Equity Residential Properties Trust (EQR) — Q3 2019 Transcript

Thanks, Marty. Good morning and thank you for joining us today. Continued solid demand for our product is driving absorption of new supply, and our excellent people and properties have produced record high resident retention, resulting in same-store revenue growth that aligns with expectations shared during our July call. While we are not providing precise guidance at this time, we want to share the basic building blocks and thought process we are undertaking to determine next year's same-store revenue guidance. Important inputs include expected supply, our embedded growth, which means the growth inherent in our rent roll headed into 2020, and, most importantly, our perspective on demand, which influences both our occupancy and rate growth estimates. A new factor this year is the negative impact of regulatory changes in California and New York on our same-store revenue numbers. In a moment, Michael Manelis, our COO, will give you insight into our third quarter operating performance, revised full-year same-store operating guidance, and discuss our 2020 building blocks before we open the call to questions. Moving on to investments, except in New York, where post the new rent control in June the activity is too limited to draw conclusions, we have seen cap rates modestly decline across our markets, pushing up values. Competition among buyers is fierce, especially for B and C quality assets where value-add play may exist. As previously stated, this has compressed cap rates between new and older products. In response, we have accelerated the sale of older, less strategic assets and purchased assets that fit our long-term strategy with minimal to no dilution. During the third quarter, we acquired four new properties consistent with this strategy and sold seven older assets. Three properties we acquired are in California, which are new properties, so they will not be subject to the new rent control law for almost 15 years. The first property is a 237-unit property in the Little Tokyo submarket of Downtown Los Angeles. This asset was built in 2017, and we bought it for approximately $105.2 million at a cap rate of 4.4%. With a Walk Score of 96, the asset is a short walk to multiple transit hubs and is near extensive employment concentrations and entertainment options. The second is a 398-unit property built in 2017 in the Koreatown submarket of Los Angeles, purchased for approximately $189 million at a cap rate of 4.3%. This property has excellent access to public transit and freeways, with abundant nearby entertainment options and boasts a 97 Walk Score. The third asset we acquired is a 137-unit property on the Peninsula in the San Francisco Bay Area, which was bought for approximately $108 million at a 4.3% cap rate. This property is very near a Caltrain station and is in close proximity to many large technology employers. Our last acquisition was the purchase of a 312-unit property in the Denver suburbs, built in 2016, for approximately $88 million at a cap rate of 4.7%. This property is an example of a well-located suburban elevator building, likely to make up about 30% of our portfolio in Denver. During the third quarter, we also sold seven assets; one was Park at Pentagon Row, a 30-year asset near Amazon HQ2, as discussed on last quarter’s call, and the remaining six sales predominantly comprised our portfolio in Berkeley, California, which were six smaller buildings totaling 343 units, sold for approximately $187 million. These buildings are about 20 years old and have significant student populations, making operation intensive. The properties sold during the quarter had an average disposition yield of 4.7%, generating an unlevered IRR of approximately 7.6%. We also completed two developments during the third quarter, one being Kendall Square 2 in Cambridge, Massachusetts. This is an 84-unit property built at a total