Equity Residential

Good day and welcome to the Equity Residential Third Quarter 2021 Earnings Conference Call. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead, sir.

Good morning and thanks for joining us to discuss Equity Residential's Third Quarter 2021 results. Our featured speakers today are Mark Perel, our President and CEO, and Michael Manelis, our Chief Operating Officer. Bob Garchana, our Chief Financial Officer, and Alec Brackenridge, our Chief Investment Officer, are here with us as well for the Q&A. Our earnings release, as well as a management presentation regarding our results and outlook, are posted in the investor section of equityapartments.com. Please be advised that one of our peers is hosting their call at 1 p.m. Central, and so we want to be conscious of everyone's time, and we'll look to finish the call in one hour. 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 Perel.

Thanks, Marty, and thanks to all of you for joining us. Today I'll give some brief remarks on the terrific pace of our operating recovery and our robust investment activity. Then Michael Manelis will follow with some top-level commentary on the current state of our operations and how we see next year playing out, and then we'll take your questions. We have talked about 2021 being a year of recovery for our company, and we are very pleased to report that our operating metrics continue to recover at a faster rate than we assumed back in July. With quarter over quarter same store revenues turning positive for the first time since the pandemic began. Strong demand across our markets drove us to achieve physical occupancy of 96.6% in the third quarter, which allowed us to continue to push rental rates. We also benefited from governmental rental relief payments made on behalf of our tenants. As a result of these strong continued operating metrics, we have raised our annual same store revenue, net operating income, and normalized FFO guidance again this quarter. We now expect our same store revenues to decline 3.7%, our expenses to increase 3.25%, and NOI to decline 7% for the full year of 2021. We expect to produce normalized FFO per share of between $2.95 and $2.97, a 2% increase at the midpoint. All of this leaves us very well positioned going into 2022. While we won't provide guidance for next year until our next earnings release in February, in our management presentation you can find the building blocks that point to our business being set up for an extended period of higher than trend growth beginning in 2022, as we recapture revenue loss due to the pandemic and continue to benefit from strong demand and growing incomes resulting from a very strong job market. We expect same store revenue growth in 2022 to exceed the historical mid single digit range that has characterized past recoveries, leading to some of the best same store revenue numbers we have ever seen. These expectations assume that the economic backdrop remains constructive and the pandemic remains controlled. Please also note that while we expect to do very well next year, we will not be able to make up our entire mark to market on our rent roll and regain our entire loss to lease in a single year for a variety of marketing and regulatory reasons that Michael will describe in a moment. Beyond 2022, we see a continuing bright future for our business as the large emerging Gen Z cohort starts their careers and joins the renter population. Also, the more diverse portfolio we are creating should improve long-term returns and dampen volatility going forward. Switching to the transaction side of the business, the positive story on fundamentals has not gone unnoticed by the investment community, as the overall theme continues to be enormous amounts of capital pursuing all types of apartment investment, driving cap rates to new lows. This has caused a convergence in nominal cap rates in the 3.5% or so range for many markets and has created a positive climate for our strategic repositioning efforts. We continue to aggressively sell our older and less desirable properties at these low cap rates and at prices that exceed our pre-pandemic value estimates, acquiring much newer assets in our expansion markets of Dallas-Fort Worth, Austin, Atlanta, and Denver, and the select suburbs of our established markets at approximately equal cap rates. All of the assets we are acquiring share the common characteristic of being recently built, having no or minimal retail, and being attractive to our target affluent renter demographic. We like that these trades are not dilutive to current earnings while adding properties to the portfolio that we believe will have better long-term cash flow growth, lower capital needs, and diversification benefits. Year to date, we have purchased more than a billion dollars of properties and expect to close another $400 million or so in acquisitions, mostly in our expansion markets, a good number of which are in various states of advanced negotiation already, all by year end. We have funded these buys with an approximately equal amount of dispositions of older and less desirable assets, which we sold at an average premium of 10% to our pre-pandemic estimates of value. Included in these sales are approximately $900 million of California assets. Currently, approximately 42% of our total assets are in California. As we seek to have more balance in our portfolio, you should expect our California exposure to decline over time, but to remain meaningful. Turning to development, we had a lot of great news in the quarter. It all starts with the apartment development joint venture with Toll Brothers, the public home builder that we announced in August. We have known and respected the team at Toll for many years and have successfully partnered with them before. They build terrific properties and have a large team spread across our expansion markets and select of our other markets that we expect to leverage in this joint venture to create quality properties for Equity Residential to own long term. The venture is off to a quick start as we closed already in this fourth quarter on one Toll land opportunity and are working with them on many others. We also have a strong internal development team in our company that continues to create opportunities. In this quarter, that team completed the development of our Edge property in Bethesda, Maryland. This high-end asset is adjacent to an existing EQR asset and located very near a metro station, as well as the large amount of new office space that has recently been built in downtown Bethesda. They also sourced and structured the three new joint venture development deals in Washington, D.C., Denver and suburban New York that began construction this quarter. Each of these joint venture development deals is with a different partner and is not related to the Toll Venture. Before I turn the call over to Michael, a big thank you to all my colleagues in our offices and properties across the country. You're doing an exceptional job during what was a particularly busy leasing season, and we're all very proud and grateful. Go ahead, Michael.