Q3 2023 Equity Residential Earnings Call

Please standby were about to begin.

Good day and welcome to the EQ are <unk> 23 earnings conference call and webcast. This call is being recorded at this time I'd like to turn the conference over to Mr. Marty Mckenna. Please go ahead.

Good morning, and thanks for joining us to discuss equity residential third quarter 2023 results. Our featured speakers today are mark <unk>, our president and CEO and Michael <unk>, Our Chief operating Officer, Bob <unk>, Our Chief Financial Officer, and Alex Brackenridge, Our Chief investment officer are here with us as well for that.

Q&A our earnings releases posted in the investors section of equity apartments Dot Com as is a management presentation for the quarterly call. 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.

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 third quarter 2023 results.

As you can see from the press release and management presentation. The business continues to do well in most of our markets with our east coast markets outperforming our West Coast markets, New York, Boston, and Washington, DC, comprising a bit more than 40% of our net operating income or all having very good years and are meeting or exceeding our expectations.

Unknown Executive: Good morning and thanks for joining us to discuss equity residential's third quarter 2023 results. Our featured speakers today are Mark Parrell, our president and CEO and Michael Manelis, our chief operating officer. Bob Garechana, our chief financial officer and Alec Brackenridge, our chief investment officer, are here with us as well for the Q&A. Our earnings release is posted in the investor section of equityopartments.com, as is a management presentation for the quarterly call.

Our target renter demographic remains well employed unemployment for the college educated is at two 1% with increasing pay levels and a continuing high propensity to rent given elevated single family ownership costs low for sale inventory and lifestyle reasons like delayed marriage and smaller families that favor our business.

Unknown Executive: Please be advised that certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal security 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.

We're also seeing lower levels of new apartment construction in most of our established markets, where we have 95% of our net operating income versus the Sun belt markets a pattern that will continue for the next several years.

Consistent with this view throughout the primary leasing season, our pricing followed a trajectory that was pretty typical for a normal pre COVID-19 year and as you can see in the management presentation on par with our guidance assumption than normal rent seasonality will return in 2023.

Mark Parrell: Now I will turn the call over to Mark Parrell. Thank you, Marty.

Mark Parrell: Good morning and thank you all for joining us today to discuss our third quarter 2023 results. As you can see from the press release and management presentation, the business continues to do well in most of our markets, with our east coast markets outperforming our west coast markets. New York, Boston and Washington, DC comprising a bit more than 40% of our net operating income are all having very good years and our meeting or exceeding our expectations.

Our portfolio wide rent peak in early August and then begin to decelerate as we expected. However, we recently saw a deceleration in pricing in San Francisco, and Seattle that was more pronounced than usual seasonal patterns.

Main culprit here it seems to be a lack of job growth for our target renter demographic Michael will have more detail on this as well as the building blocks for 2024 that are laid out in the management presentation in a moment.

Mark Parrell: Our target runner demographic remains well employed. Unemployment for the college educated is at 2.1%. With increasing pay levels and a continuing high propensity to rent, given elevated single family ownership costs, low for sale inventory and lifestyle reasons like delayed marriage and smaller families that favor our business. We're also seeing lower levels of new apartment construction in most of our established markets, where we have 95% of our net operating income versus the sunbelt markets.

In Los Angeles, we are working through the impact of a drawn out process to normalized delinquency levels and to reduce bad debt.

We continue to make good progress here portfolio wide bad debt before application of rental relief funds in the third quarter was about one 3% as compared to two 4% in 2022, but the process is uneven and it is lengthy evictions are now taking six months or more in Los Angeles versus the two to three.

Mark Parrell: A pattern that will continue for the next several years. Consistent with this view throughout the primary leasing season, our pricing followed a trajectory. That was pretty typical for a normal pre-COVID year. And as you can see in the management presentation, on par with our guidance assumption, the normal rent seasonality would return in 2023. We saw our portfolio wide rents peak in early August and then began to decelerate as we expected. However, we recently saw a deceleration in pricing in San Francisco and Seattle that was more pronounced than usual seasonal patterns. The main culprit here seems to be a lack of job growth for our target runner demographic.

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Given the underperformance in San Francisco, and Seattle, and the Lumpiness and improvement in bad debt as well as the impact from a noncash write off of a $1 $5 million.

Late line rent receivable in the quarter due to the bankruptcy of Rite aid, which is a retail tenant of ours. We have adjusted our same store revenue guidance expectation for the year to five 5% from $5 87, 5% at the previous midpoint we.

Mark Parrell: Michael will have more detail on this, as well as the building blocks for 2024, that are laid out in the management presentation in a moment. In Los Angeles, we're working through the impact of a drawn out process to normalize the length of levels and to reduce bad debt. We continue to make good progress here. Portfolio-wide bad debt before application of rental relief funds in the third quarter was about 1.3 percent as compared to 2.4 percent in 2022. But the process is uneven and it is lengthy. Evictions are now taking six months or more in Los Angeles versus the two to three months prior to the pandemic.

We have also adjusted our EPS <unk> and <unk> guidance Accordingly.

Turning to 2020 for the long term health and outlook of our business remains positive with favorable tailwind that should support performance while job growth expectations for 2024 are lower than 2023 levels. We will continue to benefit from demand from a well employed residents demographic, we think are going to rent with us longer.

The cost of single family ownership and powerful social trends like delayed marriage and smaller families that I previously mentioned.

We also see a significant benefit from lower deliveries of new supply in our established markets compared to the elevated deliveries in the sunbelt markets over the next few years.

Mark Parrell: Given the underperformance in San Francisco and Seattle and the lumpiness and improvement in bad debt, as well as the impact from the non-cash right off of a $1.5 million straight line rent receivable in the quarter due to the bankruptcy of right aid, which is a retail tenant of ours. We have adjusted our same store revenue guidance expectation for the year to 5.5 percent from 5.875 percent at the previous midpoint. We have also adjusted our EPS FFO and NFFO guidance accordingly. Committee.

Switching to capital allocation, while the overall market remains quiet, we did have some activity in the quarter, we sold a 30 year old asset in downtown Seattle during the quarter and a five 4% disposition yield as we continue to lighten the load in the urban centers of our West coast markets.

We also continued to invest in our expansion markets by acquiring two assets in suburban Atlanta.

One property was built in 2019 and was acquired from a large private equity real estate player. The transaction is a five 1% acquisition cap rate, including the impact of the mark to market on some low cost debt that we assumed as part of this transaction.

Mark Parrell: Turning to 2024, a long-term health and outlook of our business remains positive with favorable tailwinds that should support performance. While job growth expectations for 2024 are lower than 2023 levels, we'll continue to benefit from demand from a well-employed resident demographic. We think are going to rent with us longer, given the cost of single-family ownership and powerful social trends like delayed marriage and smaller families that I previously mentioned. We also see a significant benefit from lower deliveries of new supply in our established markets, compared to the elevated deliveries in the Sun Belt markets over the next few years.

This property is located in an upscale mixed use development, though we acquired none of the retail with our resident base, having high paying jobs at the large education and medical employers nearby.

The other asset we acquired is and when that county with easy access to the I 85 employment corridor and was acquired for $98 million. This asset is brand new and it's still in lease up and we expect it will stabilize at a five 4% year to acquisition cap rate.

Mark Parrell: Switching the capital allocation, while the overall market remains quiet, we did have some activity in the quarter. We sold a 30-year-old asset in downtown Seattle during the quarter at a 5.4% disposition yield as we continue to lighten the load in the urban centers of our West Coast markets. We also continue to invest in our expansion markets by acquiring two assets in suburban Atlanta. One property was built in 2019 and was acquired from a large private equity real estate player.

The median home price in a desirable area, where the property sits is $600000, which assuming a normal downpayment and current interest rates equates to an all end housing cost is two five times, our pro forma rents.

Median household incomes in the area and among our residents at the property are around $100000, making renter ship, a good financial and quality of life decision.

It is important to note that our 2023 acquisition activity was paid for with capital from our asset sales without incurring any dilution as we took a cautious approach to transaction activity given the pricing uncertainty and low volumes in the marketplace.

Mark Parrell: The transaction is a 5.1% acquisition cap raise, including the impact of the market to market on some low-cost debt that we assumed as part of this transaction. This property is located in an upscale mixed-use development, though we acquired none of the retail, with a resident-based having high-paying jobs at the large education and medical employers nearby. The other asset we acquired is in Winett County, with easy access to the I-85 employment corridor and was acquired for $98 million.

We sold properties that averaged 30 years old and that we expect we'll have more capital needs and lower go forward IRR than the properties that were acquired which we're one year old on average we are well positioned to further our portfolio diversification by taking advantage of acquisition opportunities that we believe are likely to arise from the substantial does.

Mark Parrell: This asset is brand new and is still in lease-up, and we expect it will stabilize at a 5.4% year-to acquisition cap rate. The median home price in the desirable area where the property fits is $600,000, which assuming a normal down payment and current interest rates equates to an all-in-housing cost that is 2.5 times our pro-former rents. The median household incomes in the area and among our residents at the property are around $100,000, making rentership a good financial and quality of life decision.

<unk> pipeline is delivering in our expansion markets over the next two years and now I'll turn the call over to Michael <unk>.

Thanks, Mark and thanks to everyone for joining US today. This morning, I will review the third quarter 2023 operating performance in our markets our outlook for the remainder of the year and some views into 2024 that we included in our management presentation. We continued to produce very good results with residential same store revenue growth of four four.

4% in the third quarter, driven by generally healthy fundamentals in our business and some improvement in delinquency, although not as much as we expected the east coast markets continue to outperform the west coast demand and occupancy remains healthy, especially across our east coast markets and absorption in our results in the Washington DC market.

Mark Parrell: It is important to note that our 2023 acquisition activity was paid for with capital from our asset sales, without incurring any delusion as we took a cautious approach to transaction activity, given the pricing uncertainty and low volumes in the marketplace. We sold properties at average 30 years old, and that we expect to have more capital needs and lower-go-forward IRRs than the properties that were acquired, which will one year old on average.

<unk> to impress as I will discuss shortly San Francisco and Seattle are experiencing more pricing pressure than we previously expected before I get to that let me touch upon October leasing spreads new lease renewal and blended the stats, we published through October 27 captures almost all the months activity and as we meant.

Mark Parrell: We are well positioned to further our portfolio diversification by taking advantage of acquisition opportunities that we believe are likely to arise from the substantial development pipeline that is delivering in our expansion markets over the next two years.

<unk> are consistent with seasonal declines outside of Seattle and San Francisco.

Michael Manelis: We will now turn the call over to Michael Manales. Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review the third quarter 2023 operating performance in our markets. Our outlook for the remainder of the year and some views into 2024 that we included in our management presentation. We continue to produce very good results with residential, same-store revenue growth of 4.4% in the third quarter, driven by generally healthy fundamentals in our business, and some improvement in delinquency, although not as much as we expected.

New lease change is negative which is normal for the month and we will continue to get more negative as pricing trend, which is presented on page six of the management presentation continues to decline for the balance of the year in a normal pre pandemic year by the time you get to December it is not uncommon to see new lease change be negative four 5%.

Given the weakness in our Seattle, and San Francisco portfolios, we will likely be slightly more negative than that.

Renewal rate achieved should moderate slightly but remained relatively stable and make up more of the transaction mix put it all in the blender and Q4 blended rate will continue to moderate in.

Michael Manelis: The East Coast markets continue to outperform the West Coast, demand and occupancy remains healthy, especially across our East Coast markets, and absorption and our results in the Washington DC market continue to impress. As I will discuss shortly, San Francisco and Seattle are experiencing more pricing pressure than we previously expected. Before I get to that, let me touch upon October leasing spreads. New lease renewal and blended. The stats we published through October 27 capture almost all the month's activity, and as we mentioned, our consistent with seasonal declines outside of Seattle and San Francisco.

