UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12252 (Equity Residential)
Commission File Number: 0-24920 (ERP Operating Limited Partnership)
EQUITY RESIDENTIAL
ERP OPERATING LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
Maryland (Equity Residential) | 13-3675988 (Equity Residential) |
Illinois (ERP Operating Limited Partnership) | 36-3894853 (ERP Operating Limited Partnership) |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
Two North Riverside Plaza, Chicago, Illinois 60606 | (312) 474-1300 |
(Address of Principal Executive Offices) (Zip Code) | (Registrant's Telephone Number, Including Area Code) |
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.
Equity Residential Yes x No ¨ | ERP Operating Limited Partnership Yes x No o |
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 of Regulation 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).
Equity Residential Yes x No ¨ | ERP Operating Limited Partnership Yes x No o |
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” in Rule 12b-2 of the Exchange Act.
Equity Residential: | |
Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | 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 in Rule 12b-2 of the Exchange Act).
Equity Residential Yes ¨ No x | ERP Operating Limited Partnership Yes ¨ No x |
The number of EQR Common Shares of Beneficial Interest, $0.01 par value, outstanding on July 26, 2012 was 301,014,635.
EXPLANATORY NOTE
This report combines the reports on Form 10-Q for the quarterly period ended June 30, 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 June 30, 2012 owned an approximate 95.4% ownership interest in, ERPOP. The remaining 4.6% 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 issued to the public.
The Company believes that combining the reports on Form 10-Q 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 public 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 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, including additional OP Units, 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.
TABLE OF CONTENTS
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EQUITY RESIDENTIAL
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share amounts)
(Unaudited)
June 30, 2012 | December 31, 2011 | |||||||
ASSETS | ||||||||
Investment in real estate | ||||||||
Land | $ | 4,565,646 | $ | 4,367,816 | ||||
Depreciable property | 15,886,832 | 15,554,740 | ||||||
Projects under development | 198,912 | 160,190 | ||||||
Land held for development | 372,108 | 325,200 | ||||||
Investment in real estate | 21,023,498 | 20,407,946 | ||||||
Accumulated depreciation | (4,777,887 | ) | (4,539,583 | ) | ||||
Investment in real estate, net | 16,245,611 | 15,868,363 | ||||||
Cash and cash equivalents | 44,585 | 383,921 | ||||||
Investments in unconsolidated entities | 17,886 | 12,327 | ||||||
Deposits – restricted | 193,892 | 152,237 | ||||||
Escrow deposits – mortgage | 9,139 | 10,692 | ||||||
Deferred financing costs, net | 41,854 | 44,608 | ||||||
Other assets | 161,445 | 187,155 | ||||||
Total assets | $ | 16,714,412 | $ | 16,659,303 | ||||
LIABILITIES AND EQUITY | ||||||||
Liabilities: | ||||||||
Mortgage notes payable | $ | 4,004,496 | $ | 4,111,487 | ||||
Notes, net | 5,354,768 | 5,609,574 | ||||||
Lines of credit | 35,000 | — | ||||||
Accounts payable and accrued expenses | 72,647 | 35,206 | ||||||
Accrued interest payable | 82,695 | 88,121 | ||||||
Other liabilities | 430,650 | 291,289 | ||||||
Security deposits | 68,265 | 65,286 | ||||||
Distributions payable | 109,463 | 179,079 | ||||||
Total liabilities | 10,157,984 | 10,380,042 | ||||||
Commitments and contingencies | ||||||||
Redeemable Noncontrolling Interests – Operating Partnership | 452,203 | 416,404 | ||||||
Equity: | ||||||||
Shareholders’ equity: | ||||||||
Preferred Shares of beneficial interest, $0.01 par value; 100,000,000 shares authorized; 1,600,000 shares issued and outstanding as of June 30, 2012 and December 31, 2011 | 200,000 | 200,000 | ||||||
Common Shares of beneficial interest, $0.01 par value; 1,000,000,000 shares authorized; 300,961,645 shares issued and outstanding as of June 30, 2012 and 297,508,185 shares issued and outstanding as of December 31, 2011 | 3,010 | 2,975 | ||||||
Paid in capital | 5,226,088 | 5,047,186 | ||||||
Retained earnings | 654,235 | 615,572 | ||||||
Accumulated other comprehensive (loss) | (198,075 | ) | (196,718 | ) | ||||
Total shareholders’ equity | 5,885,258 | 5,669,015 | ||||||
Noncontrolling Interests: | ||||||||
Operating Partnership | 144,521 | 119,536 | ||||||
Partially Owned Properties | 74,446 | 74,306 | ||||||
Total Noncontrolling Interests | 218,967 | 193,842 | ||||||
Total equity | 6,104,225 | 5,862,857 | ||||||
Total liabilities and equity | $ | 16,714,412 | $ | 16,659,303 | ||||
See accompanying notes
2
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
REVENUES | ||||||||||||||||
Rental income | $ | 1,063,162 | $ | 939,121 | $ | 541,569 | $ | 478,419 | ||||||||
Fee and asset management | 4,276 | 3,754 | 2,212 | 1,948 | ||||||||||||
Total revenues | 1,067,438 | 942,875 | 543,781 | 480,367 | ||||||||||||
EXPENSES | ||||||||||||||||
Property and maintenance | 218,004 | 202,157 | 107,024 | 98,571 | ||||||||||||
Real estate taxes and insurance | 118,768 | 106,610 | 63,126 | 54,803 | ||||||||||||
Property management | 44,417 | 43,148 | 21,008 | 20,767 | ||||||||||||
Fee and asset management | 2,487 | 1,957 | 1,180 | 1,009 | ||||||||||||
Depreciation | 346,079 | 311,891 | 172,338 | 154,452 | ||||||||||||
