Q2 2021 Equity Residential Earnings Call
And ladies and gentlemen, and you're currently on hold for the equity residential second quarter 2021.
Earnings Conference call, we will be starting momentarily. Thank you for your patience. Please remain online.
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Ladies and gentlemen, please standby and good day and welcome to the equity residential second quarter 2021 earnings Conference call. Today's conference is being recorded and now at this time I would like to turn the conference over to Marty Mckenna. Please go ahead.
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Yeah.
Good morning, and thanks for joining us to discuss equity residential second quarter 2021 results. Our featured speakers today are Mark <unk>, our president and CEO, Michael <unk>, Our Chief operating officer, and Bob <unk>, Our Chief Financial Officer, Alec Brackenridge, Our Chief investment Officer is here with.
As well so the Q&A our earnings release as well as a management presentation regarding our results and outlook are posted in the investors section of equity apartments Dot 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.
US and AMIC risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events and I will turn the call over to Mark per App.
Thanks, Marty and thanks to all of you for joining US today I will give some brief remarks, and our operating trajectory and investment activity and Michael Mcnellis.
This will follow with some top level commentary and the current state of our operations and how we see the remainder of the year playing out followed by Bob Garrett Jana and and color on our guidance changes and balance sheet and then we'll take your questions also as Marty mentioned, we are pleased to have Alec Brackenridge Aqr's Chief investment officer available during the Q&A period for.
Those of you who do not know Alex He's a 28 year veteran and this company. He literally started work here. The day, we went public and $19.93 and took over as our CIO in 2020 as you can see from the release he and his team have done exceptional work of late on the transaction side.
Turning to operations all of our operating metrics.
Can you to improve at a faster rate than we assumed earlier and the year were seeing demand levels, well above 2019, and all our markets and this has allowed us to continue growing occupancy while at the same time raising rates.
And this resulted in the company materially raising annual same store revenue NOI and normalized <unk> guidance.
While our quarter over quarter same store revenue and NOI results remained negative the decline was less than what we expected and our sequential same store revenue and NOI showed positive growth for the first time since the pandemic began as.
And as we've discussed on prior calls improvement and our reported quarter over quarter same store numbers.
We will lag the recovery and our operating fundamentals as we work these now higher rents and lower concessions through our rent roll and.
We believe that our business is set up for an extended period of higher than trend growth beginning in 2022, as we recapture revenue loss due to the pandemic and continue to benefit from strong.
<unk> and growing income and our target demographic also the more diverse portfolio, we are creating should improve long term returns and dampen volatility going forward on.
And the investment side, we were active buyers and sellers and the second quarter and expect to continue being active capital recyclers.
<unk> with.
What I've said on prior calls we are allocating capital to places that are attractive to our affluent renter base, including the suburbs of our established coastal markets as well as Denver, and our 2 new markets of Austin and Atlanta.
We are making these trades with no dilution, even given higher pricing levels for the properties, we are targeting because.
And to sell our older and less desirable properties at low cap rates and at prices that exceed our pre pandemic value estimates.
Earlier this month, we re entered the Texas market. After an 11 year absence by acquiring 2 well located new assets and Austin, Texas. These properties are located and the desirable area.
And with high housing costs that is equidistant between downtown Austin and the domain hub on the North side. We acquired these 2 properties for $96 million and approximately a 3.9% cap rate and about $195000 per unit.
We expect to acquire a mix of urban and suburban assets.
In the Austin market.
During the second quarter and in July we acquired 2 properties and Atlanta Sky out South and Midtown for $115 million with a 3.6% cap rate. This is a deal. We did previously disclose and a few days ago, we acquired a second property in Atlanta, and the bustling Midtown.
West neighborhood, we acquired this new property for $135 million and it is about half occupied and once it completes lease up we expect it will stabilize and a 4.1% cap rate.
We also continued adding to our Denver presence by purchasing an asset and the suburban Central Park area of Denver for 90.
$95 million. This property is located just west of the large and growing Fitzsimmons medical campus and draws residents attracted to its access to abundant outdoor amenities. We expect this property, which is also and lease up currently to stabilize at a 4.2% cap rate.
And we're also pleased to add to the portfolio.
Leo a property each and the suburbs of Boston and Washington D. C. The Boston property is located in Burlington, Massachusetts and is a new asset that we acquired for $134.5 million and a 4.1% cap rate.
This property is in a difficult to build suburb of Boston with high single family housing costs and good access.
And high paying jobs.
The D C asset is located in Fairfax, Virginia, and as of 2016 asset that we acquired from $70 million of the 4.3% cap rate.
This property is well located with both good highway and good metro access and proximity to the growing job base and Northern Virginia.
Junior Bolsa, Burlington and Fairfax assets are located in sub markets, where our existing assets have performed particularly well.
Year to date, we have bought $645 million of properties and expect to close on another $850 million and acquisitions, a good number of which are in various states of advanced negotiations.
<unk> by the end of the year.
We will fund these buys within approximately equivalent amount of dispositions, mostly from California of older and less desirable assets, which we sold or are under contract to sell at significantly above our pre pandemic estimate of value.
Turning to development, we put into service and began leasing.
<unk>, our newly developed property and Alameda Island, a short ferry ride to the city of San Francisco built on the site of a former naval base. This property has terrific views of the skyline and evolving restaurant and bar scene that we think is attractive to our clientele.
Over the next few months, we will complete our other 2 current development projects, including the <unk>.
And central Boston, the largest development project and the company's history.
Early leasing efforts on this project and our development project and Bethesda, Maryland are going well and our current estimates are that these 3 projects will stabilize at a development yield of approximately 5%.
Suitably higher than prevailing acquisition cap rates. These.
Properties will be meaningful contributors to <unk> starting in late 2022.
We see development is a good complement to our acquisition activities as we spread more of our footprint to the suburbs of our established markets as well as to our new markets. We expect a significant amount of our development activity going forward to be done through.
Al Carte venture arrangements. This allows us to leverage our partners in place sourcing and entitlement teams in locations like our new markets, where we do not currently have a development presence.
Before I turn the call over to Michael a big Thank you to my colleagues and our offices and properties across the country.
Doing an exceptional job there and it's particularly busy.
Z leasing season, and we're all very proud and Grateful go ahead Michael.
