Dear Fellow Shareholders: THE COMPANY WE HAVE BUILT

Transcription

1 2017 Annual Report

2 Equity Residential, a member of the S&P 500, is a leading real estate company focused on the acquisition, development and management of high-quality rental apartment properties located in high-density, coastal gateway markets. We are the largest publicly traded owner of rental apartments with an enterprise value in excess of $30 billion and a portfolio of nearly 80,000 apartment units. We were founded by our Chairman Sam Zell and are led by a management team with more than 100 years of combined apartment investment and operating experience. Dear Fellow Shareholders: A growing economy, resulting in record low unemployment and rising wages, along with extremely favorable demographics continue to provide strong and steady demand for rental housing across our markets. Yet we began 2017 knowing that elevated levels of new apartment supply would impact rental rates and produce revenue and earnings growth below that delivered in the prior year. Therefore, we were pleased that strong occupancy, record number of residents choosing to renew their leases with us and favorable renewal pricing allowed us to achieve our most optimistic expectations for annual growth in same store revenue, net operating income and Normalized Funds from Operations. THE COMPANY WE HAVE BUILT In 2017, we continued our long and successful track record of creating value through focused and proactive revenue generation, expense management and strategic capital allocation while maintaining a conservative balance sheet that enhances returns and value creation while maintaining capacity to take advantage of the next opportunity. We believe that our stakeholders value stability, liquidity, predictability and accountability and that is the mission to which we remain unwaveringly committed. We have focused our portfolio on the coastal, gateway markets of Boston, New York, Washington, DC, Southern California, San Francisco and Seattle where our country s knowledgebased economy will continue to grow and create well-paying jobs that attract large segments of the population opting for high-quality, well-located rental housing. These markets continue to see incredible growth in their city centers and in the downtowns of their close-in suburban submarkets as people of all ages embrace the lifestyle provided by high-density living. And, as these cities have the highest cost of single family home ownership, there are growing populations of permanent renters that ensure high occupancy, low turnover and strong renewals in the markets where we have invested your capital. Equity Residential Portfolio 2017 EQR s portfolio is focused in the coastal gateway markets Seattle 41 Properties 8,460 Units 82% NOI - Mid/High-rise 18% NOI - Garden San Francisco 54 Properties 12,961 Units 49% NOI - Mid/High-rise 51% NOI - Garden Southern California (1) 96 Properties 23,573 Units 43% NOI - Mid/High-rise 57% NOI - Garden 19% 10% 27% EQR Portfolio Characteristics Highest density, best located portfolio in the public apartment REIT sector 69% NOI Mid/High-rise properties 31% NOI Garden properties Resident demographic that chooses to rent for lifestyle reasons Highest Walk Scores Dominant presence in six markets: 24/7 coastal gateway cities Strong demand drivers Superior long-term returns 17% 10% 17% Boston 24 Properties 6,263 Units 87% NOI - Mid/High-rise 13% NOI - Garden New York 39 Properties 10,462 Units 95% NOI - Mid/High-rise 5% NOI - Garden Washington, D.C. 48 Properties 15,811 Units 90% NOI - Mid/High-rise 10% NOI - Garden Note: As of 12/31/17 (1) Includes Los Angeles, San Diego and Orange County Represents percentage of Stabilized NOI

3 THE DRIVERS OF DEMAND IN OUR MARKETS The apartment business benefits from the continuing growth in demand for rental housing and, in particular, for the high-quality, well-located assets that we own and manage. Demand for rental housing is driven primarily by household formations from the Millennial segment of our population, also known as the Echo Boom Generation. These young adults, born between 1981 and 2000, total approximately 78 million people and comprise the largest segment of the US population. Millennials are disproportionally renters and the impact they are having and will continue to have on rental housing cannot be overstated. We will continue to see strong demand from this group as the largest sub-segment of this cohort is just 27 years of age while the median age of our resident is 33 years old. And right behind the Millennials is Generation Z, another cohort of future renters comprised of more than 70 million people born after Equity Residential is extremely well positioned to benefit for many years to come as a result of the huge impact these generations will have on rental housing. Demographics and Lifestyle Choices Will Continue to Create Renter Households Births By Generation 4.5 EQR Median Resident Age is Greatest Silent Boomers Gen X Millennials Post Millennials As of Q Source: U.S. National Center for Health Statistics, Rosen Consulting. Young adults are attracted to rental housing for the flexibility it offers as they pursue their careers and life interests and are attracted to Equity Residential because of the quality of our assets and the locations that we offer. We are pleased that they stay with us because of our outstanding property staff and the remarkable services they provide.

