Q3 2024 Equity Residential Earnings Call
Please stand by your conferences about to begin.
Speaker Change: Good day and welcome to the Equity Residential 3rd Quarter 2024 earnings conference call and webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Marty McKenna. Please go ahead, sir.
Good morning and thanks for joining us to discuss equity residential third quarter 2024 results. Our featured speakers today are Mark Parrell, our president and CEO, Alec Brackenridge, our chief investment officer and Michael Manelis, our chief operating officer.
Bob Garechana, our CFO is here with us as well for the Q&A. Our earnings release and management presentation are posted in the investor section of equityapartments.com.
Please be advised to certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal scaredy's laws. These forward-looking statements are subject to certain economic risks and uncertainties.
The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.
Mark Parrell: Thank you, Marty. Good morning and thank you all for joining us today to discuss our third quarter 2020 for results and outlook for the year.
I will start us off with an Alec Brackenridge, our chief investment officer will discuss our recent acquisition from Blackstone and the overall transaction market. To the Michael Manelis, our chief operating officer will speak to our operating performance, then we'll go ahead and take your questions.
We posted solid performance in the third quarter, driven by continued good demand and little competitive and supply in our established markets, which constitute 90% of our portfolio.
Speaker Change: Big picture we continue to see a stable economic environment and a healthy consumer. On employment as well, in wage growth, the steady both of which vote well for our customers.
Speaker Change: In a moment, Michael will speak to the various twists and takes we saw on our operations during the quarter.
Michael: As is usually the case, we saw some items like occupancy and retention exceed our expectations. While others like going to rate came in lower in terms of our expectations.
As you can see on page 5 of the management presentation that we posted to our website last night, this type of variability in pricing is not uncommon.
Michael: In fact, pricing so far in the fourth quarter has normalized consistent with seasonal patterns and with our expectations.
In some, we remain on track with our same store revenue guidance and we expect to end the year in a good position for 2025.
On the expense side, the machine continues to turn out to terrific results, with same store expense growth of 3.2% for the quarter and our expectations for full year, same store expense growth of 3%.
I want to thank the team across our organization for their continuing focus on innovation, cost control, and our customer.
Turning to 2025, while they're remains a considerable amount of economic and geopolitical uncertainty. They could impact our business and economy generally. We like our setup.
Speaker Change: We are too early to give 2025 guidance at this point, but we have given you some insight into our preliminary thinking on some of the inputs for 2025's same store revenue, pages 7 through 9 of the management presentation.
Speaker Change: In some we think 2025 should produce solid, same-store revenue results for equity residential.
Speaker Change: We see steady demand from a well-employed affluent runner-based, a favorable supply picture in the 90% of our NRI and the less supply to establish markets and continuing cost and lifestyle preferences favoring rental housing.
In terms of our expansion markets, we expect that a recovery in Saint-Store revenue will not occur until 2026, given continuing high supply levels, but we do hope to see some improvement in currently highly negative new lease rates and to see lower concessions during next year's policing season.
Now switching over to capital allocation, we accelerated our acquisitions of newer, well-located assets in our expansion markets of Atlanta, Dallas, and Denver in the third quarter.
We are excited to acquire these properties at a basis that we see as highly favorable and add properties with strong cash flow growth prospects as supply levels decline substantially over the next few years.
The entire equity team also looks forward to demonstrating our core competencies of smartly acquiring and efficiently integrating new acquisitions. We now have approximately 10% of our net operating income in our expansion markets, the summing stabilization of our assets under development.
In a moment, Alex will give you more detail on our transaction activity.
Speaker Change: We are funding our expected 1.6 billion in acquisitions this year when it makes a fixed rate debt, dispositions, and the use of commercial paper supported by our unsacred line of credit.
and the moment, Alec, will give you detail on the disposition activity funding these acquisitions. But one source I did want to highlight is the $600 million sixth-rate debt we raised in September.
These 10 year notes were issued at a coupon of 4.65% which is the lowest 10 year coupon issued in the reach space since 2022 and would be hard to replicate today. So, a nice job by Bob and his team on this.
Speaker Change: before it closed, a quick note on where these acquisitions can enjoy our overall capital allocation strategy.
Our goal remains to own an apartment portfolio that is the highest long-term toll that will return in the sector with a focus on cash flow growth and taking into account risk and with the least amount of volatility possible.
We intend to achieve this goal by catering to well-learning renters and a 12 or so metro areas, that we think have the most desirable lifestyles for this demographic.
and present the best balance of long-term supply, demand, regulatory and resiliency opportunities and risks, and where we can efficiently operate our properties with our industry-leading people and systems.
As the last few years have shown, there is no riskless apartment market.
Navality and negative rental growth we see in the expansion markets.
and a strong result we are seeing in our Northeastern markets.
and many of which were recently left for dead by investors.
and Reinforces our commitment to our strategy.
Speaker Change: a better balancing our portfolio between coastal markets and select sunbelt markets as well as urban and suburban locations.
Speaker Change: We expect the benefits of the Stalin strategy to play out in 2025.
Speaker Change: Seattle and San Francisco, particularly our uniquely urban portfolios in those markets.
Speaker Change: should generate better St. Revenue results which, along with the continued strength in the Northeast and the favorable 2025 supply picture across almost all of our established markets, should more than offset continued supply driven weakness in our expansion markets.
and later years as supply weans in our expansion markets, those markets will be more of the same store revenue growth engine for our company.
Speaker Change: We are confident this balanced geographical strategy coupled with our efficient operating platform will create value over the long term for our investors and our eager to demonstrate this over the next several years. And with that, I'll turn the call over to Alec Brackenridge.
Alec Brackenridge: Thank you Mark.
As we discussed on our call in January, we came to 2024 committed to continuing to reposition our portfolio by increasing our presence in our expansion market. Atlanta, Dallas and Denver.
Speaker Change: for the first half of the year. The market remained frozen and we made no progress. However, in the third quarter, as interest rates dropped in the possibility of a soft landing for the economy.
became more evident. Mark had opened up and we significantly stepped up our activity, closing on 14 assets with over 4,400 units and a total price of 1.26 billion.
Those acquisitions were funded by a combination of the proceeds from the $600 million bond issuance that Mark mentioned, $365 million in dispositions and $295 million of commercial vapor.
The disposition's consisted of six assets located in San Francisco, Washington, D.C. and Boston at average 43 years old and sold for a 5.7% disposition yield. All the assets were non-core holdings that had a combination of significant capex, needs and a variety of operating challenges.
Speaker Change: The acquisitions meanwhile average just seven years old have limited retail and are all 100% market rate. 11 came from an off market portfolio from Blackstone that was tailored to fit our expansion strategy in terms of asset quality and locations.
Reckoning our ability to provide speed and certainty of execution, Blackstone chose to deal directly with us, rather than execute the typical auction process. The other three acquisitions were one-offs purchased for merchant builders.
After the end of the quarter, we closed on an additional asset in Atlanta for $89.5 million.
The weighted average cap rate on all this activity was 5% and is anticipated to generate an 8% unleveraged IRR.
Speaker Change: The U-Transactions appealed to us because they allowed us to expand our presence in markets with strong job growth, increasing numbers of affluent runners and relatively low regulatory risk at an attractive basis that is approximately 15% below estimated replacement costs.
