Equity Residential

Please stand by. Good day, and welcome to the Equity Residential's 2Q 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.

Good morning, and thanks to discuss Equity Residential's second quarter 2022 results. Our featured speakers today are Mark Perel, our President and CEO, Michael Manelis, our Chief Operating Officer, and Bob Garachana, our Chief Financial Officer. Alec Brackenridge, our Chief Investment Officer, is here with us as well for the Q&A. Our earnings release is posted in the investor section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements in 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.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our second quarter results. In a minute, Michael will walk you through a performance update by market. Then Bob will discuss our guidance improvements, update you on how our innovation machine continues to hold expense growth down in an increasingly inflationary world. And then Bob will close with some color on our balance sheet, and then we'll take your questions. Equity Residential had a tremendous quarter. Our business continues to benefit from terrific supply and demand dynamics, including excellent job growth and household formation. Our urban and dense suburban portfolio continues to be a magnet for our affluent renter demographic, as demonstrated by our 96.7% same-store physical occupancy. We also believe that the desire for more space due to work from home and COVID-related health concerns has resulted in significant incremental household formation, creating additional demand for our properties. Also, housing alternatives remain expensive and in low supply. Single-family home prices reached record levels in 2022, while rising mortgage rates have further stressed affordability, particularly for first-time homebuyers. Single-family housing starts are declining. Existing homeowners are more reluctant to sell due to low locked-in mortgage rates, along with minimal and expensive for sale replacement options, and competition for homes from investors remains strong. The near-term apartment supply picture also remains favorable. Starts within close proximity to our properties in our coastal markets are still at or below pre-pandemic levels. In addition, it seems likely to us that over the next few quarters, new apartment starts should decline due to reduced availability and higher pricing of construction financing, increasing construction costs, and continued supply chain disruptions, lengthening construction times, and increasing developer risk. Recently elevated inflation numbers are certainly a concern, especially if efforts to rein in inflation lead to much weaker job growth. On the positive side, our affluent renter base should be able to better weather rising inflation, in part due to lower relative rent-to-income ratios and higher amounts of disposable income. As in the past, if inflation does persist, we would expect the apartment business to perform relatively well. As we look at our resident income, the average incomes for our residents who sign new leases with us in the last 12 months is 13% higher than the group who signed with us in the 12 months ended June 2021. These new residents are paying us approximately 19.8% of their incomes versus 19.2% last year in rent. They are not rent stressed and they are willing to pay these rents to live in locations that support the lifestyles they seek to enjoy. On the larger topic of affordability, we see a continued need for more workforce housing and continue to support market-based affordable housing supply solutions, including zoning reform, public-private partnerships, and other programs that assist in affordable housing preservation and creation. As part of this support, and in addition to the more than 2,600 apartment units that we already operate in affordable programs, we have funded about half of our $5 million commitment to a privately held affordable housing preservation fund that expects to preserve approximately 1,600 affordable housing units when it's fully deployed. Now switching gears to the investment side of our business, we saw a material slowdown in the transactions market during the quarter, higher interest rates, especially for the floating rate debt used by many value-add buyers, as well as general uncertainty about the path of the economy, and evaluations led most buyers to pause. We did recently close on the sale of two properties in New York, one property for $266 million at a 3.3% disposition yield in the second quarter, and another New York property for $415 million at a 3.4% disposition yield this month. The properties are adjacent to each other on the Upper West Side. Both properties represent pricing contracted for before the recent volatility in the apartment transaction market. and are a continuation of our stated strategy of lowering our New York market exposure. As we have said before, we will continue to have a meaningful exposure to the New York area, but intend to better balance our urban versus suburban exposure in our established markets like New York, while adding over time to our exposure to our expansion markets, which are attracting increasing numbers of affluent renters and have lower regulatory risks. For our part, we are very comfortable letting the transaction market sort itself out, and have reset our transaction guidance so it reflects only buys and sells completed to date, plus one smaller disposition that is under a long-term contract that should close in the fourth quarter. While apartment values are not immune from the more general revaluation of risk assets going on across all asset classes, we expect apartment assets to remain in high demand from institutional buyers and for rising NOIs to partially cushion increases in cap rates. We have the balance sheet and a team ready to take advantage of any opportunities we do see, as we have done in the past. Moving on to development, we started two new developments in the quarter. The first project is a $153 million densification of an existing property we own in Santa Clara, California, about one and a half miles from Apple's headquarters. We will be demolishing 40 units in buildings built in 1972 in a highly desirable area with little supply of high-quality rental housing. and replacing them with 225 new units plus significant amenities that will benefit the remaining 224 units of the property that are undergoing renovation. We are very excited about this project and expect a 6% development yield when it stabilizes. At a cost per unit of about $675,000, we also like our basis as compared to recent sales counts. We're also pleased to have started this quarter our first development project with Toll Brothers. This $82 million, 362-unit project is being built just west of downtown Fort Worth, Texas, in a rapidly gentrifying area with good access to job centers and to the increasing number of nearby lifestyle amenities like restaurants, bars, and entertainment venues that are appealing to young, well-off renters. We expect to build this property for about $225,000 per unit. We like our expected basis, and we love working with a high-quality, a naturally strong developer like Toll that has the experience to capably manage construction in a climate with significant inflationary cost pressures. That said, this deal is approximately 75% bought out, reducing our risk. On current rents and costs, this deal has approximately a 5.5% development yield. And with that, I'll turn the call over to Michael.