Equity Residential

We're about to begin. Good day and welcome to the EQR 3Q23 earnings conference call and webcast. This call is being recorded. At this time, I'd like to turn the conference over to Mr. Marty McKenna. Please go ahead.

Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2023 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 is posted in the investor section of equityapartments.com, as is a management presentation for the quarterly call. 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.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our third quarter 2023 results. As you can see from the press release and management presentation, the business continues to do well in most of our markets, with our East Coast markets outperforming our West Coast markets. New York, Boston, and Washington, D.C., comprising a bit more than 40% of our net operating income, are all having very good years and are meeting or exceeding our expectations. Our target renter demographic remains well-employed. Unemployment for the college educated is at 2.1%, with increasing pay levels and a continuing high propensity to rent, given elevated single-family ownership costs. low for sale inventory and lifestyle reasons like delayed marriage and smaller families that favor our business. We're also seeing lower levels of new apartment construction in most of our established markets where we have 95% of our net operating income versus the Sunbelt markets, a pattern that will continue for the next several years. Consistent with this view, throughout the primary leasing season, our pricing followed a trajectory that was pretty typical for a normal pre-COVID year. And as you can see in the management presentation, on par with our guidance assumption, the normal rent seasonality would return in 2023. We saw our portfolio-wide rents peak in early August and then begin to decelerate as we expected. However, we recently saw a deceleration in pricing in San Francisco and Seattle that was more pronounced than usual seasonal patterns. The main culprit here seems to be a lack of job growth for our target renter demographic. Michael will have more detail on this as well as the building blocks for 2024 that are laid out in the management presentation in a moment. In Los Angeles, we're working through the impact of a drawn-out process to normalize delinquency levels and to reduce bad debt. We continue to make good progress here. Portfolio-wide bad debt before application of rental relief funds in the third quarter was about 1.3 percent as compared to 2.4 percent in 2022 But the process is uneven and it is lengthy. Evictions are now taking six months or more in Los Angeles versus the two to three months prior to the pandemic. Given the underperformance in San Francisco and Seattle and the lumpiness and improvement in bad debt, as well as the impact from the non-cash write-off of a $1.5 million straight line rent receivable in the quarter due to the bankruptcy of Rite Aid, which is a retail tenant of ours, we have adjusted our same store revenue guidance expectation for the year to 5.5% from 5.875% at the previous midpoint. We have also adjusted our EPS, FFO, and NFFO guidance accordingly. Turning to 2024, the long-term health and outlook of our business remains positive with favorable tailwinds that should support performance. While job growth expectations for 2024 are lower than 2023 levels, we will continue to benefit from demand from a well-employed resident demographic we think are going to rent with us longer given the cost of single family ownership and powerful social trends like delayed marriage and smaller families that I previously mentioned. We also see a significant benefit from lower deliveries and new supply in our established markets compared to the elevated deliveries in the Sunbelt markets over the next few years. Switching to capital allocation, while the overall market remains quiet, we did have some activity in the quarter. We sold a 30-year-old asset in downtown Seattle during the quarter at a 5.4% disposition yield as we continue to lighten the load in the urban centers of our West Coast markets. We also continue to invest in our expansion markets by acquiring two assets in suburban Atlanta. One property was built in 2019 and was acquired from a large private equity real estate player. The transaction is a 5.1% acquisition cap rate, including the impact of the mark-to-market on some low-cost debt that we assumed as part of this transaction. This property is located in an upscale mixed-use development, though we acquired none of the retail, with a resident base having high-paying jobs at the large education and medical employers nearby. The other asset we acquired is in Winnette County, with easy access to the I-85 employment corridor, and was acquired for $98 million. This asset is brand new and is still in lease-up. and we expect it will stabilize at a 5.4% year two acquisition cap rate. The median home price in the desirable area where the property sits is $600,000, which assuming a normal down payment in current interest rates equates to an all-in housing cost that is two and a half times our pro forma rents. Median household incomes in the area and among our residents at the property are around $100,000, making rentership a good financial and quality of life decision. It is important to note that our 2023 acquisition activity was paid for with capital from our asset sales without incurring any dilution as we took a cautious approach to transaction activity given the pricing uncertainty and low volumes in the marketplace. We sold properties that averaged 30 years old and that we expect will have more capital needs and lower go-forward IRRs than the properties that were acquired, which were one year old on average. We are well positioned to further our portfolio diversification by taking advantage of acquisition opportunities that we believe are likely to arise from the substantial development pipeline that is delivering in our expansion markets over the next two years. And now I'll turn the call over to Michael Manelis.