General and administrative | 27,082 | 22,341 | 13,394 | 10,908 | ||||||||||||
Total expenses | 756,837 | 688,104 | 378,070 | 340,510 | ||||||||||||
Operating income | 310,601 | 254,771 | 165,711 | 139,857 | ||||||||||||
Interest and other income | 431 | 1,288 | 259 | 277 | ||||||||||||
Other expenses | (16,584 | ) | (6,790 | ) | (9,517 | ) | (4,630 | ) | ||||||||
Interest: | ||||||||||||||||
Expense incurred, net | (234,247 | ) | (240,443 | ) | (115,618 | ) | (119,997 | ) | ||||||||
Amortization of deferred financing costs | (7,037 | ) | (7,401 | ) | (4,063 | ) | (4,396 | ) | ||||||||
Income before income and other taxes, net gain on sales of land parcels and discontinued operations | 53,164 | 1,425 | 36,772 | 11,111 | ||||||||||||
Income and other tax (expense) benefit | (405 | ) | (386 | ) | (214 | ) | (202 | ) | ||||||||
Net gain on sales of land parcels | — | 4,217 | — | 4,217 | ||||||||||||
Income from continuing operations | 52,759 | 5,256 | 36,558 | 15,126 | ||||||||||||
Discontinued operations, net | 207,723 | 709,563 | 71,757 | 566,627 | ||||||||||||
Net income | 260,482 | 714,819 | 108,315 | 581,753 | ||||||||||||
Net (income) attributable to Noncontrolling Interests: | ||||||||||||||||
Operating Partnership | (11,150 | ) | (31,533 | ) | (4,732 | ) | (25,758 | ) | ||||||||
Partially Owned Properties | (769 | ) | (31 | ) | (319 | ) | (71 | ) | ||||||||
Net income attributable to controlling interests | 248,563 | 683,255 | 103,264 | 555,924 | ||||||||||||
Preferred distributions | (6,933 | ) | (6,933 | ) | (3,467 | ) | (3,467 | ) | ||||||||
Net income available to Common Shares | $ | 241,630 | $ | 676,322 | $ | 99,797 | $ | 552,457 | ||||||||
Earnings per share – basic: | ||||||||||||||||
Income (loss) from continuing operations available to Common Shares | $ | 0.14 | $ | (0.01 | ) | $ | 0.10 | $ | 0.04 | |||||||
Net income available to Common Shares | $ | 0.81 | $ | 2.30 | $ | 0.33 | $ | 1.88 | ||||||||
Weighted average Common Shares outstanding | 299,499 | 293,784 | 300,193 | 294,663 | ||||||||||||
Earnings per share – diluted: | ||||||||||||||||
Income (loss) from continuing operations available to Common Shares | $ | 0.14 | $ | (0.01 | ) | $ | 0.10 | $ | 0.04 | |||||||
Net income available to Common Shares | $ | 0.80 | $ | 2.30 | $ | 0.33 | $ | 1.85 | ||||||||
Weighted average Common Shares outstanding | 316,457 | 293,784 | 317,648 | 312,199 | ||||||||||||
Distributions declared per Common Share outstanding | $ | 0.6750 | $ | 0.6750 | $ | 0.3375 | $ | 0.3375 | ||||||||
See accompanying notes
3
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Amounts in thousands except per share data)
(Unaudited)
Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Comprehensive income: | ||||||||||||||||
Net income | $ | 260,482 | $ | 714,819 | $ | 108,315 | $ | 581,753 | ||||||||
Other comprehensive (loss): | ||||||||||||||||
Other comprehensive (loss) – derivative instruments: | ||||||||||||||||
Unrealized holding (losses) arising during the period | (8,642 | ) | (25,119 | ) | (11,860 | ) | (31,201 | ) | ||||||||
Losses reclassified into earnings from other comprehensive income | 7,203 | 1,891 | 3,640 | 935 | ||||||||||||
Other comprehensive income – other instruments: | ||||||||||||||||
Unrealized holding gains arising during the period | 82 | 493 | 118 | 347 | ||||||||||||
Other comprehensive (loss) | (1,357 | ) | (22,735 | ) | (8,102 | ) | (29,919 | ) | ||||||||
Comprehensive income | 259,125 | 692,084 | 100,213 | 551,834 | ||||||||||||
Comprehensive (income) attributable to Noncontrolling Interests | (11,919 | ) | (31,564 | ) | (5,051 | ) | (25,829 | ) | ||||||||
Comprehensive income attributable to controlling interests | $ | 247,206 | $ | 660,520 | $ | 95,162 | $ | 526,005 | ||||||||
See accompanying notes
4
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 260,482 | $ | 714,819 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 348,106 | 330,930 | ||||||
Amortization of deferred financing costs | 7,037 | 8,048 | ||||||
Amortization of discounts and premiums on debt | (3,538 | ) | 851 | |||||
Amortization of deferred settlements on derivative instruments | 6,935 | 1,624 | ||||||
Write-off of pursuit costs | 3,565 | 3,038 | ||||||
Distributions from unconsolidated entities – return on capital | 240 | 42 | ||||||
Net (gain) on sales of land parcels | — | (4,217 | ) | |||||
Net (gain) on sales of discontinued operations | (204,053 | ) | (682,236 | ) | ||||
Loss on debt extinguishments | 272 | — | ||||||
Unrealized (gain) loss on derivative instruments | (1 | ) | 2,569 | |||||
Compensation paid with Company Common Shares | 16,878 | 12,389 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in deposits – restricted | (1,330 | ) | 1,971 | |||||
(Increase) in other assets | (23,017 | ) | (4,456 | ) | ||||
Increase in accounts payable and accrued expenses | 35,794 | 35,165 | ||||||
(Decrease) in accrued interest payable | (5,426 | ) | (6,047 | ) | ||||
Increase (decrease) in other liabilities | 141,090 | (21,980 | ) | |||||
Increase (decrease) in security deposits | 2,979 | (33 | ) | |||||
Net cash provided by operating activities | 586,013 | 392,477 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Investment in real estate – acquisitions | (520,775 | ) | (475,397 | ) | ||||
Investment in real estate – development/other | (78,210 | ) | (63,558 | ) | ||||
Improvements to real estate | (68,319 | ) | (64,863 | ) | ||||
Additions to non-real estate property | (4,700 | ) | (3,987 | ) | ||||
Interest capitalized for real estate and unconsolidated entities under development | (10,055 | ) | (3,683 | ) | ||||
