Release Date: October 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Equity Residential (EQR, Financial) posted solid performance in the third quarter, driven by strong demand and limited new supply in established markets.
- The company successfully accelerated acquisitions in expansion markets like Atlanta, Dallas, and Denver, acquiring properties at favorable prices.
- Equity Residential (EQR) achieved a low same-store expense growth of 3.2% for the quarter, showcasing effective cost control.
- The company issued $600 million in fixed-rate debt at a favorable 4.65% coupon, the lowest in the REIT space since 2022.
- Equity Residential (EQR) is leveraging AI technology to handle resident inquiries, aiming to improve operational efficiencies and reduce costs.
Negative Points
- Blended rate growth was at the low end of expectations, primarily due to lower-than-expected new lease changes in Los Angeles and expansion markets.
- Expansion markets like Atlanta are facing challenges with high supply levels, impacting occupancy and rate growth.
- The company anticipates continued supply-driven weakness in expansion markets, delaying revenue recovery until 2026.
- Equity Residential (EQR) is experiencing pressure from excess inventory due to eviction-related existing and new supply in some markets.
- The company faces economic and geopolitical uncertainties that could impact business performance and the broader economy.
Q & A Highlights
Q: You mentioned in your presentation the potential for bad debt and other income to add to revenue growth next year. Could you give us a sense of what you're thinking about that potential?
A: Robert Garechana, CFO: We expect to end 2024 with bad debt around 1% of revenue, with normal pre-pandemic levels at about 50 basis points. The opportunity is the delta between these figures. For other income, particularly from the bulk WiFi program, contributions will be more meaningful in the fourth quarter and into 2025.
Q: With the volatility in the 10-year treasury rates, does that change your pricing for Sunbelt opportunities?
A: Alexander Brackenridge, CIO: Rates have moved quickly, but as of last week, opportunities were pricing at around 4.75% in markets like Denver and Dallas. Despite rate fluctuations, there's still a lot of capital interested in apartments, and a 5% cap rate feels reasonable looking forward.
Q: Given the projections for fourth-quarter leasing spreads, do you expect leasing spreads to hold next year despite heavy supply and a slowing economy?
A: Michael Manelis, COO: It's early in our budget process, but the setup for 2025 feels similar to 2024. While we have catalysts for growth, we also need to work through supply absorption. We'll see how this plays out over the next few quarters.
Q: Can you discuss the impact of the Blackstone acquisition on your leverage and IRR expectations?
A: Robert Garechana, CFO: We used our underlevered balance sheet to capitalize on the opportunity, issuing debt at attractive rates. Alexander Brackenridge, CIO: The unlevered IRR for the Blackstone portfolio is about 8%, which was in excess of our weighted average cost of capital at the time.
Q: How are you underwriting rent growth on new acquisitions in high-supply markets?
A: Alexander Brackenridge, CIO: We expect the first year to be slightly less than the prior year, with the second year being flattish. However, we anticipate outsized growth in years three and four, potentially around 4.5%, due to operating efficiencies and other income layers.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
