# EQUITY RESIDENTIAL (EQR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from EQUITY RESIDENTIAL's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/906107/000095017023003060/eqr-20221231.htm
Accession: 0000950170-23-003060
Filing date: 2023-02-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EQR/
All MD&A years: /company/EQR/mda/
Previous year: /company/EQR/mda/fy2021/ (FY 2021)
Next year: /company/EQR/mda/fy2023/ (FY 2023)

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. 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. 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.

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. For additional details, see Item 1A, Risk Factors.

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Results of Operations

2021 and 2022 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, 2021 and 2022:

Portfolio Rollforward

($ in thousands)

[[GREPCENT_TABLE]]
[["","","Properties","","","Apartment Units","","","Purchase Price","","","Acquisition Cap Rate"],["12/31/2020","","","304","","","","77,889"],["Acquisitions:"],["Consolidated Rental Properties","","","13","","","","3,533","","","$","1,249,679","","","","3.7","%"],["Consolidated Rental Properties \u2013 Not Stabilized (1)","","","4","","","","1,214","","","$","459,700","","","","4.0","%"],["","","","","","","","","Sales Price","","","Disposition Yield"],["Dispositions:"],["Consolidated Rental Properties","","","(14",")","","","(3,053",")","","$","(1,716,775",")","","","(3.7",")%"],["Completed Developments \u2013 Consolidated","","","3","","","","824"],["12/31/2021","","","310","","","","80,407"],["","","","","","","","","Purchase Price","","","Acquisition Cap Rate"],["Acquisitions:"],["Consolidated Rental Properties","","","1","","","","172","","","$","113,000","","","","3.5","%"],["Unconsolidated Land Parcels (2)","","","\u2014","","","","\u2014","","","$","56,886"],["","","","","","","","","Sales Price","","","Disposition Yield"],["Dispositions:"],["Consolidated Rental Properties","","","(3",")","","","(945",")","","$","(746,150",")","","","(3.4",")%"],["Configuration Changes","","","\u2014","","","","(37",")"],["12/31/2022","","","308","","","","79,597"]]
[[/GREPCENT_TABLE]]

(1)
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 were in lease-up and are expected to stabilize in their second year of ownership at the combined Acquisition Cap Rate listed above.

(2)
The purchase price listed represents the total consideration for the closing of the respective joint ventures.

Acquisitions

•
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;

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

•
The consolidated property acquired in 2022 is located in the San Diego market; and

•
In 2022, the Company acquired its joint venture partner’s 25% interest in a 432-unit apartment property located in the Washington, D.C. market for $32.2 million, and the property is now wholly owned.

Dispositions

•
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%; and

•
The consolidated properties disposed of in 2022 were located in the New York (2) and Washington, D.C. markets and the sales generated an Unlevered IRR of 5.3%.

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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;

•
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;

•
The Company commenced construction on one consolidated and three unconsolidated apartment properties during 2022, located in the San Francisco and Dallas/Ft. Worth (3) markets, consisting of 1,278 apartment units totaling approximately $417.7 million of expected development costs;

•
The Company stabilized two consolidated apartment properties during 2022, located in the Washington, D.C. and Boston markets, consisting of 624 apartment units totaling approximately $482.1 million of development costs; and

•
The Company spent approximately $203.6 million during 2022, primarily for consolidated and unconsolidated development projects.

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 was approximately $72.2 million and $150.4 million as of December 31, 2021 and 2022, respectively. Three of the projects are related to the Company’s joint venture development program with Toll, two of which commenced construction during the second and third quarters of 2022; and

•
The Company entered into three separate unconsolidated joint ventures during 2022 for the purpose of developing vacant land parcels in the Dallas/Ft. Worth and Boston (2) markets. The Company’s total investment in these three joint ventures was approximately $66.8 million as of December 31, 2022. One of the projects is related to the Company’s joint venture development program with Toll, which commenced construction during the first quarter of 2022 prior to our entrance into the joint venture.

See Notes 4 and 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s real estate investments and investments in partially owned entities.