Proceeds from disposition of real estate, net | 333,015 | 1,194,005 | ||||||
Investments in unconsolidated entities | (5,420 | ) | (412 | ) | ||||
(Increase) in deposits on real estate acquisitions and investments, net | (40,539 | ) | (171,152 | ) | ||||
Decrease in mortgage deposits | 1,553 | 1,688 | ||||||
Acquisition of Noncontrolling Interests – Partially Owned Properties | (87 | ) | (8,575 | ) | ||||
Net cash (used for) provided by investing activities | (393,537 | ) | 404,066 | |||||
See accompanying notes
5
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Loan and bond acquisition costs | $ | (4,283 | ) | $ | (1,466 | ) | ||
Mortgage notes payable: | ||||||||
Proceeds | — | 135,230 | ||||||
Restricted cash | 214 | (11,663 | ) | |||||
Lump sum payoffs | (198,763 | ) | (632,477 | ) | ||||
Scheduled principal repayments | (7,575 | ) | (8,366 | ) | ||||
Loss on debt extinguishments | (272 | ) | — | |||||
Notes, net: | ||||||||
Lump sum payoffs | (253,858 | ) | (93,096 | ) | ||||
Lines of credit: | ||||||||
Proceeds | 105,000 | — | ||||||
Repayments | (70,000 | ) | — | |||||
Proceeds from sale of Common Shares | 152,058 | 154,508 | ||||||
Proceeds from Employee Share Purchase Plan (ESPP) | 4,523 | 3,501 | ||||||
Proceeds from exercise of options | 31,281 | 83,534 | ||||||
Payment of offering costs | (1,907 | ) | (2,611 | ) | ||||
Other financing activities, net | (33 | ) | (33 | ) | ||||
Contributions – Noncontrolling Interests – Partially Owned Properties | 2,935 | — | ||||||
Contributions – Noncontrolling Interests – Operating Partnership | 5 | — | ||||||
Distributions: | ||||||||
Common Shares | (269,755 | ) | (231,995 | ) | ||||
Preferred Shares | (6,933 | ) | (6,933 | ) | ||||
Noncontrolling Interests – Operating Partnership | (12,224 | ) | (10,866 | ) | ||||
Noncontrolling Interests – Partially Owned Properties | (2,225 | ) | (454 | ) | ||||
Net cash (used for) financing activities | (531,812 | ) | (623,187 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (339,336 | ) | 173,356 | |||||
Cash and cash equivalents, beginning of period | 383,921 | 431,408 | ||||||
Cash and cash equivalents, end of period | $ | 44,585 | $ | 604,764 | ||||
See accompanying notes
6
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
SUPPLEMENTAL INFORMATION: | ||||||||
Cash paid for interest, net of amounts capitalized | $ | 236,600 | $ | 242,655 | ||||
Net cash paid for income and other taxes | $ | 454 | $ | 628 | ||||
Real estate acquisitions/dispositions/other: | ||||||||
Mortgage loans assumed | $ | 106,600 | $ | 99,131 | ||||
Valuation of OP Units issued | $ | 66,606 | $ | — | ||||
Amortization of discounts and premiums on debt: | ||||||||
Mortgage notes payable | $ | (4,664 | ) | $ | (3,816 | ) | ||
Notes, net | $ | 1,126 | $ | 4,667 | ||||
Amortization of deferred settlements on derivative instruments: | ||||||||
Other liabilities | $ | (268 | ) | $ | (267 | ) | ||
Accumulated other comprehensive income | $ | 7,203 | $ | 1,891 | ||||
Unrealized (gain) loss on derivative instruments: | ||||||||
Other assets | $ | 4,663 | $ | 1,975 | ||||
Mortgage notes payable | $ | (2,589 | ) | $ | (226 | ) | ||
Notes, net | $ | (2,074 | ) | $ | (501 | ) | ||
Other liabilities | $ | 8,641 | $ | 26,440 | ||||
Accumulated other comprehensive income | $ | (8,642 | ) | $ | (25,119 | ) | ||
Interest capitalized for real estate and unconsolidated entities under development: | ||||||||
Investment in real estate, net | $ | (9,676 | ) | $ | (3,597 | ) | ||
Investments in unconsolidated entities | $ | (379 | ) | $ | (86 | ) | ||
Other: | ||||||||
Receivable on sale of Common Shares | $ | 28,457 | $ | — | ||||
See accompanying notes
7
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Amounts in thousands)
(Unaudited)
Six Months Ended | |||
June 30, 2012 | |||
SHAREHOLDERS’ EQUITY | |||
PREFERRED SHARES | |||
Balance, beginning of year | $ | 200,000 | |
Balance, end of period | $ | 200,000 | |
COMMON SHARES, $0.01 PAR VALUE | |||
Balance, beginning of year | $ | 2,975 | |
Conversion of OP Units into Common Shares | 2 | ||
Issuance of Common Shares | 21 | ||
Exercise of share options | 10 | ||
Employee Share Purchase Plan (ESPP) | 1 | ||
Share-based employee compensation expense: | |||
Restricted shares | 1 | ||
Balance, end of period | $ | 3,010 | |
PAID IN CAPITAL | |||
Balance, beginning of year | $ | 5,047,186 | |
Common Share Issuance: | |||
Conversion of OP Units into Common Shares | 4,752 | ||
Issuance of Common Shares | 123,580 | ||
Exercise of share options | 31,271 | ||
Employee Share Purchase Plan (ESPP) | 4,522 | ||
Share-based employee compensation expense: | |||
Restricted shares | 5,115 | ||
Share options | 7,976 | ||
ESPP discount | 809 | ||
Offering costs | (1,907 | ) | |
Supplemental Executive Retirement Plan (SERP) | (5,473 | ) | |
Acquisition of Noncontrolling Interests – Partially Owned Properties | 1,219 | ||
Change in market value of Redeemable Noncontrolling Interests – Operating Partnership | (32,391 | ) | |
Adjustment for Noncontrolling Interests ownership in Operating Partnership | 39,429 | ||
Balance, end of period | $ | 5,226,088 | |
RETAINED EARNINGS | |||
Balance, beginning of year | $ | 615,572 | |
Net income attributable to controlling interests | 248,563 | ||
Common Share distributions | (202,967 | ) | |
Preferred Share distributions | (6,933 | ) | |
Balance, end of period | $ | 654,235 | |
See accompanying notes
8
EQUITY RESIDENTIAL
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)
(Amounts in thousands)
(Unaudited)
Six Months Ended | |||
June 30, 2012 | |||