cost of approximately $51.4 million, which we expect will generate a stabilized yield of 5.4%. This property was developed as the second phase of our existing Kendall Square Loft asset and is an excellent addition to our portfolio in the booming Cambridge Life Sciences area. We are particularly pleased with the speed of our lease-up at this property. We also just completed our 137-unit Chloe on Madison Project in Seattle. The total cost of this project was approximately $65.3 million, and we expect it will generate a stabilized yield of 5.4%. This asset was built adjacent to our Chloe on Union asset in the Pine Pike Corridor of Seattle. Switching to new development, the availability of capital is somewhat different than for existing assets. We continue to hear from reputable local and regional developers with good projects that are unable to put their equity stack together given escalating construction costs and shrinking build-to-yield opportunities. We have been pursuing a few of these opportunities as joint ventures and believe that investing our capital in shovel-ready deals with sound structures that provide protection to our capital is a good way to source new properties while managing the inherent risks in development. We started two developments during the quarter. Arrow Apartments is a 200-unit mid-rise property that we are developing in a joint venture with a prominent regional developer. This property is part of the master plan community on the site of a former Naval Air Station and will have dedicated ferry service to San Francisco. We expect to build our 200 units for a total cost of approximately $117.8 million and anticipate a stabilized yield of 5.3%. Our other new development is 4885 Edgemoor Lane, a 154-unit property in downtown Bethesda, adjacent to an existing EQR asset. This is a ground lease deal, where we have the right to acquire the fee interest in about 20 years. We will develop this 15-story high-rise for a total cost of approximately $75.3 million with an expected stabilized yield of 5.9%. We think the recent increase in office space in Bethesda will create more demand for rental housing that this well-located property will capture from new office workers who want to live conveniently to work while having excellent access to the Metro and entertainment amenities. On the capital markets front, as you saw in the release, we took advantage of a very favorable environment, issuing $600 million in unsecured debt with a yield of 2.56%. There was tremendous demand for this issuance, and we couldn’t be more pleased with the execution; congratulations to the team. Finally, before I hand it over to Michael, I want to comment on rent control. With California recently passing AB 1482, both the state and New York have introduced new rent regulations. These new laws are complex and will create compliance challenges for all landlords, while also acting as a powerful disincentive to building new affordable apartments needed in these two states. We agree that there is a shortage of workforce and affordable housing in many areas of our country, but we believe the actions taken in New York and California will not help solve these problems. These new housing laws will discourage the production of new housing and do not adequately address the root causes of housing production shortages, such as zoning regulations prohibiting the construction of multi-unit housing and other excessive governmental regulation. We also think that over time, this will lead to the deterioration of the existing affordable housing stock. Through our trade associations, we will continue to encourage policymakers to embrace actions like zoning reform and the removal of regulatory barriers to new housing construction, as well as programs that create incentives for private market developers to build the affordable housing units our city desperately needs. I will now turn the call over to Michael Manelis.

