographical footprint.
As of December 31, 2012, the Company's cyber liability insurance policy provides for a per occurrence deductible of $250,000 and a $5.0 million general limit. Cyber liability insurance generally covers costs associated with the wrongful release, through inadvertent breach or network attack of personally identifiable information such as social security or credit card numbers. This cyber policy would cover the cost of victim notification, credit monitoring and other crisis response expenses.
Non-Performance by Our Operating Counterparties Could Adversely Affect Our Performance
We have relationships with and, from time to time, we execute transactions with or receive services from many counterparties. As a result, defaults by counterparties could result in services not being provided, or volatility in the financial markets could affect counterparties’counterparties' ability to complete transactions with us as intended, both of which could result in disruptions to our operations that may adversely affect our business and results of operations.
Debt Financing and Preferred SharesShares/Preference Units Could Adversely Affect Our Performance
General
Please refer to Item 7,Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations, for the Company’sCompany's total debt and unsecured debt summaries as of December 31, 2010.2012.
In addition to debt, we have $200.0 million of combineda liquidation value of $50.0 million of outstanding preferred shares of beneficial interestinterest/preference units with a weighted average dividend preference of 6.93%8.29% per annum as of December 31, 2010.2012. Our use of debt and preferred equity financing creates certain risks, including the following:
Disruptions in the Financial Markets Could Adversely Affect Our Ability to Obtain Debt Financing and Impact our Acquisitions and Dispositions
Dislocations and liquidity disruptions in capital and credit markets could impact liquidity in the debt markets, resulting in financing terms that are less attractive to usand/or the unavailability of certain types of debt financing. Should the capital and credit markets experience volatility and the availability of funds again become limited, or be available only on unattractive terms, we will incur increased costs associated with issuing debt instruments. In addition, it is possible that our ability to access the capital and credit markets may be limited or precluded by these or other factors at a time when we would like, or need, to do so, which would adversely impact our ability to refinance maturing debtand/or react to changing economic and business conditions. Uncertainty in the credit markets could negatively impact our ability to make acquisitions and make it more difficult or not possible for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. Potential continued disruptions in
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the financial markets could also have other unknown adverse effects on us or the economy generally and may cause the price of our Common Sharessecurities to fluctuate significantlyand/or to decline.
Potential Reforms to Fannie Mae and Freddie Mac Could Adversely Affect Our Performance
There is significant uncertainty surrounding the futures of Fannie Mae and Freddie Mac.Mac (the "Government Sponsored
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Enterprises" or "GSEs"). Through their lender originator networks, the GSEs are significant lenders both to the Company and to buyers of the Company's properties. Should Fannie Mae and Freddie Macthe GSEs have their mandates changed or reduced, materially change their lending terms, lose key personnel, be disbanded or reorganized by the government or otherwise discontinue providing liquidity to our sector, it would significantly reduce our access to secured debt capitaland/or increase borrowing costs and would significantly reduce our sales of assets and/or the values realized upon sale. Disruptions in the floating rate tax-exempt bond market (where interest rates reset weekly) and in the credit market’smarket's perception of Fannie Mae and Freddie Mac,the GSEs, which guarantee and provide liquidity for many of these bonds, have been experienced in the past and may be experienced in the future and could result in an increase in interest rates on these debt obligations. These bonds could also be put to our consolidated subsidiaries if Fannie Mae or Freddie Macthe GSEs fail to satisfy their guaranty obligations. While this obligation is in almost all cases non-recourse to us, this could cause the Company to have to repay these obligations on short notice or risk foreclosure actions on the collateralized assets.
Non-Performance by Our Financial Counterparties Could Adversely Affect Our Performance
Although we have not experienced any material counterparty non-performance, disruptions in financial and credit markets could, among other things, impede the ability of our counterparties to perform on their contractual obligations. There are multiple financial institutions that are individually committed to lend us varying amounts as part of our revolving credit facility and delayed draw term loan facility. Should any of these institutions fail to fund their committed amounts when contractually required, our financial condition could be adversely affected. Should several of these institutions fail to fund, we could experience significant financial distress. One of the financial institutions, with a commitment of $75.0 million, declared bankruptcy in 2008 and will not honor its financial commitment. Our borrowing capacity under the credit facility has in essence been permanently reduced to $1.425 billion.
The Company also has developed assets with joint venture partners which were financed by financial institutions that have experienced varying degrees of distress in the past and could experience similar distress as economic conditions change. If one or more of these lenders fail to fund when contractually required, the Company or its joint venture partner may be unable to complete construction of its development properties.
A Significant Downgrade in Our Credit Ratings Could Adversely Affect Our Performance
A significant downgrade in our credit ratings, while not affecting our ability to draw proceeds under the revolving credit facility and delayed draw term loan facility, would cause our borrowing costs to increase under the facilityfacilities and impact our ability to borrow secured and unsecured debt, or otherwise limit our access to capital. In addition, a downgrade below investment grade would require us to post cash collateraland/or letters of credit in favor of some of our secured lenders to cover our self-insured property and liability insurance deductibles or to obtain lower deductible insurance compliant with the lenders’lenders' requirements at the lower ratingratings level.
Scheduled Debt Payments Could Adversely Affect Our Financial Condition
In the future, our cash flow could be insufficient to meet required payments of principal and interest or to pay distributions on our securities at expected levels.
We may not be able to refinance existing debt, including joint venture indebtedness (which in virtually all cases requires substantial principal payments at maturity) and, if we can, the terms of such refinancing might not be as favorable as the terms of existing indebtedness. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our operating cash flow will not be sufficient in all years to repay all maturing debt. As a result, certain of our other debt may cross default, we may be forced to postpone capital expenditures necessary for the maintenance of our properties, we may have to dispose of one or more properties on terms that would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a property. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations.
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Please refer to Item 7,Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations, for the Company’sCompany's debt maturity schedule as of December 31, 2010.2012.
Financial Covenants Could Adversely Affect the Company’sCompany's Financial Condition
The mortgages on our properties may contain customary negative covenants that, among other things, limit our ability, without the prior consent of the lender, to further mortgage the property and to reduce or change insurance coverage. In addition, our unsecured credit facilities contain certain restrictions, requirements and other limitations on our ability to incur debt. The indentures under which a substantial portion of our unsecured debt was issued also contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios, as well as limitations on our ability to incur secured and
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unsecured debt (including acquisition financing), and to sell all or substantially all of our assets. Our credit facilities and indentures are cross-defaulted and also contain cross default provisions with other material debt. While the Company believes it was in compliance with its unsecured public debt covenants for both the years ended December 31, 20102012 and 2009,2011, should it fall out of compliance, it would likely have a negative impact on our financial condition and results of operations.
Some of the properties were financed with tax-exempt bonds thator otherwise contain certain restrictive covenants or deed restrictions. We have retained an independent outside consultantrestrictions, including affordability requirements. The Company, and from time to time its consultants, monitor compliance with the restrictive covenants and deed restrictions that affect these properties. If these bond compliance requirements restrict our ability to increase our rental rates to low or moderate-income residents, or eligible/qualified residents, then our income from these properties may be limited. While we generally believe that the interest rate benefit attendant to properties with tax-exempt bonds more than outweighs any loss of income due to restrictive covenants or deed restrictions, this may not always be the case. Some of these requirements are complex and our failure to comply with them may subject us to material fines or liabilities.
Our Degree of Leverage Could Limit Our Ability to Obtain Additional Financing
Our degree of leverage could have important consequences to security holders. For example, the degree of leverage could affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes, making us more vulnerable to a downturn in business or the economy in general. Our consolidateddebt-to-total market capitalization ratio was 38.4%30.7% as of December 31, 2010.2012. In addition, our most restrictive unsecured public debt covenants are as follows:
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Total Debt to Adjusted Total Assets (not to exceed 60%) | 48.5 | % | 48.8 | % | ||||
| Secured Debt to Adjusted Total Assets (not to exceed 40%) | 23.2 | % | 24.9 | % | ||||
| Consolidated Income Available for Debt Service to | ||||||||
| Maximum Annual Service Charges | ||||||||
| (must be at least 1.5 to 1) | 2.46 | 2.44 | ||||||
| Total Unsecured Assets to Unsecured Debt | ||||||||
| (must be at least 150%) | 256.0 | % | 256.5 | % | ||||
| December 31, 2012 | December 31, 2011 | |||||
| Total Debt to Adjusted Total Assets (not to exceed 60%) | 38.6 | % | 46.0 | % | ||
| Secured Debt to Adjusted Total Assets (not to exceed 40%) | 17.6 | % | 19.4 | % | ||
| Consolidated Income Available for Debt Service to | ||||||
| Maximum Annual Service Charges | ||||||
| (must be at least 1.5 to 1) | 3.00 | 2.59 | ||||
| Total Unsecured Assets to Unsecured Debt | ||||||
| (must be at least 150%) | 346.3 | % | 259.9 | % | ||
Rising Interest Rates Could Adversely Affect Cash Flow
Advances under our credit facilities bear interest at variable rates based upon LIBOR at various interest periods, plus a spread dependent upon the Operating Partnership’sPartnership's credit rating, or based upon bids received from the lending group. Certain public issuances of our senior unsecured debt instruments may also, from time to time, bear interest at floating rates. We may also borrow additional money with variable interest rates in the future. Increases in interest rates would increase our interest expense under these debt instruments and would increase the costs of refinancing existing debt and of issuing new debt. Accordingly, higher interest rates could adversely affect cash flow and our ability to service our debt and make distributions to security holders.
Derivatives and Hedging Activity Could Adversely Affect Cash Flow
In the normal course of business, we use derivatives to manage our exposure to interest rate volatility on debt instruments, including hedging for future debt issuances. At other times we may utilize derivatives to increase our exposure to floating interest rates. We may also use derivatives to manage our exposure to foreign exchange rates or manage commodity prices in the daily operations of our business. There can be no assurance that these hedging arrangements will have the desired beneficial impact. These arrangements, which can include a number of counterparties, may expose us to additional risks, including failure of any of our counterparties to
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perform under these contracts, and may involve extensive costs, such as transaction fees or breakage costs, if we terminate them. No strategy can completely insulate us from the risks associated with interest rate, foreign exchange or commodity pricing fluctuations.
We Depend on Our Key Personnel
We depend on the efforts of the Chairman of our Board of Trustees, Samuel Zell, and our executive officers, particularly David J. Neithercut, our President and Chief Executive Officer (“CEO”). If they resign or otherwise cease to be employed by us, our operations could be temporarily adversely affected. Mr. Zell has entered into retirement benefit and noncompetition agreements with the Company.
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Control and Influence by Significant ShareholdersSecurity Holders Could Be Exercised in a Manner Adverse to Other Shareholders
Security Holders
The consent of certain affiliates of Mr. Zell is required for certain amendments to the Sixth Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the “Partnership Agreement”). As a result of their security ownership and rights concerning amendments to the Partnership Agreement, the security holders referred to herein may have influence over the Company. Although to the Company’sCompany's knowledge these security holders have not agreed to act together on any matter, they would be in a position to exercise even more influence over the Company’sCompany's affairs if they were to act together in the future. This influence could conceivably be exercised in a manner that is inconsistent with the interests of other security holders. For additional information regarding the security ownership of our trustees, including Mr. Zell, and our executive officers, see the Company’sEquity Residential's definitive proxy statement.
Provisions of Our Declaration of Trust and Bylaws Could Inhibit Changes in Control
Certain provisions of our Declaration of Trust and Bylaws may delay or prevent a change in control of the Company or other transactions that could provide the security holders with a premium over the then-prevailing market price of their securities or which might otherwise be in the best interest of our security holders. This includes the 5% Ownership Limit described below. While our existing preferred sharesshares/preference units do not have these provisions, any future series of preferred sharesshares/preference units may have certain voting provisions that could delay or prevent a change in control or other transactions that might otherwise be in the interest of our security holders. Our Bylaws require certain information to be provided by any security holder, or persons acting in concert with such security holder, who proposes business or a nominee at an annual meeting of shareholders, including disclosure of information related to hedging activities and investment strategies with respect to our securities. These requirements could delay or prevent a change in control or other transactions that might otherwise be in the interest of our security holders.
We Have a Share Ownership Limit for REIT Tax Purposes
To remain qualified as a REIT for federal income tax purposes, not more than 50% in value of our outstanding Shares may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any year. To facilitate maintenance of our REIT qualification, our Declaration of Trust, subject to certain exceptions, prohibits ownership by any single shareholder of more than 5% of the lesser of the number or value of the outstanding class of common or preferred shares. We refer to this restriction as the “Ownership Limit.” Absent any exemption or waiver granted by our Board of Trustees, securities acquired or held in violation of the Ownership Limit will be transferred to a trust for the exclusive benefit of a designated charitable beneficiary, and the security holder’sholder's rights to distributions and to vote would terminate. A transfer of Shares may be void if it causes a person to violate the Ownership Limit. The Ownership Limit could delay or prevent a change in control and, therefore, could adversely affect our security holders’holders' ability to realize a premium over the then-prevailing market price for their Shares. To reduce the ability of the Board to use the Ownership Limit as an anti-takeover device, the Company’sCompany's Ownership Limit requires, rather than permits, the Board to grant a waiver of the Ownership Limit if the individual seeking a waiver demonstrates that such ownership would not jeopardize the Company’sCompany's status as a REIT.
Our Preferred Shares May Affect Changes in Control
Our Declaration of Trust authorizes the Board of Trustees to issue up to 100 million preferred shares, and to establish the preferences and rights (including the right to vote and the right to convert into common shares) of any preferred shares issued. The Board of Trustees may use its powers to issue preferred shares and to set the terms of such securities to delay or prevent a change in control of the Company, even if a change in control were in the interest of security holders.
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Inapplicability of Maryland Law Limiting Certain Changes in Control
Certain provisions of Maryland law applicable to real estate investment trusts prohibit “business combinations” (including certain issuances of equity securities) with any person who beneficially owns ten percent or more of the voting power of outstanding securities, or with an affiliate who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the Company’sCompany's outstanding voting securities (an “Interested Shareholder”), or with an affiliate of an Interested Shareholder. These prohibitions last for five years after the most recent date on which the Interested Shareholder became an Interested Shareholder. After the five-year period, a business combination with an Interested Shareholder must be approved by two super-majority shareholder votes unless, among other conditions, holders of common shares receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Shareholder for its common shares. As permitted by Maryland law, however, the Board of Trustees of the Company has opted out
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of these restrictions with respect to any business combination involving Mr. Zell and certain of his affiliates and persons acting in concert with them. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to a business combination involving usand/or any of them. Such business combinations may not be in the best interest of our security holders.
The Archstone transaction is the largest such transaction in the Company's history and exposes us to significant additional risk.
We plan to fund a portion of the cash purchase price of the Archstone transaction as well as repay indebtedness incurred or assumed in connection with the Archstone transaction with capital raised through significant dispositions of assets. If we are unable to consummate such dispositions in a timely manner, on attractive terms, or at all, we will likely have to incur greater indebtedness and/or issue additional equity securities.
We currently expect to finance a portion of the cash purchase price of the Archstone transaction and to ultimately refinance indebtedness assumed or incurred in connection with the Archstone transaction with proceeds generated from the disposition of certain Archstone assets and of our assets that we believe are not consistent with our ongoing business strategy or that may be in markets in which we intend to reduce our current presence. The amount of such proposed dispositions is significant. We can provide no assurance that we will in fact be able to consummate such dispositions at all, at a time necessary to apply the proceeds to the Archstone transaction or the refinancing of debt, or at prices that we would otherwise expect to achieve. Factors that could limit our ability to successfully dispose of assets include:
the possible lack of financing available to potential buyers, in particular if prevailing interest rates rise or if the GSEs increase their interest rates on their lending, make their underwriting criteria more restrictive, or if the lending activities of the GSEs are curtailed or ultimately terminated;
our operational ability to successfully execute a disposition plan that is more significant than any disposition plan that we have previously executed;
other sellers marketing competing properties; and
the fact that potential purchasers will perceive that we are more likely to sell on less favorable terms to us due to the Archstone transaction and our related financing needs.
Failure to timely achieve a material portion of our anticipated dispositions would likely require us to incur greater indebtedness to fund the Archstone transaction or seek other methods to refinance the debt incurred or assumed in connection with the Archstone transaction, which involves the risk described herein, or issue more equity securities, which is subject to execution and pricing risk. The failure to successfully execute a material portion of our disposition plan could have a material adverse effect on our financial condition, liquidity, results of operations and distributions to our shareholders.
In addition, we plan to defer the taxable gain on certain of our dispositions as exchanges made in connection with the Archstone transaction pursuant to Section 1031 of the Internal Revenue Code. The requirements for qualification under Section 1031 are technical and complex. To the extent we are unable to defer such gains to the extent anticipated, the benefits of such dispositions will be reduced, and we could recognize significant taxable gains as a result of such dispositions, which would require us to make distributions in excess of our expectations, which would have a material adverse effect on our financial condition.
There can be no assurance that the Archstone transaction will be consummated in accordance with the anticipated timing or at all.
Although we expect to close the Archstone transaction in the first quarter of 2013, there can be no assurance that the Archstone transaction will be completed in accordance with the anticipated timing or at all. The purchase agreement contains closing conditions, which may not be satisfied or waived, in which case the Company and AVB and/or Lehman will not be obligated to complete the Archstone transaction. In addition, under circumstances specified in the purchase agreement, the Company and AVB or Lehman may terminate the purchase agreement.
We expect to incur significant additional indebtedness, including significant floating rate debt and significant amounts of indebtedness with maturity dates in 2014, in order to consummate the Archstone transaction, which may have a material adverse effect on our financial condition, results of operations and distributions to our shareholders.
We may raise additional funds to finance our portion of the Archstone transaction cash purchase price through one or more methods, including, without limitation, from borrowings under our revolving credit facility and delayed draw term loan facility, proceeds from asset dispositions, bank term debt or unsecured debt or equity offerings. Depending on market conditions, we may increase or decrease the anticipated sources of debt financing. Our obligations under the purchase agreement are not conditioned upon the consummation of any financing transactions.
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In connection with the Archstone transaction, we will also assume significant indebtedness, including a significant amount of secured mortgage indebtedness. Taking into account our existing indebtedness, the assumption of indebtedness in the Archstone transaction, and possible financing plans to fund our portion of the Archstone transaction cash purchase price, our consolidated indebtedness will materially increase after giving effect to the Archstone transaction. We may not be able to repay or otherwise refinance such indebtedness when it becomes due and payable, which would have a material adverse effect on our results of operations, liquidity and financial condition. If we default under a mortgage loan, we may lose the properties securing these loans.
Further, because a significant amount of the assets we expect to acquire from Archstone are secured by mortgage indebtedness, and because we intend to dispose of significant amounts of our properties that are currently unencumbered, our unencumbered asset pool will be reduced significantly. This may increase our costs of raising additional unsecured indebtedness and could significantly limit our financial flexibility.
In addition, a significant amount of the indebtedness we expect to incur and assume in connection with the Archstone transaction will have floating interest rates rather than fixed interest rates or matures in 2014. To the extent that interest rates increase and we are unable to successfully hedge against rising interest rates, our interest expense could increase substantially.
Our indebtedness could have additional significant adverse consequences on our business, such as:
having our long-term debt downgraded or put on a watch list by one or more rating agencies;
requiring us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, capital expenditures, development projects and other general corporate purposes and reduce cash for distributions;
limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or other debt service requirements or for other purposes;
increasing our exposure to floating interest rates;
limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;
restricting us from making strategic acquisitions, developing properties or exploiting business opportunities;
restricting the way in which we conduct our business because of financial and operating covenants in the agreements governing our and our subsidiaries' existing and future indebtedness, including, in the case of certain indebtedness of subsidiaries, certain covenants that restrict the ability of subsidiaries to pay dividends or make other distributions to us;
exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries' debt instruments that could have a material adverse effect on our business, financial condition and operating results;
increasing our vulnerability to a downturn in general economic conditions;
limiting our ability to react to changing market conditions in our industry and in our tenants' and borrowers' industries; and
substantial prepayment penalties as we refinance this debt.
The impact of any of the potential adverse consequences could have a material adverse effect on our results of operations, financial condition, liquidity and distributions to our shareholders.
The Archstone transaction is expected to be dilutive initially to our earnings and earnings per share.
As a result of the issuance of our common shares to Lehman as part of the consideration paid in the Archstone transaction and the sale of our Common Shares in 2012 to finance the Archstone transaction, as well as a result of the expected dispositions necessary to enable us to finance the Archstone transaction, the Archstone transaction is expected to be dilutive to our operating results, both on an absolute basis and on a per share basis. However, the amount of any dilution will depend on a number of factors, including the pace of our planned asset sales, as discussed above and the ultimate mix of sources used to finance the Archstone transaction. For example, if our disposition plan occurs at a faster pace than anticipated, as we currently expect, such dispositions will result in more dilution to our revenues, net income, NOI, funds from operations and normalized funds from operations.
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We will incur substantial expenses and payments even if the Archstone transaction is not completed.
We have incurred substantial legal, accounting, financial advisory and other costs and our management has devoted considerable time and effort in connection with the Archstone transaction. If the Archstone transaction is not completed, we will bear certain fees and expenses associated with the Archstone transaction without realizing the benefits of the Archstone transaction. The fees and expenses may be significant and could have an adverse impact on our results of operations.
The purchase agreement provides for a break-up fee payable by the Company and AVB of $800.0 million if the purchase agreement is terminated under certain circumstances, including as a result of a breach by the Company and AVB of any covenant or agreement under the purchase agreement. Any payment of the break-up fees would have a material adverse impact on our results of operations and our liquidity.
Our obligations under the purchase agreement entered into in the Archstone transaction are joint and several with AVB. The failure of AVB to perform its obligations could cause the purchase agreement to be terminated and could have a material adverse effect on our results of operations and financial condition.
Although we have agreed to purchase approximately 60% of the Archstone assets in the Archstone transaction and AVB has agreed to acquire approximately 40% of the Archstone assets, our obligations under the purchase agreement are joint and several with AVB. If AVB determines not to consummate the Archstone transaction, we do not have the right to consummate the transaction alone. In addition, although we expect to be liable only for our pro rata share of any break-up fee or other obligations arising under the purchase agreement (approximately 60%) pursuant to arrangements with AVB, in the event AVB fails to pay its pro rata share of any such obligations, we will be responsible for paying 100% of such obligations. As a result, the failure of AVB to perform its obligations under the purchase agreement would have a material adverse effect on our results of operations, financial condition, liquidity and distributions to our shareholders.
Several of the assets we expect to acquire in the Archstone transaction are subject to tax protection agreements, which could limit our flexibility with respect to our ownership of such assets.
Several of the assets we expect to acquire in the Archstone transaction were contributed to Archstone subject to various agreements limiting the ability of the owner of the property to take actions that would trigger income tax liability for the contributing owner of the property, including a taxable disposition of the property. In addition, we will also be required to maintain a certain amount of qualified nonrecourse financing on the tax protected properties during their respective restricted periods. Our obligations relating to the tax protected properties may affect the way in which we conduct our business, including whether, when and under what circumstances we sell properties or interests therein and the timing and nature of our financings and refinancing transactions. As a result, we may not be able to dispose of or refinance the tax protected properties when to do so may have otherwise been favorable to us and our shareholders, which could have a material adverse effect on our results of operations and financial condition.
Our business and the market price of our Common Shares may be adversely affected if the Archstone transaction is not completed.
The Archstone transaction is subject to customary and other closing conditions. If the Archstone transaction is not completed, we could be subject to a number of risks that may adversely affect our business and the market price of our Common Shares, including:
our management's attention may be diverted from our day-to-day business and our employees and our relationships with customers may be disrupted as a result of efforts relating to attempting to consummate the Archstone transaction;
the market price of our Common Shares may decline to the extent that the current market price reflects a market assumption that the Archstone transaction will be completed;
we must pay certain costs related to the Archstone transaction, such as legal and accounting fees and expenses, regardless of whether the Archstone transaction is consummated; and
we would not realize the benefits we expect to realize from consummating the Archstone transaction.