SHAREHOLDERS' EQUITY (continued) | |||
ACCUMULATED OTHER COMPREHENSIVE (LOSS) | |||
Balance, beginning of year | $ | (196,718 | ) |
Accumulated other comprehensive (loss) – derivative instruments: | |||
Unrealized holding (losses) arising during the period | (8,642 | ) | |
Losses reclassified into earnings from other comprehensive income | 7,203 | ||
Accumulated other comprehensive income – other instruments: | |||
Unrealized holding gains arising during the period | 82 | ||
Balance, end of period | $ | (198,075 | ) |
NONCONTROLLING INTERESTS | |||
OPERATING PARTNERSHIP | |||
Balance, beginning of year | $ | 119,536 | |
Issuance of OP Units to Noncontrolling Interests | 66,606 | ||
Issuance of LTIP Units to Noncontrolling Interests | 5 | ||
Conversion of OP Units held by Noncontrolling Interests into OP Units held by General Partner | (4,754 | ) | |
Equity compensation associated with Noncontrolling Interests | 4,211 | ||
Net income attributable to Noncontrolling Interests | 11,150 | ||
Distributions to Noncontrolling Interests | (9,396 | ) | |
Change in carrying value of Redeemable Noncontrolling Interests – Operating Partnership | (3,408 | ) | |
Adjustment for Noncontrolling Interests ownership in Operating Partnership | (39,429 | ) | |
Balance, end of period | $ | 144,521 | |
PARTIALLY OWNED PROPERTIES | |||
Balance, beginning of year | $ | 74,306 | |
Net income attributable to Noncontrolling Interests | 769 | ||
Contributions by Noncontrolling Interests | 2,935 | ||
Distributions to Noncontrolling Interests | (2,258 | ) | |
Acquisition of Noncontrolling Interests – Partially Owned Properties | (1,306 | ) | |
Balance, end of period | $ | 74,446 | |
See accompanying notes
9
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
June 30, 2012 | December 31, 2011 | |||||||
ASSETS | ||||||||
Investment in real estate | ||||||||
Land | $ | 4,565,646 | $ | 4,367,816 | ||||
Depreciable property | 15,886,832 | 15,554,740 | ||||||
Projects under development | 198,912 | 160,190 | ||||||
Land held for development | 372,108 | 325,200 | ||||||
Investment in real estate | 21,023,498 | 20,407,946 | ||||||
Accumulated depreciation | (4,777,887 | ) | (4,539,583 | ) | ||||
Investment in real estate, net | 16,245,611 | 15,868,363 | ||||||
Cash and cash equivalents | 44,585 | 383,921 | ||||||
Investments in unconsolidated entities | 17,886 | 12,327 | ||||||
Deposits – restricted | 193,892 | 152,237 | ||||||
Escrow deposits – mortgage | 9,139 | 10,692 | ||||||
Deferred financing costs, net | 41,854 | 44,608 | ||||||
Other assets | 161,445 | 187,155 | ||||||
Total assets | $ | 16,714,412 | $ | 16,659,303 | ||||
LIABILITIES AND CAPITAL | ||||||||
Liabilities: | ||||||||
Mortgage notes payable | $ | 4,004,496 | $ | 4,111,487 | ||||
Notes, net | 5,354,768 | 5,609,574 | ||||||
Lines of credit | 35,000 | — | ||||||
Accounts payable and accrued expenses | 72,647 | 35,206 | ||||||
Accrued interest payable | 82,695 | 88,121 | ||||||
Other liabilities | 430,650 | 291,289 | ||||||
Security deposits | 68,265 | 65,286 | ||||||
Distributions payable | 109,463 | 179,079 | ||||||
Total liabilities | 10,157,984 | 10,380,042 | ||||||
Commitments and contingencies | ||||||||
Redeemable Limited Partners | 452,203 | 416,404 | ||||||
Capital: | ||||||||
Partners’ Capital: | ||||||||
Preference Units | 200,000 | 200,000 | ||||||
General Partner | 5,883,333 | 5,665,733 | ||||||
Limited Partners | 144,521 | 119,536 | ||||||
Accumulated other comprehensive (loss) | (198,075 | ) | (196,718 | ) | ||||
Total partners’ capital | 6,029,779 | 5,788,551 | ||||||
Noncontrolling Interests – Partially Owned Properties | 74,446 | 74,306 | ||||||
Total capital | 6,104,225 | 5,862,857 | ||||||
Total liabilities and capital | $ | 16,714,412 | $ | 16,659,303 | ||||
See accompanying notes
10
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per Unit data)
(Unaudited)
Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
REVENUES | ||||||||||||||||
Rental income | $ | 1,063,162 | $ | 939,121 | $ | 541,569 | $ | 478,419 | ||||||||
Fee and asset management | 4,276 | 3,754 | 2,212 | 1,948 | ||||||||||||
Total revenues | 1,067,438 | 942,875 | 543,781 | 480,367 | ||||||||||||
EXPENSES | ||||||||||||||||
Property and maintenance | 218,004 | 202,157 | 107,024 | 98,571 | ||||||||||||
Real estate taxes and insurance | 118,768 | 106,610 | 63,126 | 54,803 | ||||||||||||
Property management | 44,417 | 43,148 | 21,008 | 20,767 | ||||||||||||
Fee and asset management | 2,487 | 1,957 | 1,180 | 1,009 | ||||||||||||
Depreciation | 346,079 | 311,891 | 172,338 | 154,452 | ||||||||||||
General and administrative | 27,082 | 22,341 | 13,394 | 10,908 | ||||||||||||
Total expenses | 756,837 | 688,104 | 378,070 | 340,510 | ||||||||||||
Operating income | 310,601 | 254,771 | 165,711 | 139,857 | ||||||||||||
Interest and other income | 431 | 1,288 | 259 | 277 | ||||||||||||
Other expenses | (16,584 | ) | (6,790 | ) | (9,517 | ) | (4,630 | ) | ||||||||
Interest: | ||||||||||||||||
Expense incurred, net | (234,247 | ) | (240,443 | ) | (115,618 | ) | (119,997 | ) | ||||||||
Amortization of deferred financing costs | (7,037 | ) | (7,401 | ) | (4,063 | ) | (4,396 | ) | ||||||||
Income before income and other taxes, net gain on sales of land parcels and discontinued operations | 53,164 | 1,425 | 36,772 | 11,111 | ||||||||||||
Income and other tax (expense) benefit | (405 | ) | (386 | ) | (214 | ) | (202 | ) | ||||||||
Net gain on sales of land parcels | — | 4,217 | — | 4,217 | ||||||||||||
Income from continuing operations | 52,759 | 5,256 | 36,558 | 15,126 | ||||||||||||
