Equity Residential (NYSE:EQR) Q1 2024 Earnings Call Transcript

Equity Residential (NYSE:EQR) Q1 2024 Earnings Call Transcript April 24, 2024

Equity Residential isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Equity Residential 1Q 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.

Marty McKenna: Good morning and thanks for joining us to discuss Equity Residential’s first quarter 2024 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer. Alex Brackenridge, our Chief Investment Officer; and Bob Garechana, our Chief Financial 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 2024 results and outlook for the year. I will start us off, then Michael Manelis, our COO, will speak to our operating performance and how we see 2024 operations playing out. And then we will take your questions. We are pleased with our first quarter performance, which was ahead of January expectations and reflects the strong demand for the lifestyle our well-located apartment properties provide as well as little new competitive supply across most of our established markets. Our same-store revenues increased 4.1% in the quarter, and our same-store expenses rose only 1.3%, which led to same-store NOI growth of 5.5% and an increase in our NFFO per share of 6.9%.

So, overall, a very solid start to the year across all categories, with the company well positioned to capture increasing seasonal demand as we head into our prime leasing season. As is our practice, we have not revised our operating or FFO guidance and we’ll make adjustments as we get deeper into our primary leasing season. Digging under the hood a bit, the durability of the employment picture for our target affluent renter demographic is a continuing bright spot in our business as is the cost of owned housing. Unemployment for the college educated, a very sizable percentage of our residents, remains at around 2%, considerably lower than the overall average, supporting demand. This demographic, which is well employed in the growth engines of our economy, including technology, financial services, and other professional and business services, continues to grow in both our established and expansion markets.

We also see a little competition from owned housing as the high cost of homes, combined with elevated financing costs and rapidly rising insurance, real estate tax, and maintenance costs combine to make rental housing a very attractive option for many people. Social factors that we’ve discussed on prior calls like smaller households and delayed marriage and childbearing add to the attractiveness of rental housing. In the quarter just ended, the percentage of our residents leaving us to buy homes was 7.8%, a continuation of all-time lows. Strong demand and high single-family housing costs are consistent conditions across both our coastal established markets that represent 95% of our company’s NOI and our new expansion markets of Dallas-Fort Worth, Atlanta, Denver, and Austin, that collectively represent 5% of our NOI.

But on the apartment supply side, we see two very different pictures playing out in our established coastal markets versus our expansion markets. With the exception of Seattle and Central D.C. in our established coastal markets, we see the terrific demand I just mentioned being met with generally little new supply, leading to solid rent growth. Across our four expansion markets, we see robust demand as well, but it is being met by an overwhelming wave of new supply, leading to declining rent levels, high concessions, and occupancy pressure. We expect this pressure to accelerate as units continue to deliver in these oversupplied markets, especially once the prime leasing season concludes and demand seasonally declines. Switching to expenses, Michael is going to go over all that with you in a moment.

But I wanted to take a second to thank our teams across the company for their amazing work on expense management. We are very pleased to have produced a sector-leading 3.1% average growth rate of same-store expenses over the last five years. Our teams have embraced innovation and a customer service mindset and are not afraid of change, and it shows in these numbers. Well done, team. On the investment side, we are seeing properties that we would be interested in acquiring, well-located newer properties in our expansion markets in the suburbs of Seattle and Boston trade at high prices and in very low volume compared to pre-pandemic levels. Investment sales activity in the first quarter was over 60% below average pre-pandemic levels. Estimates from my colleagues who attended the recent ULI Conference indicate that there is over $200 billion of dry powder looking to invest in North American real estate, with a significant portion focused on apartments.

Recent data points from the pending AIRC transaction and apartment portfolio and one-off deals are similarly supportive of much higher values than the public market is currently suggesting. While this is a huge positive signal about the underlying value of our company, it has slowed our portfolio rebalancing efforts. And while pricing in most of the apartment transaction market is strong, buyer interest is not yet fully evident for some of the large urban West Coast assets that we want to dispose of as part of our strategic rebalancing. We expect that to change as these submarkets continue to show improved operations and better quality of life conditions. In the meantime, with the lack of actionable acquisition opportunities, we saw value in our own stock.

So, we continue to strategically deploy disposition proceeds from the sale of older inferior properties in our portfolio into repurchases of our stock. In the first quarter, we repurchased approximately $38.5 million of our own common shares at a weighted average share price of about $59 per share. Since we began this activity in the fourth quarter of 2023, we have repurchased approximately $87.5 million of our shares in what we see as an attractive valuation level of a bit below $58 per share. We are using the remaining disposition dollars to drive down our already low leverage, which will create more internal debt dry powder for when opportunities do emerge. We are going to continue to be disciplined in our transaction activities with a focus on growing cash flow over the long-term.

With regard to external growth, we are on track to deliver six newly completed joint venture developments in 2024. These six properties, three located in Dallas-Fort Worth, two located in Denver, and one located in suburban New York, will be delivered at a weighted average stabilized yield north of 6% and will contribute meaningfully to our normalized FFO starting in 2025 given their completion and lease-up timing. The three Dallas-Fort Worth developments are the first completed projects to come out of our partnership with Toll Brothers. With some of the other equity residential executives, I recently visited all six of these development projects, and I’m inspired by the enthusiasm on display from our lease-up teams and excited about adding these high-quality assets to our portfolio.

Before I turn it over to Michael, I wanted to make a quick comment on the new housing laws that were passed over the weekend in New York, though I know we are still digesting the law and its implications. The law allows for renewal increases of CPI plus 5% up to 10%, and provides for vacancy decontrol on the types of units we generally own in New York, which allows rents to move to market when a new resident moves in, and that’s similar to the rent laws that were passed a few years ago in California. Overall, new price controls on an already undersupplied good, in this case, rental housing, is not an effective way to attract private capital to help solve the housing supply problem in New York State. However, there are also tax incentives in the new law for new rental construction subject to a new higher wage scale required for labor on larger buildings as well as permanent affordability rules.