Thanks Mark.
And as evidenced by our revised guidance the pace of recovery has been very strong and both the earnings release and and the accompanying management presentation. We have provided some key performance metrics. Let me highlight a few of the overall trends.
So first we continue to see very good demand for our apartment homes, our national call Center and Ella our AI leasing agent are responding to record high levels of inbound interest for our apartments, which is converting into high volumes of self guided tours. This overall level of demand continues to drive applications.
<unk> and moving activity that is exceeding move outs and ultimately is delivering stronger than expected recovery and occupancy.
Portfolio wide physical occupancy is currently 96, 5%, which is back to 2019 levels.
San Francisco, and Seattle are still trending slightly but.
Below 2019, and southern California markets are slightly above at this point, we expect to run the portfolio above 96% through the remainder of the third quarter. This strength and occupancy is allowing us to push rate and drive revenue growth.
Overall, we are more than halfway through the typical peak.
Leasing season, and the momentum has been very strong providing us the opportunity to raise rates reduce concessions and grow occupancy.
These fundamentals are delivering RV recovery from March to December of 2020 pricing trend, which includes the impact of concessions decline.
Climbed approximately $500 per unit.
From January 2021 to today pricing trend has grown $660 and is now not only above prior year levels and all markets, but every market except for San Francisco is also above 2019.
Pricing trend levels today.
Today, the portfolio is approximately $100 higher per unit than our peak 2019 levels.
Our priority has been to test price sensitivity and every market by raising rates and reducing both the value and quantity of concessions being granted.
At the end of the first quarter about 20% of applications, we're receiving on average 4 weeks and concessions and.
As of July we are now running with less than 3% of our applications receiving on average just over 2 weeks and we expect this to continue to drop off even further.
Further.
To give you perspective, the total dollar of concessions granted peaked in the month of February at just north of $6 million for the same store portfolio for July we will be at $1.5 million for the month and August should be less and $750000.
Last week, only 12 properties had any concessions being offered.
The percent of residents renewing has stabilized around 55%, which is very much in line with historical averages, but below the record high 60% levels that we had in 2019 and early 2.
Okay.
As you saw in the press release achieved renewal increase new lease change and blended rate all continued to improve and July and we expect further improvement through the balance of the year as the comp period becomes more favorable and the business continues to strengthen.
As we.
We progressed through the remainder of the year, our focus will continue to be to push rates and our markets and manage our renewal negotiations and.
And our management presentation, we provided color on all of our markets that I wanted to take a minute to highlight New York and San Francisco as they tend to be the markets. We received the most.
<unk> thousand and <unk> about.
Both markets are recovering nicely with concession used nearly nonexistent and our new York portfolio and declining rapidly and San Francisco.
New York is seeing stronger demand right now and we think it is primarily due to greater clarity around employer returned to office plans.
New York employers, particularly the banks and financial firms have called their employees back to the office and you could feel feel it and the economic activity in many areas of Manhattan.
And we see it and our portfolio after 9 consecutive weeks of record application volume.
Quest San Francisco, However, the return to office and reopening is a little more ambiguous and employers have been slower to call employees back and with many initially targeting after labor day.
Adding to the uncertainty and San Francisco is the reintroduction of strong recommendations for indoor masking and some.
And delays and reopening which were announced last week.
The situation and San Francisco is likely to lead to a delayed leasing season and that market and a slower full recovery of occupancy.
That said occupancy is 95, 4% today and San Francisco and is growing as is pricing.
And Ah.
At this pace, we expect the San Francisco pricing trend to be back to pre pandemic levels by the end of the third quarter.
Meanwhile, we are seeing some indicators that we could see and extended leasing season with a second wave of demand in New York, Boston and Seattle, our leasing teams and these.
<unk> had been dealing with prospects that are looking for moving dates in late August and September and hearing from them that these moves are in connection with their need to be back and the office or in the case of Boston back on campus.
This demand as more and more robust and historical patterns, which could suggest and extended.
These mark leasing season, and those markets and matches up nicely with our lease explorations, which are more weighted towards the back of the year than usual.
Combining all of the data points I've, just shared and those included and the management presentation, we see an unprecedented opportunity to grow sequential revenue over.
And several quarters as the impact of better rates, nearly nonexistent concessions and higher occupancy compound <unk>.
We acknowledge how badly our operations declined over the last 16 months, but the current recovery appears to be strong enough to both quickly recapture all of that was low.
The net and the pandemic and take us into a new period of strong operating fundamentals.
Finally, I want to take a minute and give you an update on the government assistance program per renters. As we've discussed on previous calls approximately $50 billion and rental assistance for those impacted financially by the.
<unk> was made available and the various relief bills and we are laser focused on accessing the rental relief funds and are working very closely with our eligible residents to apply for this relief.
Processing to date has been relatively slow and our markets, but we were able to recover approximately $5 million.
And the quarter.
Bob will provide some color on our expectations for collections for the remainder of 2021 and his remarks.
Let me close by thanking the entire equity residential team for their continued dedication and hard work. This pace of recovery would not be possible without them and they remain relentless.
And I'm, taking care of each other and serving our customers. Thank you I will now turn the call over to Bob.
Thanks, Michael This morning, I'll cover the changes in 2020..1 guidance that were included in last night's release, along with a couple of quick comments on the balance sheet and capital markets.
As Michael just discussed the recovery is well underway and is exceeding.
Lists and higher expectations for the same store portfolio.
The continued strong operating momentum from this leasing season has led us to raise our annual same store revenue guidance from negative 6% to negative 8% to negative 4% to negative 5% and improvement at the midpoint of 250 basis points.
Strong expense.
Adding our controls and favorable real estate tax outcomes, which I will talk about in a moment also allowed us to reduce our same store expense guidance range to an increase of $2, 75% to $3.2 5%, resulting in an NOI range of negative 7.5% to negative 8.5%, which is a 400 basis point improvement.
Improvement at the midpoint relative to our prior guidance.
Drivers of our revenue guidance increase of 250 basis points or roughly 150 basis points of improving operating fundamentals that Michael just outlined 60 basis points or $15 million for the full year and related low.
Bad debt primarily.
<unk> anticipated rental assistance collections and the remaining 40 basis points is due to improved performance and our non residential business.
