Q2 2022 Equity Residential Earnings Call
Please standby good day and welcome to the equity residential to Q2022 earnings conference call.
Cause a reminder, today's conference is being recorded.
This time I would like to appropriate over to Marty Mckenna. Please go ahead, good morning, and thanks.
Got the equity residential second quarter 2022 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 as well for the Q&A. Our earnings release is posted in the investors section of <unk>.
Equity apartments Dot com, please be advised that certain matters discussed during this conference call may constitute forward looking statements in the meaning of the federal Securities laws. These forward looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.
Now I will turn the call over to Marc Piro.
Thank you Marty good morning, and thank you all for joining us today to discuss our second quarter results.
In a minute Michael will walk you through our performance update by market.
Bob will discuss our guidance improvements update you on how our innovation machine continues to hold expense growth down and increasingly inflationary world and then Bob will close with some color on our balance sheet and then we'll take your questions.
Equity residential had a tremendous quarter, our business continues to benefit from terrific supply and demand dynamics.
Including excellent job growth and household formation are urban and dense suburban portfolio continues to be a magnet for our affluent renter demographic as demonstrated by our 96, 7% same store physical occupancy.
We also believe that the desire for more space due to work from home and Covid related health concerns has resulted in significant incremental household formation, creating additional demand for our properties.
Also housing alternatives remain expensive and in low supply.
<unk> family home prices reached record levels in 2022, while rising mortgage rates have further stressed affordability, particularly for first time homebuyers.
<unk> family housing starts are declining existing homeowners are more reluctant to sell due to low locked in mortgage rates, along with minimal and expensive for sale replacement options and competition for homes from investors remains strong.
The near term apartment supply picture also remains favorable.
Arts within close proximity to our properties in our coastal markets are still at or below pre pandemic levels. In addition, it seems likely to us that over the next few quarters, new apartment starts should decline due to reduced availability and higher pricing of construction financing.
Increasing construction costs and continued supply chain disruptions lengthening construction times and increasing developer risk.
Recently elevated inflation numbers are certainly a concern, especially if efforts to rein in inflation lead to much weaker job growth on the positive side, our affluent renter base should be able to better weather rising inflation in part due to lower relative rent to income ratios and higher amounts of disposable income.
As in the past if inflation does persist we would expect the apartment business to perform relatively well.
As we look at our resident income the average incomes for our residents who signed new leases with us in the last 12 months is 13% higher than the group who signed with US in the 12 months ended June 2021.
These new residents are paying us approximately 19, 8% of their incomes versus 19, 2% last year in rent.
They are not rent stressed and they are willing to pay these rents to live in locations that support the lifestyles they seek to enjoy.
The larger topic of affordability, we see a continued need for more workforce housing and continue to support market based affordable housing supply solutions, including zoning reform public private partnerships and other programs that assist in affordable housing preservation and creation.
As part of the support and in addition to the more than 2600 apartment units that we already operate in affordable programs. We have funded about half of our $5 million commitment to a privately held affordable housing preservation fund they expect to preserve approximately <unk> hundred affordable housing units when it's fully deployed.
Now switching gears to the investment side of our business, we saw a material slowdown in the transactions market during the quarter higher interest rates, especially for the floating rate debt used by many value add buyers as well as general uncertainty about the path of the economy and evaluations led most buyers to pause.
We did recently close on the sale of two properties in New York, one property for $266 million at a three 3% disposition yield in the second quarter and another New York property for $415 million at a three 4% disposition yield. This month the properties are adjacent to each other on the upper west side.
Both properties represent pricing contracted four before the recent volatility in the apartment transaction market and are a continuation of our stated strategy of lowering our New York market exposure.
As we have said before we will continue to have a meaningful exposure to the New York area, but intend to better balance our urban versus suburban exposure in our established markets like New York, while adding over time to our exposure to our expansion markets, which are attracting increasing numbers of affluent renters and have lower regulatory risks.
For our part we are very comfortable letting the transaction market sort itself out and have reset our transaction guidance. So it reflects only buys and sells completed to date plus one smaller disposition that is under a long term contract that should close in the fourth quarter.
While apartment values are not immune from the more general reevaluation of risk assets going on across all asset classes. We expect department assets to remain in high demand from institutional buyers and for rising NOI to partially cushion increases in cap rates.
We have the balance sheet and a team ready to take advantage of any opportunities. We do see as we've done in the past moves.
Moving on to development, we started two new developments in the quarter.
The first project is $153 million densification of an existing property, we own in Santa Clara, California about one five miles from Apple's headquarters we.
We will be demolishing 40 units in buildings built to $19 72 in the highly desirable area with little supply of high quality rental housing and replacing them with 225, new units plus significant amenities that will benefit the remaining 224 units at the properties that are undergoing renovation.
We are very excited about this project and expect a 6% development yield when it stabilizes.
At a cost per unit of about $675000. We also like our basis as compared to recent sales comps.
We're also pleased to have started this quarter. Our first development project with toll brothers. This $82 million 362 unit project is being built just west of downtown Fort Worth, Texas, and a rapidly gentrifying area with good access to job centers and to the increasing number of nearby lifestyle amenities like restaurants bars and entertainment.
Venues that are appealing new young well off renters.
We expect to build this property for about $225000 per unit.
We like our expected basis, and we love working with our high quality and nationally strong developer like <unk> that has the experience to capably manage construction and our climate with significant inflationary cost pressures.
That said this deal is approximately 75% bought out reducing our risk on current rents and costs. This deal is approximately five 5% development yield.
And with that I'll turn the call over to Michael.
Mark let me start with a huge shout out to the entire equity residential team for their continued dedication and hard work they remain relentless in serving our customers and working together to deliver the strongest results in the history of our company.
As expected we had a very good second quarter resident turnover remains at all time lows with strong demand driving robust pricing power and high physical occupancy at 96, 7%.
Pricing trend, which is the net effective price of our units inclusive of concessions has grown almost 10% since the beginning of the year, which is well above the 6% range that it was storage really characterize a very good year.
This pricing strength has contributed to an unprecedented new lease change with July expected to be about 16, 5% and a significant loss to lease of 12, 5% <unk>.
<unk> moderation in the new lease change is less than we expected and is caused by a more challenging 2021 comparable period not a loss in operating momentum as our sequential rents continue to grow our current position will contribute to continued above average second half revenue growth and strong embedded growth.
For 2023.
Our residents are well employed and as Mark just mentioned seeing their incomes rise the unemployment rate for college educated continues to be below 3% and while we see the same headlines that you do about slowdowns in hiring or even layoffs. We are not seeing any impact on new leases, where renewals are operating dashboards continue to flash green.
Given the amount of hiring that the tech firms have done over the last few years, even with the moderation they are still employing more people than they did pre pandemic.
The tenure of our residents is also improved to two three years on average compared to two one years last year, and we are losing fewer and fewer residents to home purchase as single family Homeownership gets more and more challenging in fact in the second quarter, we had a 22% decrease compared to the second quarter of 'twenty one.
And the number of residents who moved out to buy a home.
We remain aware of the economic headwinds and we will position the portfolio more defensively, if need be but given the significant loss to lease strong retention and healthy demand. We are seeing we remain optimistic that said as is true every year in our business, we expect rent growth to peak and then moderate seasonally in the.
Summer. So we are happy to report that has not yet occurred.
