Equity Residential (EQR 0.88%) is one of the U.S.'s largest apartment landlords. The real estate investment trust (REIT) has investments in 311 properties with more than 80,000 units across most of the country's largest cities along the coasts. While apartment demand in high-cost coastal cities suffered during the early days of the pandemic as renters moved to cheaper suburban areas, they're starting to come back in droves. That's evident in the apartment REIT's first-quarter results.
A faster-than-expected recovery
Equity Residential's normalized funds from operations (FFO) soared 13.2% year over year in the first quarter. The residential REIT benefited from strong demand for apartments. Physical occupancy improved from 95% in the year-ago period to 96.4% in this year's first quarter. Meanwhile, comparable lease rates rose 4.2%. Those factors drove same-property revenue up by 7.8%, while same-property net operating income (NOI) jumped 10.7% as the company kept a lid on expenses despite rising inflation. The REIT also benefited from recent acquisitions of apartments across faster-growing cities in the Sun Belt region.
"We delivered very good revenue growth in the first quarter," stated CEO Mark Parrell in the earnings press release. He noted that this was "driven by lease rates that accelerated faster than we expected due to exceptionally strong demand." This improvement more than offset higher-than-anticipated levels of new delinquency in Southern California, as some tenants stopped paying rent so they could apply for more rent relief.
Coastal markets are recovering
The company's management team discussed the current state of the apartment market on the accompanying conference call. Chief Operating Officer Michael Manelis stated:
We are pleased to report that we are seeing pricing power ahead of our expectations. Strong demand is being driven by the desire of affluent residents to live in our well-located properties, both urban and suburban. We have talked in previous calls about the recovery in our business being connected more to the lifestyle that our residents crave and less to how many days workers are expected to be in the office and that pattern continues.
He noted that tenant turnover was the lowest in the company's history during the quarter. Because of that and the overall high occupancy levels, rental rates on renewals are at record levels, averaging 11.9% in the first quarter. They continued rising in the second quarter, with April renewals averaging 12.5% above prior rental rates. Meanwhile, new lease rates are even stronger. They grew 15% in the first quarter and are up 17.5% in April.
Manelis also noted that the New York market "continues to thrive and was our best performing market in the first quarter." He said "demand is robust," and it's not having any trouble attracting new tenants willing to pay higher lease rates as existing ones move out.
He also commented that Boston and Seattle remain strong. The former is benefiting from the reopening of big college campuses, the return of international students and workers, and strong demand drivers from the life science, financial, and education sectors. Meanwhile, the Seattle market is benefiting from booming job growth at Amazon, and Microsoft's employees returning to the office.
Equity Residential's California markets are also performing well. Google has asked workers to return to the office, which, along with its $3.5 billion investment in the state, has helped boost apartment demand in Northern California. Meanwhile, most of its southern California markets are benefiting from the fact that home prices have risen "out of reach for many of our residents," leading them to continue renting.
Finally, the company's expansion markets (Denver, Dallas, Austin, and Atlanta) are all performing well. In Denver, occupancy is up to 98%, helping drive 13% revenue growth as it benefits from very good pricing power. Atlanta, Dallas, and Austin continue to see more people and jobs migrating to those cities, driving strong rental growth rates.
These strong market conditions lead Equity Residential to believe that it will generate excellent cash flow growth this year. The company is heading into its primary leasing season, suggesting the next couple of quarters could produce stronger growth, providing it with momentum through the balance of the year.
Big cities are bouncing back
There were some questions about whether the pandemic would significantly affect apartment demand in large coastal cities. However, as Equity Residential's results suggest, demand has recovered sharply. Meanwhile, with large employers calling their employees back to the office, apartment demand should remain strong, which could push rental rates even higher.
That should benefit Equity Residential and its investors. As the REIT's apartments generate more income, it should grow the company's value for shareholders. That makes it an intriguing REIT to play the recovery of America's largest coastal cities.