EQUITY RESIDENTIAL Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Revenue and NOI: Same-store revenues up 2.9%, same-store expenses up 2.7%, same-store NOI growth 3%, NFFO per share up 3.2%. Steady demand in coastal markets with limited supply.
• Expense Management: Lowered same-store expense midpoint guidance by 1 percentage point to 3%, resulting in revised same-store NOI guidance midpoint of 3.25%.
• Capital Allocation: Increased transaction activity, with acquisitions in suburban Boston, Atlanta, Dallas. Focus on expansion markets, underwriting 5% forward cap rate with expectations of rental rate recovery as supply normalizes.
• Property Operations: High occupancy (96.4%), low resident turnover, strong renewal process. Testing AI resident assistant and self-guided tour app for efficiency and improved customer experience.

Segment Performance

• Coastal Established Markets: Approximately 94% of NOI. Same-store revenues increased 2.9%, same-store expenses rose 2.7%, leading to same-store NOI growth of 3%. Northeastern markets (Boston, New York, Washington, D.C.) and Seattle are standouts with strong performance.
• Expansion Markets: 6% of NOI. Markets like Atlanta, Austin, Dallas-Fort Worth, Denver have good demand but face pressure from high supply, with Atlanta and Austin portfolios most impacted.

Guidance

• Same-store Revenue: Increased guidance midpoint by 70 basis points to 3.2%.
• Same-store Expenses: Lowered midpoint guidance by 1 percentage point to 3%, leading to revised same-store NOI guidance midpoint of 3.25%.
• Property Acquisition: Anticipates rental rate recovery in expansion markets as supply levels in 2026-2027 decrease, supporting acquisition underwriting.

Risks

• Expansion Markets Supply: Current weak rent levels in expansion markets, though relief expected as supply collapses.
• Regulatory: Increased advocacy costs due to California ballot initiatives, focusing on state and local regulatory efforts.
• Property Tax: Difficult to control property taxes, a significant expense component.

Question and Answer

• Q: Seasonality expectations A: Michael Manelis discussed normal seasonal deceleration curves in the third and fourth quarters, with stable renewal rates and slight moderation in new lease change.
• Q: LA pricing weakness from evictions A: Michael Manelis stated pressure from eviction-related supply will continue through the year, with upside potential in 2025.
• Q: Capital deployment IRR hurdles A: Alex Brackenridge mentioned pricing around a 5% cap rate with IRR expectations around 8% as supply normalizes.
• Q: Expansion markets new lease growth A: Michael Manelis noted challenging operating conditions in expansion markets with less demand seasonality, focusing on renewal priority.
• Q: Margin expansion A: Mark Parrell and Robert Garechana discussed margin expansion through revenue opportunities and expense discipline, with property taxes being a challenge.
• Q: Regulatory landscape A: Mark Parrell discussed high advocacy costs due to California initiatives, focusing on state and local regulation.
• Q: Loss to lease and pricing spread A: Michael Manelis said the spread between renewal and new lease pricing is normal, with expected slight tightening.
• Q: LA demand from TV film industry A: Michael Manelis said no direct impact seen, but shadow supply from evictions is affecting the market.
• Q: Transaction market underwriting A: Alex Brackenridge said buyers underwriting at around 5% cap rate, expecting rent growth recovery.
• Q: Turnover and price sensitivity A: Michael Manelis discussed turnover trends and price sensitivity in Southern California, with residents in good financial shape.
• Q: West Coast concessions and blended rates A: Michael Manelis discussed concessions in West Coast markets and expected stability in renewals.
• Q: Asset purchases and development A: Mark Parrell and Robert Garechana discussed focus on buying existing assets, with an open approach to development.