Equity Residential Earnings Call NUGGETS: Denver – The Model Market, Views on Chicago and Vegas

On Thursday, Equity Residential (NYSE:EQR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Denver – The Model Market

Eric Wolfe – Citi: I just wanted to make sure I understood the points you’re making on Denver and how that could be the model going forward. I think you were basically saying that even though you expect turnover due to home purchases and financial reasons and everything that keep moving up that you’re confident you can replace those tenants with rate increases; is that the point you were making?

Frederick C. Tuomi – President, Property Management: That’s exactly the point we’re making, whereas looking at the kind of metrics caused our portfolio, Denver just kind of popped up. On one hand, it was worrisome and that the – it had high turnover, it was growing, and it was due to rent increases and it was due to home purchasing, but then on the revenue side it’s one of the top performers there as well, so we have great rent growth, but then also very strong leasing velocity through this leasing season, high occupancy, low left to lease and it just continues to grow. So, looks like even though that market has recovered, the single family is healthy, people are buying homes, there is plenty of demand for our product from our profile and they are ready willing and able to lease apartments at the current rents that continue to grow and refill those vacancies.

Eric Wolfe – Citi: But I guess also as part of that we should probably expect to see turnover keep rising in your markets. I mean is that an expectation that we should have or is that just sort of you’re saying we might see this in isolated cases and certain markets like Denver.

Frederick C. Tuomi – President, Property Management: Well, I think clearly this year you’re going to see turnover increase over last year, and last couple of years has been kind of low. It will normalize probably – I would say, probably after next year, but yes, turnover will continue to grow from increased rents and from home buying, and Denver just happened to be example where we’re seeing both at the same time. Other markets with big increases and turnover like San Francisco and Boston were not seeing home purchasing. They’re too expensive or they are hard to get, and other markets where home buying is picking up, they went through a low and we’re not having the increased pressure.

Eric Wolfe – Citi: Just last question, you also made the point that your rent to income ratio is only 17%, so you’re pretty confident that you can keep raising rents, but I guess if you’re only at 17% why would turnover trend up? I mean I would think that – people only think 17% is the income out in form of rent that they would be more inclined to stay where they are and renew their lease. I don’t know if there is a different dynamic going on there, but that would just be what I thought would happen?

Frederick C. Tuomi – President, Property Management: Well, I think situation on that, that 17% is the marginal resident. Those are the residents who have moved in. The actual residents who have been there for a few years, we don’t have way of keeping up with their income after they move in. Yeah, so I think a lot of the turnover you’re seeing now because the rents are being too expensive; one of them is really just the reaction to two or three years in a row of big rent increases. Then the other is during the downturn when rents were down 10%, 15%, 20%, a lot of people were able to afford a nicer apartment at the same rent. So as that rent recovers back to a normal basis, they (really are) going to choose to or not be able to pay that rent, and (no), just go to a less costly housing alternative.

Eric Wolfe – Citi: So the 17% is the incremental renter; not the average renter?

Frederick C. Tuomi – President, Property Management: Yeah, it’s not the entire installed base, correct, because someone is living there five years, we have their income as of five years ago. We don’t have recertification of income each year.

Views on Chicago and Vegas

David Toti – Cantor Fitzgerald: You guys were pretty fair about markets that you sort of (finding factors) for various reasons in the markets that you are exiting like Chicago. (I think) what are your thoughts on markets like Vegas, Phoenix, Chicago in particular (indiscernible)?

David J. Neithercut – President and CEO: No, we’ve not been in Chicago for quite some time and we’ve not been in Vegas for quite some time, but I think that you should continue to expect our investment activity to track very closely to what you’ve seen us do over the past half a dozen years. We think that focus has served us well, and notwithstanding the fact that you may get better going in cap rate to some of those markets today. We think those are more trading markets and its difficult for us to kind of play that game, we think our total return will be better achieved in the markets that we’ve been focused on.

David Toti – Cantor Fitzgerald: You guys mentioned the OP (usage) in the period. Is that just an aberration or is that something you think that’s going be – that we’d see more of in coming quarters?

David J. Neithercut – President and CEO: No, I guess it’s an aberrations; we haven’t done it in quite some time. Frankly I’ve been surprised about that, but this was just a situation where the family selling an asset that they had owned for many, many years, for tax planning purposes taking OP units made sense for them. But I have expected for some time, and I’ve been wrong frankly in this expectation that the OP units would be a security that what we use in more acquisitions, but so far I’ve been surprised that we haven’t, but I would have an expectation particularly in a rising tax rate environment that we could see more OP unit issuances and frankly I’ve surprised that we’re seeing so little thus far.

David Toti – Cantor Fitzgerald: Yeah I would think in the context potentially a political change that that would have some effect, David just quickly, my last question, how is the (indiscernible) performing in the last couple of quarters, I know we haven’t spoke about it much because the market has been strong. But how does the performance compared to today versus, let’s say, if we go back to 2007, what is the primary difference and how the performance…?

David S. Santee – EVP, Operations: The first obvious answer is I mean it works the same day and a day out whether it’s an up market or a down market. I think it’s more about what levels we decided to pull, how much we decide to intervene from a strategic position. We have executive level views myself, Fred, couple of other folks every other week. And that’s what we kind of determined what levels we want to pull to achieve specific goals in specific markets. So, I would say that historically we have intervened more and being aggressive with the rate increases that LRO has put out and I would say that at this stage of the game we are probably letting LRO learn more independently and letting it address the various markets.

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