In terms of the specific conditions on the ground in San Francisco and Seattle as we stated previously we have had little to no pricing power throughout the year. However, the peak leasing season did demonstrate an increased volume of demand and some moderation of concession use which led us to what we initially thought could be the beginning of better stability.

Over the last six weeks. However, these markets have slowed more than normal which has resulted in larger price reductions than seasonally expected characterized by both declining rates and increased concession use.

Michael Manelis: New lease change is negative, which is normal for the month, and will continue to get more negative as pricing trend, which is presented on page 6 of the management presentation, continues to decline for the balance of the year. In a normal pre-pendemic year, by the time you get to December, it is not uncommon to see new lease change be negative 4 or 5%. Given the weakness in our Seattle and San Francisco portfolios, we will likely be slightly more negative than that.

This is most pronounced in the downtown areas of both markets, though there are other suburban pockets experiencing pressure like downtown Redmond in Seattle.

The uncertainty of back to the office from the Big Tech employers combined with a slowdown in new hiring is keeping a lid on demand in order for these markets to fully recover we will need to see the vibrancy that comes to these areas. When the offices are active employment increases and residents want to enjoy the city lifestyle, an easy commute to the Oi.

Michael Manelis: Renewal rate achieved should moderate slightly, but remain relatively stable and make up more of the transaction mix. X, put it all in the blender and Q4 blended rate will continue to moderate. In terms of the specific conditions on the ground in San Francisco and Seattle, as we stated previously, we have had little to no pricing power throughout the year. However, the peak leasing season did demonstrate an increased volume of demand and some moderation of concession use, which led us to what we initially thought could be the beginning of better stability.

Office.

Both cities are making progress on improving the quality of life issues and we are seeing signs that a few of the major tech employers are slowly adding positions back, especially in Seattle, but the improvement in both of these areas needs to accelerate in order to generate enough in migration to these markets, which will allow pricing power to return.

Don.

Michael Manelis: Over the last six weeks, however, these markets have slowed more than normal. Which has resulted in larger price reductions than seasonally expected, characterized by both declining rates and increased concession use. This is most pronounced in the downtown areas of both markets, though there are other suburban pockets experiencing pressure like downtown Redmond in Seattle. The uncertainty of back to the office from the big tech employers combined with their slowdown in new hiring is keeping a lid on demand.

While recognizing challenges in these two markets overall, our business remains healthy even with these now muted expectations 2023 is on track to deliver very strong same store revenue growth with several positive trends that we expect to continue into 2024 and support our business.

First our residents remain in good shape financially with rent income ratios remaining at 20% portfolio wide 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 overall.

Michael Manelis: In order for these markets to fully recover, we will need to see the vibrancy that comes to these areas when the offices are active, employment increases, and residents want to enjoy the city life style and easy commute to the office. Both cities are making progress on improving the quality of life issues and we are seeing signs that a few of the major tech employers are slowly adding positions back, especially in Seattle, but the improvement in both of these areas needs to accelerate in order to generate enough in migration to these markets, which will allow pricing power to return.

All the job market and our residents remained resilient, which would expect which we expect to carry into 2024.

Our resident retention remains very good turnover in the portfolio remains some of the lowest that we've seen single family home purchases continue to be an expensive housing alternative, especially in our established markets. In fact, only seven 5% of our residents who moved out gave bought home as the reason in the third quarter, which is one.

Michael Manelis: While recognizing challenges in these two markets, overall our business remains healthy. Even with these now muted expectations, 2023 is on track to deliver very strong same-store revenue growth with several positive trends that we expect to continue into 2024 and support our business. First, our residents remain in good shape financially with rent income ratios remaining at 20% portfolio-wide. 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 lowest numbers, we have seen since we started tracking the data back in 2006 at this point, we are not seeing anything to suggest that the overall turnover rate in the portfolio will not remain low as I mentioned earlier on the demand side generally the employment picture, particularly for the college educated remain solid and supportive of <unk>.

<unk> demand into 2024, so as I already noted the high quality job creation machine in San Francisco, and Seattle recently, paused, but longer term fundamentals support the potential future growth on.

On the supply side overall, we are favorably positioned particularly compared to those concentrated in the sunbelt.

Michael Manelis: Overall, the job market and our residents remain resilient, which we expect to carry into 2024. Our resident retention remains very good. Turn over in the portfolio remains some of the lowest that we have seen. Single-family home purchases continue to be an expensive housing alternative, especially in our established markets. In fact, only 7.5% of our residents who moved out a bought home as the reason in the third quarter, which is one of the lowest numbers we have seen since we started tracking the data back in 2006.

We should benefit from less direct competitive supply pressure in most of our established markets. While D. C will be about the same and Seattle will have elevated supply in 2024, when looking at new supply as a percent of inventory there are significant differences between the overall sunbelt in our expansion markets as compared to our established Mark.

The average new supply as a percent of total inventory in our established markets is around 2%, which includes the Seattle market at four 5%, which is the only outlier bolt on an absolute percent basis and relative to historical norms. Meanwhile, the sunbelt markets are forecasted at just around six.

Michael Manelis: At this point, we are not seeing anything to suggest that the overall turnover rate in the portfolio will not remain low. As I mentioned earlier on the demand side, generally the employment picture, particularly for the college educated, remains solid and supportive of continuing demand into 2024. Though as I already noted, the high-quality job creation machine in San Francisco and Seattle recently paused, but longer-term fundamentals support the potential future growth. On the supply side, overall, we are favorably positioned, particularly compared to those concentrated in the Sunbelt.

<unk> and our expansion markets range between a low of 4% in Atlanta, and a high of nearly 10% in Austin, which will result in pronounced supply pressure.

This shouldn't be overly impactful for us since only 5% of our NOI is located in these expansion markets and in fact may present acquisition opportunities for us as financially stressed developers sell properties.

So putting all of these factors together, our overall revenue outlook for 2024, right now anticipate solid growth led by the East Coast markets. As you can see in the management presentation, our embedded growth going into next year is trending slightly above pre pandemic norms and loss to lease was generally in line with <unk>.

Michael Manelis: We should benefit from less direct competitive supply pressure in most of our established markets, while DC will be about the same and Seattle will have elevated supply in 2024. When looking at new supplies of a percent of inventory, there are significant differences between the overall Sunbelt and our expansion markets as compared to our established markets. Markets. The average new supply is a percent of total inventory in our established markets is around 2%, which includes the Seattle market at 4.5%, which is the only outlier, both on an absolute percent basis and relative to historical norms.

Michael Manelis: Meanwhile, the Sunbelt markets are forecasted at just around 6%, and our expansion markets range between a low of 4% in Atlanta and a high of nearly 10% in Austin, which will result in pronounced supply pressure. This shouldn't be overly impactful for us, since only 5% of our NOI is located in these expansion markets, and in fact may present acquisition opportunities for us as financially stressed developers sell properties. So putting all of these factors together, our overall revenue outlook for 2024 right now anticipates solid growth led by the East Coast markets.

Bad debt net it is hard to predict the exact amount of tailwind from improvement, but our view is that we will continue to gradually work our way back towards pre pandemic levels.

Eviction process is taking twice as long as it did pre pandemic and the speed is not yet sufficient to both clear the backlog and allow for new typical volume of evictions to be processed.

That said, we see no decline in the credit quality of our resident and their propensity to pay we continue to believe that we will see meaningful improvement in 2024.

In addition to the tailwind from bad debt net we expect to see some incremental lift from several of the operating initiatives that we have in place around renewals parking connectivity and other income opportunities.

Moving to expenses, which continue to trend in line, we would expect our 2020 for same store expense growth to be slightly below this year.

Michael Manelis: As you can see in the management presentation, our embedded growth going into next year is trending slightly above pre-pandemic norms, and lost to leases generally in line. With bad debt net, it is hard to predict the exact amount of tailwind from improvement, but our view is that we will continue to gradually work our way back towards pre-pandemic levels. The eviction process is taking twice as long as it did pre-pandemic, and this speed is not yet sufficient to both clear the backlog and allow for new typical volume of evictions to be processed.

We will feel continued pressure on the repair and maintenance lines with some of the new technology fees like smart home and Wi Fi, although the comp period from 2023 is pretty high so that will help offset some of that growth rate.

Insurance is clearly in for another significant increase and right now we expect real estate taxes to be higher than this year, but nothing that will create too much overall pressure.

Some of the growth in these expense categories will be mitigated by continued operating efficiencies in the payroll line being created from our centralization initiatives.

Michael Manelis: That said, we see no decline in the credit quality of our resident and their pre-pandemic to pay. We continue to believe that we will see meaningful improvement in 2024. In addition to the tailwind from bad debt net, we expect to see some incremental lift from several of the operating initiatives that we have in place around renewals, parking, connectivity, and other income opportunities. Moving to expenses which continue to trend in line, we would expect our 2024 same-store expense growth to be slightly below this year.

Let me wrap up by saying that the apartment business continues to be good with favorable demographics driving demand and limited new supply in most of our markets. We will continue to enhance our operating platform to take advantage of the opportunities that the markets present, while delivering a seamless customer experience to our residents.

Wanted to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these results with that I will turn the call over to the operator to begin the Q&A session.

Michael Manelis: We will feel continued pressure on the repair and maintenance lines with some of the new technology fees like Smart Home and Wi-Fi, although the comp period from 2023 is pretty high, so that will help offset some of that growth rate. Insurance is clearly in for another significant increase, and right now, we expect real estate taxes to be higher than this year, but nothing that will create too much overall pressure. Some of the growth in these expense categories will be mitigated by continued operating efficiencies in the payroll line being created from our centralization initiatives.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

Speaker phone. Please make sure your mute function is turned off.

Military.

Again press Star one to ask a question, we'll pause for just a moment.

To allow everyone an opportunity to signal for questions.

And we will go first.

Steve <unk> with Evercore ISI.

Thanks, Good morning.

Michael Manelis: Let me wrap up by saying that the apartment business continues to be good with favorable demographics driving demand and limited new supply in most of our markets. We will continue to enhance our operating platform to take advantage of the opportunities that the markets present while delivering a seamless customer experience to our residents. 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 results.

Michael I was just wondering if you could expound a little bit on the October numbers on the new side and you know if you do sort of the I guess the implied change.

If you stripped out Seattle and San Francisco, the number was only down 30 bps, but that kind of implies that those markets were down.

High single digits to almost 10% in October.

Is sort of like a month free.

Or you know rents are down with some concessions.

Or are we thinking about that right and.

Unknown Executive: With that, I will turn the call over to the operator to begin the Q&A session. Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to a live signal feature or equipment. Again, press star one. One to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

I guess, just trying to figure out what really turned the market to be that south and it sounds like it's really in the urban core as opposed to lessen the suburban communities.

Yeah, Hey, Steve This is Michael So yes, you are thinking about correct.

When you look at the October new lease spreads and you drill into Seattle, San Francisco, and I'd kind of put the expansion markets in there as well they are running in the new lease change rate in the high negative single digits, if you drilled into San Francisco and Seattle I'll tell you about 400 basis points of that is driven.

Steve Sakwa: And we'll go first to Steve Sakwa with Evercore ISI. Thanks. Good morning. Michael, I was just wondering if you could expound a little bit on the October numbers on the news side. You know, if you do sort of the, I guess the implied change, you know, if you stripped out Seattle and San Francisco. You know, the number was only down 30 bits, but that kind of implies that those markets were down kind of high single digits to almost 10% in October, which is sort of like a month free, or, you know, rents are down with some concessions.

From the increased concession use so you can almost look at that negative a negative nine split it in half and say half is from increased concession use the other happens from rate.

Some of that rate decline is really a function of who moved out when do they move in but the rates are down about two 5% in those markets on a year over year basis.

And if we drilled in even deeper into their it is heavily concentrated into those urban cores of both Seattle and San Francisco, but as I said in the prepared remarks, the suburbs arent completely immune from it when you went around San Francisco, we are using some concessions on the east Bay concentrated in Alameda, but when you look.