4 But Millennials will also stay with us longer as they delay the life choices that most commonly drive the decision to buy a home. These young adults are marrying later and having children later in life and are therefore opting to stay in rental housing significantly longer than past generations. Lifestyle Choices are Keeping People Renting Longer Median Age at First Marriage Males Females Approximately 50% of American Adults are Single Source: U.S. Census Bureau, Decennial Censuses, 1890 to 1940, and Current Population Survey, Annual Social and Economic Supplements, 1947 to 2015.

5 For many households, remaining in rental housing is a lifestyle choice a desire to live in highdensity, urban locations in close proximity to work, friends and favorite activities. For others, it is an economic reality and particularly so in our markets that have median single family housing costs well above the national average. This makes it far less likely that our residents could afford a single family home if, in fact, they wished to make that lifestyle decision. EQR is Strategically Located in Markets With High Cost of Single Family Housing Median Household Income vs. Median Home Price 1,200,000 $1.1M 1,000,000 $ ,000 Median Home Price 600, ,000 $570 $453 $452 $394 $360 Median HH Income $252 $244 $ ,000 Price/ Income 0 $78 $100 $61 $79 $82 $96 $72 $58 $51 $60 Manhattan San LA Seattle Boston DC Denver National Miami PHADO (1) Francisco 14.1x 9.3x 9.3x 5.7x 5.5x 4.1x 5.0x 4.3x 4.7x 3.5x (1) PHADO represents Phoenix, Houston, Atlanta, Dallas and Orlando as a proxy for low barrier to entry markets. Source: American Community Survey; CoreLogic; National Association of Realtors. As of Q The primary reason people buy a single family home is a lifestyle choice, one most often made when having children and looking for a place to raise their families. So it comes as no surprise that the great majority of first time home buyers are couples with children. We see little risk to our resident base from an increase in demand for a single family home lifestyle because, across our portfolio, only 8% of our units are occupied by residents who fit this profile. More importantly, more than 40% of our units are occupied by a single resident, a demographic that has an extremely low propensity to purchase a home. In fact, we saw less than 6% of our residents leave us to buy a home in 2017, a level consistent with that experienced in each of the last five years despite a significantly improving economy. There is absolutely no denying that Millennials are an important part of today s renting demographic, but they are not the whole story. Currently, more than 18% of our units are occupied by people 50 years and older. Many demographers expect the share of aging Baby Boomer rental households to grow as they shift away from home ownership and, like Millennials, seek the simplicity, flexibility and overall lifestyle offered by rental apartments. In fact, people of all ages and walks of life are participating in the re-urbanization of our nation as they are attracted to high-density living in the urban core. As a result, over the last decade we have put great focus on Walk Scores ( when making our investment decisions. These third-party scores rank a specific location based on its proximity to neighborhood restaurants, coffee shops, grocery stores, culture, education, parks, public transportation and other goods and services that are important to today s apartment resident, regardless of age. In every market in which we operate, our average Walk Score is significantly higher than that of our public market competitors. The demographic picture across our nation is a powerful generator of current and future demand for rental housing. And, as much of this demand will be in our high-density, coastal cities, we believe we are extraordinarily well positioned and have a long run of strong growth yet ahead of us.