Comparison of the year ended December 31, 2022 to the year ended December 31, 2021

The following table presents a reconciliation of diluted earnings per share/unit for the year ended December 31, 2022 as compared to the same period in 2021:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31"],["Diluted earnings per share/unit for full year 2021","","$","3.54"],["Property NOI","","","0.60"],["Interest expense","","","(0.02",")"],["Corporate overhead (1)","","","(0.03",")"],["Net gain/loss on property sales","","","(1.95",")"],["Non-operating asset gains/losses","","","(0.07",")"],["Impairment \u2013 non-operating real estate assets","","","0.04"],["Depreciation expense","","","(0.11",")"],["Other","","","0.05"],["Diluted earnings per share/unit for full year 2022","","$","2.05"]]
[[/GREPCENT_TABLE]]

(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.

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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/other results (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","2022 vs. 2021"],["","","2022","","","2021","","","$ Change","","","% Change"],["Operating income","","$","1,116,046","","","$","1,675,841","","","$","(559,795",")","","","(33.4",")%"],["Adjustments:"],["Property management","","","110,304","","","","98,155","","","","12,149","","","","12.4","%"],["General and administrative","","","58,710","","","","56,506","","","","2,204","","","","3.9","%"],["Depreciation","","","882,168","","","","838,272","","","","43,896","","","","5.2","%"],["Net (gain) loss on sales of real estate properties","","","(304,325",")","","","(1,072,183",")","","","767,858","","","","(71.6",")%"],["Impairment","","","\u2014","","","","16,769","","","","(16,769",")","","","(100.0",")%"],["Total NOI","","$","1,862,903","","","$","1,613,360","","","$","249,543","","","","15.5","%"],["Rental income:"],["Same store","","$","2,533,577","","","$","2,291,604","","","$","241,973","","","","10.6","%"],["Non-same store/other","","","201,603","","","","172,393","","","","29,210","","","","16.9","%"],["Total rental income","","","2,735,180","","","","2,463,997","","","","271,183","","","","11.0","%"],["Operating expenses:"],["Same store","","","802,291","","","","774,504","","","","27,787","","","","3.6","%"],["Non-same store/other","","","69,986","","","","76,133","","","","(6,147",")","","","(8.1",")%"],["Total operating expenses","","","872,277","","","","850,637","","","","21,640","","","","2.5","%"],["NOI:"],["Same store","","","1,731,286","","","","1,517,100","","","","214,186","","","","14.1","%"],["Non-same store/other","","","131,617","","","","96,260","","","","35,357","","","","36.7","%"],["Total NOI","","$","1,862,903","","","$","1,613,360","","","$","249,543","","","","15.5","%"]]
[[/GREPCENT_TABLE]]

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 2021 and 2022, operations from the Company’s development properties and operations prior to disposition from 2021 and 2022 sold properties.

•
The increase in same store rental income is primarily driven by strong Physical Occupancy and continued growth in pricing.

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

•
Utilities – A $13.9 million increase from gas and electric, primarily driven by higher commodity prices; and

•
Repairs and maintenance – A $9.8 million increase primarily driven by volume and timing of maintenance and repairs along with increases in minimum wage on contracted services.

•
The increase in non-same store/other NOI is due primarily to a positive impact of higher NOI from properties acquired during 2021 and 2022 of $54.5 million and higher NOI from development properties in lease-up of $20.6 million, partially offset by a negative impact of lost NOI from 2021 and 2022 dispositions of $52.2 million and a negative impact of $1.2 million in lower NOI from one former master-leased property and two properties that have been removed from same store while undergoing major renovations.

•
The increase in consolidated total NOI is primarily a result of the Company’s higher NOI from same store properties, largely due to improvement in same store revenues as noted above. Operating expense growth remains modest due to a combination of continued success in managing controllable expenses, favorable growth in real estate tax expense (increased by only $3.2 million) and declines in payroll expense (decreased by $3.1 million) primarily due to the Company's various innovation and centralization initiatives, leading to 14.1% same store NOI growth for the year ended December 31, 2022 as compared to the prior year period.

