This paragraph introduces the speakers for Equity Residential's second quarter 2023 earnings conference call and webcast. Mark Parrell, the company's President and CEO, Michael Manelis, the Chief Operating Officer, Bob Garechana, the Chief Financial Officer, and Alex Brackenridge, the Chief Investment Officer, will discuss the company's earnings results. They will also provide insight into the revenue drivers across their markets, and discuss the improvement in expenses and NFFO guidance.

Equity Residential is continuing to benefit from strong demand and managing expenses well in an inflationary environment, allowing them to make more money than their competitors. Despite the tech industry layoffs, they are still seeing good demand from their affluent renters, and while new supply is pressuring the Sunbelt and Denver markets, most of their major markets are seeing moderate levels of supply.

In the second quarter, two deals were bought including a newly developed property in Atlanta and a 287 unit property in suburban Denver. The transactions market is relatively quiet due to buyers expecting lower prices and sellers expecting early 2022 values. The company's goal is to have a balanced portfolio between urban and suburban markets and coastal and sunbelt markets to create the highest returns and lowest volatility. They will take advantage of opportunities to acquire or develop great assets at fair prices.

Equity Residential has been a public company for 30 years and has grown from 21,000 units to 80,000 units and a valuation of $26 billion. The company has acquired other public and private portfolios and has been led by the late Sam Zell. In the second quarter of 2023, same-store revenue grew 5.5% and delinquency improved. The East Coast markets outperformed the West Coast and pricing trends are following a normal, albeit slightly muted seasonal trajectory. The average resident is in great financial shape with rent-to-income ratios for new residents hovering around 20%.

The second quarter of 2023 saw resident lease breaks and transfer activities remain below pre-pandemic levels, with employment remaining healthy and young adults choosing to live in the markets. Single-family home purchases remain an expensive option, with only 8% of residents buying homes as the reason for their move out. The portfolio is 96% occupied with good demand and resident retention, although occupancy is being depressed by turnover in Southern California. The top performer was New York, with same-store residential revenue growth of more than 13% and occupancy near 97%.

In the second quarter, Boston and DC saw strong same-store revenue growth of 8% and 6.3%, respectively. Southern California markets such as Orange County and San Diego also posted good quarter-over-quarter revenue growth. Los Angeles reported slightly negative quarter-over-quarter revenue growth due to bad debt from rental relief receipts. Despite the new supply, these markets are absorbing it at a healthy pace and delivering strong performance.

In Los Angeles, there have been some short-term impacts from worker strikes and an increase in non-paying residents, but the long-term demand is expected to lead to above average market growth next year. In San Francisco, quarter-over-quarter revenue growth was 3.1%, which would have been 4.6% after adjusting for rental relief. Leasing velocity in the area was in line with normal seasonal trends, and the South Bay is a bright spot due to its hybrid work requirements. Downtown San Francisco is also improving, with many new residents moving there to be closer to work.

Overall, the sentiment in the San Francisco market is optimistic due to the recovery from tech layoffs, while Seattle has been underperforming expectations due to continued concessions and a tech-heavy workforce with the flexibility to work from anywhere. Expansion markets such as Denver, Dallas, and Austin have seen new supply which has impacted revenue performance. However, there are some positive signs in South Lake Union, Seattle, due to Amazon's return to office.

Michael discussed Equity's operating platform, which is focused on the customer experience and leveraging data and analytics to create a seamless customer experience. Robert Garechana discussed the same-store expense growth of 5.5%, which was driven by repairs and maintenance and on-site payroll. Employee benefit costs were also elevated during the quarter.

The company has lowered its same-store expense guidance midpoint by 25 basis points for the full year due to low real estate tax growth, lower expectations for commodity prices, and elevated employee benefit costs. They have also received significant interest from lenders in refinancing their $800 million debt pool, locking in a slightly below 5.25% rate for the $530 million that is being refinanced.

Robert Garechana discussed the company's expectations for the end of the year, which included 8% floating rate debt, over $2 billion in available liquidity, and no debt maturities until June 2025. Additionally, he clarified that there are no one-time or seasonal items on the expense side that will affect the company's earnings in the back half of the year. The bad debt component is expected to improve in the third and fourth quarters as the company returns to a normalization.

Michael Manelis states that there is no significant impact from the writers and actors strike on bad debt or rent growth. He notes that occupancy is 100 basis points lower than normal in the LA market due to long-term delinquent residents moving out earlier than expected. He does not seem overly concerned but is aware that if the strike is prolonged it could cause people to hesitate to move into a new place, potentially impacting the overall demand profile in the market.

Alex and Mark discuss the difficulty of selling large urban assets in San Francisco and Seattle due to the current sentiment in the market. They note that there is some contrary money out there, but it is still an abnormally hard time to raise sizable capital. They also mention that unallocated private capital could be used to support apartment values, but stability needs to be seen before people are willing to move. They are hopeful that by the end of the year and early next, there will be better numbers and capital flows in the markets.

Mark Parrell believes that in the post-COVID environment, the cap rates for larger gateway trophy assets will be compellingly lower than more suburban assets. He also believes that the QR portfolio will have a one-third split between the Sunbelt markets and coastal areas in five years, with a 50-50 split between urban and suburban locations. However, the portfolio may stay more urban if there are compelling prices.

Michael Manelis of the centralized renewal team reported that they expect to renew 55-60% of their residents and achieve a 5-5.5% renewal rate growth, which includes a small amount of negotiation. As the peak leasing season begins, the team will tighten the negotiation range to 100-150 basis points. Towards the end of the peak season, they expect to negotiate 200 basis points off of the quotes. Centralizing the team has allowed them to pivot quickly and deliver consistent results.