Some are operating metrics and forecast for the balance of the year remain beyond historical norms and Bob will provide more color on the building blocks of our revised guidance in his remarks.
Let me take a minute and provide some color on market performance in Boston demand ramped up in both the urban and suburban Submarkets driving a 90 basis improvement in physical occupancy over the first quarter, along with robust pricing power that came earlier in the season unusual rent.
Brands have begun to moderate in this market. However, it is not uncommon to see modest reacceleration in August as students. Typically return then and are an important source of demand for our portfolio we.
We are definitely bullish on the second half performance, particularly in the suburban Submarkets and remain cautiously optimistic on the city of Boston and Cambridge is ability to absorb some of the new units that are scheduled to be delivered later this year. The market continues to have strong employment with life sciences, continuing to expand their footprint.
New York continues with very healthy pricing power and demand after significant impact from the pandemic New York same store revenue and NOI are now fully recovered back to 2019 levels.
Physical occupancy is 97% new lease change and renewal rate achieved were robust in the second quarter with a vibrant environment continuing to attract our affluent renter demographic, who is well employed and can afford to pay our rent despite.
Despite these rental increases our new residents are still paying us only approximately 18% of their income and our data indicates that our rents in this market have grown more slowly over the last three years.
For the year of our new renters.
The Washington, DC market continues to perform well with physical occupancy at 96, 7% and good growth in both new lease and renewals in the quarter. The absorption of new supply was good in the first half of the year, but we're keeping an eye on it as the year progresses. There are more than 12500 units being delivered in 2010.
'twenty two with over 7000 of them coming in the back half of the year from a competitive leasing standpoint, the absorption rates slowed a little bit in the second quarter, but still remains very strong and at current levels should support continued pricing power.
While this market has historically shown high levels of supply. It is also one of the most resilient in the country during periods of uncertainty.
The D. C area unemployment rate has returned to pre pandemic levels and sits below the national average with good growth in the professional services and education and health categories, where many of our residents are employed.
Heading west Denver has solid demand and good pricing power stronger occupancy in the suburban portfolio and we expect some pressure from new supply in the downtown Submarket of.
The Denver job market continues to enjoy healthy growth across a number of sectors, including the professional and business services.
Seattle continued improvement on the quality of life issues is helping drive that come back in the city, which now has rents that are just over pre pandemic levels physic.
Physical occupancy is above 96% and we continue to see strength in new lease rates and renewals.
Concession use is isolated to the city and continues to moderate with approximately 20% of our applications receiving just under a month. This is down from over 50% from the first quarter and occupancy in the downtown Submarket is now just over 96% as compared to 93% in March.
Supply impact for Us in 2022 is limited to our high rise communities in the city, while 2023 shows less direct competition from new supply overall.
This market continues to demonstrate high wage job creation and while job postings from the major employers did moderate this quarter. The number of available positioned is still near all time record highs.
The San Francisco market continues to improve with high occupancy supporting growth in both new lease and renewal rents.
The issues around quality of life are improving but downtown San Francisco is still taking more time to return to pre pandemic conditions than other markets across the country.
Remember that the city was one of the last areas to ease Covid rules and just recently stepped up its focus on crime issues, while rents continue to be below pre pandemic levels in the downtown Submarket. They are working their way back all of our other submarkets in San Francisco are at or above pre pandemic pricing level or.
<unk> I would say we are very optimistic on current trends in San Francisco, but have an eye on new supply that is expected to be delivered in the back half of the year and could erode pricing power if demand slows.
Finally, southern California continues to perform well with physical occupancy at nearly 97% driving strong rental growth in both new lease and renewal rates specific to Los Angeles. The market is seeing elevated new supply as compared to the past several years, but the overall market remains under supplied even in sub <unk>.
<unk> like Korea town, where we expected pressure this year, the new supply is being quickly absorbed leaving us better pricing power than we anticipated on the delinquency front, we saw modest improvement in the second quarter and the payment behavior of our residents and continued rental relief receipts as we look into the second half of the year.
We don't expect rental relief receipts to be as material, which will lead to revenue growth moderation. Despite strong continued fundamentals.
Before I turn it over to Bob I, just wanted to give a quick update on some of our innovation initiatives innovation is a major contributor to our ability to create operating efficiencies, while continuing to maintain a high level of customer service.
Meaningful progress we continue to have a lot of opportunity ahead of us as we integrate our initiatives continue to leverage technology and advance our overall skill set.
Over half of our properties now operate without fully dedicated staff, we continue to invest in and implement software and processes that further enable the autonomous leasing experience, allowing customers to tour, our community and interact with a member of our team or our AI leasing agent as much or as little as they desire.
<unk> guided tours continue to dominate as a preferred to our option with just about 90% of all tours in the second quarter being self guided.
We are extremely excited about the future as we innovate to maximize revenue and minimize expense growth, while continuing to provide a great experience for our residents and employees I will now turn the call over to Bob.
Thanks, Michael a quick comment on the quarter before moving to guidance on the balance sheet Q2 normalized <unk> was <unk> <unk> above the high end of our quarterly guidance range. This beat was almost entirely driven by better same store same store NOI through a combination of better revenue growth, including lower bad debt expense and modest overall expense growth.
Now for our revisions to full year guidance as you saw in the release last night, we significantly revised same store revenue and normalized <unk> upwards, while maintaining our existing same store expense growth guidance.
Starting with same store revenue strong first half performance coupled with the constructive ongoing operating environment has led us to raise our same store revenue projections above the top end of the prior range. We now expect our same store revenue to grow between 10, and 11% are new 10, 5% mid point, it's 150 basis points higher.
Then the prior midpoint driven by continued stable physical occupancy of 96, 5% record resident retention and earlier as well as stronger pricing power both in new lease change and renewal rate achieved across all of our markets, but particularly in New York, where recovery from the pandemic has been a positive to the upside.
Our revised full year same store revenue guidance implies a slight deceleration in same store revenue growth in the back half of 2022.
This is the result of the significant governmental rental relief payments, we received in Q3 and Q4 of 2021 and the almost complete absence of relief payments, we expect to receive from the rest of this year not any expectation of a slowdown in the core business, we expect third and fourth quarter same store quarter over quarter revenues without the impact.
Of rental relief payments to be more in line with the reported Q2 number.
On the expense side, we left our already strong guidance unchanged with June year to date expense growth of two 8% and a number of innovation initiatives underway, we feel confident in our ability to deliver the low expense growth for the full year.
As you can see in our reported results both real estate tax growth in payroll are aiding in our ability to accomplish this goal with some offset in utilities and repairs and maintenance, we remain laser focused on reducing or eliminating exposure to inflationary labor pressures, whether we feel the impact from our own employees through the payroll line item or from contractors through the repairs and maintenance line.
We strive to reduce any pressure from higher efficiency and better decision, making along with the utilization of technology that can eliminate or permanently reduce labor hours needed in a category like utilities, we do our best to maximize our resident reimbursement income reduced usage through both education and technology initiatives and hedge our commodity exposure.
Thus far our approach has significantly buffered growth, but we acknowledge this is a long game if the current inflationary environment continues.
Putting it all together the revenue and expense adjustments that I just outlined resulted in a 225 basis point increase for same store NOI at the midpoint.
For normalized <unk> at the midpoint, our guidance changes added nearly 3% or $30 million to normalized <unk> growth, which results in an approximately 18% increase year over year for the company.
