Marty McKenna:

Good morning, and thanks for joining us to discuss Equity Residential's Second Quarter 2024 Results. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer; Alex Brackenridge, our Chief Investment Officer, is here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.

Michael Manelis:

Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review our second quarter 2024 operating performance as well as provide some highlights of our increased same-store operating guidance. As you saw in our release, our overall operating fundamentals remain healthy, driven by good demand across our portfolio and a strong renewal process that resulted in low resident turnover and strong occupancy of 96.4% for the quarter. As Mark mentioned, we are benefiting from what we see as a solid job picture across the country keeping our residents well employed with growing wages as well as very little competitive new supply in our established markets. The rent-to-income ratio on new move-ins during the quarter remained stable at around 20%. Not surprisingly, we are also benefiting from a very low percent of our residents moving out to buy homes. About 7.5% of our move-outs gave bought home as the reason. This is the lowest number we have seen in any given quarter. That, along with the benefits of our centralized renewal process, has made our year-to-date results on renewals, both in terms of the volume of residents renewing and the achieved renewal rate increases, a key driver to our outperformance. As has been the case for a while now, our East Coast markets are the best performers with occupancies around 97%. On the West Coast, Seattle is performing particularly well, and San Francisco is showing improvement but not quite at the pace of Seattle. Our Southern California markets have good demand, but are feeling some pressure on pricing. In our expansion markets, we continue to feel the impact of new supply as expected, but have been able to maintain occupancy at or above 95% given the strong demand in those markets. Overall, we continue to see improvements in the eviction process times as the court systems work through their backlogs and the number of long-standing delinquent residents continue to decline. This trend continues to support our view that we will see overall improvement in bad debt net contribute 30 basis points to our same-store revenue for the full-year. Given all of these trends, we have revised our full-year same-store revenue guidance midpoint to 3.2%, which includes an assumption of seasonal moderation in both new lease and renewals and a normal decline in occupancy later in the year. Now a little more color on the individual markets. Starting in Boston, the market is performing in line with our expectations, which assumed that it would be one of our best markets in 2024. Occupancy is holding strong amidst the highly seasonal summer leasing months as compared to past years when we often saw a declining occupancy as residents churned in and out more frequently. Overall, strong retention in the second quarter, along with continued new lease growth, has positioned us well as we finish the primary leasing season. We are seeing good performance in both our urban and suburban portfolios here, but the urban portfolio produced stronger results in the quarter. The market has a stable employment picture and little new competitive supply being delivered in 2024. New York continues to perform very well. We think this market probably has the best supply-demand dynamics in the country for the next couple of years. We're over 97% occupied, with both new leases and renewals coming in better than expected. Overall, the economy in New York feels healthy with a solid and increasingly diversified employment base. In fact, the private sector employment in New York is at an all-time high. All indications are that this market will continue to show strength through the remainder of the leasing season. Washington, D.C. continues to be a real standout performer for us in 2024. The market is over 97% occupied and showing great rental rate growth. Demand feels good across all of our submarkets, and we expect this to continue, but we will be keeping an eye on new supply deliveries in the back half of the year as we have felt isolated periods of pressure in the central D.C. submarket. In Los Angeles, a generally stable employment picture is leading to good demand in the market. Traffic and applications are up, and our second quarter occupancy, while slightly below where we wanted it to be, is up 70 basis points from the second quarter of 2023. During the quarter, our new lease change was negatively impacted by some concentrated new supply in Hollywood Mid-Wilshire as well as some shadow supply coming into the market in downtown and West LA submarkets from evictions. Our suburban deals in Ventura and Santa Clarita, which did not experience this, are leading the pack. We are already seeing marked improvement to the new lease change in the third quarter, but we expect this stat to continue to be volatile as the market works through filling these units, which remains a catalyst to our revenue growth. Rounding out the rest of Southern California, San Diego and Orange County are continuing to see good demand, but we are seeing some price sensitivity with residents willing to move further out in these markets for affordability reasons. Now for the markets that may be of most interest, San Francisco, Seattle and our expansion markets of Dallas-Fort Worth, Denver, Atlanta and Austin. San Francisco and Seattle continued to perform better than expected, with Seattle outperforming the most. Remember that we entered the year with relatively modest expectations and the potential for upside in both of these markets. In San Francisco, demand feels good right now, and we are seeing some of the best weeks in terms of traffic and application volume. We continue to see really positive signs in the downtown submarket in regards to the quality of life issues. Property crime is down, and the city's nightlife scene is thriving. Recent reports that Salesforce is pushing harder on return to office should have a positive impact on the city. Looking forward, there is little new supply coming to the market. Overall starts are way down, and there have been no new starts of competitive products for the last three quarters, which supports improving conditions for the next couple of years. As I mentioned earlier, Seattle is really showing signs of recovery. Occupancy is 96.2%. Our renewal performance remained strong. We're feeling good about both the quality of life issues in the market as well as tractions in places like South Lake Union from the return to office at companies like Amazon. The tech employment here looks solid as we see more postings for positions in both the city of Seattle and the Bellevue, Redmond area. And looking at our migration patterns, we are also seeing more people come to us from the farther out suburbs, which is an additional demand driver to our assets. Also, we expect our large concentration of properties in Central Seattle to benefit from a newly completed $800 million infrastructure project that better connects Downtown to the waterfront and created a spectacular new park for our residents to enjoy. We are excited to join in the effort to enhance Downtown Seattle with our newly completed $8 million improvement of the Staircase Plaza at our 761-unit Harbor Steps Apartments. Our steps and the associated new retail there are another way to connect the city down to the newly activated waterfront park. At this point, the Seattle market is positioned to do well, but there is supply coming later this year, and we need to see if the demand and pricing holds through the third quarter. Switching to the expansion markets. There's really no surprises here. We continue to see demand, but it's a challenging operating environment for both new leases and retention given the amount of new supply. Right now, the pressure on new leases makes renewing residents the number one priority in these markets. Overall, the expansion markets are performing in line with our expectations, with Dallas and Denver leading the way. Looking forward, we're excited to grow our portfolio and create operating scale in these markets that continue to demonstrate long-term demand from our target affluent renter demographic. And finally, on the innovation front. This past quarter, we began testing a new AI resident assistant that we anticipate could handle 75% of general resident inquiries, including the ability to help residents triage basic service requests and then automatically submit those that require a visit from our service members. In addition, we continue to see promising results with a self-guided tour experience app that increases tour availability to meet the needs of our prospects. We are very excited about these initiatives as they will continue to create future operating efficiencies, while providing a more seamless customer experience. I want to give a shout out to our amazing teams across our platform for their continued dedication to innovation, enhancing customer service and their exceptional disciplined approach to expense management. With that, I'll turn the call over to Bob.

Operator:

Thank you. [Operator Instructions]. Your first question comes from the line of Eric Wolfe with Citi.

Michael Manelis:

Hey, Eric, this is Michael. And I guess I'll just start out. I'll give you a little bit of color. So first and foremost, I think specific to the third quarter, right now, we expect very stable kind of achieved renewal rate increases around 4.5% and slight seasonal moderation of new lease change. We do have a little bit of an easier comp in September from the declines that we saw last year. So it may hold up a little bit better than expected, but we didn't include kind of a lot of that in the initial forecast right now. Overall, for us, I think the key takeaway should be that we originally modeled kind of this full-year blended rates to be about 2%. And right now, we're expecting them to be closer to like the mid tubes. And a lot of that is going to depend on the mix of the renewals and new lease transactions, both in the third and fourth quarter. But if we just look at the snapshot today, I mean, the portfolio is over 96% occupied, our application volumes remain solid, and our net effective pricing trend curve is more in line with a normal year as compared to the slightly muted curve that we initially modeled. So I think right now, we feel like we're in a really good spot for July and all of our dashboards, all of these metrics just point to kind of normal seasonal deceleration curves both in the third quarter and fourth quarter.

Michael Manelis:

Yes. I mean I think specific to LA, so first and foremost, right, we were focused on the occupancy build. We mentioned that on the last quarter call that we were doing some concessions. We were able to see a year-over-year lift in occupancy of about 70 basis points. And the new lease change in LA, it was less than what we anticipated by staying negative in the third quarter. And a lot of that was really based on the impact that we saw in new supply in some key submarkets of Hollywood Mid-Wilshire in Downtown. So I think when we think about the LA performance for us and like the recovery, clearly, we have upside built in for us. I still think for the balance of this year, we're going to continue to feel some of the pressure from the supply in those isolated submarkets. The start numbers are materially down, so that bodes well for future year performance. So in my mind, I think you should just expect as we continue to work through this year and get ourselves into next year for 2025, we're going to have some upside potential on the recovery. But we really like the total revenue story right now because we are filling these units with paying residents. So despite the new lease change stat that you kind of see being a little softer in the third quarter, the total revenue is still producing a pretty strong number for us.

Operator:

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Michael Manelis:

Yes. So first, I think the renewal performance through the quarter has been pretty stable for us right around that 5% mark. And I think as we look at the third quarter, like I said, we have a lot of confidence right now. We have quotes out in the marketplace for the next 90 days that range between like 6.5% and 7%. We're negotiating still a little bit more than norm, and we think this kind of slight bias towards occupancy, clearly, in some of like the expansion markets and even like the LA market that I just discussed, makes sense for us from a total revenue standpoint. So I think we expect, even as we work our way through the third quarter, pretty stable renewal performance results and we'll achieve somewhere right around that 4.5% mark.

Alexander Brackenridge:

Hey, Steve, it's Alex. And you're right, we're pricing things that are generally say, newer -- or new product in say an $80 million to $120 million price range, typically in the suburbs and what we've been buying has been our expansion mark that around a five cap. And when we filter in relatively -- some slightly negative rent growth in the first year, offset by some operating platform improvements, flat year two and then a recovery in year three, which may be 5% for the next couple of years. As you're into -- half of '27 and half of '28, you're getting to a number that's around an eight. And that's a deal that works for us and fits within our cost of capital.

Operator:

Your next question comes from the line of Adam Kramer with Morgan Stanley.

Michael Manelis:

Yes, Adam, this is Michael. So I think I would just start by saying, as we think about the new lease change performance in the expansion market. So far, there's nothing that's really surprised us. I mean what you're seeing today is that we have a lot of former residents moving out that never received a concession. We're averaging anywhere between like 35% to 50% of applications receiving about six weeks. That's what's driving some of that new lease change. And I think as we think about the balance of the year and the seasonality, the interesting thing about these markets is that, one, they definitely demonstrate a little less demand seasonality, meaning that they don't drop off in demand quite as much as some of the shoulder -- in the shoulder seasons as some of the coastal markets do. So I think we have this opportunity that we could just kind of stay in the zone that we've been in. But we expect challenging operating conditions in those markets for the balance of the year. You can look at the new supply that's coming in. You look at kind of how we're balancing the trade-offs between occupancy and rate. And I think we just expect that we're going to be in this place for the next couple of quarters. I don't necessarily forecast that we're going to see marked deceleration from this point forward. But I think we would clearly expect to have difficult operating conditions for the balance of the year.

Michael Manelis:

Yes. The other thing, I guess, I would just add besides the read through to a broader market is not our numbers is that a lot of the assets we own are brand new in the areas where a lot of the new supply is being built. So that's why we kind of say we expected those difficult operating conditions. But again, it's playing out kind of like we expected.

Adam Kramer:

Great. That's really helpful. And I thought the blended rate for established market disclosure that you guys added this quarter relative to the kind of whole portfolio. I thought that was really helpful in just kind of showing the impacts of these markets. Maybe just -- and sort of to be fixated on supply here, but I think you guys had some interesting color on kind of the Seattle supply cycle maybe hitting a little bit later this year. Just wondering kind of among the established markets. Is this the market that you kind of have -- you're watching most closely in terms of supply? Are there others that maybe have a similar cadence in terms of deliveries maybe later than later peak than the national peak in terms of deliveries?

Adam Kramer:

Great. Thank you so much for all the color.

Josh Dennerlein:

Hey guys. Mark, just wanted to follow-up on a comment you had in your opening remarks on podding of the Dallas and Atlanta acquisitions. What kind of uplift do you expect from that podding effect versus that I think year 1 underwriting of, call it, 5%? And then does that podding effect assume additional properties in those clusters?

Mark Parrell:

And just to elaborate -- it's Mark on that. It depends on where the asset is. In some cases, we're buying assets that are a ways out from what we have in contemplation or own already. So if it's an asset that's nearby, for example, in Central Atlanta, we own assets in Midtown already. And so owning more of their shared services are an obvious play. We bought assets in the Northeast quadrant of the suburbs. That asset is a little further out. There isn't as much shared service opportunity there. So it's a little bit asset by asset as well.

Mark Parrell:

So I'm going to start, and then Bob may elaborate on this. So a little bit right now with inflation tailing off, I really thought about margin expansion more in terms of just blunting the rate of inflation in our expenses. Right now, I think what technology is allowing us to do is really harvest expense savings and not sacrifice on the service side. Michael Manelis has spoken to this, we're really shifting more to our revenue focus. So I think you're going to see us talk more about ways that we can provide additional services to our residents or be more efficient on that revenue line as opposed to just simply continuing to screw down expenses. There will always be opportunities there. But I think we're getting to a point on expenses where there's probably more opportunity on the revenue line for a bit. I don't know, Bob, if there's anything you'd add on the margin side there?

Mark Parrell:

There's just a number of ideas that the group has that we're testing is the highest number we've ever seen. So just when you think about both expense and revenue opportunities, there's a lot of open experiments. And one of the great things about our platform is we can test it on three or four assets. If it works well for us and for our residents, we can roll out. And if it doesn't, well, that's fine, we'll go on to the next idea. So I think that's what's exciting about where we sit in our journey.

Anthony Paolone:

Yes, thanks. Just to follow-up on the OpEx side there. So given all these initiatives, do you think we are back to a 2% to 3% expense growth range for the next couple of years?

Robert Garechana:

And we do have some -- like Mark mentioned, this year, we had some step-up in 421-A. We will continue to have some more step up. But I think what we can kind of endeavor or what we do endeavor to promise is depending on the context is if inflation is X, we endeavor to perform the best we can at X minus, right? And so that's what those initiatives will do, and we continue to pressure Michael to deliver.

Mark Parrell:

Yes. Thanks, Tony. There's a few things in that, so I'll try and go through it. But first, directly, when you have a year like this with the California ballot initiative, you're going to see a lot more spending. So this is going to be much more akin to 2018, 2020 levels of spend on our side when we fought and successfully fought off valid proposals with the rest of the industry on rent control in California. So I would expect that number to be $10 million or more this year, and that's what's sort of contemplated in the numbers. There's a Reg G sort of reconciliation towards the back, but that's in there and that's something we would expect. And a lot of that spend will occur in the third quarter in contemplation of course, of the election in November in California. So a lot of the regulatory effort right now for the industry and for our company is focused on California. It is something we've beaten off two prior occasions by more than 20 points. So voters, I think are very sophisticated in hearing the arguments against rent control. I think it's really interesting in California that the forces of anti-housing, the people who don't want a single unit of housing built in places like Orange County love this measure, know that rent control means less production of housing. And I think people in California see that. So we're optimistic we can, again, help educate the voters in California and win on this measure again. In terms of federal versus state, I think there's just more activity that's more relevant at the state level. State and local is where most of our focus is. We did think that the President's statement about rent control is not productive. We talk to a lot of people in the administration, and a lot of those conversations are much more constructive than that sort of directly political proposal that came out that we think isn't going anywhere, but it's not helpful. So I do think most of the effort here is on the state and local side. We certainly are working with the two candidates for President, trying to educate staffs and talk to them about the opportunity to encourage supply at the federal level. And that that's something constructive the federal government can do. And so that conversation is ongoing with both the Harris campaigns and the Trump campaigns. But that's a focus on the federal side more is educational. On the states, it's both electoral and educational.

Mark Parrell:

Thanks, Tony.

Michael Goldsmith:

Good morning. Thanks a lot for taking my questions. With the increase in the occupancy guidance, does that reflect stronger demand or an intent to lean more heavily into occupancy in the back half of the year? And related to that, can you talk about which markets maybe where you're seeing occupancy build versus those where you may be pushing rate? Thanks.

Michael Goldsmith:

Thanks, and as a direct follow-up, you talked about kind of like the expectations for a normal seasonal back half of the year. So if you take the blended spread expectations, it looks like it -- you took it from two to maybe the mid-2% range and assuming a typical seasonal year, like should we be thinking about the earn-in as we sit today for 2025 is 1.25%. And within that, like what are the factors that could change that over the coming months?

Michael Goldsmith:

Got it. In that case, can I ask another question in that, right, like the NOI guidance grew by or moved higher by 145 basis points and the FFO guidance grew by 100 basis points. So can you just walk through some of the moving pieces in overhead and other that may have limited the flow through during the period?

Michael Goldsmith:

Thank you very much. Good luck in the back half.

Operator:

Your next question comes from the line of [indiscernible] with Green Street Advisors. Please go ahead.

Michael Manelis:

Hey David, this is Michael. So we've looked at the data going all the way back in time between these spreads, and it's not uncommon for the spreads to be 300 to 400 basis points different from each other, clearly, looking at the second quarter. I do think you're going to see a little bit of tightening in that spread going forward. I think with a little bit of that moderation of the renewals, just based on kind of where pricing is today in the marketplace, you'll see a little bit of that compression. But I don't think they're going to be sitting right on top of each other because it's fairly normal for us to maintain a spread between those two stats.

Michael Manelis:

Yes. So I think first, let me just explain that. At the beginning of the year, our portfolio was in a moderate gain to lease position. We're about 60 basis points gain. And since then, we've seen that pricing trend sequentially tick up and follow kind of a more normal rent seasonality curve. And it's put us back into a loss-to-lease environment. As of the middle of July, our loss-to-lease in the portfolio was negative 3.6%. It's a little bit less than kind of what you would have saw in historical years, but a lot of that is just due to the expansion market pricing as well as kind of what we were seeing in the Los Angeles market. I do think it's important for everyone to remember that gain to lease, it's just a snapshot like point in time where you mark all leases in place to the market, and they don't directly translate into like a full-year revenue number growth. A lot of that has to do with the timing of who moves out. But again, I'm going to reiterate kind of what I said before, which is when I snapshot the portfolio sitting at the end of July today, we like the position we're at both from a pricing trend, from an occupancy, from an application volume. And even with the loss-to-lease at 36, we feel like we're in a really good spot for late July to deal with kind of the balance of the year.

Operator:

Your next question comes from the line of Nick Yulico with Scotiabank.

Michael Manelis:

Yes, Nick, this is Michael. So I haven't seen anything right now in our numbers. For us, when we're looking at kind where the residents are coming to us from, the industries, I don't have an overly heavily concentrated kind of bucket that says I'm tied to like the studio activity. I think there's a lot of peripheral jobs that are all dependent upon that activity of the studios. But right now, the demand actually feels pretty good for us in L.A. What we're dealing with right now is that you have a lot of what I would say is the shadow supply occurring in the market, where units, not only in our own portfolio but in all the properties we compete against getting through the court system, getting through the eviction process. And that's really just bringing additional supply to the market. So you look at demand, you look at the fact that the occupancy is holding strong, 95.5%-plus. There's demand in the marketplace. It's just that you've got a lot more units coming into that market through this eviction process. And I think you just got to give it another couple of quarters for us to work through the absorption of those units.

