During the Equity Residential 1Q 2024 Earnings Conference Call, CEO Mark Parrell and COO Michael Manelis discussed the company's first quarter results and outlook for the year. They highlighted a strong demand for their well-located apartment properties and little new competitive supply in established markets, leading to a 4.1% increase in same-store revenues and a 5.5% growth in same-store NOI. This resulted in an increase in NFFO per share of 6.9%. The company's earnings release is available on their website and they caution that certain matters discussed during the call may constitute forward-looking statements.

The company had a strong start to the year and is well positioned for the prime leasing season. The employment situation for the target demographic is positive, with low unemployment rates and high costs of owning a home making rental housing a more attractive option. Social factors also contribute to the demand for rental housing. In established coastal markets, there is strong demand and high housing costs, while in expansion markets there is less competition from owned housing.

The demand for apartments in established coastal markets is being met with little new supply, resulting in rent growth. However, in expansion markets, there is an oversupply of new units leading to declining rent levels and high concessions. The company's expense management has been successful, with a sector-leading growth rate over the last five years. Investment sales activity has been low due to high prices and low volume, but there is a large amount of capital looking to invest in apartments. This has slowed the company's portfolio rebalancing efforts.

The company is experiencing strong pricing in the apartment market, but there is currently a lack of buyer interest in some large urban West Coast assets. As a result, the company is strategically using proceeds from property sales to repurchase their own stock and lower their leverage. They are also on track to deliver six joint venture developments in 2024, which will contribute to their normalized FFO in 2025. These developments are located in Dallas-Fort Worth, Denver, and suburban New York and are part of their partnership with Toll Brothers.

The speaker recently visited six development projects and is impressed by the enthusiasm of the lease-up teams. They also mention the new housing laws passed in New York, which allow for rent increases and vacancy decontrol, but express concern about price controls on an already undersupplied rental housing market. However, they also acknowledge the tax incentives and zoning reforms included in the new law. The speaker believes that focusing on supply, rather than heavy-handed regulation, is the long-term solution to the housing supply problem. They also mention that a good portion of their portfolio in New York City is exempt from the new law. The call is then turned over to Michael Manelis.

In the first quarter of 2024, the company has had a strong performance and a low turnover rate. They have focused on customer satisfaction and data analysis to drive results. The same-store revenue growth has exceeded expectations, especially in cities like New York, Boston, and Seattle. The company has also seen above-average rent growth and a 50-basis point increase in physical occupancy. With a high percentage of residents renewing their leases, the company is confident in their ability to continue growing rates during the leasing season.

The East Coast markets in Southern California are showing strong growth in same-store revenue, with San Francisco, Seattle, New York, and Washington, D.C. performing above expectations. Boston and Southern California are meeting expectations, while San Francisco and Seattle are historically volatile. Boston is expected to have the best full-year revenue growth, while New York has strong demand and pricing power. Washington, D.C. is outperforming expectations due to a solid employment picture, but the district is lagging behind suburban assets due to nearby supply. Overall, the company remains cautiously optimistic about holding onto gains in these markets for the rest of the year.

The company anticipates continued pressure in the market due to the influx of new units in 2024. Los Angeles is seeing good demand but limited pricing power due to evictions. The company's portfolio is 96% occupied and they are making progress on delinquency and bad debt. Processing evictions has improved but still takes longer than before. San Diego and Orange County have high occupancies due to the lack of housing and high home ownership costs. San Francisco and Seattle are performing better than expected, but the company is still monitoring for stability. The company is also seeing strong performance in the expansion markets of Dallas-Fort Worth, Denver, Atlanta, and Austin.

The market lacks catalysts for true pricing power, with concessions still prevalent in the Downtown submarket. Seattle has seen improved occupancy and rental rates, but faces potential competition in 2024. The East Side is performing better than Seattle, and expansion markets show strong demand but are facing pressure from new supply. The political situation in both markets is becoming more constructive. In primary elections in San Francisco, voters supported candidates focused on addressing safety and quality-of-life challenges. In expansion markets, occupancies are lower and concessions are prevalent, with about 30-60% of applicants receiving concessions of four to six weeks.

