Q3 2021 Equity Residential Earnings Call
Good day and welcome to the equity residential third quarter 2021 earnings conference call.
At this time I would like to turn the conference over to Marty Mckenna. Please go ahead Sir.
Good morning, and thanks for joining us to discuss equity residential third quarter 2021 results. Our featured speakers today are mark <unk>, our president and CEO and Michael <unk>, Our Chief operating Officer, Bob <unk>, Chief Financial Officer, and Alex <unk>, Chief Investment Officer are here with us as well for 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 one of our peers is hosting their call at one PM central until we want to be conscious of everyone's time, and we'll look to finish the call in one hour.
Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal Securities laws. These forward looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events now I will turn the call over.
Mark paralysis.
Thanks, Marty and thanks to all of you for joining US today I'll give some brief remarks on a terrific piece of our operating recovery and our robust investment activity then Michael Mcnellis will follow with some top level commentary on the current state of our operations and how we see next year playing out and then we'll take your questions.
We have talked about 2021 being a year of recovery for our company and we are very pleased to report that our operating metrics continue to recover at a faster rate than we assumed back in July with quarter over quarter same store revenues turning positive for the first time since the pandemic began.
Strong demand across our markets drove us to achieve physical occupancy of 96, 6% in the third quarter, which allowed us to continue to push rental rates. We also benefited from governmental rental relief payments made on behalf of our tenants.
As a result of these strong continued operating metrics. We have raised our annual same store revenue net operating income and normalized <unk> guidance again. This quarter. We now expect our same store revenues declined three 7% our expenses to increase $3, two 5% and NOI to decline.
Climbed 7% for the full year of 2021, we.
We expect to produce normalized <unk> per share of between $2 95.
And $2 97 a.
A 2% increase at the midpoint.
All of this leaves us very well positioned going into 2022, while we won't provide guidance for next year until our next earnings release in February and our management presentation. You can find the building blocks that point to our business being set up for an extended period of higher than trend growth beginning in 2022, as we recapture revenue lost due.
The pandemic and continue to benefit from strong demand and growing incomes, resulting from a very strong job market.
We expect same store revenue growth in 2022 to exceed the historical mid single digit range that has characterized past recoveries leading to some of the best same store revenue numbers, we have ever seen.
These expectations assume that the economic backdrop remains constructive and the pandemic remains controlled.
Please also note that while we expect to do very well next year, we will not be able to make up our entire market.
With less than two weeks.
New lease change was up 10, 1% in the third quarter and is on track to be just over 11% in October.
We have seen signs of seasonal softening both in terms of pricing power and application volume, but these trends are normal to slightly better than typical seasonality patterns and more importantly, the volume of traffic and applications currently has more than sufficient given the low levels of available inventory we have in the portfolio.
Renewals were a major focus for the quarter given the rapid improvements in market pricing from a year ago as well as the fact that we have slightly more explorations in the back half of 2021 the normal.
We have been centralizing negotiations for the San Francisco, New York, and Boston markets, and our Offsite call Center group as pricing in these markets were the most impacted by the pandemic and conversations and these markets have become more and more difficult as we are dealing with residents who received large concessions and much lower rates. This time last year.
The good news is that the results have been great across all of our markets. We renewed 62% of residents in September and October is on track to be just below 65%, which is much better than the 55% historical norm that we thought we were going to stabilize that at.
At the same time renewal rate achieved has continued to improve with September at seven 7% in October on track to be 9%. We expect continued growth despite what will likely be challenging negotiations.
Perhaps our biggest positive from these negotiations is that so far we are not seeing any material difference in renewal behaviors from the deal seekers, who received very discounted rents last year versus our more tenured residents overall, they're renewing at similar paces. This is something we will continue watching very closely.
Before providing color on a couple of markets, let me touch on our positioning for 2022.
As we think about same store revenue growth, we have some key drivers that should work in our favor first our existing leases are at a material loss to lease what I mean by that is if we snapshot all of our leases in place today and compare them to current market prices, 86% of our residents are paying on average rents.
That are significantly below current market prices.
The result of this as a net effective loss to lease of 13, 6%. This provides us with a significant opportunity to increase our revenue as we move these leases to market rates.
That of course does not mean that we will capture the full 13% in 2022, largely because leases expire throughout the year not on January one and we currently are subject to renewal restrictions in some jurisdictions, which means the change is very dependent upon who actually moves out.
Regardless this is definitely the highest loss to lease we have ever seen with such a large majority of leases below market and the teams are hyper focused to recapture as much of the loss to lease as possible.
Second we expect that the significant demand and favorable fundamentals in our business will drive additional revenue growth opportunities in all of our markets in 2022 remember we've seen unprecedented demand even with only modest return to office activity. So the backdrop for intra period rent growth expectations in <unk>.
'twenty two is strong.
Third we expect to get a nice lift from occupancy in the first half of the year as we were at 95% in the first quarter and 96, 2% in the second quarter of this year.
We are currently running above 96, 5% and would expect to maintain this level or better in 2022.
And finally, we have regulatory restrictions that are beginning to expire this presents an opportunity to recapture revenue through the reduction of bad debt and increased collection of late fees. In 2022. All of these factors combined put us in a position to deliver very strong revenue growth next year, assuming regulatory conditions continue.
To approve and the general economic conditions remain supportive.
