Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Same-store revenues increased by 2.9%, and same-store expenses rose only by 2.7%, leading to a same-store NOI growth of 3%.
- FFO per share increased by 3.2%, exceeding expectations due to steady demand across all markets.
- High levels of resident retention due to elevated homeownership costs, with homeownership hitting record levels.
- Transaction volumes in their markets almost tripled from the first quarter and doubled from the second quarter of 2023.
- Strong occupancy of 96.4% for the quarter, driven by good demand and a strong renewal process.
Negative Points
- Expansion markets like Atlanta and Austin are under pressure from high levels of new supply.
- Los Angeles market is feeling pressure on pricing due to new supply in key submarkets and shadow supply from evictions.
- San Francisco and Seattle, despite showing improvement, still face challenges from new supply and quality of life issues.
- Higher legal costs associated with defense and litigation, impacting property management expenses.
- Increased advocacy costs due to regulatory challenges, particularly in California, expected to be over $10 million for the year.
Q & A Highlights
Q: I was hoping you could go into greater detail on what you're expecting in terms of seasonality for the rest of the year. And I asked the question in part because it looks like you did around 2% in blended rate growth in the first half and what you're guiding to 2.5% in the third quarter. So it feels like you're guiding to more deceleration in the fourth quarter. But just trying to understand if that's actually the case.
A: Eric, this is Michael. And I guess I'll just start out. I give you a little bit of color. So first and foremost, I think specific to the third quarter right now, we expect very stable kind of achieved renewal rate increases around 4.5% and slight seasonal moderation of new lease change. We do have a little bit of an easier comp in September from the declines that we saw last year. So it may hold up a little bit better than expected, but we didn't include kind of a lot of that in the initial forecast right now. Overall for us, I think the key takeaway should be that we originally modeled kind of this full year blended rates to be about 2% right now. We're expecting them to be closer to like the mid twos. And a lot of that is going to depend on the mix of the renewals and new lease transactions, both from the third and fourth quarter. But if we just look at the snapshot today, I mean, the portfolio Ilios over 96% occupied, our application volumes remained solid and our net effective pricing trend curve is more in line with a normal year as culturally goodies. Neville.
Q: And then as far as on LA., you mentioned some of the pricing weakness you're seeing transactions. So I was wondering when you would expect that impact just want to make its way through the market and what type of improvement you would expect to see once that happens?
A: Yes. I mean, I think specific to LA, so first and foremost, right, we were focused on the occupancy builds. We mentioned that on the last quarter call that we were doing some concessions, we were able to see a year-over-year lift in occupancy of about 70 basis points. And the new lease change in LA, it was less than what we anticipated by staying negative in the third quarter. And a lot of that was really based on the impact that we saw new supply in some key submarkets of Hollywood Mid-Wilshire in downtown. So I think when we think about the LA performance for us and like the recovery fleet, finally, we have upside built in for us. I still think for the balance of this year, we're going to continue to feel some of the pressure from the supply in those isolated submarket. Start numbers are materially down, So that bodes well for future year performance. So in my mind, I think you should just expect as we continue to work through this here and get ourselves into next year for 2025, we're going to have some upside potential on the recovery, but we really like the total revenue story regimen. So despite the new lease change stat that you can see being a little softer in the third quarter, total revenue is still producing a pretty strong number for us.
Q: Michael, could you maybe just speak a little bit more about the renewals? I know it was 5% in the quarter. How did that trend kind of April May, June? And then where are you sending out renewal notices today of how the July, August and maybe September timeframe? Thanks.
A: Yes. So first, I think the renewal performance through the quarter has been pretty stable for us, right around that 5% mark. And I think as we look at the third quarter, like I said, we have a lot of confidence right now. We have quotes out in the marketplace for the next 90 days that ranged between like 6.5% and 7%. We are negotiated still a little bit more than norm. And we think this kind of slight bias towards occupancy, clearly in some of like the expansion markets and even like the LA market that I just discussed makes sense for us from a total revenue standpoint. So I think we expect even as we work our way through the third quarter, pretty stable renewal performance review salt and will achieve somewhere right around that 4.5% mark.
Q: Maybe on the capital deployment front, either for Alec or Marquee, sort of sounds like everything is somewhere in and around five caps. I guess, how are you thinking about IRR hurdles today? And has that really changed as a kind of the stock price has gone up, then bond pricing bond yields have certainly come down. Sorry, I guess are you changing or your underwriting criteria at all from an IRR perspective?
A: Hey, Steve, it's Alec. Yes, you're right. We're pricing things that are generally a newer or new product into an $80 million to $120 million price range typically in the suburbs. And what we've been buying has been not been our expansion market around a five cap. And when we filter in and I'm relatively new of some sort of slightly negative rent growth in the 1st year, offset by some operating platform and then already in year three, which may be 5% for the next couple of years. As you're into half of '27 and half of '28, you're getting to a number it's around and eight and that that's a deal that works for us and fits within our cost of capital.
Q: Maybe just focusing on the expansion markets once the kind of hear your view on maybe the potential progression of new lease growth, market rent growth as fall significantly, even kind of compare it to kind of typical seasonality, obviously, more supply there. So I just wanted to know kind of how do you think some of that will play out this fall relative to typical seasonal patterns?
A: Yes, this is Micheal. Also, I think I would just start by saying we think about the new lease change performance in the expansion market. So far, there's nothing that's really surprised us. I mean, what you're seeing today is that we have a lot of former residents moving out that never received the concession. We're averaging anywhere between like 35% to 50% of applications receiving about six weeks. That's what's driving some of that new lease change. And, I think as we think about the balance of the year and the seasonality, the interesting thing about the markets is that one, they definitely demonstrated a little less demand seasonality, meaning that they don't drop off in demand quite as much as some of the shoulder in the shoulder seasons as some of the coastal markets do. So I think we have this opportunity that we could just kind of stay in the zone that we've been in. But we expect challenging operating conditions in those markets for the balance of the year. You can look at the new supply that's coming in. You look at kind of how we're balancing the trade-offs between occupancy and rate. And I think we just expect that we're
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