Before I move on to expenses, a quick comment on our bad debt assumptions.
The back half of the year has about $10 million of additional assumed rental assistance collections on top of the $5 million.
And <unk> already received we.
We feel very confident about this amount because we either received in July or after some real digging can see that it is far along and the approval process. There are other resident accounts being worked on.
But they are not as far along given the lack of transparency and the relative slow processing speed to date. It is.
But the handicap.
How much will successfully get processed and whether we will receive these funds in 2021 or it will spill over into 2022.
On the expense side, we have also seen improvements versus prior expectations, which led us to center the mid point of expense guidance at 3% which was.
The low end of our prior guidance range.
This reduction is in part due to the modest growth experienced in Q2.2021, even with a really challenging comparable period from Q2 of 2020.
While some expense categories experienced a typically high percentage growth change quarter over quarter due to this comparability issue overall.
<unk> expenses were less than originally anticipated key categories driving the current period and anticipated full year, lower where real estate taxes and payroll.
The reduction and growth expectations for real estate taxes is primarily driven by lower than forecasted assessed values in some key markets low.
Payroll growth expectations are primarily.
Primarily driven by our progress and optimizing staffing utilization as well as higher than usual staffing vacancies.
We expect that 2021 will be our third consecutive year of low payroll growth, having delivered a 3 year average below 1%, while keeping other controllable expenses like repairs and maintenance and check.
As a result of these same store guidance changes, we raised the midpoint of our normalized <unk> from $2.75 to $2.90.
A couple of closing comments on the balance sheet and debt capital markets with the impact of the pandemic on our operations increasingly in the rearview mirror. It is clear that our balance sheet has held up remarkably.
Despite unprecedented pressure on operations, our credit metrics have remained well within our stated net debt to EBITDA leverage policy of between 5.5 times to 6.5 times.
The debt capital markets are also incredibly attractive at the moment for issuers like us this creates opportunities to term out commercial paper.
And while treasuries and credit spreads at or near record lows the potential of which has been incorporated into our revised guidance range.
With that I'll turn the call over to the operator for Q&A.
Ladies and gentlemen, and if you'd like to ask any question you could signal by pressing star 1 on your telephone keypad just keep in mind.
<unk>, who are using your speaker phone and make sure. The mute function is released to allow your signal to reach our equipment and once again for your questions. Today Star 1 we will begin with Nick Joseph with Citi.
Thanks.
Maybe we start on the rental assistance Bob I appreciate all the comments in terms of what was recovered and the second quarter and what's assumed.
And if you.
And then kind of desire to be conservative, but can you frame kind of the total opportunity.
Collecting any of the background and reduce programs.
Okay.
Yeah, Thanks, Nick so.
You look at our disclosure in terms of our total receivables the gross amount of receivables on the books and the same store.
Our portfolio is about $44 million right. So that's and it's almost entirely reserved against so that's really the total pie.
Possibility, if you think about it when you break it down kind of more granularly, we always run with 10 and $11 million worth of.
Receivable or bad.
So it's probably a number that's a little bit below that.
And and again, so that leaves probably another 5 to 10 potential.
Long run the really hard part is I kind of mentioned in my remarks is.
And the frequency and the process associated with it so it's a pretty long process Michael's teams all.
We've got and the best transparency, we could but it does require both the resident and us to match information to get it run through the process.
And then it takes a while to even after approved have the cash kind of come through the door and that's where the volatility arises and the numbers, which we wanted to highlight and be really clear about given what we.
All lines.
Thanks, that's helpful.
Maybe just on the expansion markets.
As you look at the pipeline today, and you look at kind of transaction volume broadly across multifamily, particularly in these markets. How quickly do you expect to get to scale.
And I guess, the Austin and Atlanta.
Haven't gone and continue to ramp up and Denver.
Okay.
Hey, Thanks for that Nick it's Mark and I'm going to answer a little bit and then I'm going to kick it over to Alec Brackenridge, our CIO who's on the call. So when we look at the expansion markets. We would suggest to you they'll probably be 1 or 2 more expansion markets probably more.
<unk> to come on.
And that in future quarters.
And so some of those markets Atlanta is a particularly large market.
Austin is a smaller market. So there's different volumes there so I'm going to kick it over to him to talk a little bit about how long it takes to kind of create a portfolio that makes sense and those markets, but I wanted to point out to you that it depends also on the.
Sale ability, if we're able to continue to sell a property as well that will fuel the engine to buy property as well. So it depends bolt on transaction volume in those new markets that Alex will speak to and our ability to continue to dispose as we very successfully done the date our properties at good prices and places like California, and New York and D C, where we're trying to lighten.
And the low to bit.
Yes, following up on that and this is Alec.
Atlanta is a really robust transactions market and we have great context, there from the past I've worked in that market for almost 25 years now and.
And whether it's joint venture development.
Or acquisitions, there is a wide.
Mid range of things, we can choose among and generally the property and we're looking at a roughly $80 million to $100 million and.
And what we're shooting to do over the next few years is to get to about $2 billion. So 20 ish properties and we think we can achieve that.
Austin's a smaller cities and that would be more and the $1 billion range 10 ish property's 10 to 12, maybe.
But again, we have good feelers, we have a great team and has a lot of experience in these markets and.
And that's where we're looking to accomplish.
Thank you.
Now moving to our next question that will come from John Pawlowski with Green Street.
Okay. Thanks, a lot, but at a time.
Thank you for Alec or Mark I know you made the comments and the path that given where replacement costs or ground up development doesn't pencil and particularly in Manhattan curious some more stable markets Boston and D. C. Do you think ground up development pencil.
We do have some deals we're working.
Working on Johns so thanks for that question, it's Mark and we do think and some cases it does and we've got some deals and the northeast a couple that we're likely to start and the next quarter or 2 where on current rents. We're looking at yields around 5 and a little bit higher.
We like the locations we have to constantly refresh the portfolio. So I would.
I'd say right now with us feeling a little better about construction cost and we can get into that it's not that they're not going up but we have a better handle than maybe we did and the middle of the pandemic. Our sense is that some of this development is going to make some sense to us and that we are going to going to do some of it selectively.
And it's really going to help I think get us exposure and some of the suburbs.
Of these established markets and some of these new markets, we're trying to enter into.
