Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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, many of which are unknown, including the duration and severity of the pandemic, the extent of the adverse health impact on the general population and on our residents, customers and employees in particular, its impact on the employment rate and the economy and the corresponding impact on our residents’ and tenants’ ability to pay their rent on time or at all, the impact on resident housing preferences especially for urban apartment living, the extent and impact of governmental responses, the rollout and effectiveness of vaccines 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. The 2021 guidance assumptions disclosed throughout this Item 7 are based on current expectations and are forward-looking.

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

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The continued rapid development and fast-changing nature of the COVID-19 pandemic creates many unknowns that have had and could continue to have a significant future impact on the Company. Its duration, severity and the extent of the adverse health impact on the general population, our residents and employees, the rollout and effectiveness of vaccines and the potential long-term changes in customer preferences for living in our communities, are among the many unknowns. 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. For additional details, see Item 1A, Risk Factors.

We have been supporting our residents and employees during the COVID-19 pandemic by:

	•	Utilizing technology to allow our property teams to interact remotely with current and prospective residents, including a new touchless leasing process and a service process designed to limit in-person contact;

	•	Successfully implementing changes to the physical layout of our properties and remaining focused on further enhancing our existing commitment to health and safety during the pandemic;

	•	Continuing to provide additional paid leave for employees impacted by the pandemic and in 2020 paid special bonuses to certain on-site employees in recognition of their significant efforts;

	•	Continuing to support our corporate and regional employees by allowing them to work remotely during the pandemic; and

	•	Offering an extensive outreach process for residents and tenants financially impacted by the pandemic, including creating payment plans to assist them, among other support efforts.

While the pandemic remains a significant health threat, cities continue to work towards safely re-opening their economies and to managing closures in ways that create the least amount of economic impact. We expect that employers will bring back employees to their offices deliberately and safely. We believe proximity to employment and to entertainment and social amenities in urban centers will continue to have value. Employers also continue to invest in the future, committing to long-term office obligations in our markets where they continue to create collaborative work environments.

During the year ended December 31, 2020, the Company collected approximately 97% of its expected Residential revenues in the second, third and fourth quarters of 2020. We believe that 2021 will be a year of recovery for the Company. Operating trends are improving and we believe that the first half of 2021 will be the low point in our financial results. Our affluent, well-employed resident base remains drawn to our nation’s great cities and we expect demand to accelerate and pricing to continue to improve as vaccines are widely administered and cities become more active.

Results of Operations

2020 and 2019 Transactions

In conjunction with our business objectives and operating and investing strategies, the following tables provide a rollforward of the transactions that occurred during the years ended December 31, 2020 and 2019:

Portfolio Rollforward

($ in thousands)

					Purchase Price			Acquisition Cap Rate
12/31/2019	309		79,962
Acquisitions:
Consolidated Rental Properties – Not Stabilized (1)	1		158		$	48,860			4.7	%
					Sales Price			Disposition Yield
Dispositions:
Consolidated:
Rental Properties	(6	)	(2,231	)	$	(1,066,861	)		(4.5	)%
Land Parcels	—		—		$	(55,510	)
12/31/2020	304		77,889

(1)	The Company acquired one property in the third quarter of 2020 that is in lease-up and is expected to stabilize in its second year of ownership.

The consolidated property acquired was located in the Seattle market. The consolidated properties disposed of were located in the Phoenix, San Diego, San Francisco and Washington D.C. markets and the sales generated an Unlevered IRR of 10.2%.

Portfolio Rollforward

($ in thousands)

					Purchase Price			Acquisition Cap Rate
12/31/2018	307		79,482
Acquisitions:
Consolidated:
Rental Properties	9		2,412		$	1,039,830			4.6	%
Rental Properties – Not Stabilized (1)	4		1,128		$	454,859			4.9	%
Land Parcels	—		—		$	19,832
					Sales Price			Disposition Yield
Dispositions:
Consolidated:
Rental Properties	(11	)	(2,361	)	$	(1,080,675	)		(4.6	)%
Land Parcels	—		—		$	(2,100	)
Unconsolidated:
Rental Properties (2)	(2	)	(945	)	$	(394,500	)		(4.7	)%
Completed Developments – Consolidated	2		221
Configuration Changes	—		25
12/31/2019	309		79,962

(1)	The Company acquired four properties during the year ended December 31, 2019, consisting of two properties in the Denver market and two properties in the Seattle market, all of which are in the final stages of completing lease-up and are expected to stabilize in the second year of ownership at the Acquisition Cap Rate listed above.

(2)	The Company owned a 20% interest in unconsolidated rental properties located in San Jose, CA and South Florida. Sales price listed is the gross sales price. The Company received net sales proceeds of approximately $78.3 million and recognized a GAAP gain on sale of approximately $69.5 million.

The consolidated properties acquired were located in the New York, Seattle, Washington D.C., San Francisco, Los Angeles and Denver markets. The consolidated properties disposed of were located in the New York, Washington D.C., San Francisco and Boston markets and the sales generated an Unlevered IRR of 7.8%. The consolidated properties development completions were located in the Boston and Seattle markets. Finally, the Company started construction on two consolidated projects, located in the San Francisco and Washington D.C. markets, consisting of 354 apartment units totaling approximately $193.1 million of expected development costs.

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

The Company’s guidance assumes consolidated rental acquisitions will be approximately equal to consolidated rental dispositions for the full year ending December 31, 2021. We currently budget spending approximately $220.0 million on development costs during the year ending December 31, 2021, primarily for properties currently under construction. Certain of these costs are expected to be funded by third-party construction mortgages and joint venture partner obligations. Work at all of our development projects continues with no material delays after some construction disruptions due to COVID-19.

Same Store Results

Properties that the Company owned and were stabilized (see definition below) for all of both 2020 and 2019 (the “2020 Same Store Properties”), which represented 73,585 apartment units, impacted the Company’s results of operations. The 2020 Same Store Properties are discussed in the following paragraphs.

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

The following tables provide a rollforward of the apartment units included in Same Store Properties and a reconciliation of apartment units included in Same Store Properties to those included in Total Properties for the year ended December 31, 2020:

	Year Ended December 31, 2020
	Properties			Apartment Units
Same Store Properties at December 31, 2019		279			71,830
2017 acquisitions		2			510
2018 acquisitions		5			1,461
2020 dispositions		(6	)		(2,231	)
Lease-up properties stabilized		5			2,015
Same Store Properties at December 31, 2020		285			73,585

	Year Ended December 31, 2020
	Properties		Apartment Units
Same Store		285		73,585
Non-Same Store:
2020 acquisitions		1		158
2019 acquisitions		13		3,540
Master-Leased properties (1)		1		162
Lease-up properties not yet stabilized (2)		3		443
Other		1		1
Total Non-Same Store		19		4,304
Total Properties and Apartment Units		304		77,889

Note: Properties are considered “stabilized” when they have achieved 90% occupancy for three consecutive months. Properties are included in same store when they are stabilized for all of the current and comparable periods presented.