Alexander Brackenridge:

Hey Nick, it's Alex. It really depends where you're underwriting that opportunity. In the expansion markets, as I said, most people are slightly negative and flat the first couple of years and then seeing a pop as supply goes away. In a more urban setting, say, in San Francisco, where there's still some recovery coming, it's a different underwrite, but probably starting at the same cap rate. There haven't been a whole lot of trades, but there are deals on the market right now, and my understanding is they're probably going to trade for a round of five. And that buyer is expecting better things coming. They're not seeing the supply issues, obviously, that we are in the expansion markets, but they're expecting that the city continues to improve and that rent growth is a little outsized for the next few years. So -- however you slice it, it does seem like the magic number is a five right now. And that number works well for us. We're going to be active both on the acquisitions and disposition side.

Operator:

Your next question comes from the line of John Kim with BMO Capital Markets.

Robert Garechana:

Hey John, it's Bob. I'll start with kind of the monthly commentary, and then I'll pass it off to Michael to give trends. And to be honest with you, while your inference is not incorrect based on the information you have, one of the challenges of producing these monthly numbers, particularly when they are interim numbers, which is where you would have gotten those or that inference for June is that they were interim and the final was different. So if you actually peel back the onion and looked at the quarter monthly-by-monthly, June was our best number on new lease and on blend. April and May were slightly lower, which is very typical and very normal. But it is -- it gets confusing when you're producing these monthly numbers that are preliminary that change over time, which is one of the reasons why we don't think it's helpful to provide that degree of disclosure when you're not in meaningful inflection points. So -- and that's why we're moving away from those. But to reiterate and answer specifically, June was actually the best month in terms of spreads on new lease and blend, and I'll pass it over to Michael on the outlook.

John Kim:

Okay. And then if I could ask about turnover, it went up a little bit, but still relatively low compared to where it's been historically at 11.7%. But can you discuss any differences between your established and expansion markets on turnover?

John Kim:

Great, thank you.

James Feldman:

Great, thank you. I guess sticking with the turnover topic, I mean, are there any markets where you're actually seeing an inflection point of turnover rising? And similarly, any markets where you can flag price sensitivity more than others or an inflection point in price sensitivity more than others. Kind of tying into some of the comments INVH made on their call that there are some markets where they're seeing a change.

James Feldman:

Okay. Thanks for that. And I appreciate your comments on the political environment. But I guess just sticking with D.C. specifically, and it sounds like either way, we're going to have a change in administration. Just historically, how does that market tend to trend around a Presidential election around a change in administration just in terms of demand? And what should we expect to see on the occupancy side?

James Feldman:

So you think it's pretty smooth, just through '25? Barring just normal...

Mark Parrell:

I think the federal government is a bit of a monolith. Keeps going.

Operator:

Your next question comes from the line of Haendel St. Juste with Mizuho.

Michael Manelis:

Yes. So first, concessions for us in the portfolio do remain concentrated in the West Coast, and it's really Downtown San Francisco, the City of Seattle and Los Angeles. And for us right now, the volume of concessions in those markets it's really ranging about 15% in Los Angeles, just receiving under a month and in Seattle and San Francisco were more like 30% to 40% right around a month in those Downtown areas. So I think for us, we expect that the concessions are going to be stable here for the next couple of months. And then we do anticipate a little bit of an acceleration in the back half of the third quarter and in through the fourth quarter. And that's just kind of looking at what we've seen from a demand seasonality standpoint, where our expectations are. Our overall concession use did come in a little better than we expected. It was 25% lower sequentially from the first quarter and about 7.5% lower than the second quarter of '23. In terms of like the stats as to how to think about the third quarter there, we do have a little bit of an easier comp coming at us in Seattle and San Francisco. So my guess is the new lease stack could hold up a little bit better. Not a lot of impact on the renewals. We expect the stability there. And I think in Los Angeles, I don't anticipate a material change because like I said, the pockets that were feeling supply pressure, we don't anticipate that abating. And I think we're going to continue to work through some of the excess inventory from the eviction process, and that's going to take us through the year. So I just don't have a specific number I would give you for the quarter. I just think we've got different scenarios playing out across those markets.

Alexander Brackenridge:

Hi, Haendel, it's Alex. Yes, we did take a look at that portfolio. And no, we didn't end up with any of those assets. We were interested in a subset of the assets that KKR ended up taking down. So they included things that KKR wanted that we didn't want, frankly. So unfortunately, of, say, the 38 assets, there were about nine that were a good fit for us, and that wasn't a big enough chunk for us to prevail relative to KKR as a much bigger offer.

Operator:

Your next question comes from the line of Alexander Goldfarb with Piper Sandler.

Robert Garechana:

Hey, Alex, it's Bob. So we did take a charge that you can see on Page 27, it's about $9 million. A portion of it was from a commercial dispute, which was basically a dispute related to a brown lease. So a very unique bespoke situation that is not recurring in any regard. So that was a portion of it. And unrelated to that, on a separate asset, there was a construction defect that was identified at a property, and we took a reserve around that construction defect. We are pursuing the parties involved in the construction of the assets. So there is an opportunity in the future to potentially recover some of that. This isn't that uncommon to have these kind of small construction defect issues where you have a situation and then a few quarters later, sometimes years later, you recover that amount from the insurance company of the contractor or a builder or from them themselves. So -- but it's nothing systemic or nothing that is recurring in nature. There's just two unique situations.

Mark Parrell:

Alex, it's Mark. Thanks for that question. We're open to buying existing streams of income or open to developing assets. We'll do either, and we're doing both. But right now, our lean is towards the existing assets. We think there's still going to be quite a bit sold. You saw the comment I made about transaction volumes going up, a lot of nonnatural owners, just people that are developers that are in assets with shorter-term bank debt that we think are going to sell. And may not quite be at the fire sale price as people expected a couple of years ago, but there's still going to be good values compared to replacement cost, and we like that basis. There may be a play on development later. You may see more opportunities there. You've got construction cost issues. You've got execution issues all across the industry still. And you've got funding issues. I think development in a REIT is just very challenging at scale because you either have to prefund yourself and carry that cash to the detriment of shareholders or you have to go naked and hope that at the time you need the money, the capital markets are hospitable and you're able to raise it in an accretive fashion. So we like development. We like it up to a limit. And that limit usually is about what our free cash flow is, which is about $250 million a year. Because then we can sort of self-fund it and not worry too much about the external capital markets. So right now, again, the lean is towards the existing assets.

Mark Parrell:

Thank you.

Mark Parrell:

Well, thank you all for your time and interest on the call today. We appreciate it. Good day.

Michael Manelis:

Thanks, Mark, and thanks to everyone for joining us today.

Operator:

[Operator Instructions] And our first question will come from Eric Wolfe with Citi.

Michael Manelis:

Eric, this is Michael. So yes, I think one of the things you need to remember is that, relative to the first quarter in 2023, we are issuing more concessions right now. So that does impact a little bit of what you see in that new lease change. But clearly, when you just think about the normal rent seasonality curve, pricing trend or asking rents in the marketplace, we're seeing that sequentially build. And you're seeing that sequential improvement in kind of the new lease stats for April over March. So I think what you should expect for the next several months working our way probably even through the middle of the third quarter is that we will sequentially build new lease change up, and we will see that stability in kind of the renewal, achieved renewal increase performance. So you're right to call out that it's a little lower than norm, but right now we like the sequential improvement that we're seeing.

Michael Manelis:

Yes. And I think I called this out even on the first -- or the call in January, that we made a strategic decision to increase the concession use, build up that occupancy in the fourth quarter, and really have been just pulling back the concession use as we worked our way through the first quarter. The most pronounced reduction actually came out of San Francisco. I think the offset to that reduction is that we also started to utilize some concessions in LA. So when you think about the sequential change from the fourth quarter through the first quarter, our concession use ticked down a little bit but not as much as what it would have been if we didn't start increasing some of the usage in the L.A. market.

Operator:

And our next question will come from John Pawlowski with Green Street.

Alexander Brackenridge:

John, it's Alex. So there are a couple of factors at play there. One is -- and we talked a little bit about this last quarter, is leaning in more on some ROI projects, specifically renovations, some solar installations, some smart rent installations as well, and EV chargers. So there's some things that we can toggle up and down. They have ROIs on them, and they're discretionary. So that's in the mix.

John Pawlowski:

Okay. And then a question on markets. I mean, Michael or Mark, I guess, which markets when you're looking at just in terms of the absolute level of rents are you more concerned you're getting closer to hitting the affordability ceiling?

Steve Sakwa:

Michael, I was wondering if you could just provide a little bit more commentary on the San Francisco and Seattle sort of strengths, and whether you can determine are those kind of folks that are returning to the market? Are they just kind of moving around the Bay Area and Seattle? Just how do we think about that demand that's picked up in the drop in concessions?

Mark Parrell:

Yes, I'm just going to elaborate. It's Mark, Steve, I'd add a little bit. Again, we do see that improvement in Downtown San Francisco, but it's not yet the job growth we probably need to drive rents. But we're 14% or so below rent levels that we're pre-pandemic. So there's definitely room here. Incomes have gone up, as we've talked about on the calls.

Mark Parrell:

Steve, it's Mark. Thanks for that question. I mean we are still in active litigation, as you suggested in your comment or your question. So there's not a lot I can say. Just to give you a little background, this has been a case that's been going on for 10 years. About the amount of late fees, we just got a ruling from a judge that was adverse to our interest, so we adjusted the reserve. We are considering our appeal options. So to your point about adjustments, they could go up or down depending on our actions.

Operator:

And our next question will come from Josh Dennerlein with Bank of America.

Alexander Brackenridge:

Yes. Josh, it's Alex. In Seattle, we're 60% urban and 40% suburban. In San Francisco, it's the opposite of that. So we have a broader suburban exposure there.

Michael Manelis:

Yes. Josh, this is Michael. Yes, they're absolutely different. And again, this remains the story about kind of the City of Seattle and Downtown San Francisco is where we see kind of the least amount of pricing power, kind of lower occupancy. So the suburban portfolios are clearly outperforming the urban, and that's a trend we've seen for a while in those markets.

Operator:

Our next question comes from Adam Kramer with Morgan Stanley.

Robert Garechana:

Yes. Thanks, Derrick. It's Bob. I'll take that. Let me start because there's a few pieces driving this, but let me start on the same-store revenue front with the residential rental component. Our assumption for residential rental income is that we anticipate a year that is pretty normal, meaning that sequentially, we expect the blended rates to continue to get better until they seasonally decline in Q4. And so you're going to see that normal kind of robust growth pattern as you work your way sequentially through.

Derrick Metzler:

Got it. And anything on expenses, too? And the cadence there for the year?

Operator:

And we'll take a question from Michael Goldsmith with UBS.

Mark Parrell:

Thanks for the question, Michael. It's Mark. We generally look at this at the end of each quarter. And because we have so much disproportionate activity in the second quarter, that it makes sense to us that that would be the time to really look hard at this. It's a really volatile world, even more so than usual, both in the economic terms and every other term you could think of. So to us, it makes some sense to wait. We've got a few markets that feel like they're poised to recover, but Seattle and San Francisco specifically. And those have been a little bit -- markets with a little bit of volatility as well.

Michael Goldsmith:

And my second question is, you sold a couple of properties during the quarter, used that to buy back some stock, paid out some debt, maybe fund some of these development. Would you look to kind of continue to sell at the current piece? And does the fact that -- you did talk about how there's $200 billion of dry powder on the sidelines to reinvest into real estate, like would you continue to sell even if there is nothing to acquire?

Operator:

And our next question will come from Haendel St. Juste with Mizuho.

Mark Parrell:

Yes, we can now. Go ahead, Haendel, we can hear you.

Robert Garechana:

Yes. Let me -- Haendel, it's Bob. Let me clarify real quick. So relative to expectations, we had in our guidance expectations as we called out the straight-line receivable reversal as it relates to nonresidential. So there's no change to expectations.

Haendel St. Juste:

That was helpful. And then on -- a question on the second quarter guide here. Yes, a quick one on the second quarter guide. It seems a bit low versus what we and I guess the Street was expecting, especially in consideration with the rental dynamics you're enjoying. So curious if there's any one-timers impacting that. Anything in there from a dispositions perspective, anything moving the needle? Or is that a clean guide?

Operator:

And we have a question from Jamie Feldman with Wells Fargo.

Robert Garechana:

We typically don't provide that degree of guidance. But I would tell you in terms of the actual same-store kind of revenue piece, what I would tell you is that, sequentially, what you normally see between -- in same-store revenue is call it $0.02 to $0.03 -- or NOI, sorry, is call it $0.02 to $0.03 of sequential improvement in NOI between Q1 and Q2. And that's pretty much where we are on the residential side. But we're losing, call it, about $0.01 from the nonresidential piece. We're also losing about $0.01 from the overhead kind of sequential piece along with a handful of other things in the transaction activity that we mentioned. And that's why you're only seeing $0.01 improvement sequentially.

James Feldman:

Okay. Yes, that's very helpful. And then maybe thinking about your debt maturities in '25. You've got $250 million expiring, you're sitting on pretty low leverage at 4x debt-to-EBITDAre. You've got 8.25 preferreds out there. It sounds like you're slowing down the disposition pipeline. I mean what are your thoughts on just other investments, other uses of capital here? What do you think on the balance sheet side -- you probably just let things ride through year-end without any kind of meaningful changes of -- or debt pay downs or pay downs of any sort?

John Kim:

Mark, you mentioned $200 billion of dry powder, a lot of that focused in multifamily. At the same time, we have the Blackstone-AIR transaction. How do you think that's impacted pricing or will impact pricing on sales of either assets or portfolios in the market? Could pricing be more aggressive despite the recent rise in interest rates?

Alexander Brackenridge:

Yes, John, this is Alex. One thing that hasn't changed, although the rate environment is confusing to many investors, is the amount of product that's delivering, particularly in the expansion markets that we're excited about. And a lot of that just isn't capitalized to be owned for the long term. I mean it was merchant built in many cases. And we're eager to pursue that. We just need to come up with pricing that makes sense in the current rate environment.

John Kim:

On the rebalancing strategy, it sounds like you mentioned that pricing has slowed down those efforts a little bit. At the same time, you seem very encouraged by the political environment improving in San Francisco, Seattle and New York. Do those policy changes or anything new in data as far as net migration or any other items potentially reconsider your views on either the timing or the strategy of redeploying capital into the Sunbelt?

Operator:

And we have a question from Nick Yulico with Scotiabank.

Michael Manelis:

Dennis, this is Michael. So in my prepared remarks, I kind of gave you some clustering around the expansion markets concession use. Right now, for us, I would kind of cluster Denver, Atlanta and Dallas together with about 25% to 30% of our applications receiving right around anywhere between 4 to 6 weeks.

Unknown Analyst:

Follow-up question, maybe at a higher level for Mark. You talked about this in your prepared remarks, turnovers at historic lows is a real affordability benefit for the rental product versus homeownership. Just curious if you could share any high-level thoughts on how you see this dynamic evolving in the near to medium term? Could this in theory be a durable demand and profitability tailwinds over the next cycle?

Linda Yu Tsai:

Where are renewals going out in May?

Linda Yu Tsai:

Thanks. And then just on bad debt, there's going to be a 30 basis, I guess, contribution. What's the cadence of like that is as you move through the year?

Linda Yu Tsai:

Helpful. And then one last one. On the NYC housing laws, do you view that as more of a net benefit or a detractor for your apartments in that region?

Operator:

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mark Parrell for closing comments.

Operator:

Thank you and that does conclude today's conference.

Marty McKenna:

Good morning, and thanks for joining us to discuss Equity Residential’s fourth quarter 2023 results and outlook for 2024. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; Alec Brackenridge, our Chief Investment Officer; and Bob Garechana, our CFO. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.

Michael L. Manelis:

Thanks, Mark. This morning, I will review our fourth quarter 2023 operating performance and our outlook for 2024. We produced same store revenue growth of 3.9% and same store expense growth of only 1.3% in the fourth quarter, both of which were in-line with our expectations. On the expense side, our low growth in the quarter and full-year 4.3% growth were helped by modest property tax cost as well as the savings produced as we continue to roll out initiatives focused on creating operating efficiencies and a seamless customer experience. On the revenue side, the momentum in December was a little better than we thought as sequentially we grew revenue in the fourth quarter by holding onto more occupancy, while maintaining positive blended rate growth. This set us up for a good start in 2024. Demand was solid across our markets and consistent with seasonal expectations. We finished the year with same store physical occupancy at 96% as we focused on building up occupancy in the slower part of our leasing cycle. Today, the portfolio is above 96%. As expected, we saw new lease rates go negative in the quarter as they typically do. Meanwhile, renewal rates for the quarter came in at 5.1%, which was slightly above our expectations. Together, this resulted in a fourth quarter blended rate growth of positive 80 basis points. These healthy fundamentals led to outstanding revenue growth in our East Coast markets and good growth in Southern California. As has been the case all year, the East Coast markets outperform the West Coast and by and large will likely continue to do so in 2024. As you saw in our earnings release, we have provided 2024 same store revenue guidance range of up 2% to 3%. The building blocks for this growth starts with embedded growth of 1.4% and a midpoint assumption that both physical occupancy and cash concessions remain consistent with that of 2023. We expect the year to follow the traditional pre-COVID historical patterns with rent growth sequentially picking up in the spring and likely peaking in August. Our midpoint assumes renewals for the year averaged just over 4%. New lease change is relatively flat, which together produces blended rate growth of about 2%. This is more modest growth than the 2023 full-year blended rate growth of 3.1% and is reflective of a slowing job growth environment offset by a mostly positive supply situation in our coastal market, where we have about 95% of our NOI. As you can see from the stats in the release, January is starting out the way we would expect with new lease change improving, a strong percent of residents renewing, and a renewal rate achieved that is healthy, albeit moderating a bit. While still early, all of these January trends support our outlook for the year, which includes a view that resident retention remains very good, as a result of both the benefits of a centralized renewal process, our enhanced data and analytics insights and the high cost and low availability of owned housing in our markets. Turnover in the portfolio remains some of the lowest that we have seen in the history of our company and we expect that trend to continue in 2024. Orange County, San Diego, Boston, and Washington DC will lead the pack with expected revenue growth of approximately 4%. New York and LA will follow closely behind. At the moment, we expect slightly positive same store revenue growth in San Francisco and Seattle, and in our expansion markets, which reflect only about 5.5% percent of the total company NOI, we expect to produce negative same store revenue growth given the unprecedented levels of supply being delivered. As we look to the individual markets, starting with Boston, with high occupancy and limited new competitive supply. This market should continue to perform well in 2024. The market is supported by a strong employment base and finance, tech, life science, health and education. New supply deliveries will be about the same this year as they were in 2023, and this is a market where our urban assets have outperformed suburban ones lately and we expect that trend to continue in 2024. New York should continue to perform well this year, but won't reach the high rate growth achieved over the last few years. Occupancies remain high and competitive new supply is limited, which led to record high market rents, causing some rate fatigue to be observed in late in '23. New supply deliveries will be similar to last year with very little being delivered in Manhattan, where a large part of our portfolio is located. Washington DC continues to outperform our expectations despite the delivery of a good amount of new supply. The market delivered over 13,000 units in 2023 and saw the great majority of those units absorbed. This year, the market will see a similar amount of deliveries, but demand has been strong and we expect this good performance to continue. We are starting the year with occupancies above 97%, which is a great position to be in. In Los Angeles, we expect the tailwind to growth as we work through the delinquency and bad debt issues that have been concentrated here. We continue to make progress, although the court system remains slow, taking at least six months from our court filing to being able to get the unit back. Bob will give some more color on the impact of bad debt net on our 2024 earnings expectations. New supply deliveries will be slightly higher this year with our Mid-Wilshire Koreatown and San Fernando Valley portfolio seeing the largest impact from this new supply. Strong retention and solid demand will continue to aid our ability to fill vacant units with paying residents in this market. Rounding out Southern California, San Diego, and Orange County should be some of our highest growth markets this year, driven by high occupancies and a general lack of housing. High homeownership costs make renting in these markets a more attractive option. San Diego will see more competitive new supply in 2024, while Orange County will see similar amounts to last year. In San Francisco and Seattle, we had little to no pricing power throughout 2023 and our base case expectations for this year assume that situation continues. We have seen periods of stability and then pullbacks. Concession use in both markets is widespread. We have strong physical occupancy with both markets being above 96%, which tells us there is demand, although it is very price sensitive. As Mark mentioned, the downtown areas of both markets continue to see improvement in the quality of life, but are still lacking the catalyst of return to office and or job growth. New supply in San Francisco this year will be up from last year levels, mostly due to an increase in the South Bay, although continued healthy demand in this submarket should aid the absorption. Seattle is likely to be the most impacted of any of our markets when it comes to new supply deliveries with increases in both the City of Seattle and the Eastside. The lack of expected job growth combined with this new supply has driven our low expectations in Seattle for 2024. Both Seattle and San Francisco continue to see less than normal inbound migration. Seattle in the fourth quarter, however, did see some relative improvement with new residents coming to us from out of state. This positive trend is something that we will keep an eye on as we move through the spring leasing season. Drawing new residents back to the MSAs in both Seattle and San Francisco would be a catalyst for these markets to outperform our expectations. In the expansion markets, our long-term outlook remained positive. That said, high levels of new supply are already pressuring rents and is likely to continue throughout 2024. At present, we are operating from a defensive position and starting the year with occupancies that are two to three percentage points above the market averages. Denver has demonstrated the most stability despite having limited pricing power in the portfolio, and we expect the market to produce slightly positive same store revenue growth in 2024. Currently, Atlanta is using the least demonic concessions, but we expect a few of our assets to be very challenged due to the sheer number of lease ups in close proximity, which will likely lead to negative revenue growth for the year. In Texas, Dallas and Austin have widespread concession use, and we expect all of our assets to experience direct pressure from new deliveries all year long, resulting in negative same store revenue growth in these markets. So, putting all of these factors together, our overall same store revenue outlook for 2024, right now anticipate solid growth led by the East Coast markets and Southern California, which collectively is almost 70% of our NOI. We expect our coastal existing markets to outperform our expansion markets where unprecedented supply will impact operations near-term. On the initiative side, in 2024, we will continue to focus on producing operating efficiencies and driving other income with projects tied to flexible living options, parking, renter's insurance, and monetizing technology deployed for the benefits of our residents. We are almost complete with the rollout of smart home technology across our portfolio, which will create further opportunities to share teams across properties and enable additional self-service options for residents. This, along with other ancillary income, should lead to total other income growth of 30 basis points excluding bad debt. As we sit here today, we like our positioning and look forward to capturing the opportunities the spring leasing season brings, which will help frame pricing power for the full year. I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these results. With that, I will turn the call over to Alec, to walk through our capital allocation activities and the transaction market.

Robert A. Garechana:

Thanks, Alec. As Michael and Mark mentioned, 2023 ended up right in-line with our forecast last quarter. So, let's get right to guidance. Michael gave you most of the building blocks for same store revenue, but I'll finish up with bad debt, walk through drivers of same store expenses and normalized FFO and conclude with the balance sheet. In 2023, we were able to reduce bad debt significantly once the regulatory environment became more constructive. While we continue to work with non-paying residents, as we have during and after the pandemic, ultimately, we still ended up processing a high volume of skips and evicts. In fact, about 1.5 times pre-pandemic activity levels, which coupled with not adding significant amounts of new non-paying residents, helped us reduce bad debt as a percentage of same store revenue from well over 2% to just under 1.5%. So, great progress overall, but still a long way from the 50 basis points we were accustomed to pre-pandemic. Much like last year, we expect 2024 to continue to show improvement. We also expect the pace of this improvement to be dependent on the speed of the court systems, primarily in Southern California, where delinquency remains highest, to quickly process evictions, which is a hard thing to predict. As a result, our guidance assumes that 2024 remains another transition year for bad debt and that we don't get all the way back to pre-pandemic levels. Instead, our guidance midpoint assumes that full-year bad debt as a percentage of same store residential revenue is slightly above 1% or a 30 basis point contribution to 2024 growth overall. If that plays out, by the end of 2024, we would expect to be a little under two times pre-pandemic levels. Turning to expenses. Expense management is core strength at Equity Residential as evidenced by the historical performance Mark referenced. Our same store expense guidance of 4% is also reflective of that discipline. This year, the individual drivers of growth are a little different than those from 2023. So, let me give you a high level assessment, and we can get into more detail in Q&A if required. In 2024, we expect real estate taxes and utilities to grow faster than they did in 2023, in part due to some 421-A step ups and commodity prices, while payroll and repairs and maintenance should be slower due to various initiatives and an expected normalization of inflationary pressures. Insurance, a small category at less than 5% of total expenses, but a topic often discussed should grow more slowly than last year, but remain above the long-term trend with growth in the low-double-digits. Turning to normalized FFO, Page 2 of the release provides a detailed reconciliation of our forecasted contributors to NFFO growth. As is typical, same store NOI performance is the primary driver of growth, but let me provide some color on transaction activity. We are assuming $1 billion in both acquisitions and dispositions for 2024 with limited dilution, yet we show a $0.03 reduction in normalized FFO growth there. This is due to our assumption that our acquisition activity mostly occurs later in the year than our dispositions. This is also partially offset in interest expense and interest income as disposition proceeds are used to pay down debt or invested in interest bearing 1031 accounts while we await acquisitions. Now a very brief comment on the balance sheet, because we're in really great shape here. We have no debt maturities until the middle of 2025, modest outstanding balances on our commercial paper program and less than 10% floating rate debt. So, we're very well-positioned. In fact, over 50% of our existing debt doesn't mature until after 2030. The work we've done over the last number of years has reduced our interest rate exposure and allows us for ample debt capacity to run and grow our business. With that, I'll turn it over to the operator.

Steve Sakwa:

Great. Thanks. Good morning. I guess, wanted to just maybe go through some of the building blocks of growth in 2024 either for Michael or Bob. But as you kind of look through the moving pieces here. It seemed like maybe the new rate growth that kind of flattish might be one that could pose maybe a bit more of a challenge here of job growth slow. So, just curious how you sort of sized all up those components and how did you think about the new lease component with the fact that you kept occupancy flat, I guess, within the guidance?

Steve Sakwa:

Great. And then just maybe one question on the transaction market. I know it's not been terribly, robust, but maybe, Alec, can you just speak to where you think maybe IRR hurdles are today that the 10 year is sort of plus or minus 4% come down way off the high. I realize NOI and rent growth is slowing, but where do you think investment hurdles are today either for EQR or for the market broadly speaking?

Steve Sakwa:

Great. Thanks. That's it for me.

Unidentified Participant:

Thanks. It's Nick here with Eric. Maybe just following up on that. So 8ish or so IRR, I guess, more specifically you talked about obviously the Sunbelt supply and the impact that has on your underwriting on those deals at least initially. So, when you're underwriting deals both on the buy and sell side today, what are you underwriting for IRRs in the Sunbelt? And then what are the IRRs look like for the assets you're planning to sell more coastal.

Unidentified Participant:

It's Nick.

Eric Wolfe:

Hi. It's Eric. Sorry to keep switching people on you. But, maybe just talking about coastal rent growth for a second. You talked about supply being in check, homeownership, very unaffordable, solid real wage growth, job growth, okay, maybe getting a little slower. But I guess the question is why aren't we seeing stronger rent growth today just given all of those positive dynamics? And is there anything that do you think in the future would turn it around such you see that sort of more than 3% type rent growth in those coastal markets.

Eric Wolfe:

Thank you.

Jeff Spector:

Great. Thank you. My first question is a follow-up. I heard a comment and I think it was on the Sunbelt quote it could be a couple tough years. I guess can you expand on that? And then, and maybe most important is talk about when you expect supply pressure to peak, let's say, in Seattle. And I know, again, Sunbelt is, smaller markets for you. But if you have a view on the Sunbelt, it would be appreciated? Thank you.

Mark J. Parrell:

Yes. I'm just going to add a little bit to that. If you look at ‘25 expected deliveries and some stuff from ‘24 will definitely slip, I mean, it's about as big as ‘23’s delivery. So, it's not like ‘25 is a, incredible decline. So, what we really see, Jeff, as we look at this is still good demand in those markets. That's why we like Dallas, Fort Worth, Denver, Austin and Atlanta. But the supply picture in our experience, we'll spend this whole year with declining new lease rates, occupancy pressure, all of those things, and you as an investor and an analyst may start to see improvement in that so called second derivative of rent growth late this year beginning of ‘25. But same store revenue growth in our experience will be worse in ‘25, not in ‘24 because all those leases that are being rewritten will go through the rent roll. And so you may be more optimistic in ‘25, but your numbers actually likely will be worse. So, that's what we've seen with supply in our history across our markets, and then we don't really see why it'd be any different here. And I think the wild card is if you have incredible job growth in these markets, you may be able to absorb some of this supply more efficiently and get through it more quickly. But the idea that ‘24 is the only oversupplied year is kind of a tough one for us to accept.

Mark J. Parrell:

Well, the guidance is just to help you model. If Alec, can buy things in his team earlier at good prices, we'll buy them earlier. The relationship I think you're going to see here is that prices now seem okay, maybe not quite good enough, but the discount to basis, the replacement cost, pardon me, is very good. It's the cap rate. And when you look at, like, two years of declining rental growth, you buy in Dallas, your year two number might be lower your cap rate than your year one. But on the other hand, later this year, you'll be past some of that and your year two number will look a little better. So, likely paying a higher price. So, that's what you're going to see us navigate. We like these markets long-term. We think owning the four markets that we've, tabbed as our expansion markets, say, 25% of the company will create more balance and drive growth better and reduce volatility over time, Jeff. But getting into them is a little bit of an art. There's going to be a little bit that we probably do sooner, a little bit we do later, and you may feel better about the price in one and not as good about the revenue growth in the other and vice versa. But, we're prepared to do that. And, again, the number you see there is just sort of the guidance assumption. We'd be happy to do more if we can find more.

Operator:

And our next question is going to come from Robin Lu from Green Street. Please go ahead.

Robert A. Garechana:

Yes. Hi, Robin. It's Bob. Thanks for the question. We are seeing lower values in some markets. In fact, we've gotten some assessed values, actually back already, as we look at 2024. And on the margin, you are seeing some decreases. So for instance, in Washington state, we saw about a 1% decrease, and we've got most of the values back there, and we're seeing it in other places. Obviously the income, as assessors look at values, the income production in 2023 was really quite good. But the offset there was really the cap rate change just given risk free rates and other things. And so we are seeing some acknowledgment by assessors that values are in fact, lower than what they had initially assessed at. The open item as you think about real estate taxes for 2024 will be where rate comes. And we have rates in some places, and we'll see where they, fall out in others.

Robert A. Garechana:

You are correct, and that makes for an excellent appeal activity for our real estate tax team as we challenge values.

Robert A. Garechana:

Thanks.

Mark J. Parrell:

Hi, Robin, it's Mark. Thanks for that question. Our primary capital allocation goal is going to remain building out the portfolio in the way I just described in these expansion markets and lowering exposure in Washington DC, New York, and California. Again, we believe that portfolio will create the highest returns over time, the lowest volatility, that that'll make the shareholders the most money in the long haul. All that said, we're going to continue to consider these share buybacks, especially when you get this bigger value dislocation and when you can fund it with assets that are the least desirable, among the least desirable in the portfolio against the portfolio that we think is really top notch and where there isn't a lot to buy. That's an important other ingredient. There wasn't a lot of opportunity cost here, there wasn't a lot else available to buy at prices that made sense and all those capital structure considerations have to be thought about too. We've talked about on these calls. Things like, does it create a lot of tax gain that's hard for a REIT to manage. That worked out okay for us. Bob has done a great job and his team on the balance sheet, so I don't have to worry about debt maturities that we need to kind of husband our capital. And another I want to introduce is you got to be careful about platform scaling. If you sell too many assets, you can really increase your overhead as a percentage of revenue. But all that said, the Board and the management team remain open to buybacks. And for us, it's hard for me to give you a formula. We're just going to kind of see what market conditions are, where the stock goes, what's out there to buy, and, keep our mind open to doing more, stock buybacks.

Operator:

And our next question is going to come from Michael Goldsmith from UBS. Please go ahead.

Mark J. Parrell:

Hi, Michael, it's Mark, and I think, Michael Manelis may have something to add here. So, we talked a lot about San Francisco on the call, the last one and why we like the market long-term, feel the same way. The management team thinks there's going to be elongated recovery in that market. Conditions on the ground are a lot better. The mayor put out some information about crime reductions. They have the biggest class of police cadets, at the police academy in San Francisco, they've had since before the pandemic. So, there's some good things going on. But until, as Michael said, we get a little more tech job growth, which talking to the team and talking to others in the Bay area and in the city of San Francisco is probably a more later ‘24, ‘25 thing. That's probably where you get rent to take off. The thing I want you to think about is, you've had spectacular growth in incomes in the Bay area since 2019, over 30% nominal and 12% or 13% on a real basis, yet our rents are down in the city of San Francisco 20% since 2019 and kind of flattish to up marginally in the Bay area. So, this is a market that, like New York, can really take off once you get some job growth, because there isn't a lot of new supply. Housing costs are pretty high. So, the management team's optimistic about the recovery. The timing is kind of tough. I don't know, Michael, if you've got anything you want to add.

Mark J. Parrell:

Yes. I forgot to mention something on Seattle I just want to throw out there. Seattle's nominal wage growth since 2019 is 40%, right. Yet our rents in that market are up 7%, and downtown, they're flat. So, again, these markets have the ability to pay more for great quality housing. And, again, Seattle is a supply, push this year, but after that, it gets a lot lighter. So, that's about a third of our portfolio, Seattle and San Francisco. And I hope, Michael, we're talking about that second derivative towards the end of this year for you, but we haven't embedded that into our guidance.

Robert A. Garechana:

Yes. I'll grab that, Michael. It's Bob. So, to start with what's assumed in guidance, we do assume that we will get, we will improve. So, we ended the year at, call it, 1.4% of bad debt as a percentage of same store revenue. I think I said in my remarks, we expect to get to 1% a little over 1% for the full year. That means that by the fourth quarter, we're assuming that we're sub, 1%. You're correct in the kind of 3Q to 4Q in 2023 it being flattish, and what I would caution and is that it is, this is a thing that is very hard predict because of the court systems. It has puts and takes. There's more of a step function than a linear kind of improvement function associated with it. So, our expectations and guidance is that, Q1, which we're in right now is more flattish, and that you started see seeing improvement later in Q2, Q3, and Q4, because of that kind of case of the court system and because there is there's always been a little bit of seasonality in this number as you think about, like, post holidays, bad debt in the first quarter is always or typically a little bit higher anyways. So, expect it a little bit of a choppy step function, but expect improvement overall.

Operator:

[Operator Instructions] Our next question is going to come from Jamie Feldman from Wells Fargo. Please go ahead.

Mark J. Parrell:

Yes. Thanks for that question, Jamie. I guess I attack it another way by certainly lease ups are different. But remember, the numbers we're telling you are same store numbers, so they won't include lease up conversations. But I would say we have relatively small portfolios in those markets. So, if one property is being hit hard, it could be one out of eight of our same store assets in, Denver. So, I think that is it. I think different people, obviously, different parts of the market feel it differently. So, that would be my comment. We have relatively small portfolios. I mean, Austin, we have three same store assets.

Jamie Feldman:

Okay. That's very helpful. And then as we think about the investment market, I mean, clearly, the debt markets are coming back, pretty quickly. We've now seen some real estate M&A. So, I assume competition is going to get harder for the types of assets you'd like acquire in ‘24 and beyond. How do you think about the importance of just transitioning the portfolio, as soon as you can versus, really hitting that right number? Do you think maybe your underwriting assumptions have to loosen up a little bit just so you can achieve some of your strategic goals, over the next couple of years if the market gets more competitive.

Jamie Feldman:

Okay. So, it sounds like it's more about the dilution than it is the absolute cap rate or the absolute IRR?

Jamie Feldman:

Okay. All right. Thank you.

Brad Heffern:

Yes. Hi, everybody. In the prepared comments, you mentioned some increased price sensitivity in New York late in the year. Can you add some color on that and talk about what gives you confidence to rank that market relatively high for 2024?

Brad Heffern:

Okay. Got it. Thanks for that. And as a follow on to your earlier comments about wage growth on the West Coast versus where rent has gone. I guess, how much of that opens up an opportunity for future rent growth versus how much of that just reflects that those markets have become unaffordable before the downturn, and they've been, semi-permanently reprised?

Brad Heffern:

Okay. Thank you.

Alexander Goldfarb:

Yes. Hi, good morning. So, two questions here. First, on the renewals, in addition to jobs, I guess renewals also seem to be a wild card. I realize there's a frictional cost to moving, especially in urban assets, but can you just walk through your views on renewal activity for this year. And it seems that you guys think it will hold up much better than new rents. And I'm sort of curious, I would think those same existing residents would see the new rates that, newcomers are getting in would want a rent reduction, not a rent increase?

Alexander Goldfarb:

Okay. The second question sort of dovetails on the rent fatigue comments. It seems, I mean, using New York as an example, no new supply, people want to be back in the city, and we don't really hear stories anymore about doubling up or even moving to New Jersey is still an expensive proposition. So, from a pricing perspective, do you feel more comfortable today sort of across your portfolio, especially in markets like New York, in pushing pricing versus years ago when renters and I'm not just talking about new supply, but we're doubling up or maybe moving to New Jersey or outer boroughs or something was more of an option. Do you feel like you have more pricing power today to push rents more than historically?

Alexander Goldfarb:

Thank you.

Rich Anderson:

Hi, thanks. Good morning, everyone. So, on the topic of expansion markets, is it absolutely a fee simple type of investment? Or would you be open, given the sort of the complexity of all the lending environment and all that sort of stuff and some and distress balance sheet distress and whatnot. Would you be willing to invest, in different areas of the capital stack and with an intention to ultimately own? Or are you going to have enough opportunity to keep it simple and just go, through equity channels.