Okay, and then last 1 from me on operations, Michael given all the leading indicators you see today do you think you'll have to ramp up concessions backup and any markets later this year.
Uh huh.
Based on what you see today I would say no. We do not there. There's a couple of areas I will tell you like the South Bay in San Francisco, which I think I've said on previous calls just from the volume of new supply being introduced into that sub market and the proximity to some of our properties I could see a little bit of that pressure from new.
Suburb, bringing concessions back to some of the stabilized assets and Thats a market, but I don't see us reversing trend right now given the strength of demand that we see it's really more if the demand stays strong enough to aid the absorption of the supply that's coming and the back half of the year that would be the only thing.
Supply and kind of impact the concession use on stabilized assets.
Okay. Thanks for the time.
Thanks Sharon.
Now we will take a question from rich Hightower with Evercore.
Hey, good morning, everybody. Thanks for taking the questions here.
I think.
As we think about guidance through through the the back half of the year I'm wondering.
Which markets sort of assume a normal.
Path of seasonality and which I think you mentioned, a couple of which may be arent going to be on that normal.
Seasonal pass and then how do we think about that setup for 2000.
And 22 do you expect all your markets to sort of resemble that normal seasonal path in terms of.
Ah.
Market rents and so forth.
Yes, So I think first for the balance of this year I would look at the southern California market and say there are probably going to be more in line.
With normal seasonal trends and again, a lot is going to depend on what that strength and demand is if you have a second wave of demand coming into these markets that is going to change the profile through the fourth quarter and you think about next year. We are doing some things now with some lease terms for the new leases, we're writing, but again we saw.
A 5% shift so we meaning we have about a 5% more explorations in the back half of 2021 than we normally would have otherwise seen my guess is over the course of 2022 that clearly starts to mitigate back towards a normal norm a normal pattern, but again the strength of the fourth quarter.
About year could put us in a situation, where we will have more expirations in the fourth quarter of next year as well. So I still think it's a little too early to tell what how fast youre going to get back to a normal profile and the portfolio.
I guess just to follow up on that Michael.
There's a lot.
Drivers of this sort of extraordinary demand going on right now right you've got 2 cohorts of college graduates and filling the pipeline you've got people decoupling from.
Mom and dads basement, and so forth I mean, do you think that does that set up a risk next year that there's going to be an air pocket relative.
And this 2 what's happening right now or do you think that's not a reasonable.
And maybe not an expectation, but a reasonable guess at what might be the case.
Listen I think when you look through our markets, we have such strong demand drivers and fundamentals job growth you have constrained housing so I don't.
Think this is like pulling future demand forward right now what we're feeling this is like our catch up period, and then I think again a lot is going to depend around what does this second wave look like of demand coming to us and late Q3 and Q4, how strong is that.
We'll play into kind of what.
What we should expect for next year and rich, it's Mark just to build on that I do think next year. If you recall late in 2019 and very early in 'twenty, we're doing well the industry and this company, we're doing well we had good solid demand our own internal statistics as well as all the stuff we read from the analyst firms.
We subscribe to so as our residents have kept their jobs. They have good income growth. So we're going to have the ability we think to access that demand access net income growth and just kind of not just catch up which seems like to some extent absent a real reversal and the pandemic a foregone conclusion that we will get.
Back to where we were we think were going to keep right on going and we say that with confidence now again, assuming conditions and the economy, Randy and generally supportive because we saw that great demand and 19% and 20 before the pandemic I think that demand is still there job growth still good and we see that our demographic keeps getting raises keeps being and demand.
And the shift to technology and does it kind of jobs that make up our resident base continues. So we have a lot of reasons that we feel like this thing will have this big catch up and then it's just going to have this continuation to it.
Alright, great. Thanks for the comments guys.
Thanks Rich.
Next question will come from.
Jeff Spector with Bank of America.
Great Good morning, along those lines.
Similar question I was going to ask.
If you could point to maybe something in the past or thoughts on the extent of the leasing season and 22, but in particular.
Do you think it's a good.
And Peter for renewals, you mentioned, you're at 55% book.
To your point things were really strong pre COVID-19 at around 60% I was just curious if you.
What are your thoughts on and extend the leasing season, and maybe and a positive way it could lead towards.
Higher renewals.
And 'twenty 2.
Yes.
I mean, as you keep seeing the strength and demand coming in.
And you look at the recovery and these markets you have to assume that we will fall back to kind of that higher retention level, which was renewing 60 per.
And to keep of our residents right now we are going to have a little bit of noise. As we think about the back half of this year and those residents that moved in with US with concessions moved in and the second half of last year came in with concessions at low rates, that's going to put a little bit of pressure on us from a retention perspective.
Percent and the back half of this year, but again the strength of the front door or that demand coming in and strong enough to backfill kind of that pressure on the renewals right now.
Thank you and then just 1 question wanted to clarify dispositions.
Mark you specifically mentioned.
You mentioned, California to confirm.
Are you thinking of selling similar older assets.
Lower growth assets and other.
Parts of the country or.
Just California.
Hey, Jeff This is Alec.
Yes, we are considering and other markets.
And we're selling and California right now because the bid is just so hot for it but as that moves around the country and we think markets like D C and New York with its improving fundamentals will also become a hotter.
Investment markets, and we will well, let's properties, there and we expect to.
Property there.
Great.
Yeah.
Okay.
Now I'll move to a question from Nick you Lucco with Scotiabank.
Thanks, Hi, everyone and in terms of the residents that are moving back into the portfolio and a couple of markets such as New York San Francisco.
And you just give us a feel for whats your.
Thank you about those incoming renters were they did they used to be and the portfolio or the younger.
And anything sort of about the profile of the renters and those 2 cities would be helpful.
Yeah, so not not a lot of change and I'll expand beyond just those 2 cities and any of our markets.
Learnings right. When you think about the demographics coming in and by that I am going to refer to not only the age of the new residents that moved in and the quarter, but also the average household income for those residents. So during the second quarter. Our average age for move ins was 30, just over 33 years old slightly.
Market the historical average per second quarters and previous years that was at 34, but pretty much right in line and when you think about the overall affordability index and I've said on previous calls our range of rent as a percentage of income between all of our markets goes between 17 and at the low to.
