In a growing market, with multifamily firms watching rents and revenue rise across the board, there was some feeling that expenses may rise as well in the first quarter. But the publicly traded REITs reported that that wasn’t an issue.
In fact, the strong rental market was one thing that pushed expenses down. Birmingham, Ala.-based Colonial Properties Trust saw first-quarter revenue rise 2.4 percent, but expenses were down 1.8 percent compared to the same timeframe last year.
“The expense decrease is primarily due to lower churn cost, advertising, taxes, and insurance expenses,” says C. Reynolds Thompson, CFO for Colonial during the conference call, according to a transcript provided by SeekingAlpha.com. “Turnover has improved 420 basis points over last year mainly because of the reduction in resident transfers within the portfolio.”
At the end of the quarter, Colonial’s physical occupancy was 96.1 percent and move-outs were at 13 percent. “We had an unusually low turnover number in the first quarter,” Thompson said, according to the SeekingAlpha transcript. “So we were able to create some benefit with lower turn costs. Our average turn cost per unit in the first quarter was $310. That was over $100 per unit less than a year ago. It [was] just kind of a perfect storm. We were able to do a lot more in-house because of the way the notices and turns were flowing through the quarter.”
Expenses Likely to Grow
Chicago-based Equity Residential said its main expense categories—real estate taxes, on-site payroll, and utilities—followed plan in the quarter. The company expects to be towards the bottom half of its plus-1 percent to plus-2 percent guidance range for expenses. “On the real estate tax side, we budgeted flat, and we may end up being down,” said Mark J. Parrell, executive vice president and CFO of Equity Residential, according to a transcript provided by SeekingAlpha.com. “We continue to have very good success on appeals, even better than we had expected. And if this pattern persists, we may see some unexpected benefit in that category.
Even Colonial, which made tremendous strides in expenses, ultimately expects them to grow as the year progresses, as same store property costs go up 2.25 percent to 3.75 percent, driven by utility and property taxes.
Palo Alto, Calif.-based Essex Property Trust saw operating expense move up around 3 percent in the quarter. With Prop 13 locking property taxes in at a maximum of about 2 percent, the company expects labor to jump up 3 percent to 4 percent and utilities to move about 6 percent. “The only category of expense that I think we’re very concerned about is utilities,” said Michael Schall, Essex's CEO and COO on the company’s first-quarter call.