Equity Residential (EQR) Q4 2011 Earnings Call February 02, 2012 11:00 am ET Executives Marty McKenna - Spokeman David J. Neithercut - Chief Executive Officer, President, Trustee, Member of Executive Committee and Member of Pricing Committee Frederick C. Tuomi - Former President of Property Management David S. Santee - Executive Vice President of Operations Mark J. Parrell - Chief Financial Officer and Executive Vice President Analysts Andrew McCulloch - Green Street Advisors, Inc., Research Division David Bragg - Zelman & Associates, Research Division Eric Wolfe - Citigroup Inc, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Seth Laughlin - ISI Group Inc., Research Division Jonathan Habermann - Goldman Sachs Group Inc., Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Robert Stevenson - Macquarie Research Richard C. Anderson - BMO Capital Markets U.S. Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division Swaroop Yalla - Morgan Stanley, Research Division Presentation Operator
Before I turn it over to our team with their comments, I want to point out an error contingent of the release we issued yesterday. On Page 12 of the release, the data for our same-store year-over-year turnover is incorrect, as we inadvertently calculated the numbers using 9/30 year-to-date data. The full year 2011 number should be 57.8% instead of 44.4% and the full year 2010 number should be 56.9% instead of 44.1%. Fred Tuomi will provide some color on our expectations for 2012 turnover in his remarks. We apologize for this error, and we'll issue an updated release after our call. And we thank Dave Bragg from Zelman & Associates for catching this error and bringing it to our attention.Lastly, let me remind you that certain matters discussed during this 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. And now I'll turn the call over to David Neithercut. David J. Neithercut Thank you, Marty. Good morning, everyone. Thanks for joining us today. We're extremely pleased with the company's operating performance in the fourth quarter, which wrapped up a very good year for Equity Residential. And on behalf of everyone here, we want to thank the thousands of our colleagues across the country that continue to deliver these very strong results for us. Our same-store net operating income for the full year of 7.7% was nearly spot-on the high end of the guidance range we gave you exactly 1 year ago. And this performance was a result of continued strength in fundamentals, driven by a huge demographic of our population that is not just simply in their prime rental years, the one that's currently shunning the commitment and financial risk of single-family homeownership, and is instead embracing the optionality and flexibility, the lifestyle really provided by rental housing.
At the same time, new supply has been severely limited in some markets and almost nonexistent in others. And this leads to tight markets with high retention, low vacancy and rising rental rates. So we're very confident that 2012 will be another very good year. And Fred Tuomi is going to take a moment now and take you through the baseline assumptions for our key revenue drivers for this year.Frederick C. Tuomi Thank you, David. So as noted in our press release last night, our guidance for 2012 revenue growth is between 5% and 6%. And we continue to see strength in virtually all of our markets, actually in all of our markets, and the fundamental factors of supply and demand remain in our favor. The combined forces of demographics, household formations and the continued aversion to homeownership will ensure a strong demand for rental housing. And this is further supported by gradual improvements in job creation, especially within our younger, college-educated urban cohort for unemployment now stands at 4.1% versus 8.5% overall. Our resident base is very healthy due to its high level of employment, good income growth and a demonstrated ability and desire to pay higher rents for quality rental housing. On average as a percent of income, our rent is currently 17.2%. This is a very good number and actually down slightly from last quarter. And this is versus the 33% threshold we typically use to qualify new applicants. And the household income of new residents acquired in 2011 was 4.4% greater than those residents moving in with us during 2010. So this year, some of the strongest revenue growth will come from Boston, New York and San Francisco. And in these key markets, we see continued stability in the financial sector and continued growth from technology, new media, business services and the health sciences. The more challenging markets will include San Diego and to no surprise, the D.C. Metro area.
So regarding our 2012 revenue guidance, I'll again discuss the 4 key drivers in more detail. And those are: resident turnover; our physical occupancy; base rent pricing, meaning net effective rates on new leases; and then our renewal pricing. The first, turnover. One of the benefits we've seen from this renter nation phenomenon is structurally lower resident turnover, and this has been evident since really late 2008 and 2009. In 2011, as rents were recovering, turnover actually increased slightly but well inside of our expectations that we gave to you last year. So our turnover assumption for this year's same-store set is 58%, which is up slightly from the prior year.Occupancy. Our occupancy assumption is 95.2%, which is no change from 2011. So it's relatively stable turnover, solid occupancy. The revenue forecast really comes again down to rate, meaning base rents for new leases and then the achieved renewal rates. So base rent pricing. Coming into 2012, what we said right now today, our base rents are up 7% over the same time last year. We feel very good about this and the forward trend for the next several weeks looks very encouraging. Throughout this year, base rents will follow the typical seasonal pattern, this means that we'll have continued growth from Q1 and Q2, we'll strike an interyear peak in Q3, and then the typical seasonal softening into Q4. So on average over the year 2012, we expect these base rents to run approximately 5.5% above the 2011 levels. And this implies a narrowing as we approach the peak Q3 comp period of last year. And finally, renewal pricing. We achieved renewal increases above 6% during the fourth quarter and this trend is continuing as we've turned the corner into this year. January renewals are now done at 6.7%. February is at 6.2% so far, and we've booked 1,800 March renewals at an average increase of 6.1%. So for the full year of 2012, we expect average renewal increases of between 5% and 6%. And this also implies a narrowing as we again approach the peak Q3 comp period of 2011.
So to recap our explanation of our guidance, we expect turnover up slightly to 58% on the 2012 same-store set, occupancy very steady at 95.2%, average base rent pricing growth of 5.5% and average renewal increases of between 5% and 6%. Therefore, the revenue growth for the full year 2012 should come in between 5% and 6%. David?David J. Neithercut All right. Thanks, Fred. So as Fred said, the midpoint of our 2012 same-store guidance then is 5.5%, and that's actually 50 basis points higher than our actual results for 2011. I'll have to say that 2011 had a much easier comp set than 2012 will. So clearly, we see continued strength in fundamentals across our markets. Now in addition to delivering great top line growth over the last several years, we've worked very hard to make our operations more efficient, and that's following an extensive review of our operating model several years ago. This has led a compounded annual growth in same-store expenses of just over 1 percentage point in each of the last 5 years. And our guidance for 2012 same-store expense growth is 1.5% to 2.5%. And David Santee is now going to break that down and give you some color as to how we're getting to this range. Read the rest of this transcript for free on seekingalpha.com