Speaker Change: It admittedly these markets are also seeing outside supply relative to our coastal markets. Accordingly, our underwriting reflects competitive leasing environments, but the first two years of our ownership, with the rental income down or flat depending on the amount of approximate deliveries.
We expect that some of that dragged N.O.I. will be offset by running these assets more efficiently on the revenue expense side as we integrate them into our superior operating platform.
We anticipate having further opportunities to purchase assets in these markets as a supply pipeline drives up in 2026 and more robust rent growth will be on the rise. But at that time, pricing will likely be at lower cap rates and at a less attractive price relative to replacing costs.
Speaker Change: As we head into the end of the year and plan for 2025, we expect to continue to see attractive acquisition opportunities at around five cap rates in Atlanta, Dallas, and Denver, and with a cost of capital advantage in the ability to complete due diligence quickly relative to leverage buyers, expect to close on a sizable share of transaction activity.
Speaker Change: We currently have an asset in Denver and one in Atlanta, totaling approximately 190 million under contract to close before the end of the year at around a five cap.
Austin, our fourth expansion market, where we have only three assets, remains challenged with a historic amount of deliveries that is resulting in a highly competitive rental market, leading us to stay on the sidelines, given how hard it is to assess when things will stabilize.
With our recent closings and assuming stabilization of development deals in progress as Mark noted in his comments, we now have approximately 10% of our portfolio in our expansion markets. Towards a goal of 20 to 25%, that if the transaction market remains favorable, we expect to achieve over the next 18 to 24 months.
Speaker Change: We are excited to add exposure to these high job growth markets that we'll see declining supply over the next two to three years.
which should not be forgotten however is that the reduction in supplies even more dramatic in our coastal markets.
Speaker Change: where starts are down nearly 60% in 2024 after being down over 30% in 2023. With 2025, start projected to be down again. We anticipate one of the best supply demand balances in our coastal markets that we have seen in a very long time.
Our expansion market exposure, combined with our coastal market presence, positions us to generate optimal risk adjusted returns for our shareholders, catering to a customer where they resilient and growing income, while bouncing out supply, regulatory and resiliency challenges.
I will now turn the call over to Michael Manelis.
Michael Manelis: Thanks, Alexander. I can thanks to everyone for joining us today.
Michael Manelis: This morning I will review our third quarter 2024 operating performance, as well as our expectations for the remainder of the year, and what the set up for 2025 could look like.
As Mark mentioned, fundamentals in our business remain solid. During the third quarter, our focus on serving our customers and our correspondingly strong renewal process led to the lowest reported third quarter resident turnover in our history and strong physical occupancy of 96.1%.
Move out to buy homes, remained extraordinarily low, and renewal rate achieved with strong across most markets.
Wended rate, however, ended up at the low end of our expectations for the quarter, primarily from lower than expected new lease change, driven by the city of Los Angeles and continued pressure in our expansion markets.
Indies markets the pressure from excess inventory from both eviction-related existing and new supply as led us to prioritize occupancy, the maximized revenue which came at the expense of some rate growth during the quarter.
Michael Manelis: It is also important to remember that it is often not uncommon to see variability in new lease change over relatively short periods of time.
For example, while we saw a steeper and earlier decline in the usual and new lease change in the third quarter, we have seen a better picture so far in the fourth quarter for this volatile statistic.
Looking at the remainder of the year, our strategy of maximizing revenue by maintaining higher occupancy, heading into the quieter month of the year, should drive performance along with positive contributions from other income and bad debt net.
Michael Manelis: We still anticipate normal seasonal rent desaleration, which will result in negative new lease change in the fourth quarter.
But at this point, we are seeing very stable renewal rate achieved results, and of no Seattle and San Francisco, at both a relatively easier pricing comp in the fourth quarter, and have shown good early signs of improvement, including maintaining strong occupancy and reducing concession usage.
Sitting here today, our net-effective rents at the portfolio level are close to 2% of a prior year, which is also a solid position to the end.
Now let me give you some color on the market starting with the East Coast.
Michael Manelis: The Boston Market is one of our best performers in 2024, both our urban and suburban portfolios are performing well, but consistent with our expectations. The urban portfolio produced strongly results in the third quarter.
We like our positioning here, as our urban centric portfolio, we'll see very little competitive new supply for the remainder of 24 and the full year of 2025.
Moving on to New York, demand feels good as we are more than 97% occupied.
and as we have said, I'm past calls with a solid job market and very little competitive new supply.
Michael Manelis: We think this market will continue to produce good revenue growth and will have some of the best supplied demand dynamics in the country for the next couple of years.
Michael Manelis: Rounding up the East Coast, Washington DC continues to be the Rackstar of 2024.
Michael Manelis: The market is over 96.5% occupied and is producing some of the top rental rate growth in our portfolio. The man feels good across all of our submarkets and is expected to continue, but we do expect some pressure from deliveries in the fourth quarter, particularly in the Central DC submarket.
Michael Manelis: On the west coast, as I mentioned, Los Angeles showed some weakness and blended rate growth, particularly in the new lease change.
We think there are few factors in play here. First, our overall pricing power here was clearly impacted by less job growth than anticipated, especially office using jobs and a bit of a pause from the LA studios in the content production.
Michael Manelis: Second, on supply, we are seeing some competitive new supply, particularly in the downtown, Korea Town and West LA submarkets.
as well as some excess supply coming online due to continued improvements in the eviction process, which is now taking about four months down from six months earlier in the year.
Michael Manelis: Finally, the city is still working through some quality of life issues in the urban submarkets like Korea, town and downtown LA. Our suburban portfolios, primarily driven by Santa Carita and Ventura County, are performing better than our urban submarkets.
The good news is that we are seeing some positive momentum across the entire Los Angeles market right now. And with our rent on top of last year, a condition we have not seen all year long.
Michael Manelis: and put us in a favorable position. In addition, today's occupancy is running 40 basis points above both the prior year and is trending positively versus the third quarter.
We are also experiencing some of the highest retention rates of the year in Los Angeles, and while job growth has been somewhat muted in 2024, projections for moody analytics are much more positive for growth in Los Angeles in 2025, particularly office using jobs.
Assuming that comes to pass, and along with the modest new apartment deliveries, in most places across this fast geography, we think we should drive a re-exceleration of results in 2025.
In the rest of Southern California, San Diego and Orange County, we continue to see demand, but evidence of some price sensitivity with residents willing to move farther out in these markets for affordability reasons.
After showing some of the best growth in the portfolio over the last few years, we are likely returning to more normal long-term growth rates.
Rounding out the West Coast, San Francisco and Seattle continue to perform better than our original modest expectations.
At this point we feel good about the pace of recovery in these two markets and they're set up to contribute to growth in 2025. And we have included a page in the management presentation that highlights some of the favorable trends we are already seeing in these markets.
In San Francisco, demand feels good with occupancy of 96.2%, which is 90 basis points higher than last year.
Rents are following normal seasonal patterns, but we are seeing slower deceleration compared to last year and renewals are performing well. In addition, some impactful return to office policies from firms like Salesforce are helping to drive significant improvements to street activation.
Having just spent a week in the market, you can really feel the energy and a reminder of why this market is the center of the tech universe, including the rapidly growing AI sector.
On the supply side, there is very little new supply coming to the market. Overall, starts our way down and there have been almost no new competitive starts for the last year, which supports improving conditions for the next couple of years. We are optimistic about this market and its ability to drive our results in 2025.