A final note on the balance sheet before Q&A equity residential continues to have one of the strongest balance sheets in the REIT sector characterized by low floating rate exposure and a long weighted average maturity sub.
Subsequent to quarter end, we sent a notice to redeem the $500 million secured.
Unsecured notes that are due in 2023 with proceeds from the disposition of the two New York properties. This use of proceeds will mostly offset the normalized <unk> impact of net dispositions for the year, while also significantly reducing our refinancing needs in 2023.
There is no prepayment penalty associated with the pay off but there will be a modest write off of historical discounts and cost which is estimated on the guidance page.
This will be included in EPS, and <unk>, but not in normalized <unk> with that I'd like to turn the call over to the operator to begin Q&A.
In Q as you would like to ask a question. Please take note of bypassing star one again telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to align your signal to reach our equipment again that is star one to ask a question, we'll pause for just a brief moment to allow <unk>.
Everyone kidney signal for a question.
And we will take our first caller, Nick Joseph with Citi.
Thanks, Mark you touched on the transaction market and the pause that you've seen there. If you were to estimate how much do you think asset values.
And maybe cap rates as well, obviously analyze are up.
And then are you seeing any difference between markets maybe between expansion markets and some of your established markets.
Hey, Nick this is Alec.
As you know the market is certainly unsettled right now and Theres a lot of a feeling out process going on so they're.
There had been some track transactions that closed some of those though were.
Hard prior to the rate hikes.
Some of those may be a buyer had 10 31 need so it's a little hard to get great clarity on that question, but clearly there's countervailing forces that you mentioned interest rates up.
Economic uncertainty offset by just the tremendous property operations, So I would say somewhere 5% to 8% maybe up to 10%, where we're certainly seeing buyers scrutinizing things that might have a little bit of hair on them maybe.
A lesser location, maybe a physical challenge that they might have overlooked before so the range could get higher but we also don't see a lot of distressed sellers, which a lot of people are happy to keep enjoying the great performance at their properties are generating so it's a bit of a range, but we will see how it plays out particularly come come up.
Come fall, it's a little slower in the summer.
Is it typically has been and just supplement that for just the second is just talking a little bit about replacement cost.
That's a big differentiator, it's mark between the coastal markets, where the premium to replacement cost and a lot of assets were sold that was not significant or even in places like New York, There was a little bit of a discount.
And in some of the Sunbelt markets, where there was a pretty significant premium to replacement cost and you saw us really slow down our activities. When we acquisition activities. When we saw some of those premiums go up into the 20%, 25% and up range over over current construction costs. So I guess one of the things.
Alex and I are going to be looking at as we think about starting to buy machine up again is.
Those markets, so sunbelt markets start to make more sense on a replacement cost basis that may be because construction costs keep going up that may be because values come down a little bit but that is another input. That's important and was one of the things that made US go a lot slower towards the end of last year and the beginning of this year Nick.
Thanks, That's very helpful. And then maybe just on operations you talked about July rents accelerating and the challenge in the more challenging year over year comps and kind of a normal seasonality that we've seen historically, but maybe not yet Howard guidance thinking about.
Kind of pricing in our.
Kind of contemplating seasonality in the back half of this year.
Hey, Nick this is Michael So I think right now where we sit and I said this in the prepared remark that the moderation that we saw on some of the stats in July is actually kind of much less than we expected and thats really just given kind of the speed of that concession burn off in rate growth from last year and when we started looking at the <unk>.
Modeling for the back half of this year, we're kind of just assuming normal kind of seasonal trends.
And we have data going all the way back to 2008 to benchmark. This rent seasonality that includes like the exact week when rents peaks each week each year.
And when we went back and looked and I said this in the prepared remarks, our rents have not peaked yet.
And you would see it over the time, where <unk> had years, where rents peaked in early July all the way until like the very first week in September but the most common kind of peak week has been somewhere in that first or second week of August . So as we were modeling kind of we just assume we're going to have rents peak somewhere in this first or second week of.
<unk> and then have a normal kind of trail off in rents until you get to that January period.
Thank you very much.
Thank you and next we will.
Move on to Shawn <unk>.
With Goldman Sachs.
Hi, Good morning, Thank you for taking my question.
Mark could you talk about.
Some early reads give us a lens into 2023, how should we think about the earnings given just just really strong back half that youre seeing right now.
If we go into a tougher economic scenario like how should we think about the business and the cadence.
In 2023, because we obviously have a very good starting point and our foundation, but what if things get really bad from a macroeconomic standpoint.
Yes. So hi, this is Michael maybe I'll start and Mark you can kind of add on if you'd like.
But I think what you should expect is somewhere on our October earnings call, we'll probably provide a little bit more of a range of the building blocks into 2023 that would include the earn in and buy earn in for me I use the term embedded in what that would mean is on 12 31 of this year you would freeze the rent roll and assumed.
Nobody moves and nobody moves out and what is that revenue growth look like I would tell you that in normal years, we would start January one off with an embedded growth somewhere around 1% in the rent roll and even with the forecasted moderation.
It is pretty clear that our expected embedded growth is going to be well above kind of that average.
So I guess I would point to the longer we go without having rent peak right.
Right.
Adding more growth to this embedded as every new lease and renewal gets written here in August September and even October .
And as you think about turning the corner.
Factor in moderation and then your views for what intra period growth could look like in 2023, and that's how we'll be kind of doing the building blocks for our guidance for next year, but we're not at a point, yet where we're willing to share those numbers because we still have a lot of transactions to right.
And you asked its mark this time John D asked a very good question of let's say the economy does fall down a bit more and we do have a more we actually have a severe recession and how do we feel will certainly that would affect our numbers negatively I mean job growth and economic growth are.
Vital to the apartment industry success over the long haul, but the supply demand.
Environment for US is very favorable right now and so the fact that single families pretty pricey. The fact that that means to us that our older millennial demographic is going to stay with us longer and youll see that in our retention numbers.
This Gen Z group, that's pretty large that's coming through the system, where there just aren't enough jobs, even right now. So if there is a few fewer because a lot of what we've seen about the job market isn't that there's so many fewer jobs and people are unemployed. It's more that the excess is being taken out of the system. So I guess, our sense is the supply demand.
Balance is pretty good for us and it will likely be pretty good unless the recession. If a recession occurs is very severe so the setup for 'twenty three it just really is quite excellent. Even if there is a recession. It just won't be as excellent but on a relative basis. It will still feel I think the revenue growth for us in <unk>.
For most of the industry really really good.
Very helpful. And then if I could just get a quick follow up so obviously the acquisition environment has taken a huge back seat here across the board.
Think about your expansion plans in the newer markets. How long do you think that gets pushed and what are the levers Ken development at some point become a bigger tools in your Arsenal.
As you think about getting scale in those newer markets.
Yes, it's mark again.
Development is one of the tools in the toolkit I mean, one of the things that's happening now that makes us happy not to have too large a development pipeline is if values do go down a bit here.
And there is portfolios for sale and there is a discount available to us I mean, youll see us be very active and very aggressive in going out and grabbing those deals. So I think youre going to see it be pretty quiet for a few months here. My guess is that buyers and sellers will decide that this is the new market and towards the <unk>.
