Equity Residential — 2024 Q1

Eric, this is Michael. So yes, I think one of the things you need to remember is that, relative to the first quarter in 2023, we are issuing more concessions right now. So that does impact a little bit of what you see in that new lease change. But clearly, when you just think about the normal rent seasonality curve, pricing trend or asking rents in the marketplace, we're seeing that sequentially build. And you're seeing that sequential improvement in kind of the new lease stats for April over March. So I think what you should expect for the next several months working our way probably even through the middle of the third quarter is that we will sequentially build new lease change up, and we will see that stability in kind of the renewal, achieved renewal increase performance. So you're right to call out that it's a little lower than norm, but right now we like the sequential improvement that we're seeing.

Yes. And I think I called this out even on the first -- or the call in January, that we made a strategic decision to increase the concession use, build up that occupancy in the fourth quarter, and really have been just pulling back the concession use as we worked our way through the first quarter. The most pronounced reduction actually came out of San Francisco. I think the offset to that reduction is that we also started to utilize some concessions in LA. So when you think about the sequential change from the fourth quarter through the first quarter, our concession use ticked down a little bit but not as much as what it would have been if we didn't start increasing some of the usage in the L.A. market.

John, it's Alex. So there are a couple of factors at play there. One is -- and we talked a little bit about this last quarter, is leaning in more on some ROI projects, specifically renovations, some solar installations, some smart rent installations as well, and EV chargers. So there's some things that we can toggle up and down. They have ROIs on them, and they're discretionary. So that's in the mix.

Yes, John, this is Michael. So really, from the affordability standpoint, I wouldn't say we have any concerns at all. I mean we're not seeing a material shift. We still sit at about 20% rent-to-income ratios. And the range is fairly tight, running between like 18.5% to 24%. And the Southern California markets are sitting up at that higher range and they really historically have always been up at that level.

Yes. It's a great question. So this is Michael. So I look at those markets right now and I think, clearly, we did see some marginal improvement with the migration patterns. We're still running with a slightly higher percent of new residents coming to us from within the MSA, meaning we're just trading around within the MSA. But we are marginally seeing some improvement, but we are elevated still from those historical norms. And I think we're going to remain elevated until you see the catalyst of either job growth or specific to like Downtown San Francisco really seeing kind of a more robust return-to-office policy.

Yes, I'm just going to elaborate. It's Mark, Steve, I'd add a little bit. Again, we do see that improvement in Downtown San Francisco, but it's not yet the job growth we probably need to drive rents. But we're 14% or so below rent levels that we're pre-pandemic. So there's definitely room here. Incomes have gone up, as we've talked about on the calls.

Steve, it's Mark. Thanks for that question. I mean we are still in active litigation, as you suggested in your comment or your question. So there's not a lot I can say. Just to give you a little background, this has been a case that's been going on for 10 years. About the amount of late fees, we just got a ruling from a judge that was adverse to our interest, so we adjusted the reserve. We are considering our appeal options. So to your point about adjustments, they could go up or down depending on our actions.

Yes. Josh, it's Alex. In Seattle, we're 60% urban and 40% suburban. In San Francisco, it's the opposite of that. So we have a broader suburban exposure there.

Yes. Josh, this is Michael. Yes, they're absolutely different. And again, this remains the story about kind of the City of Seattle and Downtown San Francisco is where we see kind of the least amount of pricing power, kind of lower occupancy. So the suburban portfolios are clearly outperforming the urban, and that's a trend we've seen for a while in those markets.

This is Derrick Metzler on for Adam Kramer. I wonder if you could tell us anything about the cadence of same-store growth for the rest of the year and kind of what to expect given the strong 1Q and full year guidance that's kind of well below that?

Yes. Thanks, Derrick. It's Bob. I'll take that. Let me start because there's a few pieces driving this, but let me start on the same-store revenue front with the residential rental component. Our assumption for residential rental income is that we anticipate a year that is pretty normal, meaning that sequentially, we expect the blended rates to continue to get better until they seasonally decline in Q4. And so you're going to see that normal kind of robust growth pattern as you work your way sequentially through.

Got it. And anything on expenses, too? And the cadence there for the year?

Yes. Also pretty typical. We certainly had a very good first quarter on the expense side, better than what we anticipated as we kind of highlighted in the disclosure. And we didn't adjust guidance at all. So we do expect that it's -- while it's early, we're being a little bit cautious on the expense side. So we're hopeful that we can do better than the midpoint of our guidance range, but we'll see.

Thank you. Congrats on the strong quarter.

Thanks for the question, Michael. It's Mark. We generally look at this at the end of each quarter. And because we have so much disproportionate activity in the second quarter, that it makes sense to us that that would be the time to really look hard at this. It's a really volatile world, even more so than usual, both in the economic terms and every other term you could think of. So to us, it makes some sense to wait. We've got a few markets that feel like they're poised to recover, but Seattle and San Francisco specifically. And those have been a little bit -- markets with a little bit of volatility as well.

Michael, it's Alex. We're going to slow down the dispositions until we see better visibility into the acquisition side of the market. And it did feel like 2 or 3 weeks ago we were getting there, that there were -- buyers and sellers were kind of finding common ground at around 5 to 5.25. But then the inflation report came in hot, hotter than expected, and that really kind of threw everything backwards to where we were a quarter ago, where there's a pretty good spread right now, the tenure, I think, is over 4.6 today. And so we're just trying to figure out what the cap rate environment is for acquisitions. And so we'll just temper the dispose until we get a better sense of that.