(1)	Consists of one property containing 162 apartment units that is wholly owned by the Company where the entire project is master-leased to a third-party corporate housing provider.

(2)	Consists of properties in various stages of lease-up and properties where lease-up has been completed but the properties were not stabilized for the comparable periods presented.

The 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):

	Year Ended December 31,
	2020			2019
Operating income	$	1,317,990		$	1,356,160
Adjustments:
Property management		93,825			95,344
General and administrative		48,305			52,757
Depreciation		820,832			831,083
Net (gain) loss on sales of real estate properties		(531,807	)		(447,637	)
Total NOI	$	1,749,145		$	1,887,707
Rental income:
Same store	$	2,419,018		$	2,519,235
Non-same store/other		152,687			181,456
Total rental income		2,571,705			2,700,691
Operating expenses:
Same store		773,479			757,502
Non-same store/other		49,081			55,482
Total operating expenses		822,560			812,984
NOI:
Same store		1,645,539			1,761,733
Non-same store/other		103,606			125,974
Total NOI	$	1,749,145		$	1,887,707

The following table provides comparative total same store results and statistics for the 2020 Same Store Properties:

2020 vs. 2019

Same Store Results/Statistics Including 73,585 Same Store Apartment Units

$ in thousands (except for Average Rental Rate)

2020																		2019
	Residential			% Change			Non- Residential			% Change			Total		% Change				Residential			Non- Residential		Total
Revenues	$	2,356,344			(2.9	%)	$	62,674	(1)		(33.2	%)	$	2,419,018		(4.0	%)	Revenues	$	2,425,471		$	93,764	$	2,519,235
Expenses	$	751,504			2.1	%	$	21,975			3.5	%	$	773,479		2.1	%	Expenses	$	736,279		$	21,223	$	757,502
NOI	$	1,604,840			(5.0	%)	$	40,699			(43.9	%)	$	1,645,539		(6.6	%)	NOI	$	1,689,192		$	72,541	$	1,761,733

Average Rental Rate	$	2,809			(1.5	%)												Average Rental Rate	$	2,852
Physical Occupancy		95.1	%		(1.3	%)												Physical Occupancy		96.4	%
Turnover		52.3	%		2.5	%												Turnover		49.8	%

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 deferral/abatement of rents, higher bad debt, lower parking income and the non-cash write-off of $12.9 million of Non-Residential straight-line lease receivables predominantly in the third quarter of 2020.

The following table provides results and statistics related to our Residential same store operations for the years ended December 31, 2020 and 2019:

2020 vs. 2019

Same Store Residential Results/Statistics by Market

														Increase (Decrease) from Prior Year
Markets/Metro Areas	Apartment Units		2020 % of Actual NOI			2020 Average Rental Rate		2020 Weighted Average Physical Occupancy %			2020 Turnover			Revenues			Expenses			NOI			Average Rental Rate			Physical Occupancy			Turnover
Los Angeles		15,968		20.1	%	$	2,547		95.5	%		51.9	%		(3.1	%)		0.8	%		(4.8	%)		(2.4	%)		(0.7	%)		(2.5	%)
Orange County		4,028		5.0	%		2,252		96.7	%		45.3	%		0.2	%		0.8	%		0.0	%		0.0	%		0.2	%		(6.5	%)
San Diego		2,706		3.5	%		2,374		97.0	%		49.0	%		1.4	%		1.6	%		1.3	%		1.0	%		0.4	%		(6.0	%)
Subtotal – Southern California		22,702		28.6	%		2,473		95.9	%		50.4	%		(2.1	%)		0.9	%		(3.2	%)		(1.7	%)		(0.4	%)		(3.6	%)

San Francisco		12,183		20.6	%		3,234		94.7	%		55.3	%		(3.9	%)		3.0	%		(6.1	%)		(2.5	%)		(1.3	%)		4.2	%
Washington D.C.		13,711		16.5	%		2,444		95.7	%		49.9	%		(0.6	%)		0.9	%		(1.2	%)		0.4	%		(0.9	%)		3.2	%
New York		9,475		13.3	%		3,826		93.0	%		50.9	%		(6.2	%)		3.3	%		(13.2	%)		(2.4	%)		(3.7	%)		12.1	%
Seattle		8,442		10.4	%		2,433		95.5	%		53.6	%		(0.3	%)		3.9	%		(1.8	%)		0.7	%		(0.9	%)		(0.7	%)
Boston		6,346		9.8	%		3,100		94.2	%		56.3	%		(3.3	%)		0.6	%		(4.8	%)		(1.2	%)		(2.0	%)		9.0	%
Denver		726		0.8	%		2,101		94.5	%		70.8	%		(2.4	%)		2.9	%		(4.3	%)		(1.0	%)		(1.6	%)		4.7	%

Total		73,585		100.0	%	$	2,809		95.1	%		52.3	%		(2.9	%)		2.1	%		(5.0	%)		(1.5	%)		(1.3	%)		2.5	%

Note: The above table reflects Residential same store results only. Residential operations account for approximately 97.3% of total revenues for the year ended December 31, 2020.

The following table includes select statistics for Residential same store properties presented on a suburban and urban basis. Statistics for January 2021 are preliminary and Blended Rate is inclusive of Leasing Concessions. The impact the COVID-19 pandemic is having on the operating performance in our markets and submarkets varies, with urban markets more challenged than suburban markets as presented below.

	% of Same Store Residential Revenues			Physical Occupancy on:									Percentage of Residents Renewing by Month									Blended Rate
	Dec YTD 2020			Sep 30, 2020			Dec 31, 2020			Jan 31, 2021			Jan 2020			Dec 2020			Jan 2021 (1)			Q4 2020			Dec 2020			Jan 2021 (1)
Suburban (2)		44	%		95.9	%		95.8	%		96.1	%		58	%		58	%		55	%		(7.0	%)		(7.3	%)		(7.3	%)
Urban Other (2)(3)		33	%		94.3	%		94.6	%		95.3	%		55	%		47	%		45	%		(13.4	%)		(14.3	%)		(14.7	%)
Urban Core (2)(4)		23	%		89.2	%		90.2	%		91.8	%		63	%		49	%		51	%		(25.0	%)		(26.6	%)		(25.0	%)
Total		100	%		94.2	%		94.4	%		95.1	%		58	%		53	%		52	%		(13.0	%)		(13.9	%)		(14.1	%)

(1)	January 2021 results are preliminary.