Steve Sakwa: You know, are we thinking about that right? And, you know, I guess just trying to figure out, you know, what really turned the market to be that south? And it sounds like it's really in the urban core as opposed to less than the suburban communities. Yeah, hey, Steve, this is Michael. So, yeah, you are thinking about correct. When you look at the October new lease spreads and you drill into Seattle San Francisco.

At the value of the concessions, we're up at like six weeks call it 55% of the applications.

Receiving six weeks in Seattle, and San Francisco, which is very different than what you see in the suburbs, which are running less than a month.

Steve Sakwa: And I kind of put the expansion markets in there as well. They are running in the new lease change rate in the high negative single digits. If you drilled into San Francisco in Seattle, I'll tell you about 400 basis points of that is driven from the increased concession use. So you can almost look at that negative eight negative nine split it in half and say happens from increased concession use the other happens from rate.

Yeah.

Great and then just maybe a follow up on the transaction market Mark you sort of talked about maybe starting to see some some increased activity, particularly in the sunbelt I'm just curious.

We're aware.

Where that transaction market is whereas the bid ask I know you're sort of maybe a little bit indifferent on cap rates based on where you can sell but just how are you thinking about pricing and how would you maybe changed your underwriting.

Steve Sakwa: Some of that rate decline is really a function of who moved out when did they move in, but the rates are down about two to and a half percent in those markets on a year over year basis. And if we drilled in even deeper into there, it is heavily concentrated into those urban cores of both Seattle and San Francisco. But as I said in the prepared remarks, the suburbs aren't completely immune from it. When you went around San Francisco, we are using some concessions on the East Bay, concentrated in Alameda.

Hey, Steve It's Alex.

It seemed like over the summer things are settling down to say, a five and a quarter, maybe even a five five cap.

The last 60 days, we've changed that a lot with the spike in the 10 year.

It's really uncertain, what the market's doing right now so you hear about transactions closing, but those reflect pricing from.

Michael Manelis: But when you look at the value of the concessions, we're up at like six weeks, call it 55% of the applications receiving six weeks in Seattle and San Francisco, which is very different than what you see in the suburbs, which are running less than a month. Great.

The summer not not from right now so we're all feeling it out to their properties limited number of properties on the market.

No one knows exactly what cap rate reflects what the seller is willing to give up and what a buyer thinks is appropriate returns. So it definitely upward pressure on cap rates, we're pricing things all the time as we've talked about on past calls, we look hard at replacement cost and there might be compelling activity and we just think there's going to be more and more pressure to sell over time.

Steve Sakwa: And then just as maybe a follow up on the transaction market, Mark, you sort of talked about maybe starting to see some some increased activity, particularly in the sun belt. I'm just curious, you know, where, you know, where that transaction market is, you know, where is the bid ask. I know you're sort of maybe a little bit indifferent on cap rates based on where you can sell, but just how are you thinking about pricing and how have you maybe changed your underwriting?

People are going to have to accept a new reality, particularly in these high supply markets, particularly people who have exposure to caps or debt that's maturing.

And that there'll be more activity in that as the market kind of settles down over the next six to nine months or so.

Alexander Brackenridge: Hey Steve, it's Alex. So it seemed like over the summer things were settling down to say 5 and a quarter, maybe even a 5 and a half cap. The last 60 days have changed that a lot, you know, with the spike in the 10 year, it's really uncertain what the market's doing right now. So you hear about transactions closing, but those reflect pricing from, you know, the summer, not from right now.

Great. Thanks, that's it for me.

Oh.

We'll go next to Eric Wolfe with Citi.

Hey, thanks.

On your bad debt if the court process had been as quick as you thought I guess, how much more would have bad debt been down from the current one point to 7%.

And once you're through with the bulk of evictions in court proceedings, where would that take bad debt.

Alexander Brackenridge: So we're all feeling it out. So their properties limited number of properties on the market. No one knows exactly what cap rate, you know, reflects what the seller is willing to give up and what a buyer thinks is appropriate returns. So it's definitely upward pressure on cap rates. We're pricing things all the time, you know, as we've talked about on past calls, we look hard at replacement cost and there might be compelling activity.

Yeah, Hey, Eric it's Bob So had it kind of progressed as fast as what we would've thought instead of having call. It a one point to seven in the third quarter, we probably would have been about 10 basis points ahead.

Of that and would have trended closer so.

Yes, that's the trajectory that we were hopeful that were going to get to and what we're just seeing as Mark mentioned and Michael also mentioned in their prepared remarks is that it's just taking longer right and so as the residents are.

Alexander Brackenridge: And we just think there's going to be more and more pressure to sell over time where people are going to have to accept a new reality, particularly in these high supply markets, particularly if people have exposure to caps or debt that's maturing, and that there'll be more activity in the, you know, as the market kind of settles down over the next six to nine months or so.

Staying longer with us as they go through the process, we're incurring more bad debt overall, we do have excellent transparency and excellent visibility into view.

Steve Sakwa: Great, thanks. It's it for me.

Who is where in the cycle. So who's we're on in terms of where they are in court cases, whose awaiting lockouts and all of that stuff, but we don't have great visibility into when exactly those proceedings are going to occur.

Eric Wolfe: We'll go next to Eric Wolfe with City. Hey, thanks.

Bob Garechana: On your bad debt, if the court process had been as quick as you thought, I guess how much more would have bad debt been down from the current 1.27% and once you're through with the bulk of evictions and court proceedings, where would that take bad debt? Yeah, hey, Eric, it's Bob. So, had it kind of progressed as fast as what we would have thought, instead of having call it a 1.27 in the third quarter, we probably would have been about 10 basis points ahead of that and would have trended closer.

As Michael mentioned in his prepared remarks going forward, we do expect that at some point this will accelerate because the backlog from the pandemic era.

We will be worked through and that we at some point, we'll be able to get back to that 50 basis points, particularly given the fact that the credit quality of our customer hasn't changed.

But it is harder to swag, where we're going to end up.

On a full year basis.

Eric It's mark just to add to that we certainly.

Hope 50 basis points is where we end up but I would say that the fact that in some of these markets. The process has been maybe more permanently elongated because of either rights to counsel and funded rights to council and some of our markets and just general more bureaucratic effort required to get through it you may have folks and that's what Michael was.

Bob Garechana: So, that's the trajectory that we were hopeful that we were going to get to and what we're just seeing as Mark mentioned and Michael also mentioned in their prepared remarks is that it's just taking longer, right? And so, as the residents are, you know, staying longer with us as they go through the process, we're incurring more bad debt overall. We do have excellent transparency and excellent visibility and to do, you know, who's where in the cycle?

Alluding to in his remarks, we arent seeing more delinquency with our new residents were seeing what I'll call the normal amount, but usually they would be out in a month or two and now it's just taking longer and that means theyre going to hit our bad debt reserve Theres still leaving but I just think again, we feel like the credit quality has not changed from all we can see.

Bob Garechana: So, who's where on terms of where they are in court cases? Who's awaiting lockouts and all of that stuff? But we don't have great visibility into when exactly those proceedings are going to occur. As Michael mentioned is prepared remarks going forward, we do expect that at some point this will accelerate because the backlog from the pandemic era will be worked through and that we, at some point, will be able to get back to that 50 basis points, particularly given the fact that the credit quality of our customer hasn't changed.

But the underlying bureaucratic process and regulatory environment has and it may be that we earned that pointed to something modestly higher than 50 basis points going forward again, not because the customer changed but more because of the process data.

Mark Parrell: But it's harder to swag where we're going to end up on a full year basis. And Eric, it's Mark, just to add to that. We certainly hope 50 basis points is where we end up. But I would say that the fact that in some of these markets, the process has been maybe more permanently elongated because of either rights to counsel and funded rights to counsel in some of our markets and just general more bureaucratic effort required to get through it.

Got it that's helpful and I guess that sort of brings up how much more would be just what the new normal bureaucratic process like not make it 50 to 70, but I guess my my my other question was really just on the loss to lease at this point in the year.

How you think that informs blended rent growth next year because in the loss to lease will probably just go lower maybe be like zero by the end of the year.

You included in the presentation, but wasn't sure how to translate that.

Mark Parrell: You may have, folks, and that's what Michael was alluding to in his remarks. We aren't seeing more delinquency with our new residents. We're seeing what I'll call the normal amount, but usually they'd be out in a month or two. And now it's just taking longer, and that means they're going to hit our bad debt reserve. They're still leaving. But I just think, you know, again, we feel like the credit quality has not changed from all we can see.

8% loss to lease.

October to some type of rent growth in 2024.

Yeah, Eric This is Michel so yeah, the 80 basis points that we included in the management presentations the snapshot as of October 15th and we're just giving you. The historical context, so that number will kind of decelerate a little bit as you get towards the end of the year, but theres nothing that suggests that right now we don't expect our loss to lease.

Mark Parrell: But the underlying bureaucratic process and regulatory environment has, and it may be that we aren't appointed to something modestly higher than 50 basis points going forward. Again, not because the customer changed, but more because the process did.

To be in a relatively normal place.

Art there.

Hi fold that into the blended assumptions for next year I'm going to kind of stay away from giving any specific guidance on 'twenty four I think what I would look at is the hardest part of the piece right. Now is for US is that intra period growth rate what are you going to layer in by market and we're in the very early stages.

Eric Wolfe: Yeah, that's a tell point. I guess that sort of brings up how much more would be just with the new normal bureaucratic process, like that make it 50 into the 70.

Michael Manelis: But I guess my my my other question was was really just on the loft belief at this point in the year, sort of how you think that informs when the rent print court next year, because that's in the loft lease will probably just go lower, maybe be like zero by the end of the year. You included in the presentation, but wasn't sure how to translate that, that sort of point 8% lost the lease in the October to some kind of rent growth in 2024.

This budget process that includes both a top down and bottom up approach, but I can tell you that.

Do expect like Seattle, and the expansion markets to be pressured from new supply.

We continue to see and expect the strength in the east coast markets and we will model some solid growth in southern California, driven in part by the improvements in delinquency that we just talked about.

Michael Manelis: Hey Eric, this is Michael. So yeah, the 80 basis points that we included in the management presentation, the snapshot at the back, October 15th, and we're just giving you the historical context. So that number will kind of decelerate a little bit as you get towards the end of the year, but there's nothing that suggests that right now we don't expect our loss to lease to be in a relatively normal place to start the year.

San Francisco has potential but I think you can tell from the prepared remarks, we're going to need to see a few consecutive quarters of improving fundamentals like before we adjust the somewhat muted current expectations for next year, but if you really put all those factors together you look at where that embedded range as you think about loss.

The lease being in a relatively normal you'll hold in the intra period comments that I. Just gave you. It really does still puts you in a place where we expect to see solid growth next year.

Michael Manelis: Interim of how you fold that into the blended assumptions for next year, I'm going to kind of stay away from, you know, giving any specific guidance on 24. I think what I would look at is the hardest part of the piece right now is for us is that intra period growth rate. What are you going to layer in by market? And we're in the very early stages of this budget process that includes both the opt-down and bottom up approach.

Okay, great. Thank you.

We will go next to John Pawlowski with Green Street.

Okay. Thanks for the time.

First question is on the transaction market it feels like private market pricing, particularly in the sunbelt has been very slow to adjust.

Michael Manelis: But I could tell you that do expect like Seattle and the expansion markets to be pressured from new supply. We continue to see and expect the strength in the East Coast markets and will model some solid growth in Southern California driven in part by the improvements and delinquency that we just talked about. San Francisco has potential, but I think you could tell from the prepare remarks. We're going to need to see a few consecutive quarters of improving fundamentals like before we adjust the somewhat muted current expectations for next year.

The reality of higher rates, but also declines in market rents so.

In recent quarters have you considered paying a complete pause on these one off acquisitions in the sunbelt or are you considering that going forward.

Until until more distressed flows through the private market.