End of the year, we might get considerably more active we will continue to do development, we like a lot of the deals. We got a couple more were likely to start this year, but I guess, what I'm. Most excited about is to see some of these acquisitions come in at a little bit more reasonable price to be able for us to act on that and act in volume on that so again to us it seems.
It's going to be quiet.
Through Labor day for sure and then it might pick up a bit Alex what would you I don't have a deadline for completing the transformation of the portfolio I mean, we will be reactive to the market opportunity.
I would just add that in environments. Like this we have a competitive advantage over some higher leverage buyers. So it's been very competitive everyone's bid was more or less the same last couple of years now the ability to transact very quickly we have our own management company. Our due diligence is very fast and we're all cash so and we have great relationships and that's the thing we're doing right now is.
Maintaining our relationships with our brokers and with principals and when the time is right, we'll move quickly and.
And the machine will get ramped up again.
Great Thanks, and congrats on a strong quarter.
Thank you.
Now, we will move on to Steve Farquhar with Evercore ISI.
Yes, thanks, good morning.
I was just wondering if you could talk a little bit about where renewal increases went out for August September I assume October maybe a little too far out, but maybe talk about that and then could you also talk about maybe Bob what's in guidance for the back half of the year in terms of kind of blended.
Reds, either by quarter or maybe for the second half in general.
Yeah. So Steve this is Michael I'll, just start and talk a little bit about the renewals. So yes, we definitely have kind of renewal quotes put out into the marketplace through the end of September and even into October I said in the prepared remarks, we have a lot of confidence in this renewal process that we've put in place. So right now the quotes that have gone out in July .
In August on a net effective basis, we're right around 12% and we're negotiating somewhere right under that 200 basis point kind of spread so we expect to achieve around 10% I think that's a fairly good number to think about for the next several months and even as you think about the balance of the year.
Year, you will see some moderation in that achieved renewal increase rate, but it's not going to be this material drop off its going to stay somewhere in that high single digit and maybe even to this low double digit range.
But I think as we think about our process right now we've centralized all of the renewal negotiations, which is really kind of help facilitating these renewal conversations and giving us a lot of confidence as we put out these quotes to really be able to project kind of what to expect from them.
Steve before Bob just gives you a little more elaboration on blended spreads and such one of the things that I think really interesting year on renewals is because in a fair number of jurisdictions, mostly in California, we can't raise rents to market that we're limited up to some jurisdictional limits youre going to have some energy even if <unk>.
Do decline a bit as they will seasonally and as they may do to the economy I think renewals will be another positive in 'twenty three because we're going to have markets, where we continue to be significantly some cases, even 20% below the market even after an increase and so if that 20% becomes 15, it's still a pretty good size.
The increase so I think the fact that we haven't been able to meet the market on renewals probably leaves a little bit of gas in the tank in 'twenty three two even if rents do moderate for both and it will for seasonal reasons, but for economic reasons and I am sorry, yes, So I think mark and Michael kind of gave you the blended perspective, which is in our guidance so maintaining that kind of high single digit.
Newel component. So they gave you the renewal piece and I'll give you the blended which really is the new lease. So we talked about the seasonality in the trend of seasonality in rents.
Coupled with that just hard comparable period in the back half of 2021, that's going to lead your your new lease and as a result, correspondingly or blended to moderate as you get into the back half of the year, which is what we're including in our guidance that's very normal.
The only abnormal thing here is what we've modeled is something that remains positive on the new lease side in a normal year kind of pre pandemic new lease change often would go negative in the fourth quarter and that's not what we're incorporating in our guidance.
Great and then maybe just a second question sort of following up on the transactions and sort of change in cap rates.
Other marker Alec where do you guys think kind of Unlevered IRR are today, or where do you sort of targeting and what do you think the market's targeting realizing that cap rates you can kind of be all over the board, but where do you think return hurdles are.
Yes, as I said, it's a little bit tough to know because it's pretty unsure footing right now.
That is an answer we're looking for.
On our end, we look a lot about what we can sell properties for so we have some transactions in the market that we're considering and we'll see how pricing comes out on that and that dictates that a lot but clearly.
It's higher than it was I don't know if I have an exact number on that.
Great. Thanks.
Thank you and next we'll move on to John Pawlowski with Green Street.
Alright, Thanks, Alec a follow up question on the lack of price discovery could you just help.
Quantify the.
Magnitude of that bid ask spread right now kind of the ranges you have seen or are sellers expectations, 5% above buyers are 20% above buyers right now.
Yeah, John it's Alex here.
As I said it varies a lot in well located clean properties I think it's closer to the five ish.
On something that's more complicated maybe has a physical issue maybe got a lot of vacant retail, it's going to be higher than that but.
But that's the number of people are feeling each other out and they really don't know and I think it's a time just to be patient, which is what we're doing in most sellers most sellers and buyers are doing that right. So there are some assets just been pulled off the market because theres not a lot of traction.
Traction, but theres a whole bunch of money on the sidelines as you know and there is a lot of people that are frankly, right now hiring up because they expect to buy more apartments in the future. So.
I think that this will settle itself out, but there's a range right now to answer your question of pricing.
Variance between the buyer and seller expectations.
Okay. Thanks.
Bob One question for you on expenses can you just give a little bit of color on the real estate tax.
Backdrop, right now basically zero percent growth year to date.
Are there any unusual appeals benefiting the expense line item in real estate taxes, and any color on what type of step changes, we can expect going forward would be helpful.
Yeah.
To be honest with you it's less about appeals in 2022, then it probably had been historically and more about just lower values as we came into the year, particularly in a place like Washington State, where we had.
Lower assessed values and where rate wasn't particularly high.
On the real estate tax side. So that's really been the driver of keeping it more modest the real estate market is typically a laggard.
So it usually delayed relative to like market values and other places. So that's what you're seeing play out in 2022, as we look forward into 2023, and not giving guidance, but it is setting the tone for the environment I think it will become more about appeals.
Because I think the recovery and what's happening in the broader kind of evaluation and market is more apparent and so I think it will be more what I call hand to hand comment combat with the assessors of you think that value is actually I think value is why and less appeal. So I think thats going to change the dynamic in 2023 and going forward.
Alright, thanks for that.
Okay.
Thank you and next we'll move on to Joshua <unk> with Bank of America.
Yeah, Hey, guys. Thanks for the question.
Just kind of wanted to hear your thoughts on the supply outlook for 2023.
Any kind of markets, where you're seeing more supplier less supply.
Yes, there is a range I mean, certainly New York is the poster child for lower supply.
But there are other markets too like Orange County, and San Diego that Theyre seeing a drop off in supply.
Markets that have continued high supply include Washington D C.
Denver has a lot of supply Austin, and Dallas and more moderate our Atlanta, Seattle and Boston. So it varies a lot across the market and overall, it's pretty steady looking into 2024, though it gets $24 25, it gets more complicated and harder to project and we see a lot of permits that have been pulled but we've looked historically.
When times get.
A little uncertain like this there's a big drop off I mean, historically permits translate into starts like 80% to 80%, 80% to 90%, but when times get tough that drops to 40% to 50%. So that's what might happen over time here is that 'twenty four 'twenty five deliveries decrease.
Okay.
One follow up on that with New York City.
<unk> hundred 21, a program expired.
Hi, I'm curious if you're hearing anything on maybe if there is any kind of replacement program that might come to influence the supply outlook on a longer term basis.
Just how you might think about some of the projects that might have.
Okay.