There are also some language on zoning reforms and some rules that aim to make office-to-residential conversions easier. While the rent control provisions are not helpful, we commend the governor and the legislature for focusing on a supply-based solution similar to recent legislation passed in such politically disparate states as Florida and California. We think focusing on supply, not heavy-handed regulation, has been recognized on both sides of the aisle as the long-term solution. While the new law adds to the complexity of operating in New York, a good portion of our portfolio in New York City is exempt either due to being built during or after 2009 or meeting the luxury exemption thresholds. We’ll be happy to discuss all this further in Q&A.

And with that, I’ll turn the call over to Michael Manelis.

Michael Manelis: Thanks Mark and thanks to everyone for joining us today. This morning, I will review our first quarter 2024 operating performance and our positioning as we start the leasing season. We’re off to a very good start thus far. As Mark mentioned, demand remains good across all of our markets, supported by a continuing solid job market and high employment in our affluent renter target demographic. One of the real highlights of the quarter was our turnover, which is the lowest we have ever seen. Our focus on customer satisfaction, harnessing data, and leveraging our centralized renewal team to drive results is definitely having an impact here. In the first quarter, we renewed more than 61% of our residents, which is one of the highest percentages that we have seen.

A special shout-out to New York, Boston and Seattle, who set their own high marks and greatly contributed to this result. Our first quarter same-store revenue growth exceeded our original expectations, including very good performance in San Francisco and Seattle, which I will discuss in a moment. This positions us very well for the year, but we acknowledge that this is just the beginning of a critical primary leasing season. Our efforts to build occupancy in the fourth quarter of 2023, coupled with continued strong demand and high resident retention, have resulted in both slightly above average rent growth since the beginning of the year and a 50-basis point quarterly sequential gain in physical occupancy. At 96.5% occupied this month, which is one of our highest reported occupancies in April, we have a lot of confidence that we will be able to continue to grow rates through the leasing season.

The high percentage of residents renewing that I previously mentioned is also a big factor in this strength. In terms of market same-store revenue growth, the East Coast markets in Southern California are producing leading growth, as we expected, with San Francisco, Seattle, and the expansion markets following in that order. As we think about these markets’ performance relative to our expectations, New York and Washington, D.C. are running ahead of expectations, while Boston and Southern California and the expansion markets are in line. San Francisco and Seattle are also running ahead, but remember, these markets have been historically volatile. So, we remain cautiously optimistic that we will hold on to the gains in these markets for the remainder of the year.

Now, a little more color on the individual markets before closing out with expenses and commentary in other income and initiatives. Starting in Boston, year-to-date revenue performance is in line with the expectations. City of Boston is currently 97% occupied and we have very little competitive supply to deal with. Concession use is little to none in this market. And overall, we continue to expect Boston to deliver some of the best full year revenue growth in the portfolio. As I mentioned, New York is performing well, with both strong demand and pricing power. The market is over 97% occupied and has very little competitive new supply. So far, we seem to have moved past the rent fatigue we saw in the market in late 2023 and expect good things from this market in 2024.

Hats off to Washington, D.C. as this market is outperforming our revenue growth expectations even after a strong 2023. We’re benefiting from a very solid employment picture here, particularly in the defense sector, which is driving consistent, stable high occupancy and real strength in our retention. We see good results across the whole market, but the district has recently begun lagging our suburban assets, likely due to nearby supply. Overall, we still expect Washington, D.C. to deliver a good amount of new supply in 2024 with nearly 13,000 competitive units. So, we do anticipate the pressure to continue to grow as the year progresses. In Los Angeles, we see good demand, but not a lot of pricing power at the moment due to the additional units being brought back to the market through the eviction process.

Our portfolio is 96% occupied, and we continue to make progress on the delinquency and bad debt situation, which should be a tailwind for growth in 2024. Timeframes for processing evictions have recently improved from nine months to six months, which should help us make more progress going forward. But they still do remain nearly twice as long as they used to be. That being said, we are very encouraged by the recent improvement. Rounding out the rest of Southern California, San Diego and Orange County are continuing to be very strong performers. The general lack of housing is keeping occupancies high. Home ownership costs are also high here, which makes renting in these markets the more attractive option. San Diego will see more competitive new supply in 2024, while Orange County will see similar amounts to last year, with limited pressure at a few of our Irvine locations.

Now, for the markets that may be of most interest: San Francisco, Seattle and the expansion markets of Dallas-Fort Worth, Denver, Atlanta and Austin. For the two West Coast markets, remember that we entered the year with relatively modest expectations but potential for upside. So far, both markets are doing better than we expected, but it’s early and both remain show-me stories as we saw periods of stability and pullback in 2023. In San Francisco, we are well occupied but would like to see continued improvements in pricing power. The South Bay, East Bay, and Peninsula continue to perform better than our Downtown portfolio. The situation here remains the same as the market lacks the catalysts, either job growth or more robust return-to-office policies, to create true pricing power.

Concessions remain prevalent in the Downtown submarket, but are being issued at a lower rate than they were in the fourth quarter, consistent with what you would seasonally expect. In Seattle, we carried strength from December into the early part of the year, leading to improved occupancy and the ability to move up rental rates, which is evident in our new lease growth for the quarter. That being said, we do expect a fair amount of competitive new supply in the market in 2024, which could temper growth. The East Side is performing better than the City of Seattle, and our Redmond assets are performing very well despite having some direct pressure from a new lease-up. Overall, the downtowns of both markets are showing real improvement in the quality of life, and the local political situation continues to get much more constructive as a focus on bringing these cities back to the thriving environments they were prior to the pandemic remains front and center with both policymakers and citizens.