23% at the high and as a portfolio for the move ins that occurred in the second quarter. We were just over 19% and that is very much in line with the historical averages for this portfolio. So I think what you take away from that is our rents clearly have increased.
We believe sequentially.
But so have the average household incomes for the residents that had been moving in so sequentially. We averaged at $152000 was the average household income and the second quarter. That's up from just under 150000 and for move ins and the first quarter. So you can.
Kind of see that balancing out and New York and San Francisco really kind of just fall right in line with the statements I just said.
Okay, great. Thanks, and then in terms of the moves into Atlanta, Austin and you talked some about this earlier about creating scale I guess I'm just wondering if instead.
And any potential to do a larger portfolio transaction.
Ross the Sunbelt, maybe work with the developer or any sort of M&A potential that would be possible and kind of speed up some of that process instead of buying individual assets and some of the sunbelt markets.
And it's mark Thanks for the question Nick.
And I like and his team look at everything so we're certainly open to portfolio transactions and indeed, the Austin deals where a portfolio deal effectively we're kind of bundled together.
But again when you start doing large scale transactions you can end up competing against different groups.
And so people some of the deals we've done were off market transactions, where we located and them on our own. So we are very open and the portfolio transactions. We are open for example to OE unit operating partnership unit deals, which often end up being larger deals as well, but we just haven't seen a lot of that offered and a lot of the portfolios we do see.
Some assets, we like and a lot of assets, we don't so buying and 1 at a time gives us an advantage and M&A is just a totally different conversation requires a willing participant on the other side often the payment of premiums and other things that can make the deal less economically useful but still.
We underwrite that step 2 and.
<unk> added as well.
Okay. Thanks Mark.
Hey, Thanks, Nick.
Okay.
Now, we'll take a question from rich Anderson with F N B C.
Hey, Thanks, and good morning.
So.
And when you think about all of these these building blocks of improving.
And think about and the metals that don't yet kind of matriculate to the bottom line and you still have negative same store growth of course.
But if you were pre pandemic.
3% ish percent type NOI same store growth and you're down 8%.
In the midst of it now are in the tail end of it and hopefully.
Mark talked about the bounce back opportunity is there any reason mathematically that we wouldn't be talking about a mirror image of that move so in other words, something like and the range of 10 and double digit type of.
Bounce back in 2022, maybe not sustainable, but that's the kind of sort of.
Correction and that might happen and then we go back to more normal way type of growth and the years afterwards is that a reasonable way to think about it.
Hey, rich it's mark Thanks for the question Bob May supplement or correct me is needed here.
Yeah, and we're not going to give 'twenty 2 guidance, but I think your thought process if conditions continue.
Continue as Michael has described the last 2 years, we acknowledged 20 and and this year 21 had been among the worst there.
There is a lot of reasons to believe 'twenty 2 will be among the best years for EQ, if not the best and an exceptional year for same store revenue growth.
And NOI I think we've got good discipline on.
Expense side, and so getting to double digits would require excellent expense controls as well, so and we're not going to commit to a specific number but the way the numbers just set themselves up is as these concessions go away. We report on a straight line basis, as we move rents up and a lot of cases beyond pre pandemic numbers.
<unk>, the kind of math youre, putting out there is certainly attainable.
Okay great.
And then second question is.
Left out of the discussion so far has been.
The Delta variant and the uncertainty that still lie ahead, and clearly, California has taken some steps.
On the fee.
Being sort of socially similar to California, La and San Francisco.
Do you have any concern about getting too far ahead of your skis and that there's you know them.
More.
Now to come with all of this and we're not quite through it and and there could be a.
Along the way is that a part of your line of thinking at all at this point.
Yes, rich a very fair question.
None of US here are experts not an immunologist, but it seems to us that if the vaccines continue to provide protection to the vast vast majority of people that are vaccinated and.
And then youre going to have a situation and buy protection protection from serious illness or death, I think businesses are going to remain open and cities are going to remain open and things are can continue to progress and our business will continue to improve I am not as anxious about masked mandates, whether what the CDC did yesterday or some localities.
Don I think to your point, we need to learn to manage this and live with this virus as much as we all were hoping it was just done and over I think it's going to be part of our lives for an extended period of time and the good side, we've all sort of learned or many of us have learned how to live with it and I think society will manage through it I think if you do have wide.
<unk> and spread city closures that could be a concern and would certainly be a derailleur for us I would say, though that as you think about the way we've all learned about how lockdowns work the mental health impact on people and the economic disarray that lockdowns close these sort of citywide shutdowns.
<unk> <unk> of other needed medical procedures. There is a lot of good reasons, when especially when you have a vaccine net 60% of the population over 16 is taken at least 1 dose of that seems like a more thoughtful way to proceed along with masks to us. So we're not trying to whistle passed the graveyard or otherwise ignore the.
The day variant.
Our sense that policymakers have different tools at their disposable disposal excuse me and better knowledge and they did back in 2020 and that widespread lockdowns are not as likely as they were in the past. Okay. Thanks. Thanks, Dr. Mark.
[laughter].
Delta.
Our next question will come from Brad Heffern with RBC capital markets.
Hey, everyone going back to the recoveries and I appreciate all the color on that was there any portion of that $15 million that was and the prior guide and.
And then additionally is there any assumed improve.
And then and the guide just from from day to day collections and the second half.
Yeah, So the 15 million, referring to the rental assistance that was added to the guidance. It was not in the prior guide we had kind of telegraphed on our first quarter call and and even back to original guidance that we had assumed.
Proved collections would remain the same and that the bad debt level would be the same so the $15 million is incremental we're also assuming that the collection rate and 97% stays the same so the only real change we made to the guidance was adding the $15.5 of which we've already received on the rental assistance side.
Okay great.
And with that.
And then on California.
You talked about how hot the market is can you just.
Walk through and maybe any rationale for why that would be because obviously, we all know about the regulatory and risk and sort of the lagging recovery and.
That market and then is there sort of a minimum size that you think about California, representing and the portfolio.
Oleo.
Yeah.
Hey, Brad it's Alec.
California is such a big state that I can't say that all parts of California, and San Francisco right. Now has not had trades downtown San Francisco as an example, but we have a broad portfolio and we find particularly for value add opportunities. There's just a wide.
Wide bidder pool, so that's what we're seeing and as we mentioned we're selling properties are typically 18, and 20 years old and that appeals to that value add group.
