Q2 2023 Equity Residential Earnings Call
Please standby.
Good day and welcome to the EQ are two Q twenty-three earnings conference call and webcast. Today's conference is being recorded at this time I would like to turn the conference over to Marty Mckenna.
Good morning, and thanks for joining us to discuss equity residential second quarter 2023 results. Our featured speakers today are Mark <unk>, our president and CEO , Michael <unk>, Our Chief operating Officer, and Bob Garrett, China, Our Chief Financial Officer, Alec Brackenridge, our chief investment officers here with us as well for the Q&A are.
Earnings release is posted in the investors section of equity apartments Dot com. Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal Securities laws. These forward looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become one.
True because of subsequent events now I will turn the call over to Mark Burrell.
Thank you Marty good morning, and thank you all for joining us today to discuss our second quarter 2023 results.
As we work our way through the leasing season, the business is performing well with same store expenses now looking a little bit better than we thought leading us to lower our guidance for that item last night.
As a result of this and lower expected interest expense. We are pleased to again raise our same store net operating income and normalized funds from operations guidance. After raising same store NOI and <unk> guidance, just two months ago based on better expected revenue results.
In a moment, Michael <unk>, who will give you color on revenue drivers across our markets. After Michael's remarks, Bob will address the details of the improvement in our expense and NSF <unk> guidance.
As well as our successful pending refinancing activity.
The overall theme here is that equity residential continues to benefit like most of the multifamily industry from solid demand, but with the more unique benefit of our mostly coastal portfolio being less exposed to the significant levels of supply just beginning to be delivered in the sunbelt markets. We also continue to manage expenses well and in an inflow.
<unk> environment, which we expect will allow us to drive more dollars to the bottom line than our competitors over time.
In terms of specifics in the quarter. We continued to post strong same store revenue results driven by good demand across our markets and rapidly improving delinquency in southern California.
As you May recall, we increased the midpoint of our same store revenue guidance for the year to $5 87, 5% in May right before the NAREIT conference to reflect these factors.
That in turn caused an improvement of 100 basis points in our same store NOI guidance midpoint, and a <unk> <unk> per share improvement in <unk> guidance at the midpoint.
These continued strong operating results speak to the durable nature of our business in the face of some pretty volatile economic conditions. Despite the layoff headlines, particularly in the tech sector that dominated the news in late 2022 in early 2023, we see substantial demand from our affluent renter demographic.
Also in places like Seattle, we are hopeful that the return to office mandates by employers like Amazon will drive incremental demand back into the urban areas of the city as commute times become intolerable for workers, who dispersed far outside the city in response to Covid and are now required to be in the office frequently and as koala.
<unk> life issues in these urban areas improve.
And while new supply is certainly pressuring the sunbelt and Denver markets as I mentioned before we are seeing moderate levels of supply in most of our major markets, even in Washington D. C, where we are seeing the highest levels of competitive new supply is being absorbed at a good rate and the market is performing well.
Switching over to the transactions market that market continues to be relatively quiet, we did not sell anything in the second quarter, but we did buy a couple of deals including a newly developed property in lease up in Atlanta that I spoke about on our first quarter call.
The other acquisition in the second quarter is a 287 unit property located in suburban Denver, which we purchased for approximately $108 million at an.
<unk> cap rate of 5%.
The transaction market generally remains stuck between buyers, who expect lower prices given the huge shift in interest rates and a less accommodative capital markets and sellers, who remain wedded to early 2022 values and by and large are assets that are still operating pretty well. So they feel no great compulsion to sell right now.
Our sense is that sales will pick up over the next six to 12 months and sellers accept the reality of rates being higher for longer as floating rate loans with expiring caps reset and as developer capital invested in newly completed development deals becomes impatient.
Now a quick note on our capital allocation strategy and as we've discussed with you for the past few years, we continue to have a goal of having a more balanced portfolio between urban and suburban and between coastal and Sunbelt markets. We think such a portfolio will create the highest returns and lowest volatility over time.
The recent issues caused by Covid in urban centers and the current issues in the sunbelt markets due to supply are examples of the opportunities and risks we wish to balance.
As opportunities present themselves in the Sunbelt and Denver markets, and then select suburban locations of our coastal markets to acquire or develop great assets at fair price prices, we will be there to do so.
And before I turn it over to Michael I want to take a moment to celebrate our 30 years as a public company.
On August 12 to 1993 equity residential and public on the New York Stock Exchange <unk>.
What's just happened in the past 30 years, we grew from about 21000 units an initial valuation of $800 million $19 93 to more than 225000 units across more than 50 markets at the peak, leading to our 80000 units and a value of more than $26 billion today.
On this journey, we acquired a number of other public apartment Reits as well as some very large private portfolios, including Archstone.
At the head of this enterprise for all those years was our amazing founder and Chairman Sam Zell, who we lost in May.
Sam's guidance and influence are part of our DNA at equity residential and we will continue to run this company to honor his legacy of delivering superior long term value to our shareholders. We thank all of you for your support over the past 30 years and for your kind words regarding Sam's passing and with that I'll turn the call over to Michael.
Thanks, Mark and thanks to everyone for joining US today. This morning, I will review the second quarter 2023 operating performance in our market.
We continued to produce very solid results with same store revenue growth of five 5% in the second quarter that are in line with our improved made guidance expectations.
<unk> are driven by a continuing improvement in delinquency along with a continued healthy fundamentals in the business as.
As with last quarter East Coast markets continue to outperform West coast.
Our results to date reflect our view that we have previously shared with you the pricing trends will follow a normal, albeit slightly muted seasonal trajectory.
Generally layoff announcements seem to have dissipated and our average resident remains in great financial shape with rent to income ratios during the quarter for new residents continuing to hover around 20%.