Moving to a couple of quick market comments, starting on the East Coast. The New York market not only has fully rebounded but it continues to have strong demand for our product. Despite the broader delays and returned to office at this point in New York is positioned to outperform seasonal trends in the fourth quarter.
Boston and D. C are performing as expected with great demand and strong occupancy with normal seasonality on the West Coast Southern California has been and continues to be very strong.
San Francisco and Seattle appear to be the two markets most impacted by the delay in return to office in terms of overall demand levels, but so far appear to be following normal seasonality trends.
San Francisco, while demonstrating a good recovery remains the only market that is not yet fully recovered from a pricing standpoint.
<unk> has been improving in San Francisco over the past month, or so and today, we are 96, 5%.
And should be well positioned to capture demand and pricing power once the tech companies begin to provide more clarity around return to office plans.
<unk> has been a little more volatile than expected current occupancy is 95, 6% and while the overall demand level is holding up the announcement from Amazon a few weeks ago regarding office return decisions has impacted our leasing velocity.
Our onsite teams in Seattle mentioned that prospects definitely have a lack of urgency to lease but are very interested in options for later this year or early next year move.
Moving on to expenses Mark mentioned, our same store expense guidance at three in a quarter for the full year. We are seeing increased cost across all utility categories. However, about 65% of these costs are ultimately passed back to residents through the utility reimbursements that run through the revenue line we are.
Also seeing pressure on wages in this very tight labor market, but have been successful in mitigating growth in our onsite payroll numbers by realizing staffing efficiencies. These.
These efficiencies have been achieved through the numerous innovation initiatives that we have rolled out over the past year or so this includes moving to self guided tours online leasing and utilizing our artificial intelligent leasing agent named Ella on the service side, we also leverage our service mobility platform and new technology to deliver.
The experience and service that our customers require which is evidenced by the all time high online reputation Google rating of $4. Two all while also reducing the expense pressures.
We expect these efficiencies and opportunities to accelerate into 2022, as we continue to harness technology to deliver the customer experience that our residents require.
Finally, I will end on an update on the rent relief recoveries. Fortunately our affluent resident was less impacted by the pandemic as they kept their jobs and continue to pay rent for those that were impacted we have continued to work with them, including assisting them in applying for rent relief, we have received $18 three.
September year to date in this rent relief with the majority of that coming to us in the third quarter. This exceeds our prior expectations of $15 million recovered in the full year.
Even with some of the eviction moratoriums expiring our goal will be to continue working with residents to gain access to the additional rent relief funds. We continue to have good traction in this process and now expect the full year rental relief recoveries of between 25 and $30 million in 2021, let me.
Close by thanking the entire equity residential team for their continued dedication and hard work with that I will turn the call over to the operator to begin the Q&A session.
Sure.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to ask a question.
Our first question comes from Nick Joseph of Citi.
Thanks.
We can dive into a little more of your 2022 expectations. I know you said same store revenue should be among the best in history.
That is locked in today in terms of the earn in and then.
You talked a little about trying to capture some of that loss to lease at.
I'll come in through 2022.
How are you thinking about getting to that comment about being among the best in industry.
Hey, Nick it's Mark Thanks for the question.
We're not giving 'twenty two guidance, but as you said, we did try to lay out how we're thinking about things with the building blocks are with the team is trying to figure out as we look towards 2002, when we made the comment both in the release and in my prepared remarks that it's setting up to be the best year in our company's history O&M for same store revenue growth I do want to give a little context.
So our normal I'll say, a normal meaning the last couple of recessions for US have consisted of two years or so of negative same store revenue growth and we've certainly had that that this time a year or so where.
Same store revenue growth was right around zero slightly positive slightly negative kind of a transition year and then a couple of years, where we compounded 5% mid 5% same store revenue growth numbers for high fours those kinds of things.
Given the earn and given this loss to lease that we see we think we're going to skip that transition year and Thats a comment I made on the last call as well, we're going to skip right over that zero had right into a year, that's likely to be a fair bit higher than the five 5% or so number you would think of as a normal second year.
Recovery the recovery is V shaped just like the decline was V shaped and so I think what you see here is the confidence the team has given the demand and the occupancy numbers that subject to some regulatory flak here and there we're going to regain a great deal of that loss to lease, but certainly not all of it and I think.
A bit of it is going to end up in 2023, and there is just customer relations issues. There is regulatory issues with some of these increases in the size of them and Michael has done a great job with the team of retaining our residents giving them great service. So hopefully that helps in terms of locked in and I can't give you a locked in number that team is going to need to work.
The whole year.
To do that but it feels like that five five is a bit of a floor in terms of next year same store revenue.
Number.
Thanks, That's very helpful. And then you mentioned the compounding and some of those past cycles and maybe we can tie to development. It seems like you are getting.
At least a more active on development you mentioned the toll JV.
Some of the other opportunities.
How are you thinking about the beginning of the cycle and getting more into development as you try to model out some of those out years, where you'll actually be delivering.
Yes, great question.
It's mark again in terms of the compounding the compounding is going to start with the operations with the NOI from our same store portfolio you look at 'twenty two when we've given you some color and certainly it's hard to look much further in our business, but we do look at 'twenty, three and see less supply there were a lot of deals that were delayed the starts due to the pandemic and while.
