Equity Residential

Equity Residential’s CEO said the company was benefitting from low supply, high prices, and rising rates

Equity Residential’s CEO described low supply, high prices, and rising mortgage rates as “positive factors for our business.”  “Mark Parrell – President and Chief Executive Officer: In addition, other housing alternatives remain expensive and in low supply. Though they have been declining of late, current single-family home prices continue to be at record levels, while rising mortgage rates have further stressed affordability, particularly for first-time homebuyers. Single-family housing starts are declining, existing homeowners are more reluctant to sell due to low locked in mortgage rates along with minimal and expensive for sale replacement options and competition for homes from investors remain strong. Going against these positive factors for our business is a significant impact of inflation on the economy, where job growth goes in response to the Federal Reserve’s actions as well as volatility in the capital markets, the continuing impact of the war in Ukraine and a myriad of other uncertainties. We are currently in an excellent spot but acknowledge that the risks and uncertainties are more elevated than usual.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential’s CEO said current market conditions “may turn into a nice opportunity to acquire assets” at discounted prices. “Mark Parrell – President and Chief Executive Officer: For us, this may turn into a nice opportunity to acquire assets in these expansion markets, not necessarily at fire sale prices, but at better values than prevailed in the first half of 2022 when we felt the market was overheated and chose to stay on the sidelines. We continue to see our strategy of having more balanced portfolio between our established and expansion markets as appropriate as we follow our Affluent Renter to these new markets and mitigate regulatory and resiliency risks, from overconcentration in any market or in any state.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential’s COO boasted that “we clearly benefited from a supercharged spring leasing season with more robust pricing power.”  “Michael Manelis – Chief Operating Officer: Thanks, Mark, and thanks to everybody for joining to us today. I’m going to give some brief comments regarding current market conditions, and then we can turn it over to the operator for question and answers. We just completed one of the best leasing seasons in our history. Strong demand across our markets produced high occupancy as well as continued pricing power. As we think about the trajectory of our pricing for the full year, we clearly benefited from a supercharged spring leasing season with more robust pricing power that started earlier in the spring in many markets than we have traditionally seen. This strength led us to adjust our same-store revenues upward in July and to set our current expectations slightly above the midpoint or at 10.6% for the full year 2022 which is the best same-store revenue growth in our history.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential was pushing nearly 10% increases in rents, saying any tenant leaving because of this was “by design”

Equity Residential’s COO said the company had “a pretty strong degree of confidence that we’re going to continue to achieve” 8-9% rental increases for their lease renewals.  “Michael Manelis – Chief Operating Officer: Yes. Nick, this is Michael. So I think when you’re looking at the renewal performance, again, our quotes for the balance of the year have already been issued. So we have all of those quotes out there. And right now, we’re seeing improving retention. We’re negotiating a little bit more, but that’s clearly typical for the fourth quarter and have a pretty strong degree of confidence that we’re going to continue to achieve about 8% to 9% in growth from the renewals. So we remain very optimistic about the renewal performance and clearly are seeing the trends of improving stickiness but that is a common trend to see in the fourth quarter that, that retention continues to grow.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

 Equity Residential’s COO said more tenants were moving out because of rising rents: “Part of that was by design…we were going to be fairly aggressive in July and August kind of pushing these renewals and holding the line and getting people up to market”  “Michael Manelis – Chief Operating Officer: And then in terms of kind of the reasons for move out, I mean you alluded to the home buying, you’re absolutely correct. That number is materially down. During the third quarter, we’re at like 8% of our move-out sited, home buying is the reason for move out. That’s compared to like a 12% norm. But we did see a tick up in that rent is too expensive as a reason we’re up at like 25%. Part of that was by design. We said this at the end of the second quarter that we were going to be fairly aggressive in July and August kind of pushing these renewals and holding the line and getting people up to market.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential’s COO noted that in California their tenants were accepting 10% rent increases because “those folks typically stuck around because they didn’t have a lot of options.”  “Michael Manelis – Chief Operating Officer: Not a huge difference. I’ll tell you in California where you had 1482 and you had some of the CPI plus 5 caps, maybe a little bit less, we’re citing that because they were going out at 9% or 10% increases against the market that was up 19% or 20%. So those folks typically stuck around because they didn’t have a lot of options.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential said the end of rental assistance would improve “resident behavior”

Equity Residential’s COO: “The lack of governmental rental assistance in ’23 compared to the $31 million we will receive in 2022 will require continued improvement in resident behavior — payment behaviors.”  (Equity Residential Q3 2022 Earnings Call, 10/26/2022)“Michael Manelis – Chief Operating Officer: On the occupancy side, general demand trends, including improving retention, supports strong occupancy above 96% for the balance of 2022 and should carry through into 2023, unless there is a substantial loss of jobs in our target renter demographic. Outside of occupancy and the core revenue drivers that I just discussed, bad debt net will likely continue to play a role in revenue growth as we expect the trend of reduced levels of resident delinquency to continue into 2023. The lack of governmental rental assistance in ’23 compared to the $31 million we will receive in 2022 will require continued improvement in resident behavior — payment behaviors in order to return us closer to historical norms and contribute positively to revenue growth.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential said accelerated evictions would benefit the company’s plan to bring in new tenants it could charge more

Equity Residential’s COO said if eviction court proceedings could be accelerated it “would actually be a huge positive to us given the strength in the demand and the confidence we have in being able to fill those units with paying residents.”  “Michael Manelis – Chief Operating Officer: We are still in the very early stages of this eviction court process. And we are starting to see some traction where the courts are actually moving through and following through kind of with lockouts. Overall, this level of eviction activity in the portfolio is just — it’s not that material, and we typically average less than like 1% of our move-outs from — for this reason. So I would tell you, even if everything was accelerated through the court system today, the volume would be more than manageable and would actually be a huge positive to us given the strength in the demand and the confidence we have in being able to fill those units with paying residents.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential’s COO: ”these new residents moving in are clearly going to be able to absorb kind of future increases that we push through into the portfolio.” “Michael Manelis – Chief Operating Officer: I look at like overall, I will tell you, when you just look and Mark alluded to this in his prepared remarks, is the health of the new residents moving into this portfolio from an income standpoint, our income — rent as a percent of income is right in line at 19%, which, to me, kind of points to this fact that these new residents moving in are clearly going to be able to absorb kind of future increases that we push through into the portfolio.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)

Equity Residential’s CEO was critical of rent control and over building

Equity Residential’s CEO was critical of rent control as a “political risk” and warned about “supply risk” from more building.  “Mark Parrell – President and Chief Executive Officer: Yes. Great question, Rich. It’s Mark. So it would require us to think about another risk differently, too, and that’s political risk because one of the things that our coastal markets have, I think, more of though maybe not quite as much of as we may have thought, is risk of rent control, risk of activity by politicians that’s job destroying and growth destroying. So from our perspective, we’d have to be balancing that differently as well. There is no risk-free apartment market. So if you’re in Texas market, you probably have less political risk, but you may have more resiliency risk and you certainly have a lot more supply risk than a lot of our markets.” (Equity Residential Q3 2022 Earnings Call, 10/26/2022)