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’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 any unconsolidated properties/entities.  Capitalized terms used herein and not defined are as defined elsewhere in this Annual Report on Form 10-K.  In addition, please refer to the Definitions section below for various capitalized terms not immediately defined in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Forward-looking statements are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These statements are based on current expectations, estimates, projections and assumptions made by management.  While the Company’s management believes the assumptions underlying its forward-looking statements are reasonable, such information is inherently subject to uncertainties and may involve certain risks, which could cause actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.  Many of these uncertainties and risks are difficult to predict and beyond management’s control, such as the current COVID-19 pandemic (see below for further discussion).  Forward-looking statements are not guarantees of future performance, results or events.  The forward-looking statements contained herein are made as of the date hereof and the Company undertakes no obligation to update or supplement these forward-looking statements.In addition, these forward-looking statements are subject to risks related to the COVID-19 pandemic and its accompanying variants, many of which are unknown, including the duration, severity and the extent of the adverse health impact on the general population, our residents and employees, the distribution, effectiveness and acceptance of vaccines and testing, the overall reopening progress in the cities in which we operate, the potential long-term changes in customer preferences for living in our communities and the impact of operational changes we have implemented and may implement in response to the pandemic.Additional factors that might cause such differences are discussed in Part I of this Annual Report on Form 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

See Item 1, Business, for discussion regarding the Company’s overview.

Business Objectives and Operating and Investing Strategies

See Item 1, Business, for discussion regarding the Company’s business objectives and operating and investing strategies.

COVID-19 Impact

The Company continues to monitor and respond to the ongoing effects of the COVID-19 pandemic.  Its duration, severity and the extent of its adverse health impact on the general population, our residents and employees, along with the distribution, effectiveness and acceptance of vaccines and testing and pace and degree of recovery from the pandemic are among the many unknowns that have had or could continue to have a significant impact on the Company.  These, among other items, have impacted the economy, the unemployment rate and our operations and could materially affect our future consolidated results of operations, financial condition, liquidity, investments and overall performance.  Despite the impact of COVID-19, we continue to believe that the long-term prospects for our business remain strong.  For additional details, see Item 1A, Risk Factors.

26

Results of Operations

2020 and 2021 Transactions

In conjunction with our business objectives and operating and investing strategies, the following table provides a rollforward of the transactions that occurred during the years ended December 31, 2020 and 2021:

Results of Operations

2020 and 2021 Transactions

In conjunction with our business objectives and operating and investing strategies, the following table provides a rollforward of the transactions that occurred during the years ended December 31, 2020 and 2021:

Portfolio Rollforward

($ in thousands)

[Table with ~13 rows, ~33 numbers, and 1369 characters.] (1)

The Company acquired one property during the year ended December 31, 2020 in the Seattle market that was in lease-up and is expected to stabilize in its second year of ownership.  

(2)

The Company acquired four properties during the year ended December 31, 2021, one each in the Denver, Atlanta, Seattle and Dallas/Ft. Worth markets, that are in lease-up and are expected to stabilize in their second year of ownership at the combined Acquisition Cap Rate listed above.

Acquisitions

•

The consolidated property acquired in 2020 was located in the Seattle market;

 

•

The consolidated properties acquired in 2021 are located in the Atlanta (4), Austin (3), Boston, Dallas/Ft. Worth (4), Denver (3), Seattle and Washington D.C. markets.  The Atlanta, Austin and Dallas/Ft. Worth acquisitions marked the Company’s re-entry into these markets;

 

•

Approximately $1.4 billion, or 82.0% of all acquisition activity in 2021, was in expansion markets; and

 

•

The Company funded the 2021 acquisitions by selling older assets located within established markets that no longer met our long-term investment criteria.

Dispositions

•

The consolidated properties disposed of in 2020 were located in the Phoenix, San Diego, San Francisco (3) and Washington D.C. markets and the sales generated an Unlevered IRR of 10.2%; and

 

•

The consolidated properties disposed of in 2021 were located in the Los Angeles (6), New York, San Francisco (5), Seattle and Washington D.C. markets and the sales generated an Unlevered IRR of 10.4%.

Developments

•

The Company completed construction on three consolidated apartment properties during 2021, located in the San Francisco, Washington D.C. and Boston markets, consisting of 824 apartment units totaling approximately $602.8 million of development costs; and

27

•

The Company commenced construction on one consolidated and three unconsolidated apartment properties during 2021, located in the Denver (2), New York and Washington D.C. markets, consisting of 1,241 apartment units totaling approximately $452.7 million of expected development costs.

Investments in Unconsolidated Entities

•

The Company entered into six separate unconsolidated joint ventures during 2021 for the purpose of developing vacant land parcels in Texas (3), Colorado (2) and New York.  The Company’s total investment in these six joint ventures is approximately $72.2 million as of December 31, 2021.  Three of the projects are related to the Company’s joint venture development program with Toll Brothers, Inc. (“Toll”) discussed below; and

 

•

Pursuant to our strategic partnership with Toll, the Company and Toll entered into three separate joint venture agreements during 2021.  The projects have not yet started but are expected to do so in 2022.  Toll will act as managing member of each project overseeing approvals, design and construction.  See Notes 6 and 16 in the Notes to Consolidated Financial Statements for additional discussion.

See Note 4 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate transactions.

Future Outlook

•

The Company’s guidance assumes consolidated rental acquisitions of approximately $2.0 billion and consolidated rental dispositions of approximately $2.0 billion during the year ending December 31, 2022; and

 

•

We currently anticipate spending approximately $200.0 million on development costs during the year ending December 31, 2022, primarily for consolidated and unconsolidated properties currently under construction (amount only includes our share of development costs).The above 2022 guidance assumptions are based on current expectations and are forward-looking.

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

The following table presents a reconciliation of diluted earnings per share/unit for the year ended December 31, 2021 as compared to the same period in 2020: [Table with ~11 rows, ~15 numbers, and 533 characters.] (1)

Corporate overhead includes property management and general and administrative expenses.The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”).  NOI represents rental income less direct property operating expenses (including real estate taxes and insurance).  The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties.

28

The following tables present reconciliations of operating income per the consolidated statements of operations to NOI, along with rental income, operating expenses and NOI per the consolidated statements of operations allocated between same store and non-same store results (amounts in thousands): [Table with ~20 rows, ~66 numbers, and 1829 characters.] Note: See Note 17 in the Notes to Consolidated Financial Statements for detail by reportable segment/market.  Non-same store/other NOI results consist primarily of properties acquired in calendar years 2020 and 2021, operations from the Company’s development properties and operations prior to disposition from 2020 and 2021 sold properties.

•

The decrease in same store rental income is due primarily to the negative cumulative impact of leasing activity at lower Average Rental Rates, particularly in late 2020 and early 2021.

•

The increase in same store operating expenses is due primarily to:

 

•

Utilities – A $10.2 million increase due to water, sewer and trash charges (approximately 65% of total) increasing as a result of both higher usage and rate, as well as increases in natural gas and electric charges (approximately 35% of total) due to higher commodity prices;

 

•

Real estate taxes – A $5.2 million increase due to modest rate growth, partially offset by reduced assessed values in certain locations; and

 

•

Repairs and maintenance – A $5.2 million increase primarily driven by low comparable period expense growth due to the pandemic along with increases in minimum wage on contract services and maintenance repairs in 2021.

•

The decrease in non-same store/other NOI is due primarily to a negative impact of lost NOI from 2020 and 2021 dispositions of $50.2 million, partially offset by a positive impact of higher NOI from non-stabilized properties acquired between 2019 and 2021 of $21.1 million.

•

The decrease in consolidated total NOI is primarily a result of the Company’s lower NOI from same store properties, largely due to the economic impact from the COVID-19 pandemic.See the Same Store Results section below for additional discussion of those results.