See the Same Store Results section below for additional discussion of those results.

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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 $12.1 million or 12.4% during the year ended December 31, 2022 as compared to 2021. This increase is primarily attributable to increases in payroll-related costs, training/conference costs, temporary help/contractors costs and third-party management fees.

General and administrative expenses, which include corporate operating expenses, increased approximately $2.2 million or 3.9% during the year ended December 31, 2022 as compared to 2021, primarily due to increases in payroll-related costs, legal and professional fees and training/conference costs.

Depreciation expense, which includes depreciation on non-real estate assets, increased approximately $43.9 million or 5.2% during the year ended December 31, 2022 as compared to 2021, primarily as a result of additional depreciation expense on properties acquired in 2021 and 2022 and development properties placed in service during 2021, partially offset by lower depreciation from properties sold in 2021 and 2022.

Net gain on sales of real estate properties decreased approximately $767.9 million or 71.6% during the year ended December 31, 2022 as compared to 2021, primarily as a result of a lower sales volume with the sale of three consolidated apartment properties in 2022 as compared to the sale of fourteen consolidated apartment properties in the same period in 2021.

Impairment decreased approximately $16.8 million during the year ended December 31, 2022 as compared to 2021, due to an impairment charge in 2021 on one land parcel held for development compared to no impairment charges taken during 2022.

Interest and other income decreased approximately $23.5 million or 91.5% during the year ended December 31, 2022 as compared to 2021. The decrease is primarily due to a gain of $23.6 million on the sale of various investment securities that occurred during 2021 but not during 2022.

Other expenses decreased approximately $5.6 million or 29.1% during the year ended December 31, 2022 as compared to 2021, primarily due to a decline in construction defect and litigation reserves and pursuit costs recorded between 2022 and 2021, partially offset by increases in advocacy contributions, demolition/abatement costs and data transformation project costs.

Interest expense, including amortization of deferred financing costs, increased approximately $10.4 million or 3.7% during the year ended December 31, 2022 as compared to 2021. The increase is primarily due to higher overall interest rates and lower capitalized interest. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the year ended December 31, 2022 was 3.68% as compared to 3.52% in 2021. The Company capitalized interest of approximately $7.1 million and $15.9 million during the years ended December 31, 2022 and 2021, respectively.

Net (income) loss attributable to Noncontrolling Interests in partially owned properties decreased approximately $14.2 million or 79.0% during the year ended December 31, 2022 as compared to 2021, primarily as a result of noncontrolling interest allocations related to the sale of one partially owned apartment property in 2021 as compared to no sales in 2022.

For comparison of the year ended December 31, 2021 to the year ended December 31, 2020, 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, 2021.

Same Store Results

Properties that the Company owned and were stabilized for all of both 2022 and 2021 (the “2022 Same Store Properties”), which represented 72,872 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.

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The following table provides comparative total same store results and statistics for the 2022 Same Store Properties:

2022 vs. 2021

Same Store Results/Statistics Including 72,872 Same Store Apartment Units

$ in thousands (except for Average Rental Rate)

[[GREPCENT_TABLE]]
[["2022","","","2021"],["","Residential","","% Change","","Non- Residential","","% Change","","Total","","% Change","","","","Residential","","Non- Residential","","Total"],["Revenues","$","2,441,522","","","10.7","%","$","92,055","","","5.8","%","$","2,533,577","","","10.6","%","","Revenues","$","2,204,625","","$","86,979","","$","2,291,604"],["Expenses","$","778,206","","","3.6","%","$","24,085","","","3.6","%","$","802,291","","","3.6","%","","Expenses","$","751,250","","$","23,254","","$","774,504"],["NOI","$","1,663,316","","","14.4","%","$","67,970","","","6.7","%","$","1,731,286","","","14.1","%","","NOI","$","1,453,375","","$","63,725","","$","1,517,100"],["Average Rental Rate","$","2,898","","","10.4","%","","","","","","","","","","Average Rental Rate","$","2,625"],["Physical Occupancy","","96.4","%","","0.3","%","","","","","","","","","","Physical Occupancy","","96.1","%"],["Turnover","","42.8","%","","(1.9","%)","","","","","","","","","","Turnover","","44.7","%"]]
[[/GREPCENT_TABLE]]

Note: Same store revenues for all leases are reflected on a straight-line basis in accordance with GAAP for the current and comparable periods.