6 Nevertheless, 2018 will be another year of elevated supply in our markets, particularly in New York City. Historically, the markets in which we operate annually deliver new apartment units equal to approximately one percent of existing apartment inventory but we are currently seeing higher than average deliveries this year. Rental apartments continue to be one of the most desirable sectors for institutional real estate investors so it s no surprise that developers have kept building. However, we believe that 2018 will see peak supplies in most of our markets and that new supply will decrease in 2019 and considerably so in New York City. The decline in new deliveries is the inevitable result of high land prices, rising construction costs and slowing rental growth that shrink returns on development costs to unacceptable levels. CAPITAL ALLOCATION AND PORTFOLIO TRANSFORMATION Over the last decade, we have successfully transformed our apartment portfolio from one that was comprised primarily of garden-style properties in suburban locations across more than 50 US apartment markets. Today, we are highly focused on more urban and close-in suburban locations in the six gateway coastal markets of Boston, New York, Washington, DC, Southern California, San Francisco and Seattle. As part of this process, in just the last three years we have sold more than 32,000 apartment units for approximately $7.7 billion, generating annual returns of 12% and $4.2 billion in special dividends paid to our shareholders. Our transformed portfolio is now entirely in markets expected to achieve high occupancy and produce the best long term rent growth. EQR Markets Have the Best Long-Term Average Rent Growth & Occupancy Long-Term Average Occupancy Rate ( ) 96.5% 96.0% 95.5% 95.0% 94.5% 94.0% 93.5% 93.0% 92.5% PHO NY PHIL 92.0% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% OC NASS MIA SSPRING VBCH OKC HART SLC WASH-DC BOS MINN RICH NASH WPB BAL SEA WRN PORT BIRM MEM STL FOT AUS COL TMP SAZ CHRLST CHI LSV ATL KC HOU DAL FTW ORL DEN IND RAL CHAR JAC SAC SJO LA RIV SFR SDG OAK Long-Term Average Annual Effective Rent Growth ( ) (EQR markets in orange) Note Coverage starts in for SANA, NY, SSPING, WRN Source: Axiometrics The heavy lifting in our transformation is complete and our focus now is on managing the portfolio to maximize long-term total returns by recycling capital from lower growth assets into those with higher growth potential. In 2017, we saw few opportunities to add new assets to our portfolio at attractive prices and acquired only four properties, consisting of 947 apartment units, for approximately $468 million. In 2018, we expect a similar level of acquisition activity which, like last year, will be funded with proceeds from the disposition of properties expected to underperform. We focus our development activity in the urban core and our close in, highly walkable suburban sub-markets. Development is an excellent opportunity to create long term value by building new streams of income where it is either difficult to acquire existing ones or where the costs to do so represent an unreasonable premium to development returns. We currently have seven projects under construction or in lease-up, which we are developing at a total cost of nearly $1 billion and which we expect to yield nearly 6% on costs when fully stabilized. In 2017, we

7 stabilized five new developments in Los Angeles, Orange County and San Francisco at a weighted average yield of 5.7% on $983 million of development costs. These assets would sell at yields in the high 3% to low 4% range, reflecting the significant value created by our development business in this cycle. However, like acquisitions, over the past several years we have seen few new development opportunities that make sense due to high land prices and increasing construction costs. As a result, it has been several years since we added new sites to our land inventory for future development. In 2018, we do, however, plan to begin construction on one new development project in Boston that we have been working on for nearly a decade. When completed in 2021, this $410 million project containing 469 apartment units will be New England s tallest residential rental tower. As we experience great rental demand across our portfolio of well-located assets, we continue to see unit renovations as an area of significant value creation. This year, we anticipate spending more than $60 million renovating kitchens and baths in 4,500 apartment units. This activity delivers low to mid-teen returns on capital and keeps our assets fresh. We also plan to spend several million dollars on customer facing renovation projects in our common areas like club rooms, lobbies and gyms in order to ensure that our properties remain competitive with newly delivered assets. FOCUS ON OUR CUSTOMER New apartment supply means more choices for our customers so keeping our residents happy and in place is more important than ever. In 2017, our relentless focus on our customers experience led to the highest retention rate in our history and renewal increases averaging 4.6%. This company- wide priority on the customer, led by our incredibly talented team of hard working property management professionals, produced a remarkable 11% increase in our Customer Loyalty Scores in The entire company will work hard again this year, resident by resident, lease by lease, to deliver on our commitments to our customers. The business of renting a place to live has been around since the dawn of time but the technology driving the business today continues to expand at a rapid pace. We continue to be at the forefront of harnessing advances in technology that allow us to serve our customers better and deliver them the optimal customer experience. Across our enterprise, we drive our state of the art, best in class, operating platform to create the performance that you have come to expect from Equity Residential. We maximize revenue through the utilization of our customized pricing system that uses proprietary data on current and projected demand and unit availability to create both current and future pricing every day for every unit we manage. We use a standardized, centralized purchasing system to control our operating expenses and a business intelligence platform that allows all our team members to quickly identify and address trends and opportunities. The internet of things describes the connectivity of all the systems that exist in a place like our properties from entry systems to security and lighting systems to the wi-fi in our resident lounges, roof tops, meeting rooms and other amenity areas. Technology advances at a tremendously rapid rate and our residents expect us to keep pace. We are committed to making the investments necessary to enhance our properties and systems to meet our customers rapidly changing expectations. In 2017, we upgraded high-band width internet speed and performance across most of our portfolio and will complete this process during We remain constantly focused on what s next because every day new technology is being created that will impact how we build and operate our apartment properties, communicate with our residents and help meet their needs. We are committed to staying on top of these changes and will pursue every opportunity to enhance our customers experience and improve in every aspect of our business. This commitment has led us to recently make modest investments in two venture capital funds focused on early stage real estate tech opportunities. Through these relationships, we gain valuable insights into numerous emerging real estate technology platforms, many of which are applicable to our operations and some of which we are already testing. FINANCIAL STABILITY Having a prudent capital structure through operating cycles and transformative events enables financial flexibility, better access to capital and reduced interest rate risk. We are focused on