Supply is likely to pick up in 'twenty, four or look at proximity of supply and other things makes us feel like we got at least a couple of years here are pretty good numbers coming at us on a same store NOI and that will always be the big engine at EQM development to US is just a great complement to our efforts to acquire assets, especially in.
These newer markets the suburban markets, so and we feel like right now our shareholders are getting paid to take that risk with our ability to underwrite development yields around a five on current rents and all of these acquisitions, we're looking at being in the mid threes, we're trying to be very thoughtful. This is an inflationary climate.
Construction costs are far from immune to that but I think youre going to see growth. Both from the same store portfolio and from actual net growth of the company through development that we're likely to fund with a combination of incremental debt net cash flow, which will have more of starting next year and occasional asset sale and a little bit of.
Like we did this quarter.
Okay.
Thank you we'll take our next question from John Pawlowski with Green Street.
Thanks for all the details on the on the revenue component to actually have a few questions on the cost structure of the business.
Bob could you give us.
Yes.
Expense pressures hitting some other property types in the REIT World could you give us a sense on how the <unk>.
<unk> in a reasonable worst case and best case scenario for same store expense growth over the next 12 months.
Yes.
Yeah, I mean, I'm not going to probably give specifics in terms of a range because we're not providing guidance, yet, but maybe a little bit to think about the components that are running through and where they are positioned as we go into 2022, if that helps John.
So if you think about the big four categories real estate taxes, we've had a good amount of success, that's 40% of expenses.
A good amount of extent of success. So far on appeals I think we're not seeing a ton of pressure from the municipalities I think that could carryover into another pretty good year into 2022, right. So a pretty good year means in my mind kind of sub that three ish or or a three 5% kind of regular run rate.
<unk> hundred 20 ways in 'twenty, one as in other things on the payroll side, we've done an excellent excellent job I think of managing what has been an inflationary kind of pressure over time, we're going on our third year.
Of payroll that is sub 1% in terms of growth. So what michaels doing sometimes quietly on the side in terms of managing innovation and doing new implementation is really offsetting what I think is something that every company is experiencing which is payroll pressure and we've been really good at it thus far and I don't think theres anything.
That's likely to change in a significant way it means that we feel the pressure, we're just doing things in a different way and innovating in a way to really offset that pressure.
The last two categories, which are R&M and utilities I think are the ones that we're most focused on outside of the payroll side utilities are a big chunk of them can be passed back to the residents, but we're certainly all seeing commodity pressures you saw what Nat gas has done kind of recently and that's the one that I think is where you see higher single digits, but put it all in.
To the Blender and I don't think that 2022.
Is.
That outsized relative to what we've seen historically in this business over time.
Okay that certainly helps.
Maybe Michael one quick one just in terms of the posture on renewals could you share the renewal rate increases you're sending out today.
Yes, sure. Let me. So this is Michael and I will tell you that for November our net effective quotes were came with coming in or going out at 12, 8%.
The December quotes or 13, 2% on a net effective basis and you could see that number is going to continue to grow and it's going to widen because concession use was really ramping up this time last year, so youre coming up against more and more of those residents that had concessions about 25% of all the offers that went.
Out for November and December went to residents that had concessions and I think as I said in my prepared remarks, so far the deal seeking residents that we took in last year they've been renewing at the same pace as compared to those that didn't have concessions.
So we're really we're really excited about kind of working our way through the renewal performance for the balance of the year.
Understood Alright, great. Thanks for the time.
Thank you we'll take our next question from Rich Hightower of Evercore.
Just a quick follow up on development so.
I know you started three new projects last quarter, you delivered one of them obviously the toll joint venture.
Is your mark for several of your expansion markets. So.
How easy is it to crank up the development machine internally.
And what volume of starts do you think we can sort of expect over the next few years in that regard and then.
If you had to peg.
Mix between on balance sheet, or I should say in house versus the total joint venture how would you see that breaking out.
Hey, rich, it's Mark I'm going to start pardon me and then I'm going to give it over to Alex So in terms of how big it can get it will take a little while to ramp up our expectation is this could get to $1 billion to $1 billion a year of starts in a year or so and maybe.
700 of that is toll and the rest of it is other <unk> and the stuff that we created internally.
I think that that will be funded in a way that will make that a pretty accretive thing, but most importantly for us, it's creating and giving us product again in markets and Submarkets. We just don't have enough exposure. So I think Alan can speak a little bit to things the internal teams doing because they are very actively doing a lot of good stuff. We got some great Densification deals we havent talk.
A lot about so I'll, let him speak to that hopefully that gives you the color you need.
Alright, Thanks, Mark Richards as Alec.
Yes, so we look at a lot of deals we are a selective developer and whether it's through the total JV, which has been off to a great start they have a great pipeline and we're actively engaged with them on each project and assessing whether it fits for US and then as Mark mentioned, we have these densification throughout our portfolio largely in California, but in other markets as well.
Have a great internal expertise on how to assess and execute on so we're excited about that and then.
As we've mentioned in the release.
Continually looking at other joint venture opportunities outside of toll. So we have a broad range of projects that we look at and are very selective on the ones we pick.
Okay, Great I appreciate the color guys and one quick follow up just in terms of the recent acquisitions and the expansion markets can you give us a sense of where you are acquiring those properties versus replacement cost in addition to the yield.
We've provided.