Not yet program yes.
Yes, no it doesn't it doesn't feel super optimistic there was a proposal that got rejected.
So at this point there is some discussions but nothing imminent.
Okay.
Okay.
Thanks, guys.
Thank you and next we'll move on to Brad Heffern with RBC capital market.
Hi, everybody I was curious if you could talk about the use of the disposition proceeds to take out debt.
Versus some something else like a repurchase or in an alternate use of capital.
Hey, Brad it's Mark.
So we certainly have the capability to buy the stock back and we get that.
As we've talked about on these calls in the past, it's a it's a bit of a different thing for rights than it is for most corporates because we don't retain earnings so to do a real buyback again. It requires you to sell a bunch of assets, which we did do or incur a bunch of debt and from our perspective paying off the debt helped us address the 'twenty three maturities it gave us off.
<unk> to buy the stock back later, we used up really all of our capability. So we have a little bit of a.
Flex each year, and our ability to sell assets and retain cash and we really used all of that up with these two sales. So we thought you know what we will pay down this debt while retaining this capability.
If the board decides it wants to buy some stock back later, we'll have that opportunity, but those opportunities are just so few and for reach you start to descale. The enterprise. It's just not as easier decision as it is for say a big technology company with tons of retained earnings we got that big $900 million plus dividend.
And that's really where we think the cash returned to the shareholder is out of these other folks to talk about buybacks more readily or corporates that don't have dividends and do a lot more buyback activity as a matter of course, so we did consider it it's an option by paying some debt off we retained net apps.
Okay got it.
And then I was wondering if you could talk about what's happening with sort of the deal seekers tenants in New York, The new lease change was 38% in the second quarter I know across the portfolio turnover remained low but are you seeing those people leave.
Yes so.
I would say look our record low turnover, we had 11, one reported turnover in the second quarter, which is the lowest turnover we've reported for the second quarter in the history you are starting to see and we even said this acknowledged this a little bit in June through some of the conversations. We had you are starting to see a little bit.
Price resistance from some folks that came in with the deal early on in this recovery. They were renewing at the exact same pace and by deal seekers I mean people that came in that receive concessions really discounted rent.
What we saw right now when we looked at the move out behaviors in the second quarter.
We saw a slight uptick in people, citing that the increase was too expensive.
And that was the reason they were moving out and I think specific into New York, We definitely saw some folks from Manhattan kind of give us that notice and then move over into kind of that Jersey city area and taking advantage of some of the rent arbitrage there just at that lower price point.
But overall I would say the renewal percent the percent of residents renewing remains really strong we're either at or right above like these historical averages for this time of the year and we really just haven't seen us bumping up against this kind of affordability question Thats been out there and the rent as a percent of <unk>.
<unk> in our portfolio remained very constant which means that the income for our residents is definitely keeping pace kind of with the rent increases that we're seeing across the markets.
Okay. Thank you.
Thank you and next we'll move on to Adam Kramer with Morgan Stanley .
Hey, guys. Thanks, Thanks for taking the question.
Appreciate the time just.
Wanted to maybe ask a bigger picture question a little bit.
Look I think when we kind of think about historical rent growth rate. It was kind of in a different potentially different inflationary regime.
And look I think we're certainly not expecting inflation to kind of continue with these year over year levels.
Even if we kind of do settle out of kind of higher year over year inflation increases than maybe what we've seen historically, maybe kind of walk us through how you would view rent growth in that in that type of environment relative to kind of historical rent growth.
Yeah, Hey.
It's mark I'm going to start and I think some of us might some of the others might supplement because we've been thinking a lot about this over time. So we went back and looked at periods of time when there was more significant inflation. So again this would be more like the <unk> parts of the <unk> and even into the nineties and I guess I would say our ability to reset rents every year.
Here the pretty good supply demand dynamic in fact very good we have currently.
I don't have a number for you I would have normally said that normal trend growth for <unk> on the revenue line is three 5% and I would tell you that with inflation. The way. It is the numbers are likely to be a fair bit higher because supply and demand are still also good we could have a ton of inflation. If you have a ton of supply in the submarket, you're still not moving your rent.
But we've got good demand single family sector is not drawing residents away. So the way we're feeling about it is that we're going to be able to provide a pretty good margin to whatever the inflation numbers are especially as we expect them to sort of settle down. There is also this little bit of a circular reference thing where rent is something like a third of.
CPI, so we feed into that number and that number of feeds into our number and so theres a little bit of that as well, but I think you should expect that apartments, especially our portfolio are optimized in a way with our pricing engine that we can continue to.
Have a real return that exceeds the rate of inflation. So if you take inflation. Five then I think our growth is going to be a margin to that number above it I think the other part of that question or that answer though is what are you doing what your expenses because we do feel the pressure on wages and other things and that's why we add both Michael and Bob address that issue with you because.
We need to keep our margins constant or growing and not just given all the way on the expense side and I think we're doing an exceptionally good job of that.
That was really really helpful. Appreciate it appreciate all the color.
Just a quick follow up if I may.
Look I think physical occupancy, it's a telephone here remarkably well.
Six 5% in July .
Pretty.
Pretty notable number.
I'm just wondering how you guys can kind of think about the renewal versus kind of occupancy kind of trade off.
Have decelerated a little bit it sounds like that can maybe kind of stay at this 10%, 10% growth year, but a little bit of a deceleration versus what they were in when we came into Q.
Just maybe walk us through kind of a trade off between occupancy and pushing renewals a little bit more maybe.
Yes, so I.
I think we're always pushing the renewal front, because we're quoting kind of where street rents are and then.
We're having these dialogues and pretty much holding the line when somebody does move out. So if you don't renew that resident you are absorbing vacancy loss. So that definitely starts to come into some of that equation. If you just step back and think about the occupancy of this portfolio when demand is strong and the front door is strong.
Lot more confidence to hold the line into kind of this renewal process.
Because if that resident does move out you are able to fill them very quickly at these high rates. So for us if the demand picture stays as strong as it is I would expect our portfolio is going to maintain strong occupancy I think we should allow occupancy to probably trail off a little bit into that fourth quarter, but I think it is going to.
Remained relatively strong so when we look at the difference between new lease and renewal I mean, we want to retain our residents and we want to retain our residents at a fair price. If the front door is not as strong you will see us start to negotiate more into that renewal process, but if the demand stays as strong as it is.
Youre going to see us kind of hold the line with these renewals.
Thanks for the time.
Thank you next we'll move on to Nick.
<unk> with Scotia Bank.
Thanks, I just wanted to touch on bad debt for a minute I think you said that was part of the.
Beat versus your guidance on the quarter and.
Do you break that out in the supplemental so it was about two 5%.
Net benefit to same store growth on a GAAP basis. This quarter, how should we think about the back half of the year and that.
That level or is it still a benefit year over year.
Just from a modeling standpoint, how we should think about that.
Yes, so I'll start with the last part first and then highlight a couple of things about the quarter. So.
From a year over year standpoint, our guidance assumption is that it has no impact to growth.
<unk> that we think that bad debt net of governmental rental receipts and all of the above.
Is the same in 'twenty two is what it is in 'twenty one.
What youre seeing in the second quarter is really the volatility and timing because you will recall from the first quarter that we had a little bit of a harder time with bad debt and then we had a better time in the second quarter Etsy.
