Equity Residential

Please stand by. Your conference is about to begin. Good day and welcome to the Equity Residential Third Quarter 2024 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I'd 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 2024 results. Our featured speakers today are Mark Perel, our President and CEO, Alec Brackenridge, our chief investment officer, and Michael Manelis, our chief operating officer. Bob Gartana, our CFO, is here with us as well for the Q&A. Our earnings release and management presentation are posted in the investor section of equityapartments.com. 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 Burrell.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our third quarter 2024 results and outlook for the year. I will start us off, then Alec Brackenridge, our Chief Investment Officer, will discuss our recent acquisition from Blackstone and the overall transaction market. And then Michael Minelis, our Chief Operating Officer, will speak to our operating performance. Then we'll go ahead and take your questions. We posted solid performance in the third quarter, driven by continued good demand and little competitive new supply in our established markets, which constitute 90% of our portfolio. Big picture, we continue to see a stable economic environment and a healthy consumer. Unemployment is low and wage growth is steady, both of which bode well for our customers. In a moment, Michael will speak to the various puts and takes we saw in our operations during the quarter. As is usually the case, we saw some items like occupancy and retention exceed our expectations, while others like blended rate came in lower in terms of our expectations. As you can see on page five of the management presentation that we posted to our website last night, this type of variability in pricing is not uncommon. In fact, pricing so far in the fourth quarter has normalized consistent with seasonal patterns and with our expectations. In sum, we remain on track with our same-store revenue guidance, and we expect to end the year in a good position for 2025. On the expense side, the machine continues to churn out terrific results, with same-store expense growth of 3.2% for the quarter and our expectation for full-year same-store expense growth of 3%. I want to thank the team across our organization for their continuing focus on innovation, cost control, and our customer. Turning to 2025, while there remains a considerable amount of economic and geopolitical uncertainty that could impact our business and the economy generally, we like our setup. We are too early to give 2025 guidance at this point, but we have given you some insight into our preliminary thinking on some of the inputs for 2025 same store revenue, on pages seven through nine of the management presentation. In sum, we think 2025 should produce solid same-store revenue results for equity residential. We see steady demand from a well-employed affluent renter base, a favorable supply picture in the 90% of our NOI in the less-supplied established markets, and continuing cost and lifestyle preferences favoring rental housing. In terms of our expansion markets, we expect that a recovery in same-store revenue will not occur until 2026, given continuing high supply levels, but we do hope to see some improvement in currently highly negative new lease rates and to see lower concessions during next year's leasing season. Now switching over to capital allocation, we accelerated our acquisitions of newer, well-located assets in our expansion markets of Atlanta, Dallas, and Denver in the third quarter. We are excited to acquire these properties at a basis that we see as highly favorable and add properties with strong cash flow growth prospects as supply levels decline substantially over the next few years. The entire equity team also looks forward to demonstrating our core competencies of smartly acquiring and efficiently integrating new acquisitions. We now have approximately 10% of our net operating income in our expansion markets, assuming stabilization of our assets under development. In a moment, Alec will give you more detail on our transaction activity. We are funding our expected $1.6 billion in acquisitions this year with a mix of fixed rate debt, dispositions, and the use of commercial paper supported by our unsecured line of credit. In a moment, Alec will give you detail on the disposition activity funding these acquisitions, but one source I did want to highlight is the $600 million in fixed rate debt we raised in September. These 10-year notes were issued at a coupon of 4.65%, which is the lowest 10-year coupon issued in the REIT space since 2022 and would be hard to replicate today. So nice job by Bob and his team on this. Before I close, a quick note on where these acquisitions fit into our overall capital allocation strategy. Our goal remains to own an apartment portfolio that has the highest long-term total return in the sector. with a focus on cash flow growth and taking into account risk and with the least amount of volatility possible. We intend to achieve this goal by catering to well-earning renters in the 12 or so metro areas that we think have the most desirable lifestyles for this demographic and present the best balance of long-term supply, demand, regulatory, and resiliency opportunities and risks, and where we can efficiently operate our properties with our industry-leading people and systems. As the last few years have shown, there is no riskless apartment market. The volatility and negative rental growth we see in the expansion markets and the strong results we are seeing in our northeastern markets, many of which were recently left for dead by investors, reinforces our commitment to our strategy of better balancing our portfolio between coastal markets and select Sunbelt markets, as well as urban and suburban locations. We expect the benefits of this balanced strategy to play out in 2025. Seattle and San Francisco, particularly our uniquely urban portfolios in those markets, should generate better same-store revenue results, which, along with the continued strength in the Northeast and the favorable 2025 supply picture across almost all of our established markets, should more than offset continued supply-driven weakness in our expansion markets. In later years, as supply wanes in our expansion markets, those markets will be more of a same-store revenue growth engine for our company. We are confident this balanced geographical strategy coupled with our efficient operating platform will create value over the long term for our investors and are eager to demonstrate this over the next several years. And with that, I'll turn the call over to Alec Brackenridge.

Thank you, Mark. As we discussed on our call in January, we came to 2024 committed to continuing to reposition our portfolio by increasing our presence in our expansion markets of Atlanta, Dallas, and Denver. For the first half of the year, The market remained frozen and we made no progress. However, in the third quarter, as interest rates dropped and the possibility of a soft landing for the economy became more evident, the market opened up and we significantly stepped up our activity, closing on 14 assets with over 4,400 units and a total price of $1.26 billion. Those acquisitions were funded by a combination of the proceeds from the $600 million bond issuance that Mark mentioned, $365 million in dispositions, and $295 million of commercial paper. The dispositions consisted of six assets located in San Francisco, Washington, D.C., and Boston that averaged 43 years old and sold for a 5.7% disposition yield. All of the assets were non-core holdings that had a combination of significant CapEx needs and a variety of operating challenges. The acquisitions, meanwhile, averaged just seven years old, have limited retail, and are all 100% market rate. Eleven came from an off-market portfolio from Blackstone, that was tailored to fit our expansion strategy in terms of asset quality and locations. Recognizing our ability to provide speed and certainty of execution, Blackstone chose to deal directly with us rather than execute the typical auction process. The other three acquisitions were one-offs purchased for merchant builders. After the end of the quarter, we closed on an additional asset in Atlanta for $89.5 million. The weighted average cap rate on all this activity was 5%. and is anticipated to generate an 8% unleveraged IRR. These transactions appeal to us because they allowed us to expand our presence in markets with strong job growth, increasing numbers of affluent renters, and relatively low regulatory risk at an attractive basis that is approximately 15% below estimated replacement costs. Admittedly, these markets are also seeing outside supply relative to our coastal markets. Accordingly, our underwriting reflects competitive leasing environments for the first two years of our ownership, with rental income down or flat depending on the amount of proximate deliveries. We expect that some of that dragged NOI will be offset by running these assets more efficiently on the revenue and expense side as we integrate them into our superior operating platform. We anticipate having further opportunities to purchase assets in these markets as the supply pipeline dries up in 2026 and more robust rent growth will be on the horizon. But at that time, pricing will likely be at lower cap rates and at a less attractive price relative to replacement costs. As we head into the end of the year and plan for 2025, we expect to continue to see attractive acquisition opportunities at around five cap rates in Atlanta, Dallas, and Denver, and with a cost of capital advantage and the ability to complete due diligence quickly relative to leveraged buyers, expect to close on a sizable share of transaction activity. We currently have an asset in Denver and one in Atlanta, totaling approximately $190 million under contract to close before the end of the year at around a five cap. Austin, our fourth expansion market, where we have only three assets, remains challenged with a historic amount of deliveries that is resulting in a highly competitive rental market, leading us to stay on the sidelines given how hard it is to assess when things will stabilize. With our recent closings and assuming stabilization of development deals in progress, as Mark noted in his comments, we now have approximately 10% of our portfolio in our expansion markets towards a goal of 20% to 25%. that if the transaction market remains favorable, we expect to achieve over the next 18 to 24 months. We are excited to add exposure to these high job growth markets that we'll see declining supply over the next two to three years. What should not be forgotten, however, is that the reduction in supply is even more dramatic in our coastal markets, where starts are down nearly 60% in 2024 after being down over 30% in 2023. With 2025 starts projected to be down again, we anticipate one of the best supply-demand balances in our coastal markets that we have seen in a very long time. Our expansion market exposure, combined with our coastal market presence, positions us to generate optimal risk-adjusted returns for our shareholders, catering to a customer with a resilient and growing income while balancing out supply, regulatory, and resiliency challenges. I will now turn the call over to Michael Manelis.

