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    Equity Residential (EQR)

    Business Description

    Equity Residential (EQR) is a company focused on the acquisition, development, and management of multifamily residential properties, primarily generating income through leasing apartment units to residents . The company's operations are geographically evaluated by market and include both same store and non-same store properties, with residential operations accounting for the vast majority of its revenue . EQR also maintains a small non-residential presence, designed as an amenity for residents, contributing a minor portion to total revenues . The company strategically optimizes its portfolio by targeting dynamic cities that attract affluent long-term renters, expanding in markets like Denver, Atlanta, Dallas/Ft. Worth, and Austin, while maintaining a strong presence in established markets such as Boston, New York, Washington, D.C., Southern California, San Francisco, and Seattle .

    1. Residential Operations - Manages and leases multifamily residential properties, focusing on generating rental income from apartment units across various dynamic and established markets.
    2. Non-Residential Amenities - Provides non-residential spaces designed as amenities for residential residents, contributing a minor portion to the company's overall revenue.

    Q2 2024 Summary

    Initial Price$63.02April 1, 2024
    Final Price$68.14July 1, 2024
    Price Change$5.12
    % Change+8.12%

    What went well

    • EQR is strategically focusing on acquiring existing assets at favorable prices compared to replacement cost, anticipating that many assets will be sold by developers with short-term bank debt, and positioning to benefit from rent improvements as supply decreases in late '25 to early '28.
    • EQR expects margin expansion driven by revenue growth opportunities and continued expense discipline, leveraging technology and innovation to enhance efficiency and customer service, aiming for margins approaching 70% or better.
    • EQR's strategy of "podding" or sharing resources across properties is expected to drive operational efficiencies and cost savings in expansion markets, enhancing margins and growth potential.

    What went wrong

    • Equity Residential is facing challenges in its expansion markets due to high levels of new supply, leading to pressure on new leases and retention, particularly in markets like Atlanta and Austin.
    • The benefits of resource sharing ("podding") in new acquisitions may be limited if properties are not in close proximity, potentially resulting in higher operating costs than anticipated in expansion markets like Dallas and Atlanta.
    • The company incurred a $9 million charge in Q2 due to a commercial dispute and a construction defect, indicating potential unforeseen expenses and risks that could impact financial performance.

    Q&A Summary

    1. Seasonality Expectations
      Q: Are you guiding to no deceleration in Q4?
      A: Michael stated they expect normal seasonal deceleration in both the third and fourth quarters. They originally modeled full-year blended rates at about 2%, now expecting closer to the mid-2% range. The portfolio is over 96% occupied, with solid application volumes and pricing trends aligning with a normal year.

    2. L.A. Supply and Evictions Impact
      Q: When will L.A.'s pricing weakness from evictions improve?
      A: Michael mentioned they saw a 70 basis point year-over-year occupancy lift in L.A. but new lease changes remain negative due to new supply in key submarkets like Hollywood and Downtown. They expect continued pressure from supply for the rest of the year but anticipate upside potential in 2025. Despite softer new lease changes, total revenue is strong as they fill units with paying residents.

    3. Capital Deployment and IRR Hurdles
      Q: How are you thinking about IRR hurdles today?
      A: Alex said they're pricing acquisitions, generally newer products in the suburbs, around a 5% cap rate. Under conservative growth assumptions, they're targeting IRRs around 8%, which fits within their cost of capital.

    4. Expansion Markets and Supply Impact
      Q: How will new lease growth progress in expansion markets?
      A: Michael noted challenging operating conditions in expansion markets due to supply. They're offering concessions averaging 6 weeks to 35%–50% of applicants. They don't foresee marked deceleration but expect difficult conditions for the balance of the year.

    5. Margin Expansion Opportunity
      Q: How should we think about margin expansion opportunity?
      A: Mark indicated that with inflation easing, they aim to blunt expense growth but property taxes, being 45% of expenses, make it challenging to consistently keep growth below 3%. They're focusing on revenue opportunities and aim for margins approaching 70% or better by leveraging technology and operational efficiency.

    6. Regulatory Landscape and Advocacy Costs
      Q: Can you discuss increased advocacy costs and regulatory risks?
      A: Mark explained that advocacy costs are up due to fighting rent control measures in California, expecting to spend $10 million or more this year. Regulatory efforts are focused on state and local levels, particularly in California, where they are working to educate voters against rent control initiatives.

    7. Occupancy Guidance Increase
      Q: Does increased occupancy guidance reflect stronger demand or leaning into occupancy?
      A: Michael stated the raise reflects achieved occupancy gains, with expectations of normal seasonality ahead. East Coast markets are over 97% occupied. They focus on maximizing revenue, balancing occupancy and rate based on market and submarket conditions.