29

Property management expenses 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 increased approximately $4.3 million or 4.6% during the year ended December 31, 2021 as compared to 2020.  This increase is primarily attributable to increases in payroll-related costs, legal and professional fees and information technology-related costs specifically for various operating initiatives such as sales-focused improvements and service enhancements.  The expenses in 2020 were lower than normal due to the impact of COVID-19.General and administrative expenses, which include corporate operating expenses, increased approximately $8.2 million or 17.0% during the year ended December 31, 2021 as compared to 2020, primarily due to increases in payroll-related costs, partially offset by decreases in office rent as a result of the consolidation of space at the Company’s corporate headquarters.  The expenses in 2020 were lower than normal due to the impact of COVID-19.Depreciation expense, which includes depreciation on non-real estate assets, increased approximately $17.4 million or 2.1% during the year ended December 31, 2021 as compared to 2020, primarily as a result of additional depreciation expense on properties acquired in 2020 and 2021 and development properties placed in service during 2021, partially offset by in-place leases for 2019 acquisitions being fully depreciated as of December 31, 2020 and the Company being a net seller during 2020, which resulted in lower depreciation in the current period.Net gain on sales of real estate properties increased approximately $540.4 million or 101.6% during the year ended December 31, 2021 as compared to 2020, primarily as a result of a higher sales volume with the sale of fourteen consolidated apartment properties in 2021 as compared to the sale of six consolidated apartment properties in the same period in 2020.  Impairment increased approximately $16.8 million during the year ended December 31, 2021 as compared to 2020, due to an impairment charge in 2021 on one land parcel held for development compared to no impairment charges taken during 2020.Interest and other income increased approximately $19.7 million during the year ended December 31, 2021 as compared to 2020.  The increase is primarily due to a gain of $23.4 million on the sale of various investment securities that occurred during 2021 but not during 2020, partially offset by decreases in insurance/litigation settlement proceeds and other non-comparable items that occurred during 2020 but not during 2021.Other expenses increased approximately $1.8 million or 10.1% during the year ended December 31, 2021 as compared to 2020, primarily due to an increase in various litigation and environmental reserves/settlements and an increase in ground lease finance charges, partially offset by a decrease in advocacy contributions.Interest expense, including amortization of deferred financing costs, decreased approximately $92.8 million or 24.8% during the year ended December 31, 2021 as compared to 2020.  The decrease is primarily due to lower debt extinguishment costs as well as lower overall interest rates and debt balances in 2021 as compared to 2020.  The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the year ended December 31, 2021 was 3.52% as compared to 3.94% in 2020.  The Company capitalized interest of approximately $15.9 million and $10.2 million during the years ended December 31, 2021 and 2020, respectively. Net gain on sales of land parcels decreased approximately $34.2 million during the year ended December 31, 2021 as compared to 2020, primarily as a result of the sale of two land parcels in 2020 as compared to no sales in 2021.Net (income) loss attributable to Noncontrolling Interests in partially owned properties increased approximately $3.1 million or 20.9% during the year ended December 31, 2021 as compared to 2020, primarily as a result of higher noncontrolling interest allocations from higher gains on the sale of one partially owned apartment property in 2021 as compared to the sale of one partially owned apartment property in 2020.For comparison of the year ended December 31, 2020 to the year ended December 31, 2019, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2020.

Same Store Results

Properties that the Company owned and were stabilized for all of both 2021 and 2020 (the “2021 Same Store Properties”), which represented 74,077 apartment units, drove the Company’s results of operations.  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.

30

The following table provides comparative total same store results and statistics for the 2021 Same Store Properties:

2021 vs. 2020

Same Store Results/Statistics Including 74,077 Same Store Apartment Units

$ in thousands (except for Average Rental Rate)

[Table with ~7 rows, ~39 numbers, and 1293 characters.] Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.

(1)

Changes in same store Non-Residential revenues are primarily driven by the write-off of Non-Residential straight-line lease receivables in 2020 and lower bad debt in 2021. The following table provides results and statistics related to our Residential same store operations for the years ended December 31, 2021 and 2020:

2021 vs. 2020

Same Store Residential Results/Statistics by Market

[Table with ~12 rows, ~92 numbers, and 2004 characters.] Note: The above table reflects Residential same store results only.  Residential operations account for approximately 96.1% of total revenues for the year ended December 31, 2021.Despite the significant impact from the pandemic on our business, which is reflected in the results for the year ended December 31, 2021, a strong recovery continues across our portfolio.  Robust economic growth coupled with reopening of cities drove our operations to recover rapidly with significant demand for our apartments in all of our markets.  This has led to high Physical Occupancy, increased pricing power and a material reduction in Leasing Concessions.  Key operating drivers for this performance during 2021 include:

 

•

Pricing – There has been significant improvement in pricing (net of Leasing Concessions) since the end of the fourth quarter of 2020, with pricing reaching or exceeding pre-pandemic levels.  Monthly Residential Leasing Concessions granted have also declined significantly from their peak of $6.1 million per month in February 2021 and have now returned to more normalized pre-pandemic levels.

 

•

Physical Occupancy – Physical Occupancy was 96.6% for the fourth quarter of 2021 and remained strong for the year ended December 31, 2021 at 96.1%.

31

•

Percentage of Residents Renewing and Turnover – Our strategy of focusing on resident renewals continued to deliver strong results.  We reported the lowest Turnover in our history for both the fourth quarter of 2021 (9.4%) and the full year of 2021 (44.4%), which we believe reaffirms the demand and desirability for our product.  Results have been positive to date as the Percentage of Residents Renewing continues to improve with the fourth quarter of 2021 above 60%, which is higher than 2019 levels.Despite strong rent collections throughout the pandemic, the financial impact from a small subset of our residents and Non-Residential tenants not paying has led to higher levels of bad debt than we have historically experienced.  We continue to work with our residents and Non-Residential tenants on meeting their financial obligations.  During the year ended December 31, 2021, the Company received governmental rental assistance payments paid on behalf of residents of approximately $34.7 million with approximately $16.3 million of that received in the fourth quarter of 2021.  Despite receipt of these payments, our reserves and bad debt remained elevated in 2021.  Our bad debt allowance policies remain consistent with those in place before the pandemic.

Liquidity and Capital Resources

With approximately $2.2 billion in readily available liquidity, a strong balance sheet, limited near-term maturities, very strong credit metrics and ample access to capital markets, the Company believes it is well positioned to meet its future obligations and opportunities.  See further discussion below.

Statements of Cash Flows

The following table sets forth our sources and uses of cash flows for the years ended December 31, 2021, 2020 and 2019 (amounts in thousands): [Table with ~4 rows, ~13 numbers, and 387 characters.] The following provides information regarding the Company’s cash flows from operating, investing and financing activities for the year ended December 31, 2021.

Operating Activities

Our operating cash flows are primarily impacted by NOI and its components, such as Average Rental Rates, Physical Occupancy levels and operating expenses related to our properties.  Cash provided by operating activities for the year ended December 31, 2021 as compared to 2020, declined by approximately $5.4 million as a direct result of the NOI and other changes discussed above in Results of Operations.

Investing Activities

Our investing cash flows are primarily impacted by our transaction activity (acquisitions/dispositions), development spend and capital expenditures.  For 2021, key drivers were:

 

•

Acquired seventeen consolidated rental properties for approximately $1.7 billion in cash;

 

•

Disposed of fourteen consolidated rental properties, receiving net proceeds of approximately $1.7 billion;

 

•

Invested in six separate unconsolidated development joint ventures for approximately $48.5 million in cash;

 

•

Invested $206.4 million primarily in development projects;

 

•

Purchased $168.3 million of various investment securities and other investments;

 

•

Sold various investment securities, receiving net proceeds of $191.4 million; and

 

•

Invested $151.0 million in capital expenditures to real estate presented in the table below.

32

For the year ended December 31, 2021, our actual capital expenditures to real estate included the following (amounts in thousands except for apartment unit and per apartment unit amounts):

Acquisitions

•

The consolidated property acquired in 2020 was located in the Seattle market;

 

•

The consolidated properties acquired in 2021 are located in the Atlanta (4), Austin (3), Boston, Dallas/Ft. Worth (4), Denver (3), Seattle and Washington D.C. markets.  The Atlanta, Austin and Dallas/Ft. Worth acquisitions marked the Company’s re-entry into these markets;

 

•

Approximately $1.4 billion, or 82.0% of all acquisition activity in 2021, was in expansion markets; and

 

•

The Company funded the 2021 acquisitions by selling older assets located within established markets that no longer met our long-term investment criteria.