Rich Anderson:

Okay. Great. And then, if I could just sort of, ask the sort of a different question about, what you said, Mark, earlier about 2025 being a tougher year in the Sunbelt versus 2024. But then you said something like, but the second derivative might be thought to be better. I didn't quite understand that. So, maybe you can clarify that. But would you say, generally speaking that the Sunbelt sort of recovery process is maybe a year behind San Francisco and Seattle? Is that, like, does that sort of help define the condition that you see it today?

Rich Anderson:

Right.

Rich Anderson:

Yes. That's really helpful. Thanks. And then would you then sort of characterized Sunbelt as being X money months behind San Francisco, Seattle? Is it a year in your mind if you were to just sort of simplify it?

Rich Anderson:

Okay, fair enough. Thanks very much.

John Kim:

Thank you. On your blended lease growth, improvement in January, can you comment on how you think this trends for the remainder of the quarter? I realize I expect it to improve in the second quarter. And if there's any discrepancies in the market performance versus what you had in the fourth quarter, as shown in Page 17 of your supplement?

John Kim:

Okay. And my second question is on, your development yields. Like you said, we're trending closer to 6%, given higher concessions. Can you comment on the level of concessions that you're providing today? And if, is this really driven by your Texas and Denver developments, or is this broad based?

John Kim:

Great. Thank you.

Adam Kramer:

Hi. Yes, maybe a little bit more of conceptual question and I guess also kind of in-line with Alex Goldfarb's question earlier. But just looking at kind of the new lease change by market, comparing that to the renewal change by market, it's kind of interesting that new lease can vary pretty by some of these markets, but renewals are in a pretty tight band, call it 200 basis point band give or take. And so I guess the question is kind of twofold, right? Is there an ability to maybe push renewals even more And say a market like DC where new lease is holding in a lot better versus kind of expansion markets, right or San Francisco where I guess I'm kind of surprised by that historically widespread between the new and the renewal rate. And should I be maybe a little bit worried about renewals kind of falling a little bit, getting closer to that kind of deeply negative or somewhat negative new lease change? Again, a little bit more of a conceptual question, so apologies, but hopefully that makes sense.

Adam Kramer:

Great. Thanks. That's really helpful and I appreciate that color, and all of kind of the building blocks earlier on the call too. So, maybe on concession usage, I know you've talked about it a little bit on the call thus far, maybe just if you don't mind just some of your expansion markets, kind of the level of concessions in terms of number of weeks that are being offered?

Adam Kramer:

Great. Thanks so much for the time.

Haendel St. Juste :

Hi, good, I guess, good morning out there to you guys. Mark, I guess the, first question for you, following up on Rich's question earlier about your potential interest in stepping in and participating in other parts of the capital stack, seems a bit of a departure from how you responded to this the Mez Investments in the past. So I guess, first, is that fair and why the change of heart? I'm assuming perhaps it's reflective of the opportunities. But second, I'm assuming or is it fair to assume that you'd be solely focused on the Sunbelt. And then third, what level of return or premium to acquisition cap rates would you seek there? Thanks.

Alexander Brackenridge:

No. I think we're good. I mean, we will be opportunistic, though. It's free of our company, and we'll keep looking for, chances to buy great real estate.

Haendel St. Juste :

Got you. That's helpful. But a follow-up, what level of return potentially would you or premium, to acquisitions would you seek were you to get involved in, some of these Mez or path to ownership type opportunities?

Haendel St. Juste :

Okay. Fair enough. One more on the expense side. I was hoping for a bit more detail on the key components, appreciate the overall, high level thoughts you provided there earlier, but maybe some specifics on the key components like, what you're embedding in your guide for specifically taxes, insurance, R&M, and also for the ongoing tech initiatives. I think last year, you outlined $10 million or so of savings via that. I'm just curious what level perhaps we could see from tech savings this year? Thanks.

Haendel St. Juste :

No. That's helpful. But in relation to I believe it was $10 million that you outlined last year from tech driven efficiencies, first, is that accurate? And second, do you have a comparable figure expectation for this year?

Haendel St. Juste :

Very helpful. Thank you.

Rob Stevenson:

Good morning, guys. Alec, can you talk about how robust the market is for dispositions in quality of life areas like urban Seattle, San Francisco or markets with ongoing bad debt issues like LA, are things trading and where are they pricing versus a few years ago if they are?

Rob Stevenson:

And I mean, is that just hold-on for a couple of years, hope that the cities get their act together, or is there something else just simply buy lower price capital that will allow that to sort of come back or are there you anticipating some sort of level of permanent impairment on some of those markets and submarkets?

Mark J. Parrell:

And, Rob, just to add to that. I mean, these markets, Seattle and San Francisco, particularly though, you could think about downtown LA too. We may have powerful drivers. For us, it's like we talked about New York when everyone was down on New York City, and we were positive on it still. That recovery has been vibrant. I think it's the same pattern here. It's not a matter of if, it's a matter of when, and I think these markets will recover greatly on the rental side over the next few years. What we shied away from on this call is, excessive enthusiasm too early in the year when you're not really into the leasing season yet, in markets that do have volatility associated with them. So, I don't feel any sense of permanent impairment in these markets at all. I think that you're going to have great rental growth. You're going to have a recovery that's pretty strong in these markets. And you are likely, but not certain to follow a pattern like in New York, where again, the sales market has some deals in it in New York, and they're trading really well. And so, I'm not sure why in a few years, San Francisco and Seattle wouldn't trade very well as well, but it's just going to take some time. And, again, our hesitancy here is really around the timeline for this, not the occurrence of it. And I think it's a catalyst for our investors. I think having, a portion of the portfolio and unrecovered markets with rents lower than they were in ‘19 and incomes a lot higher is a huge potential piece of kindling wood to our earnings in future years.

Robert A. Garechana:

Yes. There's one larger contributor which I'll talk about, which is, advocacy costs. So, we are forecasting higher levels of advocacy the cost in 2024, given that it's an election year and some of the ballot sheet, ballot initiatives, sorry, that we are facing, which is not atypical as in other election years. And then the remaining pieces are typical forecast for pursuit costs and other items.

Robert A. Garechana:

It's predominantly California.

Mark J. Parrell:

Rob, it's Mark. I mean, there's negatives and there's positives in the regulatory area. The ballot measure is by far the biggest point of focus in the industry. And just to remind everyone, this has been on the ballot twice before. The citizens of California rejected it by 20 percentage points each time. The industry is well organized. We're going to make the same good arguments about supply being the solution, more rental voucher funding being the solution. And to be honest, the Governor Newsom and the legislature have done a lot of supply things with the accessory dwelling unit legislation, with some of the zoning reforms. And so to be honest, when I turn to the positive on the regulatory side, people would hear us. They hear the industry's point about supply, about zoning reform. Governor DeSantis, obviously, couldn't be more different than Governor Newsom. He has done some great things in Florida as it relates to housing policy as well and zoning reform to allow more affordable housing to be built. Governor Hochul in New York was trying the same thing and got a lot of resistance, but we hope that is still in place. So California is, to answer your question, the focal point of us in the industry at large this year. But markets like New York and, Massachusetts and Colorado, there's always dialogue going on in those markets, but we're well organized to have that conversation. And I think policymakers, by and large, understand that supplies the answer, not rental regulation. That's what I think is the positive here. You hear about that a lot more in our conversations, and the reaction to rent control is, something that we talk through and, you get a lot of people calling the other direction after they've heard the arguments.

Mark J. Parrell:

Thank you.

Anthony Powell:

Hi. Good morning. A question on new and renewal lease spreads and the leases. I'm curious, what's the absolute, I guess, rent these two group consultants are paying in terms of both gross and net effective? I'm trying to understand better about what, the actual numbers are from these two, customer groups?

Anthony Powell:

Yes. So, in terms of this new renewal leases, absolute rent, is there a big difference between the two? Are customers paying, lower or higher of renewing new leases? I'm trying to get a sense of the absolute pricing difference between the two groups of customers.

Robert A. Garechana:

And one thing to keep in mind, too, Anthony, is when you're looking at the spread so if you're starting with market rate rents, right, and looking at market and that's kind of your pricing trend or whatever. Spreads can vary materially depending on who is in the mix of, moving in and moving out. So, if I have lived in a unit for one year and got a big concession, as Michael used an example, in an expansion market, and I happen to be the one renewing, then that spread can be very different than the absolute. So, just keep that in mind, as you look at any of these spreads. And then particularly keep it in mind as you think about seasonal periods, like the first quarter and the fourth quarter where transaction activity is really low. You can have even more volatility in the number.

Alexander Brackenridge:

Anthony, it's Alec. I don't know if I expect to. I certainly hope to and I think we probably will, but it remains to be seen. But there's some things out there that we've heard about that might be interesting, and we'll certainly be very actively pursuing them.

Alexander Brackenridge:

Thank you.

Linda Tsai:

Hi. Thank you. Just one question. In your prepared comments, you highlighted seeing stability and pullback in Seattle and San Francisco. Could you discuss that dynamic more? Is this volatility associated with job loss and return to work mandates or maybe just provide some examples of what drives this push and pull?

Linda Tsai:

Thank you.

Mark J. Parrell:

Thank you all for hanging in there on this long call. We appreciate your, interest and your time today. Good day.

Martin McKenna:

Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2023 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer. Bob Garechana, our Chief Financial Officer; and Alex Brackenridge, our Chief Investment Officer, are here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com as is a management presentation for the quarterly call. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.

Michael Manelis:

Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review the third quarter 2023 operating performance in our markets, our outlook for the remainder of the year, and some views into 2024, and that we included in our management presentation. We continue to produce very good results with residential same-store revenue growth of 4.4% in the third quarter driven by generally healthy fundamentals in our business and some improvement in delinquency, although not as much as we expected. The East Coast markets continue to outperform the West Coast. Demand and occupancy remain healthy, especially across our East Coast markets and absorption and our results in the Washington, D.C. market continue to impress. As I will discuss shortly, San Francisco and Seattle are experiencing more pricing pressure than we previously expected. Before I get to that, let me touch upon October leasing spreads, new lease, renewal and blended. The stats we published through October 27 captures almost all the months activity, and as we mentioned, are consistent with seasonal declines outside of Seattle and San Francisco. New lease change is negative, which is normal for the month, and will continue to get more negative as pricing trend, which is presented on Page 6 of the management presentation, continues to decline for the balance of the year. In a normal pre-pandemic year, by the time you get to December, it is not uncommon to see new lease change be negative 4% or 5%. Given the weakness in our Seattle and San Francisco portfolios, we will likely be slightly more negative than that. Renewal rate achieved should moderate slightly, but remain relatively stable and make up more of the transaction mix. Put it all in the blender and Q4 blended rate will continue to moderate. In terms of the specific conditions on the ground in San Francisco and Seattle, as we stated previously, we have had little to no pricing power throughout the year. However, the peak leasing season did demonstrate an increased volume of demand and some moderation of concession use, which led us to what we initially thought could be the beginning of better stability. Over the last six weeks, however, these markets have slowed more than normal, which has resulted in larger price reductions than seasonally expected, characterized by both declining rates and increased concession use. This is most pronounced in the downtown areas of both markets, though there are other suburban pockets experiencing pressure like Downtown Redmond in Seattle. The uncertainty of back to the office from the big tech employers, combined with their slowdown in new hiring is keeping a lid on demand. In order for these markets to fully recover, we will need to see the vibrancy that comes to these areas when the offices are active, employment increases, and residents want to enjoy the city lifestyle and easy commute to the office. Both cities are making progress on improving the quality of life issues, and we are seeing signs that a few of the major tech employers are slowly adding positions back, especially in Seattle, but the improvement in both of these areas need to accelerate in order to generate enough in migration to these markets, which will allow pricing power to return. While recognizing challenges in these two markets, overall, our business remains healthy. Even with these now muted expectations, 2023 is on track to deliver very strong same-store revenue growth with several positive trends that we expect to continue into 2024 and support our business. First, our residents remain in good shape financially with rent-to-income ratios remaining at 20% portfolio-wide. Resident lease breaks and transfer activities to reduce rent, often early indicators of resident economic stress remain below pre-pandemic levels and in line with seasonal expectations. Overall, the job market and our residents remain resilient, which would expect -- which we expect to carry into 2024. Our resident retention remains very good. Turnover in the portfolio remains some of the lowest that we have seen. Single-family home purchases continue to be an expensive housing alternative, especially in our established markets. In fact, only 7.5% of our residents who moved out, bought home as the reason in the third quarter which is one of the lowest numbers we have seen since we started tracking the data back in 2006. At this point, we are not seeing anything to suggest that the overall turnover rate in the portfolio will not remain low. As I mentioned earlier on the demand side, generally, the employment picture, particularly for the college educated, remain solid and supportive of continuing demand into 2024. So, as I already noted, the high-quality job creation machine in San Francisco and Seattle recently paused, but longer-term fundamentals support the potential future growth. On the supply side, overall, we are favorably positioned, particularly compared to those concentrated in the Sunbelt. We should benefit from less direct competitive supply pressure in most of our established markets while DC will be about the same and Seattle will have elevated supply in 2024. When looking at new supply as a percent of inventory, there are significant differences between the overall Sunbelt and our expansion markets -- as compared to our established markets. The average new supply as a percent of total inventory in our established markets is around 2%, which includes the Seattle market at 4.5% which is the only outlier both on an absolute percent basis and relative to historical norms. Meanwhile, the Sunbelt markets are forecasted at just around 6% and our expansion markets range between a low 4% in Atlanta and a high of nearly 10% in Austin, which will result in pronounced supply pressure. This shouldn't be overly impactful for us since only 5% of our NOI is located in these expansion markets and, in fact, may present acquisition opportunities for us as financially stressed developers sell properties. So, putting all of these factors together, our overall revenue outlook for 2024 right now anticipate solid growth led by the East Coast markets. As you can see in the management presentation, our embedded growth going into next year is trending slightly above pre-pandemic norms and loss to lease is generally in line. With bad debt net, it is hard to predict the exact amount of tailwind from improvement, but our view is that we will continue to gradually work our way back towards pre-pandemic levels. The eviction process is taking twice as long as it did pre-pandemic, and this speed is not yet sufficient to both clear the backlog and allow for new typical volume of evictions to be processed. That said, we see no decline in the credit quality of our resident and their propensity to pay. We continue to believe that we will see meaningful improvement in 2024. In addition to the tailwind from bad debt net, we expect to see some incremental lift from several of the operating initiatives that we have in place around renewals, parking, connectivity, and other income opportunities. Moving to expenses, which continued to trend in line, we would expect our 2024 same-store expense growth to be slightly below this year. We will feel continued pressure on the repair and maintenance lines with some of the new technology fees like Smart Home and Wi-Fi, although the comp period from 2023 is pretty high, so that will help offset some of that growth rate. Insurance is clearly in for another significant increase. And right now, we expect real estate taxes to be higher than this year, but nothing that will create too much overall pressure. Some of the growth in these expense categories will be mitigated by continued operating efficiencies in the payroll line being created from our centralization initiatives. Let me wrap up by saying that the apartment business continues to be good with favorable demographics driving demand and limited new supply in most of our markets. We will continue to enhance our operating platform to take advantage of the opportunities that the markets present while delivering a seamless customer experience to our residents. I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these results. With that, I will turn the call over to the operator to begin the Q&A session.

Steve Sakwa :

Thanks. Good morning. Michael, I was just wondering if you could expound a little bit on the October numbers on the new side. If you do sort of the -- I guess the implied change, if you stripped out Seattle and San Francisco, the number was only down 30 bps, but that kind of implies that those markets were down kind of high single digits to almost 10% in October which is sort of like a month-free or rents are down with some concessions. Are we thinking about that right? And I guess, just trying to figure out what really turned the market to be that south. And it sounds like it's really in the urban core as opposed to less in the suburban communities?

Steve Sakwa :

Great. And then just maybe a follow-up on the transaction market. Mark, you sort of talked about maybe starting to see some increased activity, particularly in the Sunbelt. I'm just curious where that transaction market is? Where is the bid ask? I know you're sort of maybe a little bit indifferent on cap rates based on where you can sell. But just how are you thinking about pricing? And how have you may be changed your underwriting?

Steve Sakwa :

Great. Thanks. That's it for me.

Eric Wolfe:

Thanks. On your bad debt, if the court process had been as quick as you thought, I guess how much more would have bad debt been down from the current 1.27%? And once you're through with the bulk of evictions and court proceedings, where would that take a bad debt?

Mark Parrell:

And Eric, it's Mark. Just to add to that. We certainly hope 50 basis points is where we end up. But I would say that the fact that in some of these markets, the process has been maybe more permanently elongated because of either right to counsel and funded rights to counsel in some of our markets and just general, more bureaucratic effort required to get through it, you may have folks, and that's what Michael was alluding to in his remarks, we aren't seeing more delinquency with our new residents. We're seeing what I'll call the normal amount. But usually, they'd be out in a month or two. And now it's just taking longer, and that means they're going to hit our bad debt reserve. They're still leaving. But I just think again, we feel like the credit quality has not changed from all we can see, but the underlying bureaucratic process and regulatory environment has and it may be that we end up pointing to something modestly higher than 50 basis points going forward, again, not because the customer changed but more because the process did.

Michael Manelis :

Eric, this is Michael. So yes, the 80 basis points that we included in the management presentation, the snapshot as of October 15, and we're just giving you the historical context. So that number will kind of decelerate a little bit as you get towards the end of the year. But there's nothing that suggests that right now, we don't expect our loss to lease to be in a relatively normal place to start the year. In terms of how you fold that into the blended assumptions for next year, I'm going to kind of stay away from giving any specific guidance on '24. I think what I would look at is the hardest part of the piece right now is for us is that intraperiod growth rate. What are you going to layer in by market? And we're in the very early stages of this budget process that includes both a top-down and bottom-up approach. But I could tell you that we do expect like Seattle and the expansion markets to be pressured from new supply. We continue to see and expect the strength in the East Coast markets, and we'll model some solid growth in Southern California, driven in part by the improvements in delinquency that we just talked about. San Francisco has potential, but I think you could tell from the prepared remarks, we're going to need to see a few consecutive quarters of improving fundamentals like before we adjust the somewhat muted current expectations for next year. But if you really put all those factors together, you look at where that embedded range is, you think about loss to lease being in a relatively normal. You hold in the intra-period comments that I just gave you, it really does still put you in a place where we expect to see solid growth next year.

Operator:

We'll go next to John Pawlowski with Green Street.

Mark Parrell:

John, it's Mark. I'll start with that. I mean we have been matched funding that. So, this year, it was a pretty modest year for us, $350-odd million of buys and sells. And frankly, we have paused our acquisition activity. The deals you saw closed, they priced really in the early second quarter, and one of them went through a long assumption -- loan assumption process and the other one had a lease-up and an elongated close process. So, we really aren't buying anything right now. What you see out there in the release is really that tail activity. We may expose a few more assets for sale. We're always doing that, trying to figure out where that market is. And continue to execute on the strategy of moving the capital around. But before we commit to your point to buy assets at this price, we're going to sort of let market settle out a bit or look for an opportunity to just obviously very good.