    8. Sustainability of Lease Pricing Spread
      Q: Is the spread between renewal and new lease pricing sustainable?
      A: Michael said a spread of 300 to 400 basis points between renewals and new leases is common. Some tightening is expected, but maintaining a spread is normal, and they don't anticipate the rates aligning completely.

    9. Hollywood Impact on L.A. Market
      Q: Any impact from Hollywood industry disruption in L.A.?
      A: Michael hasn't observed any impact on demand in L.A. from the industry's disruption. Occupancy remains strong at over 95.5%. The primary challenge is the influx of units from evictions, which will take a few quarters to absorb.

    10. Transaction Market and Cap Rates
      Q: How are buyers underwriting assets and cap rates?
      A: Alex observed that acquisitions are generally priced around a 5% cap rate. Underwriting varies by market; in expansion markets, buyers anticipate initial slight negative rent growth with recovery as supply diminishes.

    11. Commercial Dispute and Construction Charges
      Q: Can you explain the commercial dispute and defects charge?
      A: Bob stated they took a charge of about $9 million , related to a commercial dispute over a ground lease and a construction defect reserve. These are unique, non-recurring situations, and they may recover some amounts in the future.

    12. Acquisitions vs. Development Strategy
      Q: Are you favoring buying existing assets or investing in development?
      A: Mark indicated they are open to both but currently lean towards existing assets. They see opportunities as owners sell due to financing pressures and prefer existing assets over development due to funding and execution risks associated with development projects.

    Key Metrics

    View all financials →
    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Residential and Non-Residential Rent----2,640.758--685.398
    - Utility Recoveries (RUBS)----87.534--22.592
    - Parking Rent----44.530--12.097
    - Other Lease Revenue----(25.237)--(5.274)
    Total Lease Revenue----2,747.585--714.813
    Parking Revenue----40.836--10.838
    Other Revenue----85.543--22.697
    Total Other Rental Income----126.379--33.535
    Total Rental Income705.088717.309724.067727.52,873.964730.818734.163748.348
    - Fee and Asset Management--------
    Total Revenue--------
    Revenue by Geography - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Southern California169.71175.569179.375165.35690.0176.192177.28177.668
    - Los Angeles115.68118.562121.098111.66467.0119.267120.12120.211
    - Orange County31.5932.31633.01933.38130.331.10131.1731.488
    - San Diego22.4424.69125.25820.3192.725.82425.9925.969
    Washington, D.C.107.62109.660114.748109.67441.7116.387116.47117.306
    San Francisco107.48108.641109.215105.06430.4109.313108.73108.957
    New York118.05119.785118.326120.14476.3123.964122.17123.506
    Boston70.6672.46972.54173.73289.480.45182.0881.941
    Seattle74.5674.72973.35168.26290.973.83274.7975.032
    Denver17.6017.87317.85517.7771.117.80818.0019.649
    Other Expansion Markets16.0018.71818.67911.564.918.71818.6518.249
    Non-Same Store/Other23.4119.86519.97756.05119.314.15315.9926.040
    Total Revenue705.09717.309724.067727.532874.0730.818734.16748.348
    KPIs - MetricFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Unencumbered Properties Value ($B)24.524.925.525.6-25.625.626.9
    Percentage of Unencumbered Investment (%)87.187.689.189.1-89.189.189.5
    Utility Recoveries ($M)21.59021.61521.464--22.89622.99522.592
    Parking Rent ($M)10.99111.12711.191--11.64412.02412.097
    Other Lease Revenue ($M)(6.920)(5.766)(6.156)--(6.037)(5.176)(5.274)
    Parking Revenue ($M)10.20310.1929.638--10.67811.03710.838
    Other Revenue ($M)18.48622.56822.730--20.45322.36022.697
    Rental Income ($M)705.088717.309724.067--730.818734.163748.348
    Consolidated Joint Ventures Properties15151414-141414
    Consolidated Joint Ventures Apartment Units3,1143,2263,0603,060-3,0603,0603,060
    Projects Under Development2211-222
    Acquisition Cap Rate (%)-5.05.15.1--5.75.1
    Disposition Yield (%)5.35.35.3--5.55.75.7
    Unsecured Revolving Credit Facility Availability ($M)2,496.5162,311.3291,996.5802,086.585-2,270.5622,325.5621,707.562