The intended benefits of the Archstone transaction may not be realized, which could have a negative impact on our results of operations, financial conditions, the market price of our Common Shares and our distributions to our shareholders.
We may be subject to additional risks and may not be able to achieve the anticipated benefits of the Archstone transaction if the transaction is consummated. Upon completion of the Archstone transaction, we will need to integrate the properties and
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other assets we acquire from Archstone (the "Archstone Portfolio") with our existing operations. The Archstone transaction represents the largest acquisition by dollar amount of a property portfolio ever attempted by us. We may not be able to accomplish the integration of the Archstone Portfolio smoothly, successfully or within the anticipated costs. The diversion of our management's attention from our current operations to integration efforts and any difficulties encountered could prevent us from realizing the full benefits anticipated to result from the Archstone transaction and could adversely affect our business and the price of our Common Shares. Additional risks include, among others:
inability to successfully integrate the operations or information technology of the acquired company, maintain consistent standards, controls, policies and procedures, or realize the anticipated benefits of the acquisitions within the anticipated timeframe or at all;
inability to effectively monitor and manage our expanded portfolio of properties, retain key employees or attract highly qualified new employees;
increased costs or increases in taxable income due to restructuring or other steps required in connection with the integration of the Archstone Portfolio;
projections of estimated future revenues, cost savings or operating metrics that we develop during the due diligence and integration planning process might be inaccurate;
the value of acquired assets or the market price of our Common Shares may decline;
the impact of the Archstone Portfolio on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002;
unanticipated issues, expenses and liabilities, including but not limited to, an investment in a portfolio of assets in Germany;
diversion of our management's attention away from other business concerns;
exposure to any undisclosed or unknown potential liabilities or litigation relating to the Archstone Portfolio; and
potential underinsured losses on the Archstone Portfolio.
We cannot assure you that we would be able to integrate the Archstone Portfolio without encountering difficulties or that any such difficulties will not have a material adverse effect on us. Failure to realize the intended benefits of the Archstone transaction could have a material adverse effect on our results of operations, financial condition, the market price of our Common Shares and our distributions to our shareholders.
We will increase our concentration of properties in certain core markets as a result of the Archstone transaction, which could have an adverse effect on our operations if a particular market is adversely affected by economic or other conditions.
As a result of the Archstone transaction, we will increase our concentration of properties in certain core markets as a result of our strategy to reposition our portfolio from low barrier to entry/non-core markets to high barrier to entry/core markets. If any one or more of such core markets, such as Washington D.C., Southern California, New York or San Francisco, is adversely affected by local or regional economic conditions (such as business layoffs, industry slowdowns, changing demographics and other factors) or local real estate conditions (such as oversupply of or reduced demand for multifamily properties), such conditions may have an increased adverse impact on our results of operations than if our portfolio was more geographically diverse.
Our investments in joint ventures could be adversely affected by our lack of sole decision-making authority regarding major decisions, our reliance on our joint venture partners' financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners.
A portion of the assets we are acquiring in the Archstone transaction are being acquired through joint ventures with AVB that neither we nor AVB will control solely. Joint ventures, including our proposed joint ventures with AVB, involve risks not present with respect to our wholly owned properties, including the following:
We may be unable to take actions that are opposed by our joint venture partners under arrangements that require us to share decision-making authority over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the property or the making of additional capital contributions for the benefit of the property;
Our joint venture partners may take actions that we oppose;
Our ability to sell or transfer our interest in a joint venture to a third party may be restricted without prior consent of our joint venture partners;
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Our joint venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a property or increase our financial commitment to the joint venture;
Our joint venture partners may have business interests or goals with respect to a property that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property;
We may disagree with our joint venture partners about decisions affecting a property or the joint venture, which could result in litigation or arbitration that increases our expenses, distracts our officers and directors and disrupts the day-to-day operations of the property, including by delaying important decisions until the dispute is resolved; and
We may suffer losses as a result of actions taken by our joint venture partners with respect to our joint venture investments.
Any of these risks could materially and adversely affect our ability to generate and recognize attractive returns on our joint venture investments, which could have a material adverse effect on our results of operations, financial condition and distributions to our shareholders.
Shares eligible for future resale by Lehman may depress our share price.
We have agreed to issue 34,468,085 of our Common Shares to Lehman in connection with the Archstone transaction. We have agreed to enter into a registration rights agreement at the closing of the Archstone transaction to cover resales of such shares. The resale of substantial amounts of our Common Shares by Lehman in the public markets, or even the anticipation of the resale of such shares, could have a material adverse effect on the market price of our Common Shares. Such an adverse effect on the market price of our Common Shares would make it more difficult for us to sell our shares in the future at prices which we deem appropriate or to use our shares as currency for future acquisitions.
The inability of Lehman to fulfill its indemnification obligations to us under the purchase agreement could increase our liabilities and adversely affect our results of operations and financial condition.
In addition to certain indemnification obligations of each party to the purchase agreement relating to breaches of fundamental representations and warranties and breaches of covenants and certain other specified matters, we have negotiated as a term in the purchase agreement that Lehman retain responsibility for and indemnify us against damages resulting from certain third-party claims or other liabilities. These third-party claims and other liabilities include, without limitation, costs associated with various litigation matters. Lehman filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in September 2008 and is currently in the process of post-petition liquidation. If Lehman completes its liquidation prior to the termination of their indemnity obligations to us under the purchase agreement, or otherwise distributes substantially all of its assets to its creditors prior to such time, Lehman may not be able to satisfy its obligations with respect to claims and retained liabilities covered by the purchase agreement. The failure of Lehman to satisfy such obligations could have a material adverse effect on our results of operations and financial condition because claimants may successfully assert that we are liable for those claims and/or retained liabilities. In addition, we expect that certain obligations of Lehman to indemnify us will terminate upon expiration of the applicable indemnification period (generally no more than three years following the closing). The assertion of third-party claims after the expiration of the applicable indemnification period, or the failure of Lehman to satisfy its indemnification obligations, could have a material adverse effect on our results of operations and financial condition.
Our Success as a REIT Is Dependent on Compliance with Federal Income Tax Requirements
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences to Our Security Holders
We believe that we have qualified for taxation as a REIT for federal income tax purposes since our taxable year ended December 31, 1992 based, in part, upon opinions of tax counsel received whenever we have issued equity securities or engaged in significant merger transactions. We plan to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. We cannot, therefore, guarantee that we have qualified or will qualify in the future as a REIT. The determination that we are a REIT requires an analysis of various factual matters that may not be totally within our control. For example, to qualify as a REIT, our gross income must generally come from rental and other real estate or passive related sources that are itemized in the REIT tax laws. We are also required to distribute to security holders at least 90% of our REIT taxable income excluding net capital gains. The fact that we hold our assets through ERPthe Operating Limited Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status; however, the REIT qualification rules permit REITs in certain circumstances to pay a monetary penalty for inadvertent mistakes rather than lose REIT status. Furthermore,There is also risk that Congress and the IRS might make changes to the tax laws and regulations, and
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the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT. We do not believe, however, that any pending or proposed tax law changes would jeopardize our REIT status. In addition, Congress and the IRS have recently liberalized the REIT qualification rules to permit REITs in certain circumstances to pay a monetary penalty for inadvertent mistakes rather than lose REIT status.
If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified from taxation as a REIT for four years following the year in which we failed to qualify as a REIT. If we fail to qualify as a REIT, we would have to pay significant income taxes. We therefore would have less money available for investments or for distributions to security holders. This would likely have a significant adverse effect on the value of our securities. In addition, we would no longer be required to make any distributions to security holders. Even if we qualify as a REIT, we are and will continue to be subject to certain federal, state and local taxes on our income and property. In addition, our corporate housingvarious business activities which generate income that is not qualifying income for a REIT are conducted through taxable REIT subsidiaries generallyand will be subject to federal and state income tax at regular corporate rates to the extent they havegenerate taxable income.
We Could Be Disqualified as a REIT or Have to Pay Taxes if Our Merger Partners Did Not Qualify as REITs
If any of our prior merger partners had failed to qualify as a REIT throughout the duration of their existence, then they might have had undistributed “C“Subchapter C corporation earnings and profits” at the time of their merger with us. If that was the case and we did not distribute those earnings and profits prior to the end of the year in which the merger took place, we might not qualify as a REIT. We believe, based in part upon opinions of legal counsel received pursuant to the terms of our merger agreements as well as our own investigations, among other things, that each of our prior merger partners qualified as a REIT and that, in any event, none of them had any undistributed “C“Subchapter C corporation earnings and profits” at the time of their merger with us. If any of our prior merger partners failed to qualify as a REIT, an additional concern would be that they could have been required to recognize taxable gain at the time they merged with us. We would be liable for the tax on such gain. We also could have to pay corporate income tax on any gain existing at the time of the applicable merger on assets acquired in the merger if the assets are sold within ten years of the merger.
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Compliance with REIT Distribution Requirements May Affect Our Financial Condition
Distribution Requirements May Increase the Indebtedness of the Company
We may be required from time to time, under certain circumstances, to accrue as income for tax purposes interest and rent earned but not yet received. In such event, or upon our repayment of principal on debt, we could have taxable income without sufficient cash to enable us to meet the distribution requirements of a REIT. Accordingly, we could be required to borrow funds or liquidate investments on adverse terms in order to meet these distribution requirements.
Tax Elections Regarding Distributions May Impact Future Liquidity of the Company
During 2008 and 2009, we did make, and under certain circumstances may consider making again in the future, a tax election to treat future distributions to shareholders as distributions in the current year. This election, which is provided for in the REIT tax code,Code, may allow us to avoid increasing our dividends or paying additional income taxes in the current year. However, this could result in a constraint on our ability to decrease our dividends in future years without creating risk of either violating the REIT distribution requirements or generating additional income tax liability.
Federal Income Tax Considerations
General
The following discussion summarizes the federal income tax considerations material to a holder of common shares. It is not exhaustive of all possible tax considerations. For example, it does not give a detailed discussion of any state, local or foreign tax considerations. The following discussion also does not address all tax matters that may be relevant to prospective shareholders in light of their particular circumstances. Moreover, it does not address all tax matters that may be relevant to shareholders who are subject to special treatment under the tax laws, such as insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations, persons who are not citizens or residents of the United States and persons who own shares through a partnership or other entity treated as a flow-through entity for federal income tax purposes.
The specific tax attributes of a particular shareholder could have a material impact on the tax considerations associated with the purchase, ownership and disposition of common shares. Therefore, it is essential that each prospective shareholder consult
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with his or her own tax advisors with regard to the application of the federal income tax laws to the shareholder’sshareholder's personal tax situation, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.
The information in this section is based on the current Internal Revenue Code, current, temporary and proposed Treasury regulations, the legislative history of the Internal Revenue Code, current administrative interpretations and practices of the Internal Revenue Service, including its practices and policies as set forth in private letter rulings, which are not binding on the Internal Revenue Service, and existing court decisions. Future legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law. Any change could apply retroactively. Thus, it is possible that the Internal Revenue Service could challenge the statements in this discussion, which do not bind the Internal Revenue Service or the courts, and that a court could agree with the Internal Revenue Service.
Our Taxation
We elected REIT status beginning with the year that ended December 31, 1992. In any year in which we qualify as a REIT, we generally will not be subject to federal income tax on the portion of our REIT taxable income or capital gain that we distribute to our shareholders. This treatment substantially eliminates the double taxation that applies to most corporations, which pay a tax on their income and then distribute dividends to shareholders who are in turn taxed on the amount they receive. We elected taxable REIT subsidiary status for certain of our corporate subsidiaries, primarily those engaged in condominium conversion and sale activities. As a result, we will be subject to federal income taxes for activities performed by our taxable REIT subsidiaries.
We will be subject to federal income tax at regular corporate rates upon our REIT taxable income or capital gains that we do not distribute to our shareholders. In addition, we will be subject to a 4% excise tax if we do not satisfy specific REIT distribution requirements. We could also be subject to the “alternative minimum tax” on our items of tax preference. In addition, any net income from “prohibited transactions” (i.e., dispositions of property, other than property held by a taxable REIT subsidiary, held primarily for sale to customers in the ordinary course of business) will be subject to a 100% tax. We could also be
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subject to a 100% penalty tax on certain payments received from or on certain expenses deducted by a taxable REIT subsidiary if any such transaction is not respected by the Internal Revenue Service. If we fail to satisfy the 75% gross income test or the 95% gross income test (described below) but have maintained our qualification as a REIT because we satisfied certain other requirements, we will still generally be subject to a 100% penalty tax on the taxable income attributable to the gross income that caused the income test failure. If we fail to satisfy any of the REIT asset tests (described below) by more than ade minimisamount, due to reasonable cause, and we nonetheless maintain our REIT qualification because of specified cure provisions, we will be required to pay a tax equal to the greater of $50,000 or the highest marginal corporate tax rate multiplied by the net income generated by the non-qualifying assets. If we fail to satisfy any provision of the Internal Revenue Code that would result in our failure to qualify as a REIT (other than a violation of the REIT gross income or asset tests described below) and the violation is due to reasonable cause, we may retain our REIT qualification but we will be required to pay a penalty of $50,000 for each such failure. Moreover, we may be subject to taxes in certain situations and on certain transactions that we do not presently contemplate.
We believe that we have qualified as a REIT for all of our taxable years beginning with 1992. We also believe that our current structure and method of operation is such that we will continue to qualify as a REIT. However, given the complexity of the REIT qualification requirements, we cannot provide any assurance that the actual results of our operations have satisfied or will satisfy the requirements under the Internal Revenue Code for a particular year.
If we fail to qualify for taxation as a REIT in any taxable year and the relief provisions described herein do not apply, we will be subject to tax on our taxable income at regular corporate rates. We also may be subject to the corporate “alternative minimum tax.” As a result, our failure to qualify as a REIT would significantly reduce the cash we have available to distribute to our shareholders. Unless entitled to statutory relief, we would not be able to re-elect to be taxed as a REIT until our fifth taxable year after the year of disqualification. It is not possible to state whether we would be entitled to statutory relief.
Our qualification and taxation as a REIT depend on our ability to satisfy various requirements under the Internal Revenue Code. We are required to satisfy these requirements on a continuing basis through actual annual operating and other results. Accordingly, there can be no assurance that we will be able to continue to operate in a manner so as to remain qualified as a REIT.
Ownership of Taxable REIT Subsidiaries by Us. The Internal Revenue Code provides that REITs may own greater than ten percent of the voting power and value of the securities of a “taxable REIT subsidiary” or “TRS”, provided that the aggregate value of all of the TRS securities held by the REIT does not exceed 25% of the REIT’sREIT's total asset value. TRSs are corporations subject to tax as a regular “C” corporation that have elected, jointly with a REIT, to be a TRS. Generally, a taxable REIT subsidiary may own assets that cannot otherwise be owned by a REIT and can perform impermissible tenant services (discussed below), which would otherwise taint our rental income under the REIT income tests. However, the REIT will be obligated to pay a 100%
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penalty tax on some payments that we receive or on certain expenses deducted by our TRSs if the economic arrangements between us, our tenants and the TRS are not comparable to similar arrangements among unrelated parties. A TRS may also receive income from prohibited transactions without incurring the 100% federal income tax liability imposed on REITs. Income from prohibited transactions may include the purchase and sale of land, the purchase and sale of completed development properties and the sale of condominium units.
TRSs pay federal and state income tax at the full applicable corporate rates. The amount of taxes paid on impermissible tenant services income and the sale of real estate held primarily for sale to customers in the ordinary course of business may be material in amount. The TRSs will attempt to reduce, if possible, the amount of these taxes, but we cannot guarantee whether, or the extent to which, measures taken to reduce these taxes will be successful. To the extent that these companies are required to pay taxes, less cash may be available for distributions to shareholders.
Share Ownership Test and Organizational Requirement. In order to qualify as a REIT, our shares of beneficial interest must be held by a minimum of 100 persons for at least 335 days of a taxable year that is 12 months, or during a proportionate part of a taxable year of less than 12 months. Also, not more than 50% in value of our shares of beneficial interest may be owned directly or indirectly by applying certain constructive ownership rules, by five or fewer individuals during the last half of each taxable year. In addition, we must meet certain other organizational requirements, including, but not limited to, that (i) the beneficial ownership in us is evidenced by transferable shares and (ii) we are managed by one or more trustees. We believe that we have satisfied all of these tests and all other organizational requirements and that we will continue to do so in the future. In order to ensure compliance with the 100 person test and the 50% share ownership test discussed above, we have placed certain restrictions on the transfer of our shares that are intended to prevent further concentration of share ownership. However, such restrictions may not prevent us from failing these requirements, and thereby failing to qualify as a REIT.
Gross Income Tests. To qualify as a REIT, we must satisfy two gross income tests:
| (1) | At least 75% of our gross income for each taxable year must generally be derived directly or indirectly from rents from real property, |
| (2) | At least 95% of our gross income for each taxable year must generally be derived from |
To qualify as rents from real property for the purpose of satisfying the gross income tests, rental payments must generally be received from unrelated persons and not be based on the net income of the resident. Also, the rent attributable to personal property must not exceed 15% of the total rent. We may generally provide services to residents without “tainting” our rental income only if such services are “usually or customarily rendered” in connection with the rental of real property and not otherwise considered “impermissible services”. If such services are impermissible, then we may generally provide them only if they are considered de minimis in amount, or are provided through an independent contractor from whom we derive no revenue and that meets other requirements, or through a taxable REIT subsidiary. We believe that services provided to residents by us either are usually or customarily rendered in connection with the rental of real property and not otherwise considered impermissible, or, if considered impermissible services, will meet thede minimistest or will be provided by an independent contractor or taxable REIT subsidiary. However, we cannot provide any assurance that the Internal Revenue Service will agree with these positions.
If we fail to satisfy one or both of the gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under certain provisions of the Internal Revenue Code. In this case, a penalty tax would still be applicable as discussed above. Generally, it is not possible to state whether in all circumstances we would be entitled to the benefit of these relief provisions and in the event these relief provisions do not apply, we will not qualify as a REIT.
Asset Tests. In general, aton the closelast day of each quarter of our taxable year, we must satisfy four tests relating to the nature of our assets:
| (1) | At least 75% of the value of our total assets must |
| (2) | Not more than 25% of the value of our total assets may |
| (3) | Except for securities included in item 1 above, equity investments in other REITs, qualified REIT subsidiaries (i.e., corporations owned 100% by a REIT that are not TRSs or REITs), or taxable REIT subsidiaries: (a) the value of any one |
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securities representing more than 10% of the voting power or value of the outstanding securities of any one issuer; and
| (4) | Not more than 25% of the value of our total assets may |
The 10% value test described in clause (3)(b) above does not apply to certain securities that fall within a safe harbor under the Code. Under the safe harbor, the following are not considered “securities” held by us for purposes of this 10% value test: (i) straight debt securities, (ii) any loan of an individual or an estate, (iii) certain rental agreements for the use of tangible property, (iv) any obligation to pay rents from real property, (v) any security issued by a state or any political subdivision thereof, foreign government or Puerto Rico only if the determination of any payment under such security is not based on the profits of another entity or payments on any obligation issued by such other entity, or (vi) any security issued by a REIT. The timing and payment of interest or principal on a security qualifying as straight debt may be subject to a contingency provided that (A) such contingency does not change the effective yield to maturity, not considering ade minimischange which does not exceed the greater of 1/4¼ of 1% or 5% of the annual yield to maturity or we own $1,000,000 or less of the aggregate issue price or value of the particular issuer’sissuer's debt and not more than 12 months of unaccrued interest can be required to be prepaid or (B) the contingency is consistent with commercial practice and the contingency is effective upon a default or the exercise of a prepayment right by the issuer of the debt. If we hold indebtedness from any issuer, including a REIT, the indebtedness will be subject to, and may cause a violation of, the asset tests, unless it is a qualifying real estate asset or otherwise satisfies the above safe harbor. We currently own equity interests in certain entities that have elected to be taxed as REITs for federal income tax purposes and are not publicly traded. If any such entity were to fail to qualify as a REIT, we would not meet the 10% voting stock limitation and the 10% value limitation and we would, unless certain relief provisions applied, fail to qualify as a REIT. We believe that we and each of the
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REITs we own an interest in have and will comply with the foregoing asset tests for REIT qualification. However, we cannot provide any assurance that the Internal Revenue Service will agree with our determinations.
If we fail to satisfy the 5% or 10% asset tests described above after a30-day cure period provided in the Internal Revenue Code, we will be deemed to have met such tests if the value of our non-qualifying assets isde minimis(i.e. (i.e., does not exceed the lesser of 1% of the total value of our assets at the end of the applicable quarter or $10,000,000) and we dispose of the non-qualifying assets within six months after the last day of the quarter in which the failure to satisfy the asset tests is discovered. For violations due to reasonable cause and not willful neglect that are in excess of thede minimisexception described above, we may avoid disqualification as a REIT under any of the asset tests, after the30-day cure period, by disposing of sufficient assets to meet the asset test within such six month period, paying a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying assets and disclosing certain information to the Internal Revenue Service. If we cannot avail ourselves of these relief provisions, or if we fail to timely cure any noncompliance with the asset tests, we would cease to qualify as a REIT.
Annual Distribution Requirements. To qualify as a REIT, we are generally required to distribute dividends, other than capital gain dividends, to our shareholders each year in an amount at least equal to 90% of our REIT taxable income. These distributions must be paid either in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the prior year and if paid with or before the first regular dividend payment date after the declaration is made. We intend to make timely distributions sufficient to satisfy our annual distribution requirements. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100% of our REIT taxable income, as adjusted, we are subject to tax on these amounts at regular corporate rates. We will be subject to a 4% excise tax on the excess of the required distribution over the sum of amounts actually distributed and amounts retained for which federal income tax was paid, if we fail to distribute during each calendar year at least the sum of: (1) 85% of our REIT ordinary income for the year; (2) 95% of our REIT capital gain net income for the year; and (3) any undistributed taxable income from prior taxable years. A REIT may elect to retain rather than distribute all or a portion of its net capital gains and pay the tax on the gains. In that case, a REIT may elect to have its shareholders include their proportionate share of the undistributed net capital gains in income as long-term capital gains and receive a credit for their share of the tax paid by the REIT. For purposes of the 4% excise tax described above, any retained amounts would be treated as having been distributed.
Ownership of Partnership Interests By Us. As a result of our ownership of the Operating Partnership, we will be considered to own and derive our proportionate share of the assets and items of income of the Operating Partnership, respectively, for purposes of the REIT asset and income tests, including its share of assets and items of income of any subsidiaries that are partnerships or limited liability companies.
State and Local Taxes. We may be subject to state or local taxation in various jurisdictions, including those in which we transact business or reside. Generally REITs have seen increases in state and local taxes in recent years. Our state and local tax treatment may not conform to the federal income tax treatment discussed above. Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in common shares.
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Taxation of Domestic Shareholders Subject to U.S. Tax
General. If we qualify as a REIT, distributions made to our taxable domestic shareholders with respect to their common shares, other than capital gain distributions and distributions attributable to taxable REIT subsidiaries, will be treated as ordinary income to the extent that the distributions come out of earnings and profits. These distributions will not be eligible for the dividends received deduction for shareholders that are corporations nor will they constitute “qualified dividend income” under the Internal Revenue Code, meaning that such dividends will be taxed at marginal rates applicable to ordinary income rather than the special capital gain rates currently applicable to qualified dividend income distributed to shareholders who satisfy applicable holding period requirements. In determining whether distributions are out of earnings and profits, we will allocate our earnings and profits first to preferred shares and second to the common shares. The portion of ordinary dividends which represent ordinary dividends we receive from a TRS, will be designated as “qualified dividend income” to REIT shareholders. For tax years ending on or before December 31, 2012, theseThese qualified dividends are eligible for preferential tax rates if paid to our non-corporate shareholders.