Dispositions

•

The consolidated properties disposed of in 2020 were located in the Phoenix, San Diego, San Francisco (3) and Washington D.C. markets and the sales generated an Unlevered IRR of 10.2%; and

 

•

The consolidated properties disposed of in 2021 were located in the Los Angeles (6), New York, San Francisco (5), Seattle and Washington D.C. markets and the sales generated an Unlevered IRR of 10.4%.

Developments

•

The Company completed construction on three consolidated apartment properties during 2021, located in the San Francisco, Washington D.C. and Boston markets, consisting of 824 apartment units totaling approximately $602.8 million of development costs; and

27

•

The Company commenced construction on one consolidated and three unconsolidated apartment properties during 2021, located in the Denver (2), New York and Washington D.C. markets, consisting of 1,241 apartment units totaling approximately $452.7 million of expected development costs.

Investments in Unconsolidated Entities

•

The Company entered into six separate unconsolidated joint ventures during 2021 for the purpose of developing vacant land parcels in Texas (3), Colorado (2) and New York.  The Company’s total investment in these six joint ventures is approximately $72.2 million as of December 31, 2021.  Three of the projects are related to the Company’s joint venture development program with Toll Brothers, Inc. (“Toll”) discussed below; and

 

•

Pursuant to our strategic partnership with Toll, the Company and Toll entered into three separate joint venture agreements during 2021.  The projects have not yet started but are expected to do so in 2022.  Toll will act as managing member of each project overseeing approvals, design and construction.  See Notes 6 and 16 in the Notes to Consolidated Financial Statements for additional discussion.

See Note 4 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate transactions.

Future Outlook

•

The Company’s guidance assumes consolidated rental acquisitions of approximately $2.0 billion and consolidated rental dispositions of approximately $2.0 billion during the year ending December 31, 2022; and

 

•

We currently anticipate spending approximately $200.0 million on development costs during the year ending December 31, 2022, primarily for consolidated and unconsolidated properties currently under construction (amount only includes our share of development costs).The above 2022 guidance assumptions are based on current expectations and are forward-looking.

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

The following table presents a reconciliation of diluted earnings per share/unit for the year ended December 31, 2021 as compared to the same period in 2020: [Table with ~11 rows, ~15 numbers, and 533 characters.] (1)

Corporate overhead includes property management and general and administrative expenses.The Company’s primary financial measure for evaluating each of its apartment communities is net operating income (“NOI”).  NOI represents rental income less direct property operating expenses (including real estate taxes and insurance).  The Company believes that NOI is helpful to investors as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s apartment properties.

28

The following tables present reconciliations of operating income per the consolidated statements of operations to NOI, along with rental income, operating expenses and NOI per the consolidated statements of operations allocated between same store and non-same store results (amounts in thousands): [Table with ~20 rows, ~66 numbers, and 1829 characters.] Note: See Note 17 in the Notes to Consolidated Financial Statements for detail by reportable segment/market.  Non-same store/other NOI results consist primarily of properties acquired in calendar years 2020 and 2021, operations from the Company’s development properties and operations prior to disposition from 2020 and 2021 sold properties.

•

The decrease in same store rental income is due primarily to the negative cumulative impact of leasing activity at lower Average Rental Rates, particularly in late 2020 and early 2021.

•

The increase in same store operating expenses is due primarily to:

 

•

Utilities – A $10.2 million increase due to water, sewer and trash charges (approximately 65% of total) increasing as a result of both higher usage and rate, as well as increases in natural gas and electric charges (approximately 35% of total) due to higher commodity prices;

 

•

Real estate taxes – A $5.2 million increase due to modest rate growth, partially offset by reduced assessed values in certain locations; and

 

•

Repairs and maintenance – A $5.2 million increase primarily driven by low comparable period expense growth due to the pandemic along with increases in minimum wage on contract services and maintenance repairs in 2021.

•

The decrease in non-same store/other NOI is due primarily to a negative impact of lost NOI from 2020 and 2021 dispositions of $50.2 million, partially offset by a positive impact of higher NOI from non-stabilized properties acquired between 2019 and 2021 of $21.1 million.

•

The decrease in consolidated total NOI is primarily a result of the Company’s lower NOI from same store properties, largely due to the economic impact from the COVID-19 pandemic.See the Same Store Results section below for additional discussion of those results.

29

Property management expenses 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 increased approximately $4.3 million or 4.6% during the year ended December 31, 2021 as compared to 2020.  This increase is primarily attributable to increases in payroll-related costs, legal and professional fees and information technology-related costs specifically for various operating initiatives such as sales-focused improvements and service enhancements.  The expenses in 2020 were lower than normal due to the impact of COVID-19.General and administrative expenses, which include corporate operating expenses, increased approximately $8.2 million or 17.0% during the year ended December 31, 2021 as compared to 2020, primarily due to increases in payroll-related costs, partially offset by decreases in office rent as a result of the consolidation of space at the Company’s corporate headquarters.  The expenses in 2020 were lower than normal due to the impact of COVID-19.Depreciation expense, which includes depreciation on non-real estate assets, increased approximately $17.4 million or 2.1% during the year ended December 31, 2021 as compared to 2020, primarily as a result of additional depreciation expense on properties acquired in 2020 and 2021 and development properties placed in service during 2021, partially offset by in-place leases for 2019 acquisitions being fully depreciated as of December 31, 2020 and the Company being a net seller during 2020, which resulted in lower depreciation in the current period.Net gain on sales of real estate properties increased approximately $540.4 million or 101.6% during the year ended December 31, 2021 as compared to 2020, primarily as a result of a higher sales volume with the sale of fourteen consolidated apartment properties in 2021 as compared to the sale of six consolidated apartment properties in the same period in 2020.  Impairment increased approximately $16.8 million during the year ended December 31, 2021 as compared to 2020, due to an impairment charge in 2021 on one land parcel held for development compared to no impairment charges taken during 2020.Interest and other income increased approximately $19.7 million during the year ended December 31, 2021 as compared to 2020.  The increase is primarily due to a gain of $23.4 million on the sale of various investment securities that occurred during 2021 but not during 2020, partially offset by decreases in insurance/litigation settlement proceeds and other non-comparable items that occurred during 2020 but not during 2021.Other expenses increased approximately $1.8 million or 10.1% during the year ended December 31, 2021 as compared to 2020, primarily due to an increase in various litigation and environmental reserves/settlements and an increase in ground lease finance charges, partially offset by a decrease in advocacy contributions.Interest expense, including amortization of deferred financing costs, decreased approximately $92.8 million or 24.8% during the year ended December 31, 2021 as compared to 2020.  The decrease is primarily due to lower debt extinguishment costs as well as lower overall interest rates and debt balances in 2021 as compared to 2020.  The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the year ended December 31, 2021 was 3.52% as compared to 3.94% in 2020.  The Company capitalized interest of approximately $15.9 million and $10.2 million during the years ended December 31, 2021 and 2020, respectively. Net gain on sales of land parcels decreased approximately $34.2 million during the year ended December 31, 2021 as compared to 2020, primarily as a result of the sale of two land parcels in 2020 as compared to no sales in 2021.Net (income) loss attributable to Noncontrolling Interests in partially owned properties increased approximately $3.1 million or 20.9% during the year ended December 31, 2021 as compared to 2020, primarily as a result of higher noncontrolling interest allocations from higher gains on the sale of one partially owned apartment property in 2021 as compared to the sale of one partially owned apartment property in 2020.For comparison of the year ended December 31, 2020 to the year ended December 31, 2019, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2020.

Same Store Results

Properties that the Company owned and were stabilized for all of both 2021 and 2020 (the “2021 Same Store Properties”), which represented 74,077 apartment units, drove the Company’s results of operations.  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.

30

The following table provides comparative total same store results and statistics for the 2021 Same Store Properties:

2021 vs. 2020

Same Store Results/Statistics Including 74,077 Same Store Apartment Units

$ in thousands (except for Average Rental Rate)

[Table with ~7 rows, ~39 numbers, and 1293 characters.] Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.