And just to add a little bit and answer the rest of the question. We think about what percent, California could be of equity residential a few years into the future again, we are in the bay area, where and loss.
Sales were in San Diego, and Orange County, Great people, great properties and those markets I think what youre going to see is we're going to do a little building, we're going to do a little buying and those markets, but generally speaking will be a net seller and our 45% asset exposure and will go down below 40, and some of that capital will be redistributed to these expansion markets and.
And whether we get to the mid <unk> or whether it's the high thirties, and we'll just have to see but we do want to mitigate a little of this regulatory risk and California, and we want to be thoughtful about balancing out the portfolio of 45% is a pretty high concentration and any 1 state. So we think that sort of a thoughtful way to balance things out a bit.
Okay. Thank you.
Thank you.
Yeah.
Rich Hill with Morgan Stanley will take that question.
Hey, guys. Thanks, Thanks for the thanks for.
And then making and time.
I'm looking at your charts in your presentation, where you.
Comparing your various different markets, and obviously Orange County, San Diego, and Denver, and doing really well.
I'm I'm wondering does that strike you as a leading indicator for San Francisco, Los Angeles, Seattle, New York, where as people begin to move back rather than just moving out we could see a sustainable shift higher and pricing trends. So long story long long question.
Well, but is the hot markets, leading indicator for some of the coastal markets that were weaker but might have a sustained trajectory.
So rich, it's mark to start and Michael May your air Alec correct or supplement but.
Orange County, and San Diego for Us are almost entirely suburban portfolios and Denver is a little more urban and suburban.
<unk> has a big suburban component as well. So those markets are just really not been as affected and continue to progress right on straight through 2019 numbers. We think the leading indicators on coastal is what's going on and New York, So with the city not even all the way opened a few months ago. We started a strong recovery now that recoveries and full swing you see.
And but every and San Francisco, and Michael and I were there a month ago and.
All our buildings are 95% occupied concessions or nearly nonexistent and thats before the city at the end of June and that just reopened and it wasn't very activated to be honest and the office population wasn't that high. So I would say to you that are leading indicators to us and the coastal markets article.
And that rig customer markets I mean, they are already recovering and doing very well I think what youre going to see a year from now is that if things again continue to be supportive of the coastal markets will just keep going like they were and late 19 early 'twenty and that the recovery from the pandemic is not the limit of the upside in those markets.
Got it.
That's very helpful. Hey, guys, maybe just a question on underwriting.
Not necessarily what youre underwriting, although I'd love to hear it from you, but when you're selling a property. What do you think your buyers are underwriting because obviously buyers don't underwrite what's happening this quarter next quarter next year Theyre, taking a longer term view.
So as you think about the trends that buyers and sellers of our underwriting and the current market what does that look like and the out years.
Oh.
This is Alex.
Fires are optimists right I mean, that's why they're buying and typically with the value add there.
Pricing that and but there is the only successful.
So bitter right now is assuming a full recovery or youre, not youre not going to be able to be the.
Be the prevailing bid without doing that and so that's what we're seeing and.
And.
The further out years I really don't know per se. Each deal I think everyone has their own view on long term inflation, but what drives the cap rate and the short term return and are these.
Neither.
Bad.
Return or a return to pre pandemic rents or plus plus zone.
Got it okay.
That's helpful. I think thats it from me guys and congrats on the nice quarter. Thanks.
Thanks Rich.
Yes.
Next question will come from Alex <unk> with Zelman and associates.
Hi, Thank you for taking the question.
The 3 properties and the pipeline is expected to be completed this year, but what are your expectations to replenishing the development pipeline and of the year.
Yes, thanks for the question Alex It's Mark.
We expect to start 3 or 4 deals.
Value.
Through the balance of the year, maybe $4 million to $500 million of.
Excuse me construction costs to be incurred over the next few years on those there is always some uncertainty you just don't know if you get your GC lined up quite right. A couple of these deals our jv's.
The deals are both in Denver suburban and urban Denver as.
<unk> is in the northeastern markets and suburban locations. So as we said we will continue to invest in the suburbs of our established markets and 1 of them is actually and urban deal and 1 of those markets. So we will certainly go through the details with you next quarter, but we are looking to replenish the pipeline and in fact, we're hopeful there is there was a question earlier and the call.
Well and supplement the answer I mean right now.
There are most newer properties are going for some premium to replacement cost. So there is and our mind. Some reason to do more development as long as you're thoughtful about what your construction costs are your execution risks, how you're funding. It. So I think youll see us do a little bit more.
And I want the deals I, just mentioned plus some other stuff we're working on in the near term.
Got it thank you very much and looking at the transaction market again.
And when you're thinking about the acquisitions.
And how does the cap rates on a stabilized.
Development and as compare to what the trailing 12 months where.
And what kind of NOI growth are you sort of baking into those assumptions.
Okay.
Well Alex this is Alex.
You know it varies so much property by property and some of the properties were hurt more by the pandemic. So theres more of a recovery there others not so much.
And some of them have been because they're newer properties are coming out of lease up so theres a burn off of concessions and that's going on so it's hard to give a blanket statement, but were certainly seeing far fewer concessions and any of our markets and.
Expecting a return to the run rate of rental growth over time.
Okay got it thank you.
Yes.
Amanda Sweitzer with Baird has our next question.
Thanks, and good morning and.
Have you taken any lease rate growth and the near term are there still areas, where you're facing from COVID-19 related restrictions in terms of your ability to push sales lease rates and.
And then if there are how significant are they and what is kind of the outlook for them rolling off.
So yes, I mean, there are still several markets that we operate in that we are under restrictions on the ability to grow rate or grow the increase on renewals.
I think that lessens as you get past the end of September, but there still will be some restrictions in place beyond that date.
But I think we still right now we're looking at our opportunities as we get past that September to kind of keep pushing those rates and all of the markets that we're operating in.
Hi.
Okay. That's helpful. And then following up on some of your San Francisco comment.
The transaction market, specifically do you think that 4.4 cap rate you reported for the smaller asset you sold in the suburbs is indicative of market pricing and or has there just not been enough volume to tell yet.
And there's not enough volume to tell I mean, there's such a wide range and how properties are performing that that.
Yeah, Theres, not theres not enough and our expectation is that cash.