To the extent we make distributions to our taxable domestic shareholders in excess of our earnings and profits, such distributions will be considered a return of capital. Such distributions will be treated as a tax-free distribution and will reduce the tax basis of a shareholder’sshareholder's common shares by the amount of the distribution so treated. To the extent such distributions
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cumulatively exceed a taxable domestic shareholder’sshareholder's tax basis, such distributions are taxable as gain from the sale of shares. Shareholders may not include in their individual income tax returns any of our net operating losses or capital losses.
Dividends declared by a REIT in October, November, or December are deemed to have been paid by the REIT and received by its shareholders on December 31 of that year, so long as the dividends are actually paid during January of the following year. However, this treatment only applies to the extent of the REIT’sREIT's earnings and profits existing on December 31. To the extent the shareholder distribution paid in January exceeds available earnings and profits as of December 31, the excess will be treated as a distribution taxable to shareholders in the year paid. As such, for tax reporting purposes, January distributions paid to our shareholders may be split between two tax years.
Distributions made by us that we properly designate as capital gain dividends will be taxable to taxable domestic shareholders as gain from the sale or exchange of a capital asset held for more than one year. This treatment applies only to the extent that the designated distributions do not exceed our actual net capital gain for the taxable year. It applies regardless of the period for which a domestic shareholder has held his or her common shares. Despite this general rule, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income.
Generally, we will classify a portion of our designated capital gain dividends as a 15% rate gain distribution and the remaining portion as an unrecaptured Section 1250 gain distribution. A 15% rate gain distribution wouldwill be broken out into net capital gains distributions (which are taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 15% (which 15% rate is currently scheduled to increase to 20% for taxable years beginning on and afteras of January 1, 2013). An2013 for individual taxpayers in the highest tax bracket) and unrecaptured Section 1250 gain distribution would bedistributions (which are taxable to taxable domestic shareholders that are individuals, estates or trusts at a maximum rate of 25%).
If, for any taxable year, we elect to designate as capital gain dividends any portion of the dividends paid or made available for the year to holders of all classes of shares of beneficial interest, then the portion of the capital gains dividends that will be allocable to the holders of common shares will be the total capital gain dividends multiplied by a fraction. The numerator of the fraction will be the total dividends paid or made available to the holders of the common shares for the year. The denominator of the fraction will be the total dividends paid or made available to holders of all classes of shares of beneficial interest.
We may elect to retain (rather than distribute as is generally required) net capital gain for a taxable year and pay the income tax on that gain. If we make this election, shareholders must include in income, as long-term capital gain, their proportionate share of the undistributed net capital gain. Shareholders will be treated as having paid their proportionate share of the tax paid by us on these gains. Accordingly, they will receive a tax credit or refund for the amount. Shareholders will increase the basis in their common shares by the difference between the amount of capital gain included in their income and the amount of the tax they are treated as having paid. Our earnings and profits will be adjusted appropriately.
In general, a shareholder will recognize gain or loss for federal income tax purposes on the sale or other disposition of common shares in an amount equal to the difference between:
| (a) | the amount of cash and the fair market value of any property received in the sale or other disposition; and |
| (b) | the |
The gain or loss will be capital gain or loss if the common shares were held as a capital asset. Generally, the capital gain or loss will be long-term capital gain or loss if the common shares were held for more than one year.
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In general, a loss recognized by a shareholder upon the sale of common shares that were held for six months or less, determined after applying certain holding period rules, will be treated as long-term capital loss to the extent that the shareholder received distributions that were treated as long-term capital gains. For shareholders who are individuals, trusts and estates, the long-term capital loss will be apportioned among the applicable long-term capital gain rates to the extent that distributions received by the shareholder were previously so treated.
Taxation of Domestic Tax-Exempt Shareholders
Most tax-exempt organizations are not subject to federal income tax except to the extent of their unrelated business taxable income, which is often referred to as UBTI. Unless a tax-exempt shareholder holds its common shares as debt financed property or uses the common shares in an unrelated trade or business, distributions to the shareholder should not constitute UBTI. Similarly, if a tax-exempt shareholder sells common shares, the income from the sale should not constitute UBTI unless the shareholder held the shares as debt financed property or used the shares in a trade or business.
However, for tax-exempt shareholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans, income from owning or selling common shares will constitute UBTI unless the organization is able to properly deduct amounts set aside or placed in reserve so as to offset the income generated by its investment in common shares. These shareholders should consult their own tax advisors concerning these set aside and reserve requirements which are set forth in the Internal Revenue Code.
In addition, certain pension trusts that own more than 10% of a “pension-held REIT” must report a portion of the distributions that they receive from the REIT as UBTI. We have not been and do not expect to be treated as a pension-held REIT for purposes of this rule.
Taxation of Foreign Shareholders
The following is a discussion of certain anticipated United States federal income tax consequences of the ownership and disposition of common shares applicable to a foreign shareholder. For purposes of this discussion, a “foreign shareholder” is any person other than:
| (a) | a citizen or resident of the United States; |
| (b) | a corporation or partnership created or organized in the United States or under the laws of the United States or of any state thereof; or |
| (c) | an estate or trust whose income is includable in gross income for United States federal income tax purposes regardless of its source. |
Distributions by Us. Distributions by us to a foreign shareholder that are neither attributable to gain from sales or exchanges by us of United States real property interests nor designated by us as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of our earnings and profits. These distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis at a 30% rate, or a lower treaty rate, unless the dividends are treated as effectively connected with the conduct by the foreign shareholder of a United States trade or business. Please note that under certain treaties lower withholding rates generally applicable to dividends do not apply to dividends from REITs. Dividends that are effectively connected with a United States trade or business will be subject to tax on a net basis at graduated rates, and are generally not subject to withholding. Certification and disclosure requirements must be satisfied before a dividend is exempt from withholding under this exemption. A foreign shareholder that is a corporation also may be subject to an additional branch profits tax at a 30% rate or a lower treaty rate.
We expect to withhold United States income tax at the rate of 30% on any such distributions made to a foreign shareholder unless:
| (a) | a lower treaty rate applies and any required form or certification evidencing eligibility for that reduced rate is filed with us; or |
| (b) | the foreign shareholder files an IRSForm W-8ECI with us claiming that the distribution is effectively connected income. |
If such distribution is in excess of our current or accumulated earnings and profits, it will not be taxable to a foreign shareholder to the extent that the distribution does not exceed the adjusted basis of the shareholder’sshareholder's common shares. Instead, the
29
distribution will reduce the adjusted basis of the common shares. To the extent that the distribution exceeds the adjusted basis of the common shares, it will give rise to gain from the sale or exchange of the shareholder’sshareholder's common shares. The tax treatment of this gain is described below.
We intend to withhold at a rate of 30%, or a lower applicable treaty rate, on the entire amount of any distribution not designated as a capital gain distribution. In such event, a foreign shareholder may seek a refund of the withheld amount from the IRS if it is subsequently determined that the distribution was, in fact, in excess of our earnings and profits, and the amount withheld exceeded the foreign shareholder’sshareholder's United States tax liability with respect to the distribution.
Any capital gain dividend with respect to any class of our stock which is “regularly traded” on an established securities market, will be treated as an ordinary dividend described above, if the foreign shareholder did not own more than 5% of such class of stock at any time during the one year period ending on the date of the distribution. Foreign shareholders generally will not be required to report such distributions received from us on U.S. federal income tax returns and all distributions treated as
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dividends for U.S. federal income tax purposes, including any capital gain dividends, will be subject to a 30% U.S. withholding tax (unless reduced or eliminated under an applicable income tax treaty), as described above. In addition, the branch profits tax will no longer apply to such distributions.
Distributions to a foreign shareholder that we designate at the time of the distributions as capital gain dividends, other than those arising from the disposition of a United States real property interest, generally will not be subject to United States federal income taxation unless:
| (a) | the investment in the common shares is effectively connected with the foreign |
| (b) | the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the |
Under the Foreign Investment in Real Property Tax Act, which is known as FIRPTA, distributions to a foreign shareholder that are attributable to gain from sales or exchanges of United States real property interests will cause the foreign shareholder to be treated as recognizing the gain as income effectively connected with a United States trade or business. This rule applies whether or not a distribution is designated as a capital gain dividend. Accordingly, foreign shareholders generally would be taxed on these distributions at the same rates applicable to U.S. shareholders, subject to a special alternative minimum tax in the case of nonresident alien individuals. In addition, a foreign corporate shareholder might be subject to the branch profits tax discussed above, as well as U.S. federal income tax return filing requirements. We are required to withhold 35% of these distributions. The withheld amount can be credited against the foreign shareholder’sshareholder's United States federal income tax liability.
Although the law is not entirely clear on the matter, it appears that amounts we designate as undistributed capital gains in respect of the common shares held by U.S. shareholders would be treated with respect to foreign shareholders in the same manner as actual distributions of capital gain dividends. Under that approach, foreign shareholders would be able to offset as a credit against their United States federal income tax liability their proportionate share of the tax paid by us on these undistributed capital gains. In addition, if timely requested, foreign shareholders might be able to receive from the IRS a refund to the extent their proportionate share of the tax paid by us were to exceed their actual United States federal income tax liability.
Foreign Shareholders’Shareholders' Sales of Common Shares.Shares. Gain recognized by a foreign shareholder upon the sale or exchange of common shares generally will not be subject to United States taxation unless the shares constitute a “United States real property interest” within the meaning of FIRPTA. The common shares will not constitute a United States real property interest so long as we are a domestically controlled REIT. A domestically controlled REIT is a REIT in which at all times during a specified testing period less than 50% in value of its stock is held directly or indirectly by foreign shareholders. We believe that we are a domestically controlled REIT. Therefore, we believe that the sale of common shares will not be subject to taxation under FIRPTA. However, because common shares and preferred shares are publicly traded, we cannot guarantee that we will continue to be a domestically controlled REIT. In any event, gain from the sale or exchange of common shares not otherwise subject to FIRPTA will be subject to U.S. tax, if either:
| (a) | the investment in the common shares is effectively connected with the foreign |
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| (b) | the foreign shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a tax home in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the |
Even if we do not qualify as or cease to be a domestically controlled REIT, gain arising from the sale or exchange by a foreign shareholder of common shares still would not be subject to United States taxation under FIRPTA as a sale of a United States real property interest if:
| (a) | the class or series of shares being sold is “regularly traded,” as defined by applicable IRS regulations, on an established securities market such as the New York Stock Exchange; and |
| (b) | the selling foreign shareholder owned 5% or less of the value of the outstanding class or series of shares being sold throughout the five-year period ending on the date of the sale or exchange. |
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If gain on the sale or exchange of common shares were subject to taxation under FIRPTA, the foreign shareholder would be subject to regular United States income tax with respect to the gain in the same manner as a taxable U.S. shareholder, subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the branch profits tax in the case of foreign corporations. The purchaser of the common shares would be required to withhold and remit to the IRS 10% of the purchase price.
Information Reporting Requirement and Backup Withholding
We will report to our domestic shareholders and the Internal Revenue Service the amount of distributions paid during each calendar year and the amount of tax withheld, if any. Under certain circumstances, domestic shareholders may be subject to backup withholding. Backup withholding will apply only if such domestic shareholder fails to furnish certain information to us or the Internal Revenue Service. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. Domestic shareholders should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a domestic shareholder will be allowed as a credit against such person’sperson's United States federal income tax liability and may entitle such person to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
Medicare Tax on Unearned Income
Withholding on Foreign Financial Institutions andNon-U.S. Shareholders
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
As of December 31, 2010,2012, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 451403 properties located in 1713 states and the District of Columbia consisting of 129,604115,370 apartment units. The Company’s properties are summarized by building type in the following table:
| Average | ||||||||||||
| Type | Properties | Apartment Units | Apartment Units | |||||||||
| Garden | 354 | 100,551 | 284 | |||||||||
| Mid/High-Rise | 95 | 24,315 | 256 | |||||||||
| Military Housing | 2 | 4,738 | 2,369 | |||||||||
| Total | 451 | 129,604 | ||||||||||
| Type | Properties | Apartment Units | Average Apartment Units | ||||||
| Garden | 279 | 80,288 | 288 | ||||||
| Mid/High-Rise | 122 | 30,043 | 246 | ||||||
| Military Housing | 2 | 5,039 | 2,520 | ||||||
| Total | 403 | 115,370 | |||||||
The Company’s properties are summarized by ownership type in the following table:
| Properties | Apartment Units | |||||||
| Wholly Owned Properties | 425 | 119,634 | ||||||
| Partially Owned Properties – Consolidated | 24 | 5,232 | ||||||
| Military Housing | 2 | 4,738 | ||||||
| 451 | 129,604 | |||||||
| Properties | Apartment Units | |||||
| Wholly Owned Properties | 382 | 106,856 | ||||
| Partially Owned Properties – Consolidated | 19 | 3,475 | ||||
| Military Housing | 2 | 5,039 | ||||
| 403 | 115,370 | |||||
The following table sets forth certain information by market relating to the Company’s properties at December 31, 2010:2012:
PORTFOLIO SUMMARY
| % of | Average | |||||||||||||||||||||
| % of Total | Stabilized | Rental | ||||||||||||||||||||
| Markets | Properties | Apartment Units | Apartment Units | NOI | Rate (1) | |||||||||||||||||
| 1 | New York Metro Area | 28 | 8,290 | 6.4 | % | 12.7 | % | $ | 2,843 | |||||||||||||
| 2 | DC Northern Virginia | 31 | 10,393 | 8.0 | % | 12.1 | % | 1,869 | ||||||||||||||
| 3 | South Florida | 38 | 12,869 | 9.9 | % | 9.1 | % | 1,313 | ||||||||||||||
| 4 | Los Angeles | 39 | 8,311 | 6.4 | % | 8.1 | % | 1,717 | ||||||||||||||
| 5 | Boston | 28 | 5,711 | 4.4 | % | 7.1 | % | 2,204 | ||||||||||||||
| 6 | Seattle/Tacoma | 43 | 9,748 | 7.5 | % | 6.7 | % | 1,293 | ||||||||||||||
| 7 | San Francisco Bay Area | 35 | 6,606 | 5.1 | % | 6.0 | % | 1,683 | ||||||||||||||
| 8 | San Diego | 14 | 4,963 | 3.8 | % | 5.2 | % | 1,789 | ||||||||||||||
| 9 | Phoenix | 36 | 10,769 | 8.3 | % | 4.8 | % | 848 | ||||||||||||||
| 10 | Denver | 23 | 7,967 | 6.2 | % | 4.7 | % | 1,044 | ||||||||||||||
| 11 | Suburban Maryland | 21 | 5,782 | 4.5 | % | 4.5 | % | 1,346 | ||||||||||||||
| 12 | Orlando | 26 | 8,042 | 6.2 | % | 4.2 | % | 961 | ||||||||||||||
| 13 | Orange County, CA | 11 | 3,490 | 2.7 | % | 3.2 | % | 1,518 | ||||||||||||||
| 14 | Atlanta | 20 | 6,183 | 4.8 | % | 3.0 | % | 961 | ||||||||||||||
| 15 | Inland Empire, CA | 11 | 3,639 | 2.8 | % | 2.8 | % | 1,352 | ||||||||||||||
| 16 | All Other Markets(2) | 45 | 12,103 | 9.3 | % | 5.8 | % | 975 | ||||||||||||||
| Total | 449 | 124,866 | 96.3 | % | 100.0 | % | 1,444 | |||||||||||||||
| Military Housing | 2 | 4,738 | 3.7 | % | - | - | ||||||||||||||||
| Grand Total | 451 | 129,604 | 100.0 | % | 100.0 | % | $ | 1,444 | ||||||||||||||
| Markets | Properties | Apartment Units | % of Total Apartment Units | % of Stabilized NOI (1) | Average Rental Rate (2) | ||||||||||||||
| 1 | New York Metro Area | 30 | 8,047 | 7.0 | % | 13.9 | % | $ | 3,433 | ||||||||||
| 2 | DC Northern Virginia | 27 | 9,569 | 8.3 | % | 11.5 | % | 2,136 | |||||||||||
| 3 | Los Angeles | 48 | 9,815 | 8.5 | % | 9.9 | % | 1,879 | |||||||||||
| 4 | South Florida | 36 | 12,253 | 10.6 | % | 9.0 | % | 1,463 | |||||||||||
| 5 | San Francisco Bay Area | 40 | 9,094 | 7.9 | % | 8.6 | % | 1,902 | |||||||||||
| 6 | Boston | 26 | 5,832 | 5.0 | % | 8.2 | % | 2,560 | |||||||||||
| 7 | Seattle/Tacoma | 40 | 9,029 | 7.8 | % | 7.0 | % | 1,520 | |||||||||||
| 8 | Denver | 24 | 8,144 | 7.1 | % | 5.5 | % | 1,226 | |||||||||||
| 9 | San Diego | 14 | 4,963 | 4.3 | % | 5.0 | % | 1,851 | |||||||||||
| 10 | Suburban Maryland | 16 | 4,856 | 4.2 | % | 4.4 | % | 1,711 | |||||||||||
| 11 | Orlando | 21 | 6,413 | 5.6 | % | 3.5 | % | 1,086 | |||||||||||
| 12 | Phoenix | 25 | 7,400 | 6.4 | % | 3.4 | % | 946 | |||||||||||
| 13 | Orange County, CA | 11 | 3,490 | 3.0 | % | 3.3 | % | 1,660 | |||||||||||
| 14 | Inland Empire, CA | 10 | 3,081 | 2.7 | % | 2.4 | % | 1,491 | |||||||||||
| 15 | Atlanta | 12 | 3,616 | 3.1 | % | 2.0 | % | 1,157 | |||||||||||
| 16 | All Other Markets (3) | 21 | 4,729 | 4.1 | % | 2.4 | % | 1,098 | |||||||||||
| Total | 401 | 110,331 | 95.6 | % | 100.0 | % | 1,737 | ||||||||||||
| Military Housing | 2 | 5,039 | 4.4 | % | — | — | |||||||||||||
| Grand Total | 403 | 115,370 | 100.0 | % | 100.0 | % | $ | 1,737 | |||||||||||
| (1) | % of Stabilized NOI includes budgeted 2013 NOI for properties that are stabilized and projected annual NOI at stabilization (defined as having achieved 90% occupancy for three consecutive months) for properties that are in lease-up. |
| (2) | Average rental rate is defined as total rental revenues divided by the weighted average occupied apartment units for the month of December |
| (3) | All Other Markets – Each individual market is less than |
Note: Projects under development are not included in the Portfolio Summary until construction has been completed, at which time the projects are included at their stabilized NOI. Projects underlease-up are included at their stabilized NOI.
completed.
The Company’s properties had an average occupancy of approximately 94.1% (94.5%94.3% (95.0% on a same store basis) at
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December 31, 2010.2012. Certain of the Company’s properties are encumbered by mortgages and additional detail can be found on Schedule III – Real Estate and Accumulated Depreciation. Resident leases are generally for twelve months in length and can require security deposits. The garden-style properties are generally defined as properties with twoand/or three story buildings while the mid-rise/high-rise are defined as properties with greater than three story buildings. These two property types typically provide residents with amenities, which may include a clubhouse, swimming pool, laundry facilities and cable television access. Certain of these properties offer additional amenities such as saunas, whirlpools, spas, sports courts and exercise rooms or other amenities. In addition, many of our urban properties have parking garageand/or retail components. The military housing properties are defined as those properties located on military bases.
The distribution of the properties throughout the United States reflects the Company’s belief that geographic diversification helps insulate the portfolio from regional and economic influences. At the same time, the Company has sought to create clusters of properties within each of its primary markets in order to achieve economies of scale in management and operation. The Company may nevertheless acquire additional multifamily properties located anywhere in the United States.States and internationally.