8 having a strong, conservative and flexible balance sheet which preserves shareholder value during capital market dislocations and provides us with the capacity to take advantage of opportunities when others are capital constrained. Real estate is a capital intensive business so we maintain access to multiple sources of capital. Short term liquidity of $2.0 billion is provided by our unsecured commercial paper program and unsecured revolving credit agreement. Longer term, we can borrow on a secured basis at attractive rates from Fannie Mae and Freddie Mac as well as numerous life insurance companies. We also have excellent access to the public bond market. We were pleased that recent upgrades brought our senior unsecured debt ratings to A-/A3/A by S&P, Moody s and Fitch respectively, among the highest long-term credit ratings in the public real estate sector. These ratings give us immediate and regular access to the unsecured bond market, which we have been using to lock in historically low interest rates and extend our weighted average maturity from six years in 2013 to approximately nine years today. For example, in February 2018 we issued a $500 million, 10-year unsecured bond at 3.5%, representing the lowest credit spread (80 basis points) of any 10-year REIT benchmark offering in history. We were pleased to use the proceeds to retire a $550 million, 6.08% mortgage loan and significantly reduce our interest cost and extend our duration. We are excited to have additional opportunities to refinance nearly $1.0 billion of above market indebtedness in 2019 and 2020 and further reduce our interest expense. ENVIRONMENTAL SOCIAL AND GOVERNANCE ISSUES We are committed to the incorporation of Environmental, Social and Governance (ESG) concepts in all aspects of our business. We continue to improve and enhance our policies and practices on issues from sustainability to employee and community engagement to board composition and governance policies and we continue to be recognized for our work in these areas. As an industry leader, we are committed to creating and maintaining sustainable communities. For us, sustainability thrives at the intersection of people, planet and profit. We are proud that our recent developments meet sustainability standards set by the US Green Building Council or the NAHB Green Building Program. Our portfolio of over 300 properties gives us frequent opportunities to invest in projects that improve the long-term sustainability of our assets while generating annual returns of more than 20%. We have completed lighting and water conservation projects across the great majority of our portfolio and we have installed clean, on-site, power generation at 25 of our existing assets. Our focus on conservation has driven reductions of over 10% in both energy and water use across our portfolio over the past five years. The more than 350 LED lighting projects we have completed at our communities in the last 5 years have reduced our annual electricity use by 35,000,000 kwh. We were proud to be recognized as the 2017 Global Residential Listed Sector Leader by the Global Real Estate Sustainability Benchmark (GRESB) survey, a globally recognized analysis of the sustainability indicators of more than 800 real estate portfolios worldwide. This was the fourth consecutive year that we were recognized as a sector leader by GRESB. In addition, we were the recipient of the 2017 Residential Leader in the Light award for sustainability from the National Association of Real Estate Investment Trusts, our industry association.

9 We have a dedicated team of professionals across our entire enterprise. Their commitment to their customers, their colleagues and their communities is unmatched. In addition to providing remarkable customer service to our residents, our team members spend thousands of hours volunteering in the communities that they and our customers call home. Mentoring, participating in fundraising events, cleaning up local parks and running food drives are just some of the many activities in which they are engaged. Each year a rotating committee of employees from across our enterprise, our Equity Values Council, drives our initiatives in community service, employee wellness, diversity and inclusion. The Council has had a tremendous impact on our ESG efforts and will propel us forward again in (Equity Residential employees volunteering at the Greater Chicago Food Depository, November 2017) Our Board has implemented many corporate governance measures over the years designed to serve the interests of our shareholders and further align the interests of trustees and management with those of our shareholders. In late 2017, in response to the recommendations of our shareholders, the Board amended the Company s Bylaws to add a provision which provides for the right of shareholders to amend the Bylaws. This right had previously been reserved, by Maryland law, for the Board of Trustees. We are proud to have been recognized by the Women s Forum of New York as a Corporate Champion for accelerating gender parity in the boardroom with female representation of more than 25% on our Board of Trustees. Our organization is only as good as it is because of terrific people. One of the best is our long time General Counsel, Bruce Strohm, who retired at the end of 2017 after 30 years at Equity Residential and its predecessor company. Bruce has been an integral part of every acquisition, every merger, every Board meeting and every big decision we ve made starting with our IPO in He is a highly valued leader, counselor and friend and we cannot thank him enough for all that he has done to contribute to Equity Residential s success over his remarkable career. With transition comes opportunity and we are pleased that, as part of a well thought out commitment to succession planning, Scott Fenster, a 15-year veteran of our legal department, became our new General Counsel on January 1, We are also incredibly fortunate to have an exceptional Board of Trustees comprised of thoughtful and highly-engaged individuals with a variety of backgrounds who are dedicated to working with our management team to create long term value for our shareholders. One such trustee is John Alexander who is stepping down from our board having served since our IPO in John has made tremendous contributions to Equity Residential over the past 25 years for