Discontinued operations, net | 207,723 | 709,563 | 71,757 | 566,627 | ||||||||||||
Net income | 260,482 | 714,819 | 108,315 | 581,753 | ||||||||||||
Net (income) attributable to Noncontrolling Interests – Partially Owned Properties | (769 | ) | (31 | ) | (319 | ) | (71 | ) | ||||||||
Net income attributable to controlling interests | $ | 259,713 | $ | 714,788 | $ | 107,996 | $ | 581,682 | ||||||||
ALLOCATION OF NET INCOME: | ||||||||||||||||
Preference Units | $ | 6,933 | $ | 6,933 | $ | 3,467 | $ | 3,467 | ||||||||
General Partner | $ | 241,630 | $ | 676,322 | $ | 99,797 | $ | 552,457 | ||||||||
Limited Partners | 11,150 | 31,533 | 4,732 | 25,758 | ||||||||||||
Net income available to Units | $ | 252,780 | $ | 707,855 | $ | 104,529 | $ | 578,215 | ||||||||
Earnings per Unit – basic: | ||||||||||||||||
Income (loss) from continuing operations available to Units | $ | 0.14 | $ | (0.01 | ) | $ | 0.10 | $ | 0.04 | |||||||
Net income available to Units | $ | 0.81 | $ | 2.30 | $ | 0.33 | $ | 1.88 | ||||||||
Weighted average Units outstanding | 313,133 | 307,106 | 314,255 | 307,954 | ||||||||||||
Earnings per Unit – diluted: | ||||||||||||||||
Income (loss) from continuing operations available to Units | $ | 0.14 | $ | (0.01 | ) | $ | 0.10 | $ | 0.04 | |||||||
Net income available to Units | $ | 0.80 | $ | 2.30 | $ | 0.33 | $ | 1.85 | ||||||||
Weighted average Units outstanding | 316,457 | 307,106 | 317,648 | 312,199 | ||||||||||||
Distributions declared per Unit outstanding | $ | 0.6750 | $ | 0.6750 | $ | 0.3375 | $ | 0.3375 | ||||||||
See accompanying notes
11
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Amounts in thousands except per Unit data)
(Unaudited)
Six Months Ended June 30, | Quarter Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Comprehensive income: | ||||||||||||||||
Net income | $ | 260,482 | $ | 714,819 | $ | 108,315 | $ | 581,753 | ||||||||
Other comprehensive (loss): | ||||||||||||||||
Other comprehensive (loss) – derivative instruments: | ||||||||||||||||
Unrealized holding (losses) arising during the period | (8,642 | ) | (25,119 | ) | (11,860 | ) | (31,201 | ) | ||||||||
Losses reclassified into earnings from other comprehensive income | 7,203 | 1,891 | 3,640 | 935 | ||||||||||||
Other comprehensive income – other instruments: | ||||||||||||||||
Unrealized holding gains arising during the period | 82 | 493 | 118 | 347 | ||||||||||||
Other comprehensive (loss) | (1,357 | ) | (22,735 | ) | (8,102 | ) | (29,919 | ) | ||||||||
Comprehensive income | 259,125 | 692,084 | 100,213 | 551,834 | ||||||||||||
Comprehensive (income) attributable to Noncontrolling Interests – Partially Owned Properties | (769 | ) | (31 | ) | (319 | ) | (71 | ) | ||||||||
Comprehensive income attributable to controlling interests | $ | 258,356 | $ | 692,053 | $ | 99,894 | $ | 551,763 | ||||||||
See accompanying notes
12
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 260,482 | $ | 714,819 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 348,106 | 330,930 | ||||||
Amortization of deferred financing costs | 7,037 | 8,048 | ||||||
Amortization of discounts and premiums on debt | (3,538 | ) | 851 | |||||
Amortization of deferred settlements on derivative instruments | 6,935 | 1,624 | ||||||
Write-off of pursuit costs | 3,565 | 3,038 | ||||||
Distributions from unconsolidated entities – return on capital | 240 | 42 | ||||||
Net (gain) on sales of land parcels | — | (4,217 | ) | |||||
Net (gain) on sales of discontinued operations | (204,053 | ) | (682,236 | ) | ||||
Loss on debt extinguishments | 272 | — | ||||||
Unrealized (gain) loss on derivative instruments | (1 | ) | 2,569 | |||||
Compensation paid with Company Common Shares | 16,878 | 12,389 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in deposits – restricted | (1,330 | ) | 1,971 | |||||
(Increase) in other assets | (23,017 | ) | (4,456 | ) | ||||
Increase in accounts payable and accrued expenses | 35,794 | 35,165 | ||||||
(Decrease) in accrued interest payable | (5,426 | ) | (6,047 | ) | ||||
Increase (decrease) in other liabilities | 141,090 | (21,980 | ) | |||||
Increase (decrease) in security deposits | 2,979 | (33 | ) | |||||
Net cash provided by operating activities | 586,013 | 392,477 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Investment in real estate – acquisitions | (520,775 | ) | (475,397 | ) | ||||
Investment in real estate – development/other | (78,210 | ) | (63,558 | ) | ||||
Improvements to real estate | (68,319 | ) | (64,863 | ) | ||||
Additions to non-real estate property | (4,700 | ) | (3,987 | ) | ||||
Interest capitalized for real estate and unconsolidated entities under development | (10,055 | ) | (3,683 | ) | ||||
Proceeds from disposition of real estate, net | 333,015 | 1,194,005 | ||||||
Investments in unconsolidated entities | (5,420 | ) | (412 | ) | ||||
(Increase) in deposits on real estate acquisitions and investments, net | (40,539 | ) | (171,152 | ) | ||||
Decrease in mortgage deposits | 1,553 | 1,688 | ||||||
Acquisition of Noncontrolling Interests – Partially Owned Properties | (87 | ) | (8,575 | ) | ||||
Net cash (used for) provided by investing activities | (393,537 | ) | 404,066 | |||||
See accompanying notes
13
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Loan and bond acquisition costs | $ | (4,283 | ) | $ | (1,466 | ) | ||
Mortgage notes payable: | ||||||||
Proceeds | — | 135,230 | ||||||
Restricted cash | 214 | (11,663 | ) | |||||
Lump sum payoffs | (198,763 | ) | (632,477 | ) | ||||
Scheduled principal repayments | (7,575 | ) | (8,366 | ) | ||||