The properties currently in various stages of development andlease-up at December 31, 20102012 are included in the following table:
| �� | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Book | ||||||||||||||||||||||||||||||||||||||||||||||||
| No. of | Total | Total | Value Not | Estimated | Estimated | |||||||||||||||||||||||||||||||||||||||||||
| Apartment | Capital | Book Value | Placed in | Total | Percentage | Percentage | Percentage | Completion | Stabilization | |||||||||||||||||||||||||||||||||||||||
| Projects | Location | Units | Cost (1) | to Date | Service | Debt | Completed | Leased | Occupied | Date | Date | |||||||||||||||||||||||||||||||||||||
Projects Under Development – Wholly Owned: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Red 160 (formerly Redmond Way) | Redmond, WA | 250 | $ | 84,382 | $ | 76,964 | $ | 76,964 | $ | - | 97 | % | 86 | % | 68 | % | Q1 2011 | Q1 2012 | ||||||||||||||||||||||||||||||
| 500 West 23rd Street (formerly 10 Chelsea) (2) | New York, NY | 111 | 55,555 | 27,382 | 27,382 | - | 33 | % | - | - | Q4 2011 | Q4 2012 | ||||||||||||||||||||||||||||||||||||
| Savoy III | Aurora, CO | 168 | 23,856 | 5,409 | 5,409 | - | 7 | % | - | - | Q3 2012 | Q2 2013 | ||||||||||||||||||||||||||||||||||||
| 2201 Pershing Drive | Arlington, VA | 188 | 64,242 | 14,707 | 14,707 | - | 1 | % | - | - | Q3 2012 | Q3 2013 | ||||||||||||||||||||||||||||||||||||
| Projects Under Development – Wholly Owned | 717 | 228,035 | 124,462 | 124,462 | - | |||||||||||||||||||||||||||||||||||||||||||
Projects Under Development | 717 | 228,035 | 124,462 | 124,462 | - | |||||||||||||||||||||||||||||||||||||||||||
Completed Not Stabilized – Wholly Owned (3): | ||||||||||||||||||||||||||||||||||||||||||||||||
| Reunion at Redmond Ridge | Redmond, WA | 321 | 53,175 | 53,151 | - | - | 94 | % | 93 | % | Completed | Q1 2011 | ||||||||||||||||||||||||||||||||||||
| Westgate | Pasadena, CA | 480 | 165,558 | 154,886 | - | 135,000 | (4) | 80 | % | 76 | % | Completed | Q3 2011 | |||||||||||||||||||||||||||||||||||
| 425 Mass (5) | Washington, D.C. | 559 | 166,750 | 166,750 | - | - | 61 | % | 58 | % | Completed | Q1 2012 | ||||||||||||||||||||||||||||||||||||
| Vantage Pointe (5) | San Diego, CA | 679 | 200,000 | 200,000 | - | - | 42 | % | 41 | % | Completed | Q3 2012 | ||||||||||||||||||||||||||||||||||||
| Projects Completed Not Stabilized – Wholly Owned | 2,039 | 585,483 | 574,787 | - | 135,000 | |||||||||||||||||||||||||||||||||||||||||||
Completed Not Stabilized – Partially Owned (3): | ||||||||||||||||||||||||||||||||||||||||||||||||
| The Brooklyner (formerly 111 Lawrence) | Brooklyn, NY | 490 | 272,368 | 257,748 | - | 141,741 | 93 | % | 89 | % | Completed | Q2 2011 | ||||||||||||||||||||||||||||||||||||
| Projects Completed Not Stabilized – Partially Owned | 490 | 272,368 | 257,748 | - | 141,741 | |||||||||||||||||||||||||||||||||||||||||||
Projects Completed Not Stabilized | 2,529 | 857,851 | 832,535 | - | 276,741 | |||||||||||||||||||||||||||||||||||||||||||
Completed and Stabilized During the Quarter – Wholly Owned: | ||||||||||||||||||||||||||||||||||||||||||||||||
| 70 Greene (formerly 77 Hudson) | Jersey City, NJ | 480 | 268,458 | 267,403 | - | - | 93 | % | 91 | % | Completed | Stabilized | ||||||||||||||||||||||||||||||||||||
| Third Square (formerly 303 Third) | Cambridge, MA | 482 | 257,457 | 256,546 | - | - | 94 | % | 92 | % | Completed | Stabilized | ||||||||||||||||||||||||||||||||||||
| Projects Completed and Stabilized During the Quarter – Wholly Owned | 962 | 525,915 | 523,949 | - | - | |||||||||||||||||||||||||||||||||||||||||||
Projects Completed and Stabilized During the Quarter | 962 | 525,915 | 523,949 | - | - | |||||||||||||||||||||||||||||||||||||||||||
Total Projects | 4,208 | $ | 1,611,801 | $ | 1,480,946 | $ | 124,462 | (6) | $ | 276,741 | ||||||||||||||||||||||||||||||||||||||
Land Held for Development | N/A | N/A | $ | 235,247 | $ | 235,247 | $ | 18,342 | ||||||||||||||||||||||||||||||||||||||||
| Development and Lease-Up Projects as of December 31, 2012 | ||||||||||||||||||||||||||||||||
| (Amounts in thousands except for project and apartment unit amounts) | ||||||||||||||||||||||||||||||||
| Projects | Location | No. of Apartment Units | Total Capital Cost (1) | Total Book Value to Date | Total Book Value Not Placed in Service | Total Debt | Percentage Completed | Percentage Leased | Percentage Occupied | Estimated Completion Date | Estimated Stabilization Date | |||||||||||||||||||||
| Consolidated | ||||||||||||||||||||||||||||||||
| Projects Under Development - Wholly Owned: | ||||||||||||||||||||||||||||||||
| Jia (formerly Chinatown Gateway) | Los Angeles, CA | 280 | $ | 92,920 | $ | 52,995 | $ | 52,995 | $ | — | 47% | — | — | Q3 2013 | Q2 2015 | |||||||||||||||||
| Westgate II | Pasadena, CA | 252 | 125,293 | 61,947 | 61,947 | — | 25% | — | — | Q1 2014 | Q1 2015 | |||||||||||||||||||||
| 1111 Belle Pre (formerly The Madison) | Alexandria, VA | 360 | 115,072 | 56,815 | 56,815 | — | 42% | — | — | Q1 2014 | Q2 2015 | |||||||||||||||||||||
| Market Street Landing | Seattle, WA | 287 | 90,024 | 38,320 | 38,320 | — | 35% | — | — | Q1 2014 | Q3 2015 | |||||||||||||||||||||
| Westgate III | Pasadena, CA | 88 | 54,037 | 20,853 | 20,853 | — | 2% | — | — | Q2 2014 | Q1 2015 | |||||||||||||||||||||
| Projects Under Development - Wholly Owned | 1,267 | 477,346 | 230,930 | 230,930 | — | |||||||||||||||||||||||||||
| Projects Under Development - Partially Owned: | ||||||||||||||||||||||||||||||||
| 400 Park Avenue South (2) | New York, NY | 269 | 251,961 | 92,374 | 92,374 | — | 12% | — | — | Q2 2015 | Q1 2016 | |||||||||||||||||||||
| Projects Under Development - Partially Owned | 269 | 251,961 | 92,374 | 92,374 | — | |||||||||||||||||||||||||||
| Projects Under Development | 1,536 | 729,307 | 323,304 | 323,304 | — | |||||||||||||||||||||||||||
| Completed Not Stabilized - Wholly Owned (3): | ||||||||||||||||||||||||||||||||
| The Savoy at Dayton Station III (formerly Savoy III) | Aurora, CO | 168 | 22,356 | 21,460 | — | — | 93% | 91% | Completed | Q1 2013 | ||||||||||||||||||||||
| 2201 Pershing Drive | Arlington, VA | 188 | 63,242 | 56,087 | — | — | 72% | 67% | Completed | Q3 2013 | ||||||||||||||||||||||
| Projects Completed Not Stabilized - Wholly Owned | 356 | 85,598 | 77,547 | — | — | |||||||||||||||||||||||||||
| Projects Completed Not Stabilized | 356 | 85,598 | 77,547 | — | — | |||||||||||||||||||||||||||
| Completed and Stabilized During the Quarter - Wholly Owned: | ||||||||||||||||||||||||||||||||
| Ten23 (formerly 500 West 23rd Street) (4) | New York, NY | 111 | 55,113 | 55,095 | — | — | 97% | 97% | Completed | Stabilized | ||||||||||||||||||||||
| Projects Completed and Stabilized During the Quarter - Wholly Owned | 111 | 55,113 | 55,095 | — | — | |||||||||||||||||||||||||||
| Projects Completed and Stabilized During the Quarter | 111 | 55,113 | 55,095 | — | — | |||||||||||||||||||||||||||
| Total Consolidated Projects | 2,003 | $ | 870,018 | $ | 455,946 | $ | 323,304 | $ | — | |||||||||||||||||||||||
| Land Held for Development | N/A | N/A | $ | 353,823 | $ | 353,823 | $ | — | ||||||||||||||||||||||||
| Unconsolidated | ||||||||||||||||||||||||||||||||
| Projects Under Development - Unconsolidated: | ||||||||||||||||||||||||||||||||
| Nexus Sawgrass (formerly Sunrise Village) (5) | Sunrise, FL | 501 | $ | 78,212 | $ | 61,901 | $ | 61,901 | $ | 29,769 | 80% | 9% | 2% | Q3 2013 | Q3 2014 | |||||||||||||||||
| Domain (5) | San Jose, CA | 444 | 154,570 | 109,141 | 109,141 | 46,865 | 67% | — | — | Q4 2013 | Q4 2015 | |||||||||||||||||||||
| Projects Under Development - Unconsolidated | 945 | 232,782 | 171,042 | 171,042 | 76,634 | |||||||||||||||||||||||||||
| Projects Under Development | 945 | 232,782 | 171,042 | 171,042 | 76,634 | |||||||||||||||||||||||||||
| Total Unconsolidated Projects | 945 | $ | 232,782 | $ | 171,042 | $ | 171,042 | $ | 76,634 | |||||||||||||||||||||||
| (1) | Total capital cost represents 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, all in accordance with GAAP. |
| (2) | The Company is jointly developing with Toll Brothers (NYSE: TOL) a vacant land parcel at 400 Park Avenue South in New York City with the Company's rental portion on floors 2-22 and Toll's for sale portion on floors 23-40. The total capital cost and total book value to date represent only the Company's portion of the project. Toll Brothers has funded $64.4 million for their allocated share of the project. |
| (3) | Properties included here are substantially complete. However, they may still require additional exterior and interior work for all apartment units to be available for leasing. | |
26
| (5) | These development projects are owned 20% by the Company and 80% by an institutional partner in two separate unconsolidated joint ventures. Total project costs are approximately $232.8 million and construction will be predominantly funded with two separate long-term, non-recourse secured loans from the partner. The Company is responsible for constructing the projects and has given certain construction cost overrun guarantees but currently has no further funding obligations. Nexus Sawgrass has a maximum debt commitment of $48.7 million and a current unconsolidated outstanding balance of $29.8 million; the loan bears interest at 5.60% and matures January 1, 2021. Domain has a maximum debt commitment of $98.6 million and a current unconsolidated outstanding balance of $46.9 million; the loan bears interest at 5.75% and matures January 1, 2022. |
Item 3. Legal Proceedings
The Company is party to a housing discrimination lawsuit brought by a non-profit civil rights organization in April 2006
34
in the U.S. District Court for the District of Maryland. The suit alleges that the Company designed and built approximately 300 of its properties in violation of the accessibility requirements of the Fair Housing Act and Americans With Disabilities Act. The suit seeks actual and punitive damages, injunctive relief (including modification of non-compliant properties), costs and attorneys’ fees. The Company believes it has a number of viable defenses, including that a majority of the named properties were completed before the operative dates of the statutes in questionand/or were not designed or built by the Company. Accordingly, the Company is defending the suit vigorously. Due to the pendency of the Company’s defenses and the uncertainty of many other critical factual and legal issues, it is not possible to determine or predict the outcome of the suit or a possible loss or a range of loss, and no amounts have been accrued at December 31, 2010.2012. While no assurances can be given, the Company does not believe that the suit, if adversely determined, would have a material adverse effect on the Company.
The Company does not believe there is any other litigation pending or threatened against it that, individually or in the aggregate, may reasonably be expected to have a material adverse effect on the Company.
27
Item 4. Mine Safety Disclosures
Not applicable.
35
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Share Market Prices and Dividends
(Equity Residential)
The following table sets forth, for the years indicated, the high, low and closing sales prices for and the distributions declared on the Company’s Common Shares, which trade on the New York Stock Exchange under the trading symbol EQR.
| Sales Price | ||||||||||||||||
| High | Low | Closing | Distributions | |||||||||||||
2010 | ||||||||||||||||
| Fourth Quarter Ended December 31, 2010 | $ | 52.64 | $ | 47.01 | $ | 51.95 | $ | 0.4575 | ||||||||
| Third Quarter Ended September 30, 2010 | $ | 50.80 | $ | 39.69 | $ | 47.57 | $ | 0.3375 | ||||||||
| Second Quarter Ended June 30, 2010 | $ | 48.46 | $ | 38.84 | $ | 41.64 | $ | 0.3375 | ||||||||
| First Quarter Ended March 31, 2010 | $ | 40.43 | $ | 31.40 | $ | 39.15 | $ | 0.3375 | ||||||||
2009 | ||||||||||||||||
| Fourth Quarter Ended December 31, 2009 | $ | 36.38 | $ | 27.54 | $ | 33.78 | $ | 0.3375 | ||||||||
| Third Quarter Ended September 30, 2009 | $ | 33.06 | $ | 18.80 | $ | 30.70 | $ | 0.3375 | ||||||||
| Second Quarter Ended June 30, 2009 | $ | 26.24 | $ | 17.73 | $ | 22.23 | $ | 0.4825 | ||||||||
| First Quarter Ended March 31, 2009 | $ | 29.87 | $ | 15.68 | $ | 18.35 | $ | 0.4825 | ||||||||
| Sales Price | ||||||||||||||||
| High | Low | Closing | Distributions | |||||||||||||
| 2012 | ||||||||||||||||
| Fourth Quarter Ended December 31, 2012 | $ | 59.61 | $ | 53.25 | $ | 56.67 | $ | 0.7675 | ||||||||
| Third Quarter Ended September 30, 2012 | $ | 65.72 | $ | 56.76 | $ | 57.53 | $ | 0.3375 | ||||||||
| Second Quarter Ended June 30, 2012 | $ | 63.84 | $ | 58.67 | $ | 62.36 | $ | 0.3375 | ||||||||
| First Quarter Ended March 31, 2012 | $ | 62.79 | $ | 53.56 | $ | 62.62 | $ | 0.3375 | ||||||||
| 2011 | ||||||||||||||||
| Fourth Quarter Ended December 31, 2011 | $ | 60.32 | $ | 48.46 | $ | 57.03 | $ | 0.5675 | ||||||||
| Third Quarter Ended September 30, 2011 | $ | 63.86 | $ | 50.38 | $ | 51.87 | $ | 0.3375 | ||||||||
| Second Quarter Ended June 30, 2011 | $ | 61.86 | $ | 55.31 | $ | 60.00 | $ | 0.3375 | ||||||||
| First Quarter Ended March 31, 2011 | $ | 56.43 | $ | 49.60 | $ | 56.41 | $ | 0.3375 | ||||||||
The number of record holders of Common Shares at February 16, 201115, 2013 was approximately 3,000. The number of outstanding Common Shares as of February 16, 201115, 2013 was 293,981,029.325,462,816.
OP Unit Dividends (ERP Operating Limited Partnership)
There is no established public market for the OP Units.
The following table sets forth, for the years indicated, the distributions on the Operating Partnership's OP Units.
| Distributions | ||||||||
| 2012 | 2011 | |||||||
| Fourth Quarter Ended December 31, | $ | 0.7675 | $ | 0.5675 | ||||
| Third Quarter Ended September 30, | $ | 0.3375 | $ | 0.3375 | ||||
| Second Quarter Ended June 30, | $ | 0.3375 | $ | 0.3375 | ||||
| First Quarter Ended March 31, | $ | 0.3375 | $ | 0.3375 | ||||
The number of record holders of OP Units in the Operating Partnership at February 15, 2013 was 501. The number of outstanding OP Units as of February 15, 2013 was 339,571,824.
Unregistered Common Shares Issued in the Quarter Ended December 31, 20102012 (Equity Residential)
During the quarter ended December 31, 2010, the Company2012, EQR issued 262,151431,032 Common Shares in exchange for 262,151431,032 OP Units held by various limited partners of the Operating Partnership. OP Units are generally exchangeable into Common Shares of EQR on aone-for-one basis or, at the option of the Operating Partnership, the cash equivalent thereof, at any time one year after the date of issuance. These shares were either registered under the Securities Act of 1933, as amended (the “Securities Act”), or issued in reliance on an exemption from registration under Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, as these were transactions by an issuer not involving a public offering. In light of the manner of the sale and information obtained by the CompanyEQR from the limited partners in connection with these transactions, the CompanyEQR believes it may rely on these exemptions.
36
Equity Compensation Plan Information
The following table provides information as of December 31, 20102012 with respect to the Company’sCompany's Common Shares that may be issued under its existing equity compensation plans.
| Number of securities | ||||||
| remaining available | ||||||
| Number of securities | Weighted average | for future issuance | ||||
| to be issued upon | exercise price of | under equity | ||||
| exercise of | outstanding | compensation plans | ||||
| outstanding options, | options, warrants | (excluding securities | ||||
| Plan Category | warrants and rights | and rights | in column (a)) | |||
| (a) (1) | (b) (1) | (c) (2) | ||||
| Equity compensation plans approved by shareholders | 10,106,488 | $33.00 | 8,799,709 | |||
| Equity compensation plans not approved by shareholders | N/A | N/A | N/A |
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a)) | ||||
| Plan Category | ||||||
| (a) (1) | (b) (1) | (c) (2) | ||||
Equity compensation plans approved by shareholders | 8,115,255 | $41.31 | 14,278,690 | |||
Equity compensation plans not approved by shareholders | N/A | N/A | N/A | |||
| (1) | The amounts shown in columns (a) and (b) of the above table do not include |
28
| (2) | Includes |
Any Common Shares issued pursuant to EQR's incentive equity compensation and employee share purchase plans will result in ERPOP issuing OP Units to EQR on a one-for-one basis, with ERPOP receiving the net cash proceeds of such issuances.
| Item 6. | Selected Financial Data |
The following table setstables set forth selected financial and operating information on a historical basis for the Company.Company and the Operating Partnership. The following information should be read in conjunction with all of the financial statements and notes thereto included elsewhere in thisForm 10-K. The historical operating and balance sheet data have been derived from the historical financial statements of the Company.Company and the Operating Partnership. All amounts have also been restated in accordance with the guidance on discontinued operations. Certain capitalized terms as used herein are defined in the Notes to Consolidated Financial Statements.
29
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
OPERATING DATA: | ||||||||||||||||||||
| Total revenues from continuing operations | $ | 1,995,519 | $ | 1,856,503 | $ | 1,886,988 | $ | 1,739,444 | $ | 1,503,666 | ||||||||||
| Interest and other income | $ | 5,469 | $ | 16,585 | $ | 33,337 | $ | 19,660 | $ | 30,430 | ||||||||||
| (Loss) income from continuing operations | $ | (19,844 | ) | $ | 2,931 | $ | (40,054 | ) | $ | (4,982 | ) | $ | (29,983 | ) | ||||||
| Discontinued operations, net | $ | 315,827 | $ | 379,098 | $ | 476,467 | $ | 1,052,338 | $ | 1,177,600 | ||||||||||
| Net income | $ | 295,983 | $ | 382,029 | $ | 436,413 | $ | 1,047,356 | $ | 1,147,617 | ||||||||||
| Net income available to Common Shares | $ | 269,242 | $ | 347,794 | $ | 393,115 | $ | 951,242 | $ | 1,028,381 | ||||||||||
| Earnings per share – basic: | ||||||||||||||||||||
| (Loss) from continuing operations available to Common Shares | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.20 | ) | $ | (0.12 | ) | $ | (0.25 | ) | |||||
| Net income available to Common Shares | $ | 0.95 | $ | 1.27 | $ | 1.46 | $ | 3.40 | $ | 3.55 | ||||||||||
| Weighted average Common Shares outstanding | 282,888 | 273,609 | 270,012 | 279,406 | 290,019 | |||||||||||||||
| Earnings per share – diluted: | ||||||||||||||||||||
| (Loss) from continuing operations available to Common Shares | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.20 | ) | $ | (0.12 | ) | $ | (0.25 | ) | |||||
| Net income available to Common Shares | $ | 0.95 | $ | 1.27 | $ | 1.46 | $ | 3.40 | $ | 3.55 | ||||||||||
| Weighted average Common Shares outstanding | 282,888 | 273,609 | 270,012 | 279,406 | 290,019 | |||||||||||||||
| Distributions declared per Common Share outstanding | $ | 1.47 | $ | 1.64 | $ | 1.93 | $ | 1.87 | $ | 1.79 | ||||||||||
BALANCE SHEET DATA(at end of period): | ||||||||||||||||||||
| Real estate, before accumulated depreciation | $ | 19,702,371 | $ | 18,465,144 | $ | 18,690,239 | $ | 18,333,350 | $ | 17,235,175 | ||||||||||
| Real estate, after accumulated depreciation | $ | 15,365,014 | $ | 14,587,580 | $ | 15,128,939 | $ | 15,163,225 | $ | 14,212,695 | ||||||||||
| Total assets | $ | 16,184,194 | $ | 15,417,515 | $ | 16,535,110 | $ | 15,689,777 | $ | 15,062,219 | ||||||||||
| Total debt | $ | 9,948,076 | $ | 9,392,570 | $ | 10,483,942 | $ | 9,478,157 | $ | 8,017,008 | ||||||||||
| Redeemable Noncontrolling Interests – Operating Partnership | $ | 383,540 | $ | 258,280 | $ | 264,394 | $ | 345,165 | $ | 509,310 | ||||||||||
| Total Noncontrolling Interests | $ | 118,390 | $ | 127,174 | $ | 163,349 | $ | 188,605 | $ | 224,783 | ||||||||||
| Total Shareholders’ equity | $ | 5,090,186 | $ | 5,047,339 | $ | 4,905,356 | $ | 4,917,370 | $ | 5,602,236 | ||||||||||
OTHER DATA: | ||||||||||||||||||||
| Total properties (at end of period) | 451 | 495 | 548 | 579 | 617 | |||||||||||||||
| Total apartment units (at end of period) | 129,604 | 137,007 | 147,244 | 152,821 | 165,716 | |||||||||||||||
| Funds from operations available to Common Shares and Units – basic (1)(3)(4) | $ | 622,786 | $ | 615,505 | $ | 618,372 | $ | 713,412 | $ | 712,524 | ||||||||||
| Normalized funds from operations available to Common Shares and Units – basic (2)(3)(4) | $ | 682,422 | $ | 661,542 | $ | 735,062 | $ | 699,029 | $ | 699,276 | ||||||||||
| Cash flow provided by (used for): | ||||||||||||||||||||
| Operating activities | $ | 732,693 | $ | 672,462 | $ | 755,252 | $ | 793,232 | $ | 755,774 | ||||||||||
| Investing activities | $ | (646,114 | ) | $ | 103,579 | $ | (344,028 | ) | $ | (200,749 | ) | $ | (259,780 | ) | ||||||
| Financing activities | $ | 151,541 | $ | (1,473,547 | ) | $ | 428,739 | $ | (801,929 | ) | $ | (324,545 | ) | |||||||
| Equity Residential | ||||||||||||||||||||
| CONSOLIDATED HISTORICAL FINANCIAL INFORMATION | ||||||||||||||||||||
| (Financial information in thousands except for per share and property data) | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| OPERATING DATA: | ||||||||||||||||||||
| Total revenues from continuing operations | $ | 2,123,715 | $ | 1,883,491 | $ | 1,674,709 | $ | 1,548,264 | $ | 1,543,817 | ||||||||||
| Interest and other income | $ | 150,547 | $ | 7,965 | $ | 5,118 | $ | 16,520 | $ | 33,192 | ||||||||||
| Income (loss) from continuing operations | $ | 311,555 | $ | 57,794 | $ | (103,108 | ) | $ | (80,394 | ) | $ | (132,946 | ) | |||||||
| Discontinued operations, net | $ | 569,649 | $ | 877,403 | $ | 399,091 | $ | 462,423 | $ | 569,359 | ||||||||||
| Net income | $ | 881,204 | $ | 935,197 | $ | 295,983 | $ | 382,029 | $ | 436,413 | ||||||||||
| Net income available to Common Shares | $ | 826,212 | $ | 879,720 | $ | 269,242 | $ | 347,794 | $ | 393,115 | ||||||||||
| Earnings per share – basic: | ||||||||||||||||||||
Income (loss) from continuing operations available to Common Shares | $ | 0.93 | $ | 0.14 | $ | (0.39 | ) | $ | (0.33 | ) | $ | (0.52 | ) | |||||||
| Net income available to Common Shares | $ | 2.73 | $ | 2.98 | $ | 0.95 | $ | 1.27 | $ | 1.46 | ||||||||||
| Weighted average Common Shares outstanding | 302,701 | 294,856 | 282,888 | 273,609 | 270,012 | |||||||||||||||
| Earnings per share – diluted: | ||||||||||||||||||||
Income (loss) from continuing operations available to Common Shares | $ | 0.92 | $ | 0.14 | $ | (0.39 | ) | $ | (0.33 | ) | $ | (0.52 | ) | |||||||
| Net income available to Common Shares | $ | 2.70 | $ | 2.95 | $ | 0.95 | $ | 1.27 | $ | 1.46 | ||||||||||
| Weighted average Common Shares outstanding | 319,766 | 312,065 | 282,888 | 273,609 | 270,012 | |||||||||||||||
Distributions declared per Common Share outstanding | $ | 1.78 | $ | 1.58 | $ | 1.47 | $ | 1.64 | $ | 1.93 | ||||||||||
BALANCE SHEET DATA (at end of period): | ||||||||||||||||||||
| Real estate, before accumulated depreciation | $ | 21,008,429 | $ | 20,407,946 | $ | 19,702,371 | $ | 18,465,144 | $ | 18,690,239 | ||||||||||
| Real estate, after accumulated depreciation | $ | 16,096,208 | $ | 15,868,363 | $ | 15,365,014 | $ | 14,587,580 | $ | 15,128,939 | ||||||||||
| Total assets | $ | 17,201,000 | $ | 16,659,303 | $ | 16,184,194 | $ | 15,417,515 | $ | 16,535,110 | ||||||||||
| Total debt | $ | 8,529,244 | $ | 9,721,061 | $ | 9,948,076 | $ | 9,392,570 | $ | 10,483,942 | ||||||||||
Redeemable Noncontrolling Interests – Operating Partnership | $ | 398,372 | $ | 416,404 | $ | 383,540 | $ | 258,280 | $ | 264,394 | ||||||||||
| Total shareholders’ equity | $ | 7,289,813 | $ | 5,669,015 | $ | 5,090,186 | $ | 5,047,339 | $ | 4,905,356 | ||||||||||
| Total Noncontrolling Interests | $ | 237,294 | $ | 193,842 | $ | 118,390 | $ | 127,174 | $ | 163,349 | ||||||||||
| OTHER DATA: | ||||||||||||||||||||
| Total properties (at end of period) | 403 | 427 | 451 | 495 | 548 | |||||||||||||||
| Total apartment units (at end of period) | 115,370 | 121,974 | 129,604 | 137,007 | 147,244 | |||||||||||||||
Funds from operations available to Common Shares and Units – basic (1) (3) (4) | $ | 993,217 | $ | 752,153 | $ | 622,786 | $ | 615,505 | $ | 618,372 | ||||||||||
Normalized funds from operations available to Common Shares and Units – basic (2) (3) (4) | $ | 883,269 | $ | 759,665 | $ | 682,422 | $ | 661,542 | $ | 735,062 | ||||||||||
| Cash flow provided by (used for): | ||||||||||||||||||||
| Operating activities | $ | 1,046,251 | $ | 798,334 | $ | 726,037 | $ | 670,812 | $ | 755,027 | ||||||||||
| Investing activities | $ | (261,049 | ) | $ | (194,828 | ) | $ | (639,458 | ) | $ | 105,229 | $ | (343,803 | ) | ||||||
| Financing activities | $ | (556,533 | ) | $ | (650,993 | ) | $ | 151,541 | $ | (1,473,547 | ) | $ | 428,739 | |||||||
38
| ERP Operating Limited Partnership | ||||||||||||||||||||
| CONSOLIDATED HISTORICAL FINANCIAL INFORMATION | ||||||||||||||||||||
| (Financial information in thousands except for per Unit and property data) | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
| OPERATING DATA: | ||||||||||||||||||||
| Total revenues from continuing operations | $ | 2,123,715 | $ | 1,883,491 | $ | 1,674,709 | $ | 1,548,264 | $ | 1,543,817 | ||||||||||
| Interest and other income | $ | 150,547 | $ | 7,965 | $ | 5,118 | $ | 16,520 | $ | 33,192 | ||||||||||
| Income (loss) from continuing operations | $ | 311,555 | $ | 57,794 | $ | (103,108 | ) | $ | (80,394 | ) | $ | (132,946 | ) | |||||||
| Discontinued operations, net | $ | 569,649 | $ | 877,403 | $ | 399,091 | $ | 462,423 | $ | 569,359 | ||||||||||
| Net income | $ | 881,204 | $ | 935,197 | $ | 295,983 | $ | 382,029 | $ | 436,413 | ||||||||||
| Net income available to Units | $ | 864,853 | $ | 920,500 | $ | 282,341 | $ | 368,099 | $ | 419,241 | ||||||||||
| Earnings per Unit – basic: | ||||||||||||||||||||
Income (loss) from continuing operations available to Units | $ | 0.93 | $ | 0.14 | $ | (0.39 | ) | $ | (0.33 | ) | $ | (0.52 | ) | |||||||
| Net income available to Units | $ | 2.73 | $ | 2.98 | $ | 0.95 | $ | 1.27 | $ | 1.46 | ||||||||||
| Weighted average Units outstanding | 316,554 | 308,062 | 296,527 | 289,167 | 287,631 | |||||||||||||||
| Earnings per Unit – diluted: | ||||||||||||||||||||
Income (loss) from continuing operations available to Units | $ | 0.92 | $ | 0.14 | $ | (0.39 | ) | $ | (0.33 | ) | $ | (0.52 | ) | |||||||
| Net income available to Units | $ | 2.70 | $ | 2.95 | $ | 0.95 | $ | 1.27 | $ | 1.46 | ||||||||||
| Weighted average Units outstanding | 319,766 | 312,065 | 296,527 | 289,167 | 287,631 | |||||||||||||||
| Distributions declared per Unit outstanding | $ | 1.78 | $ | 1.58 | $ | 1.47 | $ | 1.64 | $ | 1.93 | ||||||||||
BALANCE SHEET DATA (at end of period): | ||||||||||||||||||||
| Real estate, before accumulated depreciation | $ | 21,008,429 | $ | 20,407,946 | $ | 19,702,371 | $ | 18,465,144 | $ | 18,690,239 | ||||||||||
| Real estate, after accumulated depreciation | $ | 16,096,208 | $ | 15,868,363 | $ | 15,365,014 | $ | 14,587,580 | $ | 15,128,939 | ||||||||||
| Total assets | $ | 17,201,000 | $ | 16,659,303 | $ | 16,184,194 | $ | 15,417,515 | $ | 16,535,110 | ||||||||||
