The operator introduces the Equity Residential Second Quarter 2024 Earnings Conference Call and Webcast, and turns the call over to featured speakers Mark Parrell, Michael Manelis, and Bob Garechana. Parrell discusses the company's second quarter results and Manelis highlights the property operations innovation machine. Garechana discusses expense results and updated guidance. Same-store revenues and NOI have both increased, exceeding expectations due to steady demand and limited supply in coastal established markets.

The majority of the company's NOI comes from coastal established markets, with the Northeastern markets and Seattle performing well. Expansion markets are also seeing good demand, but are facing pressure from high levels of supply. The company has increased its same-store revenue guidance due to several trends supporting rental housing performance, including high homeownership costs, limited for-sale inventory, and a steady employment picture. The company's retention rates remain high due to homeownership costs, and there has been a return to positive employment growth in most markets. Lifestyle factors and the company's innovation efforts are also contributing to positive results.

The company has lowered its same-store expense guidance and increased its same-store NOI guidance due to increased transaction activity and stabilized interest rates. They have acquired properties in suburban Boston, Atlanta, and Dallas and are buying properties in expansion markets at a basis that compares well to replacement cost. The company is confident in their ability to integrate these properties into their operating platform and improve their performance in the near future. However, they acknowledge that rent levels in these expansion markets are currently weak and may remain so for the time being.

The article discusses the expected relief in oversupplied markets in the coming years, which will lead to lower supply levels and a potential rental rate recovery. The company is excited to acquire properties at favorable prices and demonstrate their core competencies. The second quarter of 2024 saw healthy operating performance, with strong demand and low resident turnover. The company attributes this to a solid job market and low competition from new supply. The rent-to-income ratio for new move-ins remained stable and a low percentage of residents moved out to buy homes.

The company's centralized renewal process has led to strong results in renewals and occupancy rates, with the East Coast markets performing the best. The West Coast market, particularly Seattle, is also doing well, but there is some pressure on pricing in Southern California. Expansion markets have been impacted by new supply but have maintained high occupancy rates. The eviction process has improved and bad debt is expected to contribute positively to same-store revenue. The company has revised its full-year same-store revenue guidance to 3.2%, taking into account seasonal moderation and a normal decline in occupancy later in the year. Boston is performing in line with expectations, with strong retention and new lease growth during the summer leasing months.

In the second quarter of 2024, the company saw strong performance in both their urban and suburban portfolios, with the urban portfolio outperforming. New York and Washington D.C. were top performing markets, with high occupancy rates and strong demand. Los Angeles had a stable employment picture but faced some challenges due to new supply and evictions. However, the company expects improvement in the third quarter and overall revenue growth.

San Diego and Orange County are experiencing good demand, but residents are willing to move further out for affordability. San Francisco and Seattle are performing better than expected, with Seattle outperforming the most. San Francisco's demand is strong and there is little new supply coming to the market. Seattle is showing signs of recovery with high occupancy and strong renewal performance. The return to office at companies like Amazon is driving demand in areas like South Lake Union. Tech employment is solid and there is an increase in migration from farther out suburbs, creating additional demand for assets.

The company expects their properties in Central Seattle to benefit from a new infrastructure project and improvement of the Staircase Plaza. The Seattle market is expected to do well, but there is concern about new supply. Expansion markets are performing as expected, with Dallas and Denver leading the way. The company is testing a new AI resident assistant and seeing promising results with a self-guided tour app. These initiatives are expected to create operating efficiencies and improve the customer experience.

The speaker gives credit to the teams for their dedication to innovation, customer service, and expense management. Bob then discusses the drivers of the company's improved same-store revenue and revisions to their expense and NOI guidance. He highlights the team's solid performance in reducing expenses and expects low growth for the full year. This leads to an increase in same-store NOI and NFFO growth outlook.

In the latest quarter, the company improved its disclosure on capital expenditure, outlining its focus on unit renovations, technology, and sustainability initiatives that provide positive returns. The company expects stable achieved renewal rates and a slight seasonal moderation in new lease changes in the third quarter. The overall expectation for the full year is a blended rate of around 2%, slightly higher than the initial forecast of 2%.