Recent primary elections in San Francisco were very encouraging as voters supported candidates who are focused on addressing safety and the quality-of-life challenges. Finally, some commentary on our expansion markets. Strong demand and a favorable regulatory environment continue to confirm our positive long-term outlook for these markets. Unfortunately, however, in the near-term, we are seeing the pressures from high levels of new supply being delivered in 2024. Market occupancies are lower than our established markets and concessions are prevalent. So far, concession usage at stabilized asset properties in Atlanta, Dallas-Fort Worth, and Denver are running at about 30% of applicants getting about four to six weeks. And in Austin, it’s 60% of applicants getting about six weeks.

Operating conditions are challenging across all of these markets, but Dallas appears to be more resilient, followed by Denver, Atlanta, and then Austin. The job growth numbers in both Austin and Dallas are some of the highest in the country, which is clearly aiding in the absorption of some of the new supply. But the volume of deliveries is high and going to continue to grow throughout the year. With regards to bad debt and delinquency, the first quarter results were in line with our expectations. As I mentioned, we continue to see improvements in the time it is taking to process evictions in L.A., which is where the majority of our delinquent residents are, which is resulting in a decrease in the number of long-standing delinquent residents that we have.

This is an encouraging sign and continues to support our view that we will see overall improvement in bad debt net contribute 30 basis points to our same-store revenue for the full year. Now, let me hit on some highlights on expenses. Our 1.3% growth in the quarter was better than expected and driven by a decrease in both utilities and repairs and maintenance, coupled with pretty flat on-site payroll expense growth. On the utility expense, we primarily benefited from lower commodity pricing. We also intend to take advantage of federal and local incentive programs to continue to accelerate our sustainability efforts and moderate future utility growth. For example, we have 26 future solar installations planned, in addition to our 55 active systems, which will help reduce our future overall assumption.

Our repairs and maintenance expense decrease was driven primarily by lower turnover costs and, to a lesser degree, maintenance expense, which was unusually elevated in the prior year. Once again, our disciplined approach to expense management has continued to pay off. On the innovation front, as we have previously discussed, we will be focused on a number of initiatives to drive both revenue growth and operating efficiencies. Specific to other income, our expectation remains unchanged that this will be a contributor of 30 basis points to our full year same-store revenue growth. During the quarter, we delivered 60 basis points, which was slightly ahead of our original expectations and mostly due to faster implementation of our parking revenue optimization program.

In addition to our efforts around other income, we have been very focused on areas of opportunity like leveraging artificial intelligence into our business process. As early adopters of these AI interactions, we are thrilled with the performance of these tools. Over the past year, our AI leasing assistant, Ella, has engaged with just over 600,000 customer inquiries, set 2 million responses addressing prospect questions, and booked over 80,000 appointments. Leveraging this type of automation at the top of our demand funnel has been incredibly effective, allowing us to be nimble with increasing initial traffic demand without impacting our remaining on-site employees’ ability to provide high-touch customer interactions when needed. We’re excited to share that in the coming quarter we will begin testing an AI resident assistant, helping existing residents 24/7 with common questions about their community service and even their account statements.

I want to give a shout out for our amazing teams across our platform for their continued dedication to innovation and enhancing customer service. As we sit here today, we’re 96.5% occupied and continue to see strength in our renewal process, which positions us very well to capture the pricing power opportunities that the peak leasing season will bring. With that, I turn it over to the operator for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question will come from Eric Wolfe with Citi.

Eric Wolfe: Hey thanks for taking the questions. If I look at your April new lease growth of 0.1% versus the 1.6% at this time last year, I’m just trying to understand why it’s a bit lower given you’re in a better occupancy position. I think you said record retention, record low turnover. So, just wondering if we could see that catch up over the next couple of months?

Michael Manelis: Hey Eric, this is Michael. So, yes, I think one of the things you need to remember is that, relative to the first quarter in 2023, we are issuing more concessions right now. So, that does impact a little bit of what you see in that new lease change. But clearly, when you just think about the normal rent seasonality curve, pricing trend or asking rents in the marketplace, we’re seeing that sequentially build. And you’re seeing that sequential improvement in kind of the new lease stats for April over March. So, I think what you should expect for the next several months working our way probably even through the middle of the third quarter is that we will sequentially build new lease change up, and we will see that stability in kind of the renewal, achieved renewal increase performance. So, you’re right to call out that it’s a little lower than norm, but right now we like the sequential improvement that we’re seeing.

Eric Wolfe: All right. That’s helpful. And then to your point on concessions, if we look at SF and Seattle, specifically, can you maybe talk about where concession usage is today versus, say, this time last year and if you’re planning to dial that back further as we get into the peak leasing season?

Michael Manelis: Yes. So, — and I think I called this out even on the first — or the call in January, that we made a strategic decision to increase the concession use, build up that occupancy in the fourth quarter, and really have been just pulling back the concession use as we worked our way through the first quarter. The most pronounced reduction actually came out of San Francisco. I think the offset to that reduction is that we also started to utilize some concessions in L.A. So, when you think about the sequential change from the fourth quarter through the first quarter, our concession use ticked down a little bit but not as much as what it would have been if we didn’t start increasing some of the usage in the L.A. market.

Right now, about 50% of the concessions that we’re using are concentrated in Seattle and San Francisco, with a large majority of those sitting in those Downtown areas. Both of those markets are below where they were in January. And I’ll tell you, we’ve had a really strong couple of leasing weeks. So, I know the teams right now for the last several weeks have been strategically looking at where they can continue to dial back the concession use.

Eric Wolfe: Thank you.

Operator: And our next question will come from John Pawlowski with Green Street.

John Pawlowski: First question is on CapEx, Bob. It’s been running, I think, last year about 3,700 unit, up to 3,800 this year, which is 40% higher than 2022. Is this a new structurally higher level of CapEx we should expect moving forward? Or should we expect a reversion to historical levels in the coming years?

