The Operator introduces the EQR 3Q '23 Earnings Conference Call and turns it over to Martin McKenna. Mark Parrell, President and CEO, and Michael Manelis, COO, are the featured speakers. Bob Garechana, CFO, and Alex Brackenridge, CIO, are also present for the Q&A. The company warns that certain matters discussed may constitute forward-looking statements and will not update them if they become untrue. Mark Parrell thanks everyone for joining and discusses the company's strong performance in most markets, particularly on the East Coast. The target renter demographic remains well employed and has a high propensity to rent due to factors like high single-family ownership costs and lifestyle preferences.

The company is seeing a decrease in new apartment construction in established markets, which is expected to continue for the next few years. Rental prices followed a normal seasonal pattern, but there was a more significant decline in San Francisco and Seattle due to lack of job growth. The company is also working on reducing bad debt, but the process is lengthy and uneven. Due to underperformance in certain markets and other factors, the company has adjusted its revenue and earnings guidance for the year.

In 2024, the company expects to see positive performance due to demand from well-employed residents, lower deliveries of new supply in established markets, and social trends. They have also engaged in some capital allocation activities, including selling an older asset in Seattle and acquiring two properties in suburban Atlanta with favorable acquisition cap rates. One property is located in an upscale mixed-use development and the other is in an area with high home prices, indicating potential demand for rental properties. These acquisitions align with the company's strategy of focusing on expansion markets.

The company's median household incomes and acquisition strategy have allowed for good financial and quality of life decisions for renters. The third quarter of 2023 saw a 4.4% revenue growth in the company's residential market, with the East Coast outperforming the West Coast. Demand and occupancy remain healthy, with Washington, D.C. showing impressive results. However, San Francisco and Seattle are experiencing more pricing pressure than anticipated. October leasing spreads for new leases, renewals, and blended leases are also discussed.

The statistics for October 27 show a normal seasonal decline in new lease changes and a decrease in pricing trends. Renewal rates will remain stable and make up a larger portion of transactions. However, the San Francisco and Seattle markets have shown a larger decline in prices than expected due to decreased demand and increased concession use. This is mostly seen in downtown areas, and the uncertainty of returning to offices and tech employers' hiring slowdown is affecting demand. In order for these markets to fully recover, there needs to be an increase in office activity, employment, and residents wanting to enjoy city life and commute to the office.

Both Seattle and San Francisco are making progress in improving the quality of life and job market, but more needs to be done to attract new residents and increase pricing power. However, the company's business remains healthy and is expected to see strong revenue growth in 2023 and 2024. Residents are financially stable and turnover rates are low, with few residents leaving to buy homes. The job market for college-educated individuals remains strong, supporting future demand for housing in these cities. Despite a recent pause in job growth, the long-term fundamentals suggest potential for future growth.

The company is in a favorable position on the supply side, with less competition in established markets and potential acquisition opportunities in expansion markets. The overall revenue outlook for 2024 is expected to see solid growth, led by East Coast markets. Loss to lease is in line with pre-pandemic norms and the eviction process is taking longer, but there is no decline in resident credit quality or their propensity to pay.

The company expects to see improvement in 2024 due to various operating initiatives and a tailwind from bad debt net. Expenses are expected to trend in line, with same-store expense growth slightly below this year. Some expenses, such as repair and maintenance and insurance, will increase, but this will be offset by operating efficiencies. The apartment business continues to be strong, and the company's teams are dedicated to delivering results. During the Q&A session, Michael will provide more information on the October numbers for the new side.

Michael Manelis, from the company, confirms that Seattle and San Francisco markets were down 30 bps in October, implying a decrease of high single digits to almost 10% in rents with concessions. This decline is mainly in the urban core, with a smaller impact in the suburbs. The increased concession use accounts for about 400 basis points of the decline, while the rest is due to rate decrease. The suburbs are not completely immune, with some concessions being used in the East Bay. In terms of transaction market, there is a decrease in rates in Seattle and San Francisco, with about 55% of applications receiving six weeks of concessions, compared to less than a month in the suburbs.