Steve Sakwa asked about the yields of the handful of wholly-owned and joint venture developments that the company has. Mark Parrell responded that the risk premium of development is not enough to make it worth investing in, so acquisitions seem like a better option. He also stated that rents have moved a lot and that he likes the smaller development pipeline, as it is currently.

Michael Manelis discussed the operating platform initiatives they have planned for the year, which will lead to a $10 million increase in NOI. These initiatives are focused on both expense reduction and income generation, with the latter set to kick in during the second half of the year and have an effect in 2024.

Robert Garechana explains that the cash flow margin is the most important margin to consider, and that the initiatives they are implementing will lead to a few percentage points of incremental increase. Michael Manelis then explains that in Seattle, they are currently experiencing a low of head-to-head competition, and that the job growth needed to get out of the concessionary environment has not been consistent.

Robert Garechana expressed optimism about Seattle's ability to draw people in due to improvements in livability, access to the waterfront, and the potential for high-paying jobs. He suggested that Amazon's return to the office could bring further momentum to the city. John Kim asked if the deceleration of the blended lease growth rates in July had surprised them, to which they did not respond.

Michael Manelis explains that they looked at the last 15 years of their data and the net effective price for their units typically peaks in late July to mid-August. He also states that there has been strong foot traffic and application volume, and the pricing trend is up 6% since the beginning of the year. He notes that the deceleration in new lease change may be caused by concession use in urban centers, but he expects it to inch back up in August as they are in a tight band relative to their expectations.

Robert Garechana explains that when comparing the 472 secured debt to the unsecured notes, the spread is only a few basis points, and the secured loan has an advantage of five to ten basis points. Mark Parrell then goes on to discuss the outlook for the DC sub-market in the back half of the year and into 2024.

Michael Manelis speaks about the performance of DC real estate markets and how the transit environment allows supply to be dispersed throughout the submarkets. He anticipates that the market will remain strong and produce revenue growth for the remainder of the year. However, he is hopeful that the federal government will bring back federal workers to the job, which could potentially be a drag on comps.

Mark Parrell commented on the differences in the Seattle market between urban and suburban areas. He noted that Belltown CBD is where the pressure can be seen in prices still being off from pre-pandemic levels, while the suburbs are feeling healthy. Parrell also mentioned that the supply coming in 2021 will affect both urban and suburban areas in the Seattle market.

Michael Manelis and Robert Garechana discussed concessions in the West Coast markets, with 15% of applications receiving one month of concessions and 80% of those concentrated in Seattle and San Francisco. The East Coast markets are outperforming the West Coast by 400 basis points. The loss to lease in the portfolio is currently 3.7%, with New York and San Diego having the highest loss to lease at 9%.

Mark Parrell explains that EQR is more likely to sell large assets if they have an over concentration in a submarket, rather than being allergic to large assets. He explains that larger assets are harder to sell, but EQR generally operates them efficiently.

Mark Parrell believes that volatility in the market can be seen as an opportunity, not necessarily a negative. He suggests that having a broader platform allows EQR to act quickly and take advantage of moments when certain markets become undervalued. He adds that even in San Francisco, they would be buyers if prices dropped enough.

Alec Brackenridge discusses the difficulty of replicating portfolios in urban markets like Manhattan and talks about how the team at EQR looks for ways to enhance their initial yields, such as buying in the mass positions or junior positions. They also consider cap rate and replacement cost, as well as platform scaling and margin expansion, which can affect the yields in year two and beyond.

Mark Parrell and Michael Manelis are discussing their strategy for acquiring properties in the Sunbelt markets. They are targeting buyers who are looking for discounts to replacement cost and a limited supply pipeline. The platform they have built is highly scalable and allows them to leverage staff across properties. They are looking to underwrite and take over management quickly, while not being over exposed to the supply. They plan to be net buyers by selling some of their legacy urban assets and using their debt capacity.

In the back half of the year, the company's updated guidance includes a 30 basis point improvement in bad debt growth due to a sequential improvement. This will result in a benefit to total revenue growth in the fourth quarter, as the company is expecting to cross over the difficult comparable period from the prior year.

Mark Parrell explains that the portfolio is currently strong in coastal urban areas, but they are looking to diversify into Sunbelt markets. He believes that coastal markets have advantages in terms of supply and demand, and that the portfolio should be balanced between urban and suburban, and coastal and Sunbelt in order to outperform year-in and year-out. He believes that the Sunbelt markets will be stressed for the next few years, and that this will provide an opportunity for them to buy properties at a good basis.

Michael Manelis explains that the company is trying to create a portfolio that is balanced between risks and opportunities. He hopes that the investors will receive league-leading numbers for the next 18-24 months, and when the supply abates in new markets, the company will be in a position to take advantage of that. He expects this year to follow a normal seasonal rent pattern, but with a slightly muted peak.

The peak leasing season is expected to continue for a few more weeks, after which rates are expected to moderate. Occupancy is expected to remain stable throughout the year, and while there is a possibility of defying the normal seasonality trend of rent softening in the late third quarter and fourth quarter, there is no insight to suggest that this year will be different. The company's initial forecast for the year was 2.5% market rent growth.

Michael Manelis and Adam Kramer discussed market rent growth for the year. Manelis believes that market rate growth, combined with embedded growth and intra period growth, will result in a 4% blended rate growth for the year, and he does not anticipate changing that outlook. The call then concluded and Mark Parrell thanked everyone for their time and interest in Equity Residential.

This summary was generated with AI and may contain some inaccuracies.