Equity Residential Earnings: Higher Leasing Commissions and Net Bad Debt Cause Small Revenue Drag

No-moat Equity Residential EQR reported third-quarter results that were mixed compared with our estimates, though we didn’t see anything that would materially change our $87 fair value estimate. Same-store occupancy improved 10 basis points sequentially to 96.0%, which is slightly better than our 95.9% estimate for the quarter but is 40 basis points below the 96.4% figure the company reported in the third quarter of 2022. Average rental rates improved 5.0% year over year, better than our 3.8% estimate. However, while the blended re-leasing spread was positive with rents 1.6% higher than prior rent terms, rents to new tenants declined 3.2% compared with the prior rent. Additionally, higher leasing concessions in the quarter reduced revenue growth by 40 basis points, leading to same-store revenue growth of only 4.1%. Same-store operating expenses were up only 3.1%, leading to same-store net operating income growth of 4.6% that was relatively in line with our estimate of 4.8% growth. Equity Residential reported normalized funds from operations of $0.96 per share in the third quarter, a penny better than our $0.95 estimate and 4.9% higher than the third quarter of 2022.

The company recorded higher net bad debt—which is the company writing off unpaid rent as being uncollectable—in the quarter, and it caused a 30-basis-point drag on same-store revenue growth. However, while net bad debt is higher compared with the third quarter of 2022, gross bad debt has consistently fallen through 2023. Equity Residential reported $9.0 million bad debt in the third quarter compared with $9.5 million in the second quarter and $13.5 million in the third quarter of 2022. The difference is that government rental assistance programs were in place in 2022 but have since expired, leading to the net figure rising even though the gross figure is falling. Therefore, while same-store revenue was lower than we anticipated, we view the decline in gross bad debt as evidence of healthier tenants.