Equity Residential(EQR) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company adjusted its same-store revenue guidance expectation for the year to 5.5% from 5.875% due to underperformance in San Francisco and Seattle, as well as a noncash write-off of a $1.5 million straight-line rent receivable [7][8] - Portfolio-wide bad debt before rental relief funds was about 1.3% in Q3 2023, down from 2.4% in 2022 [6][7] - The company expects 2024 same-store expense growth to be slightly below this year, with continued pressure on repair and maintenance lines [21] Business Line Data and Key Metrics Changes - Residential same-store revenue growth was 4.4% in Q3 2023, driven by healthy fundamentals and some improvement in delinquency [11] - The East Coast markets continue to outperform the West Coast, with strong demand and occupancy, particularly in Washington, D.C. [11][12] - New lease change rates in Seattle and San Francisco are running in the high negative single digits, with increased concession use contributing significantly to the decline [25][26] Market Data and Key Metrics Changes - The company noted lower levels of new apartment construction in established markets, which should continue for the next several years [5] - The average new supply as a percent of total inventory in established markets is around 2%, compared to approximately 6% in Sunbelt markets [19] - The job market for college-educated individuals remains strong, with unemployment at 2.1%, supporting demand for rentals [4][18] Company Strategy and Development Direction - The company is focusing on capital allocation by selling older assets and acquiring newer properties in suburban markets, particularly in Atlanta [8][10] - The long-term outlook remains positive, with favorable demographics driving demand and limited new supply in most markets [22] - The company is cautious about acquisitions in politically charged municipalities due to regulatory risks [47][48] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the long-term recovery of San Francisco and Seattle, despite current challenges [51][53] - The company anticipates solid growth in 2024, led by East Coast markets, while acknowledging the need for improved fundamentals in San Francisco and Seattle [20][38] - Management highlighted that the credit quality of residents remains strong, and they expect gradual improvement in bad debt levels [20][32] Other Important Information - The company is experiencing a significant increase in same-store CapEx, now at$ 3,600 per apartment unit, due to various factors including storm damage and new projects [67] - The eviction process is taking longer than pre-pandemic levels, impacting bad debt [20][34] Q&A Session Summary Question: Can you elaborate on the October numbers regarding new lease rates? - Management confirmed that new lease change rates in Seattle and San Francisco are running in the high negative single digits, with increased concession use contributing to the decline [25][26] Question: What is the current state of the transaction market? - Management indicated that the transaction market is uncertain, with upward pressure on cap rates and limited properties available [28][29] Question: How much more would bad debt have decreased if the court process had been quicker? - Management estimated that bad debt would have been about 10 basis points lower if the court process had progressed as expected [30][32] Question: What are the expectations for same-store revenue next year? - Management stated that they are in the middle of the budget process and cannot provide specific guidance yet, but they expect solid growth in certain markets [62] Question: How is the company addressing the Rite Aid bankruptcy issue? - Management confirmed that a new lease is already in place for the space previously occupied by Rite Aid, which is expected to be a good amenity for residents [64][65]