Equity Residential (EQR)

Q2 2010 Earnings Call Transcript

July 29, 2010 11:00 am ET


Marty McKenna – IR

David Neithercut – President and CEO

Fred Tuomi – President, Property Management

Mark Parrell – EVP and CFO

David Santee – EVP, Operations


David Toti – FBR Capital Markets

Swaroop Yalla – Morgan Stanley

David Bragg – ISI Group

Alexander Goldfarb – Sandler O’Neill Partners

Michael Levy – Macquarie Research

Eric Wolf – Citi

Michael Bilerman – Citi

Jeff Spector – Banc of America

Jay Habermann – Goldman Sachs

Andrew Fenton – Credit Suisse

Richard Anderson – BMO Capital Markets

Jeff Donnelly – Wells Fargo

Michael Salinsky – RBC Capital Markets

Haendel St. Juste – KBW



Good morning. My name is Hattie, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential second 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, Hattie. Good morning, and thank you for joining us to discuss Equity Residential’s second quarter 2010 results. Our featured speakers today are David Neithercut, our President and CEO; Mark Parrell, our Chief Financial Officer; and Fred Tuomi, our EVP of Property Management. David Santee, our EVP of Property Operations is 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 on our call. It was really great to see so many of you here in Chicago last month at the NAREIT conferences, and it really gave us a great chance to introduce so many of you to our senior management team, and it was also a great opportunity to discuss with you all the dramatic improvement in fundamentals we’ve been seeing since January in our business.

During those meetings, we told you that our indicators suggest that we would continue to see steady occupancy and increasing rents during the summer months, and we’re delighted to say that that did in fact happen, and that the recovery in apartment fundamentals has continued right through our primary leasing season.

Occupancy has held in the 95% range, and as we said on our first quarter call and during NARIET, the second quarter of this year would show the first sequential increase in same store revenue, and it did coming in up 1.3%. We also said that the third quarter of this year would produce the first quarter-over-quarter increase in same store revenues in several years, and it will, with July having already delivered the first month-over-month increase up 0.4%.

We also said that the high end of our guidance given in February was no longer possible, but was probable. And of course, you’ve noticed that we have increased our guidance, and we’ve also increased same store revenue guidance now from down only 0.5% to flat.

Now when you’re down 2.1% in same store revenue as we were in the first six months, that means the back half of the year will have to be pretty strong, and it should be based upon what we did in July, and how August is setting up, as well as the current indicators that we have for September.

Earlier this year, Fred Tuomi talked about the key metrics that would determine revenue performance this year, and I’d like to him to give you a little mid-year update on those metrics. Fred?

Fred Tuomi

Sure thing. Thank you. As David mentioned I’m going to provide a little more detail, a little more color on how 2010 is progressing and how our visibility into the key drivers of our revenue is shaping our guidance for the balance of this year, and as we have discussed before, these key drivers are resident turnover, physical occupancy our base rent pricing and by that I mean, net effective new lease prices and then of course, renewal prices.

So I would like to give you an update on each of those key drivers, starting with resident turnover.

Looking back into 2009, our fundamentals began to stabilize and we noticed along with this a shift in resident behavior. People began to stay put, they just weren’t moving. Our turnover levels continued to fall as more residents elected to continue to renew their leases versus moving out. I’m happy to say that this trend has continued and is continuing.

Through the end of the second quarter, our annualized turnover is 52.1%. This is 520 basis points below last year at this time and 700 basis points below the same quarter, meaning quarter two for 2008, dramatic shift in turnover.

We all know slower turnover is a good thing but not only does it reduce our expenses, but it also provides a base for occupancy gains, and this in turn allows us to gain pricing power over new leases as well as renewal leases.

However, looking into Q3, we do see a small increase in turnover in some markets, which used to be expected given the seasonal transaction volume we are faced with and the fact we are pushing rents very aggressively.

Next is physical occupancy. The occupancy gains we noted starting back in 2009 and continuing into early Q1 of this year, have held through Q2, as David mentioned.

So growing occupancy coupled with lower turnover and improving demand, we’ve now recovered our occupancy to normal and sustainable levels in virtually every market. The northeast markets, in particular, continue to see very strong demand and therefore have very tight occupancies.

Overall, this morning our portfolio is 95.1% occupied, and with normal or even slightly favorable exposure levels, we’re 7.7% left to lease this morning. We feel very good about where we are in this leasing season.

Next, let’s talk about pricing, the base rent pricing. As also noted in Q1, we told you we saw early signs of improving fundamentals that allowed us to gain pricing power. We achieved very strong rent growth in base rents from January through June of this year and fortunately just in time for setting up in the peak leasing season.

Now through July, base rents have improved up 8.5% year-to-date, meaning from January 1 and stand 5.8% year-over-year compared to the same period last July. At this point, markets like New York, DC, South Florida, and Denver are powering right through the leasing season with continued strong growth in base rents. Other markets, which basically is Southern California, have moderated somewhat on the growth of the base rents in the face of the summer transaction volume.

Now, we know the degree of these future base rent growth will be determined on an individual market demand patterns, which we know is eventually determined by job growth, but again is by market-by-market basis, not to the national headline number.

So finally, renewal pricing. Throughout this entire recession, our renewal process and our renewal pricing strategy have been the stabilizing factors to our revenue stream. Throughout last year, we’ve reported renewals achieved at roughly flat to down 1%, which was a great result at the time.

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