(2)	The Company defines Urban submarkets as those with 3,500 or more households per square mile with the remainder defined as Suburban.

(3)	Includes all other Urban properties excluding Urban Core.

(4)	Includes Urban properties in Manhattan/Brooklyn, Downtown Boston/Cambridge and Downtown San Francisco.

The following table provides guidance for our expected full year 2021 same store operating performance:

		Full Year 2021
Physical Occupancy		94.8% to 95.8%
Revenue change		(9.0%) to (7.0%)
Expense change		3.0% to 4.0%
NOI change		(15.0%) to (12.0%)

Although 2020 has been the most challenging year that we have faced in our business, we believe that initial signs of improvement have emerged and are optimistic that 2021 will be a year of recovery. We have begun to see improvements across our portfolio for both urban and suburban properties in Physical Occupancy and pricing. Notably, this is the first time this has occurred since July 2020. We continue to test price sensitivity in many markets by reducing both the value and quantity of Leasing Concessions being granted and are beginning to raise rents from recent prior months. While forward trends are improving, our reported results for 2021, particularly in the first half, will continue to be severely impacted by the pandemic. However, we believe our results will steadily improve through the second half of 2021 as recovery accelerates. In the meantime, the Company remains focused on the following performance indicators:

	•	Demand – Demand continues to be robust and has carried us through much of the winter season with increased move-in activity well above the seasonal norms. Applications exceeded 2019 levels by approximately 25% in the fourth quarter of 2020 and we were able to generate sufficient activity for move-ins to outpace move-outs despite higher Turnover compared to 2019’s record low level. Applications have remained robust in January 2021, albeit below December 2020 levels, but that is not unexpected since improved Physical Occupancy has allowed us to start testing pricing increases and we have fewer apartment units available to lease.

	•	Pricing – We have seen improvement in the rents (net of Leasing Concessions) that we are able to charge on our apartments since December 2020. This trend, which is a good indicator of where rents including Leasing Concessions stand, has been improving across both urban and suburban markets since this time. However, New Lease Change remains negative as do Renewal Rates Achieved, which will continue to contribute to challenging Blended Rates.

	•	Renewal Rates – We continue to experience negotiation pressure on Renewal Rate Achieved as we are still renewing residents who signed leases pre-pandemic. In terms of the quantity of renewals, we have found some stability in the percent of residents renewing their leases which stands at approximately 52% in January 2021. We expect that to improve to approximately 54% for February and March 2021, which is still 6% below the record retention rates from 2019.

In summary, the operating environment remains challenging but we are beginning to see what we believe are signs of improvement. See below for specific discussion on operating performance by geographic market:

	•	Boston – Strong application volume and improved retention through the fourth quarter of 2020 resulted in steady gains in Physical Occupancy to position us at 95.4% as of January 31, 2021. This market has been reducing Leasing Concession use and now approximately 25% to 30% of our applications, as compared to approximately 50% of our applications back in November 2020, are using them. We have also been able to raise rents consecutively for the past four weeks as of January 31, 2021. Going forward, we expect continued modest improvement but acknowledge that a full recovery will require additional demand drivers to aid in the absorption of the new supply that is being delivered currently and anticipated through the first half of 2021. Despite these anticipated challenges in 2021, the performance over the last two months has definitely improved and has been stronger than our other urban core markets. We expect to regain more Physical Occupancy in 2021 which should allow us to recapture some of the pricing we lost in 2020.

	•	New York – New York continues to feel the outsized impact of the COVID-19 pandemic but there are early signs of recovery. We recently had our best Traffic week in the last twelve months and our best leasing week, in terms of applications, since August 2020. Leasing activity is still driven by deal seekers and intra-city movers who are running about 10% higher than normal. We still see residents continuing to leave the city with most of our residents moving to surrounding states with suburban New Jersey capturing the largest share, but that number is normalizing. Physical Occupancy has improved in the market and is at 91.2% at January 31, 2021, which is the first time it has exceeded 90% since September 2020. We believe the broader recovery in this market will be fueled by a lack of competitive new supply, the return to office and the continued growth of technology employers. Many of these technology firms continue to expand their investments in this market, even during the pandemic, supporting the view that the city will continue to thrive, as it has in the past, post-pandemic. For 2021, our focus for New York will be recapturing as much Physical Occupancy and rate as possible while lowering, or possibly eliminating, Leasing Concessions. Recovery in this market will take some time but it also has significant upside potential given 2020 declines.

	•	Washington, D.C. – We believe Washington, D.C. has been our most resilient market on the East Coast. Physical Occupancy remains solid at 96.1% at January 31, 2021, but the market continues to feel the impact of elevated supply and slowing absorption of new Class A multifamily properties. The market continues to benefit from federal government employment, which has actually seen a net increase over the last twelve months, but overall job growth has declined. Leasing Concession use increased in the fourth quarter of 2020, but has now been greatly reduced as of January 2021. These recent signs of improvement provide us with more confidence in the ability of the market to absorb more apartment units and allow for continued rate recovery which could make it one of our better performing markets in 2021.

	•	Seattle – We are seeing early indications of recovery. Both Physical Occupancy (95.9% at January 31, 2021) and Traffic (which normally increases at the beginning of the year) continue to improve in 2021. Traffic increased over January 2020 by approximately 6%, and we are seeing weekly application numbers that are closer to peak leasing season levels than typical first quarter levels. Leasing Concession use remains common in the market but strength in Physical Occupancy is allowing for a gradual reduction in use. In 2021, we expect to focus on maintaining strong Physical Occupancy while increasing pricing.

	•	San Francisco – This market remains our most challenged but even here we are seeing some signs of recovery. Physical Occupancy has improved to 93.8% at January 31, 2021, with our downtown assets at 92%, East Bay at 95.7% and both the Peninsula and South Bay right around 94% at the end of January 2021. The downtown portfolio especially remains pressured with about two-thirds of applicants receiving Leasing Concessions in the fourth quarter of 2020. January 2021, however, has shown improvement on this front with Leasing Concession use on only about 50% of applications. The recovery in this market is somewhat dependent on the return to office plans of technology companies, but while we acknowledge that work from home will play a role, we believe that the value of in-person collaboration and the incredible technology eco-structure of the area will make the San Francisco Bay Area attractive again. Like New York, San Francisco has significant potential due to steep declines in 2020, although recovery will take some time.