Resident lease breaks and transfer activities to reduce rent often early indicators of resident economic stress remain below pre pandemic levels and in line with seasonal expectations.
The overall employment picture continues to be healthy and young adults are choosing the attractive lifestyle is available in our markets.
<unk> family home purchases continue to be an expensive proposition in fact less than 8% of our residents gave bought home as the reason for their move out in the second quarter, which is well below the 12% norm for this period.
Combine this with the overall favorable competitive new supply position, we face in most of our markets and we are on track for a good year in 2023.
As a reminder, a combination of more difficult same store revenue comparison periods, including the absence of governmental rental relief this year and a reversion to a more normal rent growth pattern will result in more moderate but still above historical growth in the second half of 2023.
As we sit here today in the back half of our primary leasing season, the portfolio is 96% occupied with good demand in resident retention.
We expect a continued healthy trajectory for the remainder of the leasing season, our portfolio wide occupancy is being depressed by turnover in southern California, primarily law as we work our way through the delinquency issues in the longer run, replacing these vacant units with paying residents outweighs the slightly lower short.
Term occupancy now.
Now, let me spend a few minutes talking about market performance. So let's start with the East Coast, New York was by far the top performer for the second quarter with same store residential revenue growth of more than 13%.
We have very little competitive new supply in the market and our occupancy sits near 97%.
Demand indicators continue to be positive, making this market the expected top performer for the year.
Boston produced slightly above 8% same store revenue growth in the second quarter, driven by strong demand across the submarkets with our urban properties outperforming our suburban ones. We continue to hear stories of tough commute times for suburbanite that are resulting in residents coming back to the city.
While new supply in the market is above the five year average the large majority of it is not competitive with our asset and appears to be readily absorbed.
Heading down to D. C. This market continues to impress with same store revenue growth of six 3% in the second quarter. Despite a high level of new supply across a number of submarkets the.
The market just keeps going absorbing these units at a healthy pace and delivering some of the best revenue growth in the portfolio as.
As an example, rebirth our new 312 unit development in Central BC, which is currently in lease up is delivering weekly application volumes, well above expectations, allowing us to reduce concessions and push rate occupancy.
Occupancy in the DC market is just below 97% and we are optimistic for continued strong performance for the year, but recognize the increased volume of new supply that will be delivered in the rest of this year now.
Now for the West Coast are southern California markets achieved some of the strongest sequential revenue growth in the quarter demonstrating the early financial benefits are back filling long term delinquent units with paying residents.
Unlike the Orange County, and San Diego markets, which posted good quarter over quarter revenue growth, Los Angeles produced slightly negative quarter over quarter revenue growth.
This reported number however is not indicative of the health of the market, but more noise from bad debt due to large rental relief receipts in the second quarter of 2022.
When you strip this noise out same store quarter over quarter revenue growth would have been over 5% positive for la.
We are still seeing healthy demand in Los Angeles and have not felt any negative impact from the workers' strikes in the entertainment industry.
Our direct exposure is not significant but acknowledge it may soften overall market conditions in the coming months, which could slow our ability to release some of our vacant units.
In addition to the strike we continue to see more non paying residents move out which is resulting in at least 100 basis point drag to occupancy in the market. We view both of these issues is isolated short term impacts to the market as the strikes will end and delinquency will gradually resolve itself.
Which coupled with the long term demand, we see as catalysts for next year above average market growth in la.
Moving to San Francisco, the market reported respectable quarter over quarter revenue growth of three 1%, which would've been four 6% after adjusting for the impact of rental relief received in the second quarter of 2022.
Overall, the San Francisco market demonstrated leasing velocity in line with normal seasonal trends and met our expectations for the second quarter.
South Bay, which represents 37% of our NOI and the market continues to be a bright spot prospects are telling our local teams that the area meets their hybrid work requirement by keeping them close for in office days, and providing better lifestyle options and more space and access to the natural outdoor amenities.
Our recent resident survey tells us that 77% of our residents in the San Francisco Bay area are either hybrid or fully in office and.
In downtown San Francisco, we hear from our teams that new residents say that they are leasing to get closer to work with.
Good news is that the quality of life in downtown San Francisco continues to improve and the local governments focus seems to be showing some signs of promise, while our pricing power in the submarket remains less than desired and concessions are still being used downtown has been stable and allowed us to capture demand and regain occupancy.
The 96% in that sub market.
The overall sentiment in the San Francisco market indicates that the tech layoffs are mostly behind us and there is a lot of momentum around their AI, which keeps us optimistic on the continued recovery in this market.
Heading to Seattle, while there is vibrancy in the market with improvements in the quality of life issues. Some return to office activity and tourism back to pre pandemic levels. The market continues to underperform our expectations.
While net effective pricing in the overall market is now 2% below the March 2020 levels, there's a wide dispersion amongst submarkets with the downtown Seattle well below the March 2020 levels, primarily due to the continued concession use in this sub market.
Overall, Seattle has been a market that has struggled to deliver consistent strong demand over the last couple of years as its tech heavy workforce has had the flexibility to work from anywhere.
But this market to fully recover it needs to see more consistent strong job growth with better quality of life conditions that will bring people back to the market.
The good news is that we are starting to see some positive signs in South Lake Union, which is a tech heavy neighborhood in the city of Seattle and this is likely due to the Amazon return to office, which began in May we are hopeful that this activity will assume spillover to the other downtown Submarkets.
Finally in our expansion markets, which currently make up about 5% of our same store NOI revenue performance has been mostly in line with our acquisition performance and guidance expectations, our portfolios in Denver, Dallas and Austin continued to be the most impacted by new supply like we discussed last quarter.
Meanwhile, Atlanta remains a bright spot with double digit revenue growth for both the quarter and year to date in a minute I will turn it over to Bob to discuss our operating expense performance and the balance sheet, but let me take a minute to discuss our operating platform, which is humming as we continue to reap the benefits of our focus on innovation and the technology.