The following table provides results and statistics related to our Residential same store operations for the years ended December 31, 2022 and 2021:

2022 vs. 2021

Same Store Residential Results/Statistics by Market

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","","","Increase (Decrease) from Prior Year"],["Markets/Metro Areas","","Apartment Units","","","2022 % of Actual NOI","","","2022 Average Rental Rate","","","2022 Weighted Average Physical Occupancy %","","","2022 Turnover","","","Average Rental Rate","","","Physical Occupancy","","","Turnover"],["Los Angeles","","","14,662","","","","19.8","%","","$","2,733","","","","96.6","%","","","38.4","%","","","9.0","%","","","(0.2","%)","","","(3.1","%)"],["Orange County","","","4,028","","","","5.8","%","","","2,614","","","","97.0","%","","","34.5","%","","","12.8","%","","","(0.7","%)","","","(0.1","%)"],["San Diego","","","2,706","","","","4.0","%","","","2,766","","","","96.7","%","","","38.1","%","","","11.4","%","","","(0.9","%)","","","(5.0","%)"],["Subtotal \u2013 Southern California","","","21,396","","","","29.6","%","","","2,715","","","","96.7","%","","","37.6","%","","","10.0","%","","","(0.4","%)","","","(2.8","%)"],["San Francisco","","","11,368","","","","17.4","%","","","3,152","","","","96.1","%","","","41.5","%","","","8.3","%","","","0.9","%","","","(6.5","%)"],["Washington, D.C.","","","14,187","","","","16.2","%","","","2,456","","","","96.8","%","","","43.1","%","","","5.5","%","","","0.3","%","","","(2.2","%)"],["New York","","","8,536","","","","13.5","%","","","4,068","","","","96.9","%","","","42.4","%","","","17.6","%","","","1.8","%","","","4.2","%"],["Seattle","","","9,331","","","","11.4","%","","","2,497","","","","95.1","%","","","51.6","%","","","10.7","%","","","(0.5","%)","","","0.7","%"],["Boston","","","6,430","","","","10.0","%","","","3,208","","","","96.2","%","","","45.3","%","","","11.2","%","","","0.5","%","","","(1.8","%)"],["Denver","","","1,624","","","","1.9","%","","","2,299","","","","96.7","%","","","60.3","%","","","11.3","%","","","0.1","%","","","0.1","%"],["Total","","","72,872","","","","100.0","%","","$","2,898","","","","96.4","%","","","42.8","%","","","10.4","%","","","0.3","%","","","(1.9","%)"]]
[[/GREPCENT_TABLE]]

Note: The above table reflects Residential same store results only. Residential operations account for approximately 96.3% of total revenues for the year ended December 31, 2022.

Despite geopolitical and economic uncertainties, demand to live in our apartment communities remained healthy, which our financial results reflected, as we continued to capture the gap between in-place rent levels and market rent levels. Demand for our apartments continues to support strong Physical Occupancy with pricing that is largely in-line with expectations, including modest use of Leasing Concessions. Key operating drivers for this performance during 2022 include:

•
Pricing – Pricing (net of Leasing Concessions) in 2022 was strong, driven by continued improvement across the portfolio, especially in New York. After unprecedented growth earlier in the year, pricing began to moderate in late August 2022, which is typical, but slightly more pronounced than we had expected. Regardless, pricing remained positive during the fourth quarter of 2022 which is stronger than historical trends.

•
Physical Occupancy – Physical Occupancy of 96.4% for the year ended December 31, 2022 remained strong, contributing to growth in Same Store Residential Revenues.