Et cetera. So this number can be fairly volatile as you get into the back half of the year and as I mentioned in my prepared remarks, the rental relief programs are winding down. So we don't expect a lot more rental really money in.
In the back half.
The year, we got a lot of it in the back half of last year. So it's going to be a little bit of a headwind to year over year growth in the back half, but from a full year standpoint, again shouldn't have any impact just in Babil correct. My specific numbers here, but I think we got in the back half of last year's $34 million or so in the same store set in rental relief.
And our modeling is something like $2 million for the back half of this year. So when we talked in our prepared remarks about how we see that strength continuing what obscures. Some of these numbers is just these pretty significant rent recoveries from the government that tend to be kind of lumpy. So.
<unk> seen the back half of the year, a negative impact year over year on all of this bad debt stuff, but youre going to see the continued strength, we think any underlying occupancy business rate all of that stuff occupancy staying high that's going to offset that and keep those numbers pretty consistent NIM going forward.
Okay. That's helpful. Thanks, just one other one is on <unk>.
<unk> and just how to think conceptually about how you guys are thinking about that ability heading into next year.
You talked about very high occupancy not that much supply impact it's been low turnover in the business. So as you're thinking about it the numbers right around 10% right now on renewals.
What pushes that that number down at all I guess over the next year when do you start thinking heyward.
We're pushing for too much of a.
Renewal notice here.
Yeah, well this is Michael I think it's really a function of where our market rents. So what happens to intra period rent growth next year is really going to dictate a lot around where these quotes go out but I think mark mentioned earlier on the call. When you think about some of these.
Regulations that we've been bumping up against.
This year those regulations are actually going to help fuel renewal growth next year, because it's clear we're going to be able to be quoting increases beyond what intra period rent growth is.
Just to catch up to the market through that so.
In our modeling, yes, youre going to have a little bit of this tail off in this achieved renewal increase because you have to assume that market rent prices seasonally do decline they've declined every single year. Since 2008 at some point you hit a peak and then you have some sense of moderation through 12 31 of the.
Year, and then you start the cycle all over again, so that moderation is going to yield some softness in the quotes that go out the door, but again, it's very marginal.
It's still going to be very high single digit to this low kind of double digit and then as we get into this October call, we'll kind of give you our view as to how we think this is going to play out into 2023, but again, we got a little bit.
Boots coming to us from just being able to catch up from all the regulation restrictions that we're faced with today.
Thanks, guys.
Okay.
Thank you and next we'll move on to Michael Goldsmith with UBS.
Good morning, Thanks, a lot for taking my question.
As we look at the rent growth over the last several quarters and also looking forward Theres kind of three factors that play, which we've talked about which is kind of the overall rental market tougher comparisons in the presence or lack of government subsidy. So we've touched a little bit about.
The government subsidies through the back half of the year, but I guess as we think about just.
Going forward and the ability for rents to continue to grow on the tougher comparisons actually government subsidies, what's the thought process on the continuation of this and how much deceleration can kind of be expected just based on these tougher comparisons as you move past some of the.
As you lap some of the stronger growth.
Yes. This is Michael I think you're hitting on a couple of points. So even when you look at the data and you see some of that.
Rate growth deceleration.
That occurred like on the renewal quote a lot of this is just a function of that comp period from last year and just to remind everybody last year. When we hit July that was the first time that our.
New lease change went positive.
June of 'twenty, one we were negative 50 basis points July of 'twenty, one new lease change went to positive six 9%. So a huge 740 basis point improvement in one month and just that new lease change and then from that point forward. It's sequentially approved every single month that new.
<unk> change and then fuel blended so as we think about where we sit today.
<unk> do like I said before we have to allow for rents to moderate.
Price in the market will moderate between now and the end of the year in a normal year I would say its somewhere in that three to three 5% range is where kind of the market rents. After you peak whichever you peek at Youll allow some moderation to the end of the year in the tune of about three 5%, but then when you look.
Where we're at with the changes that we were seeing last year sequentially that is what's going to fuel. This moderation in our blended rate that we'll be putting up in the third and fourth quarter, but all that being said, where we land after the moderation where we land. After these tough comps is still significant.
Lee above historical norms.
Okay.
And my second question is on the kind of the expectation of expenses.
You are coming off of.
You have some of the lowest expense in the market your the expense comparisons get a little bit.
Tougher in the back half.
<unk> been able to manage it quite well.
As we think about the sustainability of controlling the expense line in the intermediate term and especially kind of in an inflationary environment do you have any thoughts on how you can kind of sustain the strong performance over the intermediate term.
Yes, I think the core driver that will be consistent throughout as kind of what I mentioned in my prepared remarks, which is just.
Reducing our exposure to labor pressure, whether it's in the payroll line item, where it's the most obvious right, which you see us having put up where literally probably on the four years in a row of either sub 1% or negative kind of payroll growth, we still have opportunity there right.
And so I think thats the engine of innovation and utilization and technology, and we will be able to completely or continue to sustain that kind of lower than inflationary growth going forward.
That should also parlay itself into repairs and maintenance to a degree too because you get that benefit because there's a labor component embedded there with contractors et cetera. So I think thats the driver of where I think we have the both containment opportunity.
Clearly as you move into future years real estate taxes will get harder from a comp standpoint, and probably won't be as sustainable but complex utilities should get better.
We hope hopefully that the commodity inflationary pressure that exists in the world today is.
More temporary than permanent.
And so that should help us it hopefully offset other line items that might return to more normal growth.
But again the controllable part is really the labor hours that payroll the technology, the innovation and that's where we're focused.
And just a quick follow up on that.
How much more runway is there.
Is this like another year or two or is this kind of a multiyear pathway, where you should continue to benefit from that.
Yes.
This is Michael I think from the operating efficiencies when we think about payroll benefits I would say, we're probably getting closer to the middle innings of our runway and I said before like when we've talked about kind of we think we've identified $25 million to $30 million, that's going to roll in over the course.
2023 and 2024.
Front half loaded with kind of more of the expense opportunities and then it kicks into the initiatives focused on enhancing revenue. So I look at the expense stuff and I'd say, we're probably in the middle of the innings there, but we're in the very early stages of the benefits from the revenue lifts on many of the initiatives that we're focused on.
Thank you very much good luck in the back half.
Thank you and next we'll move on to John Kim with BMO capital markets.
Thank you.
Hey, Mark on your commentary on the market dynamics in the Sunbelt.
With pricing above replacement cost.
This dynamic continues then it seems like both public and private.
They're very active in the market.
How would that impact your repositioning strategy.
What are you focused more on development over to you.
Perhaps look at it.
Suburban markets or other markets in the sunbelt.
Hey, John it's Alec.
In terms of pricing moderating, so thats, making acquisitions look relatively more attractive if that continues construction costs go up then we would lean more towards acquisitions, but we're also focused on development too is an important component of <unk>.
Flushing out the portfolio. So I would expect we'd do a little bit of both depending on circumstances and just add we are buying in suburbs of places like Dallas to it isn't.
Mostly or even close to mostly in all urban portfolio, we're trying to construct an atlanta or Austin or Dallas or Denver. So we are spreading our capital out and that's where development can be really handy is in some of these suburban locations, where it might be hard to find a property to buy.
Okay.
And then Michael mentioned.
And in the Q&A about effective lease growth trending around 10% give or take.
200 basis points.