In Seattle, the recovery feels similar to San Francisco, but further along. During the third quarter, St. Store revenue reflected improvement given by low turnover, strong occupancy, and better than expected renewal rate achieves.
Newlies change while still more negative than we would like is better than last year and we would expect this metric to improve over time.
As we sit here today, demand drivers are better than we thought, our occupancies over 96% and our renewal performance remains strong. And looking at our migration patterns, we are also seeing more people come to us from further out suburbs, which is an additional demand driver for our assets.
Michael Manelis: The big recent story here is the five-day a week returned to office announcement from Amazon, which is the 800-pound gorilla in the market.
For the past several weeks, our local team had reported increased interest from Amazon folks who are living further away from the office and looking for apartment homes in the downtown in South Lake Union, some markets.
Michael Manelis: with focus from city government and the local business community along with increased business and tourist what traffic, livability and the downtown just keeps getting better.
Another recent positive is that the tech employment in the market looks solid as we see more posting for positions in both the city of Seattle and Bellevue Redmond's area.
As previously discussed, there is supply coming in the fourth quarter and we will need to see how the demand in pricing holds. But at present, it should finish the year strong and like San Francisco, we have some real optimism on this market and what it can contribute in 2025.
Michael Manelis: Switching to the expansion markets, the volume of competitive new supply continues to impact old occupancy and rate.
Denver is our best performer of the expansion markets. In our relatively small same store portfolios and the other expansion markets, Dallas is producing the best revenue results. And Atlanta, where we have the most direct exposure to new supply right now, is the worst.
Michael Manelis: We continue to see demand, but it is a challenging operating environment for both new lease and retention given the amount of new supply. Similar to last quarter, the pressure on new leases makes renewing residents and maintaining occupancy the number one priority for these markets.
Michael Manelis: As you know, we added a number of new suburban assets to our portfolios in Atlanta, Dallas and Denver during the quarter that will have a while before they are in our same store reported results. Overall, we are excited to grow our portfolio and create operating scale in these markets.
While these markets have near-term supply risk, they continue to demonstrate long-term demand from our target render demographic and provide a nice balance to our core portfolio.
On the innovation front, we are very pleased with the initial results of our new AI resident inquiry application, which was able to handle almost 60% of our inquiries.
Michael Manelis: in our test market.
Michael Manelis: We have a lot of confidence that as this application keeps learning we will get to 75-80% coverage which will create an additional layer of operating efficiencies in the company.
Looking ahead, now that we have centralized the support of many parts of our customer journey, we are looking forward to improving and optimizing those processes, including the upcoming efforts to streamline the leasing process, to make it faster and easier for our renters.
Before I discuss the 2025 building blocks that would like to highlight our expense performance in the quarters
Michael Manelis: Continued favorable results on property taxes, low increases on repairs and maintenance and utilities, and an actual decrease in on-site payroll drove the quarterly results and should get us to our expected 3% midpoint for the year.
We are very proud of our 10-year same-store expense compounded annual growth rate of 3.2% and consider cost control and innovation implementation as core to our DNA at EQR.
Speaker Change: In closing, as Mark mentioned, while it's still too early to give 2025 guidance on page 7 in the management presentation that we published last night. We gave some building blocks for next year's revenue performance.
Speaker Change: Over all the setup for 2025 fuel saline, today we expected we'll start the year with a very gross near 1% and in a very well occupied position.
We also have a very favorable setup as the expected deliveries of competitive new supply in our established markets will be lower again. And while the expansion markets still have significant supply expected, the absolute quantity is beginning to come down.
On top of all of that, we like our ability to attract and retain new resonance.
In particular, we are most excited about the potential we see from our focus on the customer and our ability to maintain occupancy along with the upside we see from our west coast markets of Los Angeles, San Francisco and Seattle, which make up 42% of the companies in a life.
Those factors coupled with the continued performance in our East Coast markets should deliver a solid revenue result for the company in 2025.
Speaker Change: I want to thank our amazing teams across our platform for their continued dedication to innovation in enhancing customer service and their exceptional discipline approach to expense management. With that, I will turn the call over to the operators to begin the Q&A session.
Thank you. If you're dialed in via the telephone and would like to ask a question, please send all by pressing star one on your telephone keypad.
Speaker Change: If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to signal for our question, and we'll pause just briefly to assemble our queue.
and we'll take our first question from Eric Wolfs with City.
Hey, thanks for taking my questions. You mentioned in your presentation that's potential for bad debt, another income that adds revenue to it next year. I know it's still early, but could you give a sense for what you're thinking about that potential? Further income, I would assume it's mainly tied to the Wi-Fi program, so I think there's some good visibility there, but you know, correct me if I'm wrong.
Yeah, hey, it's Bob, I'll start in Michael Mike, augment on some of the other incomes stuff. But starting with BadDat, we continue to expect to end 2024 around call it 1% or maybe slightly better than that.
Speaker Change: of a percentage of revenue. So bad debt is a percentage of revenue.
Speaker Change: If normal is normal, meaning pre-pandemic is around 50 basis points, the opportunity set is the delta between there. Right? What have to see what the progress looks like? What have to see what the court system looks like as to whether or not we get all the way there, but to kind of frame a construct of what the opportunity set or contributions in criminal growth is somewhere between that one and back to normalcy. We'll give you more color as we get to the fourth quarter guidance as to what's embedded in our numbers overall. Thank you.
on the other income side, you're correct, that a lot of it is, and we mentioned this, this will be a contributor to fourth quarter performance as well. But a lot of our initiatives were back and loaded.
Speaker Change: In terms of their implementation, particularly the bulk wifi and the adoption of the bulk wifi.
Speaker Change: So that will start contributing in a more, it already has started in the third quarter, but will be more meaningful in the fourth quarter and will continue to contribute as you get into 25. With that, we'll come a little bit of expense component, which I think you're familiar with in the industry when you implement this, but there should be good contribution that will be potential for being greater than what you saw in 24 because of the timing of those rollouts.
That was a tough thought, and then...
Speaker Change: He also talked about seeing more sun-deld opportunities and he said low-fives, capricrenged.
Speaker Change: and we've seen a lot of all-tility in the 10-year dropping, though, as I think it's 35 now back up to 43. I mean, as it sort of oscillates back and forth, does that change your pricing, that you're willing to transact at all, or are you just less sort of focused on your short-term cost of capital?
Eric Ezzelik: Hey, Eric Ezzelik.
You know, the rates of move so quickly it's a little hard to assess that, but I will tell you that as of recently last week there were opportunities pricing at like 475ish, you know, in markets like Denver and Dallas. So there's a lot of capital, a lot of people interested in apartments.
and now we're at a 10 years 4 or 3 something. So maybe that changes a little bit. The reality is with the uncertainty about race plus the election coming up. There isn't that much product on the market right now. So I think this will be a feeling out process for everyone.
as we see what things end up, but they're still all this capital. I think overall the five cap rates feels pretty good to me looking forward.
I like it. Thank you.
If you find that your question has been answered and would like to remove yourself from the queue, you may do so by pressing star 2 and we'll move next to Steve Sakawa with Evercore ISI.
Hi, good morning. I guess given the projections that you guys have for fourth quarter on blended leasing spreads.
That's going to sort of bring the figure in some more just under 2% for the year.
and that's down about 100 basis points from the 22nd number. So as we kind of think out into next year...