Hey, John It's Mark I'll start with that I mean, we have been matched funding that so this year was a pretty modest year for US 350 odd million of buys and sells and frankly, we have paused our acquisition activity. The deals you saw closed there.

Michael Manelis: But if you really put all those factors together, you look at where that embedded range is. You think about lost the least being in a relatively normal. You hold in the intra period comments that I just gave you. It really does still put you in a place where we expect to see solid growth next year.

They priced really in the early second quarter and one of them went through a long assumption loan assumption process and the other one had a lease up in any elongated close process. So we really aren't buying anything right now what you see out there in the release is really that tail activity. We may expose a few more assets for sale we're always.

Eric Wolfe: Good, great. Thank you.

John Pawlowski: The next two, John Pawlowski, with Green Street. Thanks for the time. The first question is on the transaction market. It feels like private market pricing, particularly in the Sunbelt. It's been very slow to adjust the reality of higher rates, but also declines in market rent.

Doing that trying to figure out where that market is and continue to execute on our strategy of moving capital around but before we commit to your point to buy assets at this price, we're going to sort of let market settle out a bit or look for an opportunity to just obviously very good.

Mark Parrell: So, serious and recent quarters, have you considered taking complete pause on these one off acquisitions in the Sunbelt, or are you considering it going forward until more distress flows through the private market? John, it's Mark. I'll start with that. I mean, we have been match funding that. So, this year, you know, it was a pretty modest year for us, you know, 350 odd million of buys and sells. And frankly, we have paused our acquisition activities.

Okay that makes sense last question is on New Jersey rent control. So obviously nutrition media rumors out there about a few asset being subjective and so hoping you can give us a range of potential financial impact on these assets and then is there additional risk working in New Jersey Port your broader.

Jersey portfolio that we may hear about in the coming months or years.

Mark Parrell: The deals you saw closed, they priced really in the early second quarter, and one of them went through a long assumption, loan assumption process, and the other one had a lease up in any elongated close process. So, we really aren't buying anything right now. What you see out there in the release is really that tail activity. We may expose a few more assets for sale. We're always doing that, trying to figure out where that market is, and continue to execute on the strategy of, you know, moving the capital around.

Yeah. Thanks, John So I'll give a little color on that I'm, not going to be able to be terribly specific because it is pending litigation and giving you a range is something I'm, just not able to do.

But we arent the only ones facing these sort of issues, both public and private competitors of ours in Northern New Jersey have these litigation concerns.

In our case that particular matter Youre talking about in Jersey City. There was a ruling in our favor actually a year ago that these properties. These two towers were exempt from rent control.

Mark Parrell: But before we commit to your point to buy assets at this price, we're going to sort of let market set a lot of bid or look for an opportunity that's just obviously very good. Okay, make sense.

And administrative entity that administers these rent rules. The decision that was announced a couple of weeks ago was by a politically appointed board that overruled the Bureau's original decision here.

John Pawlowski: The last question is on New Jersey rent control. So, obviously, there's some media rumors out there about a few assets being subject to roll. And so, hoping you can give us a range of potential financial impact on these assets. And then, is there additional risk working in the Jersey port, your broader Jersey portfolio that we may hear about in the coming coming months or years? Yeah, thanks, John. So, I'll give a little color on that.

We completely disagree with that and we're going to go and litigate that in the courts and have our say there and try not to talk about it too much in the press except to say again, we think whether it's in northern New Jersey or elsewhere in the portfolio. We filed to follow the rules of the road, we feel like we comply with whether it's rental control rules or noticed.

Rules or whatever they may be in all these markets. Those rules are complex they are ever changing and we got a great legal team a great operations team that follows up on all of that so I don't have any sense of an overhanging doom, but I think this is another sign of just political pressure that's manifesting itself in litigation in some of these <unk>.

Mark Parrell: I'm not going to be able to be terribly specific because it is pending litigation and giving you a range is something I'm just not able to do. But, you know, we aren't the only ones facing these sort of issues, both public and private competitors of ours in northern New Jersey have these litigation concerns. In our case, the particular matter you're talking about in Jersey City, there was a ruling in our favor actually a year ago that these properties, these two towers were exempt from rent control by an administrative entity that administers these rent rules.

Markets, rather than just going through the process of trying to influence your public officials to change the rental rules.

Yeah.

Okay. Thanks for the time.

Yes.

Mark Parrell: The decision that was announced a couple of weeks ago was by a politically appointed board that overruled the bureau's original decision here. And we completely disagree with that. And we're going to go and litigate that in the courts and have our say there and try not to talk about it too much in the press except to say, again, we think whether it's in northern New Jersey or elsewhere in the portfolio, we follow the rules of the road.

Well go next to Alexander Goldfarb with Piper Sandler.

Hey.

Good morning out there.

And Mark maybe just continuing that that theme on the Jersey City.

You and I have chatted before on the risks of tax exempt deals and deals that have.

Incentives that years or decades later to come back to bite.

Mark Parrell: We feel like we comply with whether it's rental control rules or notice rules or whatever they may be in all these markets. Those rules are complex. They're ever changing. We got a great legal team, a great operations team that follows up on all that. So I don't have any sense of an overhanging doom. But I think this is another sign of just political pressure that's manifesting itself in litigation in some of these markets rather than just going through the process of trying to influence your public officials to change the rental rules.

So in thinking about this do you still see the appetite for EQM to pursue deals, especially in politically charged municipalities deals that have tax incentives as worth the longer term risk or what's going on here is <unk>.

Your view is hey, when we underwrite these deals even if we shave off.

A few points for the risks for the political risk going after these tax incentive deals are still economically worth it.

Yes. Thanks for the question, Alex I go up a level and say political risk. So when you look at these markets, it's more about us managing political risk in these markets and our feelings about regulatory matters.

John Pawlowski: Okay, thanks for the time, you.

In New Jersey, I think is a market where rational capital allocators that is probably disqualified itself from material additional investment by us in terms of development of our new asset acquisitions, because some of these regulatory things are coming out of left field, they're really not the result of incentives. These particular ones incentives.

Mark Parrell: Hey, morning, morning out there. And Mark, maybe just continuing that theme on the Jersey City. You and I have shouted before on the risks of tax exempt deals and deals that have, you know, incentives that, you know, years or decades later could come back to bite. So in thinking about this, do you still see the appetite for EQR to pursue deals, especially in politically, you know, charged municipalities, deals that have tax incentives as worth the longer term risk, or what's going on here is, you know, your view is hey, when we underwrite these deals, even if we shave off, you know, a few points for the risk, for the political risk, you know, going after these tax incentive deals are still economically worth it.

Construction what was done is these were placed in.

A state where for a number of years they were exempt from local existing rent control rules and Thats. What this whole discussion is about it. It is not about sort of a 421 <unk> type question just to be clear, but I get your point for example in Atlanta, almost everything built there has a tax incentive that tax incentives really well understood.

We price it in there at the beginning we understand the cap rate.

And we understand what happens at the end of the deal in terms of the incentive going away 10 years in or whatnot. So I guess, it's it's more of an indicator. These different lawsuits of political risk in places that I think for us and for others will be.

Mark Parrell: Yeah, thanks for the question Alex. I go up a level and say political risk. So when you look at these markets, it's more about us managing political risk in these markets and our feelings about regulatory matters. In New Jersey, I think, as a market, we are rational capital allocators. That is probably disqualified itself from material additional investment by us, terms of development or new asset acquisitions because some of these regulatory things are coming out of left field.

Less attractive to allocate development capital or acquisition capital in.

In places like Atlanta, where you feel more comfortable with political risk and it's just really an underwriting exercise to price the tax benefit in the deal that the city did with good reason to try and encourage affordable housing in that market or at least buildings that have affordable components.

Mark Parrell: They're really not the result of incentives, these particular ones, incentives on construction, what was done is these were placed in a state where for a number of years they were exempt from local existing rent control rules. And that's what this whole discussion is about. It's not about sort of a 421A type question, just to be clear, but I get your point. For example, in Atlanta, almost everything built there has a tax incentive.

And then the second question by the way Mark just speaking of political risk, obviously rents being down shoots a whole in the whole yield star litigation argument. So.

Yes, there is a positive about our third quarter earnings, but thinking about Seattle and San Francisco those are two markets, where the downtown's continued to suffer and have issues recovering by contrast, the issues in the sunbelt are really theres a lot of supply this year.

Mark Parrell: That tax incentive is really well understood. We price it in there at the beginning. We understand the cap rate. And we understand what happens at the end of the deal in terms of the incentive going away 10 years in or whatnot. So I guess it's more of an indicator these different lawsuits of political risk and places that I think for us and for others will be less attractive to allocate development capital or acquisition capital.

And then that supply goes away so as you think longer term.

It almost seems like the.

The resolution of Seattle, and San Francisco to your point is political and it's unknown for the recovery, whereas the sunbelt is known because you can see the product delivering that theres nothing behind it. So again thinking about EUR and capital allocation are you guys still comfortable in the belief that Seattle and San Fran.

Mark Parrell: And places like Atlanta where you feel more comfortable with political risk. And it's just really an underwriting exercise to price the tax benefit and the deal that the city did with good reason to try and encourage affordable housing and that market or at least buildings that have affordable components. And then the second question, by the way, Mark, just being a political risk obviously, rents being down shoots a hole in the whole yield star litigation argument.

Anne downtown will recover or at what point do you sort of throw up your hands and go.

The traditional recovery isn't there we have to think differently. This time.

Yeah. Thanks, great questions, So I'm going to start by saying the sunbelt definitely we'll have a lot lot less supply in three years, but it doesn't mean, you'll never be more supply again I mean, it's proven.

Mark Parrell: So I guess there is a positive out of third quarter earnings. But thinking about Seattle and San Francisco, those are two markets where the downtowns continue to suffer and have issues recovering. By contrast, the issues in the Sunbelt are really, there's a lot of supply this year into next and then that supply goes away. So as you think, longer term, it almost seems like, the resolution of Seattle and San Francisco to your point is political and it's unknown for the recovery, whereas the Sunbelt is known because you can see the product delivering and that there's nothing behind it.

Bit of a cycle that happens again, so I wanted to speak to San Francisco and its merits Seattle real quick and then sum it up here, but.

Mark Parrell: So again, think about EQR and capital allocation. Are you guys still comfortable in the belief that Seattle and SanFran downtowns will recover or at what point you sort of throw up your hands and go, you know, the traditional recovery isn't there. We have to think differently this time. Yeah, thanks. Great question. So I'm going to start by saying that Sunbelt definitely will have a lot, lot less supply in three years, but it doesn't mean they'll never be more supply again.

We got to have a little longer term perspective for us because we're long term investors in these markets. So a little background on San Francisco I know you've been around the real estate World. A long time. This is probably the best performing large market in terms of rent growth in the country over long periods of time, it's got the high housing costs, we want Scott These big barriers to.

<unk>, Scott often explosive high wage job growth and it's historically been a super desirable place for our resident demographic to live but lately I admit a little less so prop 13 also helps us limit those real estate tax increases and that's our biggest expense. So there is the framing of that market is very good but it is.

A little market and that's part of why we've been seeing since 2018, we wanted to lower exposure, but you get paid for the volatility. So for example post Dfc EQ our same store revenues in San Francisco, They were down over 2% each year for two years in a row. So we got hammered a little bit there, but for the next five years on average.

Mark Parrell: I mean, it's proven, you know, every bit of the cycle, that happens again. So I want to speak to San Francisco and it's merit Seattle real quick and then sum it up here. But, you know, we got to have a little longer term perspective for us because we're long term investors in these markets. So a little background on San Francisco. I know you've been around the real estate world a long time.

Our same store revenue was up 9% a year I think our shareholders got paid back for taking that risk and volatility.

I think the conditions in the job market in San Francisco can improve pretty rapidly. It certainly is.