(1)

Changes in same store Non-Residential revenues are primarily driven by the write-off of Non-Residential straight-line lease receivables in 2020 and lower bad debt in 2021. The following table provides results and statistics related to our Residential same store operations for the years ended December 31, 2021 and 2020:

2021 vs. 2020

Same Store Residential Results/Statistics by Market

[Table with ~12 rows, ~92 numbers, and 2004 characters.] Note: The above table reflects Residential same store results only.  Residential operations account for approximately 96.1% of total revenues for the year ended December 31, 2021.Despite the significant impact from the pandemic on our business, which is reflected in the results for the year ended December 31, 2021, a strong recovery continues across our portfolio.  Robust economic growth coupled with reopening of cities drove our operations to recover rapidly with significant demand for our apartments in all of our markets.  This has led to high Physical Occupancy, increased pricing power and a material reduction in Leasing Concessions.  Key operating drivers for this performance during 2021 include:

 

•

Pricing – There has been significant improvement in pricing (net of Leasing Concessions) since the end of the fourth quarter of 2020, with pricing reaching or exceeding pre-pandemic levels.  Monthly Residential Leasing Concessions granted have also declined significantly from their peak of $6.1 million per month in February 2021 and have now returned to more normalized pre-pandemic levels.

 

•

Physical Occupancy – Physical Occupancy was 96.6% for the fourth quarter of 2021 and remained strong for the year ended December 31, 2021 at 96.1%.

31

•

Percentage of Residents Renewing and Turnover – Our strategy of focusing on resident renewals continued to deliver strong results.  We reported the lowest Turnover in our history for both the fourth quarter of 2021 (9.4%) and the full year of 2021 (44.4%), which we believe reaffirms the demand and desirability for our product.  Results have been positive to date as the Percentage of Residents Renewing continues to improve with the fourth quarter of 2021 above 60%, which is higher than 2019 levels.Despite strong rent collections throughout the pandemic, the financial impact from a small subset of our residents and Non-Residential tenants not paying has led to higher levels of bad debt than we have historically experienced.  We continue to work with our residents and Non-Residential tenants on meeting their financial obligations.  During the year ended December 31, 2021, the Company received governmental rental assistance payments paid on behalf of residents of approximately $34.7 million with approximately $16.3 million of that received in the fourth quarter of 2021.  Despite receipt of these payments, our reserves and bad debt remained elevated in 2021.  Our bad debt allowance policies remain consistent with those in place before the pandemic.

Liquidity and Capital Resources

With approximately $2.2 billion in readily available liquidity, a strong balance sheet, limited near-term maturities, very strong credit metrics and ample access to capital markets, the Company believes it is well positioned to meet its future obligations and opportunities.  See further discussion below.

Statements of Cash Flows

The following table sets forth our sources and uses of cash flows for the years ended December 31, 2021, 2020 and 2019 (amounts in thousands): [Table with ~4 rows, ~13 numbers, and 387 characters.] The following provides information regarding the Company’s cash flows from operating, investing and financing activities for the year ended December 31, 2021.

Operating Activities

Our operating cash flows are primarily impacted by NOI and its components, such as Average Rental Rates, Physical Occupancy levels and operating expenses related to our properties.  Cash provided by operating activities for the year ended December 31, 2021 as compared to 2020, declined by approximately $5.4 million as a direct result of the NOI and other changes discussed above in Results of Operations.

Investing Activities

Our investing cash flows are primarily impacted by our transaction activity (acquisitions/dispositions), development spend and capital expenditures.  For 2021, key drivers were:

 

•

Acquired seventeen consolidated rental properties for approximately $1.7 billion in cash;

 

•

Disposed of fourteen consolidated rental properties, receiving net proceeds of approximately $1.7 billion;

 

•

Invested in six separate unconsolidated development joint ventures for approximately $48.5 million in cash;

 

•

Invested $206.4 million primarily in development projects;

 

•

Purchased $168.3 million of various investment securities and other investments;

 

•

Sold various investment securities, receiving net proceeds of $191.4 million; and

 

•

Invested $151.0 million in capital expenditures to real estate presented in the table below.

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For the year ended December 31, 2021, our actual capital expenditures to real estate included 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, 2021

[Table with ~5 rows, ~20 numbers, and 632 characters.] (1)

Renovation Expenditures – Amounts for 1,347 same store apartment units approximated $21,201 per apartment unit renovated.

Financing Activities

Our financing cash flows primarily relate to our borrowing activity (debt proceeds or repayment), distributions/dividends to shareholders and other Common Share activity.  In 2021, key drivers were:

 

•

Obtained $28.5 million in 3.58% fixed rate mortgage debt maturing on March 1, 2031;

 

•

Obtained $29.9 million in variable rate construction mortgage debt that is non-recourse to the Company maturing on June 25, 2022;

 

•

Issued $500.0 million of ten-year 1.85% unsecured notes due 2031, receiving net proceeds of approximately $497.5 million before underwriting fees and other expenses.  This was the Company’s second ever green bond offering;

 

•

Repaid $164.3 million of mortgage loans (inclusive of scheduled principal repayments);

 

•

Issued Common Shares related to share option exercises and ESPP purchases and received net proceeds of $89.7 million, which were contributed to the capital of the Operating Partnership in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis); and

 

•

Paid dividends/distributions on Common Shares, Preferred Shares, Units (including OP Units and restricted units) and noncontrolling interests in partially owned properties totaling approximately $940.7 million.

Short-Term Liquidity and Cash Proceeds

The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under the Company’s revolving credit facility and commercial paper program.  Currently, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The following table presents the Company’s balances for cash and cash equivalents, restricted deposits and the available borrowing capacity on its revolving credit facility as of December 31, 2021 and 2020 (amounts in thousands): [Table with ~3 rows, ~8 numbers, and 256 characters.]

Credit Facility and Commercial Paper Program

The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024.  The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans.  The interest rate on advances under the facility will generally be the London Interbank Offered Rate (“LIBOR”) plus a spread (currently 0.775%), or based on bids received from the

33

lending group, and the Company pays an annual facility fee (currently 0.125%).  Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating.The unsecured revolving credit agreement contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances, such as the anticipated phase-out of LIBOR. See Item 7A for additional information with respect to the LIBOR transition.The Company may borrow up to a maximum of $1.0 billion under its commercial paper program subject to market conditions.  The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness.The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations.  The following table presents the availability on the Company’s unsecured revolving credit facility as of February 11, 2022 (amounts in thousands): [Table with ~5 rows, ~5 numbers, and 334 characters.]

Dividend Policy

The Company determines its dividends/distributions based on actual and projected financial conditions, the Company’s actual and projected liquidity and operating results, the Company’s projected cash needs for capital expenditures and other investment activities and such other factors as the Company’s Board of Trustees deems relevant.  The Company declared a dividend/distribution for each quarter in 2021 of $0.6025 per share/unit, consistent with the amount paid in 2020.  All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.  Total dividends/distributions paid in January 2022 amounted to $233.5 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended December 31, 2021.

Long-Term Financing and Capital Needs

The Company expects to meet its long-term liquidity requirements, such as lump sum unsecured note and mortgage debt maturities, property acquisitions and financing of development activities, through the issuance of secured and unsecured debt and equity securities (including additional OP Units), proceeds received from the disposition of certain properties and joint ventures, along with cash generated from operations after all distributions.  The Company has a significant number of unencumbered properties available to secure additional mortgage borrowings should unsecured capital be unavailable or the cost of alternative sources of capital be too high.  The 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 $28.3 billion in investment in real estate on the Company’s balance sheet at December 31, 2021, $24.5 billion or 86.7% 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.EQR issues equity and guarantees certain debt of the Operating Partnership from time to time.  EQR does not have any indebtedness as all debt is incurred by the Operating Partnership.

