Equity Residential (NYSE:EQR) Q1 2023 Earnings Call Transcript

Equity Residential (NYSE:EQR) Q1 2023 Earnings Call Transcript April 26, 2023

Equity Residential beats earnings expectations. Reported EPS is $0.56, expectations were $0.33.

Operator: Good day, and welcome to the Equity Residential 1Q ’23 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Martin McKenna. Please go ahead, sir.

Martin McKenna: Good morning, and thanks for joining us to discuss Equity Residential’s first 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 Alex Brackenridge, our Chief Investment Officer are here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become 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 first quarter 2023 results. We had a very good quarter to start the year with same-store revenue results exceeding our expectations. And while same-store expense growth was higher than we projected due in large part to California storms, that still left us with first quarter net operating income and normalized FFO better than we expected. In a moment, Mike will take you through our first quarter operating highlights. The strength of our revenue results point to the durable nature of our business in the face of volatile economic conditions. We continue to see substantial demand from our affluent renter demographic and moderate levels of supply in most of our major markets, with the new news in the quarter being the rapidly improving regulatory conditions in California.

Based on these continuing positive business conditions and the good prospects we see for our business going forward, during the first quarter, our board raised our common share dividend by 6% on an annualized basis. Despite headlines and layoffs, demand feels solid. The unemployment rate, particularly for the college educated, remains very low, which gives us a good feeling about the employability and earnings power of our affluent renter customer. In our portfolio, we are not seeing increases in residents downsizing their units or giving us their keys because of job loss. In terms of competition from homeownership, monthly costs and down payment requirements remain high in our markets, especially relative to rents, making renting a high-quality equity residential apartment a better value.

Only 8% of our residents who moved out in the first quarter bought a home, and that’s down from 12% in the first quarter of 2022. On the apartment supply side, as we have discussed with you on previous calls, we expect 2023 national apartment new supply to run at record levels. But we generally feel good about the level of direct competition that supply will pose to us, given our market mix and importantly, the location of supply within markets relative to our properties. In our coastal markets where we still have 95% of our NOI, we see very manageable competitive new supply in most markets, with Washington, D.C. being the exception, though D.C. is holding up remarkably well so far. In the Sunbelt markets, including the Dallas-Fort Worth, Austin and Atlanta markets in which we are increasingly investing.

And in Denver, we are seeing higher relative supply and more impact. We anticipated this when we acquired our Sunbelt in Denver properties, and these properties are generally tracking consistently with our underwriting. As we look to expand our portfolio in these markets, we expect that these new deliveries will present buying opportunities for us. Mike will also discuss first quarter same-store expense growth, which was higher than we expected, especially in the repairs and maintenance and other on-site operating expenses lines. We think this growth was inflated for discrete reasons that will pass, and we continue to be comfortable in attaining our full year same-store expense range in part due to lower than previously anticipated real estate tax growth, combined with modest on-site payroll expense growth.

We have created at our company a culture and system that uses technology and centralization to improve the customer and employee experience and to contain our payroll costs. While the transaction markets remain unsettled, we did do a couple of deals to start the year. We sold a small collection of 25-year-old properties that totaled 247 units in Los Angeles for about $135 million in advance of the transfer tax increase. Also after the end of the quarter, we purchased a newly developed property in Atlanta for about $79 million that is currently in lease-up. The property is located directly on a portion of the Atlanta beltline that is being improved and paved. The beltline is a desirable amenity to our demographic and has been a catalyst for economic growth and densification across the area.

The property’s economics benefit from various tax credits and when fully stabilized next year, we expect to attain a 6.6% acquisition cap rate. Removing the tax benefits, which will burn off over time, we see the stabilized fully taxed acquisition cap rate at 5.7%. We also love our basis in this property, which is at $288,000 per unit, and we see that as a 15% to 20% discount to current replacement costs. Alex Brackenridge, our Chief Investment Officer, is here with us to answer your questions on the transaction market. And with that, I’ll turn the call over to Mike.

Michael Manelis: Thanks, Mark, and thanks to everyone for joining us today. This morning, I’m going to review key takeaways from our first quarter 2023 operating performance in our markets, along with same-store operating expenses. As Mark mentioned, we produced very good same-store revenue growth of 9.2% in the first quarter. These results were ahead of our expectations, primarily due to continuing improvement in delinquency along with continued healthy fundamentals in the business. Before I get into more details on these topics, I want to emphasize that as we sit here today, the early stages of the leasing season and its setup remains strong. With year-to-date pricing trend improvement just above 3.25%, which is where we would expect it to be at this point in the year and is also consistent with expectations underpinning guidance.

During the quarter, we continued to see good demand and strong resident retention that produced low turnover, stable occupancy and solid pricing power. Despite some recent negative job headlines, our average resident remains in great financial shape. With rent income ratios during the quarter for new residents continuing to hover around 20%. The Resident lease breaks due to job loss and transfer activities to reduce rent, often early indicators of resident economic threats remain below pre-pandemic levels and in line with seasonal expectations. A resilient labor market, along with a large number of young adults choosing the exciting attractive lifestyles our markets provide, along with the convenience and cost benefits of renting continues to result in application volumes that are on par with the same period last year and continue to grow as expected into the leasing season.

Couple this with the favorable supply position and lack of single-family home ownership competition that Mark outlined, and we should be positioned for another good year. Results to date support the view we shared on our February earnings call that we expect pricing trends for this year to follow a normal, albeit slightly muted seasonal trajectory. Given the difficult comparison periods for 2022 for the back half of the year, along with the return to normal rent growth patterns, we expect that the first quarter will be our highest reported same-store revenue growth with more moderate but still above historical growth in subsequent quarters. While there may be some uncertainty about the economy, including increasing layoff announcements, as I said previously, we are not seeing this impact our day-to-day operations.

While we acknowledge that we are generally a lagging indicator, so far so good as we head to our primary leasing season. Now let me spend a few minutes talking about our market performance. Let’s start with the East Coast. New York and D.C. are both exceeding expectations, while Boston is in line. New York was by far the top performer for the first quarter with same-store revenue growth of over 19%. With very limited and isolated supply, the outperformance in this market is consistent across all submarkets. Occupancy is currently 97.5% and all demand indicators continue to flash green, making this market the expected top performer for the year. Turning to D.C. Performance has thus far been a pleasant surprise with the market continuing to absorb significant new supply, while still delivering good revenue growth.

Similar to New York, occupancy is strong, and so far, all submarkets remain resilient in the face of new supply. Now for the West Coast, Southern California continues to post good numbers. And most notably, we are starting to see improvement in delinquency, particularly in Los Angeles, which has the heaviest concentration. As the eviction moratorium expired, we are seeing more of our delinquent residents figuring out the best option that works for them, which is either paying rent or moving out. This activity started to pick up pace late in the first quarter, which was sooner than we expected and has continued into April. While these move-outs are pressuring physical occupancy, it will benefit our financial results later in the year as we have good demand in the market to replace these residents with new residents that will pay their rent.