| Total debt | $ | 8,529,244 | $ | 9,721,061 | $ | 9,948,076 | $ | 9,392,570 | $ | 10,483,942 | ||||||||||
| Redeemable Limited Partners | $ | 398,372 | $ | 416,404 | $ | 383,540 | $ | 258,280 | $ | 264,394 | ||||||||||
| Total partners' capital | $ | 7,449,419 | $ | 5,788,551 | $ | 5,200,585 | $ | 5,163,459 | $ | 5,043,185 | ||||||||||
Noncontrolling Interests – Partially Owned Properties | $ | 77,688 | $ | 74,306 | $ | 7,991 | $ | 11,054 | $ | 25,520 | ||||||||||
| OTHER DATA: | ||||||||||||||||||||
| Total properties (at end of period) | 403 | 427 | 451 | 495 | 548 | |||||||||||||||
| Total apartment units (at end of period) | 115,370 | 121,974 | 129,604 | 137,007 | 147,244 | |||||||||||||||
Funds from operations available to Units – basic (1) (3) (4) | $ | 993,217 | $ | 752,153 | $ | 622,786 | $ | 615,505 | $ | 618,372 | ||||||||||
Normalized funds from operations available to Units – basic (2) (3) (4) | $ | 883,269 | $ | 759,665 | $ | 682,422 | $ | 661,542 | $ | 735,062 | ||||||||||
| Cash flow provided by (used for): | ||||||||||||||||||||
| Operating activities | $ | 1,046,251 | $ | 798,334 | $ | 726,037 | $ | 670,812 | $ | 755,027 | ||||||||||
| Investing activities | $ | (261,049 | ) | $ | (194,828 | ) | $ | (639,458 | ) | $ | 105,229 | $ | (343,803 | ) | ||||||
| Financing activities | $ | (556,533 | ) | $ | (650,993 | ) | $ | 151,541 | $ | (1,473,547 | ) | $ | 428,739 | |||||||
| (1) | The National Association of Real Estate Investment Trusts (“NAREIT”) defines funds from operations (“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 |
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| (2) | Normalized funds from operations (“Normalized FFO”) begins with FFO and excludes: |
| ▪ | the impact of any expenses relating to non-operating asset impairment and valuation allowances; |
| ▪ | property acquisition and other transaction costs related to mergers and acquisitions and pursuit cost write-offs (other expenses); |
| ▪ | gains and losses from early debt extinguishment, including prepayment penalties, preferred |
| ▪ | gains and losses on the sales of non-operating assets, including gains and losses from land parcel and condominium sales, net of the effect of income tax benefits or expenses; and |
| ▪ | other miscellaneous non-comparable items. |
| (3) | The Company believes that FFO and FFO available to Common Shares and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures of performance by the real estate industry and by excluding gains or losses related to dispositions of depreciable property and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO and FFO available to Common Shares and Units / Units can help compare the operating performance of a company’s real estate between periods or as compared to different companies. The company also believes that Normalized FFO and Normalized FFO available to Common Shares and Units / Units are helpful to investors as supplemental measures of the operating performance of a real estate company because they allow investors to compare the company’s operating performance to its performance in prior reporting periods and to the operating performance of other real estate 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 operating results. FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units do not represent net income, net income available to Common Shares / Units or net cash flows from operating activities in accordance with GAAP. Therefore, FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units should not be exclusively considered as alternatives to net income, net income available to Common Shares / Units or net cash flows from operating activities as determined by GAAP or as a measure of liquidity. The Company’s calculation of FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies. |
| (4) | FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units are calculated on a basis consistent with net income available to Common Shares / Units and reflects adjustments to net income for preferred distributions and premiums on redemption of preferred |
Note: See Item 7 for a reconciliation of net income to FFO, FFO available to Common Shares and Units / Units, Normalized FFO and Normalized FFO available to Common Shares and Units / Units.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of the results of operations and financial condition of the Company and the Operating Partnership should be read in connection with the Consolidated Financial Statements and Notes thereto. Due to the Company’sCompany's ability to control the Operating Partnership and its subsidiaries, the Operating Partnership and each such subsidiary entity has been consolidated with the Company for financial reporting purposes, except for antwo unconsolidated development land parceldevelopments and our military housing properties. Capitalized terms used herein and not defined are as defined elsewhere in this Annual Report onForm 10-K for the year ended December 31, 2010.2012.
Forward-Looking Statements
Forward-looking statements in this Item 7 as well as elsewhere in this Annual Report onForm 10-K 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’sCompany'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
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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’smanagement's control. 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. Factors that might cause such differences include, but are not limited to the following:
| ▪ | We intend to actively acquireand/or develop multifamily properties for rental operations as market conditions dictate. |
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We may also acquire multifamily properties that are unoccupied or in the early stages of lease up. We may be unable to lease up these apartment properties on schedule, resulting in decreases in expected rental revenues and/or lower yields due to lower occupancy and rates as well as higher than expected concessions. We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or to complete a development property. Additionally, we expect that other real estate investors with capital will compete with us for attractive investment opportunities or may also develop properties in markets where we focus our development and acquisition efforts. This competition (or lack thereof) may increase (or depress) prices for multifamily properties. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms. We have acquired in the past and intend to continue to pursue the acquisition of properties and portfolios of properties, including large portfolios, that could increase our size and result in alterations to our capital structure. The total number of apartment units under development, costs of development and estimated completion dates are subject to uncertainties arising from changing economic conditions (such as the cost of labor and construction materials), competition and local government regulation;
| Debt financing and other capital required by the Company may not be available or may only be available on adverse terms; |
| Labor and materials required for maintenance, repair, capital expenditure or development may be more expensive than anticipated; |
| Occupancy levels and market rents may be adversely affected by national and local economic and market conditions including, without limitation, new construction and excess inventory of multifamily |
| ▪ | Additional factors as discussed in Part I of this Annual Report onForm 10-K, 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.
Overview
Equity Residential (“EQR”), a Maryland real estate investment trust (“REIT”) formed in March 1993, is an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top United States growth markets. ERP Operating Limited Partnership (“ERPOP”), an Illinois limited partnership, was formed in May 1993 to conduct the multifamily residential property business of Equity Residential. EQR has elected to be taxed as a REIT. 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 Company’sCompany's corporate headquarters are located in Chicago, Illinois and the Company also operates property management offices in each of its markets. As of December 31, 2010,2012, the Company had approximately 4,0003,600 employees who provided real estate operations, leasing, legal, financial, accounting, acquisition, disposition, development and other support functions.
Business Objectives and Operating and Investing Strategies
The Company invests in high quality apartment communities located in strategically targeted markets with the goal of maximizing our risk adjusted total return (operating income plus capital appreciation) on invested capital.
We seek to maximize the income and capital appreciation of our properties by investing in markets (our core markets) that are characterized by conditions favorable to multifamily property appreciation. We are focused primarily on the six core coastal, high barrier to entry markets of Boston, New York, Washington DC, Southern California, San Francisco and Seattle. These markets generally feature one or more of the following characteristics that allow us to increase rents:
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| ▪ | High barriers to entry where, because of land scarcity or government regulation, it is difficult or costly to build new apartment properties, creating limits on new supply; |
| ▪ | High home ownership costs; |
| ▪ | Strong economic growth leading to household formation and job growth, which in turn leads to high demand for our apartments; |
| ▪ | Urban core locations with an attractive quality of life and higher wage job categories leading to high resident demand and retention; and |
| ▪ | Favorable demographics contributing to a larger pool of target residents with a high propensity to rent apartments. |
Our operating focus is on balancing occupancy and rental rates to maximize our revenue while exercising tight cost control to generate the highest possible return to our shareholders. Revenue is maximized by drivingattracting qualified
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We use technology to engage our customers in the way that they want to be engaged. Many of our residents utilize our web-based resident portal which allows them to sign their leases, review their accountaccounts and make payments, provide feedback and make service requests on-line.
Acquisitions and developments may be financed from various sources of capital, which may include retained cash flow, issuance of additional equity and debt, securities, sales of properties and joint venture agreements and collateralized and uncollateralized borrowings.agreements. In addition, the Company may acquire properties in transactions that include the issuance of limited partnership interests in the Operating Partnership (“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. EQRThe Company may also acquire land parcels to holdand/or sell based on market opportunities. The Company may also seek to acquire properties by purchasing defaulted or distressed debt that encumbers desirable properties in the hope of obtaining title to property through foreclosure ordeed-in-lieu of foreclosure proceedings. The Company has also, in the past, converted some of its properties and sold them as condominiums but is not currently active in this line of business.
As part of its strategy, the Company purchases completed and fully occupied apartment properties, partially completed or partially unoccupiedoccupied properties or land on which apartment properties can be constructed. We intend to hold a diversified portfolio of assets across our target markets. Currently,As of December 31, 2012, no single metropolitan area accountsaccounted for more than 17%15.9% of our NOI, though no guarantee can be made that NOI concentration may not increase in the future.
We endeavor to attract and retain the best employees by providing them with the education, resources and opportunities to succeed. We provide many classroom and on-line training courses to assist our employees in interacting with prospects and residents as well as extensively train our customer service specialists in maintaining the property and its improvements, equipment and appliances on our property sites.appliances. We actively promote from within and many senior corporate and property leaders have risen from entry level or junior positions. We monitor our employees’employees' engagement by surveying them annually and have consistently received high engagement scores.
We have a commitment to sustainability and consider the environmental impacts of our business activities. We have a dedicated in-house team that initiates and applies sustainable practices in all aspects of our business, including investment activities, development, property operations and property management activities. With its high density, multifamily housing is, by its nature, an environmentally friendly property type. Our recent acquisition and development activities have been primarily concentrated
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in pedestrian-friendly urban locations near public transportation. When developing and renovating our properties, we strive to reduce energy and water usage by investing in energy saving technology while positively impacting the experience of our residents and the value of our assets. We continue to implement a combination of irrigation, lighting, HVAC and HVACrenewable energy improvements at our properties that will reduce energy and water consumption.
Current Environment
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We expect continued growth in markets like the Northeast, where the economy was stronger and multifamily operating conditions were better. In 2010, the Company ceased to hold the large cash balances (often $1.0 billion or more) that it held in 2009 in anticipation of debt maturities in an unsure capital markets climate. This had the result of increasing the Company’s earnings by decreasing debt prefunding costs. Finally, the Company was aggressive in acquiring $1.5 billion of assets in its target markets in 2010. Improvement materialized throughout 2010 and as we enter 2011, we expect strong growth in2013 same store revenue (anticipated increasesincrease ranging from 4.0% to 5.0%) and 2013 NOI (anticipated increasesincrease ranging from 5.0%4.5% to 7.5%6.0%) and are optimistic that the improvementstrength in fundamentals realized in 2010the past couple of years and so far in 2013 will be sustained for the foreseeable future. We believe the key drivers behind the anticipated increase in revenue are base rent pricing for new residents, renewal pricing for existing residents, resident turnover and physical occupancy. Thus far in 2013, base rents are higher as compared with the same period last year and are gradually increasing from normal seasonal lows. We expect base rent growth to average 4.0% to 4.5% with higher growth during the peak leasing season. Renewal rates remain strong and are expected to exceed 5.0% on average throughout the year. The significant disposition activity discussed below, including exiting certain of our non-core markets, will leave a same store set expected to show a decrease in turnover as compared to 2012. Although occupancy is higher than anticipated for this time of the year, it is expected to remain consistent with last year. Despite slow growth in the overall economy, our business continues to perform well because of the combined forces of demographics, household formations and the continued aversion to home ownership, all of which should ensure a continued strong demand for rental housing.
The Company also acquired six land parcels for $141.2 million during the year ended December 31, 2012. The Company started construction on two projects (inclusive of the Company's co-development with Toll Brothers to develop 400 Park Avenue South in New York City) representing 357 apartment units totaling approximately $306.0 million of development costs during the year ended December 31, 2012. The Company currently anticipates starting between $500.0 million and 27 unconsolidated$700.0 million of new developments in 2013, some of which were delayed from 2012 as we worked on funding for the Archstone transaction.
The Company continues to sell non-core assets and reduce its exposure to non-core markets as we believe these assets will have lower long-term returns and we can sell them for prices that we believe are favorable. The Archstone transaction provides an opportunity to accelerate this strategy and do so efficiently through the use of Section 1031 tax deferred exchanges. The
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Company sold 35 consolidated properties consisting of 6,2759,012 apartment units generatingfor $1.1 billion during the year ended December 31, 2012. These dispositions combined with reinvestment of the cash proceeds in assets with lower cap rates (see definition below) were dilutive to our per share results. The Company defines dilution from transactions as the lost NOI from sales proceeds that were not reinvested in other apartment properties or were reinvested in properties with a lower cap rate. The Company anticipates consolidated dispositions of $26.9 million,approximately $4.0 billion during the year ending December 31, 2013. The Company plans to fund a portion of the cash purchase price of the Archstone transaction with capital raised through these significant dispositions of assets. The Company currently anticipates that $3.5 billion of the projected $4.0 billion of dispositions for 2013 will occur in the first half of 2013. While this accelerated disposition program will be dilutive to our per share results, it should reduce the execution risk on the Archstone transaction.
We currently have access to multiple sources of capital including the equity markets as well as 2 condominium units for $0.4both the secured and unsecured debt markets. In December 2012, the Company raised $1.2 billion in equity in a public offering of 21,850,000 Common Shares priced at $54.75 per share. We also raised $192.3 million under our ATM program in 2012. On January 11, 2013, the Company replaced its existing $1.75 billion credit facility with a new $2.5 billion unsecured revolving credit facility maturing April 1, 2018. The Company believes that the new facility contains a diversified and one land parcel for $4.0 million. We expect to continue strategic dispositions and see an increase in dispositions in 2011 as we believe therestrong bank group which increases its balance sheet flexibility going forward. On January 11, 2013, the Company also entered into a new senior unsecured $750.0 million delayed draw term loan facility which is currently a robust marketundrawn and favorable pricing for certainmay be drawn anytime on or before July 11, 2013. With the completion of our non-strategic assets. Our dispositions in 2010 were at higher capitalization (“cap”) rates (see definition in Resultsthese financing activities, along with cash on hand, the Company believes it has sufficient capital available to fund its portion of Operations) than the acquisitions we completed. We expect this to continue in 2011Archstone acquisition cash price, transaction costs and expect to experience dilution from past and future transactions.required debt paydowns.
We believe that cash and cash equivalents, securities readily convertible to cash, current availability on our revolving credit facility and delayed draw term loan facility and disposition proceeds for 20112013 will provide sufficient liquidity to meet our funding obligations relating to asset acquisitions (including Archstone), debt maturities and existing development projects through 2011.2013. We expect that our remaining longer-term funding requirements will be met through some combination of new borrowings, equity issuances (including the Company’sEQR's ATM shareCommon Share offering program), property dispositions, joint ventures and cash generated from operations.
There is significant uncertainty surrounding the futures of Fannie Mae and Freddie Mac.Mac (the “Government Sponsored Enterprises” or “GSEs”). Through their lender originator networks, the GSEs are significant lenders both to the Company and to buyers of the Company's properties. The GSEs have a mandate to support multifamily housing through their financing activities. Any changes to their mandates, reductions in their size or the scale of their activities or loss of key personnel could have a significant impact on the Company and may, among other things, lead to lower values for our disposition assets and higher interest rates on our borrowings. Such changes may also provide an advantage to us by making the cost of financing single family home ownership more expensive and provide us a competitive advantage given the size of our balance sheet and the multiple sources of capital to which we have access.
We believe that the Company is well-positioned as of December 31, 2010 (our2012 because our properties are geographically diverse, and were approximately 94.1%94.3% occupied (94.5%(95.0% on a same store basis)), and the long-term demographic picture is positive. With the exception of the Washington, D.C. and Seattle market areas and the San Jose sub-market area of San Francisco, little new multifamily rental supply will be added to most of our core markets over the next several years and the long-term demographic picture is positive.years. We believe our strong balance sheet and ample liquidity will allow us to fund our debt maturities and development fundingscosts in the near term, and should also allow us to take advantage of investment opportunities in the future. As economic conditions continue to improve, the short-term nature of our leases and the limited supply of new rental housing being constructed, along with the customer service and superior value provided by our on-site personnel, should allow us to realize even more revenue growth and improvement in our operating results.
The current environment information presented above is based on current expectations and is forward-looking.
Results of Operations
In conjunction with our business objectives and operating strategy, the Company continued to invest in apartment properties located in strategically targeted markets during the years ended December 31, 20102012 and December 31, 2009.2011. In summary, we:
Year Ended December 31, 2010:
2012:
| ▪ | Acquired |
| ▪ | Sold $1.1 billion of consolidated apartment properties consisting of 35 properties and 9,012 apartment units at a |
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weighted average cap rate of 6.2%, the majority of which were in exit or less desirable markets. These sales, excluding two leveraged partially-owned assets sold during the third quarter, generated an unlevered internal rate of return (IRR), inclusive of management costs, of 10.6%.
Year Ended December 31, 2011:
| ▪ | Acquired $1.3 billion of apartment properties consisting of 20 consolidated properties and 6,103 apartment units at a weighted average cap rate (see definition below) of 5.2% and acquired five land parcels and entered into a long-term ground lease on one land parcel located in New York City for a total of $68.3 million, all of which we deem to be in our strategic targeted markets; |
| ▪ | Acquired one vacant land parcel in New York City in a joint venture with Toll Brothers for $134.0 million, consisting of contributions by the Company and Toll Brothers of approximately $76.1 million and $57.9 million, respectively, for future development; |
| ▪ | Acquired one unoccupied property in the |
| Acquired |
| Sold | ||
The Company’sCompany's primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”). NOI represents rental income less property and maintenance expense, real estate tax and insurance expense and property management expense. 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’sCompany's apartment communities. The cap rate is generally the first year NOI yield (net of replacements) on the Company’sCompany's investment.
Properties that the Company owned and were stabilized (see definition below) for all of both 20102012 and 20092011 (the “2010“2012 Same Store Properties”), which represented 112,04298,577 apartment units, impacted the Company’sCompany's results of operations. Properties that the Company owned for all of both 20092011 and 20082010 (the “2009“2011 Same Store Properties”), which represented 113,598101,312 apartment units, also impacted the Company’sCompany's results of operations. Both the 20102012 Same Store Properties and 20092011 Same Store Properties are discussed in the following paragraphs.
The following tables provide a rollforward of the apartment units included in Same Store Properties and a reconciliation of apartment units included in Same Store Properties to those included in Total Properties for the year ended December 31, 2012:
| Year Ended | ||||
| December 31, 2012 | ||||
| Properties | Apartment Units | |||
| Same Store Properties at December 31, 2011 | 370 | 101,312 | ||
| 2010 acquisitions | 16 | 4,445 | ||
| 2010 acquisitions not stabilized | (2 | ) | (1,238 | ) |
| 2012 dispositions | (35 | ) | (9,012 | ) |
| 2012 dispositions not stabilized | 2 | 441 | ||
| 2012 dispositions not yet included in same store (1) | 2 | 542 | ||
Consolidation of previously unconsolidated properties in 2010 (1) | 2 | 501 | ||
| Lease-up properties stabilized | 4 | 1,570 | ||
| Other | — | 16 | ||
| Same Store Properties at December 31, 2012 | 359 | 98,577 | ||
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| Year Ended | ||||
| December 31, 2012 | ||||
| Properties | Apartment Units | |||
| Same Store | 359 | 98,577 | ||
| Non-Same Store: | ||||
| 2012 acquisitions | 9 | 1,896 | ||
| 2011 acquisitions | 21 | 6,198 | ||
Lease-up properties not yet stabilized (2) | 11 | 3,656 | ||
| Other | 1 | 4 | ||
| Total Non-Same Store | 42 | 11,754 | ||
| Military Housing (not consolidated) | 2 | 5,039 | ||
| Total Properties and Apartment Units | 403 | 115,370 | ||
Note: Properties are considered "stabilized" when they have achieved 90% occupancy for three consecutive months. Properties are included in Same Store when they are stabilized for all of the current and comparable periods presented.
| (1) | In 2010, the Company consolidated seven properties containing 1,811 apartment units that had previously been categorized as unconsolidated. Of these properties, one containing 208 apartment units was sold in 2010, two containing 560 apartment units were sold in 2011 and two containing 542 apartment units were sold in 2012. |
| (2) | Includes properties in various stages of lease-up and properties where lease-up has been completed but the properties were not stabilized for the comparable periods presented. |
The Company’sCompany's acquisition, disposition and completed development activities also impacted overall results of operations for the years ended December 31, 20102012 and 2009. Dilution, as a result of the Company’s net asset sales in 2009, partially offset by net asset acquisitions and lease up activity in 2010, negatively impacts property net operating income.2011. The impacts of these activities are discussed in greater detail in the following paragraphs.