10 which we will always remain extraordinarily grateful. But John has been much more than a wonderful and dedicated trustee. He has also been a friend, mentor and leader. We have all benefitted greatly from his wisdom, insight and commitment and will surely miss his sense of humor! Equity Residential will celebrate 25 years as a publicly traded company this summer. Since our IPO in August 1993, we are pleased to have returned 12.9% annually to our shareholders compared to 9.7% for the S&P 500. As we look forward, we expect apartment fundamentals to continue to be strong and we remain confident that we should see an extended run of strong growth across our markets notwithstanding short term headwinds as new supply is absorbed. We expect the re-urbanization of our cities to continue unabated as powerful demographic and economic forces shape our country s future. Equity Residential is uniquely positioned to benefit from this trend and we look forward to many years of growing income, dividends and shareholder value on your behalf. We appreciate your continued support. Regards, Sam Zell Chairman April 26, 2018 David J. Neithercut President and CEO

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12 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended DECEMBER 31, 2017 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: (Equity Residential) Commission File Number: (ERP Operating Limited Partnership) EQUITY RESIDENTIAL ERP OPERATING LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Maryland (Equity Residential) (Equity Residential) Illinois (ERP Operating Limited Partnership) (ERP Operating Limited Partnership) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Two North Riverside Plaza, Chicago, Illinois (312) (Address of principal executive offices) (Zip Code) (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Shares of Beneficial Interest, $0.01 Par Value (Equity Residential) New York Stock Exchange 7.57% Notes due August 15, 2026 (ERP Operating Limited Partnership) New York Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None (Equity Residential) Units of Limited Partnership Interest (ERP Operating Limited Partnership) (Title of each class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Equity Residential Yes No ERP Operating Limited Partnership Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Equity Residential Yes No ERP Operating Limited Partnership Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Equity Residential Yes No ERP Operating Limited Partnership Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Equity Residential Yes No ERP Operating Limited Partnership Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( of this chapter) is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Equity Residential ERP Operating Limited Partnership Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. Equity Residential: Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company ERP Operating Limited Partnership: Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Equity Residential ERP Operating Limited Partnership Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Equity Residential Yes No ERP Operating Limited Partnership Yes No The aggregate market value of Common Shares held by non-affiliates of the Registrant was approximately $23.8 billion based upon the closing price on June 30, 2017 of $65.83 using beneficial ownership of shares rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting shares owned by Trustees and Executive Officers, some of whom may not be held to be affiliates upon judicial determination. The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding on February 16, 2018 was 368,169,571.

13 DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference certain information that will be contained in Equity Residential s Proxy Statement relating to its 2018 Annual Meeting of Shareholders, which Equity Residential intends to file no later than 120 days after the end of its fiscal year ended December 31, 2017, and thus these items have been omitted in accordance with General Instruction G(3) to Form 10-K. Equity Residential is the general partner and 96.4% owner of ERP Operating Limited Partnership. 2

14 EXPLANATORY NOTE This report combines the annual reports on Form 10-K for the year ended December 31, 2017 of Equity Residential and ERP Operating Limited Partnership. Unless stated otherwise or the context otherwise requires, references to EQR mean Equity Residential, a Maryland real estate investment trust ( REIT ), and references to ERPOP mean ERP Operating Limited Partnership, an Illinois limited partnership. References to the Company, we, us or our mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the Operating Partnership mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. The following chart illustrates the Company s and the Operating Partnership s corporate structure: EQR is the general partner of, and as of December 31, 2017 owned an approximate 96.4% ownership interest in, ERPOP. The remaining 3.6% interest is owned by limited partners. As the sole general partner of ERPOP, EQR has exclusive control of ERPOP s day-to-day management. Management operates the Company and the Operating Partnership as one business. The management of EQR consists of the same members as the management of ERPOP. The Company is structured as an umbrella partnership REIT ( UPREIT ) and EQR contributes all net proceeds from its various equity offerings to ERPOP. In return for those contributions, EQR receives a number of OP Units (see definition below) in ERPOP equal to the number of Common Shares it has issued in the equity offering. The Company may acquire properties in transactions that include the issuance of OP Units as consideration for the acquired properties. Such transactions may, in certain circumstances, enable the sellers to defer in whole or in part, the recognition of taxable income or gain that might otherwise result from the sales. This is one of the reasons why the Company is structured in the manner shown above. Based on the terms of ERPOP s partnership agreement, OP Units can be exchanged with Common Shares on a one-for-one basis because the Company maintains a one-for-one relationship between the OP Units of ERPOP issued to EQR and the outstanding Common Shares. The Company believes that combining the reports on Form 10-K of EQR and ERPOP into this single report provides the following benefits: enhances investors understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business; eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and creates time and cost efficiencies through the preparation of one combined report instead of two separate reports. 3