The company's performance in the third and fourth quarter will depend on the mix of renewals and new lease transactions. The portfolio is currently over 96% occupied and application volumes are solid. Net effective pricing trend is in line with a normal year. In LA, the company is seeing pricing weakness due to evictions, but they were able to increase occupancy by 70 basis points. The new lease change in LA was less than anticipated due to new supply in certain submarkets. The company expects to see improvement in LA's performance in the future, but there may still be pressure from supply in some submarkets for the rest of the year.

The speaker discusses the company's total revenue and how it is being driven by filling units with paying residents. Despite a slight decrease in new lease changes, the total revenue is still strong. The speaker also mentions stable renewal performance and expects to achieve around a 4.5% mark. In terms of capital deployment, the company is seeing everything at around five caps and is not changing its underwriting criteria from an IRR perspective.

The speaker discusses their company's pricing strategy for new properties in the suburbs, which typically range from $80 million to $120 million. They expect a 5% rent growth in the next couple of years, leading to an 8% return on investment. They also mention that the Sun Belt market is experiencing a higher number of former residents moving out without receiving concessions, leading to a slight increase in new lease change. They expect this trend to continue throughout the year, as these markets do not experience as much seasonality as coastal markets.

The speaker believes that the company will continue to face challenging operating conditions in certain markets for the rest of the year due to increased supply and trade-offs between occupancy and rate. They do not expect a significant decline in performance, but acknowledge that it will be difficult. The company has limited exposure in these markets, but has knowledge and experience in dealing with supply. The assets they own in these areas are new and will require less CapEx in the long run, with a better resident base.

Adam Kramer asks about the impact of supply on the company's established markets and specifically mentions the Seattle market. Michael Manelis responds that they are closely monitoring the Seattle market as it is back half loaded with more deals coming online. He also mentions isolated pockets of supply pressure in other markets but overall feels that there will be less pressure from supply in the balance of the year.

During a conference call, a representative from Bank of America asks about the expected impact of podding (sharing resources) in the Dallas and Atlanta acquisitions. The company expects an uplift of around 5% in the first year, but this depends on the proximity of the assets and the potential for shared services. Currently, 65% of the company's properties already have some level of shared resources. The company also plans to leverage resources differently to reduce reliance on third-party contractors and keep maintenance costs down. The success of podding will also be reflected in payroll growth numbers.

The company is focusing on blunting the rate of inflation in expenses rather than just reducing costs. They are also shifting their focus to revenue opportunities and using technology to improve efficiency. The team has many ideas for both expense and revenue improvements, and they can test them on a few assets before rolling them out to the rest of the portfolio. The goal is to achieve a margin of 70% or higher.

The speaker is discussing the company's current journey and the challenges they face in managing expenses, particularly with property taxes being a major factor. They hope to keep expense growth below three percent, but it may be difficult due to uncontrollable factors such as property taxes. The speaker also mentions efforts to reduce costs and pressure their team to deliver results. The questioner asks about increased advocacy costs in the quarter.

Mark Parrell discusses the regulatory landscape and how it has changed, specifically mentioning the upcoming California ballot initiative on rent control. He expects a significant increase in spending on this issue and believes that the focus of regulatory efforts is currently on California. He also mentions the importance of educating voters on the negative effects of rent control and expresses optimism about winning the measure again. He notes that most of their focus is on state and local regulations, but also mentions the unhelpful statement made by the President on rent control.

The speaker discusses their conversations with the administration and their efforts to encourage supply at the federal level. They also mention working with the two presidential candidates and their focus on education. The speaker then answers a question about the increase in occupancy guidance, attributing it to gains in occupancy so far and normal seasonality. They mention the East Coast as a standout market and state their focus on maximizing revenue rather than being biased towards occupancy.

The company saw good demand in some markets and decided to increase rates, while in other markets they focused on increasing occupancy. Overall, they expect a normal seasonal drop-off for the rest of the year. The company is not speculating about the earn-in for 2025 yet. The NOI guidance increased by 145 basis points and the FFO guidance increased by 100 basis points, but there were other factors that limited the flow through during the period.