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The Company’s total debt summary schedule as of December 31, 2021 is as follows:

Financing Activities

Our financing cash flows primarily relate to our borrowing activity (debt proceeds or repayment), distributions/dividends to shareholders and other Common Share activity.  In 2021, key drivers were:

 

•

Obtained $28.5 million in 3.58% fixed rate mortgage debt maturing on March 1, 2031;

 

•

Obtained $29.9 million in variable rate construction mortgage debt that is non-recourse to the Company maturing on June 25, 2022;

 

•

Issued $500.0 million of ten-year 1.85% unsecured notes due 2031, receiving net proceeds of approximately $497.5 million before underwriting fees and other expenses.  This was the Company’s second ever green bond offering;

 

•

Repaid $164.3 million of mortgage loans (inclusive of scheduled principal repayments);

 

•

Issued Common Shares related to share option exercises and ESPP purchases and received net proceeds of $89.7 million, which were contributed to the capital of the Operating Partnership in exchange for additional OP Units (on a one-for-one Common Share per OP Unit basis); and

 

•

Paid dividends/distributions on Common Shares, Preferred Shares, Units (including OP Units and restricted units) and noncontrolling interests in partially owned properties totaling approximately $940.7 million.

Short-Term Liquidity and Cash Proceeds

The Company generally expects to meet its short-term liquidity requirements, including capital expenditures related to maintaining its existing properties and scheduled unsecured note and mortgage note repayments, through its working capital, net cash provided by operating activities and borrowings under the Company’s revolving credit facility and commercial paper program.  Currently, the Company considers its cash provided by operating activities to be adequate to meet operating requirements and payments of distributions. The following table presents the Company’s balances for cash and cash equivalents, restricted deposits and the available borrowing capacity on its revolving credit facility as of December 31, 2021 and 2020 (amounts in thousands): [Table with ~3 rows, ~8 numbers, and 256 characters.]

Credit Facility and Commercial Paper Program

The Company has a $2.5 billion unsecured revolving credit facility maturing November 1, 2024.  The Company has the ability to increase available borrowings by an additional $750.0 million by adding lenders to the facility, obtaining the agreement of existing lenders to increase their commitments or incurring one or more term loans.  The interest rate on advances under the facility will generally be the London Interbank Offered Rate (“LIBOR”) plus a spread (currently 0.775%), or based on bids received from the

33

lending group, and the Company pays an annual facility fee (currently 0.125%).  Both the spread and the facility fee are dependent on the Company’s senior unsecured credit rating.The unsecured revolving credit agreement contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances, such as the anticipated phase-out of LIBOR. See Item 7A for additional information with respect to the LIBOR transition.The Company may borrow up to a maximum of $1.0 billion under its commercial paper program subject to market conditions.  The notes will be sold under customary terms in the United States commercial paper note market and will rank pari passu with all of the Company’s other unsecured senior indebtedness.The Company limits its utilization of the revolving credit facility in order to maintain liquidity to support its $1.0 billion commercial paper program along with certain other obligations.  The following table presents the availability on the Company’s unsecured revolving credit facility as of February 11, 2022 (amounts in thousands): [Table with ~5 rows, ~5 numbers, and 334 characters.]

Dividend Policy

The Company determines its dividends/distributions based on actual and projected financial conditions, the Company’s actual and projected liquidity and operating results, the Company’s projected cash needs for capital expenditures and other investment activities and such other factors as the Company’s Board of Trustees deems relevant.  The Company declared a dividend/distribution for each quarter in 2021 of $0.6025 per share/unit, consistent with the amount paid in 2020.  All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.  Total dividends/distributions paid in January 2022 amounted to $233.5 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended December 31, 2021.

Long-Term Financing and Capital Needs

The Company expects to meet its long-term liquidity requirements, such as lump sum unsecured note and mortgage debt maturities, property acquisitions and financing of development activities, through the issuance of secured and unsecured debt and equity securities (including additional OP Units), proceeds received from the disposition of certain properties and joint ventures, along with cash generated from operations after all distributions.  The Company has a significant number of unencumbered properties available to secure additional mortgage borrowings should unsecured capital be unavailable or the cost of alternative sources of capital be too high.  The 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 $28.3 billion in investment in real estate on the Company’s balance sheet at December 31, 2021, $24.5 billion or 86.7% 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.EQR issues equity and guarantees certain debt of the Operating Partnership from time to time.  EQR does not have any indebtedness as all debt is incurred by the Operating Partnership.

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The Company’s total debt summary schedule as of December 31, 2021 is as follows:

Debt Summary as of December 31, 2021

($ in thousands)

[Table with ~14 rows, ~22 numbers, and 785 characters.] The following table summarizes the Company’s debt maturity schedule as of December 31, 2021:

Debt Maturity Schedule as of December 31, 2021

($ in thousands)

[Table with ~15 rows, ~66 numbers, and 1200 characters.] (1)

Includes $315.1 million in principal outstanding on the Company’s commercial paper program.Interest expected to be incurred on the Company’s secured and unsecured debt based on obligations outstanding at December 31, 2021, inclusive of capitalized interest, approximates $225.0 million annually for the next five years, with total remaining obligations of approximately $2.5 billion.  For floating rate debt, the current rate in effect for the most recent payment through December 31, 2021 is assumed to be in effect through the respective maturity date of each instrument.See Note 9 in the Notes to Consolidated Financial Statements for additional discussion of debt at December 31, 2021.  See also Notes 8 and 16 in the Notes to Consolidated Financial Statements for additional discussion of contractual obligations and commitments as of December 31, 2021.

35

Capital Structure

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2021 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.

35

Capital Structure

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2021 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, 2021

(Amounts in thousands except for share/unit and per share amounts)

[Table with ~10 rows, ~24 numbers, and 1078 characters.] The Operating Partnership’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2021 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.

ERP Operating Limited Partnership

Capital Structure as of December 31, 2021

(Amounts in thousands except for unit and per unit amounts)

[Table with ~8 rows, ~19 numbers, and 781 characters.]

Financial Flexibility

EQR and ERPOP currently have an active universal shelf registration statement for the issuance of equity and debt securities that automatically became effective upon filing with the SEC in June 2019 and expires in June 2022.  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).The Company has an At-The-Market (“ATM”) share offering program which allows EQR to issue Common Shares from time to time into the existing trading market at current market prices or through negotiated transactions, including under forward sale arrangements.  The current program matures in June 2022 and gives EQR the authority to issue up to 13.0 million shares, all of which remain outstanding as of December 31, 2021, pending the settlement of the outstanding forward sale agreements.  These forward sale agreements allow the Company, at its election, to settle the agreements by issuing Common Shares in exchange for net proceeds at the then-applicable forward sale price specified by the agreement or, alternatively, to settle the agreements in whole or in part through the delivery or receipt of Common Shares or cash.  Issuances of shares under these forward sale agreements are classified as equity transactions.  Accordingly, no amounts relating to the forward sale agreements are recorded in the consolidated financial statements

36

until settlement occurs.  Prior to any settlements, the only impact to the consolidated financial statements is the inclusion of incremental shares, if any, within the calculation of diluted net income per share using the treasury stock method (see Note 11 in the Notes to Consolidated Financial Statements for additional discussion).  The actual forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current overnight federal funds rate and the amount of dividends paid to holders of the Company’s Common Shares over the term of the forward sale agreement.  As of February 11, 2022, the Company had entered into such forward sale agreements under this program for a total of approximately 1.7 million Common Shares at a weighted average initial forward price per share of $83.25.  As of February 11, 2022, no shares under the forward sale agreements had been settled.  These forward sale agreements must be settled by March 2023.The Company may repurchase up to 13.0 million Common Shares under its share repurchase program.  No open market repurchases have occurred since 2008, and no repurchases of any kind have occurred since February 2014.  As of February 11, 2022, EQR has remaining authorization to repurchase up to 13.0 million of its shares. We believe our ability to access capital markets is enhanced by ERPOP’s long-term senior debt ratings and short-term commercial paper ratings, as well as EQR’s long-term preferred equity ratings.  As of February 11, 2022, the ratings are as follows: [Table with ~3 rows, ~4 numbers, and 205 characters.]

See Note 18 in the Notes to Consolidated Financial Statements for discussion of the events, if any, which occurred subsequent to December 31, 2021.

Definitions

The definition of certain terms described above or below are as follows:

 

•

Acquisition Cap Rate – NOI that the Company anticipates receiving in the next 12 months (or the year two or three stabilized NOI for properties that are in lease-up at acquisition) less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross purchase price of the asset.  The weighted average Acquisition Cap Rate for acquired properties is weighted based on the projected NOI streams and the relative purchase price for each respective property.