15 The Company believes it is important to understand the few differences between EQR and ERPOP in the context of how EQR and ERPOP operate as a consolidated company. All of the Company s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR s primary function is acting as the general partner of ERPOP. EQR also issues equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP, and guarantees certain debt of ERPOP, as disclosed in this report. EQR does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by EQR, which are contributed to the capital of ERPOP in exchange for additional partnership interests in ERPOP ( OP Units ) (on a one-for-one Common Share per OP Unit basis) or additional preference units in ERPOP (on a one-for-one preferred share per preference unit basis), the Operating Partnership generates all remaining capital required by the Company s business. These sources include the Operating Partnership s working capital, net cash provided by operating activities, borrowings under its revolving credit facility and/or commercial paper program, the issuance of secured and unsecured debt and equity securities and proceeds received from disposition of certain properties and joint venture interests. Shareholders equity, partners capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The limited partners of the Operating Partnership are accounted for as partners capital in the Operating Partnership s financial statements and as noncontrolling interests in the Company s financial statements. The noncontrolling interests in the Operating Partnership s financial statements include the interests of unaffiliated partners in various consolidated partnerships. The noncontrolling interests in the Company s financial statements include the same noncontrolling interests at the Operating Partnership level and limited partner OP Unit holders of the Operating Partnership. The differences between shareholders equity and partners capital result from differences in the equity issued at the Company and Operating Partnership levels. To help investors understand the differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity s debt, noncontrolling interests and shareholders equity or partners capital, as applicable; and a combined Management s Discussion and Analysis of Financial Condition and Results of Operations section that includes discrete information related to each entity. This report also includes separate Part II, Item 9A. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership. As general partner with control of ERPOP, EQR consolidates ERPOP for financial reporting purposes, and EQR essentially has no assets or liabilities other than its investment in ERPOP. Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company. 4

16 EQUITY RESIDENTIAL ERP OPERATING LIMITED PARTNERSHIP TABLE OF CONTENTS PAGE PART I. Item 1. Business... 6 Item 1A. Risk Factors... 8 Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II. Item 5. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III. Item 10. Trustees, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Trustee Independence Item 14. Principal Accounting Fees and Services PART IV. Item 15. Exhibits, Financial Statement Schedules Item 16. Form 10-K Summary

17 PART I Item 1. Business General Equity Residential ( EQR ), a Maryland real estate investment trust ( REIT ) formed in March 1993, is an S&P 500 company focused on the acquisition, development and management of rental apartment properties in urban and highdensity suburban coastal gateway markets. ERP Operating Limited Partnership ( ERPOP ), an Illinois limited partnership, was formed in May 1993 to conduct the multifamily residential property business of Equity Residential. EQR has elected to be taxed as a REIT. References to the Company, we, us or our mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP. References to the Operating Partnership mean collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. Unless otherwise indicated, the notes to consolidated financial statements apply to both the Company and the Operating Partnership. EQR is the general partner of, and as of December 31, 2017 owned an approximate 96.4% ownership interest in, ERPOP. All of the Company s property ownership, development and related business operations are conducted through the Operating Partnership and EQR has no material assets or liabilities other than its investment in ERPOP. EQR issues public equity from time to time, the net proceeds of which it is obligated to contribute to ERPOP, but does not have any indebtedness as all debt is incurred by the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company, including the Company s ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. The Company s corporate headquarters is located in Chicago, Illinois and the Company also operates property management offices in each of its coastal gateway markets. As of December 31, 2017, the Company had approximately 2,700 employees who provided real estate operations, leasing, legal, financial, accounting, acquisition, disposition, development and other support functions. Certain capitalized terms used herein are defined in the Notes to Consolidated Financial Statements. See also Note 17 in the Notes to Consolidated Financial Statements for additional discussion regarding the Company s segment disclosures. Available Information You may access our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8- K and any amendments to any of those reports we file with the SEC free of charge on our website, These reports are made available on our website as soon as reasonably practicable after we file them with the SEC. The information contained on our website, including any information referred to in this report as being available on our website, is not a part of or incorporated into this report. Business Objectives and Operating and Investing Strategies The Company invests in apartment communities located in strategically targeted markets with the goal of maximizing our risk adjusted total return (operating income plus capital appreciation) on invested capital. We seek to maximize the income and capital appreciation of our properties by investing in markets that are characterized by conditions favorable to multifamily property operations and appreciation. We are focused on the coastal gateway markets of Boston, New York, Washington D.C., Southern California (including Los Angeles, Orange County and San Diego), San Francisco and Seattle. These markets generally feature one or more of the following characteristics that allow us to increase rents: High home ownership costs; Strong economic growth leading to job growth and household formation, which in turn leads to high demand for our apartments; Urban and high-density suburban locations with an attractive quality of life leading to high resident demand and retention; Favorable demographics contributing to a larger pool of target residents with a high propensity or greater preference to rent apartments; and 6

