Equity Residential

Good day, and welcome to the Equity Residential 1Q 2024 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Marty McKenna. Please go ahead.

Good morning, and thanks for joining us to discuss Equity Residential's first quarter 2024 results. Our featured speakers today are Mark Perel, our President and CEO, and Michael Manelis, our Chief Operating Officer. Alec Brackenridge, our chief investment officer, and Bob Gershon, our chief financial officer, are here with us as well for the Q&A. Our earnings release is posted in the investor section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. 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 will turn the call over to Mark Perel.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our first quarter 2024 results and outlook for the year. I will start us off, then Michael Manelis, our COO, will speak to our operating performance and how we see 2024 operations playing out, and then we will take your questions. We are pleased with our first quarter performance, which was ahead of January expectations and reflects the strong demand for the lifestyle our well-located apartment properties provide, as well as little new competitive supply across most of our established markets. Our same-store revenues increased 4.1% in a quarter, and our same-store expenses rose only 1.3%, which led to same-store NOI growth of 5.5% and an increase in our NFFO per share of 6.9%. So overall, very solid start to the year across all categories, with the company well-positioned to capture increasing seasonal demand as we head into our prime leasing season. As is our practice, we have not revised our operating or FFO guidance, and we'll make adjustments as we get deeper into our primary leasing season. Digging under the hood a bit, the durability of the employment picture for our target affluent renter demographic is a continuing bright spot in our business, as is the cost of owned housing. Unemployment for the college educated, a very sizable percentage of our residents, remains at around 2%, considerably lower than the overall average, supporting demand. This demographic, which is well employed in the growth engines of our economy, including technology, financial services, and other professional and business services, continues to grow in both our established and expansion markets. We also see a little competition from owned housing, as the high cost of homes combined with elevated financing costs and rapidly rising insurance, real estate tax and maintenance costs combine to make rental housing a very attractive option for many people. Social factors that we've discussed on prior calls, like smaller households and delayed marriage and childbearing, add to the attractiveness of rental housing. In the quarter just ended, the percentage of our residents leaving us to buy homes was 7.8%, a continuation of all-time lows. Strong demand and high single-family housing costs are consistent conditions across both our coastal established markets that represent 95% of our company's NOI and our new expansion markets of Dallas, Fort Worth, Atlanta, Denver, and Austin that collectively represent 5% of our NOI. But on the apartment supply side, we see two very different pictures playing out in our established coastal markets versus our expansion markets. With the exception of Seattle and Central D.C., in our established coastal markets, we see the terrific demand I just mentioned being met with generally little new supply leading to solid rent growth. Across our four expansion markets, we see robust demand as well, but it is being met by an overwhelming wave of new supply leading to declining rent levels, high concessions, and occupancy pressure. We expect this pressure to accelerate as units continue to deliver in these oversupplied markets. especially once the prime leasing season concludes and demand seasonally declines. Switching to expenses, Michael's going to go over all that with you in a moment, but I wanted to take a second to thank our teams across the company for their amazing work on expense management. We are very pleased to have produced a sector-leading 3.1% average growth rate of same-store expenses over the last five years. Our teams have embraced innovation and a customer service mindset that and are not afraid of change, and it shows in these numbers. Well done, team. On the investment side, we are seeing properties that we would be interested in acquiring, well located, newer properties in our expansion markets, and the suburbs of Seattle and Boston trade at high prices and in very low volume compared to pre-pandemic levels. Investment sales activity in the first quarter was over 60% below average pre-pandemic levels. Estimates from my colleagues who attended the recent ULI conference indicate that there is over $200 billion of dry powder looking to invest in North American real estate with a significant portion focused on apartments. Recent data points from the pending AIRC transaction and apartment portfolio and one-off deals are similarly supportive of much higher values than the public market is currently suggesting. While this is a huge positive signal about the underlying value of our company, It has slowed our portfolio rebalancing efforts. And while pricing in most of the apartment transaction market is strong, buyer interest is not yet fully evident for some of the large urban West Coast assets that we want to dispose of as part of our strategic rebalancing. We expect that to change as these submarkets continue to show improved operations and better quality of life conditions. In the meantime, with the lack of actionable acquisition opportunities, We saw value in our own stock, so we continued to strategically deploy disposition proceeds from the sale of older inferior properties in our portfolio into repurchases of our stock. In the first quarter, we repurchased approximately $38.5 million of our own common shares at a weighted average share price of about $59 per share. Since we began this activity in the fourth quarter of 2023, we have repurchased approximately $87.5 million of our shares at what we see as an attractive valuation level of a bit below $58 per share. And we are using the remaining disposition dollars to drive down our already low leverage, which will create more internal debt dry powder for when opportunities do emerge. We are going to continue to be disciplined in our transaction activities with a focus on growing cash flow over the long term. With regard to external growth, we're on track to deliver six newly completed joint venture developments in 2024. These six properties, three located in Dallas-Fort Worth, two located in Denver, and one located in suburban New York, will be delivered at a weighted average stabilized yield north of 6%, and will contribute meaningfully to our normalized FFO starting in 2025, given their completion and lease-up timing. The three Dallas-Fort Worth developments, are the first completed projects to come out of our partnership with Toll Brothers. With some of the other equity residential executives, I recently visited all six of these development projects, and I'm inspired by the enthusiasm on display from our lease-up teams and excited about adding these high-quality assets to our portfolio. Before I turn it over to Michael, I wanted to make a quick comment on the new housing laws that were passed over the weekend in New York, though I note we are still digesting the law and its implications. The law allows for renewal increases of CPI plus 5%, up to 10%, and provides for vacancy decontrol on the types of units we generally own in New York, which allows rents to move to market when a new resident moves in, and that's similar to the rent laws that were passed a few years ago in California. Overall, new price controls on an already undersupplied good, in this case rental housing, is not an effective way to attract private capital to help solve the housing supply problem in New York State. However, there are also tax incentives in the new law for new rental construction, subject to a new higher wage scale required for labor on larger buildings, as well as permanent affordability rules. There are also some language on zoning reforms and some rules that aim to make office-to-residential conversions easier. While the rent control provisions are not helpful, we commend the governor and the legislature for focusing on a supply-based solution similar to recent legislation passed in such politically disparate states as Florida and California. We think focusing on supply, not heavy-handed regulation, has been recognized on both sides of the aisle as the long-term solution. While the new law adds to the complexity of operating in New York, a good portion of our portfolio in New York City is exempt, either due to being built during or after 2009 or meeting the luxury exemption thresholds. We'll be happy to discuss all this further in Q&A. And with that, I'll turn the call over to Michael Manelis.