 

•

Average Rental Rate – Total Residential rental revenues reflected on a straight-line basis in accordance with GAAP divided by the weighted average occupied apartment units for the reporting period presented.

 

•

Building Improvements – Includes roof replacement, paving, building mechanical equipment systems, exterior siding and painting, major landscaping, furniture, fixtures and equipment for amenities and common areas, vehicles and office and maintenance equipment.  

 

•

Disposition Yield – NOI that the Company anticipates giving up in the next 12 months less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross sales price of the asset.  The weighted average Disposition Yield for sold properties is weighted based on the projected NOI streams and the relative sales price for each respective property.

 

•

Leasing Concessions – Reflects upfront discounts on both new move-in and renewal leases on a straight-line basis.

 

•

Non-Residential – Consists of revenues and expenses from retail and public parking garage operations.

 

•

Non-Same Store Properties – For annual comparisons, primarily includes all properties acquired during 2020 and 2021, plus any properties in lease-up and not stabilized as of January 1, 2020.

 

•

Percentage of Residents Renewing – Leases renewed expressed as a percentage of total renewal offers extended during the reporting period.

 

•

Physical Occupancy – The weighted average occupied apartment units for the reporting period divided by the average of total apartment units available for rent for the reporting period.

37

•

Renovation Expenditures – Apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets.  

 

•

Replacements – Includes appliances, mechanical equipment, fixtures and flooring (including hardwood and carpeting).

 

•

Residential – Consists of multifamily apartment revenues and expenses.

 

•

Same Store Properties – For annual comparisons, primarily includes all properties acquired or completed that are stabilized prior to January 1, 2020, less properties subsequently sold.  Properties are included in Same Store when they are stabilized for all of the current and comparable periods presented.

 

•

Same Store Residential Revenues – Revenues from our same store properties presented on a GAAP basis which reflects the impact of Leasing Concessions on a straight-line basis.

 

•

% of Stabilized Budgeted NOI – Represents original budgeted 2022 NOI for stabilized properties and projected annual NOI at stabilization (defined as having achieved 90% occupancy for three consecutive months) for properties that are in lease-up.

 

•

Total Budgeted Capital Cost – Estimated remaining cost for projects under development and/or developed plus all capitalized costs incurred to date, including land acquisition costs, construction costs, capitalized real estate taxes and insurance, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, plus any estimates of costs remaining to be funded for all projects, all in accordance with GAAP.  Amounts for partially owned consolidated and unconsolidated properties are presented at 100% of the project.

 

•

Turnover – Total Residential move-outs (including inter-property and intra-property transfers) divided by total Residential apartment units.

 

•

Unlevered Internal Rate of Return (“IRR”) – The Unlevered IRR on sold properties is the compound annual rate of return calculated by the Company based on the timing and amount of: (i) the gross purchase price of the property plus any direct acquisition costs incurred by the Company; (ii) total revenues earned during the Company’s ownership period; (iii) total direct property operating expenses (including real estate taxes and insurance) incurred during the Company’s ownership period; (iv) capital expenditures incurred during the Company’s ownership period; and (v) the gross sales price of the property net of selling costs.

38

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, 2021.The Company has identified the significant accounting policies below 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.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, including its investment in real estate, for indicators of impairment at least quarterly.  The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, legal, regulatory and environmental concerns, the Company’s intent and ability to hold the related asset, as well as any significant cost overruns on development properties.  Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.  Assessing impairment can be complex and involves a high degree of subjectivity in determining if indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset.  In particular, these estimates are sensitive to significant assumptions, including the estimation of future rental revenues, operating expenses, discount and capitalization rates and our intent and ability to hold the related asset, all of which could be affected by our expectations about future market or economic conditions.  Assumptions are primarily subject to property-specific characteristics, especially with respect to our intent and ability to hold the related asset. While these property-specific assumptions can have a significant impact on the undiscounted cash flows or estimated fair value of a particular asset, our evaluation of the reported carrying values of long-lived assets during the current year were not particularly sensitive to external or market assumptions.

Acquisition of Investment Properties

The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values using assumptions primarily based upon property-specific characteristics.  In making estimates of relative 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 or developed 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 relative fair value of the tangible and intangible assets/liabilities acquired.

39

Funds From Operations and Normalized Funds From Operations

The following is the Company’s and the Operating Partnership’s reconciliation of net income to FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units for each of the three years ended December 31, 2021:

Financial Flexibility

EQR and ERPOP currently have an active universal shelf registration statement for the issuance of equity and debt securities that automatically became effective upon filing with the SEC in June 2019 and expires in June 2022.  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).The Company has an At-The-Market (“ATM”) share offering program which allows EQR to issue Common Shares from time to time into the existing trading market at current market prices or through negotiated transactions, including under forward sale arrangements.  The current program matures in June 2022 and gives EQR the authority to issue up to 13.0 million shares, all of which remain outstanding as of December 31, 2021, pending the settlement of the outstanding forward sale agreements.  These forward sale agreements allow the Company, at its election, to settle the agreements by issuing Common Shares in exchange for net proceeds at the then-applicable forward sale price specified by the agreement or, alternatively, to settle the agreements in whole or in part through the delivery or receipt of Common Shares or cash.  Issuances of shares under these forward sale agreements are classified as equity transactions.  Accordingly, no amounts relating to the forward sale agreements are recorded in the consolidated financial statements

36

until settlement occurs.  Prior to any settlements, the only impact to the consolidated financial statements is the inclusion of incremental shares, if any, within the calculation of diluted net income per share using the treasury stock method (see Note 11 in the Notes to Consolidated Financial Statements for additional discussion).  The actual forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current overnight federal funds rate and the amount of dividends paid to holders of the Company’s Common Shares over the term of the forward sale agreement.  As of February 11, 2022, the Company had entered into such forward sale agreements under this program for a total of approximately 1.7 million Common Shares at a weighted average initial forward price per share of $83.25.  As of February 11, 2022, no shares under the forward sale agreements had been settled.  These forward sale agreements must be settled by March 2023.The Company may repurchase up to 13.0 million Common Shares under its share repurchase program.  No open market repurchases have occurred since 2008, and no repurchases of any kind have occurred since February 2014.  As of February 11, 2022, EQR has remaining authorization to repurchase up to 13.0 million of its shares. We believe our ability to access capital markets is enhanced by ERPOP’s long-term senior debt ratings and short-term commercial paper ratings, as well as EQR’s long-term preferred equity ratings.  As of February 11, 2022, the ratings are as follows: [Table with ~3 rows, ~4 numbers, and 205 characters.]

See Note 18 in the Notes to Consolidated Financial Statements for discussion of the events, if any, which occurred subsequent to December 31, 2021.

Definitions

The definition of certain terms described above or below are as follows:

 

•

Acquisition Cap Rate – NOI that the Company anticipates receiving in the next 12 months (or the year two or three stabilized NOI for properties that are in lease-up at acquisition) less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross purchase price of the asset.  The weighted average Acquisition Cap Rate for acquired properties is weighted based on the projected NOI streams and the relative purchase price for each respective property.

 

•

Average Rental Rate – Total Residential rental revenues reflected on a straight-line basis in accordance with GAAP divided by the weighted average occupied apartment units for the reporting period presented.

 

•

Building Improvements – Includes roof replacement, paving, building mechanical equipment systems, exterior siding and painting, major landscaping, furniture, fixtures and equipment for amenities and common areas, vehicles and office and maintenance equipment.  

 

•

Disposition Yield – NOI that the Company anticipates giving up in the next 12 months less an estimate of property management costs/management fees allocated to the project (generally ranging from 2.0% to 4.0% of revenues depending on the size and income streams of the asset) and less an estimate for in-the-unit replacement capital expenditures (generally ranging from $100-$450 per apartment unit depending on the age and condition of the asset) divided by the gross sales price of the asset.  The weighted average Disposition Yield for sold properties is weighted based on the projected NOI streams and the relative sales price for each respective property.

 

•

Leasing Concessions – Reflects upfront discounts on both new move-in and renewal leases on a straight-line basis.