Thanks, Alec, and thanks to everyone for joining us today. This morning, I will review our third quarter 2024 operating performance, as well as our expectations for the remainder of the year and what the setup for 2025 could look like. As Mark mentioned, fundamentals in our business remain solid. During the third quarter, our focus on serving our customers and our correspondingly strong renewal process led to the lowest reported third quarter resident turnover in our history and strong physical occupancy of 96.1%. Move outs to buy homes remained extraordinarily low and renewal rate achieved was strong across most markets. Blended rate, however, ended up at the low end of our expectations for the quarter, primarily from lower than expected new lease change driven by the city of Los Angeles and continued pressure in our expansion markets. In these markets, the pressure from excess inventory from both eviction related existing and new supply has led us to prioritize occupancy to maximize revenue, which came at the expense of some rate growth during the quarter. It is also important to remember that it is often not uncommon to see variability in new lease change over relatively short periods of time. For example, while we saw a steeper and earlier decline than usual in new lease change in the third quarter, we have seen a better picture so far in the fourth quarter for this volatile statistic. Looking at the remainder of the year, our strategy of maximizing revenue by maintaining higher occupancy heading into the quieter months of the year should drive performance, along with positive contributions from other income and bad debt net. We still anticipate normal seasonal rent deceleration, which will result in negative new lease change in the fourth quarter. But at this point, we are seeing very stable renewal rate achieved results. And of note, Seattle and San Francisco have both a relatively easier pricing comp in the fourth quarter and have shown good early signs of improvement, including maintaining strong occupancy and reducing concession usage. Sitting here today, our net effective rents at the portfolio level are close to 2% above prior year, which is also a solid position to be in. Now let me give you some color on the market, starting with the East Coast. The Boston market is one of our best performers in 2024, Both our urban and suburban portfolios are performing well, but consistent with our expectations, the urban portfolio produced stronger results in the third quarter. We like our positioning here as our urban-centric portfolio will see very little competitive new supply for the remainder of 2024 and the full year of 2025. Moving on to New York, demand feels good as we are more than 97% occupied. And as we have said on past calls, with a solid job market and very little competitive new supply, we think this market will continue to produce good revenue growth and will have some of the best supply-demand dynamics in the country for the next couple of years. Rounding out the East Coast, Washington, D.C. continues to be the rock star of 2024. The market is over 96.5% occupied and is producing some of the top rental rate growth in our portfolio. Demand feels good across all of our sub-markets, and is expected to continue, but we do expect some pressure from deliveries in the fourth quarter, particularly in the central D.C. submarket. On the West Coast, as I mentioned, Los Angeles showed some weakness in blended rate growth, particularly in the new lease change. We think there are a few factors in play here. First, our overall pricing power here was clearly impacted by less job growth than anticipated, especially office-using jobs. and a bit of a pause from the LA studios in the content production. Second, on supply, we are seeing some competitive new supply, particularly in the downtown, Koreatown, and West LA submarkets, as well as some excess supply coming online due to continued improvements in the eviction process, which is now taking about four months down from six months earlier in the year. Finally, the city is still working through some quality of life issues in the urban submarkets like Koreatown and downtown LA. Our suburban portfolios, primarily driven by Santa Clarita and Ventura County, are performing better than our urban submarkets. The good news is that we are seeing some positive momentum across the entire Los Angeles market right now, and with our rent on top of last year, a condition we have not seen all year long, puts us in a favorable position. In addition, today's occupancy is running 40 basis points above both the prior year and is trending positively versus the third quarter. We are also experiencing some of the highest retention rates of the year in Los Angeles. And while job growth has been somewhat muted in 2024, projections from Moody Analytics are much more positive for growth in Los Angeles in 2025, particularly office using jobs. Assuming that comes to pass, then along with the modest new apartment deliveries in most places across this vast geography, We think we should drive a reacceleration of results in 2025. In the rest of Southern California, San Diego, and Orange County, we continue to see demand, but evidence of some price sensitivity with residents willing to move farther out in these markets for affordability reasons. After showing some of the best growth in the portfolio over the last few years, we are likely returning to more normal long-term growth rates. Rounding out the West Coast, San Francisco and Seattle continue to perform better than our original modest expectations. At this point, we feel good about the pace of recovery in these two markets, and they're set up to contribute to growth in 2025. And we have included a page in the management presentation that highlights some of the favorable trends we are already seeing in these markets. In San Francisco, demand feels good with occupancy of 96.2%, which is 90 basis points higher than last year. Rents are following normal seasonal patterns, but we are seeing slower deceleration compared to last year and renewals are performing well. In addition, some impactful return to office policy from firms like Salesforce are helping to drive significant improvements to street activation. Having just spent a week in the market, you can really feel the energy and a reminder of why this market is the center of the tech universe, including the rapidly growing AI sector. On the supply side, there is very little new supply coming to the market. Overall starts are way down, and there have been almost no new competitive starts for the last year, which supports improving conditions for the next couple of years. We are optimistic about this market and its ability to drive our results in 2025. In Seattle, the recovery feels similar to San Francisco but further along. During the third quarter, same-store revenue reflected improvement driven by low turnover strong occupancy, and better than expected renewal rate achieves. New lease change, while still more negative than we would like, is better than last year, and we would expect this metric to improve over time. As we sit here today, demand drivers are better than we thought, our occupancy is over 96%, and our renewal performance remains strong. In looking at our migration patterns, we are also seeing more people come to us from farther out suburbs, which is an additional demand driver for our assets. The big recent story here is the five-day-a-week return to office announcement from Amazon, which is the 800-pound gorilla in the market. For the past several weeks, our local team have reported increased interest from Amazon folks who are living further away from the office and looking for apartment homes in the downtown and South Lake Union submarkets. With focus from city government and the local business community, along with increased business and tourist foot traffic, Livability in the downtown just keeps getting better. Another recent positive is that the tech employment in the market looks solid as we see more postings for positions in both the city of Seattle and Bellevue Redmond's area. As previously discussed, there is supply coming in the fourth quarter and we will need to see how the demand and pricing holds. But at present, it should finish the year strong. And like San Francisco, we have some real optimism on this market and what it can contribute in 2025. Switching to the expansion markets, the volume of competitive new supply continues to impact both occupancy and rate. Denver is our best performer of the expansion markets. In our relatively small same-store portfolios and the other expansion markets, Dallas is producing the best revenue results, and Atlanta, where we have the most direct exposure to new supply right now, is the worst. We continue to see demand, but it is a challenging operating environment for both new lease and retention, given the amount of new supply. Similar to last quarter, the pressure on new leases makes renewing residents and maintaining occupancy the number one priority for these markets. As you know, we added a number of new suburban assets to our portfolios in Atlanta, Dallas, and Denver during the quarter that will have a while before they are in our same store reported results. Overall, we are excited to grow our portfolio and create operating scale in these markets. While these markets have near-term supply risks, they continue to demonstrate long-term demand from our target renter demographic and provide a nice balance to our core portfolio. On the innovation front, we are very pleased with the initial results of our new AI resident inquiry application, which was able to handle almost 60% of our inquiries in our test markets. We have a lot of confidence that as this application keeps learning, we will get to 75% to 80% coverage, which will create an additional layer of operating efficiencies in the company. Looking ahead, now that we have centralized the support of many parts of our customer journey, we are looking forward to improving and optimizing those processes, including the upcoming efforts to streamline the leasing process to make it faster and easier for our renters. Before I discuss the 2025 building blocks, I would like to highlight our expense performance in the quarter. Continued favorable results on property taxes, low increases on repairs and maintenance and utilities, and an actual decrease in on-site payroll drove the quarterly results and should get us to our expected 3% midpoint for the year. We are very proud of our 10-year same-store expense compounded annual growth rate of 3.2%, and consider cost control and innovation implementation as core to our DNA at EQR. In closing, as Mark mentioned, while it's still too early to give 2025 guidance, on page 7 in the management presentation that we published last night, we gave some building blocks for next year's revenue performance. Overall, the setup for 2025 feels solid. Today, we expect that we'll start the year with embedded growth near 1% and in a very well-occupied position. We also have a very favorable setup as the expected deliveries of competitive new supply in our established markets will be lower again. And while the expansion markets still have significant supply expected, the absolute quantity is beginning to come down. On top of all of that, we like our ability to attract and retain new residents. In particular, we are most excited about the potential we see from our focus on the customer and our ability to maintain occupancy along with the upside we see from our West Coast markets of Los Angeles, San Francisco, and Seattle, which make up 42% of the company's NOI. Those factors, coupled with the continued performance in our East Coast markets, should deliver solid revenue results for the company in 2025. I want to thank our amazing teams across our platform for their continued dedication to innovation, enhancing customer service, and their exceptional disciplined approach to expense management. With that, I will turn the call over to the operator to begin the Q&A session.