	•	Los Angeles – Our portfolio maintained Physical Occupancy above 95% throughout the fourth quarter of 2020 while contending with continued pressure from new supply in the Downtown/Koreatown-Mid Wilshire corridor. Leasing Concession use was modest and averaged approximately 20% of our applications. The suburban portfolio has very strong Physical Occupancy at or near 97% and the suburban submarkets continue to experience modest year-over-year revenue gains. Physical Occupancy was at 95.9% at January 31, 2021 for the entire market. In 2021, we expect Los Angeles to be one of our better performing markets as we now have opportunity to increase rates, but will need to work through bad debt.

	•	Orange County and San Diego – Both markets are primarily suburban and continue to stand out for their resilience throughout the pandemic. These markets have averaged approximately 97% Physical Occupancy through the fourth quarter of 2020 (Orange County and San Diego had Physical Occupancy of 97.2% and 97.4%, respectively, at January 31, 2021) and produced higher resident retention than in any of our other markets. They did so while maintaining positive Blended Rate results in December 2020 and January 2021. Both of these markets have opportunities to increase rents and we believe will continue to perform well throughout 2021.

	•	Denver – While a relatively small market for the Company, this portfolio is holding up well despite the pandemic. Physical Occupancy is at 96.7% at January 31, 2021 and both New Lease Change and Renewal Rate Achieved were improving in both December 2020 and January 2021, while Leasing Concession use has started to trend down starting in the first quarter of 2021.

Despite strong rent collections throughout the pandemic, its economic impact on a small subset of our residents and non-residential tenants 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 payment plans and collections and our bad debt allowance policies remain consistent. We expect our reserves and bad debt expense to remain elevated in 2021. See Note 8 in the Notes to Consolidated Financial Statements for additional discussion of leases at December 31, 2020.

The following table provides comparative same store operating expenses for the 2020 Same Store Properties:

2020 vs. 2019

Total Same Store Operating Expenses for 73,585 Same Store Apartment Units

$ in thousands

	2020		2019		$ Change (5)
Real estate taxes	$	337,939	$	325,332	$	12,607		3.9	%	43.7	%
On-site payroll (1)		160,983		160,569		414		0.3	%	20.8	%
Utilities (2)		102,768		101,137		1,631		1.6	%	13.3	%
Repairs and maintenance (3)		93,620		94,766		(1,146	)	(1.2	)%	12.1	%
Insurance		24,310		20,597		3,713		18.0	%	3.2	%
Leasing and advertising		10,321		10,241		80		0.8	%	1.3	%
Other on-site operating expenses (4)		43,538		44,860		(1,322	)	(2.9	)%	5.6	%
Total Same Store Operating Expenses (includes Residential and Non-Residential)	$	773,479	$	757,502	$	15,977		2.1	%	100.0	%

(1)	On-site payroll – Includes payroll and related expenses for on-site personnel including property managers, leasing consultants and maintenance staff.

(2)	Utilities – Represents gross expenses prior to any recoveries under the Resident Utility Billing System (“RUBS”). Recoveries are reflected in rental income.

(3)	Repairs and maintenance – Includes general maintenance costs, apartment unit turnover costs including interior painting, routine landscaping, security, exterminating, fire protection, snow removal, elevator, roof and parking lot repairs and other miscellaneous building repair and maintenance costs.

(4)	Other on-site operating expenses – Includes ground lease costs and administrative costs such as office supplies, telephone and data charges and association and business licensing fees.

(5)	The year-over-year changes are due primarily to:

	•	Real estate taxes – Higher rates and assessed values continue to drive real estate tax growth across most markets.

	•	On-site payroll – Increase driven by higher employee benefit-related costs, partially offset by the transition to an enhanced operating platform and less overtime.

	•	Repairs and maintenance – Decrease primarily driven by deferral and cancellation of some projects as a result of COVID-19-related delays.

	•	Insurance – Increase due to higher premiums on property insurance renewal due to challenging conditions in the insurance market.

	•	Other on-site operating expenses – Decrease primarily due to reduced ground lease expense and lower legal expenses due to legislative suspension of evictions in many markets.

We anticipate same store expenses to increase between 3.0% to 4.0% for 2021 as compared to 2020. The increase in same store expenses is expected to be primarily due to the following items:

	•	Real estate taxes are estimated to increase in the mid 3.0% range (which is slightly lower than the 3.9% increase we experienced between 2020 and 2019). While municipalities continue to search for methods to close budget gaps, we believe relief on assessed values provided by some jurisdictions and aggressive appeals activity should help control total expense growth. The timing and success of these appeals may have a significant impact on the ultimate expense growth reported.

	•	Payroll costs are estimated to increase approximately 2.0%. Our continued focus on improved efficiencies and utilizations are forecasted to balance payroll growth for the full year of 2021.

	•	Utilities are estimated to increase between 4.0% and 5.0% primarily due to expected increases in natural gas costs.

	•	Repairs and maintenance costs are estimated to increase between 4.0% and 5.0% primarily due to the resumption of activities that were delayed as a result of the COVID-19 pandemic and a difficult comparable period given this expense category declined between 2020 and 2019.

The Company anticipates same store NOI to decline for the full year 2021 by approximately 15.0% to 12.0% as a result of the same store revenue and expense expectations discussed above. Given the continued uncertainty resulting from the COVID-19 pandemic, we anticipate the possibility of greater variability around the midpoint, up or down, within these ranges than we would typically experience in the normal course of business.

See also Note 17 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s segment disclosures.

Non-Same Store/Other Results

Non-same store/other NOI results for the year ended December 31, 2020 decreased approximately $22.4 million compared to the same period of 2019. These results consist primarily of properties acquired in calendar years 2019 and 2020, operations from the Company’s development properties and operations prior to disposition from 2019 and 2020 sold properties. This difference is due primarily to:

	•	A positive impact of higher NOI from development and newly stabilized development properties in lease-up of $5.0 million;

	•	A positive impact of higher NOI from properties acquired in 2019 and 2020 of $34.5 million; and

	•	A negative impact of lost NOI from 2019 and 2020 dispositions of $61.1 million.

Comparison of the year ended December 31, 2020 to the year ended December 31, 2019

The following table presents a reconciliation of diluted earnings per share/unit for the year ended December 31, 2020 as compared to the same period in 2019:

	Year Ended December 31
Diluted earnings per share/unit for full year 2019	$	2.60
Property NOI		(0.35	)
Interest expense		0.11
Debt extinguishment costs		(0.04	)
Non-operating asset gains/losses		0.08
Net gain/loss on property sales		0.01
Other		0.04
Diluted earnings per share/unit for full year 2020	$	2.45

The decrease in consolidated NOI is primarily a result of the Company’s lower NOI from same store properties, largely due to the economic impact from the COVID-19 pandemic, and disposition activity. The following table presents the changes in the components of consolidated NOI for the year ended December 31, 2020 as compared to the same period in 2019:


Consolidated rental income	(4.8	%)
Consolidated operating expenses (1)	1.2	%
Consolidated NOI	(7.3	%)

(1)	Consolidated operating expenses are comprised of property and maintenance and real estate taxes and insurance.

