Equity Residential

Good day, everyone, and welcome to the Equity Residential 3Q 2020 Earnings Conference call. Today's call is being recorded. At this time, I'd like to turn things over to Mr. Marty McKenna. Please go ahead, sir.

Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2020 results. Our featured speakers today are Mark Perel, our president and CEO, and Michael Manelis, our chief operating officer. Bob Gershanna, our Chief Financial Officer, is with us as well for the Q&A. 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, we'll turn the call over to Mark Perel.

Good morning, and thank you all for joining us today. I will start by thanking my 2700 equity residential colleagues across the country for all they have done this year to take care of our residents and run the business under often trying circumstances. I appreciate your tireless work in meeting the needs of prospects and residents in an environment that has been constantly changing. Shifting to the business, our third quarter results reflect the challenges posed by the continuing health crisis and the impact it has had on living and working in the urban centers of our markets. The approximately 23% of our portfolio located in downtown San Francisco, Manhattan and Brooklyn, and downtown Boston and Cambridge continue to be the most impacted. When we last spoke with you in late July on our second quarter call, we were seeing demand in excess of 2019 levels and renewals that were at or near 2019 levels, albeit with significant rent reductions and concessions, leaving the occupancy being generally stable. As we went through August and early September, we continue to experience good demand, but turnover increased significantly pressuring occupancy. The timing of these turnover increases corresponded generally with the announcements by employers of delays in bringing employees back to offices, as well as incidents of civil unrest. This occupancy pressure in turn caused further rent declines and increased concessions. So far, October has been broadly similar. though we have seen scattered positive signs in the form of modestly improved renewals and higher application volumes. I caution, however, that market conditions remain too volatile and the timing of developments on mitigating the virus too unclear to suggest that we have turned a corner. All that being said, we are heartened by the demand we see for our product, even in urban centers where life has been significantly impacted by the pandemic. We also see recent office leasing activity by technology firms as well as activity by financial services office users as a long-term vote of confidence in our urban centers. We believe that the knowledge-based economy will continue to drive growth in the U.S. and that our markets with their massive installed base of universities, innovative companies, venture capital firms, and the many other things that make a knowledge economy grow, not to mention renowned entertainment and cultural amenities, will keep them at the center of this activity. The cities in which we do business and in which many of you live and work will again be attractive places for affluent long-term renters to live, work, and play once the pandemic wanes. The impact of the pandemic on increasing the ability of many office workers to remote work is certainly a fascinating new trend whose long-term impact is difficult to gauge. But no matter what it does to longer-term office demand, We feel that our relatively young demographic creates both work proximity and proximity to the entertainment and cultural amenities in our cities, which we think will remain very attractive to affluent renters once our cities reopen fully. Also, supply in urban centers should in the midterm decline sharply as developers, lenders and investors react to market conditions and construction costs that have not declined as of yet. While we are not providing earnings guidance, we do want you to be aware that our financial results will weaken over subsequent quarters as the full impact in the pandemic works its way through our rent roll. Lower lease rates take some time to fully manifest themselves in our reported same store revenue numbers because at any one time our rent roll is made up of both new leases with lower rents and leases that were signed at higher rents prior to the beginning of the pandemic. As the composition of our rent roll changes, To include more of these lower rate leases, our same store revenue results decline. The opposite is true on our way back up. Occupancy changes causing much quicker shift in the trajectory of our reported revenue numbers. In the meantime, the combination of our portfolio diversity and strong balance sheet will allow us to weather this challenging operating environment. For EQR, recovery is a matter of when, not if. A quick note on collections. We continue to have strong results. We are collecting about 97% of our rents, and resident payment behavior has not changed. And that said, we had increased residential bad debt costs in this quarter, reflecting the fact that although in the aggregate, there's only a small number of residents who have stopped paying since the pandemic began, we had a peak in July of those that reached our three-month nonpayment threshold, and their full balances were written off. From that point forward, only a small number of new nonpayers have surfaced, So while we will continue to deal with elevated bad debt, it will likely not be to the same extent seen in our third quarter numbers. On a similar note, the write off of non-residential straight line rent amounts in the quarter was large and lumpy and should not reoccur going forward. My final comment will be on investment activity. We closed on one acquisition in the quarter, 158 unit property in suburban Seattle and easy commuting distance to the growing job center of Bellevue. The purchase price was $48.9 million. The property is a brand new asset in lease up, and we expect the year two cap rate upon completion of the lease up to be 4.7%. This is the only asset that we have purchased this year versus approximately $750 million in 2020 property sales. This purchase is a continuation of our strategy of buying urban and suburban properties with affluent, well-employed residents. the acquisition of which we believe will lead to attractive long-term cash flow and unlevered IRR growth. We will continue to buy properties using proceeds from selling assets that we think have weaker prospects due to property condition or location, or where the buyer is willing to pay a price that exceeds our estimate of fair value. I will now turn the call over to Michael Manelis, our Chief Operating Officer, to walk you through the markets in detail, and then we'll take your questions. Michael?