Thank you. If you're dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to signal for a question. And we'll pause just briefly to assemble our queue. And we'll take our first question from Eric Wolf with Citi.

Hey, thanks for taking my questions. You mentioned in your presentation the potential for bad debt and other income to add to revenue growth next year. I know it's still early, but could you just give a sense for what you're thinking about that potential For other income, I would assume it's mainly tied to the Wi-Fi programs. I would think there's some good visibility there. But, you know, correct me if I'm wrong.

Yeah. Hey, Eric. It's Bob. I'll start. And Michael might augment on some of the other income stuff. But starting with bad debt, we continue to expect to end 2024 around, call it, 1% or maybe slightly better than that of a percentage of revenue. So bad debt is a percentage of revenue. If normal is normal meaning pre pandemic is around 50 basis points the opportunity set is the delta between there right we'll have to see what the progress looks like we'll have to see what the court system looks like as to whether or not we get all the way there, but to kind of frame a construct of. What the opportunity set or contribution to incremental growth is is somewhere between that one and back to normalcy will give you more color as we get to the fourth quarter guidance as to what's embedded in our numbers overall. On the other income side, you're correct that a lot of it is, and we mentioned this, this will be a contributor to fourth quarter performance as well. But a lot of our initiatives were back-end loaded in terms of their implementation, particularly the bulk Wi-Fi and the adoption of the bulk Wi-Fi. So that will start contributing in a more, it already has started in the third quarter, but will be more meaningful in the fourth quarter and will continue to contribute as you get into 2025. With that will come a little bit of expense component, which I think you're familiar with in the industry when you implement this, but there should be good contribution that will be potential for being greater than what you saw in 24 because of the timing of those rollouts.

That's helpful. And then you also talked about seeing more Sunbelt opportunities. I think you said low fives cap rate range. We've seen a a lot of volatility in the 10-year dropping, though, as I think it's 3.5, now back up to 4.3. I mean, as it sort of oscillates back and forth, does that change your pricing that you're willing to transact at at all, or are you just less sort of focused on your short-term cost of capital?

Hey, Eric, it's Alec. You know, rates have moved so quickly, it's a little hard to assess that, but I will tell you that as of recently as last week, there were opportunities pricing at like 4.75-ish, you know, in markets like Denver and Dallas. So there's a lot of capital, a lot of people interested in apartments. Now we're at a 10 years, four, three something. So maybe that changes a little bit. The reality is with the uncertainty about rates, plus the election coming up, there isn't that much product on the market right now. So I think this will be a feeling out process for everyone as we see, you know, what, what, where things end up, but there's still all this capital. I think overall the five cap rate feels pretty good to me looking forward.

Thank you.

If you find that your question has been answered and would like to remove yourself from the queue, you may do so by pressing star 2. And we'll move next to Steve Sacawa with Evercore ISI.

Hi. Good morning. I guess given the projections that you guys have for fourth quarter on blended leasing spreads, that's going to sort of bring the figure in somewhere just under 2% for the year. And that's down about 100 basis points from the 23 number. So as we kind of think out into next year, I know supply is coming down, but it's still relatively heavy. And you still have deliveries that are kind of working through the back half of this year that haven't been fully absorbed. So I'm just curious, is it your expectation that leasing spreads could actually hold next year? Or do you think with slowing economy, slowing job growth, and then still some heavy deliveries that leasing spreads likely moderate again next year.