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•
Percentage of Residents Renewing and Turnover – We continue to see a high Percentage of Residents Renewing in our portfolio, which we believe reflects both the strength of demand and quality of our product. The Percentage of Residents Renewing has been strong at 56.5% for the fourth quarter of 2022. Turnover has been the lowest in the Company’s history at 42.8% for the full year of 2022, reflecting a healthy and consistent trend of historically high resident retention.

In addition to these stronger fundamentals, bad debt, net moderated during the first half of 2022 with improvement in resident collections primarily driven by receipt of governmental rental assistance payments on behalf of our residents. Bad debt, net increased in the second half of 2022 primarily due to the governmental rental assistance programs winding down.

Transaction activity has slowed as buyers and sellers adjust their expectations to a volatile economic climate and rising interest rates. While this type of environment can be challenging, the Company has traditionally found investment opportunities during periods of market dislocation as our ability to move quickly and our relatively low cost of capital creates flexibility that can provide us a competitive advantage.

Overall, the fundamentals of our business remain strong. Long-term, we expect elevated single family home ownership costs, positive household formation trends and the overall deficit in housing across the country to buffer the impact on our business from the risks of potential economic weakness. We also see our affluent resident base as being more resilient to rising inflation due to higher levels of disposable income and lower relative rent-to-income ratios.

Liquidity and Capital Resources

With approximately $2.4 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, 2022, 2021 and 2020 (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Cash flows provided by (used for):"],["Operating activities","","$","1,454,756","","","$","1,260,184","","","$","1,265,536"],["Investing activities","","$","107,792","","","$","(434,620",")","","$","663,586"],["Financing activities","","$","(1,785,612",")","","$","(565,056",")","","$","(1,946,393",")"]]
[[/GREPCENT_TABLE]]

The following provides information regarding the Company’s cash flows from operating, investing and financing activities for the year ended December 31, 2022.

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, 2022 as compared to 2021, increased by approximately $194.6 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 2022, key drivers were:

•
Acquired one consolidated rental property for approximately $113.0 million in cash;

•
Disposed of three consolidated rental properties, receiving net proceeds of approximately $720.3 million;

•
Invested $109.3 million primarily in development projects;

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•
Invested $159.7 million primarily in unconsolidated development joint venture entities as well as unconsolidated investments in real estate technology funds/companies for various technology initiatives; and

•
Invested $221.1 million in capital expenditures to real estate presented in the table below.

For the year ended December 31, 2022, 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, 2022

[[GREPCENT_TABLE]]
[["","","Same Store Properties","","","Non-Same Store Properties/Other","","","Total","","","Same Store Avg. Per Apartment Unit"],["Total Apartment Units","","","72,872","","","","6,725","","","","79,597"],["Building Improvements","","$","102,079","","","$","16,335","","(2)","$","118,414","","","$","1,401"],["Renovation Expenditures","","","43,197","","(1)","","6,730","","(2)","","49,927","","","","592"],["Replacements","","","49,834","","","","2,911","","","","52,745","","","","684"],["Total Capital Expenditures to Real Estate","","$","195,110","","","$","25,976","","","$","221,086","","","$","2,677"]]
[[/GREPCENT_TABLE]]

(1)
Renovation Expenditures – Amounts for 1,794 same store apartment units approximated $24,079 per apartment unit renovated.

(2)
Includes expenditures for two properties that have been removed from same store while undergoing major renovations requiring a significant number of apartment units to be vacated to accommodate the extensive planned improvements. The renovations are expected to continue through at least the end of 2023 at both properties.