Mark Parrell: This is probably the best performing large market in terms of rent growth in the country over a long periods of time. It's got the high housing costs we want. It's got these big barriers to supply. It's got often explosive high wage job growth. And it's historically been a super desirable place for our resident demographic to live. But lately I admit a little less. So prop 13 also helps us limit, you know, those real estate tax increases and that's our biggest expense.

Along with Redmond, Washington, The center of the artificial intelligence employment boom that we hope is coming but I will fully can see theres, an elongated recovery going on in San Francisco and this management team is responsible if it's responsible for anything it's responsible for being optimistic and some of the things we saw in the middle of the year in that market made us feel like that recover.

He was coming right now we still have faith that will come but in terms of capital allocation, we're going to lighten the load downtown we've said that we have been selling in that market. We even sold this quarter. So far an asset in San Francisco, but we like that exposure to the tech industry. There. We still think it's the tech capital of the world and the argument on.

Mark Parrell: So there's the framing in that market is very important. Very good, but it is a volatile market and that's part of why we've been saying since 2018 we wanted to lower exposure, but you get paid for the volatility. So, for example, post GFC EQ our same store revenues in San Francisco. They were down over 2% each year for two years in a row. So we got hammered a little bit there. But for the next five years on average, our same store revenue was up 9% a year.

Seattle is not a lot different I mean, it has been a strong performer over time again, when we look back in that market, we were down gosh, 4% on average for two years and 29% and 2010. After the GSC and then were up 6% or more for five years. After that so again you get paid for your volatility Seattle's a plea.

Mark Parrell: I think our shareholders got paid back for taking that risk and that volatility. You know, I think the conditions in the job market in San Francisco can improve pretty rapidly. It's certainly along with Redmond Washington, the center of the artificial intelligence employment boom that we hope is coming. But I will fully concede there's an elongated recovery going out in San Francisco. We still have faith it will come. But in terms of capital allocation, you were going to lighten the low downtown.

Where our balances a little off where we have been saying and we have been moving assets and capital out of downtown and into the suburbs and Youll see us continue to do that but we like that market. So I believe I think the management and the board believes in those markets. I think we are a little overexposed to San Francisco, we've been forward about that a little.

<unk> to the downtown areas, but.

Longer term, we think that's where this demographic at high wage earners, who arent going to lose their jobs, because the AI arent going to lose their jobs because of automation are going to get the biggest pay increases can handle all of this inflation risk. That's why we think these people are so that's where we're headed with our capital, but I am as impatient as you are to see those markets improve.

Mark Parrell: We've said that we have been selling in that market. We even sold this quarter so far in asset in San Francisco. But we like that exposure to the tech industry there. We still think it's the tech capital of the world. And the argument on Seattle is not a lot different. I mean, it has been a strong performer over time. Again, when we look back on that market, we were down, gosh, 4% on average for two years in 2009 and 2010 after the GFC.

Mark Parrell: And then we're up 6% or more for five years after that. So again, you get paid for your volatility. Seattle's a place where our balance is a little off where we have been saying and we have been moving assets and capital out of downtown and into the suburbs and you'll see us continue to do that. But we like that market. So, you know, I believe I think the management and the board believes in those markets.

Thank you Mark.

Yeah.

We'll go next to St.

Juste with Mizuho.

Hey, there.

I'd love to get some clarification on a comment you made earlier in your remarks that it's not uncommon to see new lease rate declines of minus four to minus 5% by December and given the weakness in San Fran and Seattle that you expect will be slightly more negative than that so.

Am I correct to read that you are implying that your entire portfolio new lease rate that you expect to be minus 45 minus 5% we're definitely weaker.

And then what does that sort of imply a new lease rates youre expecting for San Fran and Seattle by that point. Thanks.

Mark Parrell: I think we are a little overexposed to San Francisco. We've been forward about that. A little exposed to the downtown areas, but you know, longer term. We think that's where this demographic of high wage earners aren't going to lose their jobs because AI aren't going to lose their jobs because automation are going to get the biggest pay increases can handle all this inflation risk. That's what we think these people are. So, that's where we're headed with our capital. But I'm as impatient as you are to see those markets improve.

Mark Parrell: Thank you, Mark.

Yes. This is Michael so yeah, just to give you like some historical context. So when we when we say historical norms I'm really just looking at like 2017, 2018, 2019 and to give you.

In new lease change would typically in the month of October be like a negative one and a half to a to November goes down to like a negative three to negative four and December would be like a negative four negative 5%. So right now youre seeing were putting up a number in October that's a negative three one because of the inclusion of <unk>.

Haendel St. Juste: The next two, Haendel, St. Juste with Mizzouho. Hey there. I'd like to get some clarification on a comment you made earlier in your remarks that it's not uncommon to see newly straight declines of minus 4 to minus 5% by December. And given the weakness in San Frananity, I know that you expect you'll be slightly more negative than that. So my director read that you're implying that your entire portfolio newly straight, you expect you to be minus 4 to minus 5% or potentially weaker.

San Francisco, and Seattle, and really the pronounced concession use that we have going on in those markets. So as you think about the fourth quarter for us.

Haendel St. Juste: And then what does that sort of imply for newly straights or expecting for San Frananity at all by that point? Thanks. Yeah, A&L, this is Michael. So yeah, just to give you like some historical context. So when we say historical norms, I'm really just looking at like 2017, 2018, 2019. And to give you in new lease change, would typically in the month of October be like an negative one and a half to a two, November goes down to like a negative three to a negative four.

I think our new lease change for the full quarter is going to be somewhere around a negative four but if you go all the way to the month of December given what we're seeing I don't know why we won't be a negative five or even slightly above that negative vibe in that spot market, but for the quarter itself I would put new lease change somewhere around that.

Close to negative 4%.

Renewals have been really stable for us and really have been doing better than what we thought we will hold somewhere right around that 5% net.

Net effective change on achieved renewal increases and when you put those two factors together, that's going to give you a blended somewhere around one and a quarter give or take 10 basis points either way.

Got it and any any color Ernie you want to share on new lease rates for San Fran and Seattle.

Haendel St. Juste: And December would be like a negative four or negative 5%. So right now, you're seeing we're putting up a number in October. That's a negative three one because of the inclusion of San Francisco in Seattle. And really the pronounced concession you that we have going on in those markets. So as you think about the fourth quarter for us, I think our new lease change for the full quarter is going to be somewhere around a negative four.

So look I mean, we're running high single digits right now I think San Francisco stays kind of at that level and I think a little bit has to do with if you backed up and think about what are we doing in the fourth quarter. This time last year, we did have concessions in play in Seattle. So we were like a mine.

Six new lease change in the fourth quarter of last year. So I would tell you maybe we kind of just hold the line in this high single digit for the balance of the year in those markets.

Haendel St. Juste: But if you go all the way to the month of December, given what we're seeing, I don't know why we won't be a negative five or even slightly above that negative five in that spot month. But for the quarter itself, I would put new lease change somewhere around that close to negative 4%. You know, renewals have been really stable for us and really have been doing better than what we thought. We will hold somewhere right around that 5% that effective change on achieve.

Great that's helpful and if I may.

One more I'm trying to get a better understanding of the range a reasonable expectation that we should have for your same store revenue next year.

Outlined in your presentation the earn in of one three to one five which is helpful, but the new and renewals getting softer blended towards 2% for the fourth quarter negative new leases.

Haendel St. Juste: Renewal increases. And when you put those two factors together, that's going to give you a blended somewhere around one and a quarter, give or take 10 basis points either way. Got any any color or any use you want to share on newly saved for San Francisco. Hello, I mean, we're running high single digits right now. I think San Francisco stays kind of at that level. And I think a little bit has to do with if you back up and think about what were we doing in the fourth quarter this time last year, we did have concessions in play in Seattle.

Bad debts, improving but slower than you expected in occupancy I think there's a bit of a tough comp. So I guess, putting it all together I can't quite seem to get some seasonal revenue projection for next year above the mid twos is that maybe.

Fair or what maybe you could I be missing or underappreciated.

Well I appreciate the question handle its mark, but we can't answer that with any specificity, we just sort of sharing what we know at this time, we are in the middle of the budget process, which is both top down and bottoms up in places like Seattle, and the expansion markets supply and close in proximate supply is going to matter or other places.

Haendel St. Juste: So we were like a minus six new lease change in the fourth quarter of last year. So I would tell you, maybe we kind of just hold the line in this high single digit for the balance of the air in those markets.

Michael Manelis: Great. That's helpful.

We're looking at job forecasts and how well occupied we are so I think thats just news yet to be yet to be ready.

Haendel St. Juste: If I may, one more, I'm trying to get a better understanding of the range of reasonable expectations that we should have for your same store revenue next year. You outlined in your presentation the earnings of one three to one five, which is helpful, but the new and renewals getting softer blended towards 2% for the fourth quarter negative new leases. The bad that's improving, but for the next year above the mid to that maybe unfair or what maybe could I be missing or under appreciating.

Fair enough fair enough, but maybe can I ask you about rite aid then.

You think about back filling those stores and if we expect should expect that to be a drag or maybe a tailwind into next year.

And Alex Alec we.

We actually have a lease in place already so we're very excited about it it's going to be a good good user it's going to be a great amenity for our residents and for the neighborhood. So it's a more.

Matter of getting them into this space and that's going to take a little bit of time through next year.

Six months or so and then there will be in place.

Yes, <unk> from a P&L standpoint.

As Alec mentioned, there's two things that will go on and determine the P&L. It's just how fast those folks get in place the new the new lease because thats when we will start recognizing the revenue for them in.

Haendel St. Juste: Well, I appreciate the question, Andel, it's Mark, but we can't answer that with any specificity. We just sort of sharing what we know at this time. We're in the middle of the budget process, which is both top down and bottoms up, you know, in places like Seattle and the expansion market supply and close in proximate supply is going to matter. Other places we're looking at job forecasts and how well occupied we are. So I think that's just news yet to be yet to be ready.

In 2024, and what that impact is relative to the right. We had the write off which we're not going to have again in our base year in 2023. So those two pieces in that rate of growth, but I would expect.

In all likelihood it'll be relatively flat because you had the impact in 23 of the $1 $5 million write offs.

I appreciate it thank you.

Alec Brackenridge: Fair enough, fair enough, but maybe you can ask you about the right aid then, how you think about back building those doors in the weeks should expect that to be a drag or maybe a tail end to next year. Hey, Andel, it's Alec. We actually have a lease in place already, so we're very excited about it. It's going to be a good good user. It's going to be a great amenity for our residents and for the neighborhood.

We'll go next to Josh.

Bank of America.

Yeah, Hey, guys. Thanks for the time.

Just wanted to touch base on same store capex.

Do you increase it again to 3600 per apartment unit.

Alec Brackenridge: So, you know, it's a matter of getting them into the space and that's going to take a little bit of time through next year. Six months or so, and then they'll be in place. Yeah, Andel from a PNL standpoint, as Alec mentioned, there's two things that will go on in terms of the PNL is just how fast those folks get in place, the new the new lease, because that's when we'll start recognizing the revenue for them in 2024 and what that impact is relative to the right.

I think if I look back like a year ago I think it was 2600 department I'm, just kind of curious what what's going on there or what are you guys seeing and if there's any shifting from like same store expenses in the capex bucket buckets or just Verizon calls.

Hey, Josh it's Alex.

Yes, Youre right. It did go up and but it went up for a variety of reasons that I'll go through.

Not related to shifting expenses into capital, it's really related to starting the year thinking that spending capital on our portfolio was more compelling use of capital than acquisitions with development and we had a big budget.

Alec Brackenridge: You know, we had the right off, which we're not going to have again in our base year in 2023. So those two pieces in that rate of growth. But I would expect, you know, in all likelihood, it'll be relatively flat, because you have the impact in 23 of the $1.5 million right off. Appreciate it.

Alec Brackenridge: Thank you.

Handicap, the budget, a little bit because things generally take a little longer its construction things go wrong contractors misstates.