Hey, Steve, this is Michael. Maybe I'll just start and just say, so first, we're in the very early stages of our kind of budget process that we're putting in all those factors that you just described. In terms of the leasing spreads and how to think about this, I revert back to kind of this page five in the management presentation that really talks more about just the pricing trend and what's happening with absolute market rent growth kind of on a year over year basis, because that's really going to be the catalyst that's going to drive a lot of that. You know, right now, a lot of the factors for the setup for 2025 feel very similar as we were heading into 2024 and how we talked about it. But I still think it's a little bit too early for me to kind of give you the guidance on where we think intra period like market rent is going to grow. But I don't, I mean, we have a lot of things that are set up to be catalysts for us, but we also know we still got to work through some of the absorption of supply in some of these markets. So I think we'll just see kind of how this plays out for the next couple of quarters.

Okay. And then maybe on the expense side, you know, kind of following up on Eric's question about the Wi-Fi, I know you get the benefits of revenue, but there's also a cost associated with that. You guys have done a very good job keeping expenses down around the 3% level. Is that growth rate achievable next year, you think, with kind of these added expenses, or is it likely that we see a little bit of pressure on the expense side just due to the pickup and other income revenue growth?

Hey, Steve, it's Mark. You may see a little pressure above that 3%. We talked about in the last call we've got still pressure from the 421As burn off of the, you know, tax abatement in New York. So it'll be a little there. Certainly, inflation numbers this morning were a little discouraging. So there may just continue to be some cost pressure. But, you know, whatever that number is, we'll be at the low end of it. And I think we'll quantify it for you so you know exactly what the Wi-Fi impact is. And, of course, there's an offsetting, much more significant revenue benefit. But, I guess it wouldn't surprise me if the number was a little bit higher than the number we're going to put up this year. But we're still rolling numbers up. Great. Thank you.

We'll go next to the line of Hondell St. Juiced with Mizuho.

Hey, good morning, guys. So first question, I guess, was just on the portfolio performance during the quarter. Maybe you could kind of walk us through how that evolved specifically. Over the course of the third quarter, it seemed like there was a bit of a drop there in September in new lease rates. And maybe as we look ahead to the fourth quarter, I think new lease rates are expected to fall to about negative 4% from the minus 1% in the third quarter. So I'm looking for some color on kind of where you see perhaps the incremental drag. I'm pretty sure San Francisco and Seattle are pretty easy comps given last year's performance. Thanks.

Yeah, hey, good morning, Handel. This is Michael. So I think what I would start and just say is let's just back up and think about the third quarter. So what we saw in the third quarter, and it was really the later part of the third quarter, is, you know, we've had an occupancy kind of bias. We've been leaning into that. And specific to really the city of Los Angeles and the expansion markets, we did drop some of the rates. We increased some of the concession usage. And you can kind of see that on page five in that pricing trend. where you just didn't have as much robust kind of pricing power near the tail end of the quarter. And that translated right into that new lease change for us for the number. Where we sit here now in October, right, we've got a setup where you do, like you said, we have a little bit of an easier comp coming at us in Seattle and San Francisco. I've got a market like Los Angeles where I now have rents on top of prior year, and that's a condition we haven't seen all year long. So now you look at the October stats and you feel like you're pretty well positioned. But I've said before, right, these metrics are best viewed over a longer period of times versus kind of any standalone month, especially kind of given the quantities. And like specific to the fourth quarter and like our assumptions for that blended rate growth between 75 and 125 basis point growth, you know, we have fairly stable achieved renewal rate increases kind of expected. and we are allowing for some continued moderation of new lease change. But the setup right now in the first month, we still got two-thirds of the quarter to get through, feels pretty good to us.

Yeah, and handouts, Mark, just to add to that a little bit, this is a give-and-take type process. I mean, we can get new lease rate to be a higher number by letting occupancy decline, and that may not benefit same-store revenue growth, which is our ultimate goal. So We're trying to make, you know, as much money as we can in the current quarter and have a nice setup for the next year. But just viewing one factor, either in one month or in without context to the other ideas, if we were hurting on blended rate and hurting on occupancy, that'd be a much more serious situation for us than, you know, what happened in September, which to us was just a blip around the average.

Got it. Got it. Thanks for the color. And then one on the Blackstone transaction. It looks like you guys used a bit more debt proportionally to fund that. I'm assuming capitalizing on lower debt costs as you highlighted the unsecured issuance, but also the opportunity in your underlevered balance sheet. So maybe can you talk about the appetite for using a bit more leverage to fund acquisitions in the near term and then maybe some color on the IRR that you underwrote the Blackstone portfolio for? Thanks.

Yeah, so I'll start with the balance sheet and then I'll pass it over to Alec to talk about the IRR. But we have an incredible, as you pointed out, under incredibly under levered and strong balance sheet. As you may recall, and as those on the call may recall, we have spent a long time, frankly, warehousing capital looking for opportunities and we warehouse capital by paying down debt. and going well below our own targeted kind of debt metrics of net debt to EBITDA five to six times. And so when the opportunity presented itself on Alex's side, we capitalized on that by using the debt capacity we had and further capitalized on it by the fact that we were able to do so at a very attractive rate overall, particularly with the use of proceeds. So we think that there is a lot more capacity given where the metrics I just outlined and the fact that we're sitting at call it 4.6 times. And we would look to use that debt capacity to take advantage of opportunities that make good long-term sense to lock in a really good cost of capital and allow for P&L accretion over time.

And, Andell, in terms of IRR, we underwrite to an unlevered IRR, and then we compare it to our weighted average cost of capital. In this case, that unlevered IRR was about an 8%, which at that time was in excess of the WAC at that point.

Thank you, guys.

We'll go next to the line of Alexander Goldfarb with Piper Sandler.

Good morning, morning out there. Bob, maybe just sticking with the balance sheet for a minute. You guys are one of the REITs that's got an active CP program. Obviously, you take advantage of the unsecured debt market. Can you just walk us through the difference in the two programs as far as the underlying rate, and does using more CP impact your ability to, you know, the pricing that you get on unsecured? And how do you think about alternating between the two programs?

Yeah, so I guess let me step back and make sure I got the question. But commercial paper for us is kind of short-term floating rate exposure that we use to deal with working capital cycles. And working capital for us really means transaction volume. Um, and so the CP program is, um, we use, we'll use a portion of it. We use it in the construct of our over a capital structure to balance how much voting rate we have, et cetera. And it's much cheaper than our line of credit, right? So we can borrow it, call it. So for plus 20 basis points in the line of credit would be contractually. So for plus 75 or so, um, but we're really toggling between short-term and long-term, um, issuance when it comes to like the unsecured market. by balancing a bunch of factors, right? How much floating rate exposure? What does our liquidity profile look like? What does our maturity profile look like? What does the whole thing look like coupled together? And balancing that out. And because we've done such a great job on the balance sheet over the years and extended our duration and have a lot of capacity to have some short-term usage and some long-term components, we can use a little bit of all pockets to reduce our aggregate cost of capital, which is the goal overall.