Mark Parrell:

Yes. Thanks, John. So, I'll give a little color on that. I'm not going to be able to be terribly specific because it is pending litigation and giving you a range is something I'm just not able to do. But we are the only ones facing these sorts of issues, both public and private competitors of ours in Northern New Jersey have these litigation concerns. In our case, the particular matter you're talking about in Jersey City, there was a ruling in our favor actually a year ago that these properties, these two towers were exempt from rent control by an administrative entity that administers these rent rules. The decision that was announced a couple of weeks ago was by a politically appointed Board that overruled the bureau's original decision here and we completely disagree with that. And we're going to go and litigate that in the courts and have our say there and try not to talk about it too much in the press, except to say, again, we think whether it's in Northern New Jersey or elsewhere in the portfolio, we follow the rules of the road. We feel like we comply with, whether it's rental control rules or notice rules or whatever they may be in all these markets, those rules are complex. They're ever-changing. We've got a great legal team, a great operations team that follows up on all that. So, I don't have any sense of an overhanging doom, but I think this is another sign of just political pressure that's manifesting itself in litigation in some of these markets rather than in just going through the process of trying to influence your public officials to change the rental rules.

Alexander Goldfarb :

And Mark, maybe just continuing that theme on the Jersey City. You and I have chatted before on the risks of tax-exempt deals and deals that have incentives that years or decades later could come back to bite. So, in thinking about this, do you still see the appetite for EQR to pursue deals, especially in politically charged municipalities, deals that have tax incentives as worth the longer-term risk? Or what's going on here is your view is, hey, when we underwrite these deals, even if we shave off a few points for the risk -- for the political risk, going after these tax incentive deals are still economically worth it.

Alexander Goldfarb :

And then the second question, by the way, Mark, just speaking of political risk, obviously, rents being down shoots a hole in the whole yield star litigation argument. So, I guess, yes, there is a positive at our third quarter earnings but thinking about Seattle and San Francisco, those are two markets where the downtowns continue to suffer and have issues recovering. By contrast, the issues in the Sunbelt are really, there's a lot of supply this year, into next, and then that supply goes away. So, as you think longer term, it almost seems like the resolution of Seattle and San Francisco, to your point, is political, and it's unknown for the recovery, whereas the Sunbelt is known because you can see the product delivering and that there's nothing behind it. So again, think about EQR and capital allocation, are you guys still comfortable in the belief that Seattle and San Fran downtowns will recover? Or at what point do you sort of throw up your hands and go, the traditional recovery isn't there, we have to think differently this time.

Alexander Goldfarb :

Thank you, Mark.

Haendel St. Juste :

I'd like to get some clarification on a comment you made earlier in your remarks that it's not uncommon to see new lease rate declines of minus 4% to minus 5% by December. And given the weakness in San Fran and Seattle that, you expect you'll be slightly more negative than that. So, am I correct to read that you're implying that your entire portfolio, new lease rates that you expect to be minus 4% to minus 5% or potentially weaker? And then what does that sort of imply for these rates you're expecting for San Fran and Seattle by that point? Thanks.

Haendel St. Juste :

Got it. And any color or any views you want to share on new lease rates for San Fran and Seattle?

Haendel St. Juste :

Great. That's helpful. And if I may, one more. I'm trying to get a better understanding of the range of reasonable expectation that we should have for your same-store revenue next year. You outlined in your presentation the earnings of 1.3% to 1.5%, which is helpful. But the new and renewals getting softer, blended towards 2% for the fourth quarter, negative new leases. The bad debt is improving. But further than you expected and occupancy, I think based on a bit of a tough comp. So, I guess putting it all together, I can't quite seem to get to the same store revenue projection for next year above the mid-2s? Is that maybe unfair or what maybe could I be missing or underappreciating.

Haendel St. Juste :

Fair enough. But maybe can I ask you about Rite Aid and how you think about backfilling those stores and if we expect -- should expect that to be a drag or maybe a tailwind to next year?

Robert Garechana:

Yes. And Haendel, from a P&L standpoint, as Alex mentioned, there's two things that will go on to determine the P&L is just how fast those folks get in place, the new lease because that's when we'll start recognizing the revenue for them in 2024 and what that impact is relative to the write -- we had the write-off which you're not going to have again in our base year in 2023. So those two pieces in that rate of growth. But I would expect -- in all likelihood, it will be relatively flat because you had the impact in '23 of the $1.5 million write-off.

Operator:

We'll go next to Josh Dennerlein with Bank of America.

Alexander Brackenridge:

Josh, it's Alex. Yes, you're right. It did go up, but it went up for a variety of reasons that I'll go through, not related to shifting expenses into capital. It's really related to starting the year thinking that spending capital on our portfolio was a more compelling use of capital than acquisitions or development. And we had a big budget. I always handicapped the budget a little bit because things generally take a little longer its construction, things go wrong, contractors, misstates and through the first half of the year, we are right on track for that. We actually had a very productive summer, and so we ended up doing more work than I thought we would do. So, it's partially that. It's also -- we added in some ROI projects, specifically some solar panel installations that have a great return that weren't available to us until the middle of the year. And we did have some storm damage that carried through into the third quarter. And on top of that, we've had some smart rent installations that we've accelerated that added on top of that. So, we expect that next year, we'll be back more in a normalized spend rate. And again, it doesn't relate to any accounting changes.

Michael Manelis :

Josh, this is Michael. I think I would back you up a little bit and say it's probably like that third week in September. And again, you're hitting a period of time which you see seasonal softening. So, it is not uncommon to see demand start to soften. And what we saw in that kind of later part of September specifically in the San Francisco and Seattle market, as things were trailing off, you clearly saw a market react very quickly with concessions increasing and rates coming down to basically get enough demand to hold occupancies. And that has manifested itself throughout the month of October with continuing deceleration, but it's not like the deceleration has been even more rapid through October. I would tell you it's kind of been at this level now for a while, but we do expect rates to keep decelerating a little bit. But the demand right now in those markets needs to be stronger in order to stop the deceleration rate. And we're just -- we don't have anything that would suggest that we should model that way right now.

Michael Goldsmith:

Good morning. Thanks for taking my question. We've seen new lease rate growth fall quite a bit faster than renewal rate. So how long can the gap remain wide? And are renewing residents more aware of pricing and pushing back harder on renewals? Or are they just accepting the rent increase? Thanks.

Michael Goldsmith:

That makes sense. And my second question is, in this environment, how do you think about your relationship with Toll Brothers? Is there a greater opportunity to push harder and deliver units into a more favorable supply environment in the expansion markets? And then along with that, have you changed your acquired yields on development? Thanks.

Alexander Brackenridge:

Yes. And I think -- it's Alex. With the 10-year in the high 4s, you think cap rates have got to be in the high 5s. And you think that development yields have got to be mid-6s or high 6s. So, the challenge right now is just getting a project to underwrite with that hurdle. Construction costs are not going up like they used to, but they're not going dramatically down and rents are not booming. So, it's very hard to get to a number that underwrites and Toll understands that and so do our other potential partners and ourselves as we look at projects we might do on our own or with partners, it just very, very difficult to make the numbers work.

Michael Goldsmith:

Thank you, very much.

John Kim :

Thank you. I wanted to ask about Seattle and your comments today that seems like it's more of a demand issue and a lack of job growth versus last quarter, where I think you cited it was more of a supply risk and there was a lot of optimism on the Amazon return office. So, I guess my question is, has that Amazon pull faded and maybe disappointed as far as drawing in employees and some of the peers? And when do you expect the supply to peak in Downtown Seattle?

John Kim :

Okay. That's helpful. And then, Mark, one of your answers, you mentioned that acquisitions are in pause for now. I was wondering if there was a cap rate or spread to your cost of capital over the 10-year that you would be looking to transact at? Or is it more about the timing and the volume activity anticipated over the next six months to nine months and for selling in the market?

John Kim :

Thank you, so much.

Jamie Feldman :

Great. Thank you, for taking my question. I guess sticking with acquisitions, what is your appetite as you think about your target markets? I mean what is your appetite to do something big? Are there -- as you look at the portfolios that are out there, are there anything that you think would be particularly interesting? Or do you think the game plan will be kind of singles and doubles as you sell out of more noncore?

Mark Parrell:

Just to add, I mean, in 2021, the last time the market was open full blast, I mean, Alex bought and his team, more than $1.7 billion of assets, almost entirely in those expansion markets and a little bit in suburbs of Seattle and Boston. So, we are capable of hitting a lot of singles and scoring a lot of runs by doing that. So, we're happy to acquire in small dribs and drabs if that gets us to our goal. But as Alex said, we're open to portfolios, but they just need to make some sense. And a lot of what we've seen, you're getting three things you like and two you don't, you're not really ahead of the game.

Alexander Brackenridge:

Yes. We're not looking for perfection to be clear, but there's nothing that's compelling right now.

Mark Parrell:

You guess it right. I can't say very much. That just kind of came over the wire to us, too. We are unfortunately in a very good company with a lot of our public and private competitors are in that suit as well. So again, we haven't analyzed it. We haven't even been served to our knowledge. So, it's hard for me to have any real comment except to say it's not uncommon to have copycat lawsuits filed by other members of the plaintiffs’ bar or by the states and the District of Columbia when you have a lawsuit like the antitrust case that's being litigated in Tennessee and Federal Court that's out there and gets publicity. I'm not sure it's a new risk. It's the same risk in a different place. And again, let us analyze it, and if it's appropriate to comment further, we will.

Operator:

We'll go next to Rich Anderson with Wedbush.

Michael Manelis :

Rich, this is Michael. I don't have that in front of me right now, but I can tell you that it clearly steps up and it's got to be in the positive 1% or 2% range because it's just going to keep sequentially building as you turn the corner into the year.

Michael Manelis :

I don't have that specific number by month outside of this fourth quarter. But I'd be surprised if it's not up near that 1% or greater number.

Mark Parrell:

Rich, it's Mark. I'm trying to answer that. I mean there are tons of rules about who you can and can't rent to. And California, as you sort of implied, as more rules than most, and we're certainly going to comply meticulously with all of those rules. But this is, again, an issue when you create this regulatory framework where delinquency is more expensive, you do motivate us, and we are using our data analytics tools and other means to try and determine whether our credit standards should be raised even further because now the marginal cost of delinquency, which is what your question was getting at, is higher. So, we need to decide whether instead of, call it, three times income to rent, we need 3.5. But we need to do that thoughtfully. We need to do that in a way that doesn't completely tank occupancy. So again, we're rational actors like all the operators are in that market. And we have the advantage of having a great team and a lot of good analytics, but we'll certainly comply with the law, but we're going to look really hard at is there a different cutoff, but there is no group of bad actors. There's not like some particular percentage that's causing this problem. It's more that the processing of delinquencies takes longer. So therefore, just the normal delinquency is in the building three months instead of two. And so now I have one extra month, that's real money, what do we do to address that? Maybe nothing, but maybe it is a change, too. But I think are already pretty stringent credit standards. And so, we'll see where we go with that.

Michael Manelis :

Yes. Rich, this is Michael. So, I guess I can just answer a little bit on that and tell you, as an industry, it is exciting. Mark mentioned a little bit around the data and analytics. But what you're seeing within our industry is there is a lot more available data around this. There are new kind of screening tools that are coming to the market, screening processes that do leverage kind of different data points than conventionally the industry has looked at. There's clearly identity verification tools that are coming into play, not only for the touring side, but the application side. And you're starting to see more and more of this alternative security deposit kind of programs come into play. I think all of these things together in the blender actually do help start mitigating some of what I would characterize as fraud or bad actors in the system.

Operator:

We'll go next to Adam Kramer with Morgan Stanley.

Michael Manelis :

Yes. Adam, this is Michael. I think right now, we put the range out there because it is hard to move that number much more than 10 basis points. And it is our assumption as to where do we land on 12/31. So, you start 1/1, what does that rent roll look like? And what is the embedded growth from the leases that you have in place. Typically, we wouldn't really give a range, we'd give a number, but you do have some volatility sitting out there right now, not on kind of the renewal front, the growth that we're going to get from renewals feel pretty stable. But you could see concessions tick up. You could see rates decelerate a little bit more or the inverse. You could see things pull back a little bit. And that's why we're giving you that 10 basis point spread. The midpoint of our guidance is PEG at the 1.4% which is the middle of that embedded growth.

Robert Garechana:

Yes. I'll start and maybe Michael can augment, if you will. So, I think if I understand your question right, you're kind of looking at the pricing trend looking at the spread between the lines, and saying, like, how does that square with my new lease change? And I guess I would tell you to start on your new lease change. There is a lot of noise around mix, and we do all terms. So, we report all terms in our new lease change. So that means that you could have had a lease that was signed in August that was for -- at a premium rent that was for three months reset in October. And therefore, you're going to have a much bigger change than what would be reflected if you just looked at those lines and said, everybody is on a 12-month lease, everybody's on a year-over-year basis, and that does create a decent amount of noise. If you look and dig into the numbers, there. You also have some level of -- even though these are small as a percentage of total, meaning most of our leases are 12 months, there's enough noise in there and enough volatility in the transaction base to not make that comparison kind of apples-to-apples. What we do think is really helpful for the price -- in pricing trend and why we present it is just to look at the overall kind of directionality of where prices are going and where they are relative to seasonal trends overall. So, I would say the pricing trend is best suited for a directional viewpoint and the new lease change is really what's going into the revenue line and it's really what's supporting your GRP and your revenue overall.

Mark Parrell:

Thanks, Jennifer. I want to thank everyone for their time and interest in Equity Residential today, and look forward to seeing everyone on the conference circuit over the next few weeks. Thank you.

Martin McKenna:

Good morning, and thanks for joining us to discuss Equity Residential's second quarter 2023 results. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer; Alex Brackenridge, our Chief Investment Officer is here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.

Michael Manelis:

Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review the second quarter 2023 operating performance in our markets. We continued to produce very solid results with same-store revenue growth of 5.5% in the second quarter that are in line with our improved May guidance expectations. Results are driven by a continuing improvement in delinquency, along with a continued healthy fundamentals in the business. As with last quarter, East Coast markets continue to outperform West Coast. Our results to-date reflect our view that we have previously shared with you that pricing trends will follow a normal, albeit slightly muted seasonal trajectory. Generally, layoff announcement seem to have dissipated and our average resident remains in great financial shape with rent-to-income ratios during the quarter for new residents continuing to hover around 20%. Resident lease breaks and transfer activities to reduce rent often early indicators of resident economic stress remained below pre-pandemic levels and in line with seasonal expectations. The overall employment picture continues to be healthy and young adults are choosing the attractive lifestyles available in our markets. Single-family home purchases continue to be an expensive proposition. In fact, less than 8% of our residents gave bought home as the reason for their move out in the second quarter, which is well below the 12% norm for this period. Combined this with the overall favorable competitive new supply position, we face in most of our markets and we are on track for a good year in 2023. As a reminder, a combination of more difficult, same-store revenue comparison periods, including the absence of governmental rental relief this year and a reversion to a more normal rent growth pattern will result in more moderate, but still above historical growth in the second half of 2023. As we sit here today in the back half of our primary leasing season, the portfolio is 96% occupied with good demand and resident retention. We expect a continued healthy trajectory for the remainder of the leasing season. Our portfolio-wide occupancy is being depressed by turnover in Southern California, primarily LA, as we work our way through the delinquency issues. In the longer run replacing, these vacant units with paying residents outweighs the slightly lower short-term occupancy. Now, let me spend a few minutes talking about market performance. So let's start with the East Coast. New York was by far the top performer for the second quarter with same-store residential revenue growth of more than 13%. We have very little competitive new supply in the market and our occupancy sits near 97%. Demand indicators continue to be positive, making this market the expected top performer for the year Boston, produced slightly above 8%, same-store revenue growth in the second quarter, driven by strong demand across the sub-markets with our urban properties outperforming our suburban ones. We continue to hear stories of tough commute times for suburbanites that are resulting in residents coming back to the city. While new Supply in the market is above the five-year average, the large majority of it is not competitive with our assets and appears to be readily absorbed. Heading down to DC, this market continues to impress with same-store revenue growth of 6.3% in the second quarter, despite a high level of new supply across a number of sub-markets. The market just keeps going, absorbing these units at a healthy pace and delivering some of the best revenue growth in the portfolio. As an example, Reverb, our new 312 unit development in Central DC, which is currently in lease up is delivering weekly application volumes well above expectations allowing us to reduce concessions and push rate. Occupancy in the DC market is just below 97% and we are optimistic for continued strong performance for the year, but recognize the increased volume of new supply that will be delivered in the rest of this year. Now for the West Coast. Our Southern California markets achieved some of the strongest sequential revenue growth in the quarter demonstrating the early financial benefits of backfilling long-term delinquent units with paying residents. Unlike the Orange County and San Diego markets, which posted good quarter-over-quarter revenue growth, Los Angeles produced slightly negative quarter-over-quarter revenue growth. This reported number however, is not indicative of the health of the market, but more noise from bad debt due to large rental relief receipts in the second quarter of 2022. When you strip this noise out, same-store quarter-over-quarter revenue growth would have been over 5% positive for LA. We are still seeing healthy demand in Los Angeles and have not felt any negative impact from the worker strikes in the entertainment industry. Our direct exposure is not significant, but acknowledge it may soften overall market conditions in the coming months which could slow our ability to relieve some of our vacant units. In addition to the strike, we continue to see more non-paying residents move out, which is resulting in at least 100 basis point drag to occupancy in the market. We view both of these issues as isolated short-term impacts to the market, as the strikes will end, and delinquency will gradually resolve itself, which coupled with the long-term demand we see as catalysts for next year above average market growth in LA. Moving to San Francisco, a market reported respectable quarter-over-quarter revenue growth at 3.1%, which would have been 4.6% after adjusting for the impact of rental relief received in the second quarter of 2022. Overall, the San Francisco market demonstrated leasing velocity in line with normal seasonal trends, and met our expectations for the second quarter. The South Bay, which represents 37% of our NOI in the market continues to be a bright spot. Prospects are telling our local teams that the area meets their hybrid work requirements by keeping them close for in office days and providing better lifestyle options and more space and access to the natural outdoor amenities. Our recent resident survey tells us that 77% of our residents in the San Francisco Bay area are either hybrid or fully in office. In downtown San Francisco, we hear from our teams that new residents say that they are leasing to get closer to work. The good news is that the quality of life in downtown San Francisco continues to improve and the local government’s focus seems to be showing some signs of promise. While our pricing power in the sub-market remains less than desired and concessions are still being used. Downtown has been stable and allowed us to capture demand and regain occupancy to 96% in that sub-market. The overall sentiment in the San Francisco market indicates that the tech layoffs are mostly behind us, and there's a lot of momentum around AI, which keeps us optimistic on the continued recovery in this market. Heading to Seattle, while there is vibrancy in the market with improvements in the quality of life issues, some return to office activity and tourism back to pre-pandemic level, the market continues to underperform our expectations. While net effective pricing in the overall market is now 2% below the March 2020 levels, there is a wide dispersion among sub-markets with the downtown Seattle well below the March 2020 levels, primarily due to the continued concession used in this sub-market. Overall, Seattle has been a market that has struggled to deliver consistent strong demand over the last couple of years, as its tech-heavy workforce has had the flexibility to work from anywhere. But this market to fully recover, it needs to see more consistent, strong job growth with better quality of life conditions that will bring people back to the market. The good news is that we are starting to see some positive signs in South Lake Union, which is a tech-heavy neighborhood in the City of Seattle, and this is likely due the Amazon return to office, which began in May. We are hopeful that this activity will soon spill over to the other downtown submarkets. Finally, in our expansion markets, which currently make up about 5% of our same-store NOI, revenue performance has been mostly in line with our acquisition performance and guidance expectations. Our portfolios in Denver, Dallas and Austin continued to be the most impacted by new supply like we discussed last quarter. Meanwhile, Atlanta remains a bright spot with double-digit revenue growth for both the quarter and year-to-date. In a minute, I will turn it over to Bob to discuss our operating expense performance and the balance sheet. But let me take a minute to discuss our operating platform, which is humming as we continue to reap the benefits of our focus on innovation and the technology evolution at Equity. We are focused on the customer experience and the feedback we receive from our customers help us in developing our platform to drive superior financial performance and customer satisfaction. The insights we gained from our resident survey, which garnered more than 32,000 responses validates our strategy of combining our growing data science capabilities with streamlined execution, while delivering self-service solutions to our customers. Leveraging data and analytics on top of our resident feedback will create further opportunities to expand our operating margin. With a fully centralized and mobile operating platform, we are in a strong position to create a seamless customer experience with a platform that continues to allow us to innovate, experiment, and rapidly scale what works across this portfolio. I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these terrific operating results. With that, I will turn the call over to Bob.