Comparison of the year ended December 31, 20102012 to the year ended December 31, 20092011
For the year ended December 31, 2010,2012, the Company reported diluted earnings per share of $0.95$2.70 compared to $1.27$2.95 per share for the year ended December 31, 2009.2011. The difference is primarily due to $37.3 million in lowerhigher gains from property sales in 20102011 vs. 20092012, partially offset by higher total property net operating income driven by the positive impact of the Company’s same store and $34.3lease-up activity and the Company's recognition of $150.0 million in higher impairment lossestermination fees related to our pursuit of Archstone (see Note 18 in 2010 vs. 2009.the Notes to Consolidated Financial Statements for further discussion).
For the year ended December 31, 2010, loss2012, income from continuing operations increased approximately $22.8$253.8 million when compared to the year ended December 31, 2009.2011. The decreaseincrease in continuing operations is discussed below.
Revenues from the 20102012 Same Store Properties decreased $2.1increased $97.5 million primarily as a result of a decreasean increase in average rental rates charged to residents and slightly higher occupancy, partially offset by an increase in occupancy.increased turnover. Expenses from the 20102012 Same Store Properties increased $6.2$11.2 million primarily due to increases in repairs and maintenance expenses (mostly due to greater storm-related costs such as snow removal and roof repairs incurred during the first quarter of 2010), higher property management costs and increases in utility costs, partially offset by lower real estate taxes and leasing and advertising expenses.insurance, partially offset by a decrease in utilities. The following tables provide comparative same store results and statistics for the 20102012 Same Store Properties:
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| 2012 vs. 2011 | ||||||||||||||||||||||
| Same Store Results/Statistics | ||||||||||||||||||||||
| $ in thousands (except for Average Rental Rate) – 98,577 Same Store Apartment Units | ||||||||||||||||||||||
| Results | Statistics | |||||||||||||||||||||
Average Rental Rate (1) | ||||||||||||||||||||||
| Description | Revenues | Expenses | NOI | Occupancy | Turnover | |||||||||||||||||
| 2012 | $ | 1,868,918 | $ | 649,914 | $ | 1,219,004 | $ | 1,658 | 95.4 | % | 58.2 | % | ||||||||||
| 2011 | $ | 1,771,449 | $ | 638,671 | $ | 1,132,778 | $ | 1,575 | 95.2 | % | 57.3 | % | ||||||||||
| Change | $ | 97,469 | $ | 11,243 | $ | 86,226 | $ | 83 | 0.2 | % | 0.9 | % | ||||||||||
| Change | 5.5 | % | 1.8 | % | 7.6 | % | 5.3 | % | ||||||||||||||
| Results | Statistics | |||||||||||||||||||||||
| Average | ||||||||||||||||||||||||
| Rental | ||||||||||||||||||||||||
| Description | Revenues | Expenses | NOI | Rate (1) | Occupancy | Turnover | ||||||||||||||||||
| 2010 | $ | 1,728,268 | $ | 654,663 | $ | 1,073,605 | $ | 1,358 | 94.8% | 56.7% | ||||||||||||||
| 2009 | $ | 1,730,335 | $ | 648,508 | $ | 1,081,827 | $ | 1,375 | 93.7% | 61.5% | ||||||||||||||
| Change | $ | (2,067) | $ | 6,155 | $ | (8,222) | $ | (17) | 1.1% | (4.8)% | ||||||||||||||
| Change | (0.1%) | 0.9% | (0.8)% | (1.2%) | ||||||||||||||||||||
| (1) | Average rental rate is defined as total rental revenues divided by the weighted average occupied apartment units for the period. |
The following table provides comparative same store operating expenses for the 20102012 Same Store Properties:
| % of Actual | ||||||||||||||||||||||||||||||||||||||
| 2012 vs. 2011 | 2012 vs. 2011 | |||||||||||||||||||||||||||||||||||||
| Same Store Operating Expenses | Same Store Operating Expenses | |||||||||||||||||||||||||||||||||||||
| $ in thousands – 98,577 Same Store Apartment Units | $ in thousands – 98,577 Same Store Apartment Units | |||||||||||||||||||||||||||||||||||||
| 2010 | % of Actual 2012 Operating Expenses | |||||||||||||||||||||||||||||||||||||
| Actual | Actual | $ | % | Operating | ||||||||||||||||||||||||||||||||||
| 2010 | 2009 | Change | Change | Expenses | Actual 2012 | Actual 2011 | $ Change | % Change | ||||||||||||||||||||||||||||||
| Actual 2012 | Actual 2011 | $ Change | % Change | % of Actual 2012 Operating Expenses | ||||||||||||||||||||||||||||||||||
| Real estate taxes | %) | 26.6 | % | $ | 197,316 | $ | 184,773 | $ | 12,543 | 6.8 | % | 30.3 | % | |||||||||||||||||||||||||
On-site payroll (1) | 156,668 | 156,446 | 222 | 0.1 | % | 23.9 | % | 146,637 | 145,979 | 658 | 0.5 | % | 22.5 | % | ||||||||||||||||||||||||
| Utilities (2) | 102,553 | 100,441 | 2,112 | 2.1 | % | 15.7 | % | 97,313 | 98,572 | (1,259 | ) | (1.3 | %) | 15.0 | % | |||||||||||||||||||||||
| Repairs and maintenance (3) | 97,166 | 94,223 | 2,943 | 3.1 | % | 14.8 | % | 88,931 | 89,152 | (221 | ) | (0.2 | %) | 13.7 | % | |||||||||||||||||||||||
| Property management costs (4) | 69,995 | 64,022 | 5,973 | 9.3 | % | 10.7 | % | 70,084 | 70,858 | (774 | ) | (1.1 | %) | 10.8 | % | |||||||||||||||||||||||
| Insurance | 21,545 | 21,525 | 20 | 0.1 | % | 3.3 | % | 20,629 | 19,257 | 1,372 | 7.1 | % | 3.2 | % | ||||||||||||||||||||||||
| Leasing and advertising | 14,892 | 16,029 | (1,137 | ) | (7.1 | %) | 2.3 | % | 10,812 | 11,798 | (986 | ) | (8.4 | %) | 1.7 | % | ||||||||||||||||||||||
Otheron-site operating expenses (5) | 17,713 | 18,642 | (929 | ) | (5.0 | %) | 2.7 | % | 18,192 | 18,282 | (90 | ) | (0.5 | %) | 2.8 | % | ||||||||||||||||||||||
| Same store operating expenses | $ | 654,663 | $ | 648,508 | $ | 6,155 | 0.9 | % | 100.0 | % | $ | 649,914 | $ | 638,671 | $ | 11,243 | 1.8 | % | 100.0 | % | ||||||||||||||||||
| (1) | On-site payroll – Includes payroll and related expenses foron-site personnel including property managers, leasing consultants and maintenance staff. |
| (2) | Utilities – Represents gross expenses prior to any recoveries under the Resident Utility Billing System (“RUBS”). Recoveries are reflected in rental income. |
| (3) | Repairs and maintenance – Includes general maintenance costs, apartment unit turnover costs including interior painting, routine landscaping, security, exterminating, fire protection, snow removal, elevator, roof and parking lot repairs and other miscellaneous building repair costs. |
| (4) | Property management costs – Includes payroll and related expenses for departments, or portions of departments, that directly support on-site management. These include such departments as regional and corporate property management, property accounting, human resources, training, marketing and revenue management, procurement, real estate tax, property legal services and information technology. |
| (5) | Other on-site operating expenses – Includes administrative costs such as office supplies, telephone and data charges, association and business licensing fees and ground lease costs. |
The following table presents a reconciliation of operating income per the consolidated statements of operations to NOI for the 2012 Same Store Properties:
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| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| (Amounts in thousands) | ||||||||
| Operating income | $ | 667,958 | $ | 541,675 | ||||
| Adjustments: | ||||||||
| Non-same store operating results | (155,374 | ) | (60,334 | ) | ||||
| Fee and asset management revenue | (9,573 | ) | (9,026 | ) | ||||
| Fee and asset management expense | 4,663 | 4,279 | ||||||
| Depreciation | 664,082 | 612,579 | ||||||
| General and administrative | 47,248 | 43,605 | ||||||
| Same store NOI | $ | 1,219,004 | $ | 1,132,778 | ||||
For properties that the Company acquired prior to January 1, 2012 and expects to continue to own through December 31, 2013 (which is computed based on the portfolio of approximately 80,000 apartment units that the Company expects to have in its annual same store set after the completion of its planned 2013 dispositions), the Company anticipates the following same store results for the full year ending December 31, 2013:
| 2013 Same Store Assumptions | ||
| Physical occupancy | 95.3% | |
| Revenue change | 4.0% to 5.0% | |
| Expense change | 2.5% to 3.5% | |
| NOI change | 4.5% to 6.0% | |
The Company anticipates no consolidated rental acquisitions outside of Archstone and consolidated rental dispositions of $4.0 billion and expects that acquisitions will have a 1.00% lower cap rate than dispositions for the full year ending December 31, 2013.
These 2013 assumptions are based on current expectations and are forward-looking.
Non-same store operating results increased approximately $95.0 million and consist primarily of properties acquired in calendar years 2011 and 2012, as well as operations from the Company’s completed development properties. Although the operations of both the non-same store assets and the same store assets have been positively impacted during the year ended December 31, 2012, the non-same store assets have contributed a greater percentage of total NOI to the Company’s overall operating results primarily due to 2011 and 2012 acquisitions, increasing occupancy for properties in lease-up and a longer ownership period in 2012 than 2011. This increase primarily resulted from:
| ▪ | Development and other miscellaneous properties in lease-up of $12.3 million; |
| ▪ | Properties acquired in 2011 and 2012 of $75.1 million; and |
| ▪ | Newly stabilized development and other miscellaneous properties of $5.9 million. |
See also Note 17 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s segment disclosures.
Fee and asset management revenues, net of fee and asset management expenses, increased approximately $0.2 million or 3.4% primarily as a result of fees earned on management of the Company’s unconsolidated development joint ventures, partially offset by lower revenues earned on management of the Company's military housing ventures at Fort Lewis and McChord Air Force Base and higher expenses.
Property management expenses from continuing operations include off-site expenses associated with the self-management of the Company’s properties as well as management fees paid to any third party management companies. These expenses were consistent between the periods under comparison.
Depreciation expense from continuing operations, which includes depreciation on non-real estate assets, increased approximately $51.5 million or 8.4% primarily as a result of additional depreciation expense on properties acquired in 2011 and 2012, development properties placed in service and capital expenditures for all properties owned, partially offset by a decrease in the amortization of both in-place leases and furniture, fixtures and equipment that were fully depreciated.
General and administrative expenses from continuing operations, which include corporate operating expenses, increased
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approximately $3.6 million or 8.4% primarily due to an increase in payroll-related costs, which is largely a result of the acceleration of long-term compensation expense for retirement eligible employees, partially offset by a decrease in office rent. The Company anticipates that general and administrative expenses will approximate $55.0 million to $58.0 million for the year ending December 31, 2013. The above assumption is based on current expectations and is forward-looking.
Interest and other income from continuing operations increased approximately $142.6 million primarily due to the Company recognizing $150.0 million in termination fees related to our pursuit of Archstone during the year ended December 31, 2012, partially offset by lower interest earned on cash and cash equivalents due to lower overall cash invested during the year ended December 31, 2012 as well as forfeited deposits for terminated disposition transactions, proceeds received from the Company’s final royalty participation in LRO/Rainmaker (a revenue management system) and litigation settlement proceeds that all occurred during the year ended December 31, 2011 and did not reoccur during the year ended December 31, 2012. The Company anticipates that interest and other income will approximate $0.5 million to $1.5 million for the year ending December 31, 2013. The above assumption is based on current expectations and is forward-looking.
Other expenses from continuing operations increased approximately $13.1 million or 91.4% primarily due to the settlement of a dispute with the owners of a land parcel, an increase in the expensing of overhead (pursuit costs write-offs) as a result of a more active focus on sourcing new development opportunities, an increase in property acquisition costs incurred in conjunction with the Company's 2012 acquisitions and transaction costs related to the pursuit of Archstone.
Interest expense from continuing operations, including amortization of deferred financing costs, decreased approximately $2.0 million or 0.4% primarily as a result of lower interest expense on mortgage notes payable due to lower balances during the year ended December 31, 2012 as compared to the same period in 2011, higher capitalized interest in 2012, the redemption of the Company's $650.0 million of unsecured notes in August 2011 and the repayment of $253.9 million of 6.625% unsecured notes in March 2012, partially offset by interest expense on the $1.0 billion of unsecured notes that closed in December 2011. During the year ended December 31, 2012, the Company capitalized interest costs of approximately $22.5 million as compared to $9.1 million for the year ended December 31, 2011. This capitalization of interest primarily relates to consolidated projects under development. The effective interest cost on all indebtedness for the year ended December 31, 2012 was 5.37% as compared to 5.30% for the year ended December 31, 2011. The Company anticipates that interest expense from continuing operations will approximate $477.3 million to $498.8 million (excluding debt extinguishment costs) for the year ending December 31, 2013. The above assumption is based on current expectations and is forward-looking.
Income and other tax expense from continuing operations decreased approximately $0.2 million or 26.0% primarily due to decreases in all other taxes. The Company anticipates that income and other tax expense will approximate $1.5 million to $2.5 million for the year ending December 31, 2013. The above assumption is based on current expectations and is forward-looking.
Loss from investments in unconsolidated entities increased as a result of the start of operations at one of the Company's unconsolidated development joint ventures.
Net gain on sales of land parcels decreased approximately $4.2 million due to the gain on sale of a land parcel located in suburban Washington, D.C. during the year ended December 31, 2011 as compared to no land sales during the year ended December 31, 2012.
Discontinued operations, net decreased approximately $307.8 million or 35.1% between the periods under comparison. This decrease is primarily due to higher gains on sales from dispositions during the year ended December 31, 2011 compared to the same period in 2012. Properties sold in 2012 reflect operations for a partial period in 2012 in contrast to a full period in 2011. See Note 11 in the Notes to Consolidated Financial Statements for further discussion.
Comparison of the year ended December 31, 2011 to the year ended December 31, 2010
For the year ended December 31, 2011, the Company reported diluted earnings per share of $2.95 compared to $0.95 per share for the year ended December 31, 2010. The difference is primarily due to higher gains from property sales in 2011 vs. 2010, higher total property net operating income driven by the positive impact of the Company's same store and lease-up activity and $45.4 million in impairment losses in 2010 that did not reoccur in 2011, partially offset by dilution as a result of the net impact of the Company's 2010 and 2011 acquisition and disposition activities.
For the year ended December 31, 2011, income from continuing operations increased approximately $160.9 million when compared to the year ended December 31, 2010. The increase in continuing operations is discussed below.
Revenues from the 2011 Same Store Properties increased $81.9 million primarily as a result of an increase in average rental rates charged to residents and an increase in occupancy. Expenses from the 2011 Same Store Properties increased $3.5 million primarily due to increases in property management costs, real estate taxes and utilities, partially offset by decreases in leasing and advertising costs and insurance. The following tables provide comparative same store results and statistics for the 2011 Same Store Properties:
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| 2011 vs. 2010 | ||||||||||||||||||||||
| Same Store Results/Statistics | ||||||||||||||||||||||
| $ in thousands (except for Average Rental Rate) – 101,312 Same Store Apartment Units | ||||||||||||||||||||||
| Results | Statistics | |||||||||||||||||||||
Average Rental Rate (1) | ||||||||||||||||||||||
| Description | Revenues | Expenses | NOI | Occupancy | Turnover | |||||||||||||||||
| 2011 | $ | 1,712,428 | $ | 617,712 | $ | 1,094,716 | $ | 1,481 | 95.2 | % | 57.8 | % | ||||||||||
| 2010 | $ | 1,630,482 | $ | 614,210 | $ | 1,016,272 | $ | 1,417 | 94.8 | % | 56.9 | % | ||||||||||
| Change | $ | 81,946 | $ | 3,502 | $ | 78,444 | $ | 64 | 0.4 | % | 0.9 | % | ||||||||||
| Change | 5.0 | % | 0.6 | % | 7.7 | % | 4.5 | % | ||||||||||||||
| (1) | Average rental rate is defined as total rental revenues divided by the weighted average occupied apartment units for the period. |
The following table provides comparative same store operating expenses for the 2011 Same Store Properties:
| 2011 vs. 2010 | ||||||||||||||||||
| Same Store Operating Expenses | ||||||||||||||||||
| $ in thousands – 101,312 Same Store Apartment Units | ||||||||||||||||||
| Actual 2011 | Actual 2010 | $ Change | % Change | % of Actual 2011 Operating Expenses | ||||||||||||||
| Real estate taxes | $ | 169,432 | $ | 166,675 | $ | 2,757 | 1.7 | % | 27.4 | % | ||||||||
| On-site payroll (1) | 144,346 | 144,878 | (532 | ) | (0.4 | %) | 23.4 | % | ||||||||||
| Utilities (2) | 96,702 | 95,083 | 1,619 | 1.7 | % | 15.7 | % | |||||||||||
| Repairs and maintenance (3) | 89,549 | 89,128 | 421 | 0.5 | % | 14.5 | % | |||||||||||
| Property management costs (4) | 68,497 | 65,219 | 3,278 | 5.0 | % | 11.1 | % | |||||||||||
| Insurance | 19,394 | 20,605 | (1,211 | ) | (5.9 | %) | 3.1 | % | ||||||||||
| Leasing and advertising | 11,515 | 14,266 | (2,751 | ) | (19.3 | %) | 1.9 | % | ||||||||||
| Other on-site operating expenses (5) | 18,277 | 18,356 | (79 | ) | (0.4 | %) | 2.9 | % | ||||||||||
| Same store operating expenses | $ | 617,712 | $ | 614,210 | $ | 3,502 | 0.6 | % | 100.0 | % | ||||||||
| (1) | On-site payroll – Includes payroll and related expenses for on-site personnel including property managers, leasing consultants and maintenance staff. |
| (2) | Utilities – Represents gross expenses prior to any recoveries under the Resident Utility Billing System (“RUBS”). Recoveries are reflected in rental income. |
| (3) | Repairs and maintenance – Includes general maintenance costs, unit turnover costs including interior painting, routine landscaping, security, exterminating, fire protection, snow removal, elevator, roof and parking lot repairs and other miscellaneous building repair costs. |
| (4) | Property management costs – Includes payroll and related expenses for departments, or portions of departments, that directly supporton-site management. These include such departments as regional and corporate property management, property accounting, human resources, training, marketing and revenue management, procurement, real estate tax, property legal services and information technology. |
| (5) | Otheron-site operating expenses – Includes administrative costs such as office supplies, telephone, |
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| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Amounts in thousands) | ||||||||
| Operating income | $ | 442,001 | $ | 496,601 | ||||
| Adjustments: | ||||||||
| Non-same store operating results | (105,960 | ) | (21,336 | ) | ||||
| Fee and asset management revenue | (9,476 | ) | (10,346 | ) | ||||
| Fee and asset management expense | 5,140 | 7,519 | ||||||
| Depreciation | 656,633 | 559,271 | ||||||
| General and administrative | 39,887 | 38,994 | ||||||
| Impairment | 45,380 | 11,124 | ||||||
| Same store NOI | $ | 1,073,605 | $ | 1,081,827 | ||||
Non-same store operating results increased approximately $84.6$110.7 million and consist primarily of properties acquired in calendar years 20092010 and 2010,2011, as well as operations from the Company’sCompany's completed development properties and corporate housing business. Whileproperties. Although the operations of both the non-same store assets and the same store assets have been negativelypositively impacted during the year ended December 31, 2010 similar to the same store assets,2011, the non-same store assets have contributed a greater percentage of total NOI to the Company’sCompany's overall operating results primarily due to 2010 and 2011 acquisitions, increasing occupancy for properties inlease-up and a longer ownership period in 20102011 than 2009.2010. This increase primarily resulted from:
| ▪ | Development and other miscellaneous properties inlease-up of |
50
| ▪ | Properties acquired in 2010 and 2011 of $53.1 million; and |
| ▪ | Newly stabilized development and other miscellaneous properties of | |
See also Note 1917 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’sCompany's segment disclosures.
Fee and asset management revenues, net of fee and asset management expenses, increased approximately $1.5$0.3 million or 53.4%6.0% primarily due to revenues earned on management of the Company's unconsolidated development joint ventures, an increase in revenue earned on management of the Company’sCompany's military housing ventures at Fort Lewis and McChord Air Force Base as well as a decrease in asset managementand lower expenses, partially offset by the unwinding of the Company’sfour institutional joint ventures during 2010 (see Note 6 in the Notes to Consolidated Financial Statements for further discussion).2010.
Property management expenses from continuing operations include off-site expenses associated with the self-management of the Company’sCompany's properties as well as management fees paid to any third party management companies. These expenses increased approximately $9.2$2.0 million or 12.8%2.5%. This increase is primarily attributable to an increase in payroll-related costs, (due primarily to higher health insurance and bonus costs, accelerationwhich is largely a result of long-term compensation expense for retirement eligible employees and the creation of the Company’sCompany's central business group, which moved administrative functions off-site),off-site, and increases in legal and professional fees and education/conference expenses, real estate tax consulting fees and travel expenses.
Depreciation expense from continuing operations, which includes depreciation on non-real estate assets, increased approximately $97.4$31.1 million or 17.4%5.4% primarily as a result of additional depreciation expense on properties acquired in 2009 and 2010,2011, development properties placed in service and capital expenditures for all properties owned.owned, partially offset by a decrease in the amortization of furniture, fixtures and equipment that were fully depreciated.
General and administrative expenses from continuing operations, which include corporate operating expenses, increased approximately $0.9$3.7 million or 2.3%9.3% primarily due to higher overallan increase in payroll-related costs, (due primarily to higher bonus costs), partially offset by lower tax compliance fees and office rents. The Company anticipates that general and administrative expenses will approximate $40.0 million to $42.0 millionwhich is largely a result of the acceleration of long-term compensation expense for the year ending December 31, 2011. The above assumption is based on current expectations and is forward-looking.retirement eligible employees.
Impairment from continuing operations increaseddecreased approximately $34.3$45.4 million due to a $45.4 millionan impairment charge taken during the fourth quarter of 2010 on land held for development related to two potential development projects compared to an $11.1 million impairment charge taken during 2009 on land held for development.that did not reoccur in 2011. See Note 2018 in the Notes to Consolidated Financial Statements for further discussion.