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 decreased approximately $1.5 million or 1.6% during the year ended December 31, 2020 as compared to 2019. This decrease is primarily attributable to decreases in payroll-related costs (inclusive of lower performance bonuses), travel costs and training/conference costs, partially offset by increases in

information technology related costs specifically for various operating initiatives such as sales-focused improvements and service enhancements as well as increases in legal and professional fees. The Company suspended the majority of all travel and training/conference activities as a result of the COVID-19 pandemic. The Company anticipates that property management expenses will approximate $96.5 million to $98.5 million for the year ending December 31, 2021.

General and administrative expenses, which include corporate operating expenses, decreased approximately $4.5 million or 8.4% during the year ended December 31, 2020 as compared to 2019, primarily due to decreases in payroll-related costs (inclusive of lower performance bonuses) as a result of the Company’s executive succession program during the past two years, decreases in travel costs and training/conference activities which were mostly suspended as a result of the COVID-19 pandemic and decreases in office rent as a result of the consolidation of space at the Company’s corporate headquarters. The Company anticipates that general and administrative expenses will approximate $53.0 million to $55.0 million for the year ending December 31, 2021.

Depreciation expense, which includes depreciation on non-real estate assets, decreased approximately $10.3 million or 1.2% during the year ended December 31, 2020 as compared to 2019, primarily due to the Company being a net seller during 2020, which resulted in lower depreciation from properties sold in 2019 and 2020 as compared to the additional depreciation expense on properties acquired in 2019 and 2020 and development properties placed in service during 2019.

Net gain on sales of real estate properties increased approximately $84.2 million or 18.8% during the year ended December 31, 2020 as compared to 2019, primarily as a result of the sale of six consolidated apartment properties sold for a higher gain in 2020 as compared to the sale of eleven consolidated properties in 2019.

Interest and other income increased approximately $2.7 million or 85.4% during the year ended December 31, 2020 as compared to 2019. The increase is primarily due to higher insurance/litigation settlement proceeds and other non-comparable items that occurred during 2020 but not during 2019, partially offset by decreases in short-term investment income on cash and restricted deposit accounts in 2020 as compared to 2019 due to a lower rate environment and lower overall invested balances.

Other expenses decreased approximately $0.7 million or 3.7% during the year ended December 31, 2020 as compared to 2019, primarily due to a decrease in various consulting costs related to a data analytics project which was completed in 2019 and litigation and environmental settlements, partially offset by increases in advocacy contributions and pursuit costs in 2020 as compared to 2019.

Interest expense, including amortization of deferred financing costs, decreased approximately $27.7 million or 6.9% during the year ended December 31, 2020 as compared to 2019. The decrease is primarily due to lower overall debt balances outstanding between the periods as a result of deploying disposition proceeds to repay and discharge debt, as well as lower overall interest rates, partially offset by higher debt extinguishment costs in 2020 as compared to 2019. The effective interest cost on all indebtedness, excluding debt extinguishment costs/prepayment penalties, for the year ended December 31, 2020 was 3.94% as compared to 4.20% in 2019. The Company capitalized interest of approximately $10.2 million and $6.9 million during the years ended December 31, 2020 and 2019, respectively. The Company anticipates that interest expense, excluding debt extinguishment costs/prepayment penalties, will approximate $270.0 million to $276.5 million and capitalized interest will approximate $14.5 million to $16.5 million for the year ending December 31, 2021.

Income and other tax expense increased approximately $3.1 million during the year ended December 31, 2020 as compared to 2019, primarily due to various alternative minimum tax credit refunds recognized in 2019 that did not occur in 2020.

Income from investments in unconsolidated entities decreased approximately $69.2 million during the year ended December 31, 2020 as compared to 2019, primarily as a result of a $69.5 million gain on the sale of two unconsolidated properties in 2019 that did not occur in 2020.

Net gain on sales of land parcels increased approximately $32.2 million during the year ended December 31, 2020 as compared to 2019, primarily due to a higher gain on the sale of two land parcels in 2020 as compared to the sale of two land parcels in 2019.

Net (income) loss attributable to Noncontrolling Interests in partially owned properties decreased approximately $11.6 million during the year ended December 31, 2020 as compared to 2019, primarily as a result of noncontrolling interest allocations related to the sale of one partially owned apartment property in 2020 as compared to no sales in 2019.

For comparison of the year ended December 31, 2019 to the year ended December 31, 2018, 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, 2019.

Liquidity and Capital Resources

The Company believes its current liquidity position is strong despite the impact of the COVID-19 pandemic. With approximately $2.0 billion in readily available liquidity, limited near-term maturities, very strong credit metrics and ample access to capital markets at historically low rates, the Company believes it is well positioned to meet its future obligations. See further discussion below.

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, 2020 and 2019 (amounts in thousands):

	December 31, 2020		December 31, 2019
Cash and cash equivalents	$	42,591	$	45,753
Restricted deposits	$	57,137	$	71,246
Unsecured revolving credit facility availability	$	1,984,051	$	1,379,071

During the year ended December 31, 2020, the Company generated proceeds from various transactions, which included the following:

	•	Disposed of six consolidated rental properties and two land parcels, receiving combined net proceeds of approximately $1.1 billion;

	•	Obtained $495.0 million in a 2.60% fixed rate mortgage loan pool maturing on May 1, 2030; and

	•	Issued Common Shares related to share option exercises and ESPP purchases and received net proceeds of $16.8 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).

During the year ended December 31, 2020, the above proceeds along with net cash flow from operations and borrowings from the Company’s revolving line of credit and commercial paper program were primarily utilized to:

	•	Acquire one consolidated rental property for approximately $48.9 million in cash;

	•	Invest $230.3 million primarily in development projects;

	•	Repay $168.3 million of mortgage loans (inclusive of scheduled principal repayments); and

	•	Repay $750.0 million of unsecured notes and incur prepayment penalties of approximately $25.8 million by discharging them pursuant to their indenture.

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 LIBOR plus a spread (currently 0.775%), 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 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 by the end of 2021. At this time, it cannot be determined with certainty what interest rate(s) may succeed LIBOR, if any, and how any successor or alternative rates for LIBOR may affect borrowing costs or the availability of variable interest rate borrowings.