Yes, so it's a range depending a lot on the project and this concept of replacement cost is an important metric. It's something we look at but it's not an absolute thing, it's actually a little bit more challenging to calculate than you might think because if you don't always find an apples to apples. It may be a location, it's really almost impossible to find similar product to build.
So some of the locations to build the same kind of product parking is another variable surface parked you may have an existing project that has surface parked, but some municipality won't allow you to do that or at the project sites too dense so that maybe you're going to have structured parking which is more expensive or you underground, which is yet more expensive on top of which their code changes.
We can generally make things more expensive an inclusionary housing requirement so.
We look at it as a metric we look at but we assess all of those things on a project by project basis.
Determined whether or not we think it fits based on that and the other typical yield parameters that we assess.
Okay. So it's hard to sort of peg a percentage discount or premium given everything you. Just mentioned there is no absolute number okay alright. Thank you.
Thank you we'll take our next question from John <unk> with Goldman Sachs.
Hi, Good afternoon. Thank you for taking my question.
So I just wanted to follow up on Joe's question one of those questions I was just asked around new.
Development projects that you started this quarter.
Antonio platform could you perhaps talk about what are the markets, where you will focus your internal development versus the focus coming in from the toll brothers JV. Thank you.
Yes, so we have and then.
John This is Alec.
We have specific markets that we've designated through the toll project that we're going to the <unk> program that we're going to focus on and for example, Atlanta is a market that we're very focused on with them Dallas is another one.
There are other markets, where they don't have a presence or that are not part of the debenture and so those are the areas, where you'd be more likely to invest on our own or with another joint venture partner.
Got it.
Talking about supply a little bit into next year, and perhaps 2023.
What are the markets that you're feeling a little better about forces, where do you see there could be more crowded crowding, especially.
As you are sort of pouring into all of these newer markets. If perhaps you could give some color on that that would be great. Thank you.
Sean This is Michael let me just start I'll give a little bit of kind of the takeaway from 2021, a little bit about what we're seeing from an operations impact in 'twenty, two and then I'll, let anybody else kind of pick up on some of the newer markets that we just entered so I think I would start by saying that the tagline for 2021 on supply would be that strong.
<unk> greatly aided the absorption of new supply in our markets.
D C produced record levels of class, a absorption and the South Bay, which we talked about on previous calls in San Francisco that Submarket at 4000, new units being delivered it continues on its path of recovery with strong occupancy and very limited concessions like in the stabilized portfolio and I think we've.
Talk about this before that we are really focused when we think about supply on the concentration of the supply and the proximity of that new supply relative to our stable of assets on top of winter. The first unit is going to actually begin leasing.
For 2021, the overall supply numbers were elevated in our markets, but we said earlier on the calls that the overall level of competitiveness against our portfolio was expected to be less.
When we look forward the data for the expected starts in 2022, so relative to this proximity of within one two miles of our locations is less which is a great indicator that we should continue to feel less pressure in the next year or so from the new supply being delivered right on top of us.
Great and just to add a little yeah, that's fine.
Thank you we'll take our next question from Jeff Spector of Bank of America.
Good afternoon. My first question Mark I guess, what held you back from providing 'twenty two guidance at this point.
I guess.
17 years of experience doing this job in the CFO job I mean, a lot. This is a pretty variable world.
Lots going on certainly the actions of the sand on the taper are.
Super relevant to how the economy recovers.
I would say there is just enough variability here. We told you is sort of what we know Jeff which is this sort of earn in this loss to lease. We gave you I think some pretty specific parameters on where things like bad debt might be able to go and then the big mysteries really our regulatory pressures how the intra period growth feels next year.
And then where we end this year.
I mean, we're going to spend the next two months continuing hopefully to close some of that loss to lease by writing terrific new leases with happy customers.
No.
Locking in revenues for next year. So there's just enough variables, where any guidance I give you would be too wide to be meaningful on same store revenue and I think the conversation in February will be much higher quality.
That's fair thank you.
And then.
I know you touched on supply I don't think I heard the answer on 'twenty three and we're hearing.
<unk> on the coast.
A significant decrease in supply in 'twenty three any.
I am sorry, again, if I missed this any early thoughts on 'twenty three supply in your markets.
Alright, it's mark Thanks for that Jeff So what we see is a.
Pretty significant decline in 'twenty three a lot and this is again in deliveries just to be clear and Thats really as a result of delays in starts or delays in completions of product that was underway during the pandemic and so we're going to get a break more of a break in New York for example, but even that is a little bit.
By area there'll be a fair bit delivered in Brooklyn will be a fair bit delivered in new Jersey coast, but in Manhattan almost nothing.
D C will kind of continue doing with DC does and deliver a lot, but we're going to feel a lot better about places like San Francisco and Los Angeles and.
Seattle, So we feel like we're walking into a pretty good setup. When you start thinking about what might deliver in 'twenty four and those are things that are starting now yes. There is a lot of development activity. The space is in great demand and the investment community hasn't not seen the strong recovery and the stability of the sector.
So we think there'll be a good amount of demand or excuse me a good amount of supply, but probably more spread out the market. That's most on the watch list of our new markets for supply is certainly Austin Austin has a lot we're being very thoughtful about adding exposure. There you may see a slow that down and added a little bit later I was just going to be 30000.