Loss on debt extinguishments | (272 | ) | — | |||||
Notes, net: | ||||||||
Lump sum payoffs | (253,858 | ) | (93,096 | ) | ||||
Lines of credit: | ||||||||
Proceeds | 105,000 | — | ||||||
Repayments | (70,000 | ) | — | |||||
Proceeds from sale of OP Units | 152,058 | 154,508 | ||||||
Proceeds from EQR’s Employee Share Purchase Plan (ESPP) | 4,523 | 3,501 | ||||||
Proceeds from exercise of EQR options | 31,281 | 83,534 | ||||||
Payment of offering costs | (1,907 | ) | (2,611 | ) | ||||
Other financing activities, net | (33 | ) | (33 | ) | ||||
Contributions – Noncontrolling Interests – Partially Owned Properties | 2,935 | — | ||||||
Contributions – Limited Partners | 5 | — | ||||||
Distributions: | ||||||||
OP Units – General Partner | (269,755 | ) | (231,995 | ) | ||||
Preference Units | (6,933 | ) | (6,933 | ) | ||||
OP Units – Limited Partners | (12,224 | ) | (10,866 | ) | ||||
Noncontrolling Interests – Partially Owned Properties | (2,225 | ) | (454 | ) | ||||
Net cash (used for) financing activities | (531,812 | ) | (623,187 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (339,336 | ) | 173,356 | |||||
Cash and cash equivalents, beginning of period | 383,921 | 431,408 | ||||||
Cash and cash equivalents, end of period | $ | 44,585 | $ | 604,764 | ||||
See accompanying notes
14
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
SUPPLEMENTAL INFORMATION: | ||||||||
Cash paid for interest, net of amounts capitalized | $ | 236,600 | $ | 242,655 | ||||
Net cash paid for income and other taxes | $ | 454 | $ | 628 | ||||
Real estate acquisitions/dispositions/other: | ||||||||
Mortgage loans assumed | $ | 106,600 | $ | 99,131 | ||||
Valuation of OP Units issued | $ | 66,606 | $ | — | ||||
Amortization of discounts and premiums on debt: | ||||||||
Mortgage notes payable | $ | (4,664 | ) | $ | (3,816 | ) | ||
Notes, net | $ | 1,126 | $ | 4,667 | ||||
Amortization of deferred settlements on derivative instruments: | ||||||||
Other liabilities | $ | (268 | ) | $ | (267 | ) | ||
Accumulated other comprehensive income | $ | 7,203 | $ | 1,891 | ||||
Unrealized (gain) loss on derivative instruments: | ||||||||
Other assets | $ | 4,663 | $ | 1,975 | ||||
Mortgage notes payable | $ | (2,589 | ) | $ | (226 | ) | ||
Notes, net | $ | (2,074 | ) | $ | (501 | ) | ||
Other liabilities | $ | 8,641 | $ | 26,440 | ||||
Accumulated other comprehensive income | $ | (8,642 | ) | $ | (25,119 | ) | ||
Interest capitalized for real estate and unconsolidated entities under development: | ||||||||
Investment in real estate, net | $ | (9,676 | ) | $ | (3,597 | ) | ||
Investments in unconsolidated entities | $ | (379 | ) | $ | (86 | ) | ||
Other: | ||||||||
Receivable on sale of OP Units | $ | 28,457 | $ | — | ||||
See accompanying notes
15
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
(Amounts in thousands)
(Unaudited)
Six Months Ended | |||
June 30, 2012 | |||
PARTNERS’ CAPITAL | |||
PREFERENCE UNITS | |||
Balance, beginning of year | $ | 200,000 | |
Balance, end of period | $ | 200,000 | |
GENERAL PARTNER | |||
Balance, beginning of year | $ | 5,665,733 | |
OP Unit Issuance: | |||
Conversion of OP Units held by Limited Partners into OP Units held by General Partner | 4,754 | ||
Issuance of OP Units | 123,601 | ||
Exercise of EQR share options | 31,281 | ||
EQR’s Employee Share Purchase Plan (ESPP) | 4,523 | ||
Share-based employee compensation expense: | |||
EQR restricted shares | 5,116 | ||
EQR share options | 7,976 | ||
EQR ESPP discount | 809 | ||
Offering costs | (1,907 | ) | |
Net income available to Units – General Partner | 241,630 | ||
OP Units – General Partner distributions | (202,967 | ) | |
Supplemental Executive Retirement Plan (SERP) | (5,473 | ) | |
Acquisition of Noncontrolling Interests – Partially Owned Properties | 1,219 | ||
Change in market value of Redeemable Limited Partners | (32,391 | ) | |
Adjustment for Limited Partners ownership in Operating Partnership | 39,429 | ||
Balance, end of period | $ | 5,883,333 | |
LIMITED PARTNERS | |||
Balance, beginning of year | $ | 119,536 | |
Issuance of OP Units to Limited Partners | 66,606 | ||
Issuance of LTIP Units to Limited Partners | 5 | ||
Conversion of OP Units held by Limited Partners into OP Units held by General Partner | (4,754 | ) | |
Equity compensation associated with Units – Limited Partners | 4,211 | ||
Net income available to Units – Limited Partners | 11,150 | ||
Units – Limited Partners distributions | (9,396 | ) | |
Change in carrying value of Redeemable Limited Partners | (3,408 | ) | |
Adjustment for Limited Partners ownership in Operating Partnership | (39,429 | ) | |
Balance, end of period | $ | 144,521 | |
ACCUMULATED OTHER COMPREHENSIVE (LOSS) | |||
Balance, beginning of year | $ | (196,718 | ) |
Accumulated other comprehensive (loss) – derivative instruments: | |||
Unrealized holding (losses) arising during the period | (8,642 | ) | |
Losses reclassified into earnings from other comprehensive income | 7,203 | ||
Accumulated other comprehensive income – other instruments: | |||
Unrealized holding gains arising during the period | 82 | ||
Balance, end of period | $ | (198,075 | ) |
See accompanying notes
16
ERP OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL (Continued)
(Amounts in thousands)
(Unaudited)
Six Months Ended | |||
June 30, 2012 | |||
NONCONTROLLING INTERESTS | |||
NONCONTROLLING INTERESTS – PARTIALLY OWNED PROPERTIES | |||
Balance, beginning of year | $ | 74,306 | |
Net income attributable to Noncontrolling Interests | 769 | ||
Contributions by Noncontrolling Interests | 2,935 | ||
