- Key Takeaway: "Above-trend growth expected for several years beginning in 2022," with all operating metrics improving faster than expected and tenant demand now above 2019 levels - we agree and have been hearing this from the buyside more often, namely that the downturn was so sharp and severe that we are staring down several years of acceleration to the "real" NOI and earnings growth trend for the Coastal Gateway apartment names, of which EQR and AVB are our favorites. The company to its credit highlights that forward-looking pricing trends are above pre-pandemic levels and occupancies are back to 2019 peaks in all markets but San Francisco (which will have a more protracted recovery). We would argue, however, that these pricing metrics are "nominal" comparisons and are just returning to prior levels despite accelerating inflation that was seen in both in Quad 2 and now in Quad 3. In other words, it is likely that pricing trends continue to overshoot to the upside, and we need to account for this in our numbers with above-consensus near- and long-term estimates. EQR and apartment REITs generally with shorter-duration leases are ideally positioned along with self-storage and SFR to pass that inflation on to tenants via rate growth and re-pricing leases more frequently. EQR is on our Long Bias list and we have said that it should be owned, but it is moving up in terms of conviction on the long side
- Management expects to continue to allocate capital into expansion markets such as the recent expansions in Denver, Atlanta and Austin, as well as potentially adding one or two additional markets before year end or in 1H22. Will acquire a mix of both urban and suburban assets, as well as suburban assets in existing coastal markets. We think EQR will largely match-fund these acquisitions with sales of older and less attractive assets in CA, as well as develop new assets through JV arrangements with partners that have an on-the-ground development presence in markets where EQR does not. Taken together, it is encouraging and bullish that management is more aggressively recycling and deploying capital towards external growth opportunities
- We think that it is likely that FY21 guidance remains conservative and that additional raises are forthcoming driven by better rate-driven top line growth, and will be updating our model following the 10-Q filing
- We are attaching our 2Q21 model variances as well as GIP Quad backtests
Figure 1: EQR 2Q21 Earnings Variances
Figure 2: EQR Quad Backtest
Figure 3: Quarterly Expected Value by Quad (Quad 3 in RED)
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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