Allergy evolution that equity we are focused on the customer experience and the feedback we received from our customers help us in developing our platform to drive superior financial performance and customer satisfaction.
The insights we gained from our resident survey, which garnered more than 32000 responses validates our strategy of combining our growing data science capabilities with streamlined execution, while delivering self service solutions to our customers.
Leveraging data and analytics on top of our resident feedback will create further opportunities to expand our operating margin with.
With a fully centralized in mobile operating platform. We are in a strong position to create a seamless customer experience with a platform that continues to allow us to innovate experiment and rapidly scale what works across this portfolio I want to give a shout out for our amazing teams across our platform for their continued.
Dedication to their residents and focus on delivering these terrific operating results with that I will turn the call over to Bob.
Thanks, Michael let me start with expenses before covering our financing activities.
We reported same store expense growth of five 5% in the quarter. The main drivers of this growth were our repairs and maintenance and onsite payroll repairs and maintenance growth in the quarter was driven by continued wage pressure, particularly from contracted services payroll growth was mostly due to elevated employee benefit costs during the quarter relative to the same period last year.
Without these costs reported payroll growth would have been two 6%, which was more in line with our expectations and reflective of the efficiencies we have been achieving from our various operating initiatives.
For the full year same store expense guidance, we have lowered the midpoint of our range by 25 basis points to 4.25%.
This reduction is driven by expectations of continued low real estate tax growth due to modest rate increases in successful appeals activity as well as significantly lower expectations for commodity prices, which are muting utilities expense growth.
These more favorable trends will be partially offset by slightly higher payroll and other onsite expenses stemming from the elevated employee benefit costs mentioned from Q2 and administrative costs from the exploration of the eviction moratoriums respectively.
The revised guidance implies a significantly lower rate of growth for expenses during the second half of the year relative to our results through Q2.
We think that this is challenging but definitely achievable given the easier comparable period from the back half of 2022 and the visibility we have into the items I just described.
Finally, turning to the capital markets and our 2023 refinancing activities.
As we previously discussed the company has an $800 million secured debt pool that matures in the middle of the fourth quarter. The debt originated from the Archstone transaction back in 2013 currently carries a rate of four 1% and a portion of it needs to be refinanced in the secured market for tax reasons.
During Q2, we began marketing this opportunity to lenders and I'm happy to report we received significant interest from a variety of capital providers.
In July we selected lenders and entered into two loan commitments and locked in slightly below 5.25% right.
For the $530 million that we're refinancing.
This was approximately 135 basis points over the 10 year Treasury at the time and was lower than what we would've expected to do had we been issuing an unsecured bond.
As you May recall, we had previously also entered into interest rate swaps to hedge this financing and those were settled for in over $25 million gain.
When the gain is amortized over the life of the loan it results in an economic cost for these financings of four 7%, which we believe is an excellent outcome given the environment.
Once these loans close we would expect the company to end the year with approximately 8% floating rate debt over $2 billion in immediately available liquidity and no real debt maturities outside of commercial paper until June of 2025.
This coupled with the lowest leverage in the company's history position us very well should any opportunities arise.
With that I'll turn it over to the operator for question and answers.
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For just a moment.
Okay.
We'll go first to Eric Wolfe with Citi.
Hey, Thanks for taking my question.
Looking at your guidance there is a nice ramp in your earnings in the back half of the year.
Just curious if theres anything sort of more one time or.
Seasonal or nonrecurring on the expense side, there and if I were to sort of take that run rate is that sort of.
Good.
We're not ready to think about going into 2024, or you know again or is there something that sort of elevated.
Hey, Eric it's Bob.
So looking at kind of our <unk> for Q3 and Q4 its theres nothing really in particular that stand out on a one time item. It's it's really the cumulative growth in NOI that you are seeing in Q3 and then.
Pushing that into Q4 coming from same store I'm drilling down a little bit into that I would say the only thing from a sequential standpoint that is maybe a little bit abnormal is the bad debt components. So we're seeing bad debt improve in the fourth quarter sequentially and in the third quarter sequentially as.
As we get back to a normalization so beyond that there isn't really anything.
Sequentially strange about the or onetime in nature about the growth for our run rate.
As it relates to 'twenty four I think it's a little early to talk about kind of 24 kind of where we are in terms of positioning but at what I would tell you is our numbers are kind of following that typical seasonal pattern that we've seen and same store is really driving the operational results.
Understood. That's helpful. And then you mentioned MLA and the writers strike after strike.
It doesn't sound like it's really impacting bad debt or rent growth piece of it could impact.
A couple of months, just curious what that sort of based on and that's already factored into your guidance as well.
Eric This is Michael So I think right now of course, we're watching to see as anybody turning keys in breaking leases at a pace, that's kind of above which you would expect to see and we really just haven't seen any impact from the strikes and our on site folks are telling us just the overall direct exposure to it.
Doesn't seem to be a significant I think my comments in the prepared remarks were right now we clearly are running occupancy about 100 basis points below.
Normal for this time of year in that la market. So the ability to lease up some of these units that had been vacant which.
We're from the delinquent long term delinquent residents moving out earlier in the year than what we thought we just think that if the strike is prolonged and keeps going on it could just create a little bit of a pause in people's willingness to make decisions to move to move into a new place and that could impact just the overall demand profile in the market.
But to date, we're really not seeing anything and I'm not overly concerned about it.
But it is something we've just got to be aware of.
Got it that's helpful. Thank you.
Well go next to John Pawlowski with Green Street.
Alright, thanks for the time.
First question is on the transaction market, Alex just curious what.
Range of pricing do you think you can achieve on kind of a large urban assets in the central business district, since San Fran and Seattle today, just given the sentiment in these markets are still pretty while maybe improving still pretty pretty down. So just curious what type of bid for those types of assets as well.