Distributions to Noncontrolling Interests | (2,258 | ) | |
Acquisition of Noncontrolling Interests – Partially Owned Properties | (1,306 | ) | |
Balance, end of period | $ | 74,446 | |
See accompanying notes
17
EQUITY RESIDENTIAL
ERP OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Business |
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. Unless otherwise indicated, the notes to consolidated financial statements apply to both the Company and the Operating Partnership.
EQR is the general partner of, and as of June 30, 2012 owned an approximate 95.4% ownership interest in, ERPOP. 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 issues public equity from time to time but 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.
As of June 30, 2012, the Company, directly or indirectly through investments in title holding entities, owned all or a portion of 421 properties located in 14 states and the District of Columbia consisting of 120,355 apartment units. The ownership breakdown includes (table does not include various uncompleted development properties):
Properties | Apartment Units | |||||
Wholly Owned Properties | 398 | 111,500 | ||||
Partially Owned Properties – Consolidated | 21 | 3,916 | ||||
Military Housing | 2 | 4,939 | ||||
421 | 120,355 | |||||
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933, as amended. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and certain reclassifications considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period financial statements in order to conform to the current year presentation. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
In preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The balance sheets at December 31, 2011 have been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For further information, including definitions of capitalized terms not defined herein, refer to the consolidated financial statements and footnotes thereto included in the Company’s and the Operating Partnership's annual report on Form 10-K for the year ended December 31, 2011.
18
Income and Other Taxes
Due to the structure of EQR as a REIT and the nature of the operations of its operating properties, no provision for federal income taxes has been made at the EQR level. In addition, ERPOP generally is not liable for federal income taxes as the partners recognize their proportionate share of income or loss in their tax returns; therefore no provision for federal income taxes has been made at the ERPOP level. Historically, the Company has generally only incurred certain state and local income, excise and franchise taxes. The Company has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries and as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses.
Deferred tax assets and liabilities applicable to the TRS are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be recovered or settled. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in earnings in the period enacted. The Company’s deferred tax assets are generally the result of differing depreciable lives on capitalized assets and the timing of expense recognition for certain accrued liabilities. As of June 30, 2012, the Company has recorded a deferred tax asset of approximately $31.7 million, which is fully offset by a valuation allowance due to the uncertainty in forecasting future TRS taxable income.
Other
The Company is the controlling partner in various consolidated partnerships owning 21 properties and 3,916 apartment units and various completed and uncompleted development properties having a noncontrolling interest book value of $74.4 million at June 30, 2012. The Company is required to make certain disclosures regarding noncontrolling interests in consolidated limited-life subsidiaries. Of the consolidated entities described above, the Company is the controlling partner in limited-life partnerships owning six properties having a noncontrolling interest deficit balance of $5.0 million. These six partnership agreements contain provisions that require the partnerships to be liquidated through the sale of their assets upon reaching a date specified in each respective partnership agreement. The Company, as controlling partner, has an obligation to cause the property owning partnerships to distribute the proceeds of liquidation to the Noncontrolling Interests in these Partially Owned Properties only to the extent that the net proceeds received by the partnerships from the sale of their assets warrant a distribution based on the partnership agreements. As of June 30, 2012, the Company estimates the value of Noncontrolling Interest distributions for these six properties would have been approximately $36.7 million (“Settlement Value”) had the partnerships been liquidated. This Settlement Value is based on estimated third party consideration realized by the partnerships upon disposition of the six Partially Owned Properties and is net of all other assets and liabilities, including yield maintenance on the mortgages encumbering the properties, that would have been due on June 30, 2012 had those mortgages been prepaid. Due to, among other things, the inherent uncertainty in the sale of real estate assets, the amount of any potential distribution to the Noncontrolling Interests in the Company’s Partially Owned Properties is subject to change. To the extent that the partnerships’ underlying assets are worth less than the underlying liabilities, the Company has no obligation to remit any consideration to the Noncontrolling Interests in these Partially Owned Properties.