 

•

Non-Residential – Consists of revenues and expenses from retail and public parking garage operations.

 

•

Non-Same Store Properties – For annual comparisons, primarily includes all properties acquired during 2020 and 2021, plus any properties in lease-up and not stabilized as of January 1, 2020.

 

•

Percentage of Residents Renewing – Leases renewed expressed as a percentage of total renewal offers extended during the reporting period.

 

•

Physical Occupancy – The weighted average occupied apartment units for the reporting period divided by the average of total apartment units available for rent for the reporting period.

37

•

Renovation Expenditures – Apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets.  

 

•

Replacements – Includes appliances, mechanical equipment, fixtures and flooring (including hardwood and carpeting).

 

•

Residential – Consists of multifamily apartment revenues and expenses.

 

•

Same Store Properties – For annual comparisons, primarily includes all properties acquired or completed that are stabilized prior to January 1, 2020, less properties subsequently sold.  Properties are included in Same Store when they are stabilized for all of the current and comparable periods presented.

 

•

Same Store Residential Revenues – Revenues from our same store properties presented on a GAAP basis which reflects the impact of Leasing Concessions on a straight-line basis.

 

•

% of Stabilized Budgeted NOI – Represents original budgeted 2022 NOI for stabilized properties and projected annual NOI at stabilization (defined as having achieved 90% occupancy for three consecutive months) for properties that are in lease-up.

 

•

Total Budgeted Capital Cost – Estimated remaining cost for projects under development and/or developed plus all capitalized costs incurred to date, including land acquisition costs, construction costs, capitalized real estate taxes and insurance, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, plus any estimates of costs remaining to be funded for all projects, all in accordance with GAAP.  Amounts for partially owned consolidated and unconsolidated properties are presented at 100% of the project.

 

•

Turnover – Total Residential move-outs (including inter-property and intra-property transfers) divided by total Residential apartment units.

 

•

Unlevered Internal Rate of Return (“IRR”) – The Unlevered IRR on sold properties is the compound annual rate of return calculated by the Company based on the timing and amount of: (i) the gross purchase price of the property plus any direct acquisition costs incurred by the Company; (ii) total revenues earned during the Company’s ownership period; (iii) total direct property operating expenses (including real estate taxes and insurance) incurred during the Company’s ownership period; (iv) capital expenditures incurred during the Company’s ownership period; and (v) the gross sales price of the property net of selling costs.

38

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, 2021.The Company has identified the significant accounting policies below 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.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, including its investment in real estate, for indicators of impairment at least quarterly.  The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, legal, regulatory and environmental concerns, the Company’s intent and ability to hold the related asset, as well as any significant cost overruns on development properties.  Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment loss is warranted.  Assessing impairment can be complex and involves a high degree of subjectivity in determining if indicators are present and in estimating the future undiscounted cash flows or the fair value of an asset.  In particular, these estimates are sensitive to significant assumptions, including the estimation of future rental revenues, operating expenses, discount and capitalization rates and our intent and ability to hold the related asset, all of which could be affected by our expectations about future market or economic conditions.  Assumptions are primarily subject to property-specific characteristics, especially with respect to our intent and ability to hold the related asset. While these property-specific assumptions can have a significant impact on the undiscounted cash flows or estimated fair value of a particular asset, our evaluation of the reported carrying values of long-lived assets during the current year were not particularly sensitive to external or market assumptions.

Acquisition of Investment Properties

The Company allocates the purchase price of properties that meet the definition of an asset acquisition to net tangible and identified intangible assets acquired based on their relative fair values using assumptions primarily based upon property-specific characteristics.  In making estimates of relative 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 or developed 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 relative fair value of the tangible and intangible assets/liabilities acquired.

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Funds From Operations and Normalized Funds From Operations

The following is the Company’s and the Operating Partnership’s reconciliation of net income to FFO available to Common Shares and Units / Units and Normalized FFO available to Common Shares and Units / Units for each of the three years ended December 31, 2021:

Funds From Operations and Normalized Funds From Operations

(Amounts in thousands)

[Table with ~26 rows, ~79 numbers, and 2696 characters.]

**(1)

The National Association of Real Estate Investment Trusts (“Nareit”) defines funds from operations (“FFO”) (December 2018 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 real estate and land when connected to the main business of a REIT, impairment write-downs of investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and depreciation and amortization related to real estate.  Adjustments for partially owned consolidated and unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis.**

(2)

Normalized funds from operations (“Normalized FFO”) begins with FFO and excludes:

•

the impact of any expenses relating to non-operating asset impairment;

•

pursuit cost write-offs;

•

gains and losses from early debt extinguishment and preferred share redemptions;

•

gains and losses from non-operating assets; and

**•

other miscellaneous items.**

40

**(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 from sales and impairment write-downs of depreciable real estate and excluding depreciation related to real estate (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 shares/preference units in accordance with GAAP.  The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units are collectively referred to as the “Noncontrolling Interests – Operating Partnership”.  Subject to certain restrictions, the Noncontrolling Interests – Operating Partnership may exchange their OP Units for Common Shares on a one-for-one basis.**

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from financial instruments primarily from changes in interest rates.  Such risks derive from the refinancing of debt maturities, from exposure to interest rate fluctuations on floating rate debt and from derivative instruments utilized to swap fixed rate debt to floating or to hedge rates in anticipation of future debt issuances.  Our operating results are, therefore, affected by changes in short-term interest rates, primarily LIBOR and Securities Industry and Financial Markets Association (“SIFMA”) indices, which directly impact borrowings under our revolving credit facility and interest on secured and unsecured borrowings contractually tied to such rates.  Short-term interest rates also indirectly affect the discount on notes issued under our commercial paper program.  Additionally, we have exposure to long-term interest rates, particularly U.S. Treasuries as they are utilized to price our long-term borrowings and therefore affect the cost of refinancing existing debt or incurring additional debt.In the U.S., the Alternative Rates Reference Committee (the “ARRC”), a group of market participants convened in 2014 to help ensure a successful transition away from USD LIBOR, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate.  As part of the transition process that is now under way, LIBOR is no longer published for certain tenors and key USD settings are expected to be discontinued by June 2023.  LIBOR is the primary basis for determining interest payments on borrowings on the Company’s $2.5 billion revolving credit facility.  This facility contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances.  We are closely monitoring the evolution of practices in the credit market and we do not expect such transition to have a material impact on the Company’s financial position or cash flows.The Company monitors and manages interest rates as part of its risk management process, by targeting adequate levels of floating rate exposure and an appropriate debt maturity profile.  From time to time, we may utilize derivative instruments to manage interest rate exposure and to comply with the requirements of certain lenders, but not for trading or speculative purposes.The Company had total variable rate debt of $0.6 billion, representing 7.3% of total debt, and $0.8 billion, representing 10.0% of total debt, as of December 31, 2021 and 2020, respectively.  If interest rates had been 100 basis points higher in 2021 and 2020 and average balances coincided with year end balances, our annual interest expense would have been $6.1 million and $8.1 million higher, respectively.  Unsecured notes issued under the Company’s commercial paper program are treated as variable rate debt for the purposes of this calculation even though they do not have a stated interest rate, given their short-term nature.  The effect of derivatives, if applicable, is also considered when computing the total amount of variable rate debt.Changes in interest rates also affect the estimated fair market value of our fixed rate debt, computed using a discounted cash flow model.  As of December 31, 2021, the Company had total outstanding fixed rate debt of $7.7 billion, or 92.7% of total debt, with an estimated fair market value of $8.4 billion.  If interest rates had been 100 basis points lower as of December 31, 2021, the estimated fair market value would have increased by approximately $637.2 million.  As of December 31, 2020, the Company had total outstanding fixed rate debt of $7.2 billion, or 90.0% of total debt, with an estimated fair market value of $8.2 billion.  If interest rates had been 100 basis points lower as of December 31, 2020, the estimated fair market value would have increased by approximately $686.6 million.These amounts were determined by considering the impact of hypothetical interest rates on the Company’s financial instruments.  These analyses do not consider the effects of the changes in overall economic activity that could exist in such an environment.  Further, in the event of changes of such magnitude, management would likely take actions to further mitigate its exposure to these changes.  However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company’s financial structure or results.The Company cannot predict the effect of adverse changes in interest rates on its debt and derivative instruments and, therefore, its exposure to market risk, nor can there be any assurance that long-term debt will be available at advantageous pricing.  Consequently, future results may differ materially from the estimated adverse changes discussed above.