Speaker Change: I know supplies coming down, but it's still relatively heavy.
and you still have deliveries that are kind of working through the back-after-this year that haven't been fully absorbed. So I'm just curious, is your expectation that leasing spreads could actually hold next year or do you think with slowing economy, slowing job growth?
Eric Ezzelik: Still, you know, some heavy deliveries that, you know, leasing spreads likely moderate again next year.
Eric Ezzelik: Hey, Steve, this is Michael. Maybe I'll just start and just say, so first we're just, we're in the very early stages of our kind of budget process that we're putting in all those factors that you just described.
In terms of the leasing spreads and how to think about this, I river back to kind of this page five in the management presentation that really talks more about just the pricing trend and what's happening with absolute market rent growth.
Kind of on a year over your bases, because that's really going to be the catalyst.
That's gonna drive a lot of that.
You know, right now a lot of the factors for the setup for 2025 sealed very similar as we were heading into 2024 and how we talked about it. But I still think it's a little bit too early for me to kind of give you the guidance on where we think inter-period like market rents can grow. But I don't I mean we have a lot of things that are set up to be catalyst for us, but we also know we still got to work through some of the adorption of supply and some of these markets.
Eric Ezzelik: So I think we'll just see kind of how this plays out for the next couple of quarters.
Speaker Change: and then maybe on the expense side, you know kind of following up on on.
Eric's question about the Wi-Fi. I know you get the benefits of revenue, but there's also a cost associated with that. You guys have done a very good job.
Keeping expenses down around the 3% level, is that growth rate achievable next year you think with kind of these added expenses or is it likely that we see a little bit of pressure on the expense side just due to the pick up and other income revenue growth.
Thanks for that. Hey Steve, it's Mark.
Mark Parrell: You may see a little pressure above that three. We talked about in the last call, we've got still pressure from the 421A
and Bullenoffers there.
You know, tax abatement in New York, so there'll be a little there.
Eric Ezzelik: and certainly the inflation numbers.
Eric Ezzelik: This morning we're a little discouraging so there may just continue to be some cost pressure but
You know, whatever that number is, we'll be at the low end of it. And I think we'll quantify it for you so you know, exactly what the Wi-Fi impact is. And of course, there's a offsetting much more significant revenue benefit, but I guess it wouldn't surprise me if the number was a little bit higher than the number we're going to put up this year.
We're still rolling numbers up.
Great, thank you.
We'll go next to the line of Hondell St. Juice with Mizzuhull.
Speaker Change: Hey, good morning guys. So first question I guess was just on the portfolio performance during the quarter. Maybe you could kind of walk us through how that evolved over the course of the third quarter. I think there was a bit of a drop there in September in New Leafs rates. And maybe if you look ahead to the fourth quarter, I think New Leafs rates are expected to.
for all to about negative 4% from the minus 1% third quarter. So, looking for some color on kind of where you see, perhaps the incremental drag, I'm pretty sure, Santa Cisco.
Seattle, a pretty easy comp, given last year's performance. Thanks.
Eric Ezzelik: Yeah, thank you for the hand out. This is Michael. So I think what I would start and just say is let's just back up and think about the third quarter. So what we saw in the third quarter and it was really the later part of the third quarter is...
Eric Ezzelik: We've had an occupancy kind of bias. We've been leaning into that.
Eric Ezzelik: and specific to really the city of Los Angeles and the expansion markets. We did drop some of the raids, we increased some of the construction usage. And you can kind of see that on page 5 in that pricing trend, where you just didn't have as much robust kind of pricing power. You're the tail end of the quarter. And that translated right into that new release change for us for the number.
where we sit here now in October.
Eric Ezzelik: Right? We've got to set up where you do, like you said, we have a little bit of an easier comp coming at us in Seattle and San Francisco
I've got a market-like Los Angeles right now we have Rentson Top of Prior Year and that's a condition we haven't seen all year long. So now you look at the October stats and you feel like you're pretty well positioned.
But I've said before, right? These metrics are best viewed over a long, real period of time versus kind of any standalone month, especially kind of given the quantities.
and like specific to the fourth quarter and like our assumptions for that blended rate growth between 75 and 125 basis point growth. We have fairly stable achiever-new rate increases kind of expected and we are allowing for some continued moderation of new lease change.
Eric Ezzelik: But the setup right now in the first month, we still got two thirds of the quarter that get through, feels pretty good to us.
Yeah, and Handel, Mark just to add to that a little bit.
Speaker Change: This is a given take type process, I mean we can't
Get New Leafs Rate to be a higher number by letting occupancy decline.
Speaker Change: that may not benefit the same story revenue growth, which is our ultimate goal. So we're trying to make as much money as we can in the current quarter and have a nice set up for the next year.
Just viewing one factor either in one month or without context to the other ideas. If we were hurting on blended rate and hurting on occupancy, that'd be a much more serious situation for us. Then what happened in September, which does was just a blip around the average.
You got it, thanks for the color. And then one on the blackstone transaction looks like you guys used.
Speaker Change: A bit more debt proportionally to fund that. I'm assuming capitalizing a lower debt cost as you highlighted the insecure issue. But also the opportunity in your under-level balance sheet. So maybe you can talk about the appetite for using a bit more leverage to fund.
Acquisites in the near term, and then maybe some call on the IRR that you underwrote the Blacks of the Poli IV. Thanks.
So I'll start with the balance sheet and then I'll pass it over to Alex to talk about the IRRR. But we have an incredible as you have pointed out, incredibly under-lovered and strong balance sheet.
is you may recall and it's those on the call may recall we have spent a long time frankly warehouse in capital looking for opportunities and we warehouse capital by paying down debt.
and going well below our own targeted kind of metrics of net-dense EBITDA of five to six times. And so when the opportunity presented itself on Alexander, we capitalized on that by using the Decapacity we had and further capitalized on it by the fact that we were able to do so at a very attractive rate overall, particularly with the use of proceeds. So we think that there is a lot more capacity given where the metrics I just outlined in the fact that we are sitting at call it 4.6 times. And we would look to use that Decapacity to take advantage of opportunities that may good long-term sense.
the lock in a really good cost to capital and allow for piano accretion over time.
and Antelda in terms of IRR, we underwrite to an unlevered IRR and then we compare it to our weighted average cost of capital. In this case, without unlevered IRR, it was about an 8% which at that time was in excess of the whack at that point.
Speaker Change: Thank you guys.
We'll go next to the line of Alexander Goldcarb with Piper Sandler.
and the morning morning up there. Bob, maybe just sticking with the balance sheet for a minute.
You guys are one of the, one of the reads that's got an active CP program obviously.
Speaker Change: You take advantage of the Unsteered Dap Market.
Jesus walked us through the difference in the two programs as far as the underlying rate. And, just using more CP impact your ability to, you know, the pricing that you get on unscured and how do you think about alternating between the two programs?
Speaker Change: Yeah, so I guess let me step back and make sure I got the question, but commercial paper for us is kind of short-term floating rate exposure that we use to deal with working capital cycles and working capital for us really means transaction volume.
Speaker Change: and so the CP program is we use a portion of it, we use it in a context of our over a capital structure to balance how much floating rate we have, etc. and it's much cheaper than our line of credit, right? So we can borrow it in solid so far plus 20 days, this point through the line of credit would be contractually so far plus 75 or so.
Speaker Change: But we're really...