Yes, we can now. Go ahead, Haendel, we can hear you.

Yes. Let me -- Haendel, it's Bob. Let me clarify real quick. So relative to expectations, we had in our guidance expectations as we called out the straight-line receivable reversal as it relates to nonresidential. So there's no change to expectations.

Yes. Good question. So as you saw from our full year guidance, we didn't adjust our full year guidance, but we did give -- provide for the first time NFFO guidance for the second quarter, and continue to maintain what is probably a little bit of a cautious outlook still. But there are a couple of callouts that I would say that are inherent in the Q2 NFFO guidance, that range that we provided, that are a little bit different than what you would have normally seen sequentially between Q1 and Q2, which I think is what you're getting at, Haendel.

Just to elaborate, it's Mark. We don't expect overheads to be higher or different than our guidance range. It's just the cadence of it is a little different where, for a variety of reasons, the first and second quarter are more similar than usual. And you should expect a real decline in quarters 3 and 4. So we'll update that all in July, but we don't have any expectation that overhead is net higher. It's just the drop between the quarters is occurring between quarters 3 and 2, not between quarters 1 and 2 as has often been the case.

We typically don't provide that degree of guidance. But I would tell you in terms of the actual same-store kind of revenue piece, what I would tell you is that, sequentially, what you normally see between -- in same-store revenue is call it $0.02 to $0.03 -- or NOI, sorry, is call it $0.02 to $0.03 of sequential improvement in NOI between Q1 and Q2. And that's pretty much where we are on the residential side. But we're losing, call it, about $0.01 from the nonresidential piece. We're also losing about $0.01 from the overhead kind of sequential piece along with a handful of other things in the transaction activity that we mentioned. And that's why you're only seeing $0.01 improvement sequentially.

Yes. As you mentioned, Jamie, the balance sheet is in phenomenal shape. I mean from an absolute leverage standpoint, it's very low. But you're also highlighting something that I think is worth noting, which is we have very little interest rate exposure because we don't have a maturity or any refinancing needs until the middle of 2025. And even when you look further out, there is a modest kind of maturity piece.

Yes. That's -- I'm going to pull a little bit. It's Mark, on the comment Alex just made. I think when people saw the AIRC print, there was enthusiasm. I think when people felt like that, combined with the thought that maybe rates were going to go down in the relative near term, and you had some certainty on sort of the financial markets and such, that that was a positive thing for stability and for kind of closing that bid-ask spread that's existed for a while that Alex talked about for several quarters.

Yes, John, this is Alex. One thing that hasn't changed, although the rate environment is confusing to many investors, is the amount of product that's delivering, particularly in the expansion markets that we're excited about. And a lot of that just isn't capitalized to be owned for the long term. I mean it was merchant built in many cases. And we're eager to pursue that. We just need to come up with pricing that makes sense in the current rate environment.

Yes. That's really an outstanding question. I think the really good news here is that both sides, whether it's Governor DeSantis in Florida, whether it's Governor Newsom in California or in New York or Governor Healey up in Massachusetts, everyone's thinking about supply as a solution. Where in 2018 when all the tumult happened started on rent control with the California Ballot Initiative, it was all about price controls, which obviously are not going to improve supply. So I think it's really a positive that everyone is trying to address supply in different ways, with different levels of effectiveness. I think the industry has done a good job. I give a lot of credit to Barry Altshuler who is our lead regulatory guy on that and many other people in the industry who pushed that supply argument, and we're seeing the results of that, and you're right to recognize it.

Dennis, this is Michael. So in my prepared remarks, I kind of gave you some clustering around the expansion markets concession use. Right now, for us, I would kind of cluster Denver, Atlanta and Dallas together with about 25% to 30% of our applications receiving right around anywhere between 4 to 6 weeks.

Yes. I think 2 of the biggest structural advantages to the rental housing business and the apartment business are what you just identified, the fact that home ownership is just tough. And that's for a lot of reasons. So many people are locked in with the real low rates on mortgages. It makes it very attractive to stay in place even if they might move or downsize. So that will slow things down in that market.

This is Michael. So I'll just give you a sense. So renewals right now are out in the marketplace for the next 90 days, for the next 3 months. Very consistent right now, the quotes are running between 6.5% and 7%. And that gives us a lot of confidence that we expect to achieve somewhere right around that 5% on the net effective side.

Linda, it's Bob. We would expect to start seeing improvement in the second quarter because you saw Q4 to Q1 was relatively flat. But we're seeing some of the lead indicators, as Michael mentioned, in terms of the timing of the courts and other things, indicate that we should start to see some sequential improvement in Q2. And then we would expect it to continue on that process, although it can be volatile in Q3 and Q4 such that, by the end of the year, Q4 is maybe ends at, call it, 90 basis points of total revenue. That means for the full year, you're getting that 30 basis points of improvement.

Yes. I'm going to answer your question very precisely because I take it to mean impact on Equity Residential, and I'd say the impact on Equity Residential is pretty modest, pretty insignificant. That's because about 40% of our units are either called luxury units under the law, meaning the rents are at higher levels, or that we own newer buildings, buildings built in 2009 or later.

Thank you all for your time and your interest in Equity Residential. Have a good day.