Operator:

[Operator Instructions] We'll go first to Eric Wolfe with Citi.

Robert Garechana :

Hey Eric, it’s Bob. So, looking at kind of our NFFO for Q3 and Q4, there's nothing really in particular that’s a standout on a one-time item. It's really the cumulative growth in NOI that you're seeing in Q3 and then pushing that into Q4 coming from same-store. Drilling down a little bit into that, I would say the only thing from a sequential standpoint that is maybe a little bit abnormal is the bad debt component. So we're seeing bad debt improve in the fourth quarter and in the third quarter sequentially as we get back to a normalization. So, beyond that there isn't really anything sequentially strange about the - or one-time in nature about the growth for runrate. As it relates to ’24, I think it's a little early to talk about kind of ‘24, kind of where we are in terms of positioning. But what I would tell you is our numbers are kind of following that typical seasonal pattern that we've seen and same-store is really driving the operational results.

Michael Manelis:

Hey, Eric, this is Michael. So, I think right now, of course we're watching to see is anybody turning keys in breaking leases at a pace that's kind of above, which you would expect to see. And we really just haven't seen any impact from the strikes and our onsite folks are telling us just the overall direct exposure to it. It doesn't seem to be significant. I think my comments in the prepared remarks were, you know right now we clearly are running occupancy about 100 basis points below normal for this time of year in that LA market. So the ability to lease up some of these units that have been vacant which, were from the delinquent - long-term delinquent residents moving out earlier in the year than what we thought. We just think that if the strike is prolonged and keeps going on, it could just create a little bit of a pause in people's willingness to make decisions to move - to move into a new place. And that could impact just the overall demand profile in the market. But today, really not seeing anything and I'm not overly concerned about it. But it is something we just got to be aware of it.

Operator:

We’ll go next to John Pawlowski with Green Street.

Alexander Brackenridge :

Hi, yeah, John. This is Alex. Yeah, there would not be a robust bid today. Larger properties are harder to sell. There's some contrary in money out there. But I don't know if it's willing to make a big bet. So I really don't have an exact number because I just haven't seen a trade. I think most people if they didn't have to trade, just wouldn't be willing to accept the number. So, it's almost theoretical at this point. I think over time, that'll change as the markets continue to improve and access to capital becomes more normal. It's just such an abnormally hard time to raise sizable capital that I really think it would be a tough time. It was a distressed sale via pretty high cap rate and maybe not indicative of what the more or less distressed owner would be willing to sell at.

John Pawlowski :

Okay. That makes sense I guess, over the coming months or quarters when there is a little bit more on price discovery. Do you expect cap rates for these types of larger gateway trophy assets to be meaningfully higher than more suburban assets in what’s kind of post-COVID environment?

John Pawlowski :

Okay. Final question, Mark, just longer term as you see these cities heal from COVID, what - and not meant to be precise, but rough order of magnitude, what's the right urban or suburban mix in the QR portfolio five years from now on this call?

John Pawlowski :

Okay. Makes sense. Thanks for the time.

Operator:

We’ll go next to Steve Sakwa with Evercore ISI.

Michael Manelis:

Yeah. Hey Steve. This is Michael. So, for the renewal right now, you're right. We've got our quotes are out there for the next three months or so. It's been fairly consistent is what we've seen in the last couple of months. And right now based on conversations, we've been seeing through our centralized renewal team. We don't really expect to see a lot of variation. We think we're going to continue to renew about 55% to 60% of our residents and achieve right around, a 5% to 5.5% kind of achieved renewal rate growth, which incorporates a little bit more negotiation and typically what you see is as you get into the beginning of the peak leasing season, our centralized renewal teams we tightened up that negotiation range, thought to like 100 150 basis points on our quote. Now what we expect to see is, we get in towards the tail end of the peak leasing season. Just to kind of drop that off a little bit and probably negotiate about 200 basis points off of the quotes that are out there. But again, I think we remain really optimistic about the performance centralizing this team has really given us the ability to kind of pivot quickly and really deliver consistent results. In terms of the new lease pressure right now, I think if you would just look at some of the reported stats and you can see kind of in Seattle and San Francisco where you're still doing that concessions in those urban centers, that's definitely weighing in on some of our ability to have a new lease change kind of go positive. But again, I think overall, where we sit today in this leasing season, it's playing out kind of exactly like we thought where rents are sitting, where our new lease changes and the renewal performance and we just see kind of the markets reacting like they normally will through kind of the season. And that's kind of what's baked into the guidance that we have.

Mark Parrell :

Hey, Steve, it's Mark, and Alec may join in a second. I mean, we've got a, it's good to have a solid internal team, which we have and good JV relationships with toll and others and we see all this stuff. But as Alec has said on prior calls, it's just not penciling out. There's not enough of a risk premium in what is a risky endeavor of development. So, for us, I think acquisitions seemed like a better place to invest capital for the time being. I think what could change there is just some sense that, are the rents have moved a lot. I doubt costs are going to move down in any material regard, but I think right now, I like the development pipeline being smaller. In terms of the yields we’re looking at, it’s mid to high fives on our existing portfolio. The Laguna Clara deal in California, which is a one mile away from Apple headquarters deal was a little lower than that. It's an existing asset we’re densifying. So there's less risk since we know the area so well. But beyond that, Steve, they're kind of high-five type of situations and to do a development deal, we need something to get into that close to that six range. And I don't - we may start a deal this year. We may not start anything we'll see.

Mark Parrell :

Thanks Steve.

Josh Dennerlein:

Yeah. Hey guys. Thanks for the time. Michael, in your opening remarks, you mentioned operating platform initiatives and I think you mentioned some margin expansion potential there. Any early thoughts on where the margins can ultimately go and maybe over what kind of time frame you are thinking?

Robert Garechana:

Yeah. So, from a margin standpoint that will all be a accretive to margin. I guess, I would say that in the states we talk we all talk about very different margins. So I'm going to talk about the margin I guess, that I think is most important which is the cash flow margin, which we highlighted at the NAREIT Conference. So, cash flow margin meaning after CapEx after expense at all of that. We're already running at a league-leading level as it relates to that cash flow margin. And when you layer in the initiative, that Michael is talking about and that's inclusive of what you have to spend in order to achieve that that ROI and CapEx, etcetera, we think we can get a few percentage points of incremental increase there and that's what we're striving for.

Michael Manelis:

Yeah, so Josh, this is Michael again. So right now, in Seattle, we’re kind of actually in a low of going up against kind of head-to-head competitive supply. If you look at what's expected to be delivered and completed in ‘24, I think we're going to see that Seattle number kind of hinge up on us. And, it is something we're absolutely kind of watching and kind of making sure that those units will be delivered. And when we create our guidance for ‘24, it's something that we will fold into that market. For us right now, Seattle, it's just been - it's kind of gets momentum and then it stalls a little bit. And then it gets momentum. So we really just haven't felt that consistent kind of strong job growth that's really needed to get us back on track and really get us out of that concessionary environment. But to-date, it's not really the new supply that's been impacting us.

Josh Dennerlein:

Appreciate the color. Thank you.

John Kim:

Thank you. You described the strong backdrop in your markets and potentially some demand catalysts going forward. But if we just wanted to isolate July, it looks like the blended lease growth rates had decelerated versus June. And I'm wondering if you – if that surprise you as well or you know, potentially it seems like it would have peaked now, rather than picking a month ago.

John Kim:

Okay. Thanks for the color. On the secured debt that you raised at 472, it looks like your unsecured notes with the similar term trades around 50 basis points above that. How does that spread – is secured is unsecured? How is that 50 basis points compared to historical? And if this continues with the secured market look more attractive to you going forward.

John Kim:

Great. Thank you.

Jamie Feldman:

Great. Thank you for taking the question. I was hoping you can dig a little deeper into DC across the different sub-market. It seems, I could tell that pretty well, but there's also a decent amount of supply. So kind of what's your outlook for the back half of the year and into ‘24 in that market?

Jamie Feldman:

And there’s been a lot of talk around the government not bringing certain agencies back to the office. Is that something that you – that’s kind of contemplated in the stats you are seeing already? Maybe those aren't really tenants that you see in your buildings or do you think that’s a potential drag to comps?

Jamie Feldman:

Okay. Thank you. That's very helpful. And then, I guess a similar question across the markets in Seattle where you know, so far this cycle we've seen major differences depending on where in the market assets are located or even diverse today. What are your thoughts there? And what do you think the implications are? Transit matters much or how should we be thinking about your outlook there?

Jamie Feldman:

Okay. Alright. Thank you.

Haendel St. Juste :

Hey there. Good morning. Why don't you go back to the West Coast markets for a bit? I was curious, if you could give us a bit more color on what you are seeing in terms of concessions maybe between San Fran, Seattle, and parts of LA? And then, at a high level, what are your blended rate growth expectations for the West Coast versus East Coast markets in the back half of the year? Thanks.

Haendel St. Juste :

That's helpful. Thank you. And where's the loss to lease in the portfolio today? And where is it highest and where is it lowest?

Haendel St. Juste :

Got it. Very helpful color. Thank you.

Alexander Goldfarb :

Hey, good morning and happy 30th anniversary. So two questions on both actually around acquisitions. So, Mark, Sam used to talk about trading sardines and eating sardines. As you guys look at your experience in the - in the - especially in the urban markets, the bigger assets, do you see those assets in EQR going forward? Do you see them more as trading sardines or eating ones?

Alexander Goldfarb :

Wait, I guess what I'm saying, what I'm getting at is given the volatility that we've seen in the urban markets, do you think that it's better for EQR going forward to be more nimble. And say, look, we have a base of assets that we like more in the suburbs where it's harder to get in, harder to get out in the cities where, you'll go up to a peak, where you have record rents. And it's easier to sell and then sort of trade around. That's what I'm trying to get at. If the urban markets are more like trading markets versus long-term markets, so you're always trying to sort of arbitrage exposure.

Alexander Brackenridge :

Yeah. Alex, this is Alec. And I would just add that take Manhattan or actually Boston and DC relate any of our urban markets to reproduce those portfolios would be virtually impossible. I mean, Manhattan, I don't know how you'd find ‘25, really well located assets in any amount of time. So we've got an unusual opportunity that we're taking advantage of today and you're seeing in Manhattan it’s the best performing market in the country. And you just couldn't decide all of a sudden you wanted to reproduce that.

Mark Parrell :

Yeah, I'm going to split this up a little bit for the team to answer. I think I want to start by Alec talk about cap rate certainly matters a ton. But we also think a lot about replacement cost and I'm going to ask Michael or Bob to just talk about platform scaling, margin expansion at EQR, those kinds of things Alex that can affect year two yields. So, why don’t Alec?

Mark Parrell :

Yeah, and I think from the operator’s standpoint, I think we have worked really hard over the last couple of years to build a platform that is highly scalable. So, when we go into these markets, we're looking really at the ability to kind of leverage staff across properties, put them onto our platform, kind of put them into our pricing system and it's clearly accretive from an operating margin for us when we're looking at underwriting these deals. Right now, when we look across these markets, any of the acquisitions we're looking at, we're saying even in our existing markets, what benefits do we get by bringing this into that portfolio? Whether that’s at a submarket level or the market as a whole.

Alexander Goldfarb :

Thank you.

Operator:

We’ll go next to Michael Goldsmith with UBS.

Robert Garechana :

Yeah. So, good question, Michael. It's Bob. So in the back half of the year, we will actually finally switch to bad debt helping with the growth rate by about 30 basis points and the reason is because, we continue to see that sequential improvement of bad debt and we will cross over the difficult comparable period, that relates to the rental relief payments at in the prior year. That accretion or that benefit to total revenue growth is likely not going to occur until the fourth quarter, because in the third quarter of 2022, you still had elevated rental relief, but we think we will cross over there. We think at the, by the end of the year, when you look at the full year basis, we will end the year around, call, it 125, 130 basis points as a percentage of total revenue and bad debt, which is still elevated relative to the historical norm of 50 basis points and leaves opportunity for more contribution to growth as you go into 2024.

Mark Parrell :

Yeah. Great. Great question. Very fair. I think you're going to see the baton kind of pass. I think for a few years, these Sunbelt markets are going to be pretty stressed. And I think a lot of the owners of these assets aren't long-term owners. They’re developers with impatient capital, expensive development debt and we can buy those properties again for a good basis as we just discussed. And add them to the portfolio. I think our kind of resident is increasingly in some of these Sunbelt markets. But yet the Coastal markets, have real supply advantages that you're seeing right now. So creating a real balanced portfolio for our investors, I think for the next year or so, they're going to benefit from just better coastal dynamics on the supply and demand side. I think after a while those things will even out, and I think they have a portfolio that year-in and year-out outperforms, not just in certain periods, but year in and year out. It just requires more balance between urban and suburban and coastal and Sunbelt. And we're really balancing the demand and supply, risks, and opportunities. We’re thinking a lot about regulatory risk. And we're thinking a bunch about resilience. The cost for example of insurance in Florida. The cost of casualty and repairs and things like that are getting more significant. So, I think as we talk to our investors and I think this has been well received and the instruction we’ve received from the Board is to again, try and create this portfolio that's a little more balanced as to opportunities and risks. And I think what our investors will get are hopefully league-leading numbers for the next, I don't know how many quarters, 18 months to 24 months. And then, hopefully, at some point we'll start to see supply abate and these other new markets and we'll be there to take advantage of that having purchased at an attractive basis. So, in my hopes and dreams, that's how it would play out.

Mark Parrell :

Thank you.

Adam Kramer:

Yes. I think you've done a really good job of kind of presenting pricing trends on a kind of a seasonal or sequential basis historically. Thinking about 5.24 in your most recent deck for example. Just wondering, thinking about kind of the, the late summer months and into the fall, maybe just walk us through your assumptions for kind of growth relative to the normal seasonal pattern?

Adam Kramer:

That's super helpful. Really appreciate that color. And then, I guess, just frankly a kind of a similar question, but thinking about back earlier in the year, I think you guys put out a kind of 2.5% market rent growth forecast for the full year. Wondering if it you know if this point in the year kind of knowing what you know you have the half year results in so far. Would you make any kind of changes to that number? Or is that kind of still how you are thinking about for the full year on average 2.5% market rent growth?

Adam Kramer:

Thanks so much for the time.

Mark Parrell:

Thanks, Roots. Thank you all for your time and interest in Equity Residential today. Enjoy the rest of your summer and we look forward to seeing many of you out on the Fall Conference Circuit. Thank you.

Martin McKenna:

Good morning, and thanks for joining us to discuss Equity Residential's first quarter 2023 results. Our featured speakers today are Mark Parrell, our President and CEO and Michael Manelis, our Chief Operating Officer. Bob Garechana, our Chief Financial Officer and Alex Brackenridge, our Chief Investment Officer are here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.

Michael Manelis:

Thanks, Mark, and thanks to everyone for joining us today. This morning, I'm going to review key takeaways from our first quarter 2023 operating performance in our markets, along with same-store operating expenses. As Mark mentioned, we produced very good same-store revenue growth of 9.2% in the first quarter. These results were ahead of our expectations, primarily due to continuing improvement in delinquency along with continued healthy fundamentals in the business. Before I get into more details on these topics, I want to emphasize that as we sit here today, the early stages of the leasing season and its setup remains strong. With year-to-date pricing trend improvement just above 3.25%, which is where we would expect it to be at this point in the year and is also consistent with expectations underpinning guidance. During the quarter, we continued to see good demand and strong resident retention that produced low turnover, stable occupancy and solid pricing power. Despite some recent negative job headlines, our average resident remains in great financial shape. With rent income ratios during the quarter for new residents continuing to hover around 20%. The Resident lease breaks due to job loss and transfer activities to reduce rent, often early indicators of resident economic threats remain below pre-pandemic levels and in line with seasonal expectations. A resilient labor market, along with a large number of young adults choosing the exciting attractive lifestyles our markets provide, along with the convenience and cost benefits of renting continues to result in application volumes that are on par with the same period last year and continue to grow as expected into the leasing season. Couple this with the favorable supply position and lack of single-family home ownership competition that Mark outlined, and we should be positioned for another good year. Results to date support the view we shared on our February earnings call that we expect pricing trends for this year to follow a normal, albeit slightly muted seasonal trajectory. Given the difficult comparison periods for 2022 for the back half of the year, along with the return to normal rent growth patterns, we expect that the first quarter will be our highest reported same-store revenue growth with more moderate but still above historical growth in subsequent quarters. While there may be some uncertainty about the economy, including increasing layoff announcements, as I said previously, we are not seeing this impact our day-to-day operations. While we acknowledge that we are generally a lagging indicator, so far so good as we head to our primary leasing season. Now let me spend a few minutes talking about our market performance. Let's start with the East Coast. New York and D.C. are both exceeding expectations, while Boston is in line. New York was by far the top performer for the first quarter with same-store revenue growth of over 19%. With very limited and isolated supply, the outperformance in this market is consistent across all submarkets. Occupancy is currently 97.5% and all demand indicators continue to flash green, making this market the expected top performer for the year. Turning to D.C. Performance has thus far been a pleasant surprise with the market continuing to absorb significant new supply, while still delivering good revenue growth. Similar to New York, occupancy is strong, and so far, all submarkets remain resilient in the face of new supply. Now for the West Coast, Southern California continues to post good numbers. And most notably, we are starting to see improvement in delinquency, particularly in Los Angeles, which has the heaviest concentration. As the eviction moratorium expired, we are seeing more of our delinquent residents figuring out the best option that works for them, which is either paying rent or moving out. This activity started to pick up pace late in the first quarter, which was sooner than we expected and has continued into April. While these move-outs are pressuring physical occupancy, it will benefit our financial results later in the year as we have good demand in the market to replace these residents with new residents that will pay their rent. Our remaining 2 West Coast markets of San Francisco and Seattle have posted respectable quarter-over-quarter revenue growth with good demand, but pricing power remains less than desired, especially in the urban centers of both of these markets. The San Francisco market is performing in line with our expectations, which already assumed a slow recovery. Use of concessions, mostly in the downtown submarket remains common along with limited pricing power. Meanwhile, the South Bay submarket is demonstrating signs of improving pricing power and stronger occupancy with less widespread concession use based on a combination of factors that includes a greater variety of stable employers who are committed to the area, coupled with just a better overall quality of life. Heading to Seattle, the overall market continues to demonstrate a lack of recovery, which wasn't completely unexpected, but is behind our forecast. Similar to Downtown San Francisco, Downtown Seattle lacks pricing power with concessions being used on over 70% of our applications. The East side, which we felt may hold up a little bit better, is still outperforming downtown, but is a little more challenging than we thought based on supply pressure, layoffs and overall just less hiring in the submarket. Amazon's May 1 mandatory return to the office date has a potential to be a catalyst for this market. Finally, in our expansion markets, which currently make up a little less than 5% of our same-store NOI, revenue performance has mostly been in line with our acquisition performance and guidance expectations. As we expected, we are being impacted by heavy new supply in Austin, Dallas and Denver. Meanwhile, Atlanta remained strong with double-digit revenue growth for the quarter. Now moving to expenses. We reported same-store expense growth of 7.2% in the quarter, which was slightly above our expectations. We had always expected Q1 growth to be higher than our full year guidance range, mostly because the growth during the first quarter of 2022 was so low, but also from pressure on a few specific items that outpaced positives in a few other expense categories. On the favorable side, we continue to benefit from good performance in real estate taxes and payroll, along with utilities, which were still elevated but lower than expected. On the unfavorable side, incremental cost in repairs and maintenance, other on-site costs and higher-than-anticipated insurance costs drove higher-than-expected first quarter same-store expense growth. For most of these costs, we had anticipated an increase but not quite to this degree. Elevated repairs and maintenance was in large part due to increased outsourcing in the quarter much of which stemmed from our own internal teams in California, focusing on the after effects of the severe rainstorms, which resulted in incremental outside vendor assistance. Higher legal and administrative costs related to faster progress in response to the expiration of the eviction moratorium, the benefit of which can be seen in our bad debt net. Insurance expense was higher due to tougher conditions than the already challenging environment we assumed on the renewal of our property insurance policy, which was completed during the first quarter. Despite this pressure, we remain comfortable with our existing guidance range on the full year same-store expense growth. At this point, we expect slower full year growth in real estate tax and utilities than we initially expected to offset the overages experienced in other categories in the first quarter. Lastly, I want to spend a minute on our focus on innovation and the technology evolution of our platform. In 2023, we have a positive NOI impact of just over $10 million included in our guidance with about 2/3 of that coming on the expense side primarily in payroll and repair and maintenance. This benefit will mostly be realized in second half of the year which will contribute to lower expense growth for that period. On the revenue side we will continue to focus on other income items like WiFi, parking and pricing optimization. We will also leverage data analytics to create opportunities to expand our operating margins. Our vision is to augment pricing and renewal strategies by combining our growing data science capabilities with streamlined execution while delivering self-service solutions to our customers. We will continue to leverage our mobile platform to create opportunities to share on-site employees across multiple properties. With a fully centralized and mobile operating platform, we are in a strong position to create a seamless customer experience with a platform that continues to allow us to innovate, experiment and rapidly scale what works across the portfolio. This uniquely positions our company to continue to create additional revenue streams while managing expenses to maintain and grow margins even in an inflationary climate. I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these terrific operating results. With that, we will turn the call over to the operator to begin the Q&A session. Thank you.

Eric Wolfe:

Just looking at your same-store revenue guidance, it looks like you're expecting roughly 4% growth for the rest of the year, maybe a bit higher if you're accounting to be better trends in bad debt. But just curious whether it's sort of the majority of the drop-off happens in 2Q and then sort of stabilizes? Or if the drop-off is a little bit more ratable through the year?

Eric Wolfe:

Got it. And then I think you said you expect the peak leasing season to play out as it normally would. But I also thought I heard you say that rent growth might be a bit more muted for its history. So just trying to tie those 2 statements together? I'm just trying to understand if market rents are sort of growing as they normally would during the peak leasing season.

Mark Parrell:

Yes. Just to supplement that, Eric, it's Mark. It's the difference between guidance when we gave our guidance, we talked about the year being kind of like a normal year 2023, but maybe a little bit less of intra-period growth and what's going on so far this year. And so far this year, absolutely consistent with that expectation. So it's -- those 2 terms are being used to describe different things, guidance versus so far so good this year.

John Pawlowski:

Bob, the first question is on real estate taxes. I know this year is faring well. Just be curious, as you stare out the next few years, are you seeing any early examples or hearing any chatter that cities need to tax apartments a little bit harder to fill the hole left by office and other commercial real estate sectors that are seeing impaired valuations?

John Pawlowski:

Okay. And then last one for me. Michael, just curious if you could expand on the softness in pricing power you're seeing in Denver and your expansion markets. I know it's a small sample size of properties, but just curious how you're seeing fundamentals on the ground there relative to some softer West Coast markets.

John Pawlowski:

Okay. Would you expect Denver and Texas NOI growth to lag or outpace your legacy footprint over the next year or 2?

Operator:

Next question is from Steve Sakwa from Evercore ISI.

Michael Manelis:

Yes. Well, maybe I'll start, and Bob, you can kind of build a little bit on the bad debt. So in terms of just the leasing spreads and kind of guide, a lot of that had to do with where we were with our embedded growth, where we were with loss to lease, capturing the loss to lease. And I think I said, right, as we were working through the call back in February, we expected roughly 2%, 2.25% on new lease change for the full year, renewals right around 5% and blended is right around 4% for the full year. When you look at where we sit today, we're set up going into our peak leasing season, where, again, we're going to do 60% of the transaction. We're set up right where we thought we would be relative to the guidance. We have a little bit of pressure that we're doing more concessions in those downtown submarkets in Seattle and San Francisco. But that's kind of being offset by some of the outperformance we're seeing in the East Coast markets.

Mark Parrell:

And Steve, it's Mark. Just to help you with your mod a little. The governmental payments are really key to the volatility because in the first quarter of '22, we got about $9.5 million of governmental rental relief. In the second quarter, we got almost $15 million in 2022. So we need to make up that difference in terms of improved delinquency performance in the second quarter. And then you drop all the way down to a little below $6 million in the third quarter and then only $2 million in the fourth quarter of 2022. So you can see that those rental relief payments are key to understanding. So the delinquency, we think, will improve the whole year, but there could be quarters where bad debt net because it's being compared to a number with so much governmental rental relief in it is just not as good as it appears to be, and then the next quarter, you'll see it even back out.

Alexander Brackenridge:

Steve, this is Alex. Well, first of all, transaction volume is down pretty dramatically. So the closings will be down about 60-plus percent across the country. And that's pretty evenly spread among the different markets. So a lot less activity, but the sellers that do act now understand that cap rates are somewhere between 5% and 5.25%. So they're eager to transact. And that comes from really 3 different types of sellers. There's the private REITs that have the redemption request that they have to fulfill. So we're seeing some activity from them. The merchant builders aren't really capitalized to own property in the long run. They always expect it to be able to execute and get out of the deal. So a little bit of that. And gives some floating rate borrowers who have caps that are expiring that they are not able to cover. So there are sources of opportunity, but it's really been slow so far. But I would expect all 3 of those areas are more likely to pick up than not in the next 6 months. So we are excited to deploy more capital as those opportunities arise. And as you mentioned in the past, we've taken advantage of dislocation in the market. So we're certainly set up to that. But in the meantime, we're trading in and out of properties, so selling -- dispose opportunistically and taking advantage of acquisitions that we see. In terms of starts, I mean, they're dramatically down. Already this year, what we were thinking in our markets would be, say, 110,000 starts is now looking like it might be half of that today, and I expect even more things that we thought might start will drop off the list through the rest of the year. It's really hard to make a development work in an environment where cap rates are, as I said, 5% to 5.25%, you need a yield at least around a 6%. And you just can't get there with costs that may not be rising as high as quickly as they used to a year or so ago, but they're still going up, and obviously, financing costs are higher. So it's just really hard to make a development underwrite. So we expect to see more and more deals drop out, development deals.

Operator:

Our next question comes from Chandni Luthra from Goldman Sachs.

Michael Manelis:

Yes. Chandni, it's Michael. So we clearly have evictions filed right now with the courts. You are seeing a little bit of momentum pick up. I would tell you across the country right now, it feels like most of this stuff is set up at about a 6-month timeframe from the time you file to the time you actually get to your proceeding with a court date. But really what's happening on the collections front is twofold. So one, you have individuals that you are filing on that have a lot of past balances with you. But if they start paying you current month's rent, those past balances are somewhat protected still to date and go out into like '24. I think maybe some of them even stretch into '25. So you have a little bit of a longer tail to go after the previous balances to collect. But we are starting to see this resident behavior where they're making decisions either to move out in front of any kind of eviction proceeding or actually just start paying us their current month's rent knowing that we're ultimately going to have to come to terms with what happens with this previous balance. In areas where those balances are not protected, we have sent much of that over to the collection agencies and let collection agencies start working. That's a slow process because typically, what you need to see is a lifestyle change. You need to see somebody needing to go buy a car or a home or some other thing that then causes them to come to terms that they got to clean up that balance. So I think what you should expect to see is the court system is going to continue to move at this pace of, call it, the 6-month window. And you'll see us gradually just start chipping away at this delinquency and gradually start to improve the recovery of this -- of the past balance.

Robert Garechana:

Yes, certainly. To the extent that all of those historical balances that Michael just described have been written off. So to the extent that you collect them, you would see that as a current period pickup offsetting bad debt. So those collections would flow through. But as Michael mentioned, we would expect that. We don't -- haven't really incorporated much of that overall that we'd expect that to really trail.

Alexander Brackenridge:

Well, clearly, it has an impact. It's a big move in the rate from 1.5% to 5.5% in L.A. And it was designed to raise cap the [indiscernible] money for cities to build affordable housing. I think it probably had the reverse effect and that there won't be that many transactions, so they're not going to collect very much. So it may be that this gets reduced over time. So we don't know that it will be around forever because it doesn't seem to be well thought out public policy. But in the meantime, there are other ways -- other properties that aren't subject to the tax within California that we can transact on. And we can also consider joint ventures as an opportunity to lower exposure in a market like L.A., where selling a property may not make a lot of sense.

Operator:

Next question goes to Michael Goldsmith from UBS.

Michael Manelis:

Yes. So Michael, this is Michael. So concessions for us right now are really concentrated in those urban centers of Seattle and San Francisco. I think what you saw when we turned the corner into January, and we were getting on that first -- or the fourth quarter call, I was telling you that the demand was picking up, and you saw the concessions starting to slow down across most of the markets that absolutely held true almost all of the markets now have weaned themselves off of the concessions, except what we saw in somewhere around that middle of February and into March, you really saw the concession use pick up in those downtown urban centers of Seattle and San Francisco, and they've been fairly constant. I'll tell you the last couple of weeks, we see a little bit of hope right now that the demand is picking up. Application volume is picking up in those areas, and you could start to see us get to a place where we could start pulling them back again. But for the most part, just in the rearview mirror, they've been constant for the last couple of months for us.

Alexander Brackenridge:

Michael, this is Alex. The 5.7% really isn't a reflection of market. It's more a reflection of the property being in lease-up right now. So we're taking it over the middle of a lease-up and we're going to finish it off. So we're getting compensated for doing that. So I would say, as I said earlier on the call, the rates are somewhere between 5% and 5.25% for a typical deal. And so yes, we're getting a little bit of a boost there because we're taking on a little bit of a lease-up, but that's not an indication of market. And then in terms of other opportunities, I mean, we're obviously always looking for other opportunities, and it has been pretty slow though so far.

Nicholas Yulico:

So I want to go back to the topic of job losses. And I know you said that you're really not seeing that much of an impact. But are there any indications yet of job losses of residents impacting expected turnover? I mean, is there anything you're learning now as you're sending renewal notices out for the spring? And I guess if there's any differentiation you're seeing on this topic between tech heavier markets like San Francisco, Bay Area, Seattle, where there has been more high-profile job losses announced versus other markets of yours.

Michael Manelis:

Yes. And I think, one, you got to put into context that the reported turnover for the first quarter was really low. I mean it's not quite record little, but it's really low number. So the absolute number of move-outs that we're having is clearly below any kind of historical norms. And when we start drilling in and we look at those reasons for move-out, we're really not seeing anything indicative of changes. You're not seeing kind of job loss or job change pick up anything different than what you would expect for the first quarter of any given year. Specific into like a Seattle or San Francisco where you saw kind of more of the headlines and we said on the last call, we thought a lot of those layoffs were being dispersed across the country, not just heavily concentrated in those markets. I think what you've seen, we have not seen anybody really give us keys telling us they're breaking the lease or they're not renewing because they were laid off. What we do notice in those 2 markets is the in-migration, meaning what percent of brand new residents are coming to us from outside of that MSA. The in-migration in those 2 areas is less than what you otherwise would have expected, which I think makes sense given not only the layoffs, but more importantly, like the hiring freezes that have been taking place. So you're just not seeing them draw into the market like they used to.

Mark Parrell:

Yes. Again, it's Mark, Nick to start, and Michael may have something to add here. But I'll start by talking about the employment base of our residents as we see it in the market. So we looked at sort of the big tech majors, and we said what percent of our residents have stated that they're employed by those big companies in Los Angeles, and that's something on the order of 3%. So I think we just have very low exposure to those sort of tech folks in the very diversified L.A. economy. So I think L.A. just, frankly, is stronger than San Francisco Bay Area and stronger than Seattle right now where we have higher numbers of our residents employed by those sorts of people and probably bigger local economic impacts. So I think we're, in your opinion -- it's almost like we have 2 empty buildings in Los Angeles, we're delivering into same-store over the rest of this year and that we're going to fill up, and we've got the demand for it. So I think when you look at the local economy, that matches up very well with our portfolio. They're in content creation. They're in other businesses, some of which feel some pressure. But this disproportionate tech layoff, that isn't a Los Angeles phenomenon that's occurring to all over the country. In the extent there's any concentration, it's more San Francisco and Seattle than it is L.A.

Mark Parrell:

Yes, but the supply is being met by people that have jobs. That was the point of my comment. It isn't -- a lot of these people are in diversified industries. So it isn't like everyone is losing their job down in Los Angeles. There's -- it's very well employed down there. A lot of people looking for housing, a lot of demand, Michael sees good demand numbers in terms of applications and the like. So that's the source of our confidence, a diversified economy in which -- like I said, us and others are effectively delivering empty buildings into that, but I'm confident that demand will need it given what we see on the ground and given the composition of employment in the market.

Richard Anderson:

So back to the bad debt question. If you were to sort of magically flip a switch and you'd be back to 40 basis points bad debt like you'd see normally, would that recovery be less than the rent relief number that you -- gathered last year about $32 million. I'm wondering how much the rent relief overcompensated you or maybe under compensate you for the bad debt that you took on? I'm just trying to understand that math.

Richard Anderson:

Yes, yes. That's great. And then my second question is, Michael, I think you mentioned you're running a 3.25% market rent growth at this point. If memory serves, I think you said your guidance presumed 3% market rent growth for 2023. And I know you guys are trying to be careful about overpromising having not updated guidance yet, and that's coming later. But it seems to me you're ahead of the schedule from a market rent growth, particularly at this point in the year, shouldn't 3.25% barring a major disruption from some sort of recession. Shouldn't that really be a maybe a significantly bigger number as you get into the heavy leasing season and maybe that will be another driving force to you upticking your guidance, just a better market rent growth trajectory than you expected? If you could comment on that, please.

Operator:

The next question comes from Brad Heffern from RBC Capital Markets.

Robert Garechana:

Yes. So that would probably be -- the 1.7% would probably be something, call it, 20 basis points better, maybe a little bit more, maybe 30.

Mark Parrell:

Yes. I've got some numbers for you. I don't have the East Coast, but the Bay Area is about 14%. And Seattle is about 30%.

Haendel St. Juste:

A couple for me. I guess first question is can you provide the new and renewal numbers for March specifically? And where are you sending out renewal rates today for May? And what's the loss to lease in the portfolio today?

Haendel St. Juste:

Very helpful. Another question on, I guess, some of the charges in the quarter. It sounds like the property, legal and admin charges are tied to the eviction process, but can you comment on the other charges, the $5 million environment settlement and the $2 million data transformation project and if we should expect those in future quarters, too.

Robert Garechana:

Yes. The other components are adjustments to various kind of regular course litigation reserves that we made during the quarter as we got more information and adjusted our outlook. So those are all case-by-case dependent and depend on facts and circumstances at the moment.

Mark Parrell:

No, this all falls, it's Mark, below our deductible handouts. So this is all covered by us.

Alexander Goldfarb:

So two questions. First, on the insurance, you guys mentioned that and we've heard from others that insurance has become more challenging, expensive, especially in like Florida and Texas. So 2 parts to this. In your experience, do you would expect that the insurance provider will rapidly adjust new capital come in and that this won't really be a problem? Or do you think that it's actually could give you some opportunities to buy deals where the existing owner can't get insurance on their property and therefore, provides you guys with some opportunity to buy some of those in some of the expansion markets.

Alexander Goldfarb:

That is. The second question is the tax deal that you did in Atlanta, you guys have previously spoken about the 421a is here in New York and the drag it cost to earnings when those tax incentives dried up -- or sorry, matured off -- burned off. Do you see similar with the Atlanta and in general, are you looking to do more tax deals or your preferences to shy away from them except where on a case-by-case basis.

Alexander Brackenridge:

And in some cases, Alex, this is Alex. As the abatement burns off or when it burns off, some of the units might go to market. So you got to pick up there, too. So it's not all downside.

James Feldman:

I guess just big picture to your comments on maybe assets come to market for investment. Your leverage tick lower in the quarter. It looks like you've been met -- this year, you plan to match fund acquisitions with dispositions. To the extent you want to put incremental capital to work beyond asset sales just because you see so much opportunity. Can you just talk about the sources of capital to do that, you're having conversations with potential JV partners? If so, what kind of capital looks interested? And then what would you be willing to do in terms of leverage? And how do you think about your liquidity position today for investment?

Robert Garechana:

By 5 to 6x net debt to EBITDA.

James Feldman:

And can you talk about the returns that private market is looking for. Are those sources of capital are looking for? How are they underwriting apartments today? And what kind of trends are they looking for?

James Feldman:

Okay. And then finally, I mean, to your comments and everyone's comments, I mean, there's so much talk about supply. When you just think about the next 6 months, 9 months or 12 months, 24 months, like when do you think the supply chain really starts to kick in based on the delivery scale?

James Feldman:

No. I mean I know in your comments, you feel somewhat protected from supply based on where your assets are located. But clearly, a very large pipeline set to deliver over the next 2 years. When do you think that supply really starts to be felt nationally? It certainly doesn't feel [indiscernible] several months.

Operator:

And John Kim from BMO Capital Markets.