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. While the COVID-19 pandemic initially caused temporary disruptions in the commercial paper market in March 2020, the Company has maintained access to this market and expects to continue to be able to do so in the future.

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 12, 2021 (amounts in thousands):

	February 12, 2021
Unsecured revolving credit facility commitment	$	2,500,000
Commercial paper balance outstanding		(470,000	)
Unsecured revolving credit facility balance outstanding		—
Other restricted amounts		(100,949	)
Unsecured revolving credit facility availability	$	1,929,051

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 2020 of $0.6025 per share/unit, an annualized increase of 6.2% over the amount paid in 2019. All future dividends/distributions remain subject to the discretion of the Company’s Board of Trustees.

Total dividends/distributions paid in January 2021 amounted to $232.3 million (excluding distributions on Partially Owned Properties), which consisted of certain distributions declared during the quarter ended December 31, 2020.

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 $27.2 billion in investment in real estate on the Company’s balance sheet at December 31, 2020, $23.2 billion or 85.3% 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.

The Company’s total debt summary and debt maturity schedules as of December 31, 2020 are as follows:

Debt Summary as of December 31, 2020

($ in thousands)

	Debt Balances
Secured	$	2,293,890	28.5	%	3.33	%	6.2
Unsecured		5,750,366	71.5	%	3.91	%	10.3
Total	$	8,044,256	100.0	%	3.76	%	9.0
Fixed Rate Debt:
Secured – Conventional	$	1,901,091	23.6	%	3.79	%	4.7
Unsecured – Public		5,335,536	66.4	%	4.03	%	11.0
Fixed Rate Debt		7,236,627	90.0	%	3.97	%	9.3
Floating Rate Debt:
Secured – Conventional		31,494	0.4	%	2.71	%	1.5
Secured – Tax Exempt		361,305	4.5	%	1.00	%	15.0
Unsecured – Revolving Credit Facility		—	—		1.47	%	3.8
Unsecured – Commercial Paper Program		414,830	5.1	%	1.72	%	—
Floating Rate Debt		807,629	10.0	%	1.34	%	7.0
Total	$	8,044,256	100.0	%	3.76	%	9.0

Debt Maturity Schedule as of December 31, 2020

($ in thousands)

Year	Fixed Rate			Floating Rate				Total
2021	$	35,665		$	415,000		(1)	$	450,665			5.5	%		4.41	%		0.64	%
2022		264,185			31,855				296,040			3.7	%		3.25	%		3.15	%
2023		1,325,588			3,500				1,329,088			16.4	%		3.74	%		3.73	%
2024		—			6,100				6,100			0.1	%	N/A				0.10	%
2025		450,000			8,200				458,200			5.6	%		3.38	%		3.32	%
2026		592,025			9,000				601,025			7.4	%		3.58	%		3.53	%
2027		400,000			9,800				409,800			5.0	%		3.25	%		3.17	%
2028		900,000			42,380				942,380			11.6	%		3.79	%		3.62	%
2029		888,120			11,500				899,620			11.1	%		3.30	%		3.26	%
2030		1,095,000			12,600				1,107,600			13.6	%		2.55	%		2.52	%
2031+		1,350,850			275,535				1,626,385			20.0	%		4.39	%		3.67	%
Subtotal		7,301,433			825,470				8,126,903			100.0	%		3.56	%		3.23	%
Deferred Financing Costs and Unamortized (Discount)		(64,806	)		(17,841	)			(82,647	)	N/A			N/A			N/A
Total	$	7,236,627		$	807,629			$	8,044,256			100.0	%		3.56	%		3.23	%

(1)	Represents principal outstanding on the Company’s commercial paper program.

See Note 9 in the Notes to Consolidated Financial Statements for additional discussion of debt at December 31, 2020.

The Company’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2020 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, 2020

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

Secured Debt					$	2,293,890	28.5	%
Unsecured Debt						5,750,366	71.5	%
Total Debt						8,044,256	100.0	%	26.0	%
Common Shares (includes Restricted Shares)		372,302,000	96.4	%
Units (includes OP Units and Restricted Units)		13,858,073	3.6	%
Total Shares and Units		386,160,073	100.0	%
Common Share Price at December 31, 2020	$	59.28
						22,891,569	99.8	%
Perpetual Preferred Equity						37,280	0.2	%
Total Equity						22,928,849	100.0	%	74.0	%
Total Market Capitalization					$	30,973,105			100.0	%

The Operating Partnership’s “Consolidated Debt-to-Total Market Capitalization Ratio” as of December 31, 2020 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, 2020

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

Secured Debt			$	2,293,890	28.5	%
Unsecured Debt				5,750,366	71.5	%
Total Debt				8,044,256	100.0	%	26.0	%
Total Outstanding Units		386,160,073
Common Share Price at December 31, 2020	$	59.28
				22,891,569	99.8	%
Perpetual Preference Units				37,280	0.2	%
Total Equity				22,928,849	100.0	%	74.0	%
Total Market Capitalization			$	30,973,105			100.0	%

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 sell Common Shares from time to time into the existing trading market at current market prices as well as through negotiated transactions. In June 2019, the Company extended the program maturity to June 2022. In connection with the extension, the Company may now also sell Common Shares under forward sale agreements. The use of a forward sale agreement would allow the Company to lock in a price on the sale of Common Shares at the time the agreement is executed, but defer receiving the proceeds from the sale until a later date. EQR has the authority to issue 13.0 million shares but has not issued any shares under this program since September 2012. EQR may, but shall have no obligation to, sell Common Shares through the ATM share offering program in amounts and at times to be determined by EQR. Actual sales will depend on a variety of factors, including (among others) market conditions, the trading price of EQR’s Common Shares and determinations of the appropriate sources of funding for EQR. Through February 12, 2021, EQR has cumulatively issued approximately 16.7 million Common Shares at an average price of $48.53 per share for total consideration of approximately $809.9 million.

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. EQR may, but shall have no obligation to, repurchase Common Shares through the share repurchase program in amounts and at times to be determined by EQR. Actual repurchases will depend on a variety of factors, including (among others) market conditions, the trading price of EQR’s

Common Shares and other opportunities for the investment of available capital. As of February 12, 2021, EQR has remaining authorization to repurchase up to 13.0 million of its shares.

ERPOP’s long-term senior debt ratings and short-term commercial paper ratings, as well as EQR’s long-term preferred equity ratings, have been reaffirmed during the COVID-19 pandemic by all three rating agencies listed below and all continue to maintain a stable outlook. As of February 12, 2021, the ratings are as follows:

	Standard & Poor’s	Moody's	Fitch
ERPOP's long-term senior debt rating	A-	A3	A
ERPOP's short-term commercial paper rating	A-2	P-2	F-1
EQR's long-term preferred equity rating	BBB	Baa1	BBB+

See Note 18 in the Notes to Consolidated Financial Statements for discussion of the events, if any, which occurred subsequent to December 31, 2020.