Units for some number of years, there Atlanta feels pretty good to us on supply Dallas has supply, but its spread out and it's a big demand market. So I guess, that's the color. We'd give you Denver has a lot of supply to more downtown than otherwise, but again, we have a portfolio. We're building that in Denver will be a pretty diversified.
<unk> portfolio when we're done.
Thanks very helpful.
Thank you we'll take our next question from Rich Hill of Morgan Stanley.
Hey, good afternoon guys.
I wanted to come back to talk about the disclosure that you provided on rental assistance, which was really helpful.
Looking at the numbers correctly does it imply that another $10 million to $12 million of rental recovery is going to come in <unk>.
Yeah.
Yeah, Hey, Hey, rich, it's Bob that's probably a little bit on the high end of the range, but yes I think.
That's you're in the ballpark. So we think as Michael said for the for the full year will be at $25 million to $30 million and we're already at 18, so far through.
Through 930.
Got it helpful and so as you think about 2022 do you think thats going to be a clean year or will it also have some rental assistance and it meaning is the same store revenue number going to be.
Does it benefit maybe even to the upside from additional rental assistance.
So I think that it probably will benefit from some of the rental assistance in 'twenty two will likely be.
Kind of a transition year, but it also is going to experience. This elevated write off too right. Because you still have that is unlike like 19 similar to what we've seen in 'twenty, one and 2020 right. So youre going to there is two things that will drive bad debt. One is the rental assistance payments and two is just the ability to.
Start collecting on the units that haven't been collected and Thats, a small number for us and it's in a small number given the high quality renter base that we have but those are the two driving factors that I think are going to make 2020 twos kind of bad debt number a tweener between what you would've seen in 19 and what we saw in maybe two.
'twenty one.
Got it.
Would you be willing to maybe frame how much of a.
Headwind.
That might be.
Yeah.
I think that will have a better idea as we get to that kind of providing guidance in general, but just to be clear I don't think it's a headwind I think it's a benefit to revenue I think we'll have I think we kind of alluded to that I think we should be in a better position in 'twenty two than we were in and we were in 'twenty one.
Got it.
Sure.
I understand that makes perfect sense I figured I'd ask about.
Thought it would be a long shot, but I figured I'd ask thanks, guys I appreciate it.
Thank you we'll take our next question from Rich Anderson with F N B C.
Thanks, everybody.
So when you think about the surprising piece of demand improvements obviously the economy turning on after shutting down so rapidly as a big part of it but related is the opening up of offices of course in universities and people rushing to get back to be close so that can be present, when the time comes that they have to be in the office. So assuming you agree with that.
I want to be true that as things settle and you kind of have this all this stuff be a wash in terms of year over year comps that the cadence of 2022 would be super strong year over year growth in the first half, but a return to earth in the second half I'm not looking for guidance question here, just sort of speaking out of logic.
<unk>.
So rich, it's mark I'm going to start and maybe others will contribute so the rushing back to the office thing I'd point out a lot of people.
Are coming back because the city's reopened they're not sure when they are employers coming back to full time, but they wanted to be back because they love the lifestyle in west L. A and they love living in downtown Seattle, and you want to go back to their favorite coffee shops.
And I've had this discussion before I think it's a little bit about return office, but it's also about just energize cities attracting are kind of residents in terms of the shape of the curve.
I don't think you're wrong about that I think the numbers early have to be extraordinary because the comp period is so poor in 'twenty. One that's exactly what it will probably occur, but what else will be going the other direction is the normalized <unk> by quarter number because as Michaels team rights better and better leases.
As Bob does this accounting work enrolls those numbers up you're likely to see the earnings power of the firm in the middle part of the year revert back to what it was in 2019, so again the quarter over quarter numbers are going to be exceptional early and they're going to be nearly very strong late in the year, but I think what youre going to see besides those operating.
<unk> rich is that quarterly normalized <unk> number get better I think every quarter of next year and we should be focused on <unk> anyway, I think but that's just me.
And then second question is.
As hybrid office like a perfect setup for multifamily and the reason I say that is people will be more inclined to choose a nicer place to live with amenities and other conveniences, just because theyre going to be spending perhaps more time, there and the hybrid model do you agree that hybrid office would be.
Particularly good thing in the sense, you might get more fee income and and with that in mind why avoid than retail at the ground floor in your new acquisitions like I guess I understand.
Why but.
Hey, guys just throw that question that you too on the on this topic.
Hey, Rich this is Alex.
Think San Francisco is an example, where people aren't back in the office, but they still want to be in the cities to your first part of your question, Yes, I think the hybrid model does work well because it enables you to do both enjoy the city and also be close enough to work to get in when you have to go in.
So.
We're seeing the impact of that and we are working on making our amenities more suited to that so we've increased a lot of our co working space within our amenities.
We haven't said no to retail we like ground floor retail we like activated streets.
Would you have the right to have a relatively small amount of it compared to the apartment business that we love.
Okay sounds good thanks.
Thank you we'll take our next question from Alexander Goldfarb with Piper Sandler.
Yes.
Hey.
Good afternoon.
So two questions here first I don't think anyone asked about the ATM.
<unk> are not historically in equity issuer.
No offense, but $140 million is almost.
Pocket change for you guys. So curious on your decision to issue equity, especially as it doesn't settle for another year and a half.
Given that you guys are good assets sellers youre getting cap rates that are commensurate with where you are buying so just trying to understand how this ATM fits in and should we expect more of it.