The operating conditions in Dallas, Denver, Atlanta, and Austin are challenging, but Dallas appears to be the most resilient due to high job growth. The volume of deliveries is expected to increase throughout the year. Bad debt and delinquency are improving, particularly in L.A., which is where most of the delinquent residents are located. Expenses were better than expected, with a decrease in utilities and repairs and maintenance costs. The company plans to take advantage of federal and local incentive programs to accelerate sustainability efforts and reduce future utility costs. The decrease in repairs and maintenance expenses was due to lower turnover costs and a decrease in maintenance expenses compared to the previous year. The company's disciplined approach to expense management has been successful.

The company is focused on driving revenue growth and operating efficiencies through innovation. They expect other income to contribute 30 basis points to same-store revenue growth, but in the quarter, they delivered 60 basis points due to faster implementation of their parking revenue optimization program. They are also leveraging artificial intelligence in their business processes, with their AI leasing assistant engaging with over 600,000 customer inquiries and booking over 80,000 appointments. They will begin testing an AI resident assistant in the coming quarter. The company is currently 96.5% occupied and expects to see strength in their renewal process. They are well-positioned to take advantage of pricing power opportunities during the peak leasing season. The call then opens up for Q&A.

During a Q&A session, Eric Wolfe asks Michael Manelis about the lower new lease growth in April compared to the same time last year. Manelis explains that this is due to an increase in concessions being offered, but they expect to see sequential improvement in the next few months. Wolfe then asks about the usage of concessions in specific cities, and Manelis reveals that they have been strategically increasing and decreasing their use of concessions to build occupancy.

The company has seen a reduction in concessions in San Francisco, but has increased their usage in the L.A. market. However, they are still using a significant amount of concessions in Seattle and San Francisco, particularly in the Downtown areas. The company plans to continue dialing back on concessions in these areas. In terms of CapEx, the company has seen an increase due to ROI projects and catch-up from the pandemic, but it is expected to revert to historical levels in the future.

Michael Manelis of AvalonBay Communities discusses the company's projected growth over the next few years and addresses concerns about hitting the affordability ceiling in certain markets. He also notes the strength of the San Francisco and Seattle markets and speculates that the recent increase in demand may be due to people returning to the area or moving within the region.

The speaker discusses the state of certain markets and notes some marginal improvement in migration patterns, but also mentions that there is still a higher percentage of new residents coming from within the MSA. They believe this will remain elevated until there is job growth or a return-to-office policy in Downtown San Francisco. The speaker also mentions the positive impact of increased vibrancy in the cities and the confidence they have in their high occupancy rates. However, they caution that it is still too early to declare these improvements as wins for the year. The speaker's colleague adds that while there has been some improvement in Downtown San Francisco, it is not yet enough to drive rent increases, but there is room for growth as incomes have gone up.

The crime statistics in San Francisco have improved compared to last year and pre-pandemic levels, and the 2024 primary election was a turning point for citizens to take back their city. The AI revolution is driving investment in the Bay Area, with companies like OpenAI choosing to stay in San Francisco. In Seattle, a $700 million project to improve the waterfront is driving tourism and activating Downtown. However, supply issues may be a problem in Seattle, but the city council and mayor are focused on addressing public safety and quality of life. Overall, both Seattle and San Francisco are seen as success stories.

The speaker discusses the possibility of a good year for the company if the market continues to perform well, but notes the potential for unexpected changes. The second question is about a California settlement and the charge taken in the quarter, which is still in active litigation. The amount of late fees is disputed and could result in additional adjustments. The speaker also mentions the split between urban and suburban exposure in San Francisco and Seattle.

Alexander Brackenridge and Michael Manelis, from Seattle and San Francisco respectively, discuss the differences in urban and suburban real estate trends in their markets. They note that the suburban portfolios are outperforming the urban ones, with San Francisco seeing a potential increase in supply in the South Bay later this year. They also mention the strong performance of the residential rental component in the same-store revenue.

The company expects normal growth in residential rental income throughout the year, with sequential improvement until a seasonal decline in Q4. Non-residential income may be lumpy but won't impact overall same-store revenue. Expenses are expected to follow a typical trajectory, with higher growth rates in Q2 and Q3 due to turnover during the leasing season. The company had a good first quarter on the expense side and is being cautious but hopeful for the rest of the year.