The speaker discusses the current state of the transaction market and how it has changed in the last 60 days due to the spike in tenure. They mention that there is upward pressure on cap rates and uncertainty about pricing. They also mention that there may be more activity in the market as it settles down over the next six to nine months. The speaker also talks about the bad debt and how it would have been lower if the court process had been quicker. They mention that once evictions and court proceedings are completed, the bad debt will likely decrease.

In the third quarter, the company's bad debt was 1.27%, which was 10 basis points lower than expected due to a slower progression of the pandemic. The company has good visibility into the status of residents in the process, but it is difficult to predict exactly when proceedings will occur. The company hopes to return to a 50 basis point bad debt rate in the future, but the elongated process in some markets may result in a longer timeline for residents to leave and hit the bad debt reserve. However, the credit quality of new residents remains consistent.

The speaker believes that the credit quality of their customers has not changed, but the bureaucratic process and regulatory environment have, which may result in a modest increase in their credit quality going forward. The loss to lease is expected to decrease by the end of the year, but it is too early to give specific guidance for 2024. The company is currently in the early stages of their budget process, but they expect some pressure on markets like Seattle due to new supply.

The company expects growth in the East Coast and Southern California markets, but is cautious about San Francisco. They have paused their acquisition activity and are only selling a few assets. They may expose more assets for sale depending on the market.

The company plans to continue its strategy of moving capital around and will wait for the market to settle before committing to buying assets at a certain price. The speaker cannot give specific details about potential financial impacts of rent control in New Jersey due to pending litigation, but assures that the company follows all rules and regulations in their operations. They will be fighting a recent decision made by a politically appointed board regarding rent control in Jersey City.

The speaker, Mark Parrell, does not feel that there is any imminent danger for the company, but sees political pressure manifesting itself in litigation rather than influencing public officials. The question is raised about the risks of pursuing tax-incentivized deals in politically charged municipalities, to which Parrell responds that they are rational capital allocators and have likely disqualified themselves from further investment in New Jersey due to regulatory challenges. However, he clarifies that these challenges are not related to tax incentives, and in other markets like Atlanta, tax incentives are well understood.

The speaker discusses the impact of political risk on real estate investments and how it affects their underwriting process. They mention the lawsuits and political climate in certain cities and how it can make them less attractive for investment. They also mention the potential for recovery in Seattle and San Francisco, but acknowledge that the Sunbelt may have less supply in the next few years. However, they note that this doesn't mean there will never be more supply in the future.

The speaker discusses the volatility of the San Francisco real estate market and how it has historically been a desirable place for residents to live. They mention the benefits of Prop 13 and how it limits real estate tax increases. Despite recent declines, the speaker remains optimistic about the market's potential for a rapid recovery, especially in terms of job growth and the potential for an artificial intelligence boom.

Mark, the CEO of the company, mentioned that they will be reducing their investments in downtown areas and focusing more on suburbs. They have already sold an asset in San Francisco and plan to continue selling in that market. However, they still believe in the tech industry in both San Francisco and Seattle. Despite some recent declines in these markets, Mark is confident in the long-term potential and growth of high-wage earners in these areas. He also clarified that it is not unusual to see lease rate declines of -4% to -5% by December, and they may experience slightly more negative declines in San Francisco and Seattle.

Michael Manelis, in response to a question, discusses the expected change in new lease rates for the company's portfolio. He mentions that historically, October sees a negative 1.5% to 2% change, November a negative 3% to 4%, and December a negative 4% to 5%. However, due to the inclusion of San Francisco and Seattle and high concession usage in those markets, the company is currently experiencing a negative 3.1% change in October. Manelis predicts that for the fourth quarter, the new lease change will be around negative 4%, with December potentially reaching negative 5%. Renewals have been stable, with a 5% achieved renewal increase. Overall, the blended change is expected to be around 1.25%. When asked about San Francisco and Seattle specifically, Manelis mentions that they are currently seeing high single digit new lease rates in those markets.

The speaker discusses the company's performance in the fourth quarter of last year and how it may affect their performance in the future. They mention concessions in Seattle and predict potential challenges and opportunities in the expansion markets. They also mention the ongoing budget process and the uncertainty of future performance. The speaker briefly mentions the backfilling of a Rite Aid store, which is expected to be a positive for the company.

