Why Are Equity Residential’s Expenses Rising?

Revenue and expenses generated in 3Q17

The company’s revenue in 3Q17 increased by ~3% backed by strong growth in rental income, while its expenses grew by ~2.4%. Real estate taxes formed ~41% of the total expenses, while on-site payroll formed ~22.5%. Same-store expenses were up 1.7% in 3Q17 because of the increase in payroll, utilities, and property tax.

Why Are Equity Residential’s Expenses Rising?

The increase in property tax was considerably less than the company’s management expected due to favorable results on various property tax deals. Payroll expenses have been increasing due to wage pressure to retain employees in the competitive market.

Reduction in leasing and a decrease in advertising expenses like reduction in gift cards led to the fall in expenses on a quarter-over-quarter basis.

Expected expenses for 4Q17

Expenses are expected to increase in the future. Payroll is expected to grow by 6% for 2017. This higher estimate is on account of the higher amount required for employee medical insurance and workmen’s comp claims.

Growth estimates for property tax for the full year are at 3.4% compared to the previous estimate of 4% to 4.5% due to the property tax deals. This reduction led to a slight decrease in the growth estimate for total expenses from the previous range of 3.3% to 4.0% to the current 3.2%. The increase in debt led to an increase in interest expenses, thereby reducing the FFO expectations by $0.02 per share.

EQR also plans to invest in LED lighting for energy conservation, which would increase its utility overhead expenses. The company is trying to mitigate this increase in expenses by locking in the future natural gas price, which will help in adding significant discounts in future years.

Below are the operating and pre-tax ratios of EQR and its peers:

  • Equity Residential (EQR): 19.0% and 19.4%
  • AvalonBay Communities (AVB): 28.1% and 41.7%
  • Camden Property (CPT): 16.5% and 17.2%
  • Essex Property (ESS): 23.5% and 40.7%

Equity Residential makes up 7.3% of the iShares Trust iShares Residential Real Estate ETF (REZ).