Hey, John it's Alex.
There would not be a robust bid today larger properties are harder to sell.
Theres some contrary in money out there, but I don't know if its willing to make a big bet. So I really don't have an exact number because I just haven't seen a trade I think most people if they didn't have to trade just wouldn't be willing to accept the number. So it's almost theoretical at this point I think over time that will change as the markets continue to improve and.
Access to capital becomes more normal it's just such an abnormally hard time to raise sizable capital that I really think it would be a tough time it would be if it was a distressed sale would be a pretty high cap rate and maybe not indicative of what the more.
Less distressed.
Owner would be willing to sell assets and John It's Mark just to add to that I mean, when you think about what supports department values Theres certainly a lot of unallocated private capital I mean, we've heard numbers up to $800 billion of private capital looking worldwide for real estate exposure. So I think people chief investment officers of those kind of funds.
Just need to see some stability before they are willing to move a multiple that towards the end of this year and early next we'll be talking to you about some better numbers in those markets operationally and I think that will also encourage capital flows, but I agree with Alex I think it'd be really hard to peg a cap rate, it's almost like on a per unit per square foot basis kind of conversation at.
The moment, but I think that's going to shift given the amount of capital on the sidelines and given our hope that operating results will improve over the next 12 months.
Okay that makes sense I guess over the coming months or quarters. When there is a little bit more price discovery.
Cap rates for these types of larger gateway trophy assets to be meaningfully higher than.
More suburban assets and he was kind of post COVID-19 environment.
Well, what you run into is what ends up being a really compelling discount to replacement cost. So I think people will start looking at that and realized that getting it at a good basis in one of these good these good cities.
Really compelling so I, just really think that'll be a floor and will prevent too much of a gap from horizon.
Okay.
Final question, Mark just longer term as you see these cities heal from Covid.
What.
Not meant to be precise.
Rough order of magnitude, what's the right urban versus suburban mix in the AQR portfolio five years from now on this call.
Well.
Great question.
We've sort of thought about as we see ourselves as sort of 60% or so urban right now and they get that number below $50. We would probably be a goal I think expanding into the sunbelt markets. As you know is our goal and I think a great opportunity with the amount of product that's coming through and I think in the suburban markets of some of our key.
Current.
Coastal areas is a good idea to so my guess John as Youll see sort of one third of the portfolio in Denver and the Sun belt markets five years from now and Youll sort of see more of a 50 50 split urban suburban but we are a creature of opportunity and if there was an opportunity to be to stay more.
Urban because it was just absolutely compelling prices as Alex described John we'd certainly think hard about that I mean, we're not we feel like having a more balanced platform will give us better cash flow growth more stable cash flow growth over time, but the name of the game is buying right and if we can buy very well, we we might move tactically for awhile a different direction.
Action.
Okay.
Makes sense thanks for the time.
Thank you.
Well go next to Steve <unk> with Evercore ISI.
Yeah.
Thanks, Good morning.
I was wondering if you could maybe just talk about where you are sending out renewal notices I know you've provided some July data, but what is August and September look like in <unk>.
What are those discussions look like and I.
I guess, where are you seeing the most pressure on new leases.
Yes, Steve This is Michael so for the renewals right now Youre right. We've got our quotes are out there for the next three months or so it's been fairly consistent as what we've seen in the last couple of months and right now based on conversations we've been seeing through our centralized renewal team, we don't really expect to see.
A lot of variation, we think we're going to continue to renew about 55% to 60% of our residents and achieve right around a five to five 5% kind of achieved renewal rate growth, which incorporates a little bit more negotiation and typically what you see is as you get into the beginning of the peak leasing season, our centralized renewal.
Teams, we've tightened up that negotiation range, Paul up to like 100, 150 basis points up quote now what we expect to see as we get in towards the tail end of the peak leasing season, just to kind of drop that off a little bit and probably negotiate about 200 basis points off of the quotes that are out there, but again I think we remain really optimistic.
Mystic about the performance centralizing. This team has really given us the ability to kind of pivot quickly and really deliver consistent results in terms of the new lease.
Pressure right now I think if you would just look at some of the reported stats and you could see kind of in Seattle, and San Francisco, where Youre still doing that concessions in those urban centers that is definitely weighing in on some of our ability to have a new lease change kind of go positive, but again I think overall, where we sit today and.
This leasing season, it's playing out kind of exactly like we thought where rents are sitting where our new lease changes and the renewal performance and we just see kind of the market's reacting like they normally will through kind of the season and thats kind of whats baked into the guidance that we have.
Yeah.
Great and then I guess just on the development front I know you've got a handful of projects I think one wholly owned in several joint venture developments can you just remind us kind of where those development yields are likely to pencil out in I guess, Mark how are you thinking about the prospect of any future development.
If we're hearing correctly merchant builders are starting to scale back their development teams and hopefully over the next 18 months that development pipeline starts to shrink, but I guess, how are you thinking about the future pipeline for AQR.
Hey, Steve, It's Mark and Alex May join in a second.
Got it that's good to have a solid internal team, which we have in good JV relationships with toll and others and we see all this stuff, but as Alex has said on prior calls is just not penciling out there just not enough of a risk premium in what is a risky endeavor of development. So for US I think acquisitions seem like a better place to invest capital for the.
<unk>.
I think what could change there is just some sense that either rents have moved a lot I doubt costs are going to move down in any material regard, but I think right now I like the development pipeline being smaller in terms of the yields we're looking at.
It's mid to high fives.
On our existing portfolio.
Laguna Clara deal in California, which is a one mile away from Apple's headquarters deal is a little lower than that its an existing asset where densify. So there's less risk since we know the area, so well, but beyond that Steve there kind of a high five type of situations.
To do a development deal, we need something to get into that close to that six range and I don't know we may start a deal. This year, we may not start anything we'll see.
