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Text: Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer.
Alec Brackenridge, our Chief Investment Officer, is here with us as well for the Q&A.
Also, as Marty mentioned, we are pleased to have Alec Brackenridge, EQR's Chief Investment Officer, available during the Q&A period.
For those of you who do not know Alec, he's a 28-year veteran in this company.
He literally started work here the day we went public in 1993 and took over as our CIO in 2020.
As you can see from the release, he and his team have done exceptional work of late on the transactions side.
All of our operating metrics continue to improve at a faster rate than we assumed earlier in the year.
We are seeing demand levels well above 2019 in all our markets.
And this has allowed us to continue growing occupancy, while at the same time raising rates.
This resulted in the company materially raising annual same-store revenue, NOI and normalized FFO guidance.
While our quarter-over-quarter same-store revenue and NOI results remained negative, the decline was less than what we expected, and our sequential same-store revenue and NOI showed positive growth for the first time since the pandemic began.
As we have discussed on prior calls, improvement in our reported quarter-over-quarter same-store numbers will lag the recovery in our operating fundamentals as we work these now higher rents and lower concessions through our rent roll.
We believe that our business is set up for an extended period of higher-than-trend growth beginning in 2022 as we recapture revenue loss due to the pandemic and continue to benefit from strong demand and growing incomes in our target demographic.
Also, the more diverse portfolio we are creating should improve long-term returns and dampen volatility going forward.
On the investment side, we are active buyers and sellers in the second quarter and expect to continue being active capital recyclers.
Consistent with what I've said on prior calls, we are allocating capital to places that are attractive to our affluent renter base, including the suburbs of our established coastal markets as well as Denver and our two new markets of Austin and Atlanta.
We are making these trades with no dilution, even given higher pricing levels for the properties we are targeting because we are able to sell our older and less desirable properties at low cap rates and at prices that exceed our pre-pandemic value estimates.
Earlier this month, we reentered the Texas market after an 11-year absence by acquiring two well-located new assets in Austin, Texas.
These properties are located in a desirable area with high housing costs that is equidistant between Downtown Austin and the Domain Hub on the north side.
We acquired these two properties for $96 million, and approximately, a 3.9% cap rate and about $195,000 per unit.
We expect to acquire a mix of urban and suburban assets in the Austin market.
During the second quarter and in July, we acquired two properties in Atlanta.
SkyHouse South in Midtown for $115 million with a 3.6% cap rate.
This is a deal we did previously disclose.
And a few days ago, we acquired a second property in Atlanta in the bustling Midtown West neighborhood.
We acquired this new property for $135 million, and it is about half occupied.
And once it completes lease-up, we expect it will stabilize at a 4.1% cap rate.
We also continued adding to our Denver presence by purchasing an asset in the suburban Central Park area of Denver for $95 million.
This property is located just west of the large and growing Fitzsimons medical campus and draws residents attracted to its access to abundant outdoor amenities.
We expect this property, which is also in lease-up currently, to stabilize at a 4.2% cap rate.
We're also pleased to add to the portfolio of property each in the suburbs of Boston and Washington, D.C. The Boston property is located in Burlington, Massachusetts, and is a new asset that we acquired for $134.5 million at a 4.1% cap rate.
This property is in a difficult-to-build suburb of Boston with high single-family housing costs and good access to high-paying jobs.
The D.C. asset is located in Fairfax, Virginia, and is a 2016 asset that we acquired for $70 million at a 4.3% cap rate.
This property is well located with both good highway and good metro access and proximity to the growing job base in Northern Virginia.
Both the Burlington and Fairfax assets are located in submarkets, where our existing assets have performed particularly well.
Year-to-date, we have bought $645 million of properties and expect to close on another $850 million in acquisitions, a good number of which are in various states of advanced negotiation by the end of the year.
We'll fund these buys with an approximately equivalent amount of dispositions, mostly from California of older and less desirable assets, which we sold or are under contract to sell at significantly above our pre-pandemic estimate of value.
We've put into service and began leasing our newly developed property in Alameda island, a short ferry ride to the city of San Francisco.