Okay. And then second question is, you guys seem to be more hopeful on Seattle and San Francisco. You know, over the past few years, there have been a lot of companies that have announced return to office, and it's fizzled out. And obviously, you know, we've all been collectively hoping for a rebound of Seattle and San Fran for the past few years. What gives the team on the ground confidence that this time the return to office mandates and some of the positives that you've seen in those two markets are actually finally truly taking hold versus this could be sort of a false start that we've seen before.

Yeah. Hey, Alex. This is Michael. I could start off here. So first, I just spent a week in San Francisco, and you could feel it, and the on-site teams will tell you just based on the prospects that are showing up for the tours what's driving some of that. So the migration patterns show people from further out coming back near in, When they walk into the office, they're talking about the fact that they need to be back into the office for work several days a week. And that's driving a lot of their decisions. So it's still a little bit early, I would say, in San Francisco to feel it. But when you have the big companies like Salesforce making that announcement, you see the activity and the ground in the office is from the prospect. A lot of the other peripheral companies start to follow some of those bigger tech companies. And this is probably... the most serious we've seen them actually talk about all of this in the marketplace. Specific to Seattle, I'll tell you, we could see it like job postings from some of the major tech providers in that market are up in the city of Seattle. Job postings in Bellevue Redmond are up. Our on-site team, we've been talking to them like every week for the past several weeks once that Amazon announcement came out. And the Amazon employees are trying to get out in front of that January start date. Because they're concerned that there's going to be this pent up demand coming in and that either the rates or the availability of certain apartments won't be there in the marketplace. So they're actually buying early from us. So we could see it right now. And Seattle just feels a little bit further along than San Francisco from that. And I feel like Amazon is really kind of serious about what they're saying to their teams.

and a little of this alex it's mark is premised on our perspective gleaned from the moody's analytics numbers for next year that there's going to be some good job growth in the bay area in terms of office using jobs the bay area shed a lot of tech jobs and the jobs that have been added in ai have not been sufficient to offset those jobs but we're hopeful that that reverses itself so i think when you talk quality of life seattle's definitively better I've been there recently as well. Same thing. San Francisco is better, but not quite as good. I think LA is less advanced in quality of life considerations being addressed. And then you got this job overlay. And I think on the job overlay side, you feel pretty good about, you know, Seattle and you're feeling better about San Francisco. And a little bit of what you saw in the third quarter for us was LA being a little sideways on jobs. So we do need that ingredient to come through for these markets to fully recover and But we feel that. We see that. Those are great industries, and I think they will attract and start to hire again if the economy keeps churning. Thank you. Thank you.

We'll go next to John Polosky with Green Street.

Hey, thanks for the time. Michael, I wanted to pick up on a conversation in Seattle. I'm just trying to help. Can you just frame it with some specific metrics so we understand kind of the night and day difference? I'm just trying to get a sense if it's a surge of kind of foot traffic applicants or just a steady trickle post-Amazon announcement.

Well, I mean, I think we saw these trends in migration patterns even last quarter, and we did put some good details on page eight in the management presentation that talk about kind of not only that urban-suburban mix, but, you know, what we're actually seeing, the fact that concessions are down 40% year over year. But I think we've seen some of these migration patterns. We've heard some of this before from our new residents moving in. And I think when you look at what the comp looks like, the comp line of our pricing trend for the fourth quarter, this time last year, we were issuing concessions, right? We had rent decelerating. And right now, while you're still seeing some normal kind of rent deceleration there, the concession use is actually kind of abating or softening a little bit in the downtown kind of sub market. So I think we're just seeing what we would describe as like the greenest shoots that we've seen and felt in a while.

Okay. And then a question on LA in terms of the overhang on market vacancy and market rents from the eviction backlog, not just in your portfolio, but surrounding competitors. What's your best sense of the inning we're in on that overhang on market fundamentals, and when do you think the anvil on market rate and occupancy will finally be gone?

Yeah, so, John, this is Michael. That's a hard thing to understand exactly when we think we'll be kind of back to normal. I feel like, you know, when you just look at the sheer number of quantities of kind of pending markets evictions in the marketplace that we have we are more than kind of two-thirds of the way through kind of our backlog it was a positive sign for us to see that the duration dropped to four months from kind of the six-month average that we saw early in the quarter but we really need to see another drop down to probably like two months for it to get back to like that normal swing of things so my guess is we think about our modeling for next year with la You know, besides some of those top line drivers that Mark just talked about, besides the fact that we have rents on top of prior year, we'll see kind of how they hold up. You know, we really are looking now at probably another couple of quarters of this pressure from this excess inventory in the market. But when you look at the occupancy for the quarter, you know, positive is that while we're getting, you know, some of this excess inventory down, occurring, we are able to rent those units out and we are getting new residents in that pay the rent. So that's a positive to us. It's just taking us a little bit longer to backfill some of those units than you otherwise would have had in normal market conditions. Thanks, Michael.

Our next question comes from John Kim with BMO Capital Markets.

Good morning. You talked about the net migration trends being favorable to Seattle and San Francisco. Where are the residents coming from? Is this a reversal of the Sunbelt migration we've seen last year?

Yeah. Hey, John. It's Michael. So it's not so much the migration is happening or in-migration is happening from out of state. What we're seeing is the migration patterns are shifting from being 20-plus miles out coming near in. So it could even be within the same MSA. They're just coming nearer in to us. So that's another source of demand for us. You are seeing kind of some out-of-state in-migration occur, but it's still not back to like what we saw in like the pre-pandemic era. We're still slightly elevated from getting more of our new residents from within the MSA.

Okay. My second question is on the Blackstone acquisition. I realize it's immediately accreted to earnings. You bought it below replacement costs. But the operating environment in your extension markets are going backwards, maybe more quickly than you anticipated. Could you have waited on acquiring assets in these markets given NOI is going negative in some of these fund-bought markets?

Yeah, it's Mark. Boy, I wish we were that prescient. You know, we've talked before on the trade-off here. you're going to get some weaker rental growth numbers, but you're going to get a better price now. And then we'll likely continue to be a buyer and you'll probably pay a higher price and you'll have less of that rental growth weakness. Frankly, it's very, very early on that deal, but everything's tracking very consistently to slightly better than our numbers in a pro forma. So again, the Sunbelt's weak. We expected it to be weak. Those markets are pretty well exactly as weak as we thought they'd be. And again, we do run things differently. Michael is an excellent operator and he and his team, you know, there are things we can do better in terms of delinquency management and vacancy management that even if rents are going down, we can underwrite and we see those sorts of improvements. So I guess I don't have any regrets about the timing because I think your dollar cost averaging a little into this. And I think we really love our basis here with that kind of replacement cost discount. And I think in a few quarters, you're going to start to see some improvement in the second derivative in the Sun Belt, but it's going to take a while for our big three Sun Belt markets to see significant improvement in same-store revenue. We did assume that would take a little bit longer.

