Equity Residential (NYSE:EQR) Q4 2022 Earnings Call Transcript

John Pawlowski: Okay. That makes sense. Just a follow-up there. You mentioned the private REITs, merchant builders and then variable rate debt, those kind of sources of potential distress. How would you rank the level of distress or capitulation among those sources right now, 1 to 10, 10 being the worst, 1 being no problems at all?

Alec Brackenridge: Well, the merchant builders really just — it’s just not their game to do that, with rates being high — I don’t know how to put a number on that, to be honest with you. But I think that there will be some trades there. Obviously, some of the private REITs have found alternate sources of capital. So maybe they’re able to mitigate that a little bit. And clearly, these caps are probably the highest among the three. And because they’re so much higher than they — I think they’re 8 to 10x what they used to cost. So that clearly is an area that’s going to be very challenging.

Mark Parrell: Hey John, it’s Mark. Just to contribute to that, because it’s hard to number order it, like you said, but it’s easy to think about what it costs to wait. So that option a seller has is costly because SOFR, which is now the new index rate is 4.5%. So you figure — if you have a development loan, you’re 2.5 to 3.5 percentage points above that. So you’re somewhere at 7% to 8%, 8.5%, that’s expensive debt to be sitting around hoping for an improvement. Meantime, the preferential rate on your equity is likely something like 8% as well. So I do think, as Alec said, unlike in the past, that option cost of waiting is more expensive for the seller than it’s typically been. And these caps — again, a lot of these caps were struck at 4% or 5%, they’re deeply in the money now.

So I mean, clearly, the price of a cap that a lender would require you to get is going to be very expensive. So, I think those are significant pressures. The private REITs are out there. We see product. And again, not all of it’s suited to us. They have other levers they can pull as well. But I think you’ll see more from them through the year as well. But we don’t see a panic sale market at all. We just expect people to sort of capitulate and just say it isn’t going all the way back to 3.5 cap rates in the next six months, so we’re going to go and sell at the market price, whether that’s high-4s, low-5s, medium-5s will — yet to be determined.

Operator: We’ll take our next question from the line of Chandni Luthra with Goldman Sachs. Please go ahead.

Chandni Luthra: Just talking about Seattle and San Francisco a little bit, you guys talked about quality of living as an issue. Are you seeing any dispersion across property types in those markets, downtown versus the rest? And then, are there any signs of slowdown beyond the central business district that you’re seeing in your numbers, in your databases at the moment?