Yeah, Hey, Alex it's Mark Thanks for the question. So we thought it was prudent to do.
Stop the old ATM as you put it and put it to some use here and it's really about this increase in development spending so our typical development spending needs. The last three or four years have been $300 million to $500 million and here I'm talking about spending that starts now of course, they correspond and we're funding that out of free cash flow and a little Inc.
Mental debt that didn't change our ratios because you had the new development assets on your books, creating income after they were stabilized going forward with the idea that we're likely to start a $1 billion to $1 billion two a year. After a ramp up period, you need to be very thoughtful about how you match fund that and when you look at 2023, we have a pretty significant amount of <unk>.
Debt maturities in that year, as well and that's probably the first year, we're going to reach this run rate of starts and so it seem prudent to us after consulting with the board to take a little equity into the mix I think youre right. It will predominantly be funded with free cash flow and we expect to have that again next year and hopefully in some good abundance Inc.
<unk> debt.
Occasional asset sales as long as we can stay within our taxable income kind of caps and then we will I think we will be issuing a smattering of equity here and there given the size of the development expectations for the company in the next few years.
Okay, but still that's mark that's a pretty big shifts. So is that the recent addition of new board members or I'm, just curious because historically you guys really haven't been equity issuers. So it does sort of represent a shift in your and your financing strategy.
Okay.
I don't view it as a shift it's the same group of people.
Maybe in different shares, but its the same conversations I mean, we don't want to dilute our current investors thats an important priority.
But we do think that when you are creating new assets, having a little equity foundational it makes sense.
No what the cash needs are to fund the development pipeline. So the conversation with the board was very easy on this point. They felt that if you were three four 500 million dollar a year spender of development that was one thing if you're going to double it that was a whole another thing and so that was the real thing that changed Alex was just this magnitude of what the manner.
<unk> team is suggesting development can be.
Okay, Great and then the second question.
Local New York prices talking about how governor Hogan was trying to send off challenges for her reelection from the left in good cause <unk> seems to be back and it seems to almost be a gimme for Albany. Your view if that goes through is does that change your plans as far as.
Selling down in New York more deep or does that make it say like Hey, New York almost becomes like a stable rent foundation market or does this mean like hey, we can actually see our property taxes go down because if theyre going to limit rent increases then it's hard for them to raise property tax. So just sort of curious how because it does look like theres a pretty.
Good chance good cause does pass this time.
Yeah, a lot of parts to that question, so ill try and I'm going to start though with the policy part does good cause eviction is just rent control by another name. It's bad policy, New York's had rent control you know you live there for since World War, two and the housing situation in New York has not improved this is just going to cause less housing to be built in.
More disinvestment in existing housing and Theres, a lot of better ideas like SB nine in California, and 40, B in Massachusetts, and some of the zoning reforms in Minneapolis that.
It should have been thought about so we're we're disappointed if it indeed is the direction its going and we'll work through our association <unk>.
To suggest other better alternatives, but let's assume it does go it was our intention to lighten our load in New York I think New York is going to have extraordinary revenue growth next year as a result of just going back to where it was in 19 frankly.
And so the idea of putting good cause eviction, and where it's going to affect landlords, who have been beaten up by the pandemic and property taxes to pay and all the rest seems like particularly bad timing and is going to particularly discourage production. It doesn't make us want to own more in New York City, that's for sure and in New York State.
So I guess I would say it's a.
<unk> to investment in the city and in the state.
A lower property taxes, I love that idea they did come with lower taxes than we expected for the most part this year in general we will see I don't know many municipalities that like to keep their property taxes low if they can raise them. So im guessing they won't lower them for us enough Alex too.
Kind of reimburses for what's about to happen if good cost comes through but again, it's just a bad policy idea of putting aside the impact on <unk> and we can respond to it will lighten our load in New York and Thats unfortunate and a lot of other people will do the same thing and there'll be less capital for housing in New York.
Thank you Mark.
Thanks, Alex.
Thank you we'll take our next question from Brad Heffern with RBC capital markets.
Yes, hi, everyone.
You talked a little bit about the bay area already but I was wondering if you could put some more color around your expectations as to how the recovery plays out over time.
Thinking about it in the context of New York, you saw occupancy and pricing come back it basically at the same time, but in the Bay Arthur countries come back with pricing really hasn't so is it as simple as just <unk>.
People with higher incomes needing to come back to work at their tech jobs.
There's something else going on.
So.
Hey, Brad This is Michael So I think you have a little bit of everything going on I think right now as I said in the prepared remarks.
We're pretty well positioned in San Francisco, there is demand coming.
Coming back to our product.
It's just the pricing power wasn't quite where it needed to be to kind of recapture everything that was loss through the pandemic. So I think right now when you look at the portfolio and you look at how its position as there. Some I guess additional clarity around what return to office looks like the tech companies have been all over the place in that market. So.
Just a little bit more clarity, probably bring some incremental demand and that most likely will happen. After we get into the new year and the portfolio that we own right now is very well positioned to capture that demand and recapture some of that rate. When you look at it from a sub market basis, I said, a little bit on the deliveries in the south.
We thought we were going to have pressure in the south Bay because of the new supply being delivered we're really holding up really well there now the rate hasnt fully recovered, but the rate recovery in the South Bay is better than the rate recovery in downtown San Francisco. So I think we need a few more months to just see how some of this ambiguity kind of flushes out and then we'll.