Okay.
Great. Thanks, that's it for me.
Thanks, Steve.
Well go next to Josh <unk> with <unk>.
<unk> of America.
Yeah, Hey, guys. Thanks for the time.
Michael in your opening remarks, you mentioned operating platform initiatives.
I think you mentioned margin expansion potential there any early thoughts on where the margins can ultimately go and maybe over what kind of timeframe.
Okay.
Yeah, Hey, Josh This is Michel so maybe I'll just hit on overall kind of some of the initiatives and the innovations and I'll, let Bob kind of touch base on the actual margins. So I think what we put out in our May investor presentation, really just kind of highlighted the initiatives that we have keyed up and this year spin.
<unk> 2023, we have about $10 million included in the NOI guidance with about two thirds of that being on the expense front as we keep working through kind of the innovations of leveraging resources across assets.
And right now, we're really focused on kind of teeing up the next round of initiatives and it's really more income based and probably other income based items that will really kick into gear in the back half of this year and start delivering kind of results into 2024 right. Now we are literally right on track with our numbers and we feel really.
Confident in about the incremental $10 million for 'twenty, three and maybe Bob If you just want to hit on the overall margin impact of that yes. So from a margin standpoint that will all be accretive to margin I guess I would say that in this space. We talk we all talk about very different margin. So I'm going to talk about the margin I guess that I think is most important which is the cash flow margin, which we.
<unk> at the NAREIT conference so cash flow margin meeting after Capex after expense and all of that we're already running at a league leading.
Level as it relates to that cash flow margin and when you layer in the initiatives that Michael was talking about and that's inclusive of what you have to spend in order to achieve that.
That ROI and Capex et cetera, we think we can get a few percentage points of incremental increase there and that's what we're striving for.
Okay I appreciate that and then.
Should the opening remarks on Seattle, just seem like its the only legacy market, you're facing with supply concerns.
How long will it take to kind of work through that supply.
Yes, so Josh this is Michael again, so right now in Seattle, where kind of actually in a lull of going up against kind of head to head competitive supply. If you look at what's expected to be delivered and completed in 24, I think we're going to see that Seattle number kind of inch up on us and.
It is something we're absolutely kind of watching and kind of making sure that those units will be delivered and when we create our guidance for 'twenty four it's something that we will fold into that market for US right now Seattle. Its just been its kind of gets momentum and then installs a little bit and then it gets momentum. So we really just haven't felt that consistent.
Kind of strong job growth, that's really needed to get us back on track and really get us out of that concessionary environment, but to date, it's not really the new supply that's been impacting US yes, I just wanted to make a comment on Seattle, It's obviously for most of us pretty far away. So people aren't out there quite as much but there has been an.
<unk> Renaissance in the city in terms of access to the waterfront.
Similar to the big dig in Boston I think that's a very positive catalyst for quality of life in the downtown area, where we have a lot of assets.
I do think there's an election coming up there's been an improvement in attitude in city government about livability and those issues. That's a positive but I think Michael is right I think youre going to see a lot of supply, which on the one hand, Seattle is a market where actually the percent of rent to income is lowest with New York for us. So there is an ability to pay more rent and there is a lot.
At a high paying jobs and a lot of good industry in the Seattle Metro area and as the city gets we hope more livable as people take advantage of these new waterfront amenities and I think we feel good about Seattle and its ability to draw people in again in scale and.
Amazon's just kind of call people back to the office our folks on the ground say there is some momentum there in South Lake Union, where Amazon is a lot of office workers. So, we'll see where that takes us as well, but you asked a very narrow question I'm, giving you more but I do have a sense of optimism about Seattle, but we have to navigate some of that supply the next really in 'twenty.
425 more than in 'twenty three.
Yeah.
Appreciate the color. Thank you.
Yeah.
Well go next to John Kim with BMO capital markets.
Thank you.
Can you describe the strong backdrop in your markets and potentially some demand catalysts going forward, but if we just wanted to isolate July it looks like the blended lease growth rates had decelerated versus June .
And I'm wondering is new is that surprised you involved.
Potentially.
It seems like it would peak now rather than picking a month ago.
Yeah, Hey, John This is Michael so.
I'm going to touch on a few different things here, let me I'm going to start as kind of the rents.
First and then I'll address the new lease change relative to July and I'll tell you. Just we went back and we've looked at like the last 15 years of our data and our pricing trend, which is that net effective price for our units. It typically peaks out somewhere in that late August two or late July to mid August period and real.
The first week of August is kind of that most common timeframe I'll tell you. We've had really strong foot traffic strong application volume, so I'm not going to be surprised that if we don't see a few more weeks of slight increases in rates kind of coming through our system.
And that being said I mean, right now the pricing trend.
It's up about 6% since the beginning of the year and it's right, where we thought it was going to be so even if we just peaked out at this level right now it's kind of right in line and we'll be just fine in terms of it flowing through the other stack in terms of that deceleration of new lease change I'd start by saying I would not read too much in.
That any single month.
Is this stat, it's really better to look at over time and I think the what you saw in our release. It was like a 10 basis point different that's just a lot of noise from maybe who moved out and versus who moved in and where that was.
Being done right now I'll say that the new lease change as being more impacted by that concession use in the urban centers of Seattle and San Francisco.
But again I think as we turned the corner and we start looking at August I wouldn't be surprised if those inch back up a little bit we're really in this tight band relative to our expectations of both new lease renewals and how that kind of translates into that blended new lease or the blended rate. So I wouldn't read too much into it.
Any one month's debt.
Okay. Thanks for the color.
On the secured debt that you raised at four seven it looks like your unsecured notes with a similar term trades around 50 basis points above that.
How does that spread.
Secured versus unsecured how is that 50 basis points compared to historical and if this continues.