And through the first half of the year, we were right on track for that we actually had a very productive summer and so we ended up doing more work than I thought we would do so.

Josh Dennerlein: We'll go next to Josh dinner line with Bank of America. Yeah, hey guys, thanks for the time. Just wanted to touch base on the same store catbacks. I like it. You increase it again to $3,600 per apartment unit. I look back like a year ago, I think it was like 2600 department. I'm just kind of curious what what's going on there. What do you guys see? And if there's any shifting from like James for expenses and the catbacks buckets are just rising costs.

Partially that it's also we added in some ROI projects, specifically some solar panel installations that have a great return.

Werent available to us until the middle of the year and.

And we did have some storm damage that carried through into the third quarter and on top of that we've had some smart rents installations that we've accelerated.

That added on top of that so we expect that next year will be back more to normalized spend rate and again it doesn't relate to any accounting changes.

Josh Dennerlein: Hey, Josh. It's Alec. Yeah, you're right. It did go up and but a one up for a variety of reasons that I'll go through. We not related to shifting expenses in the capital. It's really related to starting the year thinking that spending capital on our portfolio was more compelling use of capital than acquisitions or development. And we had a big budget. I always handicap the budget a little bit because things generally take a little longer.

Okay, Great appreciate that color and then I wanted to just explore the cadence of lease rate growth through October or just in particular the new.

Was there.

Tober.

Progressing was there like a big drop off towards the tail end of the month and then if there was where you kind of.

Doing that in response to maintaining occupancy or just kind of what's the dynamic playing out.

Josh Dennerlein: It's construction things go wrong. Contractors misstates. And through the first half of the year, we were right on track for that. We actually had a very productive summer. And so we ended up doing more work than I thought we would do. So it's partially that. It's also we added in some ROI projects, specifically some solar panel installations that have a great return that weren't available to us until the middle of the year. And we did have some storm damage that carried through into the third quarter. And on top of that, we've had some smart rents and rent installations that we've accelerated that added on top of that.

Yes, Josh this is Michael I think I would back up a little bit and say, it's probably like that third week in September and again youre hitting a period of time, which you see seasonal softening. So it is not uncommon to see demand start to soften and what we saw in that kind of later part of September.

Specifically in the San Francisco, and Seattle market as things were trailing off you clearly saw a market react very quickly with concessions, increasing and rates coming down to basically get enough demand to hold occupancy and that has manifested itself throughout the month.

Michael Manelis: So we expect that next year we'll be back more to normalize spend rate. And again, it doesn't relate to any accounting change. Thank you. Okay, great, appreciate that color. Then I wanted to just explore the cadence of we straight growth throughout October, I guess particularly the new, was there, as October was progressing, was there like a big drop off towards the tail end of the month and then if there was, were you kind of doing that in response to maintaining occupancy or were just kind of with the dynamic playing out?

October with continuing deceleration, but it's not like the deceleration has been even more rapid through October I would tell you. It's kind of been at this level now for a while but we do expect rates to keep decelerating a little bit but the demand right now in those markets needs to be stronger in order to stop the <unk>.

Celebration rate and we're just we don't have any thing that would suggest that we should model that way right now.

Michael Manelis: Got Josh, this is Michael, I think I would back you up a little bit and say it's probably like that third week in September and again, you're hitting a period of time which you see seasonal softening. So it is not uncommon to see demand start to soften. And what we saw in that kind of later part of September, specifically in the San Francisco and Seattle market, as things were trailing off, you clearly saw a market react very quickly with concessions increasing and rates coming down to basically get enough demand to hold occupancies.

I appreciate the time thanks, guys.

Well go next to Michael Goldsmith with UBS.

Good morning, Thanks, a lot for taking my question, we've seen new lease rate growth fall quite a bit faster than renewal rate too how long can the gap remain wide and are renewing residents more aware of pricing and pushing back harder on renewals or are they just accepting the rent increase thanks.

Hey, Michael this is Michael.

So we are negotiating a little bit more but again, that's not uncommon to do in the fourth quarter of any year. We have quotes out for the next 90 days I think our residents are clearly aware of what's happening in the marketplace you definitely have more conversations being taking place within our centralized <unk>.

Michael Manelis: And that has manifested itself throughout the month of October with continuing deceleration, but it's not like the deceleration has been even more rapid through October. I would tell you it's kind of been at this level now for a while, but we do expect rates to keep decelerating a little bit, but the demand right now in those markets needs to be stronger in order to stop the deceleration rate. And we're just, we don't have anything that would suggest that we should model that way right now. Appreciate the time. Thanks.

<unk> team, we're negotiating we have quotes out somewhere in that kind of mid seven range and we expect to achieve somewhere around the 5% maybe it's like low sevens to mid seven depending on the month that we have out there, but we have a lot of confidence that the spreads you are seeing is not uncommon to see in the fourth quarters, if new law.

Michael Goldsmith: The next two Michael Goldsmith with UBS. Good morning. Thanks for taking my question. We've seen new lease rate growth fall quite a bit faster than renewal rate. So how long can the gap remain wide and are renewing residents more aware of pricing and pushing back harder on renewals? Are they just accepting the rent increase? Thanks. Yeah, Michael. This is Michael.

Lease rates typically go negative our renewals typically hold up in that 4% to 5% range. So I don't really see anything that suggest that the spread is not going to continue as we see it.

And then as we turned the year again, it's really more of a function of what happens with intra period rate growth, but as you start the year off Youll see us start tightening up some of the renewal negotiations.

But we expect a lot of stability on that renewal front and what we're still trying to figure out is how to peg that new lease change assumptions for the year.

Michael Manelis: So we are negotiating a little bit more, but again, that's not uncommon to do in the fourth quarter of any year. We have quotes out for the next 90 days. I think our residents are clearly aware of what's happening in the marketplace. You definitely have kind of more conversations being, you know, taking place within our centralized renewal team. We're negotiating. We have quotes out somewhere in that kind of mid seven range and we expect to achieve somewhere around the five percent.

That makes sense and my second question is in this environment. How do you think about your relationship with toll brothers.

Is there a greater opportunity to push harder and deliver units into a more favorable supply environment and the expansion markets and then along with that have you changed your required yields on development.

Michael Manelis: Maybe it's like low sevens to mid seven depending on the month that we have out there, but we have a lot of confidence that the spread you're seeing is not uncommon to see in the fourth quarters. If new lease rates typically go negative, our renewals typically hold up in that four to five percent range. So I don't really see anything that suggests that the spread is not going to continue as we see it.

I'm going to split that in half to talk about toll it's Mark pardon me and then I'll ask Alex to speak to our required hurdle rates on development. So we have a great relationship with the folks at all they see the same thing we do that there is a need to moderate development in some of these markets. We have three deals delivering one of them.

We move forward a couple of quarters I mean, they're told US everything we thought they were they are an expert developer builder and theyre doing a great job, obviously, we're going to face those sustained supply issues in Dallas and everybody else's when he's III assets get up and running so I'm not sure why we delay anything and I'm getting the asset up and running getting heads in beds getting income.

Michael Manelis: And then as we turn the year again, it's really more of a function of what happens within the period rate growth. But as you start the year off, you'll see us start tightening up some of the renewal negotiations. But we expect a lot of stability on that renewal front. And what we're still trying to figure out is how to peg that new lease change assumptions for the year.

Michael Goldsmith: That makes sense.

That's in our in the shareholders' best interest. So that's what we'll do and we're just we're assuming that starting at the beginning of next year Middle of next year, we'll have all three of those development deals in the lease up process.

Mark Parrell: And my second question is in this environment. How do you think about your relationship with told brothers. Is there a greater opportunity to push harder and deliver units into a more favorable supply environment in the expansion to markets and then along with that have you changed your acquired yield. Development. Thanks. I'm going to split that half and talk about toll. It's Mark, pardon me, and I'm going to ask Gallic to speak to our required, you know, hurdle rates on development.

We will report back, but I wouldnt delay any of those if you are talking about other starts with toll and anyone else that goes more to Alex response on hurdle rates, Yes, I think yes, it's Alex.

With the 10 year in the high fours, you think cap rates have got to be in the high fives.

Think that development yields we gotta be mid sixes or high sixes. So the challenge right now is just getting a project to underwrite with that that hurdle.

Mark Parrell: So we have a great relationship with the folks at toll. They see the same thing we do that there's a need to, you know, moderate development in some of these markets. We have, you know, three deals delivering one of them. We move forward a couple of quarters. I mean, their toll is everything we thought they were. They're an expert developer builder. They're doing a great job. Obviously we're going to face those same supply issues in Dallas that everybody else is when he's three assets get up and running.

<unk> costs are not going up like they used to but theyre not going dramatically down and rents.

Rents the rents are not booming so it's very hard to get to a number that underwrites and toll understands that and sort of our other potential partners and ourselves as we look at projects that we might do on our own or with partners. It just very very difficult to make the numbers work.

Mark Parrell: So I'm not sure why we delay anything. I'm getting the asset up and running, getting heads and beds, getting income. That's in our and the shareholders best interest. So that's what we'll do. And we're just we're assuming that starting at the beginning of next year and middle of next year. We'll have all three of those development deals in the lease up process. And, you know, we'll we'll report back. But I wouldn't delay any of those.

But I want to interject, one thing because there are a couple of development deals. We're looking at now that we like that our end markets in the northeast and the thing that really distinguishes them as they're really hard places to buy so we look at these assets. They have the benefit of having certain zoning and electrical codes and other things that are beneficial it might be to start that.

Alec Brackenridge: If you're talking about other starts. With toll and anyone else that goes more to Alex response on hurdle rates. Yeah, and I think it's Alec. With the 10 year in the high fours, you'd think cap rates have got to be in the high five. And you think that development yields got to be mid sixes or high sixes. So the challenge right now is just getting a project to underwrite with that that hurdle.

Deal or start one or two of these deals, but we're being super selective we haven't started anything this year, but we do have instances like that where there is an opportunity to build somewhere that you really can't buy in and where we like that exposure, where we might be willing to move forward, even if it isn't really a high six mid six return.

The return in the sort of overall IRR and a long haul makes some sense so yet to come on that but I do want to put that out there.

Alec Brackenridge: Construction costs are not going up like they used to, but they're not going dramatically down. And. You know, rents are not booming. So it's very hard to get to a number that underwrites and toll understands that. And you know, and so do our other potential partners and and ourselves as we look at projects. We might do on our own or with partners. It just very, very difficult to make the numbers work.

Thank you very much.

Okay.

We go next to John Kim with BMO capital markets.

Thank you.

To ask about Seattle and your comments today. It seems like it's more of a demand issue and a lack of job growth.

Mark Parrell: By line interject one thing because there are a couple of development deals we're looking at now that we like that are in markets in the northeast. And the thing that really distinguishes them is they're really hard places to buy. So we look at these assets. They have the benefit of having certain zoning and electrical codes and other things that are beneficial. It might be to start that deal or start one or two of these deals.

Since last quarter, where I think you said it was more of a supply risk and there was a lot of optimism on the Amazon return to office.

So I guess my question is has that Amazon pull faded and maybe disappointed as far as drawing in.

Employees and some of it some of the peers.

And when do you expect supply to peak in downtown Seattle.

Mark Parrell: But we're being super selective. We haven't started anything this year. But we do have instances like that where there's an opportunity to build somewhere that you really can't buy in. And where we like that exposure. Where we might be willing to move forward, even if it isn't a really a, you know, high six mid six return, but the return and the sort of overall IRA and the long haul makes some sense.

Mark Parrell: So yet to come on that, but I do want to put that out there.

Hello.

Yeah, Hey, John This is Michael So I think last quarter or what you heard us speaking to is with Amazon's return to the office mandate you did see South Lake Union occupancy tick up you saw the demand pick up it wasn't in migration from outside the MSA. It was just pulling people back in from further out within.