    Executive Team

    NamePositionStart DateShort Bio
    Mark J. ParrellPresident & Chief Executive OfficerJan 2019Mark J. Parrell has been the CEO of Equity Residential since January 2019 and the President since September 2018. He joined the company in September 1999 and has held various finance roles .
    Barry S. AltshulerExecutive Vice President – InvestmentsFeb 2015Barry S. Altshuler has been EVP – Investments since February 2015. He has held various roles since 1998, including VP of Acquisitions and Asset Management .
    Alexander BrackenridgeExecutive Vice President & Chief Investment OfficerSep 2020Alexander Brackenridge has been EVP & CIO since September 2020. He joined the company in 1993 and has held various investment and asset management positions .
    Catherine M. CarrawayExecutive Vice President & Chief Human Resources OfficerApr 2021Catherine M. Carraway has been EVP & CHRO since April 2021. She joined the company in March 2001 and has held various HR roles .
    Scott J. FensterExecutive Vice President, General Counsel & Corporate SecretaryJan 2018Scott J. Fenster has been EVP, General Counsel, and Corporate Secretary since January 2018. He joined the company in September 2003 and has held various legal positions .
    Robert A. GarechanaExecutive Vice President & Chief Financial OfficerSep 2018Robert A. Garechana has been EVP & CFO since September 2018. He joined the company in November 2004 and has held various finance roles .
    Michael L. ManelisExecutive Vice President & Chief Operating OfficerJul 2018Michael L. Manelis has been EVP & COO since July 2018. He joined the company in 1999 and has held various operations roles .
    Ann C. HoffTrustee, Member of the Audit Committee2024Ann C. Hoff has been a Trustee and Audit Committee member since 2024. She is also President and COO of Bellagio and Park MGM at MGM Resorts International .
    Nina P. JonesTrustee, Member of the Audit and Corporate Governance Committees2024Nina P. Jones has been a Trustee since 2024. She has over 15 years of real estate investing experience at T. Rowe Price and serves as a director of Simon Property Group .

    Questions to Ask Management

    1. With your current preference for acquiring existing assets over development due to challenges like construction costs and funding issues, how do you plan to finance these acquisitions without negatively impacting shareholder value in a market where transaction volumes are increasing?
    2. In light of the significant supply pressures in your expansion markets such as Atlanta and Austin, how confident are you in your underwriting assumptions for rent recovery, and what risks do you foresee if supply levels remain elevated longer than expected?
    3. Given the substantial increase in advocacy costs related to regulatory challenges like rent control initiatives in California, how do you anticipate these regulatory pressures impacting your operations and financial performance, and what strategies are you implementing to address them?
    4. Considering the rising resident turnover and increased price sensitivity in markets like Southern California, how are you balancing rent growth with occupancy levels to maintain margins without driving residents to more affordable alternatives?
    5. With supply pressures expected to peak later this year in established markets like Seattle, how is this influencing your portfolio strategy, and what measures are you taking to mitigate potential impacts on occupancy and rent growth in these areas?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateN/A
    End Date/DurationMay 2025
    Total additional amount13.0 million shares
    Remaining authorization amount12,347,548 shares
    DetailsThe program is part of the company's capital allocation strategy, aiming to manage capital structure and enhance shareholder value. It is flexible, with no expiration date, and can be suspended or discontinued at any time.

    Past Guidance

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      • Same-Store Revenue Growth: Midpoint revised to 3.2% for the full year, an increase of 70 basis points from previous expectations .
      • Same-Store Expense Growth: Midpoint lowered to 3%, a reduction of 100 basis points from prior guidance .
      • Same-Store NOI Growth: Midpoint increased to 3.25% for the year, 145 basis points better than the prior midpoint .
      • Normalized Funds From Operations (NFFO) Growth: Improved by 100 basis points, reflecting a $0.04 increase at the midpoint .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      • Same-Store Revenue Growth: Expected normal sequential improvement, with a 30 basis point contribution from bad debt improvement and other income initiatives over the full year .
      • Expenses: Higher growth rates expected in Q2 and Q3 due to increased turnover, with a challenging comp period in Q4 .
      • NFFO Guidance for Q2: Cautious outlook due to factors like lack of sequential benefit from straight-line receivables and temporary dilution from dispositions .
      • Bad Debt: Sequential improvement expected starting in Q2, with a full-year improvement of 30 basis points in total revenue .
      • Overall Outlook: Optimistic about fundamentals, aiming for high end of revenue and low end of expense range .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      • Same-Store Revenue Growth: Range of 2% to 3%, driven by embedded growth and stable occupancy and concessions .
      • Same-Store Expense Growth: 4%, with faster growth in real estate taxes and utilities, slower growth in payroll and repairs .
      • Bad Debt: Improvement from 1.4% to slightly above 1% for the full year, sub-1% by Q4 .
      • Normalized FFO: $0.03 reduction due to acquisition timing .
      • Acquisitions and Dispositions: $1 billion planned for both .
      • Development: Completion of six properties, not expected to contribute meaningfully to NFFO growth .
      • Other Income Growth: 30 basis points growth excluding bad debt .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: N/A
    • Guidance: The documents do not contain information from the Q3 2024 earnings call for EQR, so specific guidance metrics are unavailable.