With the secured market look more attractive to you going forward.
Yes, So let me breakdown hey, Jon its Bob.
Let me break down a couple of pieces when you're comparing the 472, what I'm guessing you're comparing to where our unsecured are trading today, what you're incorporating in that is the impact of the hedges right. So in my prepared remarks, I mentioned that we when we issued the secure we haven't issued yet, but when we locked rate on the secured loan we were at 135 base.
Points on the Treasury at that time, which was call it five in a quarter.
How you get to 470 as you apply the gain that we got because we did some forward starting swaps at really attractive rates and that reduced it to <unk>. So what we should compare is really the spread at that 135 basis points that I talked about in my prepared remarks to where the spread that would be implied in our unsecured and that's a lot more narrow.
So that's probably five to 10 basis point hit or Miss between either one.
So they are relatively on top of each other we think maybe we were maybe five basis points inside an unsecured but that's one day's worth of trading activity can flip you and you could be at parity.
Yeah.
That's great. Thank you.
Well go next to Jamie Feldman with Wells Fargo.
Great. Thank you for taking my question I was hoping you can dig a little deeper on D C across the different submarkets.
It seems like it's held up pretty well, but there's also a decent amount of supply.
Kind of what's your outlook for the back half of the year ended 24 in that market.
Yeah, So what's amazing about D C and even when you drill in by Submarket, you really don't see a huge differential in our performance and I think part of that is just when we talked about new supply coming into that market they've got such a great transit.
Environment, there that supply really in any one of these submarkets can pull from other areas. So we really haven't seen any deviation of the performance across the Submarkets now when you look forward to the balance of the year like it was back half loaded for delivery. So we are aware that we're gonna be facing more and more competitive supply.
And it is fairly dispersed across some of these submarkets.
But again I don't think we're forecasting to have like more pressure in one sub market than the other because of that transit environment that could pull from everywhere.
The outlook for the balance of the year, it's still good right, we're producing really strong revenue growth good absorption of the supply it may soften up a little bit, but I think we still have this momentum coming in and I think it's positioned well for 2004, even though you got another round of supply coming at you again, it's a market.
It's been demonstrating resilience and stability.
And there's been a lot of talk around the government not bringing certain agencies back to the office.
Is that something that you kind.
Kind of.
Contemplated in the stats, you're seeing already in any of those aren't really tenants that would be in your buildings or do you think that's a potential drag to come.
Well, it's mark and Michel May add to this I mean through the real estate Roundtable has been a lot of advocacy around that are trying to get federal workers back on the job.
Hopeful that continues to push the administration put something out it wasn't very strong on that topic, but we will continue to push for that I mean, the federal government as such the key employer of course in the Metro mean implicitly in our guidance is not much of a change in our current reality on the ground getting all of those folks back in the office would be helpful and I remind you there is a difference between.
The type of employee if youre in the National Security World, you've likely been at the office the whole time and as that group grows there need to be closer in and closer into their office will continue to be relatively high.
Again, I am hopeful that we get and Theres been some action in Congress by the way some bills introduced to get federal workers back in the office. So I am hopeful that thats a positive but it isn't income its not inside of our guidance and we expect improvement.
It's just I hope, we have both frankly as taxpayers and as you know.
And as owners of real estate in DC.
Yeah.
Okay. Thank you that's very helpful. And then I guess, a similar question across the market in Seattle, where so far this cycle, we've seen major differences, depending on where in the market assets are located in or even beat versus today. What are your thoughts there and what do you think the implications are.
Transit matter as much or how should we be thinking about your outlook there.
I mean for US right now, it's really like Bell town CBD is where you see the pressure where you see the prices that are still materially off from where they were in March of 2020.
The suburbs there feel good right, but it's not like great and robust.
But they are healthy so it's really just a suburban versus urban kind of differential that we see across that Seattle market and when you think about the supply that's coming.
It will impact not only urban but also the suburban areas as well for next year in those in that market.
Okay alright, thank you.
Our next question comes from Handel St Juste.
Zero.
Hey, there good morning.
I wanted to go back to the West Coast markets of our bid was curious if you could give us a bit more color on what you're seeing in terms of concessions maybe between San Fran and Seattle parts of L. A and then at a high level what are you.
Blended rate growth expectations for the West coast versus East coast markets in the back half of the year.
Hey, I know this is Michael So let me just I'll start with just the overall kind of concession used in the portfolio fairly consistent in the second quarter versus kind of the first quarter.
Overall, we're running about 15% of the applications are receiving just about a month about 80% of all the concessions that are being used are concentrated in the urban centers of both Seattle and San Francisco in downtown San Francisco, It's about 50% of the applications are receiving about six weeks and in <unk>.
Downtown Seattle, it's about a third of the applications that are receiving just over a month in terms of the the spreads in the west coast markets, where new lease change I don't know if I have that kind of handy I will tell you that right now the east coast markets had been outperforming the west coast by about 400 base.
This point my guess is that spread is going to stay fairly consistent although you definitely have some movement in L. A with some of the changes happening with bad debt.
Yeah.
That's helpful. Thank you.
Whereas the loss to lease in the portfolio today, and where the highest and whereas the lowest.
Sure. So right now the loss to lease is up three 7%.
Which for this time of the year is actually a little bit stronger than what we have seen historically and maybe rather than let go on by market around loss to lease I could just kind of cluster them for you and group a few buy a range. So like New York and San Diego have the highest loss to lease right now.
Which has been running at about 9% and then that's followed by like DC Orange County, Boston are all very tightly clustered in this like four 5% to 6% range and then you go to like the Denver is the San Francisco, Seattle and La those are all in like the flat to 2% and then I have my <unk>.
Spansion markets of Dallas, and Austin are the two markets right now there isn't a gain to lease.