Speaker Change: toggling between short-term and long-term issuance when it comes to the unsecured market by balancing a bunch of factors. How much floating rate exposure, what does the liquidity profile look like, what does our maturity profile look like, what does the whole thing look like couple together and balancing that out. And because we've done such a great job on the balance sheet over the years and extended our duration and have a lot of capacity to have some short-term usage and some long-term components, we can bet we can use a little bit of all pocket.
to reduce our aggregate cost of capital, which is the goal overall.
Okay, and then second question is...
You guys seem to be more hopeful on Seattle and San Francisco. You know, over the past few years, there have been a lot of companies that have announced to return to office.
and it's sizzled out and obviously, you know, we've all been collectively hoping for a rebound of Seattle and Sam Francis in the past few years. What gives the team on the ground confident?
that this time, the return to office mandates, and some of the positives, and that you've seen in those two markets are actually finally truly taken hold versus this could be sort of a fall start that we've seen before.
Yeah, Alex, this is Michael, I could start off here. So first I just spent a week in San Francisco, and you could feel it, and the onsite teams will tell you just based on the prospects that are showing up for the tours, what's driving some of that.
So the migration patterns show people from further out coming back near Ian.
when they walk into the office and talking about the fact that they need to be back into the office.
Speaker Change: for Work, Several Days a week and that's driving a lot of their decision. So, it's still a little bit early. I would say in San Francisco to feel it, but when you have the big companies like Salesforce making that announcement, you see the activity in the ground in the office is from the prospect.
A lot of the other Paraparrell companies start to follow some of those bigger tech companies and this is probably the most serious we've seen them actually talk about all of this in the marketplace. Pacific Cousciado, I'll tell you if we could see it like job postings.
Speaker Change: From some of the major tech providers in that market are up in the city of Seattle job, postings in Bellevue Redmond or up.
Speaker Change: Aaron Syteam, we've been talking to them like every week for the past several weeks once that Amazon announcement came out. And the Amazon employees are trying to get out in front of that January start date because they're concerned that there's going to be this pent up demand coming in.
Speaker Change: and that either the rates or the availability of certain apartments won't be there in the marketplace, so they're actually buying early from us. So we could see it right now and Seattle just feels a little bit further along than San Francisco from that and that feel like Amazon.
is really kind of serious about what they're saying to their teams.
and a little of this, Alex, Mark is premise on our perspective, Gleene from the movies and a litigants numbers for next year that there's going to be some good job growth in the Bay Area in terms of office using jobs. The Bay Area is shed a lot of tech jobs, and the jobs that have been added in AI have not been sufficient to offset those jobs.
but we're hopeful that that reverses itself. So I think when you talk quality of life, Seattle is definitively better.
Speaker Change: I've been there recently as well, same thing, San Francisco is better but not quite as good. I think LA is less advanced in quality of life, considerations being addressed. Then you got this job overlay and I think on the job overlay side.
Speaker Change: You feel pretty good about Seattle and you're feeling better about San Francisco and a little bit of what you saw on the third quarter for us was LA being a little sideways on jobs. So we do need that ingredient to come through for these markets to fully recover, but we feel that. We see that. Those are great industries and I think they will attract.
and start to hire again if the economy keeps turning.
Speaker Change: Thank you.
Thank you. We'll go next to the Gallonopolowski with Green Street.
Hey, thanks for the time. Michael, I want to pick up on my conversation Seattle. I'm just trying to help. Can you just frame it with some specific metrics so we understand kind of the night and day difference? Just trying to get a sense of it. It's a surge of kind of foot traffic, applicant surge is the steady trickle post Amazon announcement.
Well, I mean, I think we saw these trends in migration patterns even last quarter and we did put some good details on page 8 in the management presentation that talked about kind of not only that urban suburban mix, but you know what we're actually seeing the fact that concessions are down 40% year over year.
But I think we've seen some of these migration patterns. We've heard some of this before from our new residents moving in. And I think when you look at what the cops look like, the cop line of our pricing trends for the fourth quarter, this time last year we were issuing concessions.
Right, we had Rens deselerating, and right now while you're still seeing some normal kind of Rens deseleration there.
The concession uses actually kind of abating or softening a little bit in the downtown kind of submarket. So I think we're just seeing what we would describe as like the greenest shoots that we've seen in felt in a while.
Okay, and then a question on L.A. in terms of the overhang on market vacancy and market brands from the eviction backlog, not just in your portfolio, but surrounding competitors.
What's your best sense of the anywhere in on that overhang on market fundamentals and what do you think? The Anvil on market rate and occupancy will finally be gone.
Speaker Change: Yes, John, this is my, well that's a, that's a hard thing to understand exactly when we think we'll be kind of back to normal
I feel like when you just look at the sheer number of quantities of kind of pending evictions in the marketplace that we have, we are more than kind of two-thirds of the way through kind of our backlog. It was a positive sign for us to see that the duration dropped for a month.
from the 6-month average we saw earlier in the quarter, but we really need to see another drop down to probably like two months.
Speaker Change: for the get back to like that normal swing of things. So my guess is we think about our modeling for next year with LA. You know, besides some of those top line drivers that Mark just talked about, besides the fact that we have rent on top of prior year, we'll see how it kind of has a hold up. You know, we really are looking now at...
Probably another couple of quarters of this pressure from this excess inventory in the market. But when you look at the occupancy for the quarter, you know.
Positive is that while we're getting some of this excess inventory occurring, we are able to rent those units out and we are getting new residents in that day to rent. So that's a positive to us. It's just taking us a little bit longer to backfill some of those units, then you'll otherwise would have had a normal market conditions.
Speaker Change: to
Good, thanks Michael.
Our next question comes from John Kim with BMO Capital Market.
Good morning. You talked about the net migration trend being favorable to the Adam Camps Cisco. Where are the residents coming from? Is this a reverse of the Sunbott migration seen last years?
Yeah, A. John's Michael, so it's not so much the migration is happening or in migration is happening from out of state. What we're seeing is the migration patterns or shifting from being 20 plus miles out coming near in.
So it could even be within the same MSA that just coming near or into us.
Speaker Change: So that's another source of demand for us. You are seeing kind of some out of state in migration occur, but it's still not back to like what we saw in like the pre-pandemic era. I was still slightly elevated from getting more of our new residents from within the MSX.
Speaker Change: Okay, my second question is on the Blackstone Acquisition. I realize it's immediately a creative learning. It's invited to the lower place in costs.
but the operating environment in your extension markets are going backwards, maybe more quick as a new anticipated.
To you have waited on acquiring assets in these markets, given an anoids going negatives in some of these on-bought markets.
Yeah, it's Mark Boy, wish we were that president. You know, we've talked before on the trade-off here.
You're going to get some weaker, you know, growth rental rental growth numbers, but you're going to get a better price now. And then we're likely continue to be a buyer and you'll probably pay a higher price and you'll have less of that rental growth weakness.
Frankly, it's very, very early on that deal, but everything's tracking very consistently, to slightly better than our numbers in a pro-forma.
Hi, you know, again, the Sunbells week, we expect it to be week, those markets are pretty well exactly as week as we thought they'd be. And again, we do run things differently. Michael is an excellent operator, and he and his team, you know, there are things we can do better in terms of the link with see management and vacancy management.