Interest and other income from continuing operations decreasedincreased approximately $11.1$2.8 million or 67.0%55.6% primarily as a result of a decrease in interest earned on cash and cash equivalents and investment securities due to lower interest rateslarger overall cash balances during the year ended December 31, 2011 as compared to the same period in 2010, forfeited deposits for terminated disposition transactions and proceeds received from the Company's final royalty participation in LRO/Rainmaker (a revenue management system), partially offset by insurance/litigation settlement proceeds that occurred during the year ended December 31, 2010 and lower overall balances as well as gains on debt extinguishment and the sale of investment securities recognizeddid not reoccur during the year ended December 31, 2009 that did not reoccur in 2010, partially offset by an increase in insurance/litigation settlement proceeds. The Company anticipates that interest and other income will approximate $2.0 million to $3.0 million for the year ending December 31, 2011. The above assumption is based on current expectations and is forward-looking.
Other expenses from continuing operations increased approximately $5.4$2.5 million or 83.9%21.2% primarily due to an increase in the expensing of overhead (pursuit cost write-offs) as a result of the Company’s decision to reduce its development activities in prior periods as well as an increase in property acquisition costs incurred in conjunction with the Company’s significantly higher acquisition volume in 2010.Company's 2011 acquisitions as well as transaction costs related to the pursuit of Archstone.
Interest expense from continuing operations, including amortization of deferred financing costs, decreasedincreased approximately $27.8$10.7 million or 5.5%2.3% primarily as a result of lower overall debt balances and higher debt extinguishment costs due to the significant debt repurchases in 2009 and lower rates in 2010, partially offset bya full year of interest expense on the $500.0 million mortgage pool that closed in 2009, the $600.0 million of unsecured notes that closed in July 2010 and interest expense on forward starting swaps terminated in conjunction with the issuance of $1.0 billion of unsecured notes, partially offset by lower capitalized interest.interest expense on mortgage notes payable due to lower balances during the year ended December 31, 2011 as compared to the same period in 2010. During the year ended December 31, 2010,2011, the Company capitalized interest costs of approximately $13.0$9.1 million as compared to $34.9$13.0 million for the year ended December 31, 2009.2010. This capitalization of interest primarily relates to consolidated projects under development. The effective interest cost on all indebtedness for the year ended December 31, 20102011 was 5.14%5.30% as compared to 5.62%5.14% for the year ended December 31, 2009. The Company anticipates that interest expense (excluding debt extinguishment costs and convertible debt discounts) will approximate $470.0 million to $480.0 million for the year ending December 31, 2011. The above assumption is based on current expectations and is forward-looking.2010.
Income and other tax expense from continuing operations decreasedincreased approximately $2.5$0.4 million or 88.1% primarily due to a decrease inTennessee and Texas franchise taxes for Texas and a decrease in business taxes for Washington, D.C. The Company anticipates that income and other tax expense will approximate $0.5 million to $1.5 million forrefunds received during the year endingended December 31, 2011. The above assumption is based on current expectations and is forward-looking.2010 that did not reoccur during the year ended December 31, 2011, partially offset by decreases in all other taxes.
Loss from investments in unconsolidated entities decreased approximately $2.1$0.7 million or 73.9% as compared to the year ended December 31, 20092010 primarily due to the Company’s $1.8 million shareunwinding of defeasance costs incurred in conjunction with the extinguishment of cross-collateralized mortgage debt on one of the Company’s partially owned unconsolidatedfour institutional joint ventures taken during the year ended December 31, 2009 that did not reoccur in 2010.
Net gain on sales of unconsolidated entities increaseddecreased approximately $17.4$28.1 million primarily due to larger gainsthe gain on sale and revaluation of seven previously unconsolidated properties that were acquired from the Company’sCompany's joint venture partner and the
51
gain on sale for 27 unconsolidated properties soldthat occurred during the year ended December 31, 2010 compared with unconsolidated properties sold inthat did not reoccur during the same period in 2009.year ended December 31, 2011.
Net lossgain on sales of land parcels increased approximately $1.4$5.6 million primarily due to the lossgain on sale of onea land parcel located in suburban Washington, D.C. during the year ended December 31, 2011 and a loss on sale of a land parcel during the same period in 2010.
Discontinued operations, net decreasedincreased approximately $63.3$478.3 million or 16.7% between the periods under comparison. This decreaseincrease is primarily due to lowerhigher gains from property sales during the year ended December 31, 20102011 compared to the same period in 2009 and the operations of those properties. In addition,2010, partially offset by properties sold in 20102011 which reflect operations for none of or a
38
partial period in 20102011 in contrast to a full or partial period in 2009.2010. See Note 1311 in the Notes to Consolidated Financial Statements for further discussion.
| Results | Statistics | |||||||||||||||||||||||
| Average | ||||||||||||||||||||||||
| Rental | ||||||||||||||||||||||||
| Description | Revenues | Expenses | NOI | Rate (1) | Occupancy | Turnover | ||||||||||||||||||
| 2009 | $ | 1,725,774 | $ | 644,294 | $ | 1,081,480 | $ | 1,352 | 93.8% | 61.0% | ||||||||||||||
| 2008 | $ | 1,778,183 | $ | 645,123 | $ | 1,133,060 | $ | 1,383 | 94.5% | 63.7% | ||||||||||||||
| Change | $ | (52,409) | $ | (829) | $ | (51,580) | $ | (31) | (0.7%) | (2.7%) | ||||||||||||||
| Change | (2.9%) | (0.1%) | (4.6%) | (2.2%) | ||||||||||||||||||||
| % of Actual | ||||||||||||||||||||
| 2009 | ||||||||||||||||||||
| Actual | Actual | $ | % | Operating | ||||||||||||||||
| 2009 | 2008 | Change | Change | Expenses | ||||||||||||||||
| Real estate taxes | $ | 173,113 | $ | 171,234 | $ | 1,879 | 1.1 | % | 26.9 | % | ||||||||||
On-site payroll (1) | 155,912 | 156,601 | (689 | ) | (0.4 | %) | 24.2 | % | ||||||||||||
| Utilities (2) | 100,184 | 99,045 | 1,139 | 1.1 | % | 15.5 | % | |||||||||||||
| Repairs and maintenance (3) | 94,556 | 95,142 | (586 | ) | (0.6 | %) | 14.7 | % | ||||||||||||
| Property management costs (4) | 63,854 | 67,126 | (3,272 | ) | (4.9 | %) | 9.9 | % | ||||||||||||
| Insurance | 21,689 | 20,890 | 799 | 3.8 | % | 3.4 | % | |||||||||||||
| Leasing and advertising | 15,664 | 15,043 | 621 | 4.1 | % | 2.4 | % | |||||||||||||
Otheron-site operating expenses (5) | 19,322 | 20,042 | (720 | ) | (3.6 | %) | 3.0 | % | ||||||||||||
| Same store operating expenses | $ | 644,294 | $ | 645,123 | $ | (829 | ) | (0.1 | %) | 100.0 | % | |||||||||
39
40
Liquidity and Capital Resources
For the Year Ended December 31, 20102012
EQR issues public equity from time to time and guarantees certain debt of ERPOP. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership.
As of January 1, 2010,2012, the Company had approximately $193.3$383.9 million of cash and cash equivalents, its restricted 1031 exchange proceeds totaled $244.3$53.7 million and it had $1.37$1.22 billion available under its revolving credit facility (net of $56.7$31.8 million which was restricted/dedicated to support letters of credit and $75.0 million which had been committed by a now bankrupt financial institution and is not available for borrowing)credit). After taking into effect the various transactions discussed in the following paragraphs and the net cash provided by operating activities, the Company’s cash and cash equivalents balance at December 31, 20102012 was approximately $431.4$612.6 million, its restricted 1031 exchange proceeds totaled $103.9$152.2 million and the amount available on the Company’sits revolving credit facility was $1.28$1.72 billion (net of $147.3$30.2 million which was restricted/dedicated to support letters of credit and net of the $75.0 million discussed above)credit).
During the year ended December 31, 2010,2012, the Company generated proceeds from various transactions, which included the following:
| ▪ | Disposed of 35 consolidated properties, |
| Obtained |
| ▪ | ||
Issued approximately |
| ▪ | Collected $150.0 million in termination fees relating to the pursuit of Archstone. |
During the year ended December 31, 2010,2012, the above proceeds were primarily utilized to:
| ▪ | Acquire |
| Invest |
41
| ▪ | Repay $364.3 million of mortgage loans and $976.0 million of unsecured notes; and |
| ▪ | ||
On November 28, 2012, EQR priced the issuance of 21,850,000 Common Shares at a price of $54.75 per share for total consideration of approximately $1.2 billion, after deducting underwriting commissions of $35.9 million. Concurrent with the closing of this transaction, ERPOP issued 21,850,000 OP Units to EQR.
In September 2009, the CompanyEQR announced the establishment of anAt-The-Market (“ATM”) share offering program which would allow the CompanyEQR to sell up to 17.0 million Common Shares from time to time over the next three years (later increased by 5.7 million Common Shares and extended to February 2014) into the existing trading market at current market prices as well as through negotiated transactions. The CompanyPer the terms of ERPOP's partnership agreement, EQR contributes the net proceeds from all equity offerings to the capital of ERPOP in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis). EQR may, but shall have no obligation to, sell Common Shares through the ATM share offering program in amounts and at times to be determined by the Company.EQR. Actual sales will depend on a variety of factors to be determined by the CompanyEQR from time to time, including (among others) market conditions, the trading price of the Company’sEQR's Common Shares and determinations of the appropriate sources of funding for the Company.EQR. During the year ended December 31, 2012, EQR issued approximately 3.2 million Common Shares at an average price of $60.59 per share for total consideration of approximately $192.3 million through the ATM program. During the year ended
52
December 31, 2011, EQR issued approximately 3.9 million Common Shares at an average price of $52.23 per share for total consideration of approximately $201.9 million through the ATM program. During the year ended December 31, 2010 the Company, EQR issued approximately 6.2 million Common Shares at an average price of $47.45 per share for total consideration of approximately $291.9 million through the ATM program. Through February 15, 2013, EQR has cumulatively issued approximately 16.7 million Common Shares at an average price of $47.45$48.53 per share for total consideration of approximately $291.9$809.9 million. EQR has 6.0 million through the ATM share offering program. During the year ended December 31, 2009, the Company issued approximately 3.5 million Common Shares at an average price of $35.38 per share for total consideration of approximately $123.7 million through the ATM share offering program. In addition, during the first quarter of 2011 through January 13, 2011, the Company has issued approximately 3.0 million Common Shares at an average price of $50.84 per share for total consideration of approximately $154.5 million. The Company has not issued any shares under this program since January 13, 2011. Through February 16, 2011, the Company has cumulatively issued approximately 12.7 million Common Shares at an average price of $44.94 per share for total consideration of approximately $570.1 million. Including its recently filed prospectus supplement which added 5,687,478 Common Shares, the Company has 10.0 million Common Shares remaining available for issuance under the ATM program.program as of February 15, 2013.
On June 16, 2011, the shareholders of EQR approved the Company's 2011 Share Incentive Plan, as amended (the “2011 Plan”). The 2011 Plan reserved 12,980,741 Common Shares for issuance. In conjunction with the approval of the 2011 Plan, no further awards may be granted under the 2002 Share Incentive Plan. The 2011 Plan expires on June 16, 2021. See Note 12 in the Notes to Consolidated Financial Statements for further discussion.
Depending on its analysis of market prices, economic conditions and other opportunities for the investment of available capital, the CompanyEQR may repurchase its Common Shares pursuant to its existing share repurchase program authorized by the Board of Trustees. The Company repurchased $1.9 million (58,130 shares at an average price per share of $32.46) of its Common Shares (all related to the vesting of employee restricted shares) during the year ended December 31, 2010. As of December 31, 2010, the CompanyFebruary 15, 2013, EQR had authorization to repurchase an additional $464.6 million of its shares. No shares were repurchased during 2012. See Note 3 in the Notes to Consolidated Financial Statements for further discussion.
Depending on its analysis of prevailing market conditions, liquidity requirements, contractual restrictions and other factors, the Company may from time to time seek to repurchase and retire its outstanding debt in open market or privately negotiated transactions.
The Company’s total debt summary and debt maturity schedules as of December 31, 20102012 are as follows:
Debt Summary as of December 31, 2010
2012
2012
(Amounts in thousands)
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Maturities | |||||||||||||||
| Amounts (1) | % of Total | Rates (1) | (years) | |||||||||||||
| Secured | $ | 4,762,896 | 47.9 | % | 4.79 | % | 8.1 | |||||||||
| Unsecured | 5,185,180 | 52.1 | % | 4.96 | % | 4.5 | ||||||||||
| Total | $ | 9,948,076 | 100.0 | % | 4.88 | % | 6.2 | |||||||||
| Fixed Rate Debt: | ||||||||||||||||
| Secured – Conventional | $ | 3,831,393 | 38.5 | % | 5.68 | % | 6.9 | |||||||||
| Unsecured – Public/Private | 4,375,860 | 44.0 | % | 5.78 | % | 5.1 | ||||||||||
| Fixed Rate Debt | 8,207,253 | 82.5 | % | 5.73 | % | 5.9 | ||||||||||
| Floating Rate Debt: | ||||||||||||||||
| Secured – Conventional | 326,009 | 3.3 | % | 2.56 | % | 0.7 | ||||||||||
| Secured – Tax Exempt | 605,494 | 6.1 | % | 0.48 | % | 20.4 | ||||||||||
| Unsecured – Public/Private | 809,320 | 8.1 | % | 1.72 | % | 1.3 | ||||||||||
| Unsecured – Revolving Credit Facility | - | - | 0.66 | % | 1.2 | |||||||||||
| Floating Rate Debt | 1,740,823 | 17.5 | % | 1.39 | % | 7.5 | ||||||||||
| Total | $ | 9,948,076 | 100.0 | % | 4.88 | % | 6.2 | |||||||||
| Amounts (1) | % of Total | Weighted Average Rates (1) | Weighted Average Maturities (years) | ||||||||||
| Secured | $ | 3,898,369 | 45.7 | % | 4.96 | % | 7.3 | ||||||
| Unsecured | 4,630,875 | 54.3 | % | 5.10 | % | 5.1 | |||||||
| Total | $ | 8,529,244 | 100.0 | % | 5.04 | % | 6.1 | ||||||
| Fixed Rate Debt: | |||||||||||||
| Secured – Conventional | $ | 3,517,273 | 41.2 | % | 5.49 | % | 6.2 | ||||||
| Unsecured – Public/Private | 4,329,352 | 50.8 | % | 5.70 | % | 5.4 | |||||||
| Fixed Rate Debt | 7,846,625 | 92.0 | % | 5.61 | % | 5.8 | |||||||
| Floating Rate Debt: | |||||||||||||
| Secured – Conventional | 30,516 | 0.4 | % | 3.25 | % | 1.8 | |||||||
| Secured – Tax Exempt | 350,580 | 4.1 | % | 0.23 | % | 19.7 | |||||||
| Unsecured – Public/Private | 301,523 | 3.5 | % | 1.83 | % | 0.2 | |||||||
| Unsecured – Revolving Credit Facility | — | — | 1.35 | % | 1.5 | ||||||||
| Floating Rate Debt | 682,619 | 8.0 | % | 1.35 | % | 9.8 | |||||||
| Total | $ | 8,529,244 | 100.0 | % | 5.04 | % | 6.1 | ||||||
| (1) | Net of the effect of any derivative instruments. Weighted average rates are for the year ended December 31, |
Note: The Company capitalized interest of approximately $13.0$22.5 million and $34.9$9.1 million during the years ended December 31, 20102012 and 2009,2011, respectively.
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Debt Maturity Schedule as of December 31, 2010
2012
2012
(Amounts in thousands)
| Weighted Average | Weighted Average | |||||||||||||||||||||||
| Fixed | Floating | Rates on Fixed | Rates on | |||||||||||||||||||||
| Year | Rate (1) | Rate (1) | Total | % of Total | Rate Debt (1) | Total Debt (1) | ||||||||||||||||||
| 2011 | $ | 906,266 | (2) | $ | 759,725 | (3) | $ | 1,665,991 | 16.8 | % | 5.28 | % | 3.49 | % | ||||||||||
| 2012 | 778,181 | 38,128 | 816,309 | 8.2 | % | 5.65 | % | 5.57 | % | |||||||||||||||
| 2013 | 269,159 | 309,828 | 578,987 | 5.8 | % | 6.72 | % | 4.89 | % | |||||||||||||||
| 2014 | 562,583 | 22,034 | 584,617 | 5.9 | % | 5.31 | % | 5.24 | % | |||||||||||||||
| 2015 | 357,713 | - | 357,713 | 3.6 | % | 6.40 | % | 6.40 | % | |||||||||||||||
| 2016 | 1,167,662 | - | 1,167,662 | 11.7 | % | 5.33 | % | 5.33 | % | |||||||||||||||
| 2017 | 1,355,830 | 456 | 1,356,286 | 13.6 | % | 5.87 | % | 5.87 | % | |||||||||||||||
| 2018 | 80,763 | 44,677 | 125,440 | 1.3 | % | 5.72 | % | 4.28 | % | |||||||||||||||
| 2019 | 801,754 | 20,766 | 822,520 | 8.3 | % | 5.49 | % | 5.36 | % | |||||||||||||||
| 2020 | 1,671,836 | 809 | 1,672,645 | 16.8 | % | 5.50 | % | 5.50 | % | |||||||||||||||
| 2021+ | 255,506 | 544,400 | 799,906 | 8.0 | % | 6.62 | % | 2.67 | % | |||||||||||||||
| Total | $ | 8,207,253 | $ | 1,740,823 | $ | 9,948,076 | 100.0 | % | 5.63 | % | 4.93 | % | ||||||||||||
Fixed Rate (1) | Floating Rate (1) | Weighted Average Rates on Fixed Rate Debt (1) | Weighted Average Rates on Total Debt (1) | ||||||||||||||||||
| Year | Total | % of Total | |||||||||||||||||||
| 2013 | $ | 224,277 | $ | 302,033 | $ | 526,310 | 6.2 | % | 6.93 | % | 4.79 | % | |||||||||
| 2014 | 564,302 | 22,021 | 586,323 | 6.9 | % | 5.31 | % | 5.24 | % | ||||||||||||
| 2015 | 417,812 | — | 417,812 | 4.9 | % | 6.30 | % | 6.30 | % | ||||||||||||
| 2016 | 1,190,538 | — | 1,190,538 | 14.0 | % | 5.34 | % | 5.34 | % | ||||||||||||
| 2017 | 1,446,120 | 456 | 1,446,576 | 17.0 | % | 5.95 | % | 5.95 | % | ||||||||||||
| 2018 | 81,450 | 724 | 82,174 | 1.0 | % | 5.70 | % | 5.70 | % | ||||||||||||
| 2019 | 802,640 | 20,766 | 823,406 | 9.6 | % | 5.49 | % | 5.36 | % | ||||||||||||
| 2020 | 1,672,482 | 809 | 1,673,291 | 19.6 | % | 5.50 | % | 5.50 | % | ||||||||||||
| 2021 | 1,188,905 | 856 | 1,189,761 | 13.9 | % | 4.64 | % | 4.64 | % | ||||||||||||
| 2022 | 2,401 | 905 | 3,306 | — | 5.81 | % | 5.74 | % | |||||||||||||
| 2023+ | 231,464 | 337,699 | 569,163 | 6.7 | % | 6.76 | % | 3.29 | % | ||||||||||||
| Premium/(Discount) | 24,234 | (3,650 | ) | 20,584 | 0.2 | % | N/A | N/A | |||||||||||||
| Total | $ | 7,846,625 | $ | 682,619 | $ | 8,529,244 | 100.0 | % | 5.54 | % | 5.25 | % | |||||||||
| (1) | Net of the effect of any derivative instruments. Weighted average rates are as of December 31, | |
The following table provides a summary of the Company’s unsecured debt as of December 31, 2010:2012:
Unsecured Debt Summary as of December 31, 2010
2012
2012
(Amounts in thousands)
| Unamortized | ||||||||||||||||||
| Coupon | Due | Face | Premium/ | Net | ||||||||||||||
| Rate | Date | Amount | (Discount) | Balance | ||||||||||||||
Fixed Rate Notes: | ||||||||||||||||||
| 6.950% | 03/02/11 | $ | 93,096 | $ | 205 | $ | 93,301 | |||||||||||
| 6.625% | 03/15/12 | 253,858 | (229 | ) | 253,629 | |||||||||||||
| 5.500% | 10/01/12 | 222,133 | (383 | ) | 221,750 | |||||||||||||
| 5.200% | 04/01/13 | (1) | 400,000 | (266 | ) | 399,734 | ||||||||||||
| Fair Value Derivative Adjustments | (1) | (300,000 | ) | - | (300,000 | ) | ||||||||||||
| 5.250% | 09/15/14 | 500,000 | (228 | ) | 499,772 | |||||||||||||
| 6.584% | 04/13/15 | 300,000 | (469 | ) | 299,531 | |||||||||||||
| 5.125% | 03/15/16 | 500,000 | (278 | ) | 499,722 | |||||||||||||
| 5.375% | 08/01/16 | 400,000 | (1,036 | ) | 398,964 | |||||||||||||
| 5.750% | 06/15/17 | 650,000 | (3,306 | ) | 646,694 | |||||||||||||
| 7.125% | 10/15/17 | 150,000 | (441 | ) | 149,559 | |||||||||||||
| 4.750% | 07/15/20 | 600,000 | (4,349 | ) | 595,651 | |||||||||||||
| 7.570% | 08/15/26 | 140,000 | - | 140,000 | ||||||||||||||
| 3.850% | 08/15/26 | (2) | 482,545 | (4,992 | ) | 477,553 | ||||||||||||
| 4,391,632 | (15,772 | ) | 4,375,860 | |||||||||||||||
Floating Rate Notes: | ||||||||||||||||||
| 04/01/13 | (1) | 300,000 | - | 300,000 | ||||||||||||||
| Fair Value Derivative Adjustments | (1) | 9,320 | - | 9,320 | ||||||||||||||
| Term Loan Facility | LIBOR+0.50% | 10/05/11 | (3)(4) | 500,000 | - | 500,000 | ||||||||||||
| 809,320 | - | 809,320 | ||||||||||||||||
Revolving Credit Facility: | LIBOR+0.50% | 02/28/12 | (3)(5) | - | - | - | ||||||||||||
Total Unsecured Debt | $ | 5,200,952 | $ | (15,772 | ) | $ | 5,185,180 | |||||||||||
| Coupon Rate | Due Date | Face Amount | Unamortized Premium/ (Discount) | Net Balance | ||||||||||||
| Fixed Rate Notes: | ||||||||||||||||
| 5.200% | 04/01/13 | (1) | $ | 400,000 | $ | (30 | ) | $ | 399,970 | |||||||
| Fair Value Derivative Adjustments | (1) | (300,000 | ) | — | (300,000 | ) | ||||||||||
| 5.250% | 09/15/14 | 500,000 | (105 | ) | 499,895 | |||||||||||
| 6.584% | 04/13/15 | 300,000 | (248 | ) | 299,752 | |||||||||||
| 5.125% | 03/15/16 | 500,000 | (170 | ) | 499,830 | |||||||||||
| 5.375% | 08/01/16 | 400,000 | (665 | ) | 399,335 | |||||||||||
| 5.750% | 06/15/17 | 650,000 | (2,289 | ) | 647,711 | |||||||||||
| 7.125% | 10/15/17 | 150,000 | (311 | ) | 149,689 | |||||||||||
| 4.750% | 07/15/20 | 600,000 | (3,433 | ) | 596,567 | |||||||||||
| 4.625% | 12/15/21 | 1,000,000 | (3,397 | ) | 996,603 | |||||||||||
| 7.570% | 08/15/26 | 140,000 | — | 140,000 | ||||||||||||
| 4,340,000 | (10,648 | ) | 4,329,352 | |||||||||||||
| Floating Rate Notes: | ||||||||||||||||
| 04/01/13 | (1) | 300,000 | — | 300,000 | ||||||||||||
| Fair Value Derivative Adjustments | (1) | 1,523 | — | 1,523 | ||||||||||||
| 301,523 | — | 301,523 | ||||||||||||||
| Revolving Credit Facility: | LIBOR+1.15% | 7/13/2014 | (2)(3) | — | — | — | ||||||||||
| Total Unsecured Debt | $ | 4,641,523 | $ | (10,648 | ) | $ | 4,630,875 | |||||||||
| (1) |
| (2) | ||
| (3) | As of December 31, |
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maturing April 1, 2018. The interest rate on advances under the new credit facility will be LIBOR plus a spread (currently 1.05%) and an annual facility fee (currently 15 basis points). Both the spread and the facility fee are dependent on the credit rating of the Company's long-term debt. As of January 31, 2013, there was approximately $2.47 billion available on the Company's unsecured revolving credit facility.