Built on the side of a former naval base, this property has terrific views of the skyline and an evolving restaurant and bar scene that we think is attractive to our clientele.
Over the next few months, we'll complete our other two current development projects, including the Alcott in Central Boston, the largest development project in the company's history.
Early leasing efforts on this project and our development project in Bethesda, Maryland, are going well.
And our current estimates are that these three projects will stabilize at a development yield of approximately 5%, considerably higher than prevailing acquisition cap rates.
These properties will be meaningful contributors to NFFO starting in late 2022.
We see development as a good complement to our acquisition activities as we spread more of our footprint to the suburbs of our established markets as well as to our new markets.
We expect a significant amount of our development activity going forward to be done through joint venture arrangements.
This allows us to leverage our partners in place sourcing and entitlement teams in locations like our new markets where we do not currently have a development presence.
You're doing an exceptional job during this particularly busy leasing season, and we're all very proud and grateful.
As evidenced by our revised guidance, the pace of recovery has been very strong.
Let me highlight a few of the overall trends.
So first, we continue to see very good demand for our apartment homes.
Our national call center in Ella, our AI leasing agent, are responding to record high levels of inbound interest for our apartments, which is converting into high volumes of self-guided tours.
This overall level of demand continues to drive applications and move-in activity that is exceeding move-out, and ultimately, is delivering stronger-than-expected recovery in occupancy.
Portfoliowide, physical occupancy is currently 96.5%, which is back to 2019 levels.
San Francisco and Seattle are still trending slightly below 2019, and Southern California markets are slightly above.
At this point, we expect to run the portfolio above 96% through the remainder of the third quarter.
This strength in occupancy is allowing us to push rate and drive revenue growth.
Overall, we are more than halfway through the typical peak leasing season, and the momentum has been very strong, providing us the opportunity to raise rates, reduce concessions and grow occupancy.
These fundamentals are delivering RV recovery.
From March to December of 2020, pricing trend, which includes the impact of concessions, declined approximately $500 per unit.
From January 2021 to today, pricing trend has grown $660, and is now not only above prior year levels in all markets but every market, except for San Francisco is also above 2019 peak pricing trend levels.
Today, the portfolio is approximately $100 higher per unit than our peak 2019 levels.
Our priority has been to test price sensitivity in every market by raising rates and reducing both the value and quantity of concessions being granted.
At the end of the first quarter, about 20% of applications were receiving on average four weeks in concessions.
As of July, we are now running with less than 3% of our applications receiving on average just over two weeks, and we expect this to continue to drop-off even further.
To give you perspective, the total dollar of concessions granted peaked in the month of February at just north of $6 million for the same-store portfolio.
For July, we will be at $1.5 million for the month, and August should be less than $750,000.
Last week, only 12 properties had any concessions being offered.
The percent of residents renewing has stabilized around 55%, which is very much in line with historical averages but below the record high 60% levels that we had in 2019 and early 2020.
As we progress through the remainder of the year, our focus will continue to be to push rates in our markets and manage our renewal negotiations.
Both markets are recovering nicely with concession use nearly nonexistent in our New York portfolio and declining rapidly in San Francisco.
New York is seeing stronger demand right now, and we think it is primarily due to greater clarity around employer return-to-office plans.
New York employers, particularly the banks and financial firms have called their employees back to the office, and you could feel it in the economic activity in many areas of Manhattan.
We see it in our portfolio after nine consecutive weeks of record application volume.
In San Francisco, however, the return to office and reopening is a little more ambiguous.
Employers have been slower to call employees back in, with many initially targeting after Labor Day.
Adding to the uncertainty in San Francisco is the reintroduction of strong recommendations for indoor masking and some delays in reopening, which were announced last week.
The situation in San Francisco is likely to lead to a delayed leasing season in that market and a slower full recovery of occupancy.
That said, occupancy is 95.4% today in San Francisco and is growing as is pricing trend.
At this pace, we expect the San Francisco pricing trend to be back to pre-pandemic levels by the end of the third quarter.