Speaker Change: [inaudible]
I guess I don't have any regrets about the timing because I think your dollar cost averaging a little into this. And I think we really love our basis here with that kind of replacement cost discount. And I think in a few quarters, you're going to start to see some improvement in the second derivative in the Sunbelt, but it's going to take a while for our big three Sunbelt markets to see significant improvement.
in Same Store Revenue. We did assume that would take a little bit longer. And John, it's Alec. We are in just those specific three Sunbelt markets.
Speaker Change: too, when you think of Denver being outside the Sun Belt, not in some of the markets that are just seeing massively historic amounts of oversupply. So ours, we feel like a little more digestible over time.
We are not.
Speaker Change: We have not been buying in Austin, as an example, where we do have three properties, but we're standing pat because the amount of supply is just so overwhelming.
Thank you.
Our next question comes from
Speaker Change: This question comes from Michael Goldsmith with UBS.
Hi, this is Amy. I'm for Michael. Have you been seeing the same in migration trends for the East Coast markets as you've been seeing in the Seattle or San Francisco?
Yeah, hi Amy, this is Michael. So really, when you look across the East Coast markets, our migration patterns are very much in line with pre-pandemic kind of norms, both from how we're actually attaining new residents, and we also watch when residents leave us, where are they going? So both the out-migration and the in-migration patterns across those East Coast markets, very much in line with historical norms that we saw back in 17, 18, and 19.
Speaker Change: Okay, and then one on bad debt. How are bad debt, new levels of bad debt, so for new residents coming in the door, how are bad debt levels for those residents trending? Is this in line with historical or elevated below normal?
and many more. Thank you. Thank you.
Speaker Change: Yeah, it's Bob. So in terms of new entrants from a bad debt standpoint, it's very normalized. So it's normalized back to pre-pandemic levels. So the quantity of non-paying residents that are coming in the front door has very much normalized back to pre-pandemic levels. The thing that we have to keep in mind and the thing that we do keep in mind as we manage this is that if eviction processes take longer, each one of those quantity of people actually still cost more. So we have a bunch of initiatives and a bunch of technology that we utilize to try to actually make it lower than normal, to the extent that we think the eviction process is going to be extended. But in terms of quality of resident kind of getting
Looking at that level, it's still very high quality, still low percentage of people coming through that don't pay.
Speaker Change: Thank you.
Speaker Change: We'll go next to Nick Ulico with Scotiabank
and many more. Thank you. Thank you.
Speaker Change: Hey, good morning. It's Daniel Tricarico along with Nick. Maybe following up on John's question from earlier, Alec, how are you, you know, underwriting rent growth on new acquisitions today in those higher supply markets? And I think you mentioned flat in the first year or two, but that probably assumes some higher rent growth in the out years. So curious how you or maybe just generally private market players are baking in that rent growth to get the IRR math to work.
Yeah. Hey, Daniel. It's Alex.
Every property is a little different, but certainly all three markets are seeing higher than a historic supply.
Speaker Change: Across the board, the first year has always been less, a little bit less than what the prior year was. The second year is maybe flattish to a little bit less, but part of that is offset.
Speaker Change: by operating efficiencies that we have from our platform and other income that we're layering in. So the net-net is an improvement by the end of the second year. And then we do think that in years three and four, we will see outsides grow. So if you thought the historic norm might be three, three and a half, I think four, four and a half is...
are going to be highly achievable, and so we do factor that in, depending a little bit on the approximate supply for each asset, but that's generally the trend that we show.
Speaker Change: Sorry, I was on mute. Appreciate that. And then I'd follow up maybe for Mark.
Just wanted to ask your high-level thinking on the election, different legislative things. You know, are there different, like what are the variables maybe you're focused on? Maybe what's less topical now and you think maybe could be more topical next week or next year?
Yeah, thanks for that question.
Speaker Change: I mean, you know, of course, the federal election is getting a lot of notice, I will say.
Speaker Change: State and local government is generally more impactful to our business.
Speaker Change: and so most of our focus and the industry's focus has been on Proposition 33 in California and we've been
very active there and we remain optimistic that
Speaker Change: Californians will reject for the third time this sort of anti-housing
Speaker Change: and Mark Borden. Thank you. Thank you. Thank you.
So, that is certainly topical. Depending on the president, there is a difference in approach there. You know, the federal government has important levers it can pull in terms of the GSEs, Stanny and Freddie, and how they put capital into the market, and FHA and HUD as well. So, I guess that's an impact. So, we'll have to see all that settle out. And then, of course,
Whoever is president will inherit
budget circumstances and we'll see.
you know, how that impacts things like the voucher programs, expansions of the LIHTC, which is the low-income.
housing program.
Speaker Change: middle income housing tax credit program the industry's advocating for. So there's a lot of
Speaker Change: topics on the table that
I hope in a week we know, you know, a little bit more, have a little more certainty, but
Speaker Change: The main discussions that the industry is having right now and the main focus are this state ballot initiative in California.
Speaker Change: And, you know, we've had some terrific luck across the country in the last year or so, whether it's the Massachusetts housing bill, which was very supply focused, very much trying to generate affordable housing, whether it's in Florida, very different government there, of course.
Their housing bill, which again focused on supply and zoning reform. California, transit-oriented development.
Speaker Change: that Governor Newsom's focused on. So I think everyone gets the message about supply being a solution. I think the industry's just got to push that, whether it's the federal or state level, as well as voucher enhancement and public-private partnerships like 421A and
the MBTI program in Seattle and things like that. So again, I think we're going to have a great dialogue when the smoke clears, but for a week or maybe a little longer, there's going to be a little uncertainty.
Thanks for the time, Tim.
Speaker Change: We'll go next to Adam Kramer with Morgan Stanley.
Please see the complete disclaimer at http://sites.google.com
Great, thanks for the time. I wanted to ask maybe a couple quick ones. Where's the lost police in the portfolio today and where are you sending out renewals for November, December here?
Hey Adam, this is Michael. So first, I'll just start off. So the loss to lease, and maybe I'll just back up, so at the beginning of the year, we actually started in a moderate gain to lease position at about 60 basis points.
Michael Manelis: And then as that pricing trend kind of grew, kind of we moved ourselves back into a loss to lease position. As of kind of the middle of the month, October 15, we were in a slight gain to lease of about 10 basis points.
which, you know, again, it kind of tells us that we're going to wind up at the end of the year in a normal range.
because any given year you can start in a slight gain or a slight loss to lease position, but that's kind of where we're positioned right now. We do have a little bit of that easier comp in the fourth quarter in a couple of these markets, so we'll see kind of how that plays into the final year-end number. In terms of the renewals, right now our quotes are out in the marketplace for the next 90 days. We still expect to continue to renew a high percentage of our residents. We put some stats in there. We've been really focused on that, the customer service side of our business and leveraging our centralized team.
Thank you very much.
Michael Manelis: With the quotes that are out in the marketplace that are around a six and a half or seven percent, we expect to achieve around a 4.7 percent renewal increase or a little bit better because obviously if the markets continue to improve some of those west coast markets, we have the ability to kind of dial down some of the negotiations that we're doing, which could produce a little bit higher results in the quarter for us.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: That's really helpful, Michael. Thank you. And just maybe switching gears on kind of external growth.
Maybe a two-parter here. I guess first part is just when you're thinking about dispositions going forward, which markets are you focused on? And then the second part of that is, you know, obviously pretty, pretty acquisitive here with this larger portfolio. You know, is there more to come and if so, is it kind of more on the one-off side of things or is there the potential for kind of further portfolio opportunities here?
Thank you. Thank you.