18 Higher barriers to entry where, because of land scarcity or government regulation, it is typically more difficult or costly to build new apartment properties, creating limits on new supply. We believe our strategy also capitalizes on the increasing preference of renters of all ages to live in the urban core of cities or dense suburban locations near transit, entertainment and cultural amenities. Millennials, the approximately 78 million people born between 1981 and 2000, are a prime apartment rental demographic. Reports also show a growing trend among aging Baby Boomers, a demographic of more than 76 million people born between 1946 and 1964, toward apartment rentals. We believe that both groups appreciate the locational values described above as well as the flexibility that rental apartments offer. Our operating focus is on balancing occupancy and rental rates to maximize our revenue while exercising tight cost control to generate the highest possible return to our shareholders. Revenue is maximized by attracting qualified prospects to our properties, cost-effectively converting these prospects into new residents and keeping our residents satisfied so they will renew their leases upon expiration. While we believe that it is our high-quality, well-located assets that bring our customers to us, it is the customer service and superior value provided by our on-site personnel that keeps them renting with us and recommending us to their friends. We use technology to engage our customers in the way that they want to be engaged. Many of our residents utilize our web-based resident portal which allows them to sign and renew their leases, review their accounts and make payments, provide feedback and make service requests on-line. Acquisitions and developments may be financed from various sources of capital, which may include retained cash flow, issuance of additional equity and debt, sales of properties and joint venture arrangements. In addition, the Company may acquire properties in transactions that include OP Units as consideration for the acquired properties. Such transactions may, in certain circumstances, enable the sellers to defer, in whole or in part, the recognition of taxable income or gain that might otherwise result from the sales. As part of its strategy, the Company purchases completed and fully occupied apartment properties, partially completed or partially occupied properties and may acquire land parcels to hold and/or sell based on market opportunities as well as options to buy more land in the future. The Company may also seek to acquire properties by purchasing defaulted or distressed debt that encumbers desirable properties in the hope of obtaining title to property through foreclosure or deed-in-lieu of foreclosure proceedings. Over the past several years, the Company has done an extensive repositioning of its portfolio into urban and highly walkable, close-in suburban assets. Since 2005, the Company has sold approximately 199,000 apartment units primarily located in the less dense portion of suburban markets for an aggregate sales price of approximately $23.8 billion, acquired nearly 70,000 apartment units primarily located in urban and high-density suburban markets for approximately $20.5 billion and began approximately $5.9 billion of development projects primarily located in urban and high-density suburban markets. We are currently seeking to acquire and develop assets in the following coastal gateway metropolitan areas: Boston, New York, Washington D.C., Southern California, San Francisco and Seattle. We endeavor to provide a richly diverse work environment that employs the highest performers, cultivates the best ideas and creates the widest possible platform for success. We are committed to elevating and supporting the core values of diversity and inclusion, total well-being (which brings together physical, financial, career, social and community well-being into a cohesive whole), and environmental, social and governance ("ESG"), which includes sustainability and social responsibility, by actively engaging in these areas. Each member of the executive team maintains an annual goal related to these core values. Our goal is to create and sustain an inclusive environment where diversity will thrive, employees will want to work and residents will want to live. We are committed to providing our employees with encouragement, guidance, time and resources to learn and apply the skills required to succeed in their jobs. We provide many classroom and on-line training courses to assist our employees in interacting with prospects and residents as well as extensive training for our customer service specialists in maintaining our properties and improvements, equipment and appliances. We actively promote from within and many senior corporate and property leaders have risen from entry level or junior positions. We monitor our employees' engagement by surveying them annually and find most employees say they are proud to work at the Company, value one another as colleagues, believe in our mission and values and feel their skills meet their job requirements. We have a commitment to sustainability and consider the environmental impacts of our business activities. Sustainability and social responsibility are key drivers of our focus on creating the best apartment communities for residents to live, work and play. We have a dedicated in-house team that initiates and applies sustainable practices in all aspects of our business, including investment activities, development, property operations and property management activities. With its high density, multifamily 7