The MSA into that specific area and in South Lake Union. We did have some new lease ups. Those lease ups did did feel like they were getting kind of their application volume through so you saw concession use really kind of pull back a little bit or stay stable. So the pressure, we felt was a little bit less.

John Kim: Thank you very much. Next to John Kim with BMO capital markets. Thank you. I wanted to ask about Seattle and your comments today that seems like it's more of a demand issue and a lack of job growth versus last quarter where I think he cited it was more of a supply risk and there was a lot of optimism on the Amazon return office. So I guess my question is has that Amazon poll faded and maybe disappointed as far as drawing in an employee in some of some of the peers. And when do you expect to supply to peak in downtown Seattle?

In that specific area.

You fast forward into next year.

Seattle is going to have elevated supply and that supply is going to be concentrated in the city of Seattle, and we are going to feel that specifically and like a micro submarket of like downtown Redmond, where we happen to have six properties five of which are really a product that will compete head to head with that supply so in <unk>.

Michael Manelis: Hey John, this is Michael. So I think last quarter what you heard us speaking to is with Amazon's return to the office mandate. You did see South Lake unions occupancy pickup. You saw the demand tick up. It wasn't in migration from outside the MSA. It was just pulling people back in from further out within the MSA into that specific area. And in South Lake unions, we did have some new lease up.

Terms of like how to think about when that pressure is coming to US next year I don't have the breakouts for the new leasing that's by quarter, but I do know that it's not like Q1 is not one we're expecting to feel it I think we have a little bit of a ramp up period, but we do expect to outside pressure in that market.

Yeah.

Okay. That's helpful. Thank you and then Mark on one of your answer you mentioned that acquisitions are on pause for now I was wondering if there was a cap rates or spread to your cost of capital or the tenure that you would be looking to transact that or is it more about the timing and the volume of activity anticipate over the next six years.

Michael Manelis: Those lease up did did feel like they were getting kind of their application volume through. So you saw concession use really kind of pull back a little bit or stay stable. So the pressure we felt was a little bit less in that specific area. If you fast forward into next year, the adult is going to have elevated supply and that supply is going to be concentrated in the city of Seattle. And we are going to feel that specifically in like a micro sub market of like downtown Redmond where we happen to have six properties, five of which are really a product that will compete head to head with that supply.

Nine months and for selling in the market.

We remain open for business on acquisitions, we're underwriting deals. They just have to make sense relative to our cost of capital. We're looking for a discount to current replacement costs.

So.

It is right now at a pause because the market is an offering us that opportunity and usually it happens that theres a whole bunch of deals that people have signed up and everyone. Just closes them at the end of the year and that's not what's going on there. So there likely isn't going to be a lot more exposed for sale until the beginning of next year. So I'm not sure. This situation is going to change much.

Michael Manelis: So in terms of like how to think about when that pressure is coming to us next year, I don't have the breakouts for the new leasing that by quarter. But I do know that it's not like you want is not when we're expecting to feel it. I think we have a little bit of a ramp up period. But we do expect outside pressure in that mark.

I don't know that Alex and I and the board are going to make big pronouncements about acquisitions in the next couple of months because there just won't be much action on but we're hopeful next year you start to see folks that look at the higher for longer scenario on interest rates that may be see some pressure on NOI and especially in the sunbelt markets and maybe are more open to <unk>.

John Kim: I think it's helpful. Thank you.

Mark Parrell: And then Mark on one of your answers you mentioned that acquisitions are in pause for now. I was wondering if there was a cap rates or spread to your cost of capital or the tenure that you would be looking to transact at or is it more about the timing and the volume of activity anticipated over the next 69 months and and for selling in the market. We remain open for business and acquisitions.

Selling and folks like us that are more open to buying the last point to make is what is our source of capital for that if we are able to sell our assets in some of these over sort of over concentrated co.

Coastal areas that we liked general exposure, but we're a little out of balance that if that's the fuel then we'll be thinking a lot about the degree or not have dilution between those two if we're borrowing money we're going to think a lot about not just the beginning cap rate, but where it can reasonably go over the next few years, but right now I think we'd be borrowers around.

Mark Parrell: We're underwriting deals. They just have to make sense relative to our cost to capital. We're looking for a discount to current replacement cost. So, you know, it is right now at a pause because the market is an offering us that opportunity. And, you know, usually it happens that there's a whole bunch of deals that people have signed up and everyone just closes them at the end of the year and that's not what's going on there.

Six 4% or so on 10 years, and that's a pretty significant hurdle.

Mark Parrell: So they're likely isn't going to be a lot more exposed for sale until the beginning and next year. So I'm not sure this situation is going to change much like I don't know that Alec and I in the board are going to make big pronouncements about acquisitions in the next couple of months because there just won't be much action on. But we're hopeful next year you start to see folks that look at the higher for longer scenario on interest rates that maybe see some pressure on NLI and especially in the sunbelt markets and maybe are more open to selling and folks like us that are more open to buying.

Those are the kinds of things we're thinking about over there is that helpful framing for you.

Thank you so much.

Okay.

We'll go next to Jamie Feldman with Wells Fargo.

Great. Thank you for taking my question I guess sticking with acquisitions what is your appetite as you think about your target markets. I mean, what is your appetite to do something big.

Are there are there as you look at the portfolios that are out there are there any that you think would be particularly interesting or do you think the game plan will be kind of singles and doubles as you sell out of more noncore.

Mark Parrell: The last point to make is what is our source of capital for that? If we're able to sell our assets in some of these over sort of overconcentrated coastal areas that we like general exposure but we're a little out of balance, you know, that if that's the fuel then we'll be thinking a lot about the degree or not of dilution between those two. If we're borrowing money we're going to think a lot about not just the beginning cap rate but where it can reasonably go over the next few years.

Hey, Jamie its Alec.

We're open to anything here the bigger bigger is great for us if the pricing makes sense and if the locations and the quality of the assets are good enough and Thats generally been the challenge with some of the portfolio as we've seen.

Mark Parrell: But right now I think we'd be borrowers around 6.4% or so on 10 years and that's a pretty significant hurdle. So, those are the things that we're going to do and we're going to think a lot about not just the beginning cap rate but where it can reasonably go over the next few years. But right now I think we'd be borrowers around 6.4% or so on 10 years and that's a pretty significant hurdle. So those are the kind of things we're thinking about over there.

Over the last couple of years is that the mix of properties and locations just arent compelling enough. So we have been targeting one offs and we will do that as well, but suddenly becomes up we'll certainly pursue it.

But in the meantime, there's going to be a lot of product coming to the market at some point and we're really primed up for that and we're excited to take advantage of that opportunity just to add I mean in 2021 and the last time. The market was open full blast I mean, Alec bot and his team more than $1 billion seven of assets almost entirely in those expansion markets and a little.

Mark Parrell: Is that helpful framing for you? It is.

Jamie Feldman: Thank you so much for the next two Jamie Feldman with Wells Fargo. Great. Thank you for taking my question. I guess sticking with acquisitions. What is your appetite, you know, as you think about your target markets? I mean, what is your appetite to do something big? Are there, are there, if you look at the portfolios that are out there? Are there any that you think would be particularly interesting or do you think the game plan will be kind of single than doubles as you sell out of more non-core?

In suburbs of Seattle, and Boston. So we are capable of hitting a lot of singles and scoring a lot of runs by doing that so we're happy to acquire and small dribs and drabs, if that gets us to our goal, but as Alex said, we are open to portfolios, but they just need to make some sense.

Lot of what we've seen Youre getting three things you like and two you don't you're not really ahead of the game.

Mark Parrell: Hey Jamie, it's Alec. We're opened anything. The bigger is great for us if the pricing makes sense and if the locations and the quality of the assets are good enough. And that's generally been the challenge with some of the portfolios we've seen over the last couple of years is that the mix of properties and locations just aren't compelling enough. So we have been targeting one off and we'll do that as well, but something big comes up.

Okay. So I guess, just what are the things you're answering it sounded like there is nothing that would be a perfect fit at this point.

Yeah, well when we're not looking for perfection to be clear, but there's nothing that's compelling right now.

Okay.

And then I know there's been some questions on litigation, there's an article out talking about our D. C real page lawsuit and <unk> been named as defendant can you probably can't say much here, but can you give us any color on that at this point.

Mark Parrell: We'll certainly pursue it. But in the meantime, there's going to be a lot of product coming to the market at some point and we're really primed up for that and we're excited to take advantage of that opportunity. If they had, I mean in 2021, the last time the market was open full blast and an Alec bought and his team more than a billion, seven of assets almost entirely in those expansion markets and a little bit in suburbs of Seattle and Boston.

You guessed right I can't say very much on that just kind of came over the wire to us too.

We are unfortunately in very good company with a lot of our public and private competitors are in that suite as well. So again, we haven't analyzed it we haven't even been served to our knowledge. So it's hard for me to have any real comment except to say, it's not uncommon to have copycat lawsuits filed by other members of the plaintiffs.

Mark Parrell: So we're capable of hitting a lot of singles and scoring a lot of runs by doing that. So we're happy to acquire in small dribs and drabs if that gets us to our goal. But as Alex said, we're open to portfolios, but they just need to make some sense and a lot of what we've seen you're getting three things you like and two you don't and you're not really out of the game.

Bar or by the states and the district of Columbia, When you have a lawsuit like the antitrust case, that's being litigated in Tennessee in Federal Court, that's out there and gets publicity so I'm not sure. It's a new risk. It's the same risk in a different place and again, let us analyze it and if it's appropriate to comment further we will.

Mark Parrell: Okay, so I guess just listening to your answer and it sounds like there's nothing that would be a perfect fit at this point? Yeah, we're not looking for perfection to be clear, but there's nothing that's compelling right now.

Okay. Thank you.

Jamie Feldman: Okay, and then I know there's been some questions on litigation.

Okay.

Oh.

Mark Parrell: There's an article out talking about a DC real page lawsuit and you've been named as a defendant. Can you probably can't say much here, but can you give us any color on that at this point? You guessed right. I can't say very much on that just kind of came over the wire to us too. We are unfortunately in very good company with a lot of our public and private competitors are in that suit as well.

Next to rich Anderson with Wedbush.

Hey, Thanks, good morning.

<unk> to Michael.

You mentioned in the history of negative four negative five by December.

At that same history.

What's the new lease rate typically change to by the time, we get to April or May.

Okay.

Hey, Rich this is Michael I don't have that in front of me right now, but I can tell you that it clearly steps up and it's got to be in the positive one or 2% range.

Mark Parrell: So again, we haven't analyzed it. We haven't even been served to our knowledge. So it's hard for me to have any real common except to say it's not uncommon to have copycat lawsuits filed by other members of the plaintiffs bar. Or by the states and the district of Columbia when you have a lawsuit like the antitrust case that's being litigated in Tennessee and federal court that's out there and gets publicity. So I'm not sure it's a new risk. It's the same risk in a different place. And again, let us analyze it and you know, if it's appropriate to comment further, we will.

Jamie Feldman: Okay.

Rich Anderson: Thank you.

Because it's just going to keep sequentially building as you as you turn the corner into the year.

Of course that would be expect I was just wondering if you had some specific numbers for December I thought maybe I'd ask you about <unk>.

Yes, I don't I don't have that specific number by month outside of this fourth quarter.

But I'd be surprised if it's not up near that 1% or greater number okay.

And then.

Going back to L, a and perhaps the opportunity cost of having to deal with all of this litigation and so on.

Rich Anderson: Next to Rich Anderson with Wed Bush. Hey, thanks.

Michael Manelis: Good morning. A question to Michael. You mentioned the history of negative four and negative five by December. If you look at that same history, what's the new lease rate typically changed to by the time we get to April or May? Hey, Rich. This is Michael. I don't have that in front of me right now, but I can tell you that it clearly steps up and it's got to be in the positive one or two percent range.

Is there a common thread to some of these bad actors that maybe you don't want to sort of.