Meanwhile, we are seeing some indicators that we could see an extended leasing season with a second wave of demand in New York, Boston and Seattle.
Our leasing teams in these markets have been dealing with prospects that are looking for move-in dates in late August and September and hearing from them that these moves are in connection with their need to be back in the office, or in the case of Boston, back on campus.
This demand is more robust than historical patterns, which could suggest an extended peak leasing season in those markets, and matches up nicely with our lease expirations, which are more weighted toward the back of the year than usual.
Finally, I want to take a minute and give you an update on the government assistance program for renters.
As we've discussed on previous calls, approximately $50 billion in rental assistance for those impacted financially by the pandemic was made available in the various relief bills.
We are laser-focused on accessing the rental relief funds and are working very closely with our eligible residents to apply for this relief.
Processing to date has been relatively slow in our markets, but we were able to recover approximately $5 million in the quarter.
Bob will provide some color on our expectations for collections for the remainder of 2021 in his remarks.
This pace of recovery would not be possible without them, and they remain relentless in taking care of each other and serving our customers.
As Michael just discussed, the recovery is well underway and is exceeding our prior expectations for the same-store portfolio.
The continued strong operating momentum from this leasing season has led us to raise our annual same-store revenue guidance from negative 6% to negative 8% to negative 4% to negative 5%, an improvement at the midpoint of 250 basis points.
Strong expense controls and favorable real estate tax outcomes, which I will talk about in a moment, also allowed us to reduce our same-store expense guidance range to an increase of 2.75% to 3.25%, resulting in an NOI range of negative 7.5% to negative 8.5%, which is a 400 basis point improvement at the midpoint relative to our prior guidance.
Drivers of our revenue guidance increase of 250 basis points are roughly 150 basis points of improving operating fundamentals that Michael just outlined; 60 basis points or $15 million for the full year in related lower bad debt, primarily due to anticipated rental assistance collections; and the remaining 40 basis points is due to improved performance in our nonresidential business.
Before I move on to expenses, a quick comment on our bad debt assumptions.
The back half of the year has about $10 million of additional assumed rental assistance collections on top of the $5 million we've already received.
We feel very confident about this amount because we either received it in July, or after some real digging, can see that it is far along in the approval process.
There are other resident accounts being worked on, but they are not as far along.
Given the lack of transparency and the relative slow processing speed to date, it is difficult to handicap how much will successfully get processed and whether we will receive these funds in 2021 or it will spill over into 2022.
On the expense side, we have also seen improvements versus prior expectations, which led us to center the midpoint of expense guidance at 3%, which was the low end of our prior guidance range.
This reduction is in part due to the modest growth experienced in second quarter 2021 even with a really challenging comparable period from second quarter of 2020.
While some expense categories experienced a typically high percentage growth change quarter-over-quarter due to this comparability issue, overall expenses were less than originally anticipated.
Key categories driving the current period and anticipated full year lower were real estate taxes and payroll.
Reduction in growth expectations for real estate taxes is primarily driven by lower than forecasted accessed values in some key markets.
Lower payroll growth expectations are primarily driven by our progress in optimizing staffing utilization as well as higher-than-usual staffing vacancies.
We expect that 2021 will be our third consecutive year of low payroll growth, having delivered a three-year average below 1%, while keeping other controllable expenses like repairs and maintenance in check.
As a result of these same-store guidance changes, we raised the midpoint of our normalized FFO from $2.75 to $2.90.
A couple of closing comments on the balance sheet and debt capital markets.
With the impact of the pandemic on our operations increasingly in the rearview mirror, it is clear that our balance sheet has held up remarkably well.
Despite unprecedented pressure on operations, our credit metrics have remained well within our stated net debt-to-EBITDA leverage policy of between 5.5 times to 6.5 times.
The debt capital markets are also incredibly attractive at the moment for issuers like us.
This creates opportunities to term out commercial paper with treasuries and credit spreads at or near record lows, the potential of which has been incorporated into our revised guidance range.

user
sees fy 2021 same store noi change down 8.5% to down 7.5%.

assistant