Debt Covenants

The Company’s unsecured debt includes certain financial and operating covenants including, among other things, maintenance of certain financial ratios. These provisions are contained in the indentures applicable to each note payable or the credit agreement for our line of credit. The Company was in compliance with its unsecured debt covenants for all periods presented. The following table presents the Company’s selected unsecured public debt covenants as of December 31, 2020 and 2019:

	December 31, 2020		December 31, 2019
Debt to Adjusted Total Assets (not to exceed 60%)	30.5%		33.8%
Secured Debt to Adjusted Total Assets (not to exceed 40%)	9.6%		8.2%
Consolidated Income Available for Debt Service to Maximum Annual Service Charges (must be at least 1.5 to 1)		5.42		5.07
Total Unencumbered Assets to Unsecured Debt (must be at least 125%)	457.1%		386.1%

Note: These selected covenants represent the most restrictive financial covenants relating to ERPOP’s outstanding public debt securities and are defined in the indenture relating to such securities. The Company maintains substantial additional borrowing capacity and, as reflected by the above selected covenant information, believes it could currently incur substantial additional debt before it would breach any of its debt covenants.

Capitalization of Fixed Assets and Improvements to Real Estate

Our policy with respect to capital expenditures is generally to capitalize expenditures that improve the value of the property or extend the useful life of the component asset of the property. We track improvements to real estate in three major categories and several subcategories:

	▪	Replacements (inside the apartment unit). These include:

	•	flooring such as carpets, hardwood, vinyl or tile;

	•	appliances;

	•	mechanical equipment such as individual furnace/air units, hot water heaters, smoke/carbon monoxide/water alarms, etc.;

	•	furniture and fixtures such as kitchen/bath cabinets, light fixtures, ceiling fans, sinks, tubs, toilets, mirrors, countertops, etc.; and

	•	blinds and window coverings.

All replacements are depreciated over a five to ten-year estimated useful life. We expense as incurred all make-ready maintenance and turnover costs such as cleaning, interior painting of individual apartment units and the repair of any replacement item noted above.

	▪	Building improvements (outside the apartment unit). These include:

	•	roof replacement and major repairs;

	•	paving or major resurfacing of parking lots, curbs and sidewalks;

	•	amenities and common areas such as pools, exterior sports and playground equipment, lobbies, clubhouses, laundry rooms, alarm and security systems and offices;

	•	major building mechanical equipment systems;

	•	interior and exterior structural repair and exterior painting and siding;

	•	major landscaping and grounds improvement; and

	•	vehicles and office and maintenance equipment.

All building improvements are depreciated over a five to fifteen-year estimated useful life. We capitalize building improvements and upgrades only if the item: (i) exceeds $2,500 (selected projects may be restricted by other thresholds); (ii) extends the useful life of the asset; and (iii) improves the value of the asset.

The third major category is renovations, which primarily consists of expenditures for kitchens and baths designed to reposition the apartment units/properties for higher rental levels in their respective markets. All renovation expenditures are depreciated over a ten-year estimated useful life.

For the year ended December 31, 2020, 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, 2020

	Same Store Properties (4)		Non-Same Store Properties/Other (5)		Total		Same Store Avg. Per Apartment Unit
Total Apartment Units		73,585		4,304		77,889

Building Improvements (1)	$	78,969	$	2,905	$	81,874	$	1,073
Renovation Expenditures (2)		22,060		6		22,066		300
Replacements (3)		31,252		787		32,039		425
Total Capital Expenditures to Real Estate	$	132,281	$	3,698	$	135,979	$	1,798

(1)	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.

(2)	Renovation Expenditures – Apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets. Amounts for 1,034 same store apartment units approximated $21,335 per apartment unit renovated.

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

(4)	Same Store Properties – Primarily includes all properties acquired or completed that are stabilized prior to January 1, 2019, less properties subsequently sold.

(5)	Non-Same Store Properties/Other – Primarily includes all properties acquired during 2019 and 2020, plus any properties in lease-up and not stabilized as of January 1, 2019. Also includes capital expenditures for properties sold.

For the year ended December 31, 2019, 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, 2019

	Same Stores Properties (4)		Non-Same Store Properties/Other (5)		Total		Same Store Avg. Per Apartment Unit
Total Apartment Units		71,830		8,132		79,962

Building Improvements (1)	$	91,256	$	7,469	$	98,725	$	1,270
Renovation Expenditures (2)		37,466		2,607		40,073		522
Replacements (3)		37,063		2,562		39,625		516
Total Capital Expenditures to Real Estate	$	165,785	$	12,638	$	178,423	$	2,308

(1)	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.

(2)	Renovation Expenditures – Apartment unit renovation costs (primarily kitchens and baths) designed to reposition these units for higher rental levels in their respective markets. Amounts for 2,415 same store apartment units approximated $15,515 per apartment unit renovated.

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

(4)	Same Store Properties – Primarily includes all properties acquired or completed that are stabilized prior to January 1, 2018, less properties subsequently sold.

(5)	Non-Same Store Properties/Other – Primarily includes all properties acquired during 2018 and 2019, plus any properties in lease-up and not stabilized as of January 1, 2018. Also includes capital expenditures for properties sold.

The COVID-19 pandemic has led us to temporarily slow our capital expenditures, including our renovation activities, to those deemed essential. Governmental movement restrictions, social distancing requirements, and in some cases, difficulty in procuring materials and labor make continuing these activities more difficult.

The Company estimates that during 2021 it will spend approximately $1,950 per same store apartment unit or $150.0 million of total capital expenditures to real estate for same store properties. Included in these total expected expenditures are approximately $25.0 million for apartment unit renovation expenditures on approximately 1,250 same store apartment units at an average cost of approximately $20,000 per apartment unit renovated. The anticipated total capital expenditures to real estate for same store properties represent a higher absolute and per unit dollar amount as compared to 2020 but a lower absolute and per unit dollar amount as compared to 2019, as the Company anticipates slowly returning its capital expenditure activity to more normalized pre-COVID-19 levels.

During the year ended December 31, 2020, the Company’s total non-real estate capital additions, such as computer software, computer equipment, and furniture and fixtures and leasehold improvements to the Company’s property management offices and its corporate offices, were approximately $20.1 million. The Company expects to fund approximately $2.1 million in total non-real estate capital additions in 2021. These anticipated fundings are significantly lower than in 2020 primarily due to corporate office renovations completed during 2020.