GAAP rates will normalize there and lower over time and there'll be a lot more bids and looking forward.
Thank you I appreciate.
At this time.
Thank you.
Next question will come from John Kim BMO capital markets.
Thank you on developments Mark I think you mentioned in your prepared remarks doing more through joint venture arrangements.
Can you provide from a color on what this may look like are you just.
The funding partner and you have the option to take it out or do you see them being long term partnerships.
Yes more of the former more where we're partnering with a local or regional or maybe even national developer who has.
And embedded existing infrastructure of deal finders entitlement experts and markets.
It's particularly the suburbs, where we have less of a presence our development focus of late has been doing our own wholly owned deals and urban centers, but in the suburbs of our established markets and in some of these new markets. So it would be up sort of renting that expertise and exchange for our promote the developer building the deal as being the capital and having the right to purchase the asset.
And at the and so it's not a merchant build program and our sense that we're certainly happy to make money, but we want to end up with the asset at the end and added to the portfolio and kind of help us fill things out.
And so what would be the yield differential between.
Joint ventures and <unk>.
And on balance sheet development.
Yeah. That's a great question, we spent some time talking about that and some real life. Examples so I'm going to ballpark. Some of these numbers and would ask you to stick with me for a minute and and Alec and sort of supplement that but paying promote does not have a terribly material impact on the yield even and a fairly successful deal.
So we thought about a deal where the Unlevered IRR of the deal was something like 11% or 12% and I believe it changed the acquisition yield for EQ are from a fee.
5.4 to a 5.2% cap rate at EDA.
And that's not zero 20 basis points is real but when you think about the fact that EQM or doesn't.
And have to carry all that overhead and doesn't have good dead deal costs doesn't have failed deal cost and can be expert capital allocators I mean, we all.
Learned about some costs and business school, but it's still really hard to let go of a deal you've worked on when you are and our position as a capital allocator and not as only a developer you're in a better position to pick.
And choose the opportunities that suit us best allocate and I would just add that the developers typically a really small part of the equity overall equity typically 5% to 10%, we're 95%, 90%. So that's why it doesn't really change the return to us as much as you might think.
That's very helpful. Thank you my second question is on.
And I know renovation capex.
Which had been trending down over the last couple of years would totally understandable, but now that your markets are fully recovered when do you expect that to ramp up and you have the ability to do so.
And to increase rents.
Yes, so we're looking at that all the time and we're pushing opportunities that we can but.
I will tell you there are a lot of challenges right now just getting the getting appliances and example, getting lumber as you've heard cabinets are so the reasons why we're not picking up the base outside of the immediate impact of the pandemic, which.
Has abated and some of our markets, but our expectation is to increase that over the next 12 months.
Great. Thanks.
We'll now hear from Alexander Goldfarb with Piper Sandler.
Thank you and good morning, good morning out there.
2 questions first just going back to <unk>.
You analysts ago.
When you guys were talking about managing the heavy 2.
Pre explorations. This fall is it your view that you're going to bring basically all of those to market like force turnover or is it your view that would be sort of split Samuel stair step. Some Neil first force turnover just trying to understand how much of that given the strong market demand you guys talk about how much of that you think you'll be.
We're able to get this year versus having to wait until next year to get it.
<unk> renewal quotes going out to folks that had previously come in with concessions. So about 17% of our offers for July and August went out to those folks that received a concession and so far the retention and ability to bring them up to market has played out now as we progress through.
September and into December that number 17% gross to about 25% of our offers will be to individuals that came in on a concession and so the strong demand that we have right now is really driving the confidence and in our ability to backfill at current rates. So.
So while we don't want to drive the additional vacancy we're going to work with residents and potentially stair step if the demand remains as strong as it is we will bring everybody up to market or we will have some increased turnover because we can replace those units at higher rates and a very short order of time. So the other thing I just.
Call out is our residents are used to paying us that gross rent amount and the concessions that we granted were granted and usually the first or second full month of occupancy with us So our challenge and our opportunity is really more around bringing them up to the.
Gross street rents that you see today.
And like I said, if the demand at the front door remains as strong as it is we have a high degree of confidence because their options to go elsewhere in that market are going to be very limited because we're at market rates now.
Okay. So basically you are saying that when you guys offered that whatever.
Whatever 2 months 3 months rate that was at the initial first months and since then the people have been paying the full frame.
That is correct.
Second question is as you guys have returned to markets like I mean, you've been back and Denver, awhile, but Austin and Atlanta et cetera, when you compare now versus when you were.
And were previously and those markets. What would you say is your biggest sort of shock. If you will is it is it household income is it.
How the areas and built a lack of supply is a better product and what you used to own and I'm just sort of curious how you compare when you guys left those markets to now and what's been.
The biggest change that you've encountered obviously that makes you excited to reenter, but I'm just kind of curious the biggest change that you've noticed.
Yeah. So there are quite a few of those things and Alex Alexander This is Alec.
The change, but the primary thing that we look for and a new market is that renter.
And the knowledge based industry Renter, who has got a resilient job growing income and that those numbers up dramatically and in Atlanta, and certainly and in Austin, but also in Denver and that comes and then with these much more vibrant urban settings that they are choosing to live and and kind of foster.
The and be part of and that's a big part of why they stay and these neighborhoods longer than and the old days and we had a lot.
Lower rents we had.
Much more turnover and single family home prices were so much lower particularly and the kind of neighborhoods that folks were living either oriented we're choosing to live and so that was a big source of competition, whereas.
Sure.
In a market like Atlanta defined.
Our reportable house, you have to go out and really far and a lot of people just don't want to make that trade off when they have been living and Midtown and Midtown west or Buckhead theyre enjoying the life that they have and they're just less likely to move out and that's been a big change from the way. It was when we were there 10 and 15.
<unk>, Yeah, and that's right and that's a great question and so I'm just going to build on and it's Marc I mean rents that we used to charge, where Buck Buck 50 rents and our situation. When we exited those markets was our our best renters could immediately afford to purchase a home and our worst renters didn't pay us and left and the middle of the night and.
It was a whole different demographic and now this demographic is much more like a coastal demographic, there well employed and financial technology and new media other fields. They enjoy these urban amenities and these dense suburban amenities.