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. For 2022, key drivers were:

•
Obtained $48.1 million in variable rate construction mortgage debt that is non-recourse to the Company;

•
Repaid $289.9 million of mortgage loans (inclusive of scheduled principal repayments);

•
Repaid $500.0 million of unsecured notes by using disposition proceeds;

•
Settled all 1.7 million Common Shares under the ATM forward sale agreements for cash proceeds of $139.6 million;

•
Acquired our joint venture partner’s 25% interest in an apartment property for $32.2 million;

•
Issued Common Shares related to share option exercises and ESPP purchases and received net proceeds of $29.2 million; 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 $982.8 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, 2022 and 2021 (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","","December 31, 2021"],["Cash and cash equivalents","","$","53,869","","","$","123,832"],["Restricted deposits","","$","83,303","","","$","236,404"],["Unsecured revolving credit facility availability","","$","2,366,537","","","$","2,181,372"]]
[[/GREPCENT_TABLE]]

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Credit Facility and Commercial Paper Program

The Company has a $2.5 billion unsecured revolving credit facility maturing October 26, 2027. 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 Secured Overnight Financing Rate ("SOFR") plus a spread (currently 0.725%), or based on bids received from the 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 Revolving Credit Agreement also contains a sustainability-linked pricing component which provides for interest rate margin reductions upon achieving certain sustainability ratings. See Note 9 in the Notes to Consolidated Financial Statements for additional discussion of the Company’s credit facility.

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 10, 2023 (amounts in thousands):

[[GREPCENT_TABLE]]
[["","","February 10, 2023"],["Unsecured revolving credit facility commitment","","$","2,500,000"],["Commercial paper balance outstanding","","","(130,000",")"],["Unsecured revolving credit facility balance outstanding","","","\u2014"],["Other restricted amounts","","","(3,484",")"],["Unsecured revolving credit facility availability","","$","2,366,516"]]
[[/GREPCENT_TABLE]]

Dividend Policy

The Company declared a dividend/distribution for each quarter in 2022 of $0.625 per share/unit, an annualized increase of 3.7% over the amount paid in 2021. All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.

Total dividends/distributions paid in January 2023 amounted to $244.6 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended December 31, 2022.

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 $28.1 billion in investment in real estate on the Company’s balance sheet at December 31, 2022, $24.5 billion or 87.1% 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. For additional details, see Item 1A, Risk Factors.

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, 2022 is as follows:

Debt Summary as of December 31, 2022

($ in thousands)

[[GREPCENT_TABLE]]
[["","","Debt Balances","","","% of Total"],["Secured","","$","1,953,438","","","","26.3","%"],["Unsecured","","","5,472,284","","","","73.7","%"],["Total","","$","7,425,722","","","","100.0","%"],["Fixed Rate Debt:"],["Secured \u2013 Conventional","","$","1,608,838","","","","21.7","%"],["Unsecured \u2013 Public","","","5,342,329","","","","71.9","%"],["Fixed Rate Debt","","","6,951,167","","","","93.6","%"],["Floating Rate Debt:"],["Secured \u2013 Conventional","","","108,378","","","","1.4","%"],["Secured \u2013 Tax Exempt","","","236,222","","","","3.2","%"],["Unsecured \u2013 Revolving Credit Facility","","","\u2014","","","","\u2014"],["Unsecured \u2013 Commercial Paper Program","","","129,955","","","","1.8","%"],["Floating Rate Debt","","","474,555","","","","6.4","%"],["Total","","$","7,425,722","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The following table summarizes the Company’s debt maturity schedule as of December 31, 2022:

Debt Maturity Schedule as of December 31, 2022

($ in thousands)

[[GREPCENT_TABLE]]
[["Year","","Fixed Rate","","","Floating Rate","","","Total","","","% of Total"],["2023 (2)","","$","800,000","","","$","198,275","","(1)","$","998,275","","","","13.3","%"],["2024","","","\u2014","","","","6,100","","","","6,100","","","","0.1","%"],["2025","","","450,000","","","","53,180","","","","503,180","","","","6.7","%"],["2026","","","592,025","","","","9,000","","","","601,025","","","","8.0","%"],["2027","","","400,000","","","","9,800","","","","409,800","","","","5.5","%"],["2028","","","900,000","","","","10,700","","","","910,700","","","","12.1","%"],["2029","","","888,120","","","","11,500","","","","899,620","","","","12.0","%"],["2030","","","1,095,000","","","","12,600","","","","1,107,600","","","","14.8","%"],["2031","","","528,500","","","","39,700","","","","568,200","","","","7.6","%"],["2032","","","\u2014","","","","28,000","","","","28,000","","","","0.4","%"],["2033+","","","1,350,850","","","","110,900","","","","1,461,750","","","","19.5","%"],["Subtotal","","","7,004,495","","","","489,755","","","","7,494,250","","","","100.0","%"],["Deferred Financing Costs and Unamortized (Discount)","","","(53,328",")","","","(15,200",")","","","(68,528",")","","N/A"],["Total","","$","6,951,167","","","$","474,555","","","$","7,425,722","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