Our remaining 2 West Coast markets of San Francisco and Seattle have posted respectable quarter-over-quarter revenue growth with good demand, but pricing power remains less than desired, especially in the urban centers of both of these markets. The San Francisco market is performing in line with our expectations, which already assumed a slow recovery. Use of concessions, mostly in the downtown submarket remains common along with limited pricing power. Meanwhile, the South Bay submarket is demonstrating signs of improving pricing power and stronger occupancy with less widespread concession use based on a combination of factors that includes a greater variety of stable employers who are committed to the area, coupled with just a better overall quality of life.

Heading to Seattle, the overall market continues to demonstrate a lack of recovery, which wasn’t completely unexpected, but is behind our forecast. Similar to Downtown San Francisco, Downtown Seattle lacks pricing power with concessions being used on over 70% of our applications. The East side, which we felt may hold up a little bit better, is still outperforming downtown, but is a little more challenging than we thought based on supply pressure, layoffs and overall just less hiring in the submarket. Amazon’s May 1 mandatory return to the office date has a potential to be a catalyst for this market. Finally, in our expansion markets, which currently make up a little less than 5% of our same-store NOI, revenue performance has mostly been in line with our acquisition performance and guidance expectations.

As we expected, we are being impacted by heavy new supply in Austin, Dallas and Denver. Meanwhile, Atlanta remained strong with double-digit revenue growth for the quarter. Now moving to expenses. We reported same-store expense growth of 7.2% in the quarter, which was slightly above our expectations. We had always expected Q1 growth to be higher than our full year guidance range, mostly because the growth during the first quarter of 2022 was so low, but also from pressure on a few specific items that outpaced positives in a few other expense categories. On the favorable side, we continue to benefit from good performance in real estate taxes and payroll, along with utilities, which were still elevated but lower than expected. On the unfavorable side, incremental cost in repairs and maintenance, other on-site costs and higher-than-anticipated insurance costs drove higher-than-expected first quarter same-store expense growth.

For most of these costs, we had anticipated an increase but not quite to this degree. Elevated repairs and maintenance was in large part due to increased outsourcing in the quarter much of which stemmed from our own internal teams in California, focusing on the after effects of the severe rainstorms, which resulted in incremental outside vendor assistance. Higher legal and administrative costs related to faster progress in response to the expiration of the eviction moratorium, the benefit of which can be seen in our bad debt net. Insurance expense was higher due to tougher conditions than the already challenging environment we assumed on the renewal of our property insurance policy, which was completed during the first quarter. Despite this pressure, we remain comfortable with our existing guidance range on the full year same-store expense growth.

At this point, we expect slower full year growth in real estate tax and utilities than we initially expected to offset the overages experienced in other categories in the first quarter. Lastly, I want to spend a minute on our focus on innovation and the technology evolution of our platform. In 2023, we have a positive NOI impact of just over $10 million included in our guidance with about 2/3 of that coming on the expense side primarily in payroll and repair and maintenance. This benefit will mostly be realized in second half of the year which will contribute to lower expense growth for that period. On the revenue side we will continue to focus on other income items like WiFi, parking and pricing optimization. We will also leverage data analytics to create opportunities to expand our operating margins.

Our vision is to augment pricing and renewal strategies by combining our growing data science capabilities with streamlined execution while delivering self-service solutions to our customers. We will continue to leverage our mobile platform to create opportunities to share on-site employees across multiple properties. With a fully centralized and mobile operating platform, we are in a strong position to create a seamless customer experience with a platform that continues to allow us to innovate, experiment and rapidly scale what works across the portfolio. This uniquely positions our company to continue to create additional revenue streams while managing expenses to maintain and grow margins even in an inflationary climate. I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these terrific operating results.

With that, we will turn the call over to the operator to begin the Q&A session. Thank you.

Q&A Session

Operator: . And our first question is going to come from Eric Wolfe from Citi.

Eric Wolfe: Just looking at your same-store revenue guidance, it looks like you’re expecting roughly 4% growth for the rest of the year, maybe a bit higher if you’re accounting to be better trends in bad debt. But just curious whether it’s sort of the majority of the drop-off happens in 2Q and then sort of stabilizes? Or if the drop-off is a little bit more ratable through the year?

Robert Garechana: Eric, it’s Bob. I would say that the drop-off is more ratable through the year because what’s going on in the 2023 kind of guidance is really more about what’s happened in 2022, than the kind of core trajectory of the business. So we continue to expect kind of that sequential leasing component, but you start getting into — starting in Q2 and really into Q3. Difficult comp periods from 2022. And so you’ll see Q1 as the high point and then a pretty consistent but above trend quarter-over-quarter rate of growth as you go through the back end of the year.

Eric Wolfe: Got it. And then I think you said you expect the peak leasing season to play out as it normally would. But I also thought I heard you say that rent growth might be a bit more muted for its history. So just trying to tie those 2 statements together? I’m just trying to understand if market rents are sort of growing as they normally would during the peak leasing season.

Michael Manelis: Yes. Eric, this is Michael. So I think there’s 2 factors. One, the way that the rents are moving, and I said, albeit a little bit muted, that’s more indicative to when we think about normal rent patterns of pricing trends. We came into the year with our guidance expecting the sequential build. We just didn’t think we were going to see kind of outsized momentum anywhere near the pace that we saw last year. And in terms of the setup right now, I guess I would just say the portfolio is sitting at 96.1% today. We’ve got great momentum. The blended rate for April sitting right at 4%, you get the sequential build and pricing trend at 3.25%, which basically positions us right where we thought we would be heading into this peak leasing season.

Mark Parrell: Yes. Just to supplement that, Eric, it’s Mark. It’s the difference between guidance when we gave our guidance, we talked about the year being kind of like a normal year 2023, but maybe a little bit less of intra-period growth and what’s going on so far this year. And so far this year, absolutely consistent with that expectation. So it’s — those 2 terms are being used to describe different things, guidance versus so far so good this year.

Operator: Our next question is going to come from John Pawlowski from Green Street.

John Pawlowski: Bob, the first question is on real estate taxes. I know this year is faring well. Just be curious, as you stare out the next few years, are you seeing any early examples or hearing any chatter that cities need to tax apartments a little bit harder to fill the hole left by office and other commercial real estate sectors that are seeing impaired valuations?

Robert Garechana: Yes, I would say that not a lot of chatter yet because we’re really just focused on 2023. And to your point, John, 2023 is actually better than what we anticipated. Obviously, we have that Anchor with prop 13 in California, which is helpful. As you move beyond, you always deal with that issue of revenue gaps and budgetary gaps and where people are going to get money out of what pocket. So far, we feel good about where we are, very good about where we are in 2023. And it’s too early to tell — but with these municipalities, what they’ll do in 2024, what those revenue gaps will look like and where — what pockets they’ll come to get it. So, so far, I’d say too early to tell for ’24.

