Equity Residential Earnings: California Rains Cause High Expense Growth

No-moat Equity Residential EQR reported first-quarter results that were relatively in line with our expectations, leading us to reaffirm our $88 fair value estimate. Same-store occupancy fell 50 basis points year over year but was up 10 basis points sequentially to 95.9%, in line with our estimate. Average rental rates were up 9.8% year over year, in line with our 9.3% estimate. As a result, same-store revenue growth matched our estimate of 9.2% growth. However, the first quarter saw operating expenses increase 7.2% year over year, the largest single-quarter increase in at least the past 15 years for the company. While real estate taxes and payroll expenses remain low, only growing 2.6% and 2.8%, respectively, in the quarter, utility costs increased 12.7%, insurance increased 14.3%, and maintenance costs increased 16.9%. As a result, same-store net operating income increased 10.2%, which matched our estimate for the quarter. Equity Residential reported normalized funds from operations of $0.87 per share, which was $0.02 lower than our estimate because corporate expenses for the year were more concentrated in the first quarter than we anticipated.

Despite the higher-than-anticipated expense growth, Equity Residential is maintaining its 2023 full-year guidance. This includes management’s projection that full-year same-store expenses will grow between 4.0% and 5.0%, which puts our 5.0% estimate at the high end of management’s range. Management explained that the first quarter was negatively impacted by significant rainfall in California with the Southern California markets, which make up about 30% of the total portfolio, seeing expenses rise 9.9% in the first quarter. Expense growth should slow in the second half of the year, which we agree with as our estimates decelerate to 4.0% growth by the fourth quarter. Therefore, we agree that the first quarter was negatively affected by one-time events and the rest of the year should perform better.