I'll have a better feel as to what that means for next year.
Okay perfect.
And then on bad debt.
You have on the slide some of the potential there I mean, you also said you don't expect it to really.
Fully get recovered in 2022 can you just talk about what some of the impediments are there I mean is it strictly just eviction restrictions are or what else would keep it from.
But also make it play out over a longer period of time.
Yes, I think it's hey, it's Bob Brad I think it starts with.
Just.
Getting to the point, where these residents that haven't been able to pay start making different housing choices or are in a position to start paying right and so that can comment a few forms that can come in the form of some of the eviction restrictions being lifted it can come in the form of residents now being employed again, because the economy is in a much better spot and they can start.
Paying again, but there is a process that we're all going to have to go through a kind of unwinding, this or or moving back to kind of a market level and that's going to take a little bit of time right. That's unlikely to be a light switch like activity, especially as we work with residents kind of figuring that out and so as a result, I think 'twenty two is going to be that transition.
Year I alluded to that's probably the biggest thing and then to add a little bit of the financial statements to add a little bit more noise associated with it or make the forecasting harder as I like to say around here.
Going to have the trickle down of the government rental assistance payments because those programs eventually will come to an end as well. So it's really the unwind but of that that's likely to occur in 2022.
Okay. Thanks.
Thank you we'll take our next question from Amanda Sweitzer of Baird.
Thanks.
Lots to Lee are you willing to provide that number by region and then can you also quantify how much of your NOI objective regulatory restriction you mentioned that one <unk>.
<unk> ability to fully realize that loss to lease next year.
Yeah, Hi, Amanda this is michel so maybe rather than going by every market I'll just start by saying that the majority of our markets. So Boston DC, Seattle, Southern California, and Denver, All fall within a range of a net effect of loss to lease between 11% and 15% with about 80% plus of the resin.
And those markets being below current market prices.
Not surprising San Francisco has the lowest with a five 7% net effective loss believed was 67% of residents paying below current market prices and New York is the highest with 21% loss to lease with 93% of the residents paying below the current market.
And as I stated in my prepared remarks, the loss to lease snapshot of today.
It never has.
Translated into full year revenue growth because you have to work your way through those explorations and I guess I'll just stop and just say that all of that being said. This is the best positioned the portfolio has ever been and for the ability to capture it but I think you need several months into next year to really understand how youre going to <unk>.
Late that into revenue growth and how much of that is going to roll in to 2023 and in regards to kind of thinking about the restrictions or the governors I guess I would say, it's really hard to understand because it's so subject to who is actually going to renew who's going to move out and what your abilities are.
And what the caps are in place and they are really are so many different programs out there. So it's really difficult to try to quantify that for you.
Okay. That's helpful and makes sense and then just given the scale of the toll brothers JV being able to talk more about how the potential buyout would be structured in terms of the implied acquisition yield versus that five plus percent.
I'll bet you sited.
Hey, Amanda it's Mark I'm going to start Alex we have something but we are underwriting these deals and generally for told to bring them to us as we said they need to be in that 5% yield range on current rents are better and so right now Alex and his team are buying at a three 5% or so cap rate on.
Existing assets. So that's that three <unk> to 5% difference that 150 basis points or so of margin that again, we think is compensating us for the risks so.
When we buy the asset we will be paying toll of promote presumably and so we'll be buying at a slightly.
Lower cap rate than that five in my example, assuming no intra period rent growth, but again because of the way the promote structured and all of that it's not that meaningful a difference where 75% of the capital in the deal or the equity capital in the deal. So is that helpful to you.
It is I appreciate the color.
Thank you.
Thank you we'll take our next question from John Kim of BMO capital markets.
Thank you Mark you mentioned in your prepared remarks about cap rate conversions.
Around three 5% across your markets and I realised multifamily is a very hot asset class.
But with rates rising and now 20% rental growth achieved in many of the sunbelt market.
Seeing any upward pressure in cap rates.
In your markets.
I mean, I'll, let Allen give you detail on our second because they have been a little shift here and there but it's.
Interest rates matter, but fund flows matter more and fund flows right now are highly favorable into the space because of the performance matters you mentioned, because though the there were significant declines in urban apartments. They came back pretty quick and because of the GSE is existing as a financing option that no other sector.
Has so I.
I think when we look back at our research there was generally a 200 basis points difference between whatever cap rate. We thought we were underwriting an acquisition whatever the tenure spot treasury rate was right near the 10 year spot Treasury rates, one 5% a lot of what Alex buying is very much close to that $3 seven so it might be a little lower.
But it's not a lot lower and so I think I do.
Feel like we're that far out of whack and I do feel like generally speaking.
When we look at the whole sort of situation. It generally seems to make sense to me and I don't think that interest rates rising alone as long as cash flows increase will drive values down.
I don't know if you want to talk about the bidding tents youre seeing yes. So John this is Alec.
There are.
In some cases slightly fewer bidders showing up at the auction. So thats kind of the feedback we get from brokers, but I will tell you the pricing Hasnt gone down in fact, it continued to edge up so.
There are some participants who have kind of stepped back and said well I'm not going to win anyway. So I'm not going to spend my time underwriting. This but there is still enough as mark says funds flowing in to make it for a very competitive bid to be able to prevail.
On our end we're trying.