John Pawlowski: Okay. And then last one for me. Michael, just curious if you could expand on the softness in pricing power you’re seeing in Denver and your expansion markets. I know it’s a small sample size of properties, but just curious how you’re seeing fundamentals on the ground there relative to some softer West Coast markets.

Michael Manelis: Yes. I mean I think I would carve them out a little bit different. So Denver, you clearly have supply pressure sitting on top of us in the downtown submarket, but yet the suburban portfolios are actually doing pretty well. When we go into the Texas markets, we clearly are seeing just more concessions being used. You have demand, right? But when you look at across all of these expansion markets, any of the reported data, including our own portfolio, which again is a pretty small subset. It’s less than 5% of the company’s NOI. The occupancies tend to be running lower in these kind of expansion markets for us. The one exception I would say for us is Atlanta, seems to be doing a little bit better than even what we thought coming into the year. We just don’t have quite as much supply pressure on us. So we see a little bit better pricing power than what we thought.

John Pawlowski: Okay. Would you expect Denver and Texas NOI growth to lag or outpace your legacy footprint over the next year or 2?

Michael Manelis: Oh, I mean I think clearly, our coastal markets right now are set up not even for this year, but just the entire setup, the demand drivers that we see, the cost of housing in those markets has really positioned them to outperform. But again, as we went into these sunbelt, we knew like what to expect for these first couple of years. So for us, the positive is that — the large majority of our acquisitions are trending slightly ahead of how we perform in them and clearly in line with our expectations for this year.

Operator: Next question is from Steve Sakwa from Evercore ISI.

Stephen Sakwa: Just a couple of follow-ups on the topline growth. Michael, I know you don’t necessarily guide to leasing spreads, new renewals or blend. But just any thoughts on kind of where our spreads might be for the year? And it certainly sounded like bad debt is trending better. I realize it might be a little too early, but how much of a tailwind could that be if things continue sort of on the path they’re on today?

Michael Manelis: Yes. Well, maybe I’ll start, and Bob, you can kind of build a little bit on the bad debt. So in terms of just the leasing spreads and kind of guide, a lot of that had to do with where we were with our embedded growth, where we were with loss to lease, capturing the loss to lease. And I think I said, right, as we were working through the call back in February, we expected roughly 2%, 2.25% on new lease change for the full year, renewals right around 5% and blended is right around 4% for the full year. When you look at where we sit today, we’re set up going into our peak leasing season, where, again, we’re going to do 60% of the transaction. We’re set up right where we thought we would be relative to the guidance. We have a little bit of pressure that we’re doing more concessions in those downtown submarkets in Seattle and San Francisco. But that’s kind of being offset by some of the outperformance we’re seeing in the East Coast markets.

Robert Garechana: Yes. And Steve, on the bad debt side, just to fill out the question, we are — we certainly did better in the first quarter. We expected the first quarter to sequentially be equivalent, excluding governmental rental assistance to the fourth quarter, and we’re a couple of million dollars better. And that equates to a little bit under 10 basis points on a full year basis for revenue. That trajectory is continuing into April, so it’s still early. And so we would expect to perform better overall. But keep in mind, the 90 basis points assume that we’re having improvement. So it’s just how much that improvement is better relative to what we embedded in guidance, but we do think there’s potential upside there. To the extent we continue to see that same pace as we play out through April into May and the rest of the year.

Mark Parrell: And Steve, it’s Mark. Just to help you with your mod a little. The governmental payments are really key to the volatility because in the first quarter of ’22, we got about $9.5 million of governmental rental relief. In the second quarter, we got almost $15 million in 2022. So we need to make up that difference in terms of improved delinquency performance in the second quarter. And then you drop all the way down to a little below $6 million in the third quarter and then only $2 million in the fourth quarter of 2022. So you can see that those rental relief payments are key to understanding. So the delinquency, we think, will improve the whole year, but there could be quarters where bad debt net because it’s being compared to a number with so much governmental rental relief in it is just not as good as it appears to be, and then the next quarter, you’ll see it even back out.

Stephen Sakwa: Okay. And then just, I guess, second question is on sort of capital deployment. I mean, you guys did raise acquisitions and dispositions to still be net zero. But I’m just curious what — and maybe distress you’re sort of seeing in the marketplace and what opportunities that might afford you thinking back to the coming out of GFC, you guys were early to buy broken condos and did the transaction. I’m just curious if you’re starting to see things percolate and — and I guess secondly, are you seeing a big slowdown in new starts or planned starts from maybe some of the competitors and merchant builders?

Alexander Brackenridge: Steve, this is Alex. Well, first of all, transaction volume is down pretty dramatically. So the closings will be down about 60-plus percent across the country. And that’s pretty evenly spread among the different markets. So a lot less activity, but the sellers that do act now understand that cap rates are somewhere between 5% and 5.25%. So they’re eager to transact. And that comes from really 3 different types of sellers. There’s the private REITs that have the redemption request that they have to fulfill. So we’re seeing some activity from them. The merchant builders aren’t really capitalized to own property in the long run. They always expect it to be able to execute and get out of the deal. So a little bit of that.

And gives some floating rate borrowers who have caps that are expiring that they are not able to cover. So there are sources of opportunity, but it’s really been slow so far. But I would expect all 3 of those areas are more likely to pick up than not in the next 6 months. So we are excited to deploy more capital as those opportunities arise. And as you mentioned in the past, we’ve taken advantage of dislocation in the market. So we’re certainly set up to that. But in the meantime, we’re trading in and out of properties, so selling — dispose opportunistically and taking advantage of acquisitions that we see. In terms of starts, I mean, they’re dramatically down. Already this year, what we were thinking in our markets would be, say, 110,000 starts is now looking like it might be half of that today, and I expect even more things that we thought might start will drop off the list through the rest of the year.

It’s really hard to make a development work in an environment where cap rates are, as I said, 5% to 5.25%, you need a yield at least around a 6%. And you just can’t get there with costs that may not be rising as high as quickly as they used to a year or so ago, but they’re still going up, and obviously, financing costs are higher. So it’s just really hard to make a development underwrite. So we expect to see more and more deals drop out, development deals.

Mark Parrell: Yes. And Steve, it’s Mark. Just to supplement that. I mean all this supply in the Sunbelt markets, Denver, places we’d like more long-term exposure, but we recognize that it’s going to be a tough couple of years, that’s an opportunity for us. I mean we’re going to sell low performing assets in the coastal markets are assets where we have an over concentration in the sub market and kind of trade in and accepting that there might be a little near-term decline and putting it in the pro forma. But as you said, I mean, I’m very hopeful. I think we’re in a really good spot where our numbers are going to show well comparatively in the costal markets, we’ll exercise our usual good expense control, and then we’ll turn around and deploy capital. And Alex got a big team, a very capable, experienced people out there ready to buy. So I think we’ll be active as soon as those opportunities are more substantial.