Michael Manelis:

John, this is Michael. I don't -- I haven't heard that. I mean I did hear a few kind of comments from prospects around what time they're looking for. So typically, they're showing uptake in tours. And these folks were thinking more like the June, July timeframe. There's definitely a little pause in the prospects decision-making process right now around, are there going to be more layoffs, will they actually get the offer to start when they want it. But it's nothing of a material nature because, again, our sequential build of application volumes, our foot traffic year-over-year, all of those things are trending in line with what we would say is a normal seasonal pattern. So we haven't seen anything like that.

Mark Parrell:

Yes, it's Mark. I'll take that. So being in a consumer-facing business, there's always some level of litigation costs. They're widely varying. There's no significant amount of RealPage related costs in there, but they are in there, but it's relatively small. The reason for that is that the case is at its early stages. And you should think about that going on for a longer period of time. They aren't resolved in weeks or months. It's more like years. But again, we feel very strongly about our position. We think these claims are without merit, and we're going to defend ourselves, and we continue to feel really confident in our prospects there. So there is some small amount, but it's small. Most of that just relates to just continuing legal costs from being in a customer-facing business in an industry that has regulation.

Adam Kramer:

Yes, I just wanted to ask about this California storm damage kind of cost. Look, I appreciate kind of the disclosure around 1Q impacts. Wondering just on if there will be further impacts in particular, if you could kind of quantify maybe the 2Q impacts or any other impacts going forward?

Adam Kramer:

Great. And then just on thinking through occupancy and kind of the occupancy versus renewal, renewal kind of pushing renewals kind of trade off. Look, recognizing occupancy, there's some drivers there in terms of physical occupancy, right, kind of what's happening on the on the bad debt and eviction side. But just thinking through how was that kind of -- that trade-off that you guys going through, right, managing occupancy versus pushing renewals? How would that conversation maybe evolved from 4Q to 1Q to today? Is there a change in kind of how you're approaching that and how much you're kind of willing or able to push renewals?

Operator:

And Linda Tsai from Jefferies.

Mark Parrell:

There's no riskless apartment market, and it's Mark. I'll start, and Alex may supplement it. I mean, if you're buying in some markets, you're going to have higher insurance costs, but maybe lower political risk. And then another market, you may have slightly higher political risk and a lot better resilience and maybe a better supply picture. Our whole investment thought process of being diversified is premised on the idea of kind of accepting these risks in small doses across the whole country and staying tied to these affluent renters so it doesn't change our mind. We just underwrite it and the deals will either work or they won't. I do think that some of the markets that have outperformed lately in the Sunbelt that have resilience challenges are really going to be pressed by these insurance costs. And frankly, maybe even the availability of financing if insurance is unavailable at some of the issue lenders are very sensitive to. But from our point of view, I mean, we're just going to run the numbers. I think these markets continue to have other subjective factors that are valuable to us. And I think they're going to remain investable the ones that we're interested in, for sure.

Michael Manelis:

Yes. I mean -- this is Michael. I said in the prepared remarks, I mean, New York, the strength is really kind of widespread across all of the submarkets where you have good demand, you have pricing power, you have the sequential build of the demand and rents moving up with really strong kind of results, both on the retention as well as the achieved renewal increase. In Atlanta, I think right now, relative to our expectations, we feel really good. We're not having that like direct supply pressure on us. We're not seeing kind of heavy use of concessions in our portfolio, and we have demand. And even the deals that we're looking at, one that we have to go through the lease-up or finish the lease-up on, we got a lot of confidence in the velocity, the weekly velocity of application volume there that they're going to perform really well.

Omotayo Okusanya:

Yes. On just capital recycling and the updated guidance there. I get it of buying assets that higher cap rates and selling us at a lower cap rate and kind of creating value that way. But I'm curious with your implied cap at like 6% at this point, according to our math, you did make some comments earlier on about kind of development starts slowing because that development doesn't tend to allow. How do you kind of think about that on the other side of the story, which is the acquisition side, are still -- is the idea still things are not going to be able to kind of pencil out for a while? And unless you're kind of matching asset sales versus acquisitions, you don't expect to kind of be doing much out there on the acquisition side as well?

Omotayo Okusanya:

And the focus from an acquisition perspective remains in your newer markets rather than some of the more established markets.

Omotayo Okusanya:

Got you. Okay. That's helpful. Would there be any interest in doing something in regards to office to resi conversion from your end or just the development risk and everything is just way too great for you?

Alexander Brackenridge:

And in New York, downtown where it was done a lot. That was on the back of a tax abatement that since expired. The 421g was specifically to promote the conversion. So it doesn't happen easily and it does need -- it generally does need public policy support.

Joshua Dennerlein:

I just wanted to touch base on the new lease change in April relative to 1Q. It looks like it kind of stepped up 30 basis points. How does that compare to kind of the typical acceleration in April versus 1Q?

Joshua Dennerlein:

Okay. It sounds like concessions use picked up in March and April in Yale in San Francisco. If you stripped out those 2 markets, how is kind of new lease rate trending?

Joshua Dennerlein:

Okay. And then just digging down into same-store expenses, I don't think we've touched on the other on-site operating expenses on the call. I think that's where kind of people kind of use flow through for the evictions. What's kind of the expectation in that line item going into 2Q, just given the move-outs?

Operator:

And there's no further questions in the queue. I'll turn the call back over to Mark for additional and closing remarks. Please go ahead.

Operator:

Everyone else has left the call. This concludes today's call. Thank you for your participation. You may now disconnect.

Marty McKenna:

Good morning, and thanks for joining us to discuss Equity Residential’s fourth quarter 2022 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer. Alec Brackenridge, our Chief Investment Officer is here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue, because of subsequent events. Now, I will turn the call over to Mark Parrell.

Michael Manelis :

Thanks, Mark, and thanks to everybody for joining us today. This morning, I will review key takeaways from our fourth quarter 2022 performance, expectations for 2023 and provide some color on the markets before I turn it over to Bob to walk through our financial guidance. 2022 same-store revenue growth of 10.6% was the best in EQR’s history of nearly 30 years as a public company. Reported turnover for both the full year and the fourth quarter was the lowest in the Company’s history, reflecting great demand that produced high occupancy and significant pricing power. In most of our markets, we had a supercharged spring leasing season with more robust pricing power that started earlier than usual in the year. Rents peaked in August, which is typical and then started to seasonally moderate, which is also typical. The seasonal moderation was a little more pronounced than we originally expected and likely due to a combination of rents reaching such a high peak, along with less pricing power than expected as we ended the year. Given current uncertainty about the economy, including increasing layoff announcements, this moderation isn’t surprising, though the January employment report that Mark just mentioned was very encouraging. Sitting here today, we have good occupancy with solid demand across our markets. Our dashboards and current leasing momentum continue to signal a normal spring. Let me take a minute and walk through the building blocks of our guidance range of 4.5% to 6% revenue growth. This is an updated look to what we provided in our third quarter management presentation. So first, we start with an embedded growth of 4.2% for 2023. This is slightly below the midpoint of the range we talked about in the third quarter of 4% to 5%, but mostly consistent with expectations and takes into account the additional concessions used in the fourth quarter. Next, we expect strong occupancy for 2023 at 96.2% which includes a continuation of low resident turnover but is 20 basis points lower than that of 2022. Finally, we’re assuming blended rates in 2023 will average approximately 4% for the full year. This assumption incorporates capturing our 1.5% loss to lease along with approximately 2.5% intraperiod growth in rates. This intraperiod growth assumes a positive impact from less overall pressure from competitive new supply and acknowledges some potential headwinds for a softening economy. For your reference, in a normal non-recessionary year, we would expect intraperiod growth to be about 3% to 3.5% with us capturing about half of that gain in same-store revenue. The first half of 2023 will benefit from the momentum we had last year, while the back half of the year faces tougher comps and could feel the impact of the economy, as the year progresses. The contribution of this blended rate growth to revenue will be approximately half, as we capture it over the 2023 leasing season. Add all of that up and the implication is revenue growth over 6%, which would be exceptional after a remarkable 2022. The midpoint of our guidance range however is 5.25%, which is lower because we do not expect bad debt net to return to pre-pandemic levels in 2023, and it continues to work against us this year, due to a lack of expected government rental assistance and the extension of the eviction moratoriums in both LA and Alameda counties. Bob will go into more detail on bad debt net, including our assumption in his prepared remarks. The outlook I just described is based on a belief that, while the economy may be slowing, our business continues to demonstrate a number of favorable drivers and resiliency. As we have often said in the past, we focus on our dashboards while also acknowledging the headlines. While keeping in mind that this is very early in the year, when we look at our dashboards today, the portfolio is demonstrating sequential improvement in both pricing trends and application volume, as we would expect, which by all indications is a typical pre-pandemic setup for the spring leasing season. New York and Boston will be two of our top performers in 2023, after delivering strong results in 2022. In San Francisco and Seattle, we are seeing good demand and sequential improvement in pricing with slight reductions in both the quantity and value of concessions being offered since the beginning of the year. Even with this modest improvement, the overall level of concessions are still elevated, resulting in weaker-than-anticipated pricing power. San Francisco and Seattle have been slower to recover than the other markets, but both posted really good revenue growth in 2022. Both cities have been balancing a combination of quality of life issues in their downtown, which are getting better and a delayed return to the office from large tech employers. In addition, there have been some layoff announcements from companies based in these two cities. These layoffs are a direct result of excessive hiring during the pandemic. This excess was spread across multiple markets and countries, not just Seattle and San Francisco. The remote nature of work in tech during the pandemic along with these hiring sprees, likely means that the layoffs are more geographically dispersed than in prior periods. Both of these cities remain hubs of the tech industry and share an entrepreneurial spirit that will continue to incubate the next big idea, be it AI or other innovations we find changing our lives a decade from now. The midpoint of our guidance range assumes that these markets continue to improve modestly as we get into the spring leasing season but overall weakness persists, which is why our intraperiod growth assumptions for the company overall are somewhat lower than the typical 3% to 3.5% range. If San Francisco and Seattle get some traction this year, that could have a significant positive impact on our same-store revenue growth as could a more rapid improvement in bad debt net, leading us to the higher end of our range. Reaching the bottom end of our range would require either rate growth to slow much earlier in the year than expected or occupancy to dip to the mid-95% range for a sustained period of time. And lastly, before I turn it over to Bob to discuss our guidance, I want to spend a minute on our focus on innovation. On the revenue side, we will continue to focus on other income items like Wi-Fi, parking and amenity rate optimization. We will also leverage data and analytics to create opportunities to expand our operating margin. We have been a sector leader in limiting same store expense growth, and this is attributable to our team’s willingness to embrace innovation and initiatives focused on centralized activities. We are driven to get the most out of the portfolio and continue to have great success in creating efficiencies in our sales and office functions. In 2023, we will complete the centralization of onsite activities such as application processing, and our move-out and collection process. On the service side, we will continue to leverage our mobile platform to create more opportunities to share our resources across multiple properties. I want to give a shout out for our amazing teams across our platform for their continued dedication to the residents and focus on delivering these terrific operating results. With that I will turn the call over to Bob.

Operator:

Thank you. [Operator Instructions] We’ll take our first question from the line of Nick Joseph with Citi.

Michael Manelis:

Yes. Hey Nick, this is Michael. So first, I guess, I would say back in the November management presentation, we highlighted this whole technology evolution of our platform. That really has been focused on creating this mobility and efficiency in the operating model. And clearly, for the last couple of years, it’s been more expense-focused and that shows up in the numbers that we just talked about. Specific to 2023, I think we’ve included just over $10 million in the guidance with still about two-thirds of that benefit on the expense front, and that’s spread out across a couple of various accounts in repair and maintenance, along with the payroll accounts. And the revenue impact is several million dollars in ‘23. But for us, it’s probably going to kick in more in the back half of the year and really start to show up in 2024 as a lot of these initiatives we have don’t get put into place until kind of the middle of the year. We got a lot of different pilots going on right now with like short-term and common area rentals, the property wide Wi-Fi. We’ve got another 25,000 units being installed with the smart home. And again, most of this is going to contribute probably to the other income line. And I think you see about 20 or 30 basis-point growth in that number for 2023. And I’ll tell you, we’re excited about all of this stuff. We’re going to continue to kind of look at the way we’ve been doing this in the past, which is areas that are capital intensive. And the technology is like first gen. We’re -- that signals to us that it’s okay to be a fast follower in that area, similar to like how we approach the smart home installations and for us, we just want to make sure that we’re going to get the appropriate return on this stuff. So, I think right now, the foundation is almost in place. By the middle of the year, we’ll have kind of most of the operating platform where we need it to be to capture that benefit. And I think you should expect the $30 million to $35 million that we outlined in that presentation really to start shifting more towards that revenue front in ‘24 and ‘25. But at the end of the day, the reality is you’re never done with this pursuit of operational excellence, and it’s something that’s clearly wired into the DNA of our company.

Michael Manelis:

Yes. So again, for us, we’re very focused, right, on this proximity of the supply, when are the first units going to hit the market. And specific to the ‘23 deliveries, it’s pretty clear to us across our portfolio that we’re going to feel less overall direct pressure like from it. What we’ve been watching is in the fourth quarter, which is really a bad time to watch for concession change because you typically see concessions inch up but in many of the markets, you’re seeing that the new supply did absolutely grow their concessions compared to the third quarter and tend to be in that 6- to 8-week range. What’s promising for us right now is that we did see, just like in the stabilized portfolio, starting the year in January, starting to see these concessions kind of fall back a little bit in the volume of the concessions that are being issued as well as the value of them. So for us right now, I’ll tell you that we’re still focused in San Francisco and Seattle is where we see the heaviest concentration of supply of concessions being used. And it’s about 25% of our applications in San Francisco are receiving about two weeks. And then in Seattle, we have about 40% of applications receiving one month. And if you put kind of all of that into the blender and you think about like 2023 and our expectations, right now in our portfolio, we kind of normalize concessions to the 2022 level, so we expect to continue to see some elevated concessions in the shoulder periods. And it’s hard to say what’s going to happen with the new supply across the market. It’s clearly something we’re going to be watching.

Operator:

[Operator Instructions] We’ll take our next question from the line of John Pawlowski with Green Street. Please go ahead, sir.

Alec Brackenridge:

Hey John, yes, it’s Alec. It’s hard to say that any one is mispriced right now because there’s so little transaction activity. The activity that we have seen is typically, say, 1031 buyer who has to place money or maybe a seller who for whatever reason has to move a property. But that’s been really hard to -- and few and far between. It’s very hard to pick market and say any one of them is more opportunistic than the other. I would say though that looking forward, markets that have a lot of supply coming are -- typically it’s coming from merchant builders who are not capitalized to own the property in the long run. And so, I expect to see some opportunities there, new product coming from merchant builders that really want to move it. And other areas of opportunity are -- I’m sure you’ve read about the private REITs that have the redemption requests that they need to fulfill. Not all of that product is a great fit for us, but some of that might be an opportunity. And then, you have the guys who took on floating rate debt that have caps that are expiring. So, it’s been really slow, but I think that there’s going to be more opportunity in the next six to nine months and more capitulation probably coming from sellers than buyers given how the financing market has been pretty choppy.

Alec Brackenridge:

Well, the merchant builders really just -- it’s just not their game to do that, with rates being high -- I don’t know how to put a number on that, to be honest with you. But I think that there will be some trades there. Obviously, some of the private REITs have found alternate sources of capital. So maybe they’re able to mitigate that a little bit. And clearly, these caps are probably the highest among the three. And because they’re so much higher than they -- I think they’re 8 to 10x what they used to cost. So that clearly is an area that’s going to be very challenging.

Operator:

We’ll take our next question from the line of Chandni Luthra with Goldman Sachs. Please go ahead.

Michael Manelis:

Yes. Hi Chandni, this is Michael. So, I think in both of those areas, clearly, you saw more of the concession use in the fourth quarter concentrated into those urban cores of those markets. The demand is there across urban, suburban across all of the submarkets. It just got a little bit more price sensitivity to it. And clearly, I think the urban still has more pronounced price sensitivity than the suburban areas. And we haven’t really seen any change. Like in the demand profile coming in, we haven’t seen any shifts like going urban or suburban in those markets, the profile seems very similar to what we are typically used to kind of seeing in the market. And right now, I guess I would tell you, when we look at these January stats and we think about the sequential improvement that we’re seeing over kind of the December numbers, those urban markets are actually kind of growing at a pace a little bit faster than the suburban and probably because we’re pulling back on the concession, right? So, when we think about that, you can see you pull back a couple of weeks on a concession, that’s like a 4% change in pricing right off the bat. So, no real signals yet to any significant change other than what we have felt, which is the urban cores, which by the way, do feel better from a quality of life. You could see the efforts that are being placed in both of these cities right now on it. You can feel the improvement there. But you still just have more pronounced price sensitivity in those urban areas.

Mark Parrell:

Yes. Hey Chandni, it’s Mark. We don’t look at job forecast -- national job forecast, especially as particularly relevant to our numbers. We do focus a little more on the bottom up. We do spend time and we’ve done the regression analysis and a lot of the work to try and understand how different variables, job growth, like foremost and household income among them, impact our numbers in the near term. And so we do kind of gut check what comes out of the bottom-up process with our perspective from the top down, both in terms of numbers that your firm and others put out there as potential forecast. But we don’t have a model that we would rely on that would spit out numbers. I think there’s just too many variables. We back tested lots of those models. And I’ll tell you, we don’t have confidence than that system being a better one than looking at it from the bottom up, feeling your market, understanding local drivers of employment, local supply and sort of thinking about your business that way, has proven to us to be much more reliable. So, we feel really good, though, about job growth in our markets generally. I mean, the employment report last week was terrific. Our residents, as I said in my remarks, they found work when they’ve lost their positions. And it’s been a very small number of people, literally handfuls that have handed us their keys. So, this is -- if this is a recession, it’s the best one we’ve ever been to. And it’s going pretty well for us so far. So, I don’t have anything to share with you in terms of top-down job forecast inputs.

Steve Sakwa:

Mark, to stay on that question and your comments about sort of getting the keys back. Is it concentrated in any one market and are there other discussions where maybe people haven’t given you the keys back, but there’s conversations with managers and people are a bit more on edge about finding kind of work in the tech markets? Or just how would you handicap that?

Mark Parrell:

And Steve, it’s Mark. Just to supplement on that just a bit. Our transfers are low, too. So sometimes you’ll see people going down to a cheaper unit and things like that that can also be an indicator of stress. We don’t see that in any meaningful size. And we did a little research, I want to share. We asked our folks in markets like San Francisco, Seattle, New York. When a local firm announces a layoff, then tracking that either using the filings, and I believe you do something similar, using the various governmental filings or some of the layoffs, dot, whatever websites and what we’re seeing is just like these tech jobs and a lot of these financial jobs were spread over the whole country of late, these layoffs are spread over the whole country. So generally, we’ve seen a Bay Area company or a Seattle company announced layoffs, 20% to 30% of those are in that home market and the rest are spread all over the country. So I think what you and I, right, recall from ‘01 where if you had a tech layoff in San Francisco, that person was definitively in San Francisco, I think it’s much more diffused now, and it’s just a different sort of employment picture than it was in the past.