Derivative Instruments

In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company may seek to manage these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments. The Company may also use derivatives to manage commodity prices in the daily operations of the business.

The Company has a policy of only entering into derivative contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from these instruments nor does it anticipate any material adverse effect on its net income or financial position in the future from the use of derivatives it currently has in place.

See Note 10 in the Notes to Consolidated Financial Statements for additional discussion of derivative instruments at December 31, 2020.

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.

	•	Blended Rate – The weighted average of New Lease Change and Renewal Rate Achieved.

	•	Development Yield – NOI that the Company anticipates receiving in the next 12 months following stabilization 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 $50-$150 per apartment unit depending on the type of asset) divided by the Total Budgeted Capital Cost of the asset. The weighted average Development Yield for development properties is weighted based on the projected NOI streams and the relative Total Budgeted Capital Cost for each respective property.

	•	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.

	•	New Lease Change – The net effective change in rent (inclusive of Leasing Concessions) for a lease with a new or transferring resident compared to the rent for the prior lease of the identical apartment unit, regardless of lease term.

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

	•	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.

	•	Renewal Rate Achieved – The net effective change in rent (inclusive of Leasing Concessions) for a new lease on an apartment unit where the lease has been renewed as compared to the rent for the prior lease of the identical apartment unit, regardless of lease term.

	•	Residential – Consists of multifamily apartment revenues and expenses.

	•	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 2021 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.

	•	Traffic – Consists of an expression of interest in an apartment by completing an in-person tour, self-guided tour or virtual tour that may result in an application to lease.

	•	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.

	•	Weighted Average Coupons – Contractual interest rate for each debt instrument weighted by principal balances as of December 31, 2020. In case of debt for which fair value hedges are in place, the rate payable under the corresponding derivatives is used in lieu of the contractual interest rate.

	•	Weighted Average Rates – Interest expense for each debt instrument for the year ended December 31, 2020 weighted by its average principal balance for the same period. Interest expense includes amortization of premiums, discounts and other comprehensive income on debt and related derivative instruments. In case of debt for which derivatives are in place, the income or expense recognized under the corresponding derivatives is included in the total interest expense for the period.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has various unconsolidated interests in certain joint ventures. The Company does not believe that these unconsolidated investments have a materially different impact on its liquidity, cash flows, capital resources, credit or market risk than

its consolidated operating and/or other activities. See also Note 6 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s investments in partially owned entities. See also Note 16 in the Notes to Consolidated Financial Statements for discussion regarding the Company’s development projects.

The following table summarizes the Company’s contractual obligations for the next five years and thereafter as of December 31, 2020:

Payments Due by Year (in thousands)
Contractual Obligations	2021		2022		2023		2024		2025		Thereafter		Unamortized Cost/Discounts			Total
Debt:
Principal (1)	$	450,665	$	296,040	$	1,329,088	$	6,100	$	458,200	$	5,586,810	$	(82,647	)	$	8,044,256
Interest (2)		261,125		256,206		233,804		200,591		191,694		1,491,050		—			2,634,470
Finance Leases (3):
Minimum Rent Payments		578		590		601		614		626		33,224		—			36,233
Operating Leases (3):
Minimum Rent Payments		17,160		16,906		16,997		17,329		17,375		954,108		—			1,039,875
Other Long-Term Liabilities (3):
Deferred Compensation		769		1,130		1,005		723		723		3,976		—			8,326
Total	$	730,297	$	570,872	$	1,581,495	$	225,357	$	668,618	$	8,069,168	$	(82,647	)	$	11,763,160

(1)	Amounts include aggregate principal payments only.

(2)	Amounts include interest expected to be incurred on the Company’s secured and unsecured debt based on obligations outstanding at December 31, 2020 and inclusive of capitalized interest. For floating rate debt, the current rate in effect for the most recent payment through December 31, 2020 is assumed to be in effect through the respective maturity date of each instrument.

(3)	See Note 8 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company’s lease disclosures. See Note 16 in the Notes to Consolidated Financial Statements for discussion regarding the Company’s deferred compensation.

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, 2020.

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 periodically evaluates its long-lived assets, including its investment in real estate, for indicators of impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, 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. These estimates can have a significant impact on the undiscounted cash flows or estimated fair value of an asset.

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. 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 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 acquired.

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, 2020:

Funds From Operations and Normalized Funds From Operations

(Amounts in thousands)

	Year Ended December 31,
	2020			2019			2018
Net income	$	962,501		$	1,009,708		$	685,192
Net (income) loss attributable to Noncontrolling Interests – Partially Owned Properties		(14,855	)		(3,297	)		(2,718	)
Preferred/preference distributions		(3,090	)		(3,090	)		(3,090	)
Net income available to Common Shares and Units / Units		944,556			1,003,321			679,384
Adjustments:
Depreciation		820,832			831,083			785,725
Depreciation – Non-real estate additions		(4,564	)		(5,585	)		(4,561	)
Depreciation – Partially Owned Properties		(3,345	)		(3,599	)		(3,740	)
Depreciation – Unconsolidated Properties		2,454			2,997			4,451
Net (gain) loss on sales of unconsolidated entities - operating assets		(1,636	)		(69,522	)		—
Net (gain) loss on sales of real estate properties		(531,807	)		(447,637	)		(256,810	)
Noncontrolling Interests share of gain (loss) on sales of real estate properties		11,655			—			(284	)
Impairment – operating assets		—			—			702
FFO available to Common Shares and Units / Units (1) (3) (4)		1,238,145			1,311,058			1,204,867
Adjustments:
Impairment – non-operating assets		—			—			—
Write-off of pursuit costs		6,869			5,529			4,450
Debt extinguishment and preferred share redemption (gains) losses		39,292			23,991			41,335
Non-operating asset (gains) losses		(32,590	)		(940	)		(161	)
Other miscellaneous items		4,652			8,430			(1,781	)
Normalized FFO available to Common Shares and Units / Units (2) (3) (4)	$	1,256,368		$	1,348,068		$	1,248,710

FFO (1) (3)	$	1,241,235		$	1,314,148		$	1,207,957
Preferred/preference distributions		(3,090	)		(3,090	)		(3,090	)
FFO available to Common Shares and Units / Units (1) (3) (4)	$	1,238,145		$	1,311,058		$	1,204,867

Normalized FFO (2) (3)	$	1,259,458		$	1,351,158		$	1,251,800
Preferred/preference distributions		(3,090	)		(3,090	)		(3,090	)
Normalized FFO available to Common Shares and Units / Units (2) (3) (4)	$	1,256,368		$	1,348,068		$	1,248,710

(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.

(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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