Operator: Our next question comes from Chandni Luthra from Goldman Sachs.

Chandni Luthra: This is Chandni Luthra, Goldman. Could you guys help us understand what the collections process will look like from here? And what the magnitude and timing of recovery from past accounts could shape up to be. Like do you have to go to courts to get rents from tenants who are perhaps no longer active with you or you’re just evicting now? And what kind of experience are folks witnessing with the court processes these days?

Michael Manelis: Yes. Chandni, it’s Michael. So we clearly have evictions filed right now with the courts. You are seeing a little bit of momentum pick up. I would tell you across the country right now, it feels like most of this stuff is set up at about a 6-month timeframe from the time you file to the time you actually get to your proceeding with a court date. But really what’s happening on the collections front is twofold. So one, you have individuals that you are filing on that have a lot of past balances with you. But if they start paying you current month’s rent, those past balances are somewhat protected still to date and go out into like ’24. I think maybe some of them even stretch into ’25. So you have a little bit of a longer tail to go after the previous balances to collect.

But we are starting to see this resident behavior where they’re making decisions either to move out in front of any kind of eviction proceeding or actually just start paying us their current month’s rent knowing that we’re ultimately going to have to come to terms with what happens with this previous balance. In areas where those balances are not protected, we have sent much of that over to the collection agencies and let collection agencies start working. That’s a slow process because typically, what you need to see is a lifestyle change. You need to see somebody needing to go buy a car or a home or some other thing that then causes them to come to terms that they got to clean up that balance. So I think what you should expect to see is the court system is going to continue to move at this pace of, call it, the 6-month window.

And you’ll see us gradually just start chipping away at this delinquency and gradually start to improve the recovery of this — of the past balance.

Chandni Luthra: So then can there be a reversal to some write-offs or some reserves that you’ve taken in the past as we sort of think about the magnitude going forward?

Robert Garechana: Yes, certainly. To the extent that all of those historical balances that Michael just described have been written off. So to the extent that you collect them, you would see that as a current period pickup offsetting bad debt. So those collections would flow through. But as Michael mentioned, we would expect that. We don’t — haven’t really incorporated much of that overall that we’d expect that to really trail.

Chandni Luthra: Got it. Very helpful. And a follow-up question is on L.A. mansion tax. So obviously, you guys sold a property ahead of that sort of tax change on April 1. But as we think about the composition of your current portfolio and what you’ve laid out in the past that you want basically 33% of your portfolio. It’s sitting in sort of each of the coasts and then 33 in the Sunbelt. How do you think about the impact from this policy change to affect how you think about sort of selling properties in L.A. going forward and you’re reaching towards that optimal mix of geography that you’ve laid out in the past?

Alexander Brackenridge: Well, clearly, it has an impact. It’s a big move in the rate from 1.5% to 5.5% in L.A. And it was designed to raise cap the money for cities to build affordable housing. I think it probably had the reverse effect and that there won’t be that many transactions, so they’re not going to collect very much. So it may be that this gets reduced over time. So we don’t know that it will be around forever because it doesn’t seem to be well thought out public policy. But in the meantime, there are other ways — other properties that aren’t subject to the tax within California that we can transact on. And we can also consider joint ventures as an opportunity to lower exposure in a market like L.A., where selling a property may not make a lot of sense.

Mark Parrell: Yes. Chandni, it’s Mark. And just to supplement Alex answer. We — I mean, it certainly impacts the tactical way to get to the success to lower that exposure. But mean we remain committed to the goal, and we’re just going to figure out different ways to do it. And again, maybe you’re selling properties in Ventura County instead or in — outside the city of San Francisco and the County of Los Angeles, and we have plenty of those, too. So we’ve got other levers to pull, and we’ll be thoughtful about that.

Operator: Next question goes to Michael Goldsmith from UBS.

Michael Goldsmith: On the concessions, have they gotten better or worse as the year has progressed? And is the gap between markets? Is it getting lighter or narrower?

Michael Manelis: Yes. So Michael, this is Michael. So concessions for us right now are really concentrated in those urban centers of Seattle and San Francisco. I think what you saw when we turned the corner into January, and we were getting on that first — or the fourth quarter call, I was telling you that the demand was picking up, and you saw the concessions starting to slow down across most of the markets that absolutely held true almost all of the markets now have weaned themselves off of the concessions, except what we saw in somewhere around that middle of February and into March, you really saw the concession use pick up in those downtown urban centers of Seattle and San Francisco, and they’ve been fairly constant. I’ll tell you the last couple of weeks, we see a little bit of hope right now that the demand is picking up.

Application volume is picking up in those areas, and you could start to see us get to a place where we could start pulling them back again. But for the most part, just in the rearview mirror, they’ve been constant for the last couple of months for us.

Michael Goldsmith: That’s very helpful. And then my second question is on the transaction market. Does this 5.7% stabilized cap rate on the Atlanta deal, does that represent a motivated seller or a function of the actual market? Is this where deals are going forward? And maybe just on a broader terms, like — are you starting to see a reopening of the transaction market now that you’re guiding to a modest amount of activity in the year?

Alexander Brackenridge: Michael, this is Alex. The 5.7% really isn’t a reflection of market. It’s more a reflection of the property being in lease-up right now. So we’re taking it over the middle of a lease-up and we’re going to finish it off. So we’re getting compensated for doing that. So I would say, as I said earlier on the call, the rates are somewhere between 5% and 5.25% for a typical deal. And so yes, we’re getting a little bit of a boost there because we’re taking on a little bit of a lease-up, but that’s not an indication of market. And then in terms of other opportunities, I mean, we’re obviously always looking for other opportunities, and it has been pretty slow though so far.

Operator: Our next question will come from Nick Yulico from Scotiabank.

Nicholas Yulico: So I want to go back to the topic of job losses. And I know you said that you’re really not seeing that much of an impact. But are there any indications yet of job losses of residents impacting expected turnover? I mean, is there anything you’re learning now as you’re sending renewal notices out for the spring? And I guess if there’s any differentiation you’re seeing on this topic between tech heavier markets like San Francisco, Bay Area, Seattle, where there has been more high-profile job losses announced versus other markets of yours.