Might want to buy a home by home prices and we spent a lot of time on this and Atlanta because average prices.
15 year Ana from the Metro arent very high for homes. They are about the national average, but any areas near where the employment centers our people work and the neighborhoods that Alec mentioned they want to live it is quite high and Atlanta has got a lot of traffic. So if you want to move just like you can move and New York you can move to you qualify, but it's a good distance where and before and Atlanta.
It wasn't much of a distance. So again, we got a lot of our folks siphoned. So we're looking at rents and the 2 to 2.5 bucks a foot and these areas double what it was before a demographic that's got much higher incomes are simple.
Family situation and to us looks a lot better than it did when we left these markets a decade or a decade ago and then again.
And it aligns with the political risk that you and I and others have talked about on these calls for a long time, that's considerably more favorable than some of the other markets. We're in.
So just to sum that up when you guys look at that kind of income and like you guys. Thanks, and I think.
And at 23 or $7.23, and general are these market.
And that combining them now and the lower end and therefore, you see more of an opportunity push growth.
Or are those market and just more structurally the rent to income levels are strong.
And lower versus and New York and folks.
All right.
Yeah, I missed a little of that question, but generally speaking and the rent income.
Ratios are higher and the markets, we're going into we think that will be offset a little bit by pretty good growth and incomes by those residents because those areas are growing so much.
Also say that some of the cost structures like the fact that theres, no cash taxes, and Texas matter as well, so it isn't and apples to apples comparison, but the ratios.
Shows and places like New York are lower than than places like Atlanta.
Thank you thank you Mark.
Thanks, Alex.
Yeah.
Now, we'll take a question from <unk> St Juste with Mizuho.
Hey, guys.
Good morning out there.
Yes.
Just 2 quick ones from me.
And you ask you if you could talk a bit more specifically.
And the math and how you underwrote the IRR and when the asset bought here in Atlanta, and Austin and how that compares to the IRR assets that you underwrote when we sold them.
I'm sorry can you can you repeat the question.
Can you hear me.
And that's always on the comparative net.
And is on a comparative irr's, if you could talk a bit more specifically on how you underwrote the IRR as to what Youre buying and Atlanta, and Austin and how they got it got it and I missed the first part.
So the big 1 of.
In terms of the age of the property. So we're selling properties that are a lot older that have typically have capital needs and again, we find buyers who look at the future a little differently than we do want to.
Invest the value add money so.
We look at that we're not sure youre going to get the return on that so it ends up and a lower IRR.
The big dip of properties, we're buying we just see such strong demand for that we think that.
And that IRR over time, we will exceed the 1 we're seeing and.
As a result of a combination of higher rent growth and less capex.
Okay.
So to be a bit more specific thank you.
And what assets at 3.8 and the.
Quarter, you filled at 4 O you mentioned in the past that you are looking to do these match funded deals on a net neutral to IR basis. So I was curious if that was indeed the case here are you.
Able to underwrite and where you're basically.
So the numbers, you're citing of the cap rates going in yields what I was referring to is the longer term IRR.
And I think the IRR and are higher.
And all the irons are higher on what we're buying and what we're selling and the cap rates are the same. So 1 good question net we've been talking about on these calls is our shareholders going to Miss out on some of the recovery and some of these assets, we're selling because we've talked about it's going to be pretty strong income growth.
And California, and New York, and I would say that there's not going to be the case, because we are not selling the best assets with the best income growth are selling assets that have regulatory challenges or concentration issues, where we own so much already and that sub market that the shareholders will get the benefit or as Alex and we just don't believe and the renovation play so.
I think just again, we're selling what we believe are lower IRR and buying higher and we believe that's true both on the NOI side and on the net cash flow because of the Capex.
Got it Mark. Thank you that's helpful. And then you've mentioned developments and any of these a few times here and your remarks, and the Q&A and you've outlined the risk of on balance sheet development.
And so it certainly sounds like building out and internal platform and you're just not in the index card near term I guess my question is how much more fruit do you think there is less and shape from your existing relationships like say toll brothers you guys have and history of working together. It looks like you bought 1 of your Atlanta assets from them. They have a large development footprint and a lot of let's.
And that's called attractive market.
And so it did seem like an ideal partner so I guess, what's the perceived opportunity there are you having conversations.
And is that kind of fit the profile of the department and you'd be looking for.
Well first I just wanted to correct. The beginning statement, we have a terrific existing development team it just isn't.
Isn't in Atlanta, It isn't and Austin, and it mostly isn't and Denver, So our development team not as large as some of our competitors, but very capable certainly exists.
Our teams delivered alcott this enormous $400 million building on time and on budget during a pandemic. So we've got a very capable team and they'll continue to focus.
On things for example, our California team, we've got a lot of Densification deals that we've mentioned on occasion, but youll hear more about in the next few years and these are deals where for.
For example, and Dell we have 300 unit deal you take down 60 units and a garden style.
The structure and you put up mid <unk>.
<unk> hundred units those are terrific deals for EQ are those we do on our own we don't need a partner for that so we're open to all sorts of partnership opportunities again national and local regional and you should expect that we're exploring all of those things at this point and we're thought of as I quality partner and we're looking for a high quality counterparty.
<unk>.
Okay fair enough and did not meet the diminished the team and any way and it's just making the point that obviously it could be larger given the company of your of your scale and just probing on if there are any opportunities under discussion today with toll brothers as I indicated as you.
No obviously you bought.
And Atlanta from them just curious if that was.
Fruit tree that could bear more fruit.
Sure and.
And I don't mean to be defensive I, just want to acknowledge the contributions of the team and a lot of people working hard and lot of people listened and those call as it relates to any specific party.
If we were doing something I Couldnt tell you and if.
Yes, and it wouldn't matter. So I just would say we are out there we're always talking to people and that's that's Alex job. He has a whole team that is out there talking to developers of all shapes and sizes.
Well I have to ask but thank you for taking <unk> and <unk>.
Thank you.
If we're not and there appears to be no additional questions and the queue I will turn the call back over to your host for any additional or closing remarks.
Yes, well. Thank you everyone for your time today enjoy the rest of the summer and we'll see you on the conference circuit and the fall. Thank you.
With that ladies and gentlemen, this will conclude your conference for today and thank you for your participation and you may now disconnect.
Okay.
Yeah.