We have been monitoring presentations from a competitor conference, and wanted to highlight Best Idea Long EQR's comments as particularly meaningful/bullish with read-across implications for fellow Best Idea Long AVB, which has higher relative suburban exposure but significant geographic overlap:
- Current spot rents portfolio-wide are trending up +30% since January 1st, demand is "very high," and same-store revenue growth is on track to meet or slightly exceed guidance presented in July. Our money is on exceed outright.
- This perked our ears up the most - "We see 2022 as a year of acceleration... and we believe the company is going to post the best numbers in its history in terms of same-store revenue growth." Given the importance of ROC for both absolute and relative stock price performance, we feel VERY comfortable with our Trade/Trend/Tail positioning on EQR.
- Current loss-to-lease (equivalent to mark-to-market) is +16%, moving down slightly by year end due to seasonal factors, which is fantastic for a shorter lease duration REIT in an inflationary environment.
- Monetizing older, usually mid-90s vintage California assets (regulatory challenges, taxes, property specific issues) and recycling that capital into acquisitions in markets like Denver, Austin, Atlanta and Dallas. EQR will also likely trim older non-core assets in Manhattan/Brooklyn. The portfolio will remain overweight Coastal Gateway markets, but reading between the lines we expect a gradual re-weighting towards new frontier markets. The goal is to create a company with 11-12 markets and a 60/40% urban/suburban weighting over time.
- Interesting comment on frontier markets - the Dallas and Atlanta of ~15 years ago were not markets EQR wanted to own in. Over that time there have been significant changes in those markets obviously - a shift to higher-quality jobs like Microsoft's campus in Atlanta and State Farm in Dallas, higher quality renters, improving single family home markets, much lower relative political risk given the rise in the main Coastal Gateways, and additional resiliency.
- Selling assets at mid-3% cap rates and buying at essentially equivalent cap rates in frontier markets, just with higher long-term IRRs while holding onto the highest-quality assets in the existing portfolio.
- As an aside on New York - "We don't particularly like the regulatory climate in that particular town." Long-term negative read-across for the NYC CBD Office REITs as well. At the same time, multifamily market asking rents in New York are showing the steepest upward trajectory right now.
We are working to update our AVB and EQR models smartly and will have other notes out shortly, but in general we think FY22/23 numbers are too low which was the genesis for our Best Idea Long calls last week.
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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