Mark Parrell: Yes, Nick, it’s Mark. I’m going to start, and Michael is going to supplement with some market specifics. I mean, again, when we look at the general economics, professional and business services, for example, still has positive job growth. And that’s an area where we do have a lot of our residents employed. Finance and insurance kind of flat, information service is certainly down but not down that dramatically, and the unemployment rate remains very low, especially for the college educated. So I guess, I just want to point out again on the macro. The macro picture is very good for our company and for the markets we sit in, not just in the long term, but in the near term in the here and now. So certainly, there can be another shoe that drops, but the current numbers we’re all seeing are certainly declined from the COVID recovery numbers, but they’re still pretty good, and people losing jobs are finding them.

And that’s been the experience that looks to me like in the general economy. And I’ll let Michael comment on what he’s seeing in the rest of our portfolio.

Michael Manelis: Yes. And I think, one, you got to put into context that the reported turnover for the first quarter was really low. I mean it’s not quite record little, but it’s really low number. So the absolute number of move-outs that we’re having is clearly below any kind of historical norms. And when we start drilling in and we look at those reasons for move-out, we’re really not seeing anything indicative of changes. You’re not seeing kind of job loss or job change pick up anything different than what you would expect for the first quarter of any given year. Specific into like a Seattle or San Francisco where you saw kind of more of the headlines and we said on the last call, we thought a lot of those layoffs were being dispersed across the country, not just heavily concentrated in those markets.

I think what you’ve seen, we have not seen anybody really give us keys telling us they’re breaking the lease or they’re not renewing because they were laid off. What we do notice in those 2 markets is the in-migration, meaning what percent of brand new residents are coming to us from outside of that MSA. The in-migration in those 2 areas is less than what you otherwise would have expected, which I think makes sense given not only the layoffs, but more importantly, like the hiring freezes that have been taking place. So you’re just not seeing them draw into the market like they used to.

Nicholas Yulico: That’s very helpful. My second question is going back to Los Angeles. And it’s a market that doesn’t look like it has much supply, except for Downtown. And you did talk about delinquent — dealing with delinquent units going forward, right? In some cases, it’s impacting occupancy right now or at some point, it will. And I guess what I’m wondering is how you think — how you feel comfortable with this. It’s almost like a shadow supply type of scenario where you and other landlords are finally getting tenants out in L.A. and that you feel confident that there’s enough demand to fill tenants leaving?

Mark Parrell: Yes. Again, it’s Mark, Nick to start, and Michael may have something to add here. But I’ll start by talking about the employment base of our residents as we see it in the market. So we looked at sort of the big tech majors, and we said what percent of our residents have stated that they’re employed by those big companies in Los Angeles, and that’s something on the order of 3%. So I think we just have very low exposure to those sort of tech folks in the very diversified L.A. economy. So I think L.A. just, frankly, is stronger than San Francisco Bay Area and stronger than Seattle right now where we have higher numbers of our residents employed by those sorts of people and probably bigger local economic impacts. So I think we’re, in your opinion — it’s almost like we have 2 empty buildings in Los Angeles, we’re delivering into same-store over the rest of this year and that we’re going to fill up, and we’ve got the demand for it.

So I think when you look at the local economy, that matches up very well with our portfolio. They’re in content creation. They’re in other businesses, some of which feel some pressure. But this disproportionate tech layoff, that isn’t a Los Angeles phenomenon that’s occurring to all over the country. In the extent there’s any concentration, it’s more San Francisco and Seattle than it is L.A.

Nicholas Yulico: Yes, No, I wasn’t specifically really wondering about tech in L.A. I just meant the issue of delinquent units coming back to market for you and other landlords, right, as you’re getting people out and rates almost a supply issue in the market.

Mark Parrell: Yes, but the supply is being met by people that have jobs. That was the point of my comment. It isn’t — a lot of these people are in diversified industries. So it isn’t like everyone is losing their job down in Los Angeles. There’s — it’s very well employed down there. A lot of people looking for housing, a lot of demand, Michael sees good demand numbers in terms of applications and the like. So that’s the source of our confidence, a diversified economy in which — like I said, us and others are effectively delivering empty buildings into that, but I’m confident that demand will need it given what we see on the ground and given the composition of employment in the market.

Operator: The next question comes from Rich Anderson from SMBC is next.

Richard Anderson: So back to the bad debt question. If you were to sort of magically flip a switch and you’d be back to 40 basis points bad debt like you’d see normally, would that recovery be less than the rent relief number that you — gathered last year about $32 million. I’m wondering how much the rent relief overcompensated you or maybe under compensate you for the bad debt that you took on? I’m just trying to understand that math.

Robert Garechana: Yes. So — the government — you’re right, the governmental rental relief in ’22 was $32 million. You would have to get back to, call it, 40, 50 basis points normal, that’s $1 million a month of bad debt. If you look at kind of the disclosure for Q1, we were averaging like probably around — certainly in January and February, more like . So it’s like a $3 million spread — so you’d have to get $3 million times the 12 months or so is about where you’d be at, which would be a little bit more than what the governmental rental relief would be. But you’re getting there if you got back to, call it, that $1 million a month right away. That’s obviously not what’s happening yet. We’re hopeful that, that happens and the sooner the better from a growth perspective. Does that help, Rich?

Richard Anderson: Yes, yes. That’s great. And then my second question is, Michael, I think you mentioned you’re running a 3.25% market rent growth at this point. If memory serves, I think you said your guidance presumed 3% market rent growth for 2023. And I know you guys are trying to be careful about overpromising having not updated guidance yet, and that’s coming later. But it seems to me you’re ahead of the schedule from a market rent growth, particularly at this point in the year, shouldn’t 3.25% barring a major disruption from some sort of recession. Shouldn’t that really be a maybe a significantly bigger number as you get into the heavy leasing season and maybe that will be another driving force to you upticking your guidance, just a better market rent growth trajectory than you expected? If you could comment on that, please.

Michael Manelis: Yes. I mean I think, Rich, you can look at that and say the 3.25% sequential build from January 1 is about where we peg where we should be of what a normal cycle is. The 3% for the full year, remember, you got to blend in what happens due in that first quarter and the fourth quarter. So when you put it all into the blender, could you be up at a 4%, 4.5% in the peak leasing season? Sure. And you still could average to the 3% for the full year. So I think I would just look at the trajectory that we see the sequential build of application volume and the sequential build of this net effective pricing trend is basically resulting in us being right on top of where we thought we would be from the blended rate growth, which is what manifests itself to the P&L.

Operator: The next question comes from Brad Heffern from RBC Capital Markets.

Bradley Heffern: Circling back on bad debt. So it was 1.7% of revenue in the first quarter, excluding the assistance payments. But you obviously mentioned that it improved in March and April. So I’m curious if you can just compare the whatever leading-edge figure you have to that 1.7%.

Robert Garechana: Yes. So that would probably be — the 1.7% would probably be something, call it, 20 basis points better, maybe a little bit more, maybe 30.