Doing is matching up the timing of our dispositions and our acquisitions. So we're effectively making a neutral bet, we're not going out on a limb so that's protecting us.
And in the spirit of full disclosure on this.
A lot of our buyers are leveraged buyers of our assets. So if the fed raises floating rates, but if they stay is still relatively low compared to the cap rates. These are good leverage buys.
So that's one of the other thing that continues to force capital into R. R. R space.
Okay, that's great color. Thank you.
In your presentation, you talked about maintaining occupancy at high levels for the remainder of the year and then Michael talked about sending renewals out at 13% in November December.
Are you basically saying that youre not seeing much resistance to this level of renewal increase and you're not expecting turnover to increase.
Yes. This is Michael so I would tell you our expectations are the continued success that we've seen in retention will will balance out the rest of the year and probably even next year right. We're in the mid <unk> right now for October even the trends for November are very promising the increases are.
Getting more significant we're having more conversations around negotiations, but just feel really positive about the ability to deliver results from that process.
Yeah.
Great. Thanks.
Thank you, we'll take our last question from Rob Stevenson of Janney.
Hi, good afternoon guys.
Prop 13, as you continue to trade $1 billion of California assets for $1 billion of Sunbelt, how much is that going to push property taxes up but are we going to be at a same elevated same store expense level.
Because of that going forward, presumably youll have higher revenues to offset that but at the same store expenses just going to be higher just simply by trade in California for elsewhere.
So it's mark just to clarify that Rob you mean that in California, because of some of these prop 13 limits property taxes can't grow as much going forward.
In our as maybe in Atlanta, they wouldn't be bounded by that well I guess I'd say a couple of things first for example in Texas, There's a whole bunch of property tax limitations that are coming into place on both commercial real estate residential real estate.
Alex and his team underwrite these increases so if cash flow isn't going up net net then those assets aren't going to be appealing to us. So.
Not sure. What you said is certain because when you say same store expenses, maybe property taxes go up more but I will tell you, California minimum wage is a lot higher California, all the other compliance costs that go with owning in California are much higher so I think if youre talking about holistic same store expenses I'm not sure I believe.
At least for the first 10 years or so of owning a california asset that theres going to be that much of a difference in same store expense growth, but Alex you have all the other thing I would add Rob This is alec.
Is that were buying properties that on average two years old and selling properties that are 30 years old and that expense load on the older properties tends to accumulate over time.
There is very significant trade off there.
Okay and then the other one for me.
I mean, it doesn't sound like that you have an exact number but what are you sort of figuring out.
Percentage of revenue that you are still losing today is your loss to regulation executive orders eviction restrictions how material in general is that is that 1% of your sort of call. It $625 million of quarterly revenues is that 2% is that half a percent in terms of ballpark how big is that.
That you are having that you are either foregoing or you are incurring additional expenses to comply with et cetera, how material is that or is that an immaterial amount that we should be focused on.
It's mark I'm going to start with Bob and Michael have anything you'll add but I'm on 12 page 12 of our press release, we gave you a bunch of disclosure about residential bad debt and maybe this will boundless up for you in 2019, our write offs. So that would be a direct negative against residential revenues were about 40 basis points. That's a good run rate of.
Delinquency in our portfolio rents, we never receive and that burden same store revenue. When you look at what happened last year in 'twenty, where there were no recoveries in the pandemic was three quarters of the year and this year you see on the bottom of 12, we're talking about numbers that are in the 2% to 5% range as a headwind now the problem we're having.
<unk> is forecasting for you where between 40 basis points and two 5% does next year fall and that depends on how quickly the courts process evictions. Our success in continuing to work with our residents which is always our first goal whether government revenue of government relief programs kind of leak Robert into <unk>.
Next year or mostly are covered this year. So hopefully that gives you a boundary, but that's what we have to be a little general about because there just isn't certainty in our mind and across so many CT systems in so many jurisdictions for us to know all of that stuff plays out.
And part of that is also the remainder of the the rental assistance the other sort of $8 million to $10 million that you guys expect in the fourth quarter.
Very much so and you can see what it did to our Q3 number went down to 70 basis points. So we can out of but yes. We told you that we continue to collect all but two 5% or so of our reps. So when we're that changed a little it's getting a little better collections are every month from what is still a very good collection level already but this governor.
Money is definitely hard to predict and then when we can start working with people more directly and getting them into a housing situation that stable for them long term I don't know when that is exactly but we think it's coming up.
Is there anything of any material.
Substance to you that's expiring either year end or over the next three or four months without renewals by either a governor.
Later.
So the New York eviction moratorium, we understand expires in the middle of January 'twenty, two both commercial and residential California's.
Statewide eviction moratorium has expired, but there are some city of Los Angeles rules out there still Boston instituted an eviction moratorium that has no set expiration date. They have an election in a week and then after that we will see Seattle as an expert.
<unk> excuse me of their commercial and residential eviction moratorium in the middle of January of 'twenty, two as well. So you can see I'm, giving you a hodgepodge of dates there is local overlay. There is a lot going on here. So thats why youre getting a range from us and not the precision that we usually try and give you.
Okay. Thanks, guys I appreciate it.
Yes, thanks Ralph.
<unk>.
I think that's the end of the call we're appreciative for everyone's time and attention on the call today have a good day.
Thank you everyone else has left the call. This concludes today's call you may now disconnect.