Equity Residential CEO Discusses Q3 2010 Results - Earnings Call Transcript

Equity Residential CEO Discusses Q3 2010 Results - Earnings Call Transcript
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Equity Residential (

EQR

)

Q3 2010 Earnings Call Transcript

October 28, 2010 11:00 am ET

Executives

Marty McKenna – IR

David Neithercut – President and CEO

Mark Parrell – EVP and CFO

Fred Tuomi – President, Property Management

David Santee – EVP, Operations

Analysts

Eric Wolfe – Citigroup

Rob Stevenson – Macquarie

Michelle Ko – Bank of America

David Toti – FBR Capital Markets

Swaroop Yalla – Morgan Stanley

Rich Anderson – BMO Capital Markets

Alex Goldfarb – Sandler O'Neill

Jay Habermann – Goldman Sachs

Michael Salinsky – RBC

Dustin Pizzo – UBS

Andy McCulloch – Green Street Advisors

Haendel St. Juste – KBW

Presentation

Operator

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Previous Statements by EQR
» Equity Residential Q2 2010 Earnings Call Transcript
» Equity Residential Q1 2010 Earnings Call Transcript
» Equity Residential Q4 2009 Earnings Call Transcript
» Equity Residential Q3 2009 Earnings Call Transcript

Good morning. My name is Paula, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you.

Mr. McKenna, you may begin your conference.

Marty McKenna

Thanks, Paula. Good morning, and thank you for joining us to discuss Equity Residential’s third quarter 2010 results. Our featured speakers today are David Neithercut, our President and CEO and Mark Parrell, our Chief Financial Officer. Fred Tuomi, our EVP of Property Management and David Santee, our EVP of Property Operations, are also here with us for the Q&A.

Certain matters discussed during the conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

Now I’ll turn it over to David.

David Neithercut

Thank you, Marty, and good morning, everyone. Thanks for joining us today. We are extremely pleased with the operating performance of the company thus far, and we’d like to acknowledge the hard work that the entire team is doing out there to deliver that performance. So, thank you all so [ph] very much for what you do each and every day for us.

We have come an awfully long way in the last year and this is really the result of continued strength in each of the four areas that Fred Tuomi on prior calls has pointed out as key factors for driving performance for us.

The first was retention, which we estimate will improve 4.5 to 5 percentage points over the last year, because our turnover in 2009 was about 61.3%, and we think that will improve to around 56.5% or so in 2010. And I want to add that both of these figures are inclusive of the onsite transfers and those between EQR properties, so that the really net true move out is even better than that.

Our renewal rates in September, we achieved renewal rate increases of 5.1%. In October, those renewal rate increases we achieved were 5.5% and on the 2,500 leases renewed thus far for November, we are achieving a 5.7% increase.

Occupancy which was 93.8% in 2009, will average more than a 100 basis points higher in 2010 and occupancy currently at 94.8% today, is a very strong level for this time of the year.

In our base rents, those being new rents we’re asking for our new residents to pay, these asking rents are up 8.7% since the beginning of the year on a weighted average basis across the portfolio. As a result of this, we’ve recovered a significant portion of the discounts in rents that we gave our residence in 2008 and 2009.

We now have only about 5% more rate growth left to reestablish peak pricing across the portfolio and that’s helped by some markets that have already surpassed the prior high watermarks and are now creating new peak pricing levels. So, we remain very optimistic as we wrap up the year and we move into 2011.

Now we know there’s a bit of disbelief out there about how well the apartment space is doing, despite any kind of real meaningful job growth. I’ll be honest with you by saying that, when we look at our dashboards and we see continued improvement in these four years that I just mentioned and then, we look ourselves at the newspaper headlines, we ask ourselves the same thing. We ask ourselves this question without taking our foot off the gas on rental increases I will tell you, but we do ask the same thing.

In addition all of the things that we’ve talked about over the course of this year that have positively impacted apartment fundamentals such as, the powerful demographic picture comprised of $80 million plus echo-boomers.

The fact is there’s been virtually no new supply added to core markets across the country, as well as the changing dynamic with respect to the wisdom and benefits of single-family home ownership.

The Head of our Research Department, the smart guy by the name of Jay Lybik reminds us about the importance of household growth and that well job growth certainly fuels household growth, household growth can and does occur without job growth and in fact, markets can simultaneously experience household formation, while actually losing jobs.

According to several sources, it’s estimated that nationally we formed somewhere between 800,000 and 900,000 new households this year and that’s the level that’s pretty consistent with a year ago, and this compares to a recent period of economic expansion when we were forming about 1.2 million households annually. So, the number is down this year, but it’s still very meaningful.

Furthermore, notwithstanding what the apartment capture rate might have been of these new households in the past, the likelihood of the new households being created today opting for rental housing rather than home ownership is extremely, extremely high.

So, when one thinks about this increase in household formations at a time of significantly reduced new apartment supply in a time of declining single-family home ownership levels, this can explain a lot of the strength and fundamentals we’re experiencing today in a period of little new job growth.

In any event, I’ll tell you we remained very optimistic about our business prospects and it will only get better as the economy recovers and adds more jobs.

So, on the transaction side, let me tell you that as we noted in the release last night, we acquired six assets in the third quarter for a total of nearly $550 million. That brings the total for the year to 14 assets and $1.4 billion of acquisitions.

The assets we acquired in the third quarter, four of those were in California, two in the San Francisco Bay area, one in Berkley and the other in Burlingame near the San Francisco airport and one each in Los Angeles and San Diego.

We acquired two deals in the D.C. area, one in Arlington, Virginia and the other in Alexandria, Virginia.

Of the five assets that were fully leased, cap rates on these deals ranged from the high 4s at one of the Bay area deal that near airport which is a value-add deal, which should stabilize in the mid 6s to the low 6s on the Alexandria, Virginia acquisition that was adjacent to an existing property that we already own.

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