The speaker discusses the company's fourth quarter and notes that there was a difficult comparison period. They are cautiously optimistic about expenses and are currently trending towards the higher end of the guidance for revenue and the lower end for expenses. However, they will reassess at the end of each quarter due to the volatile market conditions.

Mark and Alex are optimistic about the business and will report back in July. Michael asks about selling properties and using the funds to buy back stock, pay debt, and fund development. Alex explains that they will slow down dispositions until they have better visibility into the acquisition market, which has been affected by inflation. Haendel asks about rent reversals, which are tied to Rite Aid.

The speaker, Bob, clarifies that there has been no change in expectations and that the first quarter benefit is not related to the Rite Aid lease. He explains that the benefit is due to the conversion of non-residential tenants to an accrual basis of accounting and that they are cautious about collectibility. He also mentions that the Rite Aid space has been re-leased after the lease was terminated.

The company has an active lease with a high-quality tenant and is in the process of investing in tenant improvements. Once completed, the space will generate revenue. There are no other updates on the relationship with Rite Aid. The second quarter guidance may seem low, but there are a few factors, such as the lack of a straight-line receivable and slower decline in overhead, that are impacting the numbers.

The company is experiencing some transaction noise due to front-end loading on the disposition side. This is causing a temporary dilution in NOI and will result in a decline in quarters three and four. The company does not expect overhead to be higher, but the drop between quarters will occur in quarters three and two instead of one and two. The company does not typically provide guidance on core numbers, but there is usually a $0.02 to $0.03 sequential improvement in NOI between Q1 and Q2. However, in this case, the company is losing $0.01 from the non-residential piece.

In the second quarter, the company lost $0.01 due to overhead costs and other transaction activity. Leasing activity in the second quarter has a bigger impact on revenue in the third quarter. The company has $250 million in debt maturing in 2025 but has low leverage and no immediate need for refinancing. Debt paydown is the last option for use of proceeds, with a focus on acquiring assets or buying back shares.

Mark Parrell, CEO of the company, is answering a question from John Kim about the impact of the recent Blackstone-AIR transaction on asset pricing. Parrell mentions that there is still a significant gap between seller and buyer expectations, despite the enthusiasm for apartments in the private and public markets. Alex Brackenridge, another executive, adds that the amount of product delivering in expansion markets is not capitalized for long-term ownership and the company is eager to pursue it.

The company is looking for opportunities to invest in stable properties with favorable pricing in the current rate environment. While their rebalancing strategy has been slowed down by pricing, they are encouraged by the improving political environment in cities like San Francisco, Seattle, and New York. The focus on increasing supply in these cities is seen as a positive, and the company will continue to monitor the attractiveness of these locations for potential investments.

The speaker discusses the need for cities like New York to compete with other more attractive cities like Texas in terms of amenities and business opportunities. They mention the importance of regulatory reforms to improve public safety and encourage employers to relocate or stay in these markets. The speaker also shares information on lease rates and concession activity in expansion markets, noting that Austin is the outlier with higher concession rates but overall the new lease-ups seem to be in line with expectations.

The company has seen a decrease in concession use in the first quarter due to high occupancy rates. However, they expect concessions to remain in place in expansion markets due to increasing supply. The low turnover rate in the rental market is seen as a structural advantage and is expected to continue to benefit the company in the near to medium term, as homeownership remains difficult and homebuilding production is lower than pre-GFC levels. This makes rental housing more attractive and is likely to be a persistent benefit for the company.

The lack of housing supply in the U.S. is a major factor driving the demand for rental housing, especially in growth markets. The company plans to continue its strategy of having a balance between expansion and established markets to take advantage of this trend. Renewals for the next three months are consistent and expected to result in a 5% net effective rate. Bad debt is expected to improve in the second quarter.

The speaker discusses the potential impact of lead indicators on the company's revenue in the second quarter, predicting a 30 basis points improvement for the full year. They also address the NYC housing laws and their limited impact on the company due to a large portion of their units being considered luxury or newer buildings. The speaker notes that the laws may have a greater impact in the future when trying to recover from the pandemic.

Mark Parrell is thanking everyone for attending the Equity Residential conference and is ending the call.

This summary was generated with AI and may contain some inaccuracies.