I think when you put all of this into the blender, knowing where pricing trend is today like I said with that 6% growth from the beginning of the year sitting with the three seven loss to lease which is above kind of a normal year. It really does put us in a great position not only to finish off the year, but they have a starting point for 2004.
That's really above our norm.
Got it very helpful color. Thank you.
We'll go next to Alexander Goldfarb with Piper Sandler.
Hey, good morning.
And happy <unk> anniversary.
Two questions on both actually around acquisitions.
So mark Sam used to talk about trading sardines and eating sardines.
Look at your experience in the especially in the urban markets the bigger assets.
Do you see those assets and EQ or going forward do you see them more as trading sardines are eating ones.
Hmm.
Interesting I love the channel that analogy out for historical reference point.
I mean these some of the markets like New York, If you want a presence in Midtown the assets by definition are mostly large and costly alright. So it's.
It's more of a market than a type decision I would say I think it's more likely that you would see us sell a large asset.
Because we just want to lower our market exposure there not because we are particularly allergic to a large asset in the market. If it has not performed well or if we have an over concentration in a sub market youll see us sell it. So I guess I don't know what to do with that analogy in a sense that larger assets are harder to sell.
We generally operate them pretty efficiently, we generally can run capital pretty efficiently to make up for that but I don't have a sardine type description for Ya.
To say that I think we'd sell it if we don't like to spot big or small asset.
What I'm, saying, what I'm getting at is given the volatility that we've seen in the urban markets do you think that it's better for EQM going forward to be more nimble and say look we have a <unk>.
<unk> of assets that we like more in the suburbs, where it's harder to get in order to get out in the cities, where you know Youll go up to a peak, where you have record rents and it's easier to sell and then sort of trade around that's what I'm trying to get at is if the urban markets or more like trading markets versus long term market. So you're always trying to.
Sort of arbitrage exposure.
I guess I don't I don't agree with that I'd start by saying volatility in all sorts of assets and you're about to see volatility in the sunbelt markets with these kind of prices. The fact that there are smaller assets just means that the prices just decline I mean, the way to protect against volatility in our markets to be in a position with your balance sheet and your strategy, where youre not a compelled seller.
So for us volatility can mean opportunity right if prices go down enough as I mentioned in my remarks in even in San Francisco, we'd be a buyer. So I just wanted to make that clear. So russ volatility is opportunity not always negative and the way we protect ourselves is by having a broader platform. So I think one lesson we.
Earned over the last 10 15 years as a broader platform means you can act more quickly and more markets and take advantage of those volatile moments, where Austin, Texas trades cheap to long term value and you are a buyer there are new York trades cheap and you are a buyer there. So I think as you see has balanced the platform out youre going to see us be more even more opportunistic and.
I wouldn't shy away from buying a large asset I think you just got to go with your eyes wide open about those assets being harder to sell or is there something you'd add Alex yeah. Alex. This is Alex I would just add that take Manhattan or actually Boston D. C really any of our urban markets to reproduce those portfolios will be virtually impossible I mean, Manhattan I don't know how you would find 25 really well.
Okay that assets in any amount of time, so we've got it.
An unusual opportunity that we're taking advantage of today and Youre seeing in Manhattan, It's the best performing market in the country and you just couldn't decide all of a sudden you wanted to reproduce that.
Okay and then the second question is given.
Given its a competitive market for transactions, we saw one of your peers due to large transactions that are basically neutral. Initially are there ways for you guys to enhance your initial yields be it like buying at the end.
In the preferred or the Mezz positions are junior positions or are there other ways that you can enhance your yield so that when you do close on a deal it's more accretive than often it seems like.
In REIT land transaction ends up being neutral year, one and it's not until year, two or three that we start to see the benefits.
Yes, I'm going to split this up a little bit for the team to answer I think I want to start by Alec talk about cap rates certainly matters a ton, but we also think a lot about replacement cost and I'm going to ask Michael or Bob to just talk about platform scaling margin expansion at EQM or those kinds of things Alex that can affect year to year.
So yes. So this is Alex.
What we're really focused on being a very targeted buyer right now and what we are targeting our opportunities, whereas Marc says there is a discount to replacement cost, but also a limited supply pipelines. So that typically has been out in the suburbs.
And those kinds of basically if you get it on a good basis like that.
That's the best thing for your investment in the long run.
Rather than some kind of mezz piece that might be a little bit of financial engineering getting at a good basis, It's just irreplaceable.
I think from the operator standpoint, I think we have worked really hard over the last couple of years to build a platform that is highly scalable. So when we go into these markets. We're looking really at the ability to kind of leverage staff across properties put them onto our platform.
Put them into our pricing system, and it's clearly accretive from an operating margin for us when we're looking at underwriting. These deals right now when we look across these markets any of the acquisitions. We're looking at we're saying, even though in our existing markets what benefits do we get by bringing this into that portfolio, whether that's at a submarket level.
<unk> or the market as a whole yes, I just think you've asked some great questions. Alex I mean, we're in a really good position, where we've got teams in the markets. We can underwrite quickly we can take over management quickly, but we're not overexposed to the supply and there is going to be a lot that's going to be sold in the sunbelt markets and I think you should think not just about our self.
Some of these legacy urban assets and affecting I'll call. It the numerator, but thats, making the company net bigger likely by using some of our debt capacity that Bob and his team have created so capably over the last few years to go out there and be a net buyer and I think what's more important to the management team and the board is that per pound replacement cost.
Discount I think we're looking for the deals to make sense on an initial cap rate basis, as well, but I mean, the most important thing most important signal to us historically has been buying at a meaningful discount to replication cost and in an environment, where construction costs are high and they might be flat for a year or so but they are likely not going to decline and our.
Opinion, much you can get a discount basis, you've got a little mode around your asset I like everything about that so I think thats. What you will hear us talk about if we're fortunate to see some assets out there to buy in these expansion markets and in the suburbs of our existing existing markets.