Alexander Brackenridge: Hey John, it’s Alex. So, there are a couple of factors at play there. One is — and we talked a little bit about this last quarter, is leaning in more on some ROI projects, specifically renovations, some solar installations, some smart rent installations as well, and EV chargers. So, there’s some things that we can toggle up and down. They have ROIs on them, and they’re discretionary. So, that’s in the mix. There’s also an element of catch-up from the pandemic. Those are projects that we just couldn’t get to because we didn’t want to disrupt our residents who were staying at home at that time. And so there’s a little bit of catch-up there. So, we’re going to have a couple of more years of that, we think. So, I think this 3,800-ish number is pretty good.

John Pawlowski: Okay. And then a question on markets. I mean, Michael or Mark, I guess, which markets when you’re looking at just in terms of the absolute level of rents are you more concerned you’re getting closer to hitting the affordability ceiling?

Michael Manelis: Yes, John, this is Michael. So, really, from the affordability standpoint, I wouldn’t say we have any concerns at all. I mean we’re not seeing a material shift. We still sit at about 20% rent-to-income ratios. And the range is fairly tight, running between like 18.5% to 24%. And the Southern California markets are sitting up at that higher range and they really historically have always been up at that level. So, I’m not concerned about us hitting that point where the affordability index. I think what we saw in a market like New York where you had such robust rent growth through the peak leasing season last year, you hit that point where kind of you felt like you hit a rent fatigue level. We’re not seeing any of that right now in the portfolio, but it’s still pretty early into the leasing season. So, I’m more looking at that absolute rent level than anything around the affordability of our resident base.

John Pawlowski: Okay. Thank you for your time.

Operator: And our next question will come from Steve Sakwa with Evercore ISI.

Steve Sakwa: Yes, great. Thanks. Michael, I was wondering if you could just provide a little bit more commentary on the San Francisco and Seattle sort of strengths, and whether you can determine are those kind of folks that are returning to the market? Are they just kind of moving around the Bay Area and Seattle? Just how do we think about that demand that’s picked up in the drop in concessions?

Michael Manelis: Yes, it’s a great question. So, this is Michael. So, I look at those markets right now and I think, clearly, we did see some marginal improvement with the migration patterns. We’re still running with a slightly higher percent of new residents coming to us from within the MSA, meaning we’re just trading around within the MSA. But we are marginally seeing some improvement, but we are elevated still from those historical norms. And I think we’re going to remain elevated until you see the catalyst of either job growth or specific to like Downtown San Francisco really seeing kind of a more robust return-to-office policy. So, in terms of the demand, it’s not really like the migration factors that are doing it. I still think you see some folks coming from further out near or in, and that was a little bit of the catalyst that we saw.

And you also get a different sense of vibrancy. I mean we talked about this now for over a year. Every quarter, the cities, those metro areas seem to start feeling better and better. And you’re seeing that play out. So, right now, our positioning — we’ve got both markets sitting up at 96% occupied. It gives us a lot of confidence to keep pressuring whether we’re raising the absolute rate, holding back the concession, we’re seeing the sequential build in our net effective rent. And that’s what we’re looking for. As long as the velocity holds, we’re going to do really well through the peak leasing season. But we’ve seen these markets before kind of have fits and starts. So, I think it’s just too early to call that these are wins for the year.

Mark Parrell: Yes, I’m just going to elaborate. It’s Mark, Steve, I’d add a little bit. Again, we do see that improvement in Downtown San Francisco, but it’s not yet the job growth we probably need to drive rents. But we’re 14% or so below rent levels that we’re pre-pandemic. So, there’s definitely room here. Incomes have gone up, as we’ve talked about on the calls. The crime statistics in the city of San Francisco generally have really improved compared to last year and compared to pre-pandemic levels. And as Michael said, politically, we think the March 2024 primary was a real watershed moment. We think the citizens really took it upon themselves on both public safety and other matters to really take back their city. So, we’re excited about some of the progress there.

The AI revolution is a big driver potentially for San Francisco, the city and the Bay Area more widely. Our numbers indicate that the Bay Area is getting 13 times more funding than the next metro area in terms of AI investment. Now, that’s very significant. Now, those jobs aren’t that many yet. I mean they are a few hundred, they’re not the thousands. So, we’re not seeing that job growth yet that we really need to drive our numbers. But we are seeing that network effect where companies like OpenAI was incubated at UC Berkeley and it opted to stay in San Francisco. Some of these incubator firms have moved back in to San Francisco from the city, from the suburbs. So, that’s all really positive. In Seattle, I just want to give a plug for our friends in the Northwest, I mean this enormous $700 million project, their version of the Big Dig, to take the Alaskan Way highway and put it underground and really activate the waterfront is really significant.

It’s driving tourism, it’s driving activation slowly but surely in Downtown Seattle. Seattle’s problem is really going to be the supply issues. There’s just a fair bit of supply. But we do see activity levels improving. And again, politically, the city council and the mayor are much more focused in Seattle on public safety and quality of life because that’s what their constituents have told them to be focused on. So, again, we’re pretty excited. And I guess we’d make the statement that we continue to see Seattle and San Francisco as when, not if, stories. And the when could be this year if things continue as they are, but we need to see a little few more months of continued good results in a market that, again, can give you a head fake once in a while.

Steve Sakwa: Great. Thanks for that color. Maybe the second question, I don’t know if Mark or Bob, you want to take this, on the — I guess it was on the late fee California settlement and the charge that you guys took in the quarter. Can you just kind of elaborate or say what you can say about that? And does this kind of put this issue to bed? Or could there still be lingering kind of issues that come out of that lawsuit?