Michael Manelis: Because it's just going to keep sequentially building as you as you turn the corner into the year. Of course, that would be expected. I just wonder if you had some specific numbers for December. I thought maybe I'd ask you about. Yeah, I don't I don't have that specific number by month outside of this fourth quarter, but I'd be surprised if it's not near that one percent or greater number.

Put them in a group publicly.

But maybe that there's some cleansing that can happen. So that you don't you say you can avoid some of this scenario.

Perhaps bound to happen in the future is there.

Changing a change to your leasing sort of.

Documentation or your credit quality process to sort of avoid a certain segment of the renting population on a go forward basis.

Or is it just yeah, it's mark.

Yeah, Mark it's a <unk>.

Rich, it's mark I'm trying to answer that I mean, there are tons of rules about who you can and can't rent too and California, as you sort of implied as more rules than most and.

We're certainly going to comply meticulously with all of those rules, but this is again an issue when you create this regulatory framework, where delinquency is more expensive you do motivate us and we are using our data analytics tools and other means to try and determine whether our credit standards should be raised even further.

Mark Parrell: Okay. And then, you know, going back to LA and perhaps the opportunity cost of having to deal with all this litigation and so on. Is there a common thread to some of these bad actors that maybe you don't want to sort of put them in a group publicly? But but maybe that there's some cleansing that can happen so that you don't so you can avoid some of this scenario that's perhaps bound to happen in the future.

Because now the marginal cost of delinquency, which is what your question was getting at is higher so we need to decide whether instead of call. It three times income to rent, we need three and a half.

But we need to do that thoughtfully, we need to do that in a way that doesn't completely tank occupancy. So you know again, we're rational actors like all the operators are in that market and we have the advantage of having a great team and a lot of good analytics, but we'll certainly comply with the law, but we're going to look really hard at.

Mark Parrell: Is there a changing a change to your leasing sort of documentation or your credit quality process to sort of avoid a certain sort of segment of the renting population on the go forward basis? Or is it just? Yeah, it's Mark. Yeah, Mark. It's a rich. It's Mark trying to answer that. I mean, there are tons of rules about who you can and can't rent to and California as you sort of implied has more rules than most.

Is there a different cutoff, but there is no group of bad actors isn't like some particular.

Percentage, that's causing this problem, it's more that the processing of delinquencies takes longer. So therefore, just the normal delinquencies in the building three months instead of two and so now I have one extra month, that's that's real money what do we do to address that may be nothing but maybe it is a change to what I think are already.

Mark Parrell: We're certainly going to comply meticulously with all of those rules, but this is again an issue when you create this regulatory framework where delinquency is more expensive. You do motivate us and we are using our data analytics tools and other means to try and determine whether our credit standards should be raised even further because now the marginal cost of delinquency, which is what your question was getting at is higher. So we need to decide whether instead of call it three times income to rent.

Pretty stringent credit standards and so we'll we'll see where we go with that.

Is there an AI application to this possibly.

Yeah Rich this is Michael so I guess I can just answer a little bit on that and tell you as an industry. It is exciting mark mentioned, a little bit around the data and analytics, but what youre seeing within our industry is there is a lot more available data around this there are new kind of screening.

Mark Parrell: We need three and a half, but we need to do that thoughtfully. We need to do that in a way that doesn't completely tank occupancy. So, you know, again, we're rational actors like all the operators are in that market and you know, we have the advantage having a great team and a lot of good analytics, but we'll certainly comply with the law. But we're going to look really hard at, you know, is there a different cutoff, but there is no group of bad actors.

Schools that are coming to the market screening processes that do leverage kind of different data points than conventionally the industry's looked at theres clearly identity verification tools that are coming into play not only for the touring side, but the application side and youre starting to see more and more of these alternative security deposit kind of.

Mark Parrell: There's not like some particular Personage that's causing this problem, it's more that the processing of delinquencies takes longer, so therefore just the normal delinquency is in the building three months instead of two, and so now I have one extra month that's, you know, that's real money. What do we do to address that?

<unk> come into play I think all of these things together in the Blender actually do help start mitigating some of what I would characterize as broad or bad actors in the system.

Okay, great. Thanks very much.

Alec Brackenridge: Maybe nothing, but maybe it is a change to what I think are already pretty stringy credit standards, and so we'll see where we go with that. Is there an AI application to this possibly? Yeah, I guess I can just answer a little bit on that and tell you, as an industry, it is exciting, Mark mentioned a little bit around the data analytics, but what you're seeing within our industry is there is a lot more available data around this, there are new kind of screening tools that are coming to the market screening processes that do leverage kind of different data points than conventionally the industries looked at.

We'll go next to Adam Kramer with Morgan Stanley.

Hey, guys. Thanks for taking the question wanted to ask about the earn in.

I know you guys put in your slide deck, I always find that that could be really helpful.

I guess, if I'm just looking at that 1.3% to one 5% range I'm, assuming that that's kind of your assumption today for what the earnings will be going into next year. So that you know on January one.

So just to confirm that and then maybe just thinking about over the last two months of the year, what could kind of change that changed that number right and maybe a focus on San Francisco and channels typically could there be some risk to that number or you know it was kind of further softening in those two markets already kind of embedded in that in that embedded growth.

Alec Brackenridge: There's clear. Clearly identity verification tools that are coming into play not only for the touring side, but the application side and you're starting to see more and more of these alternative security deposit kind of programs come into play. I think all of these things together in the blender actually do help start mitigating some of what I would characterize as fraud or bad actors in the system.

Mark Parrell: Thank you.

Yeah, Adam this is Michael.

Adam Kramer: Thanks very much.

I think right now we put the range out there because it is hard to move that number much more than 10 basis points and it is our assumption as to where do we land on 12 31. So you start one one what is that rent will look like and what is the embedded growth.

Michael Manelis: Well, the next two, Adam Kramer with Morgan Stanley. Hey guys, thanks for taking the question. I want to ask about the earning, which I know you guys put in your side deck, always find the deck really helpful. I guess if I'm just looking at that 1.2% to 1.5% range, I'm assuming that that's kind of your your assumption today for what the earning will be going into next year. So at, you know, on January 1st, they're just can confirm that and then maybe just thinking about, you know, the last months of the year, what could kind of change that change that number right and maybe a focus on services going to help specifically.

From the leases that you have in place typically we wouldn't really give a range. We would give a number but you do have some volatility sitting out there right now not on kind of the renewal front the growth that we're going to get from renewals feel pretty stable, but you could see concessions tick up you could see rates decelerate a little bit more.

Sure or the inverse you could see things pull back a little bit and that's why we're giving you that 10 basis point spread the midpoint of our guidance is pegged at the one four which is the middle of that embedded growth.

That's really helpful. Michael Thank you and then maybe just a follow up on the.

Michael Manelis: Could there be some risk for that number or, you know, it's kind of further softening in those two markets already kind of embedded in that embedded growth. Yeah, Adam, this is Michael. You know, I think right now we put the range out there because it is hard to move that number much more than 10 basis points and it is our assumption as to where do we land on 1231. So you start 11. What does that rent roll look like and what is the embedded growth from the leases that you have in place?

On the pricing trends seasonality chart in the deck.

I always find this to be really helpful. I guess I'm, just trying to kind of square that.

With the kind of year over year, new lease numbers that you've talked to or I think some of the minus four minus 5% as we kind of progress through the rest of the year for new lease.

No.

I recognize that obviously there is there seasonality here right things on a sequential basis youre going to worsen I guess I'm, just a little bit surprised that the minus four months, 5% there should be a year over year figure if I'm not mistaken right. So we're shrinking that already include the impact of seasonality.

Michael Manelis: Typically, we wouldn't really give a range. We'd give a number, but you do have some volatility sitting out there right now, not on kind of the renewal front, the growth that we're going to get from renewals, feels pretty stable. But you could see concessions tick up. You could see rates decelerate a little bit more or the inverse. You could see things, you know, pull back a little bit. And that's why we're giving you that 10 basis point spread.

I apologize a little bit of a conceptual question here, maybe but just trying to kind of square that kind of seasonal versus sequential I guess.

Kind of discussion here.

Yeah.

I'll start and maybe Michael can augment if you will so I think if I understand your question right Youre kind of looking at the pricing trend looking at the spread between the lines and saying like how does that square with my new lease change and I guess I would tell you to start on your new lease change there is a lot of noise around mix.

Michael Manelis: You know, the midpoint of our guidance is pegged at the 1.4, which is the middle of that embedded growth. That's really helpful, Michael. Thank you. And then maybe just to follow up on the one kind of the pricing trend seasonality charts and in the in the deck. Always find this really helpful. I guess I'm just trying to kind of square this. Relics, with the kind of year of a year, new lease numbers that you talked about, I think some of the minus four minus five percent as we kind of progress to the rest of the year for new lease.

And we do all terms. So we report all terms and are in our new lease change. So that means that you could have had.

A lease that was signed in August that was for us at a premium rent that was for three months.

Reset in October and therefore, youre going to have a much bigger change than what would be reflected if you just looked at those lines and that everybody is on a 12 month lease everybody's on a year.

Michael Manelis: You know, I recognize that there's this is now the right things on a sequential basis, you're going to worsen. I guess I'm just a little bit surprised that, you know, with that minus four minus five percent, that there should be a year of a year of a year figure I'm not mistaken, right? And so it should kind of already include the impact of seasonality. Again, apologies a little bit of a conceptual question here maybe.

Year over year basis, and that does create a decent amount of noise. If you look and dig into the numbers.

There you also have some level of even though these are small as a percentage of total meaning most of our leases are 12 months, there's enough noise in there and enough volatility in the transaction base to not make that comparison kind of apples to apples. What we do think is really helpful for the price in pricing trends and why we presented it.

Michael Manelis: But just trying to kind of square the kind of seasonal versus sequential, I guess, you know, kind of discussion here. Yeah, I'll start and maybe Michael can augment if you will. So I think if I understand your question right, you're kind of looking at the pricing trend, looking at the spread between the lines and saying, like, how does that square with my new lease change? And I guess I would tell you to start on your new lease change, there is a lot of noise around mix.

To look at the overall kind of directionality of where prices are going and where they are relative to seasonal trends overall, so I would say the pricing trend is best suited for a directional viewpoint.

Michael Manelis: And we do all terms. So we report all terms in our in our new lease change. So that means that you could have had a lease that was signed in August, that was for at a premium rent, that was for three months, reset in October. And therefore, you're going to have a much bigger change than what would be reflected if you just looked at those lines and said, everybody is on a 12 month lease, everybody's on a, you know, year over your basis.

And the new lease change is really whats going into the revenue line and it's really what's supporting your ERP and your revenue overall.

Yeah.

Okay. Thanks, so much for the time that was really helpful.

Thank you.

And at this time there are no further questions.

Thanks, Jennifer I want to thank everyone for their time and interest in equity residential today and look forward to seeing everyone on the conference circuit over the next few weeks. Thank you.

Michael Manelis: And that does create a decent amount of noise. If you look and dig into the numbers. There, you also have some level of even though these are small as a percentage of total, meaning most of our leases are 12 months, there's enough noise in there and enough volatility in the transaction base to not make that comparison kind of apples to apples. What we do think is really helpful for the price in pricing trends and why we present it is just to look at the overall kind of directionality of where prices are going and where they are relative to seasonal trends overall.

Everyone else has left the call.

This does conclude today's conference we thank you for your participation.

Yeah.

Michael Manelis: So I would say the pricing trend is best suited for a directional viewpoint. And the new lease change is really what's going into the revenue line and is really what's supporting your GRP and your revenue overall. Thanks so much for the time. That was really helpful. Thank you.

Unknown Executive: And at this time, there are no further questions. Thanks, Jennifer. I want to thank everyone for their time and interest in equity residential today and look forward to seeing everyone on the conference circuit over the next few weeks. Thank you. Everyone else has left a call.

Unknown Executive: This desk concludes today's conference.

Unknown Executive: We thank you for your participation.