Thanks Mark. I would like to begin with a shout out to all of the employees of Equity Residential. The third quarter represents our busiest leasing period of the year, with just over one-third of the entire year’s transactions taking place. The team’s focus on delivering remarkable experiences to our new customers and current residents continues to pay off, allowing us to achieve our highest recorded resident satisfaction scores while increasing our all-time high online reputation scores. Favorable operating fundamentals continued through the quarter with strong occupancy of 96.5%, which is 20 basis points above Q3 of 2018. Record low resident turnover delivered a 5% achieved renewal increase for the quarter and strong demand to close out the peak leasing season. While we reported strong occupancy this quarter, we anticipate that the balance of the year will moderate in line with normal seasonal decline, a process that has already begun, and should result in our full-year same-store occupancy ending up at 96.4%, which supports our 3.3% same-store revenue growth. Today, our portfolio is 96.2% occupied, exactly where it was this time last year. Base rents are up 2.7% year-over-year, with renewal performance remaining stable and expected achieved renewal rate increases around 5% for the remainder of the year. Heading into 2020, a few top-level inputs will serve as building blocks for our guidance process. Most markets will deliver a relatively similar amount of new supply, with the exception being New York, which will have considerably less, and Boston, which will have more. We expect demand for our high-quality well-located assets to remain relatively the same as 2019, equating to similar occupancy next year. Revenue growth in both our California markets and New York will be negatively impacted by about 20 basis points each due to the recently enacted rent control rules. For the entire company, this approximates a 15 to 20 basis point impact to our 2020 same-store revenue growth. We also anticipate starting the year with better embedded growth than we had entering into 2019. Overall, assuming these inputs hold, we expect New York, DC, Seattle, and San Diego to deliver equal or better revenue growth next year, and Boston, San Francisco, LA, and Orange County to experience less. We are in the early stages of our budget process; we will update our models throughout the remaining balance of this year and will issue specific guidance on our January call. Moving on to the markets, let’s start with Boston. Full-year revenue growth expectations have been raised to 3.9% from 3.5% as quarterly results were better than expected. A reprieve from head-to-head supply delivered strong rate growth and notably an occupancy of 96.4%, which is 70 basis points better than the third quarter of 2018. On the supply front, after a quiet 2019, we’re beginning to see new competitive supply return to Boston, tracking about 5,800 units to be delivered in 2020, with roughly 60% of those units in the city, heavily concentrated in the Seaport. Demand remains strong, bolstered by large corporate expansions and relocations. It also helps that increasing rents for office and lab space appears to be pushing the highest and best use for development parcels away from multifamily in the Seaport District. While we’ve only seen a few of these deals shift, this could create more renters and less supply in future years. The New York market continues to demonstrate strength, and its performance during the quarter was in line with our expectations. There is no change to our full-year same-store revenue growth projection for New York of 2.5%. Overall, we continue to see good economic activity and strong demand for our product in this market. The impact from changes associated with the rent regulations that took effect in mid-June are playing out as expected, with about a 50 basis point reduction to achieved renewal increases in the second half of the year and approximately a $400,000 reduction in application and late fees. Combined, these changes will reduce our expected revenue performance in the New York Metro market by approximately 20 basis points in 2019, with a similar impact anticipated for next year. On the supply front, next year we will deliver just over 4,300 units in our competitive footprint, a 50% drop from 2019. While we still see some pressure, the overall competitive nature of the new supply will be much less, which should allow us to absorb the impact from rent regulation changes. Washington DC continues to show strength despite elevated deliveries, with our full-year revenue growth projected to be 2.5%. Quarterly results were in line with expectations. The market’s unemployment rate of 3.3% remains below the national average, and job growth remains healthy, with professional and business services sector gains concentrated in Northern Virginia. Deliveries of 10,000 units per year or more seem to be the new norm for the Washington region. Ongoing demand is fueling robust Class A absorption, supporting strong occupancy and improved pricing power in Q3. In 2020, we’re tracking just over 12,000 units, with notable growth expected in the capital riverfront area, where we have no direct exposure. Shifting to the West Coast, Seattle surpassed our expectations for the quarter, prompting us to increase our full-year revenue growth projection by 20 basis points to 3.4%. Job growth remains robust; Seattle is creating jobs at its fastest pace since 2016, and office absorption is at its highest in a