Mark Parrell: Hey Steve, it’s Mark. Thanks for that question. I mean we are still in active litigation, as you suggested in your comment or your question. So, there’s not a lot I can say. Just to give you a little background, this has been a case that’s been going on for 10 years. About the amount of late fees, we just got a ruling from a judge that was adverse to our interest, so we adjusted the reserve. We are considering our appeal options. So, to your point about adjustments, they could go up or down depending on our actions. Also the judge didn’t give us a number. He gave us a methodology, and we’re working out with claimant’s council what that means. So, we can charge late fees, it’s just the amount that’s an issue. So, we need to figure that out.

So, there could certainly be additional adjustments. I wouldn’t expect them to be terribly significant upward. But if we win an appeal, I guess there could be a downward adjustment. But this is going to go on for a little while yet, I would think.

Steve Sakwa: Great. That’s it.

Operator: And our next question will come from Josh Dennerlein with Bank of America.

Josh Dennerlein: Yes, hey guys. Thanks for the time. I appreciate all the comments on San Francisco and Seattle, definitely a hot topic. Could you just remind us your split between urban and suburban exposure in those markets?

Alexander Brackenridge: Yes. Hey Josh, it’s Alex. In Seattle, we’re 60% urban and 40% suburban. In San Francisco, it’s the opposite of that. So, we have a broader suburban exposure there.

Josh Dennerlein: Okay, cool. I appreciate that. And then I guess just are the trends like really materially different between the urban and suburban assets in those markets? And just trying to figure out like the dichotomy going forward?

Michael Manelis: Yes. Hey Josh, this is Michael. Yes, they’re absolutely different. And again, this remains the story about kind of the City of Seattle and Downtown San Francisco is where we see kind of the least amount of pricing power, kind of lower occupancy. So, the suburban portfolios are clearly outperforming the urban, and that’s a trend we’ve seen for a while in those markets. The only thing I would call out in San Francisco is that you do have some supply coming back to the South Bay and it is back-half loaded. So, you do need to see kind of that demand pick up because you have like 4,000 units coming back to that submarket just later on this year. But again, it’s doing — it’s performing very well right now. We saw it absorb 4,000 units a couple of years ago. So, it’s nothing that we’re concerned, but it’s still something that we’re watching for.

Josh Dennerlein: Okay, appreciate that. Thanks for the time.

Operator: And our next question comes from Adam Kramer with Morgan Stanley.

Derrick Metzler: Hi, this is Derrick Metzler on for Adam Kramer. Thanks for the question. I wonder if you could tell us anything about the cadence of same-store growth for the rest of the year and kind of what to expect given the strong 1Q and full year guidance that’s kind of well below that?

Robert Garechana: Yes. Thanks Derrick. It’s Bob, I’ll take that. Let me start because there’s a few pieces driving this, but let me start on the same-store revenue front with the residential rental component. Our assumption for residential rental income is that we anticipate a year that is pretty normal, meaning that sequentially, we expect the blended rates to continue to get better until they seasonally decline in Q4. And so you’re going to see that normal kind of robust growth pattern as you work your way sequentially through. On the other income front, which also drives the same-store revenue piece, that’s a little bit lumpier. So, we expect to see bad debt improvement and increased income from initiatives later in the year as well.

So, that will all help growth as you kind of continue on sequentially as well. And then the non-residential side, which you saw some lumpiness in the first quarter that we disclosed in a footnote on the bottom of Page 10, that is going to be a little bit of a drag when you get to the back half of the year. But when you get to the full holistic year, it doesn’t really impact same-store revenue overall. So, normal kind of seasonal trajectory. Given the comp period, when you put it in the blender, when you look at quarter-over-quarter, we would expect the quarter-over-quarter to be lower in the back quarters of the year than they are in the first quarter.

Derrick Metzler: Got it. Thank you for that. And anything on expenses, too? And the cadence there for the year?

Robert Garechana: Yes. Also pretty typical. We certainly had a very good first quarter on the expense side, better than what we anticipated as we kind of highlighted in the disclosure. And we didn’t adjust guidance at all. So, we do expect that it’s — while it’s early, we’re being a little bit cautious on the expense side. So, we’re hopeful that we can do better than the midpoint of our guidance range, but we’ll see. But from a growth trajectory standpoint, remember that Q2 and Q3 are always usually the higher growth rate periods because you have more turnover going on in the portfolio because you’re in the leasing season. So, you expect those growth rates to be higher. And then the only other thing I would highlight is 4Q had a difficult comp period. 2023 fourth quarter growth rates were really low, and so we have a little bit of a harder comp period in the fourth quarter. But we’re off to a really good start on expenses, and so we’re cautiously optimistic there.

Derrick Metzler: Great. Thank you. Congrats on the strong quarter.

Robert Garechana: Thanks.

Operator: And we’ll take a question from Michael Goldsmith with UBS.

Michael Goldsmith: Good morning. Thanks a lot for taking my question. At what point during the year do you feel confident about maybe not hitting the low end of the guidance, like recognizing you don’t make adjustments for the first quarter of print, you did speak about trends being ahead of expectations, I guess maybe the question is, are you, at this point, do you feel like you’re trending at the higher end of the range or above the range? Where you sit today? And what will give you confidence about adjusting that with the next quarter? Thanks.

Mark Parrell: Thanks for the question Michael. It’s Mark. We generally look at this at the end of each quarter and because we have so much disproportionate activity in the second quarter, that it makes sense to us that that would be the time to really look hard at this. It’s a really volatile world, even more so than usual, both in the economic terms and every other term you could think of. So, to us, it makes some sense to wait. We’ve got a few markets that feel like they’re poised to recover, but Seattle and San Francisco specifically. And those have been a little bit — markets with a little bit of volatility as well. So, I guess I don’t know what to say about whether you get the low end of the guidance or the high end of the guidance, but right now we’re clearly pointed to the high end of the rev number and the lower end of the expense range.