19 housing is, by its nature, an environmentally friendly property type. Our recent acquisition and development activities have been primarily concentrated in pedestrian-friendly urban and close-in suburban locations near public transportation. When developing and renovating our properties, we strive to reduce energy and water consumption by investing in energy saving technology while positively impacting the experience of our residents and the value of our assets. We continue to implement a combination of irrigation, lighting, HVAC and renewable energy improvements at our properties that will reduce energy and water consumption. The Company was named the 2017 Global Residential Listed Sector Leader in ESG by GRESB, a globally recognized analysis of the ESG indicators of more than 800 real estate portfolios worldwide. The Company was also recently awarded the 2017 Residential Leader in the Light award for sustainability by the National Association of Real Estate Investment Trusts ( NAREIT ). For additional information regarding our sustainability efforts, see our December 2017 Corporate Social Responsibility and Sustainability Report at our website, This report was reviewed and approved by the Corporate Governance Committee of our Board of Trustees, which monitors the Company s ongoing ESG efforts. For 2018, we continue to have an express company-wide goal regarding enhanced ESG efforts. Employees, including our executives, will have their performance against our various ESG goals evaluated as part of our annual performance review process. Please refer to Item 7, Management s Discussion and Analysis of Financial Condition and Results of Operations, for the Company s Results of Operations and Liquidity. Starwood Transaction The Company executed an agreement with controlled affiliates of Starwood Capital Group ( Starwood ) on October 23, 2015 to sell a portfolio of 72 operating properties consisting of 23,262 apartment units located in five markets across the United States for $5.365 billion (the Starwood Transaction or Starwood Portfolio ). On January 26 and 27, 2016, the Company closed on the sale of the entire portfolio described above. The sale of the Starwood Portfolio, combined with the other 2016 dispositions, resulted in the Company s exit from the South Florida, Denver and New England (excluding Boston) markets and substantially completed the Company s portfolio transformation which started approximately ten years ago. These sales narrowed the Company s focus, which is now entirely directed towards our coastal gateway markets. The Company used the majority of the proceeds from the Starwood Transaction and other 2016 dispositions to pay two special dividends to its shareholders and holders of OP Units of $11.00 per share/unit in the aggregate, consisting of special dividends of $8.00 per share/unit (approximately $3.0 billion) on March 10, 2016 and $3.00 per share/unit (approximately $1.1 billion) on October 14, The Company used the majority of the remaining proceeds to reduce aggregate indebtedness in order to make the transaction leverage neutral. The Company retired approximately $2.0 billion in secured and unsecured debt, the majority of which was scheduled to mature in 2016 and 2017, which improved the Company s already strong credit metrics. Competition All of the Company s properties are located in developed areas that include other multifamily properties. The number of competitive multifamily properties in a particular area could have a material effect on the Company s ability to lease apartment units at its properties and on the rents charged. The Company may be competing with other entities that have greater resources than the Company and whose managers have more experience than the Company s managers. In addition, other forms of rental properties and single family housing provide housing alternatives to potential residents of multifamily properties. See Item 1A. Risk Factors for additional information with respect to competition. Environmental Considerations See Item 1A. Risk Factors for information concerning the potential effects of environmental regulations on our operations. Item 1A. Risk Factors General References to EQR mean Equity Residential, a Maryland real estate investment trust ( REIT ), and references to ERPOP mean ERP Operating Limited Partnership, an Illinois limited partnership. Unless otherwise indicated, when used in this section, the terms Company, we, us or our mean collectively EQR, ERPOP and those entities/subsidiaries owned or controlled by EQR and/or ERPOP and the term Operating Partnership means collectively ERPOP and those entities/subsidiaries owned or controlled by ERPOP. This Item 1A. includes forward-looking statements. You should refer to 8