And, John, it's Alec. We are in just those specific three Sun Belt markets, actually. Two, when you think of Denver being outside the Sun Belt, not in some of the markets that are just seeing massively historic amounts of oversupply. So ours, we feel like it's a little more digestible over time. We are not, we have not been buying in Austin, as an example, where we do have three properties, but we're standing pat because the amount of supply is just so overwhelming.

Thank you.

Our next question comes from Michael Goldsmith with UBS.

Hi, this is Amy. I'm from Michael. Have you been seeing the same in migration trends for the East Coast markets as you've been seeing in the Seattle or San Francisco?

Yeah. Hi, Amy. This is Michael. So really, when you look across the East Coast markets, our migration patterns are very much in line with pre-pandemic kind of norms, both from how we're actually attaining new residents. And we also watch when residents leave us, where are they going? So both the out-migration and the in-migration patterns across those East Coast markets, very much in line with historical norms that we saw back in 17, 18, and 19.

Okay. And then one on bad debt. How are bad debt, new levels of bad debt, so for new residents coming in the door, how are bad debt levels for those residents trending? Is this in line with historical or elevated below normal?

Yeah, it's Bob. So in terms of new entrants from a bad debt standpoint, it's very normalized. So it's normalized back to pre-pandemic levels. So the quantity of non-paying residents that are coming in the front door has very much normalized back to pre-pandemic levels. The thing that we have to keep in mind and the thing that we do keep in mind as we manage this is that if eviction processes take longer, each one of those quantity of people actually still costs more. So we have a bunch of initiatives and a bunch of technology that we utilize to try to actually make it lower than normal to the extent that we think the eviction process is going to be extended. But in terms of quality of resident kind of getting at that level, it's still very high quality, still low percentage of people coming through that don't pay.

Thank you.

We'll go next to Nick Ulico with Scotiabank.

Hey, good morning. It's Daniel Tricarico on with Nick. Maybe following up on John's question from earlier, Alec, how are you underwriting rent growth on new acquisitions today in those higher supply markets? And I think you mentioned flat in the first year or two, but that probably assumes some higher rent growth in the out years. So curious how you or maybe just generally private market players are baking in that rent growth to get the IRR math to work.

Yeah, hey Daniel, it's Alex. So every property is a little different, but certainly all three markets are seeing higher than historic supply. So across the board, the first year has always been less, a little bit less than what the prior year was. The second year is maybe flattish to a little bit less, but part of that is offset by operating efficiencies that we have from our platform and other income that we're layering in. So the net-net is an improvement by the end of the second year. then we do think that in years three and four um we will see outsides grow so if you thought the historic norm might be three three and a half i think four four and a half is uh going to be highly achievable and so we do do factor that in varying depending a little bit on the approximate supply for each asset but that's generally the trend that we show sorry i was on mute appreciate that um and then i'd follow up maybe for mark

um just wanted to ask your high level thinking on on the election different legislative things um you know are there different very like what are the variables maybe you're focused on um maybe what's less topical now and and you think maybe could be more topical next week or or next year yeah thanks for that question i mean you know of course the federal election is getting a lot of notice i will say state and local government is generally more impactful to our business

And so most of our focus and the industry's focus has been on Proposition 33 in California. And we've been very active there and we remain optimistic that Californians will reject for the third time this sort of anti-housing rent control proposal. So that is certainly topical. Depending on the president, there is a difference in approach there. You know, the federal government has important levers it can pull in terms of the GSEs, Fannie and Freddie. and how they put capital into the market, and FHA and HUD as well. So I guess that's an impact. So we'll have to see all that settle out. And then, of course, whoever is president will inherit some challenging budget circumstances, and we'll see how that impacts things like the voucher programs, expansions of the LIHTC, which is the low-income housing program, middle-income housing tax credit program the industry is advocating for. So there's a lot of topics on the table that I hope in a week we know a little bit more, have a little more certainty. But the main discussions that the industry is having right now and the main focus are this state ballot initiative in California. And we've had some terrific luck across the country in the last year or so, whether it's the Massachusetts housing bill, which was very supply focused, very much trying to generate affordable housing, whether it's in Florida, very different government there, of course. their housing bill, which again, focused on supply and zoning reform, California transit-oriented development that Governor Newsom's focused on. So I think everyone gets the message about supply being a solution. I think the industry's just got to push that, whether it's the federal or state level, as well as voucher enhancement and public-private partnerships like 421A and the MBTI program in Seattle and things like that. So I think we're going to have a great dialogue when the smoke clears, but for a week or maybe a little longer, there's going to be a little uncertainty.

All right. Thanks for the time, Tim.

We'll go next to Adam Kramer with Morgan Stanley.

Great. Thanks for the time. I wanted to ask maybe a couple of quick ones. Where is the loss to lease in the portfolio today, and where are you sending out renewals for November, December? here.

Yeah. Hey, Adam, this is Michael. So first I'll just start off. So the loss to lease, and maybe I'll just back up. So at the beginning of the year, we actually started in a moderate gain to lease position at about 60 basis points. And then as that pricing trend kind of grew, kind of we moved ourselves back into a loss to lease position. As of kind of the middle of the month, October 15th, we were in a slight gain to lease of about 10 basis points which, you know, again, it kind of tells us that we're going to wind up at the end of the year in a normal range because any given year you can start in a slight gain or a slight loss to lease position, but that's kind of where we're positioned right now. We do have a little bit of that easier comp in the fourth quarter in a couple of these markets, so we'll see kind of how that plays into the final year-end number. In terms of the renewals, right now our quotes are out in the marketplace for the next 90 days. we still expect to continue to renew a high percentage of our residents. We put some stats in there. We've been really focused on that, the customer service side of our business and leveraging our centralized team. With the quotes that are out in the marketplace that are around a 6.5% or 7%, we expect to achieve around a 4.7% renewal increase or a little bit better because obviously if the markets continue to improve some of those West Coast markets, we have the ability to kind of dial down some of the negotiations that we're doing, which could produce a little bit higher results in the quarter for us.

Great. That's really helpful, Michael. Thank you. And just maybe switching gears on kind of external growth, maybe a two-parter here. I guess first part is just when you're thinking about dispositions going forward, which markets are you focused on? And then the second part of that is, you know, obviously pretty, pretty inquisitive here with this larger portfolio. You know, is there more to come, and if so, is it kind of more on the one-off side of things, or is there the potential for kind of further portfolio opportunities here?