Bradley Heffern: Okay. Perfect. And then going back to next question. You gave the 3% employed by Big Tech in LA figure. I’m curious if you have the figures handy for the Bay Area and for Seattle and if there are any other markets like, I don’t know, New York that have a larger number too.

Mark Parrell: Yes. I’ve got some numbers for you. I don’t have the East Coast, but the Bay Area is about 14%. And Seattle is about 30%.

Operator: Next question comes from Haendel Juste from Mizuho.

Haendel St. Juste: A couple for me. I guess first question is can you provide the new and renewal numbers for March specifically? And where are you sending out renewal rates today for May? And what’s the loss to lease in the portfolio today?

Michael Manelis: Yes. Okay. So let me just start with loss to lease. So we snapshot that on the 15th of every month. By April 15, we were at 3.4%, which basically compares to, I think we are 1.5% on January 15 again, trending in line with where you would have expected it to be. In terms of like the March, April, I will tell you both new lease and renewals are basically flat when you look at it sequentially. You look at the blended rate, and you can see that we’re moving from a 3.8% in March to a 4.0% expected in April. So again, right in line with what we would think based on the sequential build heading into the peak leasing season. If I look forward to think about transactions that are on the books for May, so we have renewals on the books, we’ve got some expected move-ins for leases that just haven’t started yet.

Those are also trending in line with what you would expect, which you’re starting to see that improvement kick into gear on new lease change and you got that consistency on renewal. In terms of the forward view on renewals, we’ve got quotes sitting out there for the next 90 days. I think I said in the prepared remarks, we really do expect a lot of consistency here. We’re renewing about 55% to 60%. We don’t see any reason not to expect that in the next several months going forward. We’re achieving somewhere in this 5.5% to 6% achieved renewal rate increase each month. We don’t see a significant change there. We have a lot of confidence in this renewal process. My expectation is we turn to corner to the second half of the year. We do expect to see a little bit of moderation on renewals, probably more like in that 4% to 5% range, which is just a function of the comp period and what we see as we return to more of a normal pricing trend.

Haendel St. Juste: Very helpful. Another question on, I guess, some of the charges in the quarter. It sounds like the property, legal and admin charges are tied to the eviction process, but can you comment on the other charges, the $5 million environment settlement and the $2 million data transformation project and if we should expect those in future quarters, too.

Mark Parrell: And I’ll start. Bob will help here a little. The data transformation project is something we’re working on. We mentioned this before in prior calls. It’s a big data analytics project with an outside vendor. You can expect a couple of million dollars more there and then it should be at an end. All of our internal employee hires and all that, that’s in our normal overhead load. So continuing costs are in the run rate of the business. The sort of discrete onetime sort of events are separately categorized, as we said on the Page 24 of the release. And I don’t know, Bob, if you want to comment on the risk.

Robert Garechana: Yes. The other components are adjustments to various kind of regular course litigation reserves that we made during the quarter as we got more information and adjusted our outlook. So those are all case-by-case dependent and depend on facts and circumstances at the moment.

Haendel St. Juste: Got it. Got it. And one more question on cost. Is there any part of the property damage from the cost in California at the rain storms. Any part of that recoverable perhaps from insurance?

Mark Parrell: No, this all falls, it’s Mark, below our deductible handouts. So this is all covered by us.

Operator: Our next question comes from Alexander Goldfarb from Piper Sandler.

Alexander Goldfarb: So two questions. First, on the insurance, you guys mentioned that and we’ve heard from others that insurance has become more challenging, expensive, especially in like Florida and Texas. So 2 parts to this. In your experience, do you would expect that the insurance provider will rapidly adjust new capital come in and that this won’t really be a problem? Or do you think that it’s actually could give you some opportunities to buy deals where the existing owner can’t get insurance on their property and therefore, provides you guys with some opportunity to buy some of those in some of the expansion markets.

Mark Parrell: It’s Mark. It’s a good question. The insurance market typically has, as you suggested, when you see costs go up as much as this capacity has gone up. We don’t yet see that. And the difference now is that fixed income is a real alternative. I mean folks that are reinsurers can invest in a lot of different things. And the fixed income market and maybe even these beaten down equity values may be more interesting to them. So there’s a little more competition for those reinsurance dollars that investment. So in the off-season here because we just renewed our policy program — our property program last month, Alex, we’re going to be out there looking for other capacity in other places because I’m not sure given the severity of this named windstorm risk that we’re going to be able to find additional capacity for that risk.

Now EQR doesn’t have Florida exposure, and we don’t have that risk, but it has impacted other spots in the market. And other folks have much larger increases than we had. Ours was about 20% on our property program. So I would say I would expect normally for the market to get bigger, I wonder this time how quickly that’s going to occur, given concerns that these sort of wind storms, especially are going to be more continuous than they’ve been in the past and just alternatives that insurers have and reinsurers have to invest elsewhere. So hopefully, that’s helpful.

Alexander Goldfarb: That is. The second question is the tax deal that you did in Atlanta, you guys have previously spoken about the 421a is here in New York and the drag it cost to earnings when those tax incentives dried up — or sorry, matured off — burned off. Do you see similar with the Atlanta and in general, are you looking to do more tax deals or your preferences to shy away from them except where on a case-by-case basis.

Mark Parrell: Yes, a great question. We certainly like not to repeat things like that. You got to look at the IRR in the deal. You start with these elevated cash flows, you’re getting a little bit better cap rate because of the fact that later on, you’re going to be paying these higher taxes. So for us in year 8 or 9, taxes are going to go up and you’re going to really have this flatten out. But it’s not the order of magnitude of the 421a program. So — and we also keep track, Alex, of these. So we’re not allowing any 1 year to be overburdened. So we don’t feel like we’re robbing Peter to pay Paul as long as we’re comfortable with our IRR. So as our overall IRR, we being paid upfront, for the cash flow growth flatness that will occur 8, 9, 10 years from now.

And I think we feel like we were, and we’ll do deals like that. And most of the new product is going to have stuff like this. So we’ll also buy some stuff that’s a little bit older. Alex and his team are looking at those kind of deals as well where you won’t have that but if you have an older deal, remember, you’re going to be putting in a lot more capital. So it’s not possible to avoid some sort of cost here because if we bought something 10 years old that had fully stabilized taxes in Atlanta, it probably would require more capital, and that would affect the IRR. So we’re going to look at the IRR and use that as our check on that.

Alexander Brackenridge: And in some cases, Alex, this is Alex. As the abatement burns off or when it burns off, some of the units might go to market. So you got to pick up there, too. So it’s not all downside.

Operator: And Jamie Feldman from Wells Fargo.

James Feldman: I guess just big picture to your comments on maybe assets come to market for investment. Your leverage tick lower in the quarter. It looks like you’ve been met — this year, you plan to match fund acquisitions with dispositions. To the extent you want to put incremental capital to work beyond asset sales just because you see so much opportunity. Can you just talk about the sources of capital to do that, you’re having conversations with potential JV partners? If so, what kind of capital looks interested? And then what would you be willing to do in terms of leverage? And how do you think about your liquidity position today for investment?