Item 8. Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements and Schedule on page F-1 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Equity Residential

(a) Evaluation of Disclosure Controls and Procedures:

Effective as of December 31, 2021, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the

42

Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Management’s Report on Internal Control over Financial Reporting:

Equity Residential’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act.  Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation.Based on the Company’s evaluation under the framework in Internal Control – Integrated Framework, management concluded that its internal control over financial reporting was effective as of December 31, 2021.  Our internal control over financial reporting has been audited as of December 31, 2021 by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

(c) Changes in Internal Control over Financial Reporting:

There were no changes to the internal control over financial reporting of the Company identified in connection with the Company’s evaluation referred to above that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ERP Operating Limited Partnership

(a) Evaluation of Disclosure Controls and Procedures:

Effective as of December 31, 2021, the Operating Partnership carried out an evaluation, under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of EQR, of the effectiveness of the Operating Partnership’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Operating Partnership in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Management’s Report on Internal Control over Financial Reporting:

ERP Operating Limited Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act.  Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of EQR, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation.Based on the Operating Partnership’s evaluation under the framework in Internal Control – Integrated Framework, management concluded that its internal control over financial reporting was effective as of December 31, 2021.  Our internal control over financial reporting has been audited as of December 31, 2021 by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

43

(c) Changes in Internal Control over Financial Reporting:

There were no changes to the internal control over financial reporting of the Operating Partnership identified in connection with the Operating Partnership’s evaluation referred to above that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

Item 9B. Other Information

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

44

(2)

Normalized funds from operations (“Normalized FFO”) begins with FFO and excludes:

•

the impact of any expenses relating to non-operating asset impairment;

•

pursuit cost write-offs;

•

gains and losses from early debt extinguishment and preferred share redemptions;

•

gains and losses from non-operating assets; and

**•

other miscellaneous items.**

40

**(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 from sales and impairment write-downs of depreciable real estate and excluding depreciation related to real estate (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 shares/preference units in accordance with GAAP.  The equity positions of various individuals and entities that contributed their properties to the Operating Partnership in exchange for OP Units are collectively referred to as the “Noncontrolling Interests – Operating Partnership”.  Subject to certain restrictions, the Noncontrolling Interests – Operating Partnership may exchange their OP Units for Common Shares on a one-for-one basis.**

41

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from financial instruments primarily from changes in interest rates.  Such risks derive from the refinancing of debt maturities, from exposure to interest rate fluctuations on floating rate debt and from derivative instruments utilized to swap fixed rate debt to floating or to hedge rates in anticipation of future debt issuances.  Our operating results are, therefore, affected by changes in short-term interest rates, primarily LIBOR and Securities Industry and Financial Markets Association (“SIFMA”) indices, which directly impact borrowings under our revolving credit facility and interest on secured and unsecured borrowings contractually tied to such rates.  Short-term interest rates also indirectly affect the discount on notes issued under our commercial paper program.  Additionally, we have exposure to long-term interest rates, particularly U.S. Treasuries as they are utilized to price our long-term borrowings and therefore affect the cost of refinancing existing debt or incurring additional debt.In the U.S., the Alternative Rates Reference Committee (the “ARRC”), a group of market participants convened in 2014 to help ensure a successful transition away from USD LIBOR, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate.  As part of the transition process that is now under way, LIBOR is no longer published for certain tenors and key USD settings are expected to be discontinued by June 2023.  LIBOR is the primary basis for determining interest payments on borrowings on the Company’s $2.5 billion revolving credit facility.  This facility contains provisions that establish a process for entering into an amendment to replace LIBOR under certain circumstances.  We are closely monitoring the evolution of practices in the credit market and we do not expect such transition to have a material impact on the Company’s financial position or cash flows.The Company monitors and manages interest rates as part of its risk management process, by targeting adequate levels of floating rate exposure and an appropriate debt maturity profile.  From time to time, we may utilize derivative instruments to manage interest rate exposure and to comply with the requirements of certain lenders, but not for trading or speculative purposes.The Company had total variable rate debt of $0.6 billion, representing 7.3% of total debt, and $0.8 billion, representing 10.0% of total debt, as of December 31, 2021 and 2020, respectively.  If interest rates had been 100 basis points higher in 2021 and 2020 and average balances coincided with year end balances, our annual interest expense would have been $6.1 million and $8.1 million higher, respectively.  Unsecured notes issued under the Company’s commercial paper program are treated as variable rate debt for the purposes of this calculation even though they do not have a stated interest rate, given their short-term nature.  The effect of derivatives, if applicable, is also considered when computing the total amount of variable rate debt.Changes in interest rates also affect the estimated fair market value of our fixed rate debt, computed using a discounted cash flow model.  As of December 31, 2021, the Company had total outstanding fixed rate debt of $7.7 billion, or 92.7% of total debt, with an estimated fair market value of $8.4 billion.  If interest rates had been 100 basis points lower as of December 31, 2021, the estimated fair market value would have increased by approximately $637.2 million.  As of December 31, 2020, the Company had total outstanding fixed rate debt of $7.2 billion, or 90.0% of total debt, with an estimated fair market value of $8.2 billion.  If interest rates had been 100 basis points lower as of December 31, 2020, the estimated fair market value would have increased by approximately $686.6 million.These amounts were determined by considering the impact of hypothetical interest rates on the Company’s financial instruments.  These analyses do not consider the effects of the changes in overall economic activity that could exist in such an environment.  Further, in the event of changes of such magnitude, management would likely take actions to further mitigate its exposure to these changes.  However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company’s financial structure or results.The Company cannot predict the effect of adverse changes in interest rates on its debt and derivative instruments and, therefore, its exposure to market risk, nor can there be any assurance that long-term debt will be available at advantageous pricing.  Consequently, future results may differ materially from the estimated adverse changes discussed above.

Item 8. Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements and Schedule on page F-1 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Equity Residential

(a) Evaluation of Disclosure Controls and Procedures:

Effective as of December 31, 2021, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the

42

Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Management’s Report on Internal Control over Financial Reporting:

Equity Residential’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act.  Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation.Based on the Company’s evaluation under the framework in Internal Control – Integrated Framework, management concluded that its internal control over financial reporting was effective as of December 31, 2021.  Our internal control over financial reporting has been audited as of December 31, 2021 by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

(c) Changes in Internal Control over Financial Reporting:

There were no changes to the internal control over financial reporting of the Company identified in connection with the Company’s evaluation referred to above that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ERP Operating Limited Partnership

(a) Evaluation of Disclosure Controls and Procedures:

Effective as of December 31, 2021, the Operating Partnership carried out an evaluation, under the supervision and with the participation of the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer of EQR, of the effectiveness of the Operating Partnership’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Operating Partnership in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Management’s Report on Internal Control over Financial Reporting:

ERP Operating Limited Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act.  Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of EQR, management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial statement preparation and presentation.Based on the Operating Partnership’s evaluation under the framework in Internal Control – Integrated Framework, management concluded that its internal control over financial reporting was effective as of December 31, 2021.  Our internal control over financial reporting has been audited as of December 31, 2021 by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

43

(c) Changes in Internal Control over Financial Reporting:

There were no changes to the internal control over financial reporting of the Operating Partnership identified in connection with the Operating Partnership’s evaluation referred to above that occurred during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

Item 9B. Other Information

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

44

Items 10, 11, 12, 13 and 14.

Trustees, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Trustee Independence; and Principal Accountant Fees and Services

The information required by Item 10, Item 11, Item 12, Item 13 and Item 14 is incorporated by reference to, and will be contained in, Equity Residential’s Proxy Statement, which the Company intends to file no later than 120 days after the end of its fiscal year ended December 31, 2021, and thus these items have been omitted in accordance with General Instruction G(3) to Form 10-K. Equity Residential is the general partner and 96.7% owner of ERP Operating Limited Partnership.

45