The speaker explains that the main contribution to NOI growth is offset by overhead growth, particularly in property management due to legal costs associated with defense. This increase accounts for a $0.02 production in normalized FFO, while the rest is attributed to regular compensation accrual adjustments. The difference between the 100 and 145 basis points is due to these factors. The speaker also addresses the spread between renewal and new lease pricing, stating that it is not uncommon for there to be a 300-400 basis point difference between the two. However, they expect some tightening of this spread in the future due to market conditions.

The speaker explains that there is a spread between two stats and that the loss-to-lease position has changed since the beginning of the year. They mention the current loss-to-lease percentage and how it compares to historical years. The speaker also states that the timing of when people move out affects the overall revenue growth. They reiterate that they are happy with the current position and mention the positive factors such as pricing trend, occupancy, and application volume. The next question is about Los Angeles.

Michael Manelis, speaking on behalf of the company, discusses potential supply and demand impacts on the Hollywood TV film industry in the region. He notes that while there may be some supply impact, demand for properties in the area remains strong. However, there is a significant amount of "shadow supply" from units going through the eviction process, which is contributing to increased competition in the market. In terms of the transaction market, Alexander Brackenridge explains that underwriting and initial cap rate expectations vary depending on the specific opportunity being considered.

The speaker explains that in expansion markets, there is a slight negative trend in the first few years, followed by a pop in demand as supply decreases. In urban areas like San Francisco, the cap rate is starting at the same level, but there are currently deals on the market that are expected to trade for around five. The buyer expects the city to continue improving and for rent growth to be higher in the next few years. The speaker notes that the magic number for rent is currently five, and this works well for their company, as they plan to be active in both acquisitions and dispositions. In response to a question about new lease rent, the speaker clarifies that the monthly numbers can be misleading and that June was actually their best month for new lease and blend pricing.

The company's monthly numbers for April and May were lower, but June was the best month for spreads on new lease and blend. The company is moving away from providing monthly disclosures when not in meaningful inflection points. The company expects rent to peak in July or the second week of August, with a potential double peak. However, rents are currently up 7% from the beginning of January, which is stronger than normal. Turnover increased slightly but is still relatively low at 11.7%.

Michael Manelis, speaking on a conference call, discusses the differences in turnover between established and expansion markets. He notes that turnover is higher in expansion markets due to the large number of choices available to residents. In established markets, the turnover rate is lower, but still historically low overall. In Southern California, there has been a slight increase in price sensitivity and a willingness to move to lower-priced areas. However, only 16% of move-outs cited cost as a reason.

The West Coast portfolio is performing well, with residents in good financial shape and low rent to income ratios. The political environment is not expected to have a significant impact on demand. Concessions in Los Angeles, San Francisco, and Seattle are not mentioned.

Michael Manelis, speaking on behalf of the company, discussed the concentration of concessions in the West Coast, specifically in Downtown San Francisco, the City of Seattle, and Los Angeles. He stated that they expect the concessions to remain stable for the next few months, with a potential acceleration in the back half of the third quarter and into the fourth quarter. The overall concession use was better than expected, with a 25% decrease from the first quarter and a 7.5% decrease from the second quarter of 2023. Manelis also mentioned that they anticipate a little bit of an easier comparison in Seattle and San Francisco, leading to potentially better new lease stats. However, there is not a specific number given for the third quarter, as different scenarios are playing out across the markets. Haendel St. Juste asked a question to Mark, but it is not specified what the question was.

In the third quarter, Lennar sold assets to KKR, but the company did not end up acquiring any of them. Lennar was only interested in a subset of the assets, but KKR wanted different ones. In the second quarter, Lennar took a charge for a commercial dispute and construction defects, which had been growing for a while. This resulted in a $9 million charge, with a portion of it related to a brown lease.

The company experienced a unique situation with a bespoke asset and a construction defect at another property. They have taken a reserve for the construction defect and are pursuing legal action to potentially recover some of the cost. They are open to buying existing assets or investing in developments, but currently their focus is on buying existing assets.

The speaker mentions that transaction volumes are increasing and there are many non-natural owners, such as developers with shorter-term bank debt, who may sell their assets at good values compared to replacement cost. They also discuss the challenges of development in a REIT, and mention that their limit for development is around $250 million a year. The focus for now is on existing assets. The speaker thanks the audience for their time and the call concludes.

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