(1)
Includes $130.0 million in principal outstanding on the Company’s commercial paper program.

(2)
During 2022, the Company entered into $450.0 million of ten-year forward starting SOFR swaps at a weighted average rate of 2.90% (currently equivalent to a ten-year U.S. Treasury of approximately 3.23%) to hedge the U.S. Treasury risk for the refinancing of 2023 maturities.

Interest expected to be incurred on the Company’s secured and unsecured debt based on obligations outstanding at December 31, 2022, inclusive of capitalized interest, approximates $210.0 million annually for the next five years, with total remaining obligations of approximately $2.3 billion. For floating rate debt, the current rate in effect for the most recent payment through December 31, 2022 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, 2022. 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, 2022.

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Capital Structure

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2022 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, 2022

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

[[GREPCENT_TABLE]]
[["Secured Debt","","","","","","","","$","1,953,438","","","","26.3","%"],["Unsecured Debt","","","","","","","","","5,472,284","","","","73.7","%"],["Total Debt","","","","","","","","","7,425,722","","","","100.0","%","","","24.3","%"],["Common Shares (includes Restricted Shares)","","","378,429,708","","","","96.8","%"],["Units (includes OP Units and Restricted Units)","","","12,429,737","","","","3.2","%"],["Total Shares and Units","","","390,859,445","","","","100.0","%"],["Common Share Price at December 31, 2022","","$","59.00"],["","","","","","","","","","23,060,707","","","","99.8","%"],["Perpetual Preferred Equity","","","","","","","","","37,280","","","","0.2","%"],["Total Equity","","","","","","","","","23,097,987","","","","100.0","%","","","75.7","%"],["Total Market Capitalization","","","","","","","","$","30,523,709","","","","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The Operating Partnership’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2022 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, 2022

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

[[GREPCENT_TABLE]]
[["Secured Debt","","","","","","","$","1,953,438","","","","26.3","%"],["Unsecured Debt","","","","","","","","5,472,284","","","","73.7","%"],["Total Debt","","","","","","","","7,425,722","","","","100.0","%","","","24.3","%"],["Total Outstanding Units","","","390,859,445"],["Common Share Price at December 31, 2022","","$","59.00"],["","","","","","","","","23,060,707","","","","99.8","%"],["Perpetual Preference Units","","","","","","","","37,280","","","","0.2","%"],["Total Equity","","","","","","","","23,097,987","","","","100.0","%","","","75.7","%"],["Total Market Capitalization","","","","","","","$","30,523,709","","","","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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 May 2022 and expires in May 2025. 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 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. In May 2022, the Company replaced the prior program with a new program which extended the maturity to May 2025 and gives us the authority to issue up to 13.0 million shares, all of which remain available for issuance as of December 31, 2022.

Forward sale agreements under the ATM program 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

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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 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.

During the quarter ended September 30, 2021, the Company entered into forward sale agreements under the prior program for a total of approximately 1.7 million Common Shares at a weighted average initial forward price per share of $83.25. During the quarter ended December 31, 2022, the Company settled all of the outstanding forward sale agreements, at a weighted average forward price per share of $80.22, which is inclusive of adjustments made to reflect the then-current federal funds rate and the amount of dividends paid to holders of the Company's Common Shares, for net proceeds of approximately $139.6 million. Concurrent with this transaction, ERPOP issued the same amount of OP Units to EQR in exchange for the net proceeds.