Alec Brackenridge: Hey Adam it's Alec, first on the Dispo question.
As we've talked about in the past, we are focused on decreasing exposure in California and we've done that recently and will continue to do that.
We'd also decrease more in the urban core of a couple of other cities as well outside of California. It's just not a great bid right now for that yet, but we're starting to hear requests for information about properties.
talking to people who are kind of taking a contrarian view. But as you know, we're never in a position where we have to sell something. So we're just kind of waiting for the market to come to us a little bit on that. But I think you'll see us continue to spread our footprint into these expansion markets, and then within our coastal markets become a little bit more suburban than we are right now. So a little more urban, but we want the market to come to us a little bit. And we have the ability to sell other assets while we're waiting for that to happen.
in terms of the one-offs versus portfolios.
You know, we're out there trying to create opportunity every day. That's how the Blackstone deal came about. And we're talking to any of the major developers or owners, and we would love to do business in volume.
and if not, we'll keep doing the one-offs, but we expect to be able to find more opportunities like the Blackstone deal.
Great. Thanks for the time.
We'll go next to the line of Josh Dinnerling with Bank of America.
Speaker Change: improvement opportunity here.
and many more. Thank you. Thank you.
Speaker Change: Hey Josh, this is Michael. So maybe I'll start with the first one and just talk about like what we're doing. So we were early pioneers of kind of leveraging AI into our leasing process. We did that back in 2019.
and you saw that benefit almost immediately in the reduction of on-site kind of payroll or mitigating payroll growth on-site as we continue to centralize a lot of those kind of customer experiences. Right now in this last quarter what we're doing is we're actually rolling out an AI tool that deals with resident inquiries so questions that residents have not necessarily prospects.
Alec Brackenridge: And what we hope to see with that is that as these kind of machine learning applications get in there, they get better and better.
out of the box, we started with like 60% coverage of being able to answer inquiries from our residents. We think over the next couple of quarters, we'll get to that 75-80%. And really what you get then is you get another layer of operating efficiencies, whether that's the onsite side, where we're able to kind of pod or flex staff across multiple properties, even further than what we've already done. Or you start looking into our centralized teams and you say, where can we create efficiencies there so we can take on new tasks. So we're really excited. And again, this is something that we're never done with, but you're seeing some of these applications come to the market that really do have a pretty quick impact on the operations of the company. And the second part of your question, I just wanted to make sure I understood, were you talking about like market upside?
Speaker Change: No, I guess, sorry, just like margin expansion opportunity across the portfolio, it seems like this might generate some expense savings. So just trying to think about the opportunity set here.
Speaker Change: Yeah, I'm not sure it's Mark, how much margin improvement as much as it is, it's just blunting the rate of inflation. I mean, you've got a fair bit of
growth of just various costs, I mean, just direct payroll, as well as medical and the rest of it. And I think what you've seen us do is kind of hold those costs to subinflationary levels. And when we do that, and we grow revenue, that's the margin improvement. But you know, again, we, we seek to be closer to 70% better in that number. But a little bit of this is just being and I think Bob Garechana said it well on the last call, whatever you think inflation is, we're a little bit below it. And this was part of that sort of effort.
Speaker Change: Thanks, guys.
Speaker Change: and many more. Thank you. Thank you.
We'll go next to the line of Julian Blewin with Goldman Sachs.
Yeah, thank you for the question. Bob, you talked about an openness to continue to deploy leverage capacity here. Maybe, I guess, bigger picture. I get the geographic mix reasons for the acquisitions, but why does now feel like the right time to be deploying your leverage capacity into acquisitions when maybe the spread between cap rates and your cost of debt remains at some of the tightest levels in maybe the last decade?
Speaker Change: Interesting. It's Mark, I'm gonna start and Alec may add to it.
Cap rates aren't the only input to this calculus. I mean, replacement cost is really important too. And as we've said on prior calls, the replacement cost thing isn't just about buying an asset at a good basis. It means that it's unlikely to be a lot of supply there because there's not an economic incentive to build.
So, you know, there is, in our minds, probably much better revenue growth prospects.
Speaker Change: especially in the outer years, as Alex just described, years three and four than what we've underwritten.
And so that's a little bit of what we're buying as well here.
In terms of the spread between our cost of funds and the disposition assets and the like, you also have to think about CapEx, the assets we're buying.
generally are pretty new and have relatively little capital.
Speaker Change: you saw us sell and will continue to sell these much older assets with a bigger capital load.
So when you think about ASFO kind of yields, those are better.
then they look on the surface on the FFO side. So I think there's a few things going on here and also say apartments are such a desirable and liquid asset class.
The idea that you're going to get like you do in some other sectors that are less well-owned, these huge gaps between, you know, your cost of capital and what you can invest at, that's just not realistic. We just don't see that happen often or at all in the last
I guess almost decade. So I guess I I'd end with that comment that
you know that sort of view would be great if it happened but I think some other sectors have that happen a lot more and that means that frankly they don't trade very well in the private market and our assets do trade really well in our super liquid and that means they tend to compress to the cost of capital more quickly.
Speaker Change: Robert Garechana, Martin McKenna, Michael Manelis, Mark Parrell
Speaker Change: Got it. And maybe sort of thinking about the other potential use of capital development, I know your view sort of over an entire cycle is that acquisitions produce sort of better risk-adjusted returns on your capital. But I guess at this point in the cycle, why not maybe tilt more aggressively towards developments? I know you expect to complete $780 million in 2024 and 2025, but I guess why not sort of bring that a little bit higher?
and many more. Thank you. Thank you.
Hey Julian, it's Alex. The markets that we're particularly interested in, like Denver, Dallas, and Atlanta, have all this supply coming, so
Speaker Change: Sure, we could look at building into those markets, but I'm not really sure that that's...
Thank you everyone, I really appreciate you joining us. Thank you very much. On behalf of the Catholic Church, your host and Albenon church, I would like to thank you all for joining me today, and I hope that we'll all look forward to Respons'd coming out with their speeches during the next season of De NASSIE Podcast, which you'll be hearing about in our full episode series the next week. We look very forward to learning from you on all the information we use to provide for your today's thoughts and programs.
best risk-adjusted return that we're going to get when you look at the amount of opportunity we're going to have to kind of cherry-pick properties that really work well for us.
so our development net instead is focused on places where we don't see those buying opportunities and that's why you saw us with with starts in suburban Seattle and suburban Boston where we we looked historically at how hard it was to amass a portfolio with one-off acquisitions.
Speaker Change: Got it. Thank you.
and many more. Thank you. Thank you.
We'll go next to Jamie Seldman with Wells Fargo.
and many more. Thank you. Thank you.
Jamie Seldman: Thanks, I know we've covered a lot of ground here. I guess just thinking about insurance, I know your renewal doesn't come up until March, but can you give us any initial thoughts just where you think property insurance or commercial property insurance rates are heading and you know what your initial conversations are?
and many more. Thank you. Thank you.
Hey Jamie, it's Mark. Coincidentally I was just talking to the risk management team yesterday about that. So our renewal on our property is done in March of each year and just to remind everyone our increase was about ten percent.
year over year, and that included us enhancing, increasing our coverage a bit as well. So we had a pretty good renewal, we thought. And remember, we didn't have those giant renewals, a lot of the folks with more hurricane exposure. We don't own in places that have windstorm risk, so that's a huge benefit to us.