But this is just one quarter and there’s a lot of time to go. And again, we feel very optimistic and very excited about the fundamentals of the business, and we’ll report back in July and tell you where we are.

Michael Goldsmith: Thanks for that Mark. And my second question is, you sold a couple of properties during the quarter, used that to buy back some stock, paid out some debt, maybe fund some of these development. Would you look to kind of continue to sell at the current piece? And does the fact that — you did talk about how there’s $200 billion of dry powder on the sidelines to reinvest into real estate, like would you continue to sell even if there is nothing to acquire? Thanks.

Alexander Brackenridge: Hey Michael, it’s Alex. We’re going to slow down the dispositions until we see better visibility into the acquisition side of the market. And it did feel like two or three weeks ago we were getting there, that there were — buyers and sellers were kind of finding common ground at around 5 to 5.25. But then the inflation report came in hot, hotter than expected, and that really kind of threw everything backwards to where we were a quarter ago, where there’s a pretty good spread right now, the tenure, I think, is over 4.6 today. And so we’re just trying to figure out what the cap rate environment is for acquisitions. And so we’ll just temper the dispose until we get a better sense of that.

Michael Goldsmith: Thank you very much.

Operator: And our next question will come from Haendel St. Juste with Mizuho.

Mark Parrell: You there, Haendel?

Haendel St. Juste: Hey there. Good morning. I had a follow-up on, I guess, the rent reversal — I’m here. Can you hear me?

Mark Parrell: Yes, we can now. Go ahead, Haendel, we can hear you.

Haendel St. Juste: Sorry about that. So, had a follow-up on the rent reversals during — okay. I had a question on the rent reversals in the quarter. The improved collectibility expectations you outlined, I assume they were tied to Rite Aid. So, can you outline what’s changed there and why you’re adjusting your expectations? And then what’s the net-net of all of this beyond this year? I think you said this year was a net neutral event. So, just curious if the space now spoken for or what we should expect over the next year or two?

Robert Garechana: Yes. Let me — hey Haendel, it’s Bob. Let me clarify real quick. So, relative to expectations, we had in our guidance expectations as we called out the straight-line receivable reversal as it relates to non-residential. So, there’s no change to expectations. The other thing I would point out is that the benefit in the first quarter actually has no relation to the Rite Aid lease that we talked about last year. So, let me describe what it is. You may recall that during the pandemic, we actually took a large write-off of the straight-line receivable related to a variety of tenants, which converted those non-residential tenants to a cash basis of accounting. Under the accounting literature that, over time, when your outlook on collectibility changes, you convert them back to an accrual basis level of accounting.

So, you put that straight line receivable back on the books. As you can imagine, given the nature of the tenancy and the nature of that space in the retail, we’re very cautious to ensure that there was our collectibility view change. So, we had a pretty high hurdle rate in terms of determining that we thought that these leases would be collectible, and we did so in the first quarter, but that was intended and anticipated in guidance. So, what you saw was a return of that receivable balance. We don’t expect there to be much more there in the quarterly cadence for non-residential. And so that’s kind of what that nature was specifically. Since you mentioned Rite Aid, I will just say one quick thing on Rite Aid because that is a rather large space.

So, that space, the lease was terminated associated with Rite Aid, but we have re-leased it. So, we have an active lease with a very high credit quality tenant. We’re in the process of putting TI dollars into that. And once those TI dollars are completed, which should happen later this year, at that point, we’ll turn the space over and we can begin revenue recognition on that lease specifically. And that’s the update on Rite Aid. But otherwise, there’s nothing — there’s no relationship with Rite Aid at this point.

Haendel St. Juste: That was helpful. Thank you. And then on — a question on the second quarter guide here. Yes, a quick one on the second quarter guide. It seems a bit low versus what we and I guess the Street was expecting, especially in consideration with the rental dynamics you’re enjoying. So, curious if there’s any one-timers impacting that. Anything in there from a dispositions perspective, anything moving the needle? Or is that a clean guide? Thank you.

Robert Garechana: Yes. Good question. So, as you saw from our full year guidance, we didn’t adjust our full year guidance, but we did give — provide for the first time NFFO guidance for the second quarter, and continue to maintain what is probably a little bit of a cautious outlook still. But there are a couple of callouts that I would say that are inherent in the Q2 NFFO guidance, that range that we provided, that are a little bit different than what you would have normally seen sequentially between Q1 and Q2, which I think is what you’re getting at, Haendel. The core business continues to do what we would expect it to do as Michael just outlined. So, the core kind of residential NOI business is growing the way that it would normally grow, but we won’t have that sequential benefit from the straight-line receivable that I just described.

So, that’s a little bit of drag on the sequential component. Overhead is also not declining as quickly sequentially as what it has done in historical periods for a few puts and takes. And finally, there is a little bit of transaction noise because we are front-end loaded on the disposition side. Oftentimes, when we do dispositions, we put those proceeds into 1031 accounts, which are interest-bearing cash accounts, but they don’t earn as much interest as the NOI loss. That’s a temporary dilution that we incur. And so that’s putting a bit of a drag on the sequential Q1 to Q2 numbers.

Mark Parrell: Just to elaborate, it’s Mark. We don’t expect overheads to be higher or different than our guidance range. It’s just the cadence of it is a little different where, for a variety of reasons, the first and second quarter are more similar than usual. And you should expect a real decline in quarters three and four. So, we’ll update that all in July, but we don’t have any expectation that overhead is net higher. It’s just the drop between the quarters is occurring between quarters three and two, not between quarters one and two as has often been the case.

Haendel St. Juste: Very helpful. Thank you guys.

Operator: And we have a question from Jamie Feldman with Wells Fargo.

Jamie Feldman: Great. Thank you and good morning. I guess just a follow-up to the 2Q number or 2Q guidance. So, can you — since it sounds like there’s a lot of moving pieces, can you talk about just the core numbers? I mean what are you expecting for rents, blends, occupancy, same-store revenue in 2Q, just to maybe level set?