Mark Parrell: So first off, there isn’t such a significant opportunity out there that it’s worth using our precious leverage capacity or issuing a bunch of equity below what we think the intrinsic worth of the business is. So I haven’t been presented yet with that issue. Talking to the Board, we’re certainly willing to take leverage up. We have a stated leverage policy, Bob?

Robert Garechana: By 5 to 6x net debt to EBITDA.

Mark Parrell: Yes. And we’re approaching 3x so into the 3x. So I would say to you that there are several billion dollars of capacity in the system to buy great assets at great prices using debt when and if we see those opportunities, and we’re looking hard for those. We don’t see them yet. But I’d start with debt. But certainly, the JV market is another source of capital. We’re very aware of that. The private market continues to love the apartment industry, even if the public markets are being buffeted a little bit by some of these cross wins. So we’re out there looking for other sources of capital for sure.

James Feldman: And can you talk about the returns that private market is looking for. Are those sources of capital are looking for? How are they underwriting apartments today? And what kind of trends are they looking for?

Alexander Brackenridge: Generally, there — this is Alex. Generally, they’re looking for the same kind of return, a cap rate of, say, 5%, 5.25%, depending on the assets that we would see in the transactions market.

James Feldman: Okay. And then finally, I mean, to your comments and everyone’s comments, I mean, there’s so much talk about supply. When you just think about the next 6 months, 9 months or 12 months, 24 months, like when do you think the supply chain really starts to kick in based on the delivery scale?

Mark Parrell: Just to make sure I understand the question. When do we think supply will start going down based on deliveries? I’m sorry, didn’t near the end of that.

James Feldman: No. I mean I know in your comments, you feel somewhat protected from supply based on where your assets are located. But clearly, a very large pipeline set to deliver over the next 2 years. When do you think that supply really starts to be felt nationally? It certainly doesn’t feel several months.

Mark Parrell: I think you’ve got the stuff it’s going to get completed. I would say you’re looking more in like ’25 and ’26. I mean stuff you start now — I mean, if you’ve got your capital stack and you’re able to start, you’re going to deliver. I mean, you may deliver a quarter late because of the supply chain, but you’re going to deliver. So I think the starts Alex referred to, will impact ’25’s count will be lower and ’26’s count will be lower but stuff for this year and next, that’s expected to deliver will deliver. And I think some of the numbers in some of the markets, some of which we’re interested in, like Denver and Austin are really large. And that’s a terrific opportunity for us to buy. And to sell some of these assets where we’re overallocated in some of the coastal markets. And I think that’s going to be an attractive play for us.

Operator: And John Kim from BMO Capital Markets.

John Kim: I realize unemployment remains pretty healthy. It seems like demand is going very well for you guys. There have been some reports of employers delaying start dates for new hires. And I’m wondering if you’ve seen any softness in demand as it pertains to the upcoming graduate pool?

Michael Manelis: John, this is Michael. I don’t — I haven’t heard that. I mean I did hear a few kind of comments from prospects around what time they’re looking for. So typically, they’re showing uptake in tours. And these folks were thinking more like the June, July timeframe. There’s definitely a little pause in the prospects decision-making process right now around, are there going to be more layoffs, will they actually get the offer to start when they want it. But it’s nothing of a material nature because, again, our sequential build of application volumes, our foot traffic year-over-year, all of those things are trending in line with what we would say is a normal seasonal pattern. So we haven’t seen anything like that.

John Kim: Okay. My second question is, I think, for Bob, but on the litigation reserve that you incurred this quarter, is this something that may be ongoing? And is this related to RealPage?

Mark Parrell: Yes, it’s Mark. I’ll take that. So being in a consumer-facing business, there’s always some level of litigation costs. They’re widely varying. There’s no significant amount of RealPage related costs in there, but they are in there, but it’s relatively small. The reason for that is that the case is at its early stages. And you should think about that going on for a longer period of time. They aren’t resolved in weeks or months. It’s more like years. But again, we feel very strongly about our position. We think these claims are without merit, and we’re going to defend ourselves, and we continue to feel really confident in our prospects there. So there is some small amount, but it’s small. Most of that just relates to just continuing legal costs from being in a customer-facing business in an industry that has regulation.

Operator: Next question comes from Adam Kramer from Morgan Stanley.

Adam Kramer: Yes, I just wanted to ask about this California storm damage kind of cost. Look, I appreciate kind of the disclosure around 1Q impacts. Wondering just on if there will be further impacts in particular, if you could kind of quantify maybe the 2Q impacts or any other impacts going forward?

Robert Garechana: Yes. Thanks, Adam. It’s Bob. Our expectation is that there won’t be anything material going forward into Q2 related to these specific storms. Obviously, if there’s a different event, then we don’t know. But as it relates to this, there’s nothing material that’s moving the numbers soon for Q2.

Adam Kramer: Great. And then just on thinking through occupancy and kind of the occupancy versus renewal, renewal kind of pushing renewals kind of trade off. Look, recognizing occupancy, there’s some drivers there in terms of physical occupancy, right, kind of what’s happening on the on the bad debt and eviction side. But just thinking through how was that kind of — that trade-off that you guys going through, right, managing occupancy versus pushing renewals? How would that conversation maybe evolved from 4Q to 1Q to today? Is there a change in kind of how you’re approaching that and how much you’re kind of willing or able to push renewals?

Michael Manelis: Yes. Well, I think you could see just that sequential build that we have right now and the achieved renewal increase shows that we are pushing on that front. I mean every market has a different balance act that’s going on between the trade-offs of occupancy and renewals. I mean for us, the preference clearly would be to continue to renew as many residents as possible because, one, we avoid the turn cost; and two, we avoid the vacancy loss with that. So you’re seeing us do a little bit more negotiation across many of the markets right now. But again, we’re well positioned, which gives us that confidence to keep kind of pushing on that rate in the marketplace that not only fuels the new lease change, but also helps the future months renewals as well.

So I think this trade-off is constantly balanced. And honestly, we’re looking at these markets every week going through that conversation now that we have the centralized renewal team, which is which way are we leaning.

Operator: And Linda Tsai from Jefferies.

Linda Tsai: I know you just emphasized IRR of individual deals, but the higher taxes and insurance occurring in the expansion markets, does this shift the attractiveness of these regions long term?

