Q1 2024 Earnings Summary
- EQR is experiencing historic low turnover with record resident retention of over 61%, positioning the company to capture pricing power opportunities during the peak leasing season.
- Persistent demand for rental housing, driven by high home ownership costs and undersupply, provides EQR with significant secular tailwinds likely to persist over the next cycle, supporting durable demand and profitability.
- EQR is strategically investing in ROI projects such as renovations, solar installations, smart rent installations, and EV chargers, which are discretionary and expected to enhance long-term value.
- Equity Residential is experiencing lower new lease growth, with April new lease growth at 0.1% compared to 1.6% last year, due to increased leasing concessions.
- Urban assets in Seattle and San Francisco are underperforming, showing lower occupancy and less pricing power compared to suburban assets, which could impact overall performance.
- Higher capital expenditures are expected to continue over the next few years due to ROI projects and catch-up from the pandemic, potentially affecting cash flows.
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San Francisco and Seattle Performance
Q: What's driving improvements in San Francisco and Seattle?
A: Michael noted that occupancy in both markets is at 96% , boosting confidence to reduce concessions and raise rates. While migration improvements are marginal, there's a better sense of vibrancy in these cities. Mark added that San Francisco rents are still 14% below pre-pandemic levels , indicating room for growth. Significant AI investment in the Bay Area may boost long-term demand. -
CapEx Increase
Q: Is higher CapEx the new normal?
A: Alex explained that CapEx per unit increased to about $3,800 this year, up 40% from 2022. This is due to investments in ROI projects like renovations, solar installations, smart rent tech, and EV chargers, along with pandemic catch-up work. They expect this level to continue for a couple more years. -
Affordability Concerns
Q: Are rents near the affordability ceiling?
A: Michael stated they're not concerned about hitting affordability limits. Rent-to-income ratios are around 20%, ranging from 18.5% to 24%. Southern California markets are at the higher end but have historically been so. -
Same-Store Growth Outlook
Q: What's the expected cadence of same-store growth?
A: Bob indicated normal seasonal growth, with sequential improvement in blended rates through the year. They expect Q2 and Q3 to show higher growth due to leasing season, but Q4 will have a tougher comp. -
Second Quarter Guidance
Q: Why is Q2 guidance lower than expected?
A: Bob explained that while the core business is performing as expected, several factors impact Q2 guidance. They won't have the sequential benefit from a straight-line receivable seen in Q1, overhead won't decline as quickly, and there's some transaction noise from front-loaded dispositions. -
Disposition Strategy
Q: Will you continue property dispositions?
A: Alex stated they're slowing dispositions until there's better visibility into acquisitions. Recent market volatility has widened the bid-ask spread, making it challenging to find suitable transactions. -
Bad Debt Improvement
Q: How will bad debt trend through the year?
A: Bob expects bad debt to improve starting in Q2, aiming for 90 basis points of total revenue by Q4. This would contribute about 30 basis points of improvement for the full year. -
Balance Sheet and Capital Use
Q: Plans for debt maturities and capital allocation?
A: Bob highlighted minimal debt maturities until mid-2025 and low leverage. Debt paydown is a low priority; they prefer acquisitions or share buybacks depending on value propositions. -
Renewal Rates
Q: Where are renewals going out in May?
A: Michael said renewal offers for the next 90 days are quoted around 6.5% to 7% increases , expecting to achieve about 5% net effective growth. -
NYC Housing Laws Impact
Q: How do NYC housing laws affect you?
A: Mark believes the impact on Equity Residential is modest. About 40% of their units are classified as luxury or newer buildings not subject to the laws. The current market doesn't necessitate increases over the 8% to 10% cap imposed.
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