In the next few months and maybe softening towards the end of the year, but my question was already embedded in your same store guidance or have you accomplished is there an upward bias to year to year.
Same store revenue.
Yes. So this is Michael let me clarify so the numbers that I was quoting before is the achieved renewal rate.
Off of the offers that we put out there where we believe that is going to be around this 10% for the next several months and when we think about kind of the midpoint of our guidance.
Bob Bob pointed to this earlier, we are allowing some moderation in the new lease change and we are factoring in fairly consistent achieved renewal rate increases based on what we can see with a little bit of moderation in the fourth quarter, just based on kind of normal seasonal decline in rate.
Okay, great. Thank you.
Thank you and next we'll move on to Rich Anderson with NBC.
Hey, Thanks, good morning.
So I want to get back to.
What you said earlier about normal earning for the following year is 1% and so youre thinking it'll be something more than that.
I guess that's helpful, but maybe.
Okay.
I get to that.
A little bit more so how linear is the relationship between blended rate.
And.
The earn in in other words like for the 1% typical for the earn in that you described what does that what does that assume or what does that imply in terms of the blended rate in the previous year and if we were to just do a ratio would would it be.
Correct to assume that if its five times more this year than the earning will be five times more or is it not that simple.
Not that simple, it's not that simple, but I will correct you I think I did say, it's going to be well above that.
Okay.
Above that is below that scratch that maybe that's a little more.
Yes look again I said this earlier, we are still writing a lot of leases right you still got a lot of activity coming through the rent roll.
I think it's clear that we've got the right setup in place for a really strong year next year based on the fundamentals of loss to lease looking at where this embedded growth is today looking at the strength in the market knowing that rents haven't peaked out yet.
So I think you've just got hold off and give us until October and we'll give you a little bit more clarity into the ranges of these building blocks.
But I don't think it's as pure as like there is a direct one to one relationship between blended rate.
And kind of where that embedded growth is on 12 31.
I'm aware of there is many more variables I was just trying to get to production.
Yes.
And.
And then the second question I have is.
You talked to Mark at the early stage single family rental single family home affordability.
Yes.
Helping the apartment business.
You have your eyes on any sort of replacement competitive pressures, if it's not buying a home or whatever the reasons are top five reasons are that people move out.
What we have this time around which is somewhat new is single family rental.
As an option for people that are millennials that are that have families that need more space and so on so do you have your eye on like kind of a change in the competitive landscape outside of conventional multifamily that is sort of on your radar screen right now is something to watch.
Yes.
Mark Thanks for that that's very insightful question, we've got a fair bit about it we wondered if it isn't similar to buying something you do as a lifestyle decision I mean people, mostly by homes not for financial reasons, but lifestyle that the second Kid.
Got married or at some other life change that requires them it makes them feel like it.
We will do the commute will do what we need to do to have the lifestyle. We now need to have with the family situation. We now have.
I think that single family rental thus feels the same way that people will be similarly attracted to it not because they've dynamo alon, but because they are really.
At a point, where they have two kids and they are living in an urban environment and Thats, just more challenging for them or whatnot. So I think about <unk> as more of an additional competitor for sure but having the same drivers as just purchasing a home in terms of other competitive threats, we've definitely benefited.
From people wanting more space and.
<unk>.
<unk> coupling, we do see that people will.
Except roommates and live in other situations. So just switching to another thing that could be a demand negative for us it's possible that it will go the other direction I mean, it is certainly something rich that could happen where folks decide they will take on the roommate, they're not afraid of the pandemic.
Do that we're not seeing any of that but that would be another way you could see demand decline, but I don't these SSR homes are mostly it seems to us on a replacement for single family owned housing not a new like an entirely new source of competition.
Competition.
In the past <unk> got in front of some of these things whether it was rent to own programs or what have you.
What do you think about single family rental I mean, as a place where you and your peers might start to dip your toes in overtime.
Yeah.
A really interesting question I mean.
We had a version of this conversation if I remember a couple quarters ago, but that's part of our job.
And your question implies it to be looking at every sub sector in the residential space I think single family rental is certainly established itself as a very legitimate long term business a lot of our former executives worked in that space, we do pay attention to that space, it's very interesting in that regard.
Our primary focus right now is running this big apartment business we have.
But we will keep our eyes open and I guess, it's something wanders by we'll act on it but again, we're getting a lot of benefit right now people moving into the cities again.
We're focused mostly on that at this point.
Thanks, so much.
Thanks Rich.
Thank you and next we'll move on to hand down got it with Netsuite.
Hi, there. Thank you appreciate the time.
A couple of quick questions for me first one on the expenses.
Certainly sounds like technology, and operating efficiencies are helping offset the very pervasive cost headwind.
A couple of questions on that maybe.
Remind us update us on how far along you are in the technology implementation and the efficiency plan that you talked about the last few quarters and then secondly, I'm curious if you're seeing any distinction in opex between your urban and suburban assets are you finding it more efficient perhaps to operate.
Urban high rise versus suburban.
Asset given perhaps less acreage to maintain and fewer HVAC.
Yes, so and this is Michael I guess I would just start.
I think I just went through a little bit of this is to where we are which is from the efficiency standpoint on the operating platform.
I would say that we're probably getting close to the middle innings.
Midway through we've got a lot of the base technology installed we're still working through some of kind of the smart home technology or access into the units that will add to some some more efficiencies you got half the portfolio running today without fully dedicated teams. There. So we've still got a little bit of opportunity kind of left to lease.
And the technology.
And create more efficiencies in the property management side, but for US we're more excited right now because we're still in the early stages of the lift that we see from layering in technology into the income side of our business. The revenue growth engine and we're in the very early innings of that of laying out all of these initiatives.
And that that benefit really comes in in late 2003 and into 'twenty four but I think what youll see is youre going to see us continue to kind of mitigate some of the inflationary pressures on opex by just continuing what we've laid out in course of leveraging technology to create the operating efficiencies that will mitigate some of the expense prep.
<unk> in 2023, and then Youll see the engine kick in and switch more to the revenue lift.
Okay.
Any color on opex trends or comparisons between urban and suburban assets.
Yes.
I guess I would look into some of the high rise portfolio and say you typically would have more staffing there you have <unk>, we have more labor pressure.
You clearly have more dependency on some contractors relative to elevators and things like that so.
I'm guessing I haven't looked at the number but I would be surprised if we don't see a little bit more growth in the high rise portfolio than we did in the.
Suburban garden style, and just its mark to add to that.
Good question you have there I mean, the Capex load for example, and I know you referred to expenses, but the capex load is spread on a high rise on a usually a much higher rent than the garden. One so you might be doing things with Chillers and you might be doing things, but theres one roof not a multitude of routes there's no.
<unk> so.
Putting aside real estate taxes margins I would think the labor only margin would not be as good in a high rise because of usually higher service standards, but I bet you some of the Capex with the higher rents is a lower percentage of each rent dollar in a high rise. So that's typically what we've seen in the high rises as you.
Do the work and then you don't need to do anything at all for quite a period of time. So there is a little bit of an interplay there with expenses and capital.
Fair enough. Thank you for that clarity one more I guess a follow up on the toll partnership the new Fort worth project that Youre. Starting here is that five 5% yield you outlined that locked in or can that be adjusted yield or cap rate move significantly and then you mentioned that 75% of the costs are locked in there as well.
What about the remaining 25% are you insulated from that or how would that work.