Robert Garechana: We typically don’t provide that degree of guidance. But I would tell you in terms of the actual same-store kind of revenue piece, what I would tell you is that, sequentially, what you normally see between — in same-store revenue is call it $0.02 to $0.03 — or NOI, sorry, is call it $0.02 to $0.03 of sequential improvement in NOI between Q1 and Q2. And that’s pretty much where we are on the residential side. But we’re losing, call it, about $0.01 from the non-residential piece. We’re also losing about $0.01 from the overhead kind of sequential piece along with a handful of other things in the transaction activity that we mentioned. And that’s why you’re only seeing $0.01 improvement sequentially. Keep in mind that the leasing activity that you execute in the second quarter typically has a bigger effect on revenue in the third quarter because those leases are ratably reset during the second quarter. So hopefully, that helps from a color perspective.

Jamie Feldman: Okay. Yes, that’s very helpful. And then maybe thinking about your debt maturities in 2025. You’ve got $250 million expiring, you’re sitting on pretty low leverage at 4 times debt-to-EBITDAre. You’ve got 8.25 preferreds out there. It sounds like you’re slowing down the disposition pipeline. I mean what are your thoughts on just other investments, other uses of capital here? What do you think on the balance sheet side — you probably just let things ride through year-end without any kind of meaningful changes of — or debt pay downs or pay downs of any sort?

Robert Garechana: Yes. As you mentioned, Jamie, the balance sheet is in phenomenal shape. I mean from an absolute leverage standpoint, it’s very low. But you’re also highlighting something that I think is worth noting, which is we have very little interest rate exposure because we don’t have a maturity or any refinancing needs until the middle of 2025. And even when you look further out, there is a modest kind of maturity piece. So, I think when you look at use of proceeds, probably in the menu of choices, debt paydown is the last one, to be frank. And we’d be more interested on the capital allocation front, whether it’s acquiring assets or otherwise, even buying back shares just from a standpoint of whatever presents a better value proposition because we don’t have any maturity issues and we have very limited exposure to rates.

Jamie Feldman: Okay, all right. Thank you for that.

Operator: And we’ll take a question from John Kim with BMO Capital Markets.

John Kim: Thank you. Mark, you mentioned $200 billion of dry powder, a lot of that focused in multifamily. At the same time, we have the Blackstone-AIR transaction. How do you think that’s impacted pricing or will impact pricing on sales of either assets or portfolios in the market? Could pricing be more aggressive despite the recent rise in interest rates?

Mark Parrell: Yes, that’s — I’m going to pull a little bit. It’s Mark, on the comment Alex just made. I think when people saw the AIRC print, there was enthusiasm. I think when people felt like that, combined with the thought that maybe rates were going to go down in the relative near-term and you had some certainty on sort of the financial markets and such, that that was a positive thing for stability and for kind of closing that bid/ask spread that’s existed for a while that Alex talked about for several quarters. And I think when the treasury sold off, when you saw rates really, that inflation print was high, and you have a 460-plus tenure, all of a sudden that threw that all back into play again. So, I would say right now, we continue to struggle to see a great deal of product offered.

I think the obvious evident enthusiasm for apartments in the private space, and we hope soon in the public space more so, is powerful. But I think there’s still a bit of — a pretty big difference between seller and buyer expectations, that I think was the gap was closing a little and now I think the gap remains. And Alex, how would you expound?

Alexander Brackenridge: Yes, John, this is Alex. One thing that hasn’t changed, although the rate environment is confusing to many investors, is the amount of product that’s delivering, particularly in the expansion markets that we’re excited about. And a lot of that just isn’t capitalized to be owned for the long-term. I mean it was merchant built in many cases. And we’re eager to pursue that. We just need to come up with pricing that makes sense in the current rate environment. And there’s some other owners of more stable properties that also were seeing some debt challenges, and we just expect more opportunities where, as Bob has mentioned, really well poised to take advantage of them. We just need the right price given the rate environment.

John Kim: On the rebalancing strategy, it sounds like you mentioned that pricing has slowed down those efforts a little bit. At the same time, you seem very encouraged by the political environment improving in San Francisco, Seattle, and New York. Do those policy changes or anything new in data as far as net migration or any other items potentially reconsider your views on either the timing or the strategy of redeploying capital into the Sunbelt?

Mark Parrell: Yes, that’s really an outstanding question. I think the really good news here is that both sides, whether it’s Governor DeSantis in Florida, whether it’s Governor Newsom in California or in New York or Governor Healey up in Massachusetts, everyone’s thinking about supply as a solution. Where in 2018 when all the tumult happened started on rent control with the California Ballot Initiative, it was all about price controls, which obviously are not going to improve supply. So, I think it’s really a positive that everyone is trying to address supply in different ways, with different levels of effectiveness. I think the industry has done a good job. I give a lot of credit to Barry Altshuler who is our lead regulatory guy on that and many other people in the industry who pushed that supply argument, and we’re seeing the results of that, and you’re right to recognize it.

But I also would say that places like New York, California, continue to need to work on being an attractive place to live and for businesses to locate. They need to be able to more effectively compete against places like Texas that are more attractive than they used to be in terms of amenities to our residents, our demographic, as well as to business leaders who just want to expand their operations in places where it’s less complex and less expensive to do business. So, I do say we remain open. I think New York is something we’ll continue to think on. Right now, our opinion is you need to have some regulatory reforms away from housing just to make public safety better in some of those places and both to sort of encourage employers to relocate or to stay located in those markets.

But I definitely see this as progress for sure.

John Kim: Very interesting. Thank you.

Operator: And we have a question from Nick Yulico with Scotiabank.