Mark Parrell: There’s no riskless apartment market, and it’s Mark. I’ll start, and Alex may supplement it. I mean, if you’re buying in some markets, you’re going to have higher insurance costs, but maybe lower political risk. And then another market, you may have slightly higher political risk and a lot better resilience and maybe a better supply picture. Our whole investment thought process of being diversified is premised on the idea of kind of accepting these risks in small doses across the whole country and staying tied to these affluent renters so it doesn’t change our mind. We just underwrite it and the deals will either work or they won’t. I do think that some of the markets that have outperformed lately in the Sunbelt that have resilience challenges are really going to be pressed by these insurance costs.

And frankly, maybe even the availability of financing if insurance is unavailable at some of the issue lenders are very sensitive to. But from our point of view, I mean, we’re just going to run the numbers. I think these markets continue to have other subjective factors that are valuable to us. And I think they’re going to remain investable the ones that we’re interested in, for sure.

Linda Tsai: And then just on the strength you’re seeing in New York and Atlanta. Could you talk about that a little more?

Michael Manelis: Yes. I mean — this is Michael. I said in the prepared remarks, I mean, New York, the strength is really kind of widespread across all of the submarkets where you have good demand, you have pricing power, you have the sequential build of the demand and rents moving up with really strong kind of results, both on the retention as well as the achieved renewal increase. In Atlanta, I think right now, relative to our expectations, we feel really good. We’re not having that like direct supply pressure on us. We’re not seeing kind of heavy use of concessions in our portfolio, and we have demand. And even the deals that we’re looking at, one that we have to go through the lease-up or finish the lease-up on, we got a lot of confidence in the velocity, the weekly velocity of application volume there that they’re going to perform really well.

Operator: Omotayo Okusanya from Credit Suisse.

Omotayo Okusanya: Yes. On just capital recycling and the updated guidance there. I get it of buying assets that higher cap rates and selling us at a lower cap rate and kind of creating value that way. But I’m curious with your implied cap at like 6% at this point, according to our math, you did make some comments earlier on about kind of development starts slowing because that development doesn’t tend to allow. How do you kind of think about that on the other side of the story, which is the acquisition side, are still — is the idea still things are not going to be able to kind of pencil out for a while? And unless you’re kind of matching asset sales versus acquisitions, you don’t expect to kind of be doing much out there on the acquisition side as well?

Alexander Brackenridge: It’s really — as you said — Tayo, this is Alex, about matching the sales and the acquisition. So we keep track of that. We don’t get ahead of ourselves on either side and just match them up and it’s a neutral bet, but we feel like we’re accomplishing our goal of diversifying the footprint.

Omotayo Okusanya: And the focus from an acquisition perspective remains in your newer markets rather than some of the more established markets.

Alexander Brackenridge: Quiet primarily, but also in the sub of our established markets. And as we’ve talked about, being opportunistic, there may be opportunities that come up. There’s more dislocation that are appealing anywhere and we would chase those.

Omotayo Okusanya: Got you. Okay. That’s helpful. Would there be any interest in doing something in regards to office to resi conversion from your end or just the development risk and everything is just way too great for you?

Mark Parrell: Well, I’m going to split it up because there’s the urban conversion of these office buildings that are really giant 1-block floor plates. It’s very challenging in urban locations to take a property on LaSalle Street in Chicago or in Midtown Manhattan, it spans a block and doesn’t have a lot of windows relative to the total floor space, doesn’t have a lot of plumbing fixtures. There’s been work done by engineering firms in Boston, for example, on this. And there’s relatively few of these buildings — these large buildings that are going to work as repositioning plays. They may work if the building isn’t there anymore, but they’re just taking that building and some of our reengineering it is going to be tough. In the suburbs, you may — and this has been common in the Bay Area and in suburban Washington.

You may scrape an office park and build apartments there. And we’ve been involved in those sort of plays, but those are different altogether because you’re not reusing the building. So I think reusing an office building is tough in an urban situation just because of the need for plumbing fixtures in the unit and the need for windows that these larger office buildings just don’t allow very well. But I would say, as urban owners, we’d like to see the central business district — office districts thrive. I mean they pay taxes that support transit, that support public safety, we want those to be repositioned. It will just take more time and likely be more costly and extensive than some observers seem to think. I just don’t think you can snap your finger and take a 4-year-old office building and turn it into a livable awesome apartment building in the center of whether it’s Manhattan or the center of Los Angeles.

So we’ll kind of play wait-and-see on that, but urban repositionings for us are not likely in place.

Alexander Brackenridge: And in New York, downtown where it was done a lot. That was on the back of a tax abatement that since expired. The 421g was specifically to promote the conversion. So it doesn’t happen easily and it does need — it generally does need public policy support.

Operator: And our next question comes from Josh Dennerlein from Bank of America.

Joshua Dennerlein: I just wanted to touch base on the new lease change in April relative to 1Q. It looks like it kind of stepped up 30 basis points. How does that compare to kind of the typical acceleration in April versus 1Q?

Michael Manelis: I don’t know if I looked historically back, I will tell you it’s sitting right on top of what we modeled at the beginning of the year, which is what we would say more like a 2019, 2018 kind of curve and expectation. Some of this just has to do with the timing of who moved out? What was their previous lease? So when I look at the 30 basis points growth, I would just tell you any time you look at these statistics or these metrics on such a short time period of time, it does create some volatility with it. So we tend to look at this over the longer stretch. And right now, I’ve said this a couple of that, we’re sitting right where we kind of modeled for the year and write what we would expect based on just the normal sequential build.

Joshua Dennerlein: Okay. It sounds like concessions use picked up in March and April in Yale in San Francisco. If you stripped out those 2 markets, how is kind of new lease rate trending?

Michael Manelis: I think the impact on the overall portfolio was like 20 or 30 basis points on the net effective, like new lease change. So if you just pulled out those 2 markets with the heavy concession use, I think that was what the impact was.

Joshua Dennerlein: Okay. And then just digging down into same-store expenses, I don’t think we’ve touched on the other on-site operating expenses on the call. I think that’s where kind of people kind of use flow through for the evictions. What’s kind of the expectation in that line item going into 2Q, just given the move-outs?

Robert Garechana: Yes. Josh, it’s Bob. Our expectation is that, that could be pretty bumpy because — if you think about the expense, the expense is really in advance, oftentimes is in advance of the actual move-out. So it depends on how quickly and how fast the cases get filed, which we’ve made a good amount of progress faster than what we thought in the first quarter. We’ll have some go into the second quarter. That line item is normally a line item that barely grows for us. And so it will be bumpy because of this elevated activity, but it will be lumpy. So just expect it to be kind of grow above trend relative to history and be lumpy quarter-to-quarter, hopefully tailing off as we get to the back end of the year.

Operator: And there’s no further questions in the queue. I’ll turn the call back over to Mark for additional and closing remarks. Please go ahead.

Mark Parrell: All right. Well, thank you all for your time on the call today and for your interest in Equity Residential. Good day.

Operator: Everyone else has left the call. This concludes today’s call. Thank you for your participation. You may now disconnect.