The same-store CapEx has increased to $3,600 per apartment unit, up from $2,600 a year ago. This is due to a variety of reasons, including a big budget for capital spending and a productive summer that resulted in more work being done than expected. The increase is not due to shifting expenses into capital.

The company's increased spending is due to a combination of factors, including new projects, storm damage, and smart rent installations. The lease rate growth has been decelerating since September, particularly in the San Francisco and Seattle markets, where concessions have increased and rates have come down to maintain occupancy. The demand needs to be stronger in order to stop the deceleration, but there is no indication of that happening currently.

Michael Goldsmith of UBS asks about the gap between new lease rate growth and renewal rate growth, and if residents are more aware of pricing and pushing back on renewals. Michael Manelis responds that the gap is not uncommon in the fourth quarter and they expect it to continue. He also mentions their relationship with Toll Brothers and the potential to deliver units in a favorable supply environment in expansion markets.

Mark Parrell and Alex Brackenridge discuss Toll's development projects and their required hurdle rates. Toll is doing a great job with their current projects, but there may be supply issues in Dallas. The company is assuming that all three current projects will be in the lease-up process by next year. However, it is difficult to find new projects that meet the required hurdle rates, as construction costs are not decreasing and rents are not increasing significantly.

The speaker discusses development deals in the Northeast and the potential for building in difficult-to-buy locations. They mention Seattle and how last quarter there was optimism about Amazon's return to the office, but now it seems like a lack of job growth is the issue. They also mention that supply in Downtown Seattle is expected to peak soon.

The speaker discusses the impact of concession use on their business, noting that it has decreased or remained stable. However, they anticipate increased pressure in the Seattle market due to elevated supply, specifically in the Downtown Redmond submarket. The speaker also mentions that acquisitions are currently on pause, as they are looking for a discount to current replacement cost, which is not being offered in the market. They expect this situation to continue into the beginning of next year.

The speaker discusses the company's future plans for acquisitions and their source of capital. They mention the potential impact of interest rates on NOI and their willingness to sell assets in certain markets. They also mention their willingness to take on larger acquisitions if the pricing and quality of assets are favorable.

The company has faced challenges with portfolios in recent years and has been targeting smaller acquisitions. They are open to larger portfolios but nothing has been compelling so far. The company has been named as a defendant in a lawsuit, but they cannot provide any details as they are still analyzing the situation.

The speaker discusses the possibility of copycat lawsuits being filed in response to the antitrust case being litigated in Tennessee and Federal Court. They state that this is not a new risk and that they will analyze it further before commenting. When asked about the history of negative lease rates in December, the speaker does not have specific numbers but expects it to be around 1% or greater. The speaker also mentions the possibility of "cleansing" bad actors to avoid similar scenarios in the future.

The speaker, Mark Parrell, responds to a question about whether there will be changes to their leasing and credit processes to avoid certain segments of the renting population. He explains that they will comply with all rules and regulations, but may consider raising credit standards due to the higher cost of delinquency. They will use data analytics to determine if this is necessary, but there is no specific group causing the problem. The speaker, Michael Manelis, adds that there is potential for AI to be used in this process.

Mark and Michael discuss the increasing availability of data and analytics within the rental industry, including new screening tools, identity verification, and alternative security deposit programs, which can help mitigate fraud and bad actors. They also mention the earnings forecast for next year, which is currently projected to be between 1.3% and 1.5%, with a potential 10 basis point margin of error. They note that this forecast is based on the current rent roll and embedded growth from existing leases, and that any changes in the last two months of the year could potentially affect this number, particularly in markets like San Francisco and Seattle.

The speaker explains that they typically give a specific number for guidance, but due to current volatility, they are giving a range. They clarify that the midpoint of their guidance is at 1.4% growth, which is the middle of the range. The speaker also discusses the seasonality of pricing trends and how it relates to sequential and year-over-year figures for new lease changes. They mention that there is a lot of noise around mix and that they report all terms in their new lease change.

The speaker explains that comparing rent prices year-over-year can be misleading due to the variability of lease terms and transactions. Instead, they suggest looking at the overall trend and direction of prices. They thank the listeners for their time and interest in the company.

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