Expense control is important for REITs
Residential REITs undertook several strategic initiatives to maintain their leadership in the industry. Due to a demographic shift in the US to Class A cities, residential REITs are also repositioning their properties in order to benefit from this shift.
In order to maintain the competitiveness of their properties, REITs have undertaken several redevelopment and maintenance initiatives for their apartments. All three REITs reported higher NOI (net operating income) during the quarter. However, although AvalonBay foresees higher expenses in the upcoming months, EQR and ESS expect income to rise due to lower operating expenses for the rest of the year. Let’s have a look at how these residential REITs managed their expenses in 2Q17.
Equity Residential’s income may go up in fiscal 2017
On a same-store basis, EQR’s NOI rose 1.3%. Higher taxes in Boston, Seattle, and New York drove the company’s real estate taxes higher by 5%. Operating expenses rose 3.4% mainly due to higher leasing and advertising expenses.
EQR expects leasing and advertising expenses to fall 6% during the quarter, which is expected to elevate the company’s net operating income. EQR has raised its NOI growth guidance for fiscal 2017 by 1.3% compared to the 1% expected previously. Same-store expenses for its real estate are expected to be between 4% to 4.5%.
AvalonBay expects higher expenses
AvalonBay, however, expects higher expenses in the future. Repair and maintenance costs along with higher bad debt and professional fees will push up overhead costs in the upcoming months. As a result, NOI is expected to fall $7 million during the quarter.
The company reported net operating income of $367.1 million in 2Q17, which came in higher than the figure last year by 8.1%. The growth in NOI was mainly driven by the North California region and the metro New York region. Among the categories, AVB’s development/redevelopment communities reported the highest NOI growth during the quarter. Operating expenses for established communities rose 3.5% to $117.4 million mainly due to higher expenses in the Pacific Northwest region.
ESS also expects higher income in fiscal 2017
ESS reported NOI growth of 4% during the quarter. Although operating expenses rose 8%, higher revenue mitigated the effect of higher costs. The company’s Seattle Metro segment reported the highest operating expenses during the period.
The company expects lower expenses during the quarter. As a result, it tightened its same-property expense growth from 2.5% to 2.9%, thus decreasing the midpoint by 30 basis points. Thus, NOI is expected to grow in a range of 3.3% to 4.6%. The midpoint of this guidance is 30 basis points higher than what was expected previously.