Yes, so the five and a half is just our projected yield it's not locked in we haven't.
Or a partner with them, we have 75% of the equity they are 25% and then property will yield what it yields and they will get their promotes relative to that.
And then the.
The second part of your question, but what was that again I'm sorry locked in costs locked out with the cost yes. So 75% is what we bought out we've got that.
Tal has bought out from their contractor. They also have a guarantee.
US that there'll be able to perform at that 100% numbers. So it's just it further surety that you have both the contractor and the developer has bought out 75% total has a little bit more work to do to get it 100% bought out.
Thank you.
Thank you and next we'll move on to Alexander Goldfarb with Piper Sandler.
Hey, I guess, it's still morning out there, but thank you.
Two questions.
Well very efficient call you guys have gone through a lot of people.
On the on the residents.
Last year clearly the city's benefited big time as people flooded back in and took to renting apartments are you seeing that same phenomenon. This year, so meaning the ability for you guys to push rents is that really driven by people continuing to flood into the markets or are you seeing this year more normal that most of your demand.
Is from within the market.
Some move in I'm, just trying to get a sense of how the new resident profile has changed last year versus this year.
Yeah, Hey, Alex it's Mark I'm going to start and Michael is going to supplement because it does have some good statistical stuff for you.
As we kind of look at these markets Seattle and San Francisco are less well recovered compared to New York and East Coast markets. So we still have that tailwind of people returning and we've talked on some of these calls that if things and we do feel some improvement in the public safety situation in those.
Two markets in the urban core that is a possible tailwind <unk> towards the end of this year and going into next year, because there is relative value in downtown Seattle and downtown San Francisco on rents because they are still not really back theyre not certainly theyre not above where they were when the pandemic occurred and a lot of these suburban rents are crowding those rent.
<unk> as we've said on calls so I'll, let Michael talk about where the people are coming from but I think that rent checks being low on a relative basis still it makes those markets attractive if public safety concerns continue to go away. So im sorry, Michael did note. So I'd just remind everybody we do receive at time of application.
A previous address for our new residents coming into the portfolio. So this is where kind of the stats come from and I will tell you. This quarter, we looked at the trends for the second quarter move ins and we continue to see slightly more new residents coming into our portfolio from outside of an MSA or even the.
State than normal and to just give you some stats so in a normal environment and this would be like 2018 2019 like historical data we.
Would typically see about 60% of our new residents come to us from within the same MSA and about 64% come from within the same state our move ins during the second quarter, 55% came from within the same MSA, so about 5% lower and 59% came from within the same state. So.
Both of these metrics were down about 500 basis points and when we drilled in <unk>.
Any one of these areas to say where are they coming from is it concentrated like us everybody coming to Seattle from San Francisco or anything like that it was not concentrated at all it was very fragmented and for US. We viewed this as a very good positive indicator that our markets are continuing to a draw.
This and attract this affluent renter from all over the United States and even slightly more kind of from the foreign countries. Because we saw that number tick up a little bit too.
And you'd say that was pretty those pads are pretty uniform across all your markets. I mean, obviously, you spoke Seattle, San Fran, but it's pretty uniform across all of its bias yeah. I guess I would tell you that when we went into like southern Cal like Orange County, and San Diego, the inbound or the.
The new residents there it was more like in line in California, typically has a really high percent that come from within the same MSA and the same kind of state very loyal to that state and MSA that didn't have quite the same kind of shift as the whole portfolio, but it was pretty systemic across all the markets and even sub market.
That we saw that trend.
Okay and then the second question is on the asset sale you only quoted the IRR for the second quarter sales. So I don't know what the IRR was on the July sale, but <unk> six unlevered IRR, how does that compare to your.
Historic I would've thought it would've been better just because of cap rate compression and I think you guys have owned your New York assets. A long time, you certainly bought macklowe assets at a really attractive cap rate I guess I would've expected a better IRR, but maybe some perspective and then also your thoughts on the July one.
Yes, so Alex this is Alex.
Couple of things that work there one is it's a long time, we built those property or the bonds that we bought those properties in 2005, so you've got an IRR spread typically hours go down over time, just because if they get dilutive a little bit.
So there is that it works also in New York went through some challenging times since 2005, there was the Dfc and the recovery from that then there was the pandemic and then there were the changes to the rent stabilization laws that had an impact, particularly on one's ability to convert at property in the condominiums, which was buttressing for a period of time a lot of value in apartment buildings in New York.
So all of those things kind of combined work against us on top of which cap rates started out low in New York. So there was less compression there because I think your question kind of implied there is spin all of this compression why why wouldn't you see more value growth and in New York, We just didn't see that because it started so low and stayed low.
Thank you.
Thank you and next we'll move on to pay through Cardoso with T. C. W.
Hi, Thanks for taking the call.
Gross in the quarter just a quick one from me I'll be curious to know if you guys have been noticing any shift in tenant behavior.
Tabs.
Or are they looking to shift to as more units or they're trying to do.
Find something a little bit more affordable I'll be curious to know if you're seeing any shifts in any way shape or form I know that from a from a depth from a rent to income perspective, the portfolio is very healthy condition.
Curious to know what you guys are noticing any shifts so all those trends.
Pedro This is Michael so first.
On the reasons for move out I said this a little bit earlier, we did see a slight uptick in just the increase was too expensive as one of the reasons that they are citing for move outs that did occur but again, we're running off of a base of 11, 1% turnover, which is the lowest that we've seen in the second quarter. When you just step back and just think.
About the overarching behaviors of the residents.
Bucket this into like a decoupling like and are we seeing any changes in unit type preference, reaching seeing any changes in kind of the average adult per occupied home and I would say in our portfolio, we really haven't seen this material change.
Pre pandemic, we used to be at 165 adults per occupied home sitting.
Sitting here today, we're at one $5 seven so you can kind of see a slight decline in the average adult and when you drill in it's actually a little bit more prevalent in our one bedroom households, which is about 48 or 50% kind of a bar portfolio versus anything that we saw like in the larger unit types. So.
I think when you just step back and you think about macro trends in our industry this potential decoupling.
Whether it's explained by young adults, making lifestyle decisions later relative rent affordability that we saw during the pandemic and now they're kind of moving on to something else or maybe starting to double up we haven't seen that in our own or even just the rising wages, allowing single adults to live by themselves.
All of that is contributing probably did this incremental demand and strength and pricing power.
Specific to like our affluent renter in our portfolio I wouldn't say that we've seen a significant shift in their behaviors.
Got it.
Very helpful and when it flows if I may.
And again I understand it's very healthy rent to income portfolio.
Portfolio around 18%.
Be curious to know if there are what.
The extremes like meaning how many tenants have rent income that are above 30% that represents a little over that.
Total tenant base that you have in New York.
Yes I.
I don't have that in front of me I will tell you across all of our markets. We have a range of 18 to 24 specific to New York.
It is very very few if any that bump up against that because our underwriting criteria against a gross rent would kind of prevent that from being anything of a significant level.
Got it that's very helpful. Thank you.
Thank you.
Thank you and there are no further questions I would like to turn your conference back over to <unk>.
Mark <unk> for any additional or closing remarks.
Alright, well. Thank you everyone for your time today and enjoy the rest of the summer. Thank you again.
Thank you and that does conclude today's teleconference. We do appreciate your participation everyone else has left the call.