The Company may repurchase up to 13.0 million Common Shares under its share repurchase program. No open market repurchases have occurred since 2008. As of February 10, 2023, 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 10, 2023, the ratings are as follows:

[[GREPCENT_TABLE]]
[["","","Standard & Poor\u2019s","","Moody's"],["ERPOP's long-term senior debt rating","","A-","","A3"],["ERPOP's short-term commercial paper rating","","A-2","","P-2"],["EQR's long-term preferred equity rating","","BBB","","Baa1"]]
[[/GREPCENT_TABLE]]

See Note 18 in the Notes to Consolidated Financial Statements for discussion of the events, if any, which occurred subsequent to December 31, 2022.

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 $150-$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.

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•
Non-Same Store Properties – For annual comparisons, primarily includes all properties acquired during 2021 and 2022, plus any properties in lease-up and not stabilized as of January 1, 2021.

•
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.

•
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, 2021, 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 2023 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.

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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, 2022.

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, 2022:

Funds From Operations and Normalized Funds From Operations

(Amounts in thousands)

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Net income","","$","806,995","","","$","1,396,714","","","$","962,501"],["Net (income) loss attributable to Noncontrolling Interests \u2013 Partially Owned Properties","","","(3,774",")","","","(17,964",")","","","(14,855",")"],["Preferred/preference distributions","","","(3,090",")","","","(3,090",")","","","(3,090",")"],["Net income available to Common Shares and Units / Units","","","800,131","","","","1,375,660","","","","944,556"],["Adjustments:"],["Depreciation","","","882,168","","","","838,272","","","","820,832"],["Depreciation \u2013 Non-real estate additions","","","(4,306",")","","","(4,277",")","","","(4,564",")"],["Depreciation \u2013 Partially Owned Properties","","","(2,640",")","","","(3,673",")","","","(3,345",")"],["Depreciation \u2013 Unconsolidated Properties","","","2,898","","","","2,487","","","","2,454"],["Net (gain) loss on sales of unconsolidated entities - operating assets","","","(9",")","","","(1,304",")","","","(1,636",")"],["Net (gain) loss on sales of real estate properties","","","(304,325",")","","","(1,072,183",")","","","(531,807",")"],["Noncontrolling Interests share of gain (loss) on sales of real estate properties","","","\u2014","","","","15,650","","","","11,655"],["FFO available to Common Shares and Units / Units (1) (3) (4)","","","1,373,917","","","","1,150,632","","","","1,238,145"],["Adjustments:"],["Impairment \u2013 non-operating real estate assets","","","\u2014","","","","16,769","","","","\u2014"],["Write-off of pursuit costs","","","4,780","","","","6,526","","","","6,869"],["Debt extinguishment and preferred share redemption (gains) losses","","","4,664","","","","744","","","","39,292"],["Non-operating asset (gains) losses","","","2,368","","","","(22,283",")","","","(32,590",")"],["Other miscellaneous items","","","(13,901",")","","","8,976","","","","4,652"],["Normalized FFO available to Common Shares and Units / Units (2) (3) (4)","","$","1,371,828","","","$","1,161,364","","","$","1,256,368"],["FFO (1) (3)","","$","1,377,007","","","$","1,153,722","","","$","1,241,235"],["Preferred/preference distributions","","","(3,090",")","","","(3,090",")","","","(3,090",")"],["FFO available to Common Shares and Units / Units (1) (3) (4)","","$","1,373,917","","","$","1,150,632","","","$","1,238,145"],["Normalized FFO (2) (3)","","$","1,374,918","","","$","1,164,454","","","$","1,259,458"],["Preferred/preference distributions","","","(3,090",")","","","(3,090",")","","","(3,090",")"],["Normalized FFO available to Common Shares and Units / Units (2) (3) (4)","","$","1,371,828","","","$","1,161,364","","","$","1,256,368"]]
[[/GREPCENT_TABLE]]

(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 real estate 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.

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(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.