Note: In October 2012, the Company paid off the $222.1 million outstanding of its 5.500% public notes and its $500.0 million term loan facility, both at maturity.
An unlimited amount of equity and debt securities remains available for issuance by EQR and the Operating PartnershipERPOP under effective shelf registration statements filed with the SEC. Most recently, EQR and the Operating Partnership filed a universal shelf registration statement for an unlimited amount of equity and debt securities that automatically became automatically effective upon filing with the SEC in October 2010 (under SEC regulations enacted in 2005, the registration statement automaticallyand expires on October 14, 2013 and does not contain a maximum issuance amount).15, 2013. However, as of February 16, 2011,15, 2013, issuances under the ATM share offering program are limited to 10.06.0 million additional shares. Per the terms of ERPOP's partnership agreement, EQR contributes the net proceeds of all equity offerings to the capital of ERPOP in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis) or preference units (on a one-for-one preferred share per preference unit basis).
44
The Company’s “ConsolidatedDebt-to-Total Market Capitalization Ratio” as of December 31, 20102012 is presented in the following table. The Company calculates the equity component of its market capitalization as the sum of (i) the total outstanding Common Shares and assumed conversion of all Units at the equivalent market value of the closing price of the Company’s Common Shares on the New York Stock Exchange and (ii) the liquidation value of all perpetual preferred shares outstanding.
Equity Residential
Capital Structure as of December 31, 2010
2012
2012
(Amounts in thousands except for share/unit and per share amounts)
| Secured Debt | $ | 4,762,896 | 47.9 | % | ||||||||||||||||
| Unsecured Debt | 5,185,180 | 52.1 | % | |||||||||||||||||
Total Debt | 9,948,076 | 100.0 | % | 38.4 | % | |||||||||||||||
| Common Shares (includes Restricted Shares) | 290,197,242 | 95.5 | % | |||||||||||||||||
| Units (includes OP Units and LTIP Units) | 13,612,037 | 4.5 | % | |||||||||||||||||
| Total Shares and Units | 303,809,279 | 100.0 | % | |||||||||||||||||
| Common Share Price at December 31, 2010 | $ | 51.95 | ||||||||||||||||||
| 15,782,892 | 98.7 | % | ||||||||||||||||||
| Perpetual Preferred Equity (see below) | 200,000 | 1.3 | % | |||||||||||||||||
Total Equity | 15,982,892 | 100.0 | % | 61.6 | % | |||||||||||||||
Total Market Capitalization | $ | 25,930,968 | 100.0 | % |
| Secured Debt | $ | 3,898,369 | 45.7 | % | |||||||||||||
| Unsecured Debt | 4,630,875 | 54.3 | % | ||||||||||||||
| Total Debt | 8,529,244 | 100.0 | % | 30.7 | % | ||||||||||||
| Common Shares (includes Restricted Shares) | 325,054,654 | 95.9 | % | ||||||||||||||
| Units (includes OP Units and LTIP Units) | 13,968,758 | 4.1 | % | ||||||||||||||
| Total Shares and Units | 339,023,412 | 100.0 | % | ||||||||||||||
| Common Share Price at December 31, 2012 | $ | 56.67 | |||||||||||||||
| 19,212,457 | 99.7 | % | |||||||||||||||
| Perpetual Preferred Equity (see below) | 50,000 | 0.3 | % | ||||||||||||||
| Total Equity | 19,262,457 | 100.0 | % | 69.3 | % | ||||||||||||
| Total Market Capitalization | $ | 27,791,701 | 100.0 | % | |||||||||||||
Equity Residential
Perpetual Preferred Equity as of December 31, 2010
2012
2012
(Amounts in thousands except for share and per share amounts)
| Annual | Annual | Weighted | ||||||||||||||||||||||
| Redemption | Outstanding | Liquidation | Dividend | Dividend | Average | |||||||||||||||||||
| Series | Date | Shares | Value | Per Share | Amount | Rate | ||||||||||||||||||
| Preferred Shares: | ||||||||||||||||||||||||
| 8.29% Series K | 12/10/26 | 1,000,000 | $ | 50,000 | $ | 4.145 | $ | 4,145 | ||||||||||||||||
| 6.48% Series N | 6/19/08 | 600,000 | 150,000 | 16.20 | 9,720 | |||||||||||||||||||
| Total Perpetual Preferred Equity | 1,600,000 | $ | 200,000 | $ | 13,865 | 6.93 | % | |||||||||||||||||
| Series | Redemption Date | Outstanding Shares | Liquidation Value | Annual Dividend Per Share | Annual Dividend Amount | ||||||||||||
| Preferred Shares: | |||||||||||||||||
| 8.29% Series K | 12/10/26 | 1,000,000 | $ | 50,000 | $ | 4.145 | $ | 4,145 | |||||||||
| Total Perpetual Preferred Equity | 1,000,000 | $ | 50,000 | $ | 4,145 | ||||||||||||
On November 1, 2010,August 20, 2012, the Company redeemed its Series E and Series HN Cumulative ConvertibleRedeemable Preferred Shares for cash consideration of $0.8$150.0 million and 355,539 Commonplus accrued dividends through the redemption date. As a result of this redemption, the Company recorded the write-off of approximately $5.1 million in original issuance costs as a premium on the redemption of Preferred Shares.
The Operating Partnership's “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2012 is presented in the following table. The Operating Partnership calculates the equity component of its market capitalization as the sum of (i) the total outstanding Units at the equivalent market value of the closing price of the Company's Common Shares on the New York Stock Exchange and (ii) the liquidation value of all perpetual preference units outstanding.
55
ERP Operating Limited Partnership
Capital Structure as of December 31, 2012
(Amounts in thousands except for unit and per unit amounts)
| Secured Debt | $ | 3,898,369 | 45.7 | % | ||||||||||||
| Unsecured Debt | 4,630,875 | 54.3 | % | |||||||||||||
| Total Debt | 8,529,244 | 100.0 | % | 30.7 | % | |||||||||||
| Total outstanding Units | 339,023,412 | |||||||||||||||
| Common Share Price at December 31, 2012 | $ | 56.67 | ||||||||||||||
| 19,212,457 | 99.7 | % | ||||||||||||||
| Perpetual Preference Units (see below) | 50,000 | 0.3 | % | |||||||||||||
| Total Equity | 19,262,457 | 100.0 | % | 69.3 | % | |||||||||||
| Total Market Capitalization | $ | 27,791,701 | 100.0 | % | ||||||||||||
ERP Operating Limited Partnership
Perpetual Preference Units as of December 31, 2012
(Amounts in thousands except for unit and per unit amounts)
| Series | Redemption Date | Outstanding Units | Liquidation Value | Annual Dividend Per Unit | Annual Dividend Amount | ||||||||||||
| Preference Units: | |||||||||||||||||
| 8.29% Series K | 12/10/26 | 1,000,000 | $ | 50,000 | $ | 4.145 | $ | 4,145 | |||||||||
| Total Perpetual Preference Units | 1,000,000 | $ | 50,000 | $ | 4,145 | ||||||||||||
On August 20, 2012, the Operating Partnership redeemed its Series N Cumulative Redeemable Preference Units for cash consideration of $150.0 million plus accrued dividends through the redemption date, in conjunction with the concurrent redemption of the corresponding Company Preferred Shares. As a result of this redemption, the Operating Partnership recorded the write-off of approximately $5.1 million in original issuance costs as a premium on the redemption of Preference Units.
The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and certain scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under itsthe Company's revolving credit facility. Under normal operating conditions, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. However, there may be times when the Company experiences shortfalls in its coverage of distributions, which may cause the Company to consider reducing its distributionsand/or using the proceeds from property dispositions or additional financing transactions to make up the difference. Should these shortfalls occur for lengthy periods of time or be material in nature, the Company’s financial condition may be adversely affected and it may not be able to maintain its current distribution levels. The Company reduced its quarterly common share dividend beginning with the dividend for the third quarter of 2009, from $0.4825 per share to $0.3375 per share.
During the fourth quarter of 2010, the Company announced a new dividend policy which it believes will generate payouts more closely aligned with the actual annual operating results of the Company’s core business and provide transparency to investors. The Company intends to pay an annual cash dividend equal to approximately 65% of Normalized FFO.FFO for the year. During the year ended December 31, 2010,2012, the Company paid $0.3375 per share for each of the first three quarters and $0.4575$0.7675 per share for the fourth quarter to bring the total payment for the year (an annual rate of $1.47$1.78 per share) to approximately 65% of Normalized FFO. The Company expects to pay $0.40 per share for each of the first three quarters of 2013. This represents an increase from the $0.3375 per share paid in each of the first three quarters of 2012. The Company anticipates the expected dividend payout will be $1.56range from $1.82 to $1.62$1.89 per share ($0.33750.40 per share for each of the first three quarters with the balance for the fourth quarter) for the year ending December 31, 2011.2013. All future dividends remain subject to the discretion of the Board of Trustees. The above assumption is based on current expectations and is forward-looking. While the newour dividend policy makes it less likely that the Companywe will over distribute, it will also lead to a dividend reduction more quickly than in the pasta fixed dividend policy should operating results deteriorate. However, whether due to changes in the dividend policy or otherwise, there may be times when the Company experiences shortfalls in its coverage of distributions, which may cause the Company to consider reducing its distributions and/or using the proceeds from property dispositions or additional financing transactions to make up the difference. Should these shortfalls occur for lengthy periods of time or be material in nature, the Company's financial condition may be adversely affected and it may not be able to maintain its current distribution levels. The Company believes that its expected 20112013 operating cash flow will be sufficient to cover capital expenditures and distributions.
45
The Company also expects to meet its long-term liquidity requirements, such as scheduled unsecured note and mortgage debt maturities, property acquisitions, financing of construction and development activities and capital improvements through the issuance of secured and unsecured debt and equity securities, including additional OP Units, and proceeds received from the
56
disposition of certain properties as well asand joint ventures. In addition, the Company has significant unencumbered properties available to secure additional mortgage borrowings in the event that the public capital markets are unavailable or the cost of alternative sources of capital is too high. The fair value of and cash flow from these unencumbered properties are in excess of the requirements the Company must maintain in order to comply with covenants under its unsecured notes and line of credit. Of the $19.7$21.0 billion in investment in real estate on the Company’s balance sheet at December 31, 2010, $12.62012, $15.1 billion or 63.9%,71.6% was unencumbered. However, there can be no assurances that these sources of capital will be available to the Company in the future on acceptable terms or otherwise.
In July 2011, Moody’s raised its outlook for both the Company and the Operating Partnership from negative outlook to stable outlook.
See Note 2018 in the Notes to Consolidated Financial Statements for discussion of the events which occurred subsequent to December 31, 2010.2012.
Capitalization of Fixed Assets and Improvements to Real Estate
Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in two major categories and several subcategories:
| ▪ | Replacements(inside the apartment unit). These include: |
flooring such as carpets, hardwood, vinyl or tile;
appliances;
mechanical equipment such as individual furnace/air units, hot water heaters, etc;
furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc; and
blinds.
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All replacements are depreciated over a five-yearfive to ten-year estimated useful life. We expense as incurred all make-ready maintenance and turnover costs such as cleaning, interior painting of individual apartment units and the repair of any replacement item noted above.
| ▪ | Building improvements(outside the apartment unit). These include: |
| roof replacement and major repairs; |
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paving or major resurfacing of parking lots, curbs and sidewalks;
amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices; major building mechanical equipment systems; interior and exterior structural repair and exterior painting and siding; major landscaping and grounds improvement; and vehicles and office and maintenance equipment. |
All building improvements are depreciated over a five to ten-yearfifteen-year estimated useful life. We capitalize building improvements and upgrades only if the item: (i) exceeds $2,500 (selected projects must exceed $10,000); (ii) extends the useful life of the asset; and (iii) improves the value of the asset.
For the year ended December 31, 2010,2012, our actual improvements to real estate totaled approximately $138.2 million.$152.8 million. This includes the following (amounts in thousands except for apartment unit and per apartment unit amounts):
Capital Expenditures to Real Estate
For the Year Ended December 31, 20102012
| Total | Avg. Per | Avg. Per | Avg. Per | |||||||||||||||||||||||||
| Apartment | Apartment | Building | Apartment | Apartment | ||||||||||||||||||||||||
| Units (1) | Replacements (2) | Unit | Improvements | Unit | Total | Unit | ||||||||||||||||||||||
| Same Store Properties (3) | 112,042 | $ | 70,620 | $ | 630 | $ | 54,118 | $ | 483 | $ | 124,738 | $ | 1,113 | |||||||||||||||
| Non-Same Store Properties (4) | 12,824 | 4,180 | 457 | 5,547 | 607 | 9,727 | 1,064 | |||||||||||||||||||||
| Other (5) | - | 1,509 | 2,234 | 3,743 | ||||||||||||||||||||||||
| Total | 124,866 | $ | 76,309 | $ | 61,899 | $ | 138,208 | |||||||||||||||||||||
Total Apartment Units (1) | Replacements (2) | Avg. Per Apartment Unit | Building Improvements | Avg. Per Apartment Unit | Total | Avg. Per Apartment Unit | |||||||||||||||||||||
| Same Store Properties (3) | 98,577 | $ | 65,490 | $ | 664 | $ | 55,097 | $ | 559 | $ | 120,587 | $ | 1,223 | ||||||||||||||
| Non-Same Store Properties (4) | 11,754 | 7,599 | 706 | 21,788 | 2,026 | 29,387 | 2,732 | ||||||||||||||||||||
| Other (5) | — | 1,723 | 1,131 | 2,854 | |||||||||||||||||||||||
| Total | 110,331 | $ | 74,812 | $ | 78,016 | $ | 152,828 | ||||||||||||||||||||
| (1) | Total Apartment Units – Excludes |
| (2) | Replacements – Includes new expenditures inside the apartment units such as appliances, mechanical equipment, fixtures and flooring, including carpeting. Replacements for same store properties also include |
| (3) | Same Store Properties – Primarily includes all properties acquired or completed and stabilized prior to January 1, |
| (4) | Non-Same Store Properties – Primarily includes all properties acquired during |
| (5) | Other – Primarily includes expenditures for properties sold during the period. |
For the year ended December 31, 2009,2011, our actual improvements to real estate totaled approximately $123.9$144.5 million. This includes the following (amounts in thousands except for apartment unit and per apartment unit amounts):
Capital Expenditures to Real Estate
For the Year Ended December 31, 20092011
| Total | Avg. Per | Avg. Per | Avg. Per | |||||||||||||||||||||||||
| Apartment | Apartment | Building | Apartment | Apartment | ||||||||||||||||||||||||
| Units (1) | Replacements (2) | Unit | Improvements | Unit | Total | Unit | ||||||||||||||||||||||
| Same Store Properties(3) | 113,598 | $ | 69,808 | $ | 614 | $ | 44,611 | $ | 393 | $ | 114,419 | $ | 1,007 | |||||||||||||||
| Non-Same Store Properties(4) | 10,728 | 2,361 | 240 | 3,675 | 374 | 6,036 | 614 | |||||||||||||||||||||
| Other(5) | - | 2,130 | 1,352 | 3,482 | ||||||||||||||||||||||||
| Total | 124,326 | $ | 74,299 | $ | 49,638 | $ | 123,937 | |||||||||||||||||||||
Total Apartment Units (1) | Replacements (2) | Avg. Per Apartment Unit | Building Improvements | Avg. Per Apartment Unit | Total | Avg. Per Apartment Unit | |||||||||||||||||||||
| Same Store Properties (3) | 101,312 | $ | 70,937 | $ | 700 | $ | 49,674 | $ | 490 | $ | 120,611 | $ | 1,190 | ||||||||||||||
| Non-Same Store Properties (4) | 15,761 | 7,505 | 658 | 13,827 | 1,211 | 21,332 | 1,869 | ||||||||||||||||||||
| Other (5) | — | 2,147 | 362 | 2,509 | |||||||||||||||||||||||
| Total | 117,073 | $ | 80,589 | $ | 63,863 | $ | 144,452 | ||||||||||||||||||||
| (1) | Total Apartment Units – Excludes |
| (2) | Replacements – |
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rehabs (primarily kitchens and baths) on 5,416 apartment units (equating to about $7,000 per apartment unit rehabbed) designed to reposition these assets for higher rental levels in their respective markets.
| (3) | Same Store Properties – Primarily includes all properties acquired or completed and stabilized prior to January 1, |
| (4) | Non-Same Store Properties – Primarily includes all properties acquired during |
| (5) | Other – Primarily includes expenditures for properties sold during the period. |
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For 2011,2013, the Company estimates that it will spend approximately $1,200$1,500 per apartment unit of capital expenditures for the approximately 80,000 apartment units that the Company expects to have in its annual same store propertiesset after the completion of its planned 2013 dispositions, inclusive of apartment unit renovation/rehab costs, or $850$1,150 per apartment unit excluding apartment unit renovation/rehab costs. For 2011,2013, the Company estimates that it will spend $41.0$40.8 million rehabbing 5,5005,000 apartment units (equating to about $7,500$8,150 per apartment unit rehabbed). The above assumptions are based on current expectations and are forward-looking.
During the year ended December 31, 2010,2012, the Company’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company’s property management offices and its corporate offices, were approximately $3.0$8.8 million. The Company expects to fund approximately $8.5$4.2 million in total additions to non-real estate property in 2011.2013. The above assumption is based on current expectations and is forward-looking.
Improvements to real estate and additions to non-real estate property are generally funded from net cash provided by operating activities and from investment cash flow.
Derivative Instruments
In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company seeks to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.
The Company may also use derivatives to manage its exposure to foreign exchange rates (should the Archstone transaction close) or manage commodity prices in the daily operations of the business.
The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from these instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives it currently has in place.
See Note 119 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at December 31, 2010.2012.
Other
Total distributions paid in January 20112013 amounted to $141.3$260.2 million (excluding distributions on Partially Owned Properties), which included certain distributions declared during the fourth quarter ended December 31, 2010.2012.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company had co-investedadmitted an 80% institutional partner to two separate entities/transactions (one in various properties that were unconsolidatedDecember 2010 and accountedthe other in August 2011), each owning a developable land parcel, in exchange for under$40.1 million in cash and retained a 20% equity interest in both of these entities. These land parcels are now unconsolidated. Total project costs are approximately $232.8 million and construction will be predominantly funded with two separate long-term, non-recourse secured loans from the equity methodpartner. While the Company is the managing member of accounting. Managementboth of the joint ventures, is responsible for constructing both of the projects and has given certain construction cost overrun guarantees, all major decisions are made jointly, the large majority of funding is provided by the partner and the partner has significant involvement in and oversight of the ongoing projects. The Company currently has no further funding obligations related to these projects. The Company's strategy with respect to these ventures was to reduce its financial risk related to the development of the properties. However, management does not believe that these investments hadhave a materially different impact upon the Company’sCompany's liquidity, cash flows, capital resources, credit or market risk than its other property management and ownershipconsolidated development activities. During 2000 and 2001, the Company entered into institutional ventures with an unaffiliated partner. At the respective closing dates, the Company sold
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detail in Note 1816 of the Company’s Consolidated Financial Statements.
See also Notes 2 and 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in partially owned entities.
The following table summarizes the Company’s contractual obligations for the next five years and thereafter as of December 31, 2010:
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| Payments Due by Year (in thousands) | ||||||||||||||||||||||||||||
| Contractual Obligations | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||||
| Debt: | ||||||||||||||||||||||||||||
| Principal (a) | $ | 1,665,991 | $ | 816,309 | $ | 578,987 | $ | 584,617 | $ | 357,713 | $ | 5,944,459 | $ | 9,948,076 | ||||||||||||||
| Interest (b) | 460,045 | 407,793 | 367,642 | 344,599 | 309,043 | 1,016,041 | 2,905,163 | |||||||||||||||||||||
| Operating Leases: | ||||||||||||||||||||||||||||
| Minimum Rent Payments (c) | 5,478 | 4,285 | 4,431 | 4,736 | 4,729 | 320,928 | 344,587 | |||||||||||||||||||||
| Other Long-Term Liabilities: | ||||||||||||||||||||||||||||
| Deferred Compensation (d) | 1,457 | 1,770 | 1,485 | 1,677 | 1,677 | 9,182 | 17,248 | |||||||||||||||||||||
| Total | $ | 2,132,971 | $ | 1,230,157 | $ | 952,545 | $ | 935,629 | $ | 673,162 | $ | 7,290,610 | $ | 13,215,074 | ||||||||||||||
| Payments Due by Year (in thousands) | ||||||||||||||||||||||||||||
| Contractual Obligations | 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | |||||||||||||||||||||
| Debt: | ||||||||||||||||||||||||||||
| Principal (a) | $ | 526,310 | $ | 586,323 | $ | 417,812 | $ | 1,190,538 | $ | 1,446,576 | $ | 4,361,685 | $ | 8,529,244 | ||||||||||||||
| Interest (b) | 432,884 | 409,840 | 371,992 | 322,266 | 246,237 | 751,660 | 2,534,879 | |||||||||||||||||||||
| Operating Leases: | ||||||||||||||||||||||||||||
| Minimum Rent Payments (c) | 7,462 | 8,862 | 9,501 | 9,462 | 9,415 | 691,304 | 736,006 | |||||||||||||||||||||
| Other Long-Term Liabilities: | ||||||||||||||||||||||||||||
| Deferred Compensation (d) | 1,179 | 1,691 | 1,691 | 1,691 | 1,692 | 6,529 | 14,473 | |||||||||||||||||||||
| Total | $ | 967,835 | $ | 1,006,716 | $ | 800,996 | $ | 1,523,957 | $ | 1,703,920 | $ | 5,811,178 | $ | 11,814,602 | ||||||||||||||
| (a) | Amounts include aggregate principal payments |
| (b) | Amounts include interest expected to be incurred on the Company’s secured and unsecured debt based on obligations outstanding at December 31, |
| (c) | Minimum basic rent due for various office space the Company leases and fixed base rent due on ground leases for |
| (d) | Estimated payments to the |
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or different presentation of our financial statements.
The Company’s significant accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements. These policies were followed in preparing the consolidated financial statements at and for the year ended December 31, 20102012 and are consistent with the year ended December 31, 2009.
2011.
The Company has identified five significant accounting policies as critical accounting policies. These critical accounting policies are those that have the most impact on the reporting of our financial condition and those requiring significant judgments and estimates. With respect to these critical accounting policies, management believes that the application of judgments and estimates is consistently applied and produces financial information that fairly presents the results of operations for all periods presented. The five critical accounting policies are:
Acquisition of Investment Properties
The Company allocates the purchase price of properties to net tangible and identified intangible assets acquired based on their fair values. In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.
Impairment of Long-Lived Assets
The Company periodically evaluates its long-lived assets, including its investments in real estate, for indicators of impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal and environmental concerns, as well as the Company’s ability to hold and its intent with regard to each asset. Future events could occur which would cause the Company to conclude that impairment indicators exist and an
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impairment loss is warranted.
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