But having spoken through our risk management team to insurers, the two big storms this year
People don't feel we'll have a big impact on 25 renewals at this point.
because the insurers had apparently relatively little exposure to Helene.
and the exposure that was triggered on Milton, which could be $50 billion of insurance losses was within what they thought they would underwrite to. So it appears to us that the insurance market was
mostly prepared for what occurred. I can't give you an exact number because we're still rolling up budgets, but we don't see yet, we're not hearing from insurers that this is like after Hurricane Ian where there's a catastrophic increase in insurance rates coming, you know, across the whole property sector.
Okay, thank you for that. And then I guess just quickly for Bob, the debt coming due in 2025, any initial thoughts on timing of when you'll try to get after that?
Speaker Change: and others. Thank you. Thank you. Thank you. Thank you.
Yeah, so we have about $500 million coming due, as you mentioned, in 2025, which is kind of in the middle of the year, so we'll look at the market opportunistically. $500 million for a company of our size, our liquidity, our credit rating is not particularly large.
So really we'll just be opportunistic at how we minimize what that cost is and we have a lot of, like I mentioned in response to some other questions, we have a lot of variables that we can pull in terms of tenor, in terms of size, in terms of all of that stuff, and the maturity is in June.
By the way, but we have a lot of just a lot of leverage and a lot of excellent access to capital In the in the mix of tools that we can use so very manageable
Speaker Change: Are there any types of instruments that look particularly interesting to you now?
Jamie Seldman: You know, it's so volatile lately that it changes almost on a daily basis. Like the 10-year 600 million that wasn't that long ago that we did in September when we kind of bottom ticked the Treasury at a 375, that the 10-year looked great, the spreads were low, and it was, you know, great. As the curve steepens,
Obviously, maybe a little bit of shorter tenors begin to become interesting, right?
You know, you're getting paid for that, and because our duration is so long, and because we've, you know, got some 30 years outstanding, etc., we can take advantage of that.
And to be honest with you, we also have, you know, our target for floating rate exposure is around 15%. We're under that right now.
Jamie Seldman: And if the Fed does start putting more aggressively, doesn't look like they will now, but they might. It doesn't hurt to have a little bit of floating rate exposure too. So it's a little bit of a, it's good to have options. And I think we have a lot of options.
It seems like with the volatility in the markets right now, that every day something new is more interesting than it was the day before and we'll have to see as we get closer what opportunity looks like.
Speaker Change: Okay, great. Thanks for your thoughts on that.
and many more. Thank you. Thank you.
Our next question comes from Linda Sy with Jefferies.
Speaker Change: Hey, Linda, are you there? We can't hear you.
Sorry. Sorry if this question has been asked already.
Is there a sense of when new lease spreads get more positive?
and many more. Thank you. Thank you.
Speaker Change: Yeah, hey Linda, this is Michael. So the new lease spreads, there's a lot of seasonality that goes into that. And I think what you should expect, and we said this in the prepared remarks, and you can kind of look at page five in that management presentation to understand how pricing trend curves throughout the year. But as we typically will start, we will decelerate in the fourth quarter with those spreads. Then you start into the first year, you'll start to get some acceleration in your pricing power, and that usually then transfers over to positive new lease spread somewhere in that kind of later part of the first quarter.
and many more. Thank you. Thank you.
Speaker Change: We'll go next to Alex Kim with Zellman and Associates.
and many more. Thank you. Thank you.
and Paolo. Thank you. Thank you. Thank you. Thank you.
Speaker Change: Hey Alex, it's Alex. You know, we're really following our customer.
You know, we see these high-tech jobs in places that didn't used to have them in volume, like Denver, Dallas, and Atlanta, as an example. And so that will be the principle that guides us.
And we continue to see good numbers coming out of those places, particularly Dallas, which has been fantastic recently in terms of the demand side.
Other markets that we've talked about are specific to North Carolina, Charlotte and Raleigh, because they have many of those very same dynamics with a really great tech job base.
Speaker Change: particularly in the Raleigh area, and then more finance in Charlotte, but we've been slow to get going on that because like Austin, the amount of supply is just daunting, and when that really gets absorbed is hard to project right now. So we're willing to accept some dilution, but there's a limit to, you know, how much we're willing to accept. So I think you might see us enter those markets in a little bit when that becomes a little more clear.
Got it. That's it for me. Thanks for taking the time.
Speaker Change: We go next to Rich Andrews.
Steve Anderson with Wed Bush
and many more. Thank you. Thank you.
Rich Andrews: Hey, thanks. Good morning, still. First question on the Blackstone deal, Bob, what's the longer term turnout plan on the CP side of the financing?
So in the near term, a good component of it will be disposition proceeds because it was the CP balance was partially elevated just from timing and dispositions. So we still have call it in with our guidance, like 400 million or so of dispositions that we have planned for the back half of this year or for the fourth quarter could slip into early Q1 of next year. But that will bring our CP balance back to kind of what is the normal line that we call it, you know, five to 700 million or keep it around that level. So it's really disposed.
and many more. Thank you. Thank you.
Okay, and then a bigger picture perhaps for Mark.
Speaker Change: In 2016, the company...
Speaker Change: Sold
It's probably not fair to call it all suburb or sunbelt, but a chunk of sunbelt to Barry Sternlicht.
Speaker Change: That was almost...
10 years ago, and now you're kind of reversing course with the expansion today. Is this all a function of how tech business has moved and business-friendly climates have gotten better in other areas outside of, say, California and so on? Or is there something else that has caused the company to sort of, you know, arguably reverse course on the Sun Belt and why, you know, why you're doing this now versus the decision you made, you know, eight years ago? Thanks.
Thanks, Rich. It's good to talk to someone who has such a long amount of history in our business.
Speaker Change: You look at every one of our competitors and their...
market mixes morphed.
We may be more vocal and more communicative about it. The people have left tertiary markets in focus. They've left lower end renters in Sunbelt markets in focus and higher. So just to be fair, I mean, really every company does adjust to circumstances and we among them. I would say several things changed. Regulatory risk became more significant in some of our coastal markets.
And for a while, you might remember, we thought that was a big advantage because no one could build in those markets. But it got, you know, challenging enough for some of those states and some of those jurisdictions became difficult. Alec mentioned following our customer, which is kind of our byline. And our customer, there are more higher end jobs.
Speaker Change: in the Sunbelt markets like Atlanta than there was when we exited those markets.
And the other part that goes with that is housing is a lot more expensive in those places.
So it used to be our best renter in Atlanta, they'd be with us six months and they'd buy a home.
And our worst-runner would move out in the middle of the night, and it was a pretty low-quality tenancy, all right? And that's really changed. You go to these places, they're much higher-quality job growth. So it was a combination of regulatory risk, following our residents, and much higher single-family housing costs in desirable areas.
Speaker Change: Okay, good enough. Thanks very much.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: We have no further questions. I'd like to turn the floor back to Mark Parrell for any additional or closing remarks.
Thanks, Melinda. As we close the call, I want to thank my colleagues at our Augusta, Georgia Accounting Center for their work above and beyond the call of duty.
to close our books in the aftermath of what Hurricane Helene's terrible damage was to that city. I salute all of you and the folks in accounting here in Chicago who picked up the slack and got all our quarter-end financial work done on time.
To our other conference call listeners, thanks for your time today and we'll see you on the conference circuit for the rest of the year. Thank you.
and many more. Thank you. Thank you.