Hey, Adam. It's Alec. First on the DISPO question, as we've talked about in the past, we are focused on decreasing exposure in California, and we've done that recently and will continue to do that. We'd also decrease more in the urban core of a couple of other cities as well outside of California. just not a great bid right now for that yet but we're starting to hear requests for information about properties we were talking to people who are kind of taking a contrarian view but as you know we're never in a position where we have to sell something so we're just kind of waiting for the market to come to us a little bit on that but i think you'll see us continue to spread our footprint into these expansion markets and then within our coastal markets become more a little bit more suburban than we are right now so a little more urban But we want the market to come to us a little bit, and we have the ability to sell other assets while we're waiting for that to happen. In terms of the one-offs versus portfolios, you know, we're out there trying to create opportunity every day. That's how the Blackstone deal came about. And, you know, we're talking to any of the major developers or owners, and we would love to do business in volume. And if not, we'll keep doing the one-offs. But we expect to be able to find more opportunities like the Blackstone deal. Great. Thanks for the time.

We'll go next to the line of Josh Dinerling with Bank of America.

Yeah, hey, guys. I just wanted to follow up on one of the opening remarks about the resident AI rollout and how you're going to get to 75%, 80% coverage pretty shortly. I guess just how should we think about the benefits of this rollout impacting the P&L? And then maybe any thoughts on the potential margin, you know, improvement opportunity here.

Hey, Josh, this is Michael. So maybe I'll start with the first one and just talk about like what we're doing. So we were early pioneers of kind of leveraging AI into our leasing process. We did that back in 2019. And you saw that benefit almost immediately in the reduction of onsite kind of payroll or mitigating payroll growth onsite as we continue to centralize a lot of those kind of customer experiences. Right now in this last quarter, what we're doing is we're actually rolling out an AI tool that deals with resident inquiries. So questions that residents have, not necessarily prospects. And what we hope to see with that is that as these kind of machine learning applications get in there, they get better and better. Out of the box, we started with like 60% coverage of being able to answer inquiries from our residents. We think over the next couple of quarters, we'll get to that 75, 80%. And really what you get then is you get another layer of operating efficiencies, whether that's the onsite side where we're able to kind of pod or flex staff across multiple properties even further than what we've already done. Or you start looking into our centralized teams and you say, where can we create efficiencies there so we can take on new tasks? So we're really excited. And again, this is something that we're never done with. But you're seeing some of these applications come to the market that really do have a pretty quick impact on the operations of the company. And the second part of your question, I just want to make sure I understood. Were you talking about like market upside?

No, I guess, sorry, just like margin expansion opportunity across the portfolio, it seems like this might generate some expense savings. So just trying to think about the opportunity set here.

Yeah, I'm not sure it's how much margin improvement, as much as it is just blunting the rate of inflation. I mean, you've got a fair bit of growth of just various costs. I mean, just direct payroll as well as medical and the rest of it. And I think what you've seen us do is kind of hold those costs to subinflationary levels. And when we do that and we grow revenue, that's the margin improvement. But, you know, again, we seek to be closer to 70% and better in that number. But a little bit of this is just being, and I think Bob Garachana said it well on the last call, whatever you think inflation is, we're a little bit below it. And this is part of that sort of effort.

Thanks, guys.

We'll go next to the line of Julian Bluen with Goldman Sachs.

Yeah, thank you for the question. Bob, you talked about an openness to continue to deploy leverage capacity here. Maybe I guess bigger picture, I get the geographic mixed reasons for the acquisitions, but why does now feel like the right time to be deploying your leverage capacity into acquisitions when maybe the spread between cap rates and your cost of debt remains at some of the tightest levels in maybe the last decade?

Interesting. It's Mark. I'm going to start now. I may add to it. Cap rates aren't the only input to this calculus. I mean, replacement cost is really important, too. And as we've said on prior calls, the replacement cost thing isn't just about buying an asset at a good basis. It means that it's unlikely to be a lot of supply there because there's not an economic incentive to build. So, you know, there is in our minds probably much better revenue growth prospects than especially in the outer years, as Alex just described, years three and four than what we've underwritten. And so that's a little bit of what we're buying as well here. In terms of the spread between our cost of funds and the disposition assets and alike, you also have to think about CapEx. The assets we're buying generally are pretty new and have relatively little capital. You saw us sell and will continue to sell these much older assets with a bigger capital load. So when you think about AFFO kind of yields, those are better than they look on the surface on the FFO side. So I think there's a few things going on here. And I'll also say apartments are such a desirable and liquid asset class. The idea that you're going to get like you do in some other sectors that are less well-owned, these huge gaps between your cost of capital and what you can invest at, that's just not realistic. We just don't see that happen often or at all in the last decade. I guess almost decade. So I guess I I'd end with that comment that, you know, that sort of view would be great if it happened, but I think some other sectors have that happen a lot more. And that means that frankly, they don't trade very well in the private market and our assets do trade really well in our super liquid. And that means they tend to compress to the cost of capital more quickly.

Got it. And, and maybe Steve, sort of thinking about the other potential use of capital developments. I know your view sort of over an entire cycle is that acquisitions produce sort of better risk-adjusted returns on your capital. But I guess at this point in the cycle, why not maybe tilt more aggressively towards developments? I know you expect, you know, to complete $780 million in 24 and 25, but I guess why not sort of bring that a little bit higher?

Hey, Julian, it's Alex. The markets that we're particularly interested in, like Denver, Dallas, and Atlanta, have all this supply coming. So, sure, we could look at building into those markets, but I'm not really sure that that's the best risk-adjusted return that we're going to get when you look at the amount of opportunity we're going to have to kind of cherry-pick properties that really work well for us. So our development then instead is focused on places where we don't see those buying opportunities, and that's why you saw us with Starts. in suburban Seattle and suburban Boston, where we, we looked historically at how hard it was to, um, amass a, a portfolio with one-off acquisitions.

Got it. Thank you.

We'll go next to Jamie Feldman with Wells Fargo.

Thanks. I know we've covered a lot of ground here. I guess, um, Just thinking about insurance, I know your renewal doesn't come up until March, but can you give us any initial thoughts just where you think property insurance or commercial property insurance rates are heading and what your initial conversations are?

Hey, Jamie, it's Mark. Coincidentally, I was just talking to the risk management team yesterday about that. So our renewal on our property is done in March of each year. And just to remind everyone, our increase was about 10%. year over year, and that included us enhancing, increasing our coverage a bit as well. So we had a pretty good renewal, we thought. And remember, we didn't have those giant renewals, a lot of the folks with more hurricane exposure. We don't own in places that have windstorm risk, so that's a huge benefit to us. But having spoken through our risk management team to insurers, the two big storms this year, people don't feel will have a big impact on 25 renewals at this point. because the insurers had apparently relatively little exposure to Helene, and the exposure that was triggered on Milton, which could be $50 billion of insurance losses, was within what they thought they would underwrite to. So it appears to us that the insurance market was mostly prepared for what occurred. I can't give you an exact number because we're still rolling up budgets, but we don't see yet, we're not hearing from insurers that this is like after Hurricane Ian, where there's a catastrophic increase in insurance rates coming across the whole property sector.