Well thank you.
Thank you.
Okay.
Yeah.
We'll go next to Michael Goldsmith with UBS.
Good morning, Thanks, a lot for taking my question. My first question is on bad debt can you provide some context in terms of what's included or implied.
That happens to bad debt in the back half of the year in your updated guidance. Thanks.
Yeah. So.
Good question, Michael It's Bob So in the back half of the year, we will actually finally switch to bad debt, helping with the growth rate by about 30 basis points and the reason is because we continue to see that sequential improvement of bad debt and we'll cross over the difficult comparable period that relates to the rental relief.
Payments add in the prior year.
That accretion or that benefit too.
<unk> total revenue growth is likely not going to occur until the fourth quarter because in the third quarter of 2022, you still had elevated rental relief, but we think we'll cross over there we think at the by the end of the year. When you look at the full year basis will end the year around call. It 125 to 130 basis points as a percentage of total <unk>.
Revenue and bad debt, which is still elevated relative to the historical norm of 50 basis points.
And leave the opportunity for more contribution to growth as you go into 2024.
Got it thanks for that and my second question is more of a strategic question arguably you have one of if not the best positioned portfolios for the market right now given the strength in coastal urban areas.
And then we consistently are being told that youre looking to have a more balanced portfolio between urban and suburban coastal sunbelt. So can you just talk a little bit about like how should investors reconcile kind of the strength of the portfolio now to kind of the overall <unk>.
Strategy of diversifying away from from what's working right now thank you.
Yeah, Great Great question very fair I.
I think youre going to see the baton kind of past I think for a few years. The sunbelt markets are going to be pretty stressed and I think a lot of the owners of these assets arent long term owners or developers within patient capital expensive development that and we can buy those properties again.
For a good basis as we just discussed and add them to the portfolio. I think are kind of resident is increasingly in some of these sun belt markets, but yet the coastal markets of real supply advantages that youre seeing right now so creating a real balanced portfolio for our investors I think for the next year or so theyre going to benefit from just better coastal dynamics on the supply and <unk>.
<unk> side I think after a while those things will even out and I think they have a portfolio that year in and year out outperforms not just in certain periods, but year in and year out. We're just requires more balanced between urban suburban and coastal and sunbelt and we're really balancing the demand and supply risks and opportunities we're thinking a lot about regular.
Tori risk and we're thinking a bunch about resilience the cost for example of insurance in Florida.
And the cost of casualty.
Repairs and things like that are getting more significant so I think as we talked to our investors and I think this has been well received and the instruction. We've received from the board as to again try and create this portfolio, that's a little more balanced as to opportunities and risks and I think what our investors will get or hopefully league leading numbers for the next I don't know how many quarters <unk>.
18 months to 24 months and then ill.
Play at some point, we will start to see supply abate in these other new markets and we will be there to take advantage of that having purchased at an attractive basis. So.
In my hopes and dreams Thats, how it would play out.
Thank you very much good luck in the back half.
Thank you.
Our last question comes from the line of Adam Kramer with Morgan Stanley .
Yes.
Look I think you've done a really good job of kind of present pricing trends on a kind of a seasonal or sequential basis historically.
About 524 in your most recent deck for example, just wondering you know thinking about kind of the.
The late late summer months and into the fall, maybe just walk us through your assumptions for kind of growth relative to the normal seasonal pattern.
Hey, Adam This is Michael So I think what we've got is we expected this year to follow normal.
<unk> grown both on a rent seasonality of demand seasonality and right now for the and we said it was giving you a little bit muted, we didn't expect rents to peak quite as high as what they would normally peak.
Right now, we're doing kind of right, where we thought we would be turning the corner heading into August we would expect just given the application volume in the foot traffic. We're seeing that we've got you know several weeks left of what I would say is the peak leasing season, where we'll continue to inch up a little bit of rate.
And then as you turn the corner and you work your way and through September we do expect that rates will start to moderate a little bit we have so many years of data. We're looking at all of these stats and we haven't really seen anything that tells us not to expect not to expect that normal kind of softening that occurs in the late third.
Quarter and into the fourth quarter, both from the pricing trend standpoint little bit on the occupancy standpoint, but right now we feel pretty good because of the southern California situation that occupancy will continue to improve and be stable for us for the year.
I just think you just got to look through all of those stats and just put yourself into a bell curve and allow both rent seasonality in demand seasonality to kind of tail off in the third late third quarter and fourth quarter. That's what we're model we've seen years, clearly, where we've been able to defy that and hold the line with rate or have.
Good demand kind of going all the way through the fourth quarter I just don't have any insight right now to say that this is going to be the year that does that.
That's super helpful. Really appreciate that color and then I guess it is frankly, a kind of a similar question, but thinking about back earlier in the year. I think you guys put out a two 5% market rent growth forecast for the full year wondering if at this point in the year kind of knowing what you know.
Your results in so far.
Would you make any kind of changes to that number or is that going to as to how you think about for the full year on average 2.5% luxury groups.
So this is Michael again, no I think we're like we're running right at it like we're right on top of these numbers.
That market rate growth.
Layer on top of where our embedded growth was in the beginning of the year our ability to capture the loss to lease and then you had that intra period growth you put all of that stuff into the blender together and it was pointing off to this like 4% blended rate growth for the year and right now thats like exactly where we're headed.
I wouldn't change that number or outlook at all.
Thanks, so much for the time.
This does conclude today's question and answer session I would like to turn the call back over to Mark <unk>. Please go ahead.
Thanks, Ruth I. Thank you all for your time and interest in equity residential today enjoy the rest of your summer and we look forward to seeing many of you out on the fall Conference circuit. Thank you.
Okay.
Everyone else has left to come.
Today's conference call. Thank you for your participation you may now.
That's correct.
Yeah.