Unidentified Analyst: Morning. This is Dennis [indiscernible] Nick. On your expansion markets, could you share the lease rates and concessionary activity for Atlanta, Austin and Dallas in 1Q and April?

Michael Manelis: Yes, hey Dennis, this is Michael. So, in my prepared remarks, I kind of gave you some clustering around the expansion markets concession use. Right now, for us, I would kind of cluster Denver, Atlanta and Dallas together with about 25% to 30% of our applications receiving right around anywhere between four to six weeks. Austin is a little bit of the outlier and it’s running about 60% of our applications with almost six weeks of concessions. But again, we only have three assets in Austin, so I don’t think it’s kind of overly indicative of what may be happening in the broader market. I’ll tell you, we’ve been watching the new lease-ups and the concessions that we see. And right now, they really seem to be in line with what you would expect.

There’s nothing like out of the norm that’s running anywhere between four and eight weeks across all of those markets. And that’s kind of one of those positive signs for us. Relative to the first quarter, I’ll tell you, we’ve ticked down a little bit of our concession use. Most all of these markets have occupancies above 95% right now. So, as soon as we get to that threshold, we kind of pulled back a little bit of the concessions and see what does that velocity look like. And we’ve had a couple of strong leasing weeks. So, I think the teams are dialing it back. But we do expect concessions will remain in place in those expansion markets throughout the year because the levels of supply is going to continue to increase, which means we’re most likely going to see these concessions stay.

As long as they stay within the realm of reasonableness in this four to eight-week range on the new lease-ups, I think we’re okay. That’s kind of how we’ve modeled it.

Unidentified Analyst: Thanks for that. Follow-up question, maybe at a higher level for Mark. You talked about this in your prepared remarks, turnovers at historic lows is a real affordability benefit for the rental product versus homeownership. Just curious if you could share any high-level thoughts on how you see this dynamic evolving in the near to medium term? Could this in theory be a durable demand and profitability tailwinds over the next cycle?

Mark Parrell: Yes, I think two of the biggest structural advantages to the rental housing business and the apartment business are what you just identified, the fact that home ownership is just tough. And that’s for a lot of reasons. So, many people are locked in with the real low rates on mortgages. It makes it very attractive to stay in place even if they might move or downsize. So, that will slow things down in that market. I think the amount of production by the homebuilders is just a lot lower than it was pre-GFC. I think the cost of ownership, including things like insurance, are significantly higher. And I think all of that together makes rental housing a lot more attractive, and that’s likely to be a persistent benefit.

And embedded in that is just a lack of supply. So, even though Michael just talked about some of the impacts of supply in these expansion markets for us and for people that own in the Sunbelt, that’s certainly a pretty profound impact for the next couple of years. It still means that the U.S. as a whole is undersupplied in housing. And I think at 1.5 million units a year of owned and rental housing supplied, the same as the number was in 1960 for a population twice as big, you can see the opportunity there if you own like we do, 80,000 well-positioned nice units to rent in some of the higher growth parts of the country. So, I think those are huge secular tailwinds to our business and are likely to persist. And that’s why, again, we want to stick with our strategy of having balance, being in the 12 best markets, these expansion markets, for 20%, 25% of NOI, and the remainder in these established markets where our higher-end resident wants to be and take advantage of the supply imbalances, and frankly, the preference that we think is going to be pretty persistent for rental housing.

Unidentified Analyst: Thanks for the time.

Operator: And we’ll take a question from Linda Tsai with Jefferies.

Linda Tsai: Yes, hi. Where are renewals going out in May?

Michael Manelis: Yes hi. This is Michael. So, I’ll just give you a sense. So, renewals right now are out in the marketplace for the next 90 days, for the next three months. Very consistent right now, the quotes are running between 6.5% and 7%. And that gives us a lot of confidence that we expect to achieve somewhere right around that 5% on the net effective side.

Linda Tsai: Thanks. And then just on bad debt, there’s going to be a 30 basis, I guess, contribution. What’s the cadence of like that is as you move through the year?

Robert Garechana: Hey Linda, it’s Bob. We would expect to start seeing improvement in the second quarter because you saw Q4 to Q1 was relatively flat. But we’re seeing some of the lead indicators, as Michael mentioned, in terms of the timing of the courts and other things, indicate that we should start to see some sequential improvement in Q2. And then we would expect it to continue on that process, although it can be volatile in Q3 and Q4 such that, by the end of the year, Q4 is maybe ends at, call it, 90 basis points of total revenue. That means for the full year, you’re getting that 30 basis points of improvement.

Linda Tsai: Helpful. And then one last one. On the NYC housing laws, do you view that as more of a net benefit or a detractor for your apartments in that region?

Mark Parrell: Yes, I’m going to answer your question very precisely because I take it to mean impact on Equity Residential, and I’d say the impact on Equity Residential is pretty modest, pretty insignificant. That’s because about 40% of our units are either called luxury units under the law, meaning the rents are at higher levels, or that we own newer buildings, buildings built in 2009 or later. And for the other units, for us to get over an 8% or 10% renewal increase, which is what the law would limit, 2023 was a great year in New York, so just looking backwards, but it wasn’t that great. And it would be more impactful to us in a year like late 2021 or 2022 when we were trying to recover from the pandemic and rents were going up more quickly on renewal and we were taking away concessions.

That market is not that kind of market right now. So I would expect right now for it not to be terribly significant to us. And again, a great benefit, I think, in trying to encourage supply, which I noted in my remarks. I just think rent control in general does not encourage more supply into the market. So, we got to work through that in New York. But I do think having some certainty here for everyone involved is a plus.

Linda Tsai: Thank you.

Operator: And that does conclude the question-and-answer session. I’ll now turn the conference back over to Mark Parrell for closing comments.

Mark Parrell: Thank you all for your time and your interest in Equity Residential. Have a good day.

Operator: Thank you and that does conclude today’s conference.