Okay, thank you for that. And then I guess just quickly for Bob, the debt coming due in 25, any initial thoughts on timing of when you'll try to get after that?

Um, yeah, so we have about 500 million coming due, as you mentioned in 2025, which is kind of in the middle of the year. So we'll look for them. We'll look at the market opportunistically, um, 500 million for a company of our size, our liquidity, our credit rating is not particularly, um, large. Um, so we're really, we'll just be opportunistic at how we, um, minimize, uh, what that cost is. And we have a lot of, like I mentioned in response to some other questions. We have a lot of variables that we can pull in terms of tenor, in terms of size, in terms of all of that stuff. And the maturity is in June, by the way. But we have a lot of just a lot of leverage and a lot of excellent access to capital in the in the mix of of tools that we can use. So very manageable.

Are there any types of instruments that look particularly interesting to you now?

You know it's so volatile lately that it changes almost on a daily basis, like the 10 the 10 year 600 million that wasn't that long ago that we didn't September, when we kind of bottom take the Treasury at a 375 that the 10 year look great the spreads were low and it was you know great as the curve steepens. Obviously, maybe a little bit of shorter tenure tenors begin begin to become interesting right because you've got. you know, you're getting paid for that. And because our duration is so long and because we've, you know, got some 30 years outstanding, et cetera, we can take advantage of that. And to be honest with you, we also have, you know, our target for floating rate exposure is around 15%. We're under that right now. And if the Fed does start putting more aggressively, it doesn't look like they will now, but they might. It doesn't hurt to have a little bit of floating rate exposure too. So it's a little bit of a, it's good to have options. And I think we have a lot of options and, Seems like with the volatility in the markets right now that every day something new is more interesting than it was the day before, and we'll have to see as we get closer what opportunity looks like.

Okay, great. Thanks for your thoughts on that.

Our next question comes from Linda Tsai with Jefferies.

Hey, Linda, are you there? We can't hear you.

Sorry, this question has been asked already. Is there a sense of when new lease spreads get more positive?

Yeah. Hey, Linda, this is Michael. So the new lease spreads, there's a lot of seasonality that goes into that. And I think what you should expect, and we said this in the prepared remarks, and you can kind of look at page five in that management presentation to understand how pricing trend curves throughout the year. But as we typically will start, we will decelerate in the fourth quarter with those spreads. Then you start into the first year, you'll start to get some acceleration in your pricing power. And that usually then transfers over to positive new lease spread somewhere in that kind of later first part of the first quarter.

Thank you.

We'll go next to Alex Kim with Zellman and Associates.

Hey guys, thanks for taking my question. I'm going to piggyback off Julian's second question a bit here. Can you talk through, you know, what you're seeing in your expansion markets that makes them so attractive on a long-term basis? And then I guess just any other markets that you're looking at that fit that criteria as well.

Hey, Alex, it's Alex. You know, we're really following our customer. You know, we see these high-tech jobs in places that didn't used to have them in volume, like Denver, Dallas, and Atlanta as an example. And so that will be the principle that guides us. And we continue to see good numbers coming out of those places, particularly Dallas, which has been fantastic recently in terms of the demand side. Other markets that we've talked about are specific to North Carolina, Charlotte, and Raleigh, because they have many of those very same dynamics with a really great tech job base, particularly in the Raleigh area, and then more finance in Charlotte. But we've been slow to get going on that because like Austin, the amount of supply is just daunting. And when that really gets absorbed, it's hard to project right now. So we're willing to accept some dilution, but there's a limit to, you know, how much we're willing to accept. So I think you might see us enter those markets in a little bit when that becomes a little more clear.

Got it. That's it for me. Thanks for taking the time.

We go next to Rich Anderson with Wedbush.

Hey, thanks. Good morning, still. First question on the Blackstone deal. Bob, what's the longer-term term-out plan on the CP side of the financing?

So in the near term, a good component of it will be disposition proceeds because the CP balance was partially elevated just from timing and disposition. So we... Still have, call it, with our guidance, like $400 million or so of dispositions that we have planned for the back half of this year or for the fourth quarter. Could slip into early Q1 of next year, but that will bring our CP balance back to kind of what is the normal line that we call it, you know, $500 to $700 million or keep it around that level. So it's really disposed.

Okay. And then a bigger picture perhaps for Mark. In 2016, the company sold... It's probably not fair to call it all Sunbelt, but a chunk of Sunbelt to Barry Sternlich. That was almost 10 years ago, and now you're kind of reversing course with the expansion today. Is this all a function of how tech business has moved and business-friendly climates have gotten better in other areas outside of, say, California and so on? Or is there something else that has caused the company to sort of you know, arguably reverse course on the Sunbelt and why, you know, why you're doing this now versus the decision you made, you know, eight years ago. Thanks.

Thanks, Rich. It's good to talk to someone who has such a long amount of history in our business. You look at every one of our competitors and their market mix has morphed. We may be more vocal and more communicative about it, But people have left tertiary markets in focus. They've left lower-end renters in Sunbelt markets in focus and higher. So just to be fair, I mean, really every company does adjust to circumstances and we among them. I would say several things changed. Regulatory risk became more significant in some of our coastal markets. And for a while, you might remember, we thought that was a big advantage because no one could build in those markets. But it got challenging enough where some of those states and some of those jurisdictions became difficult. Alec mentioned following our customer, which is kind of our byline. And our customer, there are more higher-end jobs in the Sunbelt markets like Atlanta than there was when we exited those markets. And the other part that goes with that is housing is a lot more expensive in those places. So it used to be our best renter in Atlanta, they'd be with us six months and they'd buy a home. And our worst runner would move out in the middle of the night, and it was a pretty low-quality tenancy, all right? And that's really changed. You go to these places, they're much higher-quality job growth. So it was a combination of regulatory risk following our residents and much higher single-family housing costs in desirable areas.

Okay, good enough. Thanks very much.

Thank you. We have no further questions. I'd like to turn the floor back to Mark Perel for any additional or closing remarks.

Thanks, Melinda. As we close the call, I want to thank my colleagues at our Augusta, Georgia Accounting Center for their work above and beyond the call of duty to close our books in the aftermath of what Hurricane Helene's terrible damage was to that city. I salute all of you and the folks in accounting here in Chicago who picked up the slack and got all our quarter-end financial work done on time. To our other conference call listeners, thanks for your time today, and we'll see you on the conference circuit for the rest of the year. Thank you.

This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time.