decade. Demand for our product remains strong, allowing us to maintain high occupancies while pushing rates. Supply concentration has shifted to the East side in 2019, allowing pricing power to return to the CBD where we own several assets. Over the last several years, suburban submarkets yielded greater rental income growth; however, that trend reversed for us over the summer as downtown submarket rent growth led the charge for Q3. Overall deliveries in 2020 will be similar to 2019, with just over 8,000 new units coming online, and the concentration will continue to favor the East side in the first half of the year, returning to the CBD Belton submarket in the latter half. Regarding California, the new rent control laws go into effect on January 1, 2020. We have 97 properties—about 70% of our California portfolio—subject to these new restrictions next year. The most pronounced impact will be renewals, as there will be a cap on increases equivalent to CPI plus 5% on all properties over 15 years old. The law allows vacancy decontrol, meaning upon move-out, rents may increase to market levels above this cap. If these regulations had been in effect for 2019, they would have reduced our renewal growth rate by about 50 basis points, impacting our same-store revenue growth in these markets by about 20 basis points. Moving to San Francisco, we now expect full-year same-store revenue growth of 3.8%, down 20 basis points from our July guidance. During Q3, we were unable to sustain both occupancy and rate at anticipated high levels. We maintained strength in July and August, yet September traffic fell short of expectations. Currently, our San Francisco portfolio is 95.5% occupied, 10 basis points lower than the same week last year. While this reduction in occupancy at this time of year aligns with typical seasonal declines, it is something we will monitor closely. Strongest results persist in Downtown, while the East Bay continues to encounter pressure. In employment terms, the Bay Area topped 4.1 million jobs, maintaining 10 straight months of employment increases. It's possible that the pace of job growth is slowing, but these gains are still strong. We’re tracking about 9,800 units to be delivered in 2020, similar to 2019, though the East Bay will deliver fewer units, shifting the concentration to the South Bay. In Los Angeles, we’re projecting a full-year same-store revenue growth of 3.8%, down 10 basis points from our July guidance. As mentioned last quarter, we anticipated deceleration due to pressure from new supply that was back-loaded, coupled with a difficult occupancy comparison for the latter half of 2018. Occupancy remains strong at 96.3%, although we didn't achieve as much pricing power as expected, which resulted in softening rate growth to maintain necessary leasing velocity. Continuing the supply trend, roughly 2,800 units of deliveries were postponed from 2019 to 2020. These units were originally scheduled to complete in late 2019, but with labor shortages and construction delays, this results in both 2019 and 2020 having around 9,700 units being delivered. Downtown LA, West LA, and the San Fernando Valley are the highest supplied submarkets in 2019. We're still looking at about 3,900 competitive units under construction scheduled for completion by the end of the year, which will continue to pressure rates. Entering 2020, supply will be concentrated in West LA, Hollywood, and the San Fernando Valley, while Downtown LA is expected to see a reduction, with only 1,200 units being delivered, benefiting our pricing power and performance in the latter half of the year, in a submarket that accounts for close to 20% of our LA revenue. Orange County's third quarter results were better than expected, primarily driven by 40 basis points of stronger occupancy compared to last year. Our full-year revenue growth guidance has increased by 20 basis points to 3.8%. As stated previously, we have a diverse set of properties in Orange County, and not all directly compete with 2019’s supply. 2020 is expected to be similar, with just over 2,700 units to be delivered. San Diego met expectations in Q3, and there are no changes to our full-year revenue growth guidance at 3.4%. Overall, while newer product downtown continues to pressure pricing power, supply will drop to just over 2,100 units next year. Regarding initiatives, we continue to advance our sales and service roadmap shared in June's investor update. On the sales front, by year-end, we will have over one-third of our communities on our Artificial Intelligence e-lead platform and self-guided tours deployed in over 25% of our communities. On the service side, our new mobility platform for service teams will be fully implemented by year-end. Additionally, we have about 2,500 units equipped with smart home technology. During the quarter, we launched our new resident portal and app, with adoption rising to 55% of households. Residents continue to utilize this platform for rent payments, service requests, and engagement, including reserving amenities and organizing social events or sale posts. We expect this to further enhance resident satisfaction and retention. The evolution of our operating platform is underway, enabling continued centralization and digitalization to enhance resident and employee experiences. Over the next few quarters, we expect to provide more detailed updates on financial and customer impacts from these initiatives. At this time, I will turn the call over to the operator to begin the Q&A session.

Thanks. Maybe just starting with guidance; historically, for the fourth quarter, you have seen an acceleration both in terms of core NFFO and also same-store NOI growth, and this year seems to be an exception. So I am wondering if you can walk through what’s the variance of that versus historical years?

Thanks, Nick. It’s Bob Garechana. It is really three-fold items overall as it relates to the NFFO guidance, the $0.03 identified in the press release. The first of which is really timing of transaction activity. During the fourth quarter, our guidance incorporates about $300 million in dispositions, and in the third quarter, we had a similar amount of dispositions but actually had about $500 million of acquisitions that Mark went through, front-loaded, which accounts for about a penny of delta. It is also the timing of other items, predominantly corporate overhead, and some other expense items as well, which drives another penny. The final penny relates to same-store; you’re correct. Sequential same-store revenue does decelerate between the third and the fourth quarter, which is what we have embedded in our guidance today, indicating a modest traditional deceleration from seasonal activity. You also usually see some expense seasonality; typically, expenses decline from the third quarter to the fourth quarter substantially, and we don’t expect to see that as much this year, mainly due to the timing of some real estate tax appeals and other items that are driving that last penny identified in the release.

Thanks. And then Mark, you are active with California acquisition, and I note that the recent law doesn’t impact those assets, but is your underwriting standards changed at all, either quantitatively or qualitatively, given the more broad regulatory environment in California?

Thanks for that question, Nick. Yes. We have talked, I think, more than ever before; and while we have always had a regulatory component to our underwriting, it has become a bigger discussion. We have done things like sensitized exit cap rates. We generally think about asset hold periods in our pro forma as 10 years. So, ten years from now, these assets will be closer to the end of their protected periods, and we have sensitized those exit cap rates a little to be more thoughtful about how those assets might trade ten years from now. We typically hold these assets longer than 10 years, but we need to be more mindful. So we have conducted that analysis, and we’re still happy to hold the assets, which generally changed our IRRs from mid-7 IRRs to high-6 IRRs by making that assessment.

Thanks.

Thanks. You had this unusual dynamic this quarter for new lease growth, where it strengthened on the East Coast and weakened in California. You talked about some of the California issues, but it also looks like your new lease gross debts were weaker than some of the industry stats we’re looking at in California. So just hoping to get a little bit more info on how new lease growth turned negative in the third quarter for the California markets?

Yes. This is Michael. First, I want to emphasize that looking at any of these stats for the stand-alone quarter regarding new lease change isn’t the best approach; it’s more indicative to consider the long-term perspective over the year. Specifically, for this quarter, I want to point out what we reported on Page 15 of that release—it reflects the impact of all lease terms, meaning it doesn’t matter what lease was in place when the resident moved out to the replacement rent. When we isolate leases that match terms—specifically 12-month leases—we see about a 100 basis point improvement for the quarter. So, I would say that outwardly, we've anticipated deceleration. I mentioned this on the previous call; if you look specifically at LA, instead of the reported negative 20 basis points, it would have shown 80 basis points positive if just isolated to the term match. Overall, this quarter performed consistently with our expectations; we knew we would face pressure in the back half of the year, which is evident in San Diego and LA where we’ve faced the most pronounced pressure with that new lease change. As I said in my prepared remarks, Downtown LA is expected to see a reduction in supply next year, which should lead to some pricing power returning there.

Okay, that’s helpful. So it sounds like you’re not expecting these new lease growth numbers in the California markets to stay negative going forward?

Well, I will say that as we hit the fourth quarter, they will likely be negative; they typically are negative, and I discussed that before. There is a seasonality component to these stats, which is why isolating any one quarter isn’t always indicative of the full year.

Okay, thanks. Just last question, Mark. I guess, how are you thinking about doing more acquisitions, right? EQR hasn’t been a net acquirer in a while, and your stock price is looking more attractive. Would you issue equity to do that? What’s the size of the opportunity set you’re considering?

Thanks, Nick. No, we are certainly open to growing larger. I would start by saying, as I mentioned in my prepared remarks, the transaction market for quality assets is extremely competitive. So it’s not as if we have a whole bunch of attractive deals piling up that we want to acquire. I mean we’re buying nearly everything again that fits into the price window we’re comfortable with. So I would start by saying there isn’t a lot left that we haven’t already done. I would also point out that if you were to use, for example, the ATM, the implied cap rate on the stock—including our asset cap rates—is not likely to create a great deal of immediate accretion for the company. We’re more interested in potentially issuing debt to acquire assets. We have a modest leverage profile, and we're not suggesting that we plan on piling on debt. However, we’re in a position where we could certainly spend a considerable amount of money and fund it with debt for assets if we can find enough quality assets worth buying. So definitely it’s something that’s top of mind for us, but it’s primarily a debt play at this point rather than using the ATM or a secondary offering.

Thank you, Mark.

Thank you.

Hi, guys. Thanks for taking my question. Just a follow-up to Nick’s earlier question on rent regulation AB 1482. What is your most current input on it? Did you see any impact on transaction markets or on entering those markets just given that new regulation is in place?

Hi, Shirley. It’s Mark. Thanks for the question. We have not observed any negative impact. California has kept going, with cap rates generally steady or declining for our type of assets. That’s primarily because California was so well discussed; to the credit of the policymakers and the tenant group activists, the companies like ours and the owners, everyone was part of this conversation about rent control and reform. So when it all came to pass, everyone understood, and the regulations made sense in the market. In contrast, New York’s process lacks clarity and was done somewhat unexpectedly, making its implications harder to grasp. Overall, everything feels about the same in California.

That’s great to hear. There are talks of new ballot initiatives that could bring back discussions around repealing Costa Hawkins in 2020. Have you heard any updates on that front?

Sure. The industry has been calling this Prop 10 2.0, and the proponent recently indicated that they have enough signatures to put this on the ballot, which we anticipated. I will tell you we are very well organized. The industry has conducted meetings about this; we had previously defeated this by about 20 percentage points last November by educating the public and policymakers about how detrimental this idea is. We believe the same educational approach is justified again. We intend to be proactive and forthright in having conversations in the public space about how repealing Costa Hawkins will lead to reduced supply and investment in existing housing stock, both single-family and multifamily units. We will ensure that we are very well organized in our opposition to this measure.

Great. Thanks for the insight.

Hi, good morning, guys.

Hey, good morning.

Good morning. I wanted to revisit a few of your comments from the prepared remarks about developer equity appetite and relationships between the capital stacks required from equity and the cost of capital. I’m curious if there’s a disconnect between public and private sectors, as apartment REITs are trading favorably and have certain opportunities while private developers seem to face challenges. How do you see that leading to opportunities for EQR? I know at least one of the developments started in the quarter was a joint venture. What does that opportunity set look like?

Yes; thank you for the question. We have a few others; we've effectively communicated this on the prior call, seeing greater inbound inquiries from developers, regional reputable developers who previously had no problem obtaining equity but now find it challenging. We think some anxiety exists in development, particularly regarding where they are in the cycle. Developers typically build for a specific window, needing optimal performance in 2022 or 2023, or they risk losing money. This doesn’t align with how we think about development as we focus on our unit costs and location for the long term. Therefore, we consider ourselves in a favorable position at present, as we can take a long view on projects where we have ample capital. This offers us a chance to jump into deals that are ready to go, with a bit of risk mitigation.

Okay, great. That’s very helpful color. A quick follow-up—supply projections are continuously changing based on various sources, making it challenging to predict what's on the pipeline and timing of completion. How much flexibility do you put into your forecasts regarding supply?

Yes; we have a process with on-the-ground teams validating these stats. It’s currently difficult to believe that in most markets, anything anticipated for delivery in 2020 isn’t on our radar as we approach the shoulder periods, thus as we get to the third and fourth quarter, we may see shifting from what we thought would be a completion in 2019 to 2020. This shift has been consistent in LA. We typically see around a 10% to 15% shift; in LA, it has started to exceed 20% to 25% for unit movements. However, in terms of total quantity, our local investment team is actively trying to gauge the competitive supply in our marketplace, and deals don't just come and go.

I would add that this demand becomes competitive earlier. Before a competing project starts, they may go out for pre-leasing, impacting operators and property owners in the area, and often the movement from December to January may appear inconsequential, but it holds great meaning for operators.

Got it; thank you very much.

Thank you.

Thanks. Mark, could you give us some insight into the anticipated size of the development pipeline for EQR next year?

Thanks, John. I would prefer to specify it in terms of spend; our discussions with the Board indicate we expect to spend about $500 million annually on development, consisting of the $300 million of excess cash flow that we have each year after satisfying all CapEx needs, as well as around $200 million of additional leverage from EBITDA growth. Given that, we believe that’s the best and safest approach. My expectation is that next year, we can get close to starting $500 million in developments. We have one large deal on the West Coast that would comprise half of that, as well as various density plays replacing garden units with high-rise units across the West Coast and a few exciting opportunities on the East Coast that may take longer. That’s a reasonable expectation moving forward.

Thanks; can you provide more specifics regarding your comments about traffic weakness and occupancy challenges in San Francisco? What is the current demand outlook for your portfolio there?

It varies by submarket. Looking at our quarter results, the Downtown portfolio saw approximately 6% revenue growth, while East Bay was up only 2.5%. Reviewing traffic for availability, we noticed it resembles a 2017 pattern rather than 2018. Overall demand appears to be trending toward normal seasonal decline, which does not appear to deviate from what we would expect; we haven't seen anything indicating substantial downward shifts.

Is the increasing supply in Oakland siphoning off demand?

Interestingly, while we see very little outward movement from our residents relocating to Oakland, the assets there coming online appear to be performing well, achieving reasonable concessions as they lease up—likely siphoning some demand.

Thank you.

Good morning, guys. Quick question on the leasing spreads; your comments regarding like-for-like leasing spreads showing around a 100 basis points higher, which is interesting. I’m curious if you're noticing tenants requesting longer leases. I presume your commentary suggests they are?

You are correct that the spread reflects a 100 basis point improvement in new lease change when you isolate it to matching terms. However, I haven't seen significant demand changes towards longer lease terms; we have had strategic long-term lease initiatives in LA but haven’t noted trends in New York or California that suggest a different outlook.

Understood; there’s a tendency to view regulation negatively. Some foreign investors argue that the consequences of limiting supply and accelerating rents could yield upside, so how do you view that in the medium to long term, particularly in California or New York?

We have discussed multiple times that these rent control initiatives will reduce long-term supply, and while our existing property holdings offer low bases, government actions have become our partners in diminishing supply and bolstering market strength. However, I sincerely believe that rent regulation ultimately hinders the dynamism and vibrancy of a city, which isn't beneficial. We would rather endure some short-term pain to allow neighborhoods to expand, which in return will enhance the popularity of our existing assets.

Got it. The 4.4% cap rate cited seems compelling against the global macro backdrop. Is 4.5% a steady state for where you see cap rates at this point? I'm mindful you won’t forecast, but is that a fair assessment?

Yes, I think that’s a fair estimate, perhaps slightly lower. We typically operate within a range of 4.3% to 4.7%; for markets like Boston, it tends to be more toward the lower end as it remains highly competitive.

That’s helpful; thanks.

Thank you.

Thank you. You targeted dispositions in Berkeley this quarter. In light of Prop 10, 2.0 on the horizon, do you plan to reposition out of specific California markets, or is age the primary factor for asset sales?

The regulatory environment and pressures we feel from the welcoming atmosphere within specific cities are notable factors. In the case of the Berkeley assets, both city characteristics and asset attributes convinced us they were worth selling. We remain aware that certain locations are more challenging to conduct business and factor that into our selling decisions.

Do you have commentary on Google and Facebook potentially investing billions into the San Francisco housing market? Can EQR partner with those efforts?

We welcome these conversations and try to engage in such discussions in multiple avenues. Facebook’s recent announcement, equating to about $1 billion, which results in approximately $50,000 a unit, entails additional components from government intervention. We view it as a positive push to address housing shortages, so the combination of government and corporate entities working together could be foundational to solve these shortages.

Can EQR partner with them in these initiatives?

Absolutely; we are open to partnerships. However, if tech companies build assets specifically for employees, that’s less enticing for us. Should they build properties with city support, we will definitely explore partnership opportunities in those developments.

Thank you.

Thank you.

Hi everyone. Given that cap rates are currently low and development yield targets are difficult to justify, do you expect continued capital recycling going forward? You’ve previously stated focusing on the Denver market, which contributes modestly to earnings currently. What is the target NOI contribution you’d like to achieve from that market?

Yes, great question. Our goal in Denver is to elevate its contribution to around 5% of our NOI, up from about 1.5% currently. We plan to fund this increase with some incremental capital but also through recycling from other markets like Washington DC, where we have a significant concentration with ongoing supply issues, as well as from other areas. You can expect continued acquisition activity in Denver; we've previously made one acquisition in the past quarter, and we have close to $600 million invested in that market. Our ambition is to reach a $2 billion target and increasing our concentration closer to 5%.

Excellent, thank you. Regarding the new low-end requirements for development yields, under the current environment, what would your low-end cap rate be? I think you mentioned a projected 5.2% for an asset in San Francisco during your prepared remarks.

Our project's perspective revolves around long-term demand dynamics rather than requiring minimum short-term yields. We look for how protected the market is, underlying demand dynamics, and our basis. We generally do not set a minimum cap rate as part of our strategy.

Got it. Thank you.

Thank you.

Thanks. Good morning. Regarding cap rates, can you clarify if these are economic cap rates observed during acquisitions and dispositions?

Yes, they reflect our normal thought processes on CapEx for these types of assets.

Understood. I wanted to pose a question about the potential spread if you were to include taxes, implying a 30 basis point difference in an economic basis.

This pertains to FFO—after accounting for replacement reserves and units. For instance, the Park at Pentagon Row illustrates that the buyer is overshooting the expected unit cost. We have positioned some of our newer product in California appropriately. This indicates that as we draw attention to actual replacement needs focused on specific deals, we shouldn’t lead to long-term accretion.

Understood. Switching gears to California—representing 48% of your portfolio—despite housing shortages, regulations, and wildfires, you are managing to continue growth there. Would it be fair to conclude that you won't shrink your California exposure but seek younger properties instead?

Absolutely; while there are some issues in California, there are also demographics and job creation that we view positively. We’re concerned if those demand dynamics shift, but we do not see that trend emerging. Additionally, Prop 13 and the split-role initiative isn’t impacting us materially in the rental space, and our property taxes aren’t seeing the significant hikes seen across the U.S. markets, providing us with competitive advantages. So indeed, we want to maintain our NOI in California while enhancing the youth of our properties, leading to disposals of older assets.

Perfect; that's all I have. Thank you.

Thank you.

Hey, good morning.

Good morning.

To expand on Richard’s inquiry, should we assume your demand growth in Southern California has underperformed? There were signals of that trend early in the year and we want to understand your outlook moving forward.

Southern California’s demand hasn’t been disappointing at all. We previously anticipated and acknowledged expected deceleration attributed to upcoming supply impacts. Currently, LA has new supply pressuring us while high demand for our types of products remains intact. Heading into 2020, we recognize that these pressures will continue, particularly in the first half of the year.

Thanks for the insight. For the East Coast specifically regarding your comments on leasing spreads, if we average them over the full year, it appears they have transitioned from negative to flat, and they’re seemingly representing inflationary levels. Given the steady employment backdrop, wage growth, home ownership trends, and demographic movements, how do you foresee potential future growth in leasing spreads? Could it potentially surpass CPI?

The momentum from our East Coast markets remains strong, though we will factor in increased supply challenges for Boston, which could create some pricing pressures that we haven't been garnering this year. Overall, I'm optimistic regarding new lease growth and renewal sustainability in the East Coast markets.

Thanks for the clarity.

Thank you.

Good morning; I have two questions. You provided extensive commentary on your expense drivers. Looking into next year, what do you expect regarding OpEx growth rates compared to revenue growth, and could you articulate the factors contributing to any observed variance?

Hey, Alex. Bob here. We’re very focused on reducing expenses. Historically, we’ve generated growth rates below 3%, and we aspire to return to those levels. A challenge has been the 421a assets. We’ve progressed through the past year reducing that growth rate. However, this segment is projected to contribute significantly to same-store expenses overall. That could be a factor in expense variance. Michael will readdress this; we can outline initiatives that could help mitigate growth rates and share insights on potential spending patterns to maintain efficiency.

Acknowledged, Bob. The commentary about equity advocacy is valued. How might you approach budgeting potential expenses in light of ongoing rent control initiatives for 2020?

We will clarify our projected spending for the upcoming year regarding advocacy efforts. We intend to remain transparent about these costs and manage them proactively, facilitating discussions to gauge expectations as we move into regulatory changes. This will require strategic considerations relative to our operations going forward.

Thanks. I appreciate your time.

Thank you.