Effective January 1, 2011, companies are required to separately disclose purchases, sales, issuances and settlements on a gross basis in the reconciliation of recurring Level 3 fair value measurements. This does not have a material effect on the Company’s consolidated results of operations or financial position. See Note 9 for further discussion.
Effective January 1, 2012, companies are required to separately disclose the amounts and reasons for any transfers of assets and liabilities into and out of Level 1 and Level 2 of the fair value hierarchy. For fair value measurements using significant unobservable inputs (Level 3), companies are required to disclose quantitative information about the significant unobservable inputs used for all Level 3 measurements and a description of the Company’s valuation processes in determining fair value. In addition, companies are required to provide a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs. Companies are also required to disclose information about when the current use of a non-financial asset measured at fair value differs from its highest and best use and the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. This does not have a material effect on the Company's consolidated results of operations or financial position. See Note 9 for further discussion.
19
3. | Equity, Capital and Other Interests |
Equity and Redeemable Noncontrolling Interests of Equity Residential
The following tables present the changes in the Company’s issued and outstanding Common Shares and “Units” (which includes OP Units and Long-Term Incentive Plan (“LTIP”) Units) for the six months ended June 30, 2012:
2012 | ||
Common Shares | ||
Common Shares outstanding at January 1, | 297,508,185 | |
Common Shares Issued: | ||
Conversion of OP Units | 135,823 | |
Issuance of Common Shares | 2,078,310 | |
Exercise of share options | 1,014,585 | |
Employee Share Purchase Plan (ESPP) | 91,872 | |
Restricted share grants, net | 132,870 | |
Common Shares outstanding at June 30, | 300,961,645 | |
Units | ||
Units outstanding at January 1, | 13,492,543 | |
LTIP Units, net | 70,235 | |
OP Units issued through acquisitions | 1,081,797 | |
Conversion of OP Units to Common Shares | (135,823 | ) |
Units outstanding at June 30, | 14,508,752 | |
Total Common Shares and Units outstanding at June 30, | 315,470,397 | |
Units Ownership Interest in Operating Partnership | 4.6 | % |
The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units, as well as the equity positions of the holders of LTIP Units, are collectively referred to as the “Noncontrolling Interests – Operating Partnership”. Subject to certain exceptions (including the “book-up” requirements of LTIP Units), the Noncontrolling Interests – Operating Partnership may exchange their Units with EQR for Common Shares on a one-for-one basis. The carrying value of the Noncontrolling Interests – Operating Partnership (including redeemable interests) is allocated based on the number of Noncontrolling Interests – Operating Partnership Units in total in proportion to the number of Noncontrolling Interests – Operating Partnership Units in total plus the number of Common Shares. Net income is allocated to the Noncontrolling Interests – Operating Partnership based on the weighted average ownership percentage during the period.
The Operating Partnership has the right but not the obligation to make a cash payment instead of issuing Common Shares to any and all holders of Noncontrolling Interests – Operating Partnership Units requesting an exchange of their OP Units with EQR. Once the Operating Partnership elects not to redeem the Noncontrolling Interests – Operating Partnership Units for cash, EQR is obligated to deliver Common Shares to the exchanging holder of the Noncontrolling Interests – Operating Partnership Units.
The Noncontrolling Interests – Operating Partnership Units are classified as either mezzanine equity or permanent equity. If EQR is required, either by contract or securities law, to deliver registered Common Shares, such Noncontrolling Interests – Operating Partnership are differentiated and referred to as “Redeemable Noncontrolling Interests – Operating Partnership”. Instruments that require settlement in registered shares can not be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered shares. Therefore, settlement in cash is assumed and that responsibility for settlement in cash is deemed to fall to the Operating Partnership as the primary source of cash for EQR, resulting in presentation in the mezzanine section of the balance sheet. The Redeemable Noncontrolling Interests – Operating Partnership are adjusted to the greater of carrying value or fair market value based on the Common Share price of EQR at the end of each respective reporting period. EQR has the ability to deliver unregistered Common Shares for the remaining portion of the Noncontrolling Interests – Operating Partnership Units that are classified in permanent equity at June 30, 2012 and December 31, 2011.
The carrying value of the Redeemable Noncontrolling Interests – Operating Partnership is allocated based on the number of Redeemable Noncontrolling Interests – Operating Partnership Units in proportion to the number of Noncontrolling Interests – Operating Partnership Units in total. Such percentage of the total carrying value of Units which is ascribed to the Redeemable Noncontrolling Interests – Operating Partnership is then adjusted to the greater of carrying value or fair market value as described
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above. As of June 30, 2012, the Redeemable Noncontrolling Interests – Operating Partnership have a redemption value of approximately $452.2 million, which represents the value of Common Shares that would be issued in exchange with the Redeemable Noncontrolling Interests – Operating Partnership Units.
The following table presents the change in the redemption value of the Redeemable Noncontrolling Interests – Operating Partnership for the six months ended June 30, 2012 (amounts in thousands):
2012 | |||
Balance at January 1, | $ | 416,404 | |
Change in market value | 32,391 | ||
Change in carrying value | 3,408 | ||
Balance at June 30, | $ | 452,203 | |
Net proceeds from EQR Common Share and Preferred Share (see definition below) offerings are contributed by EQR to ERPOP. In return for those contributions, EQR receives a number of OP Units in ERPOP equal to the number of Common Shares it has issued in the equity offering (or in the case of a preferred equity offering, a number of preference units in ERPOP equal in number and having the same terms as the Preferred Shares issued in the equity offering). As a result, the net offering proceeds from Common Shares and Preferred Shares are allocated between shareholders’ equity and Noncontrolling Interests – Operating Partnership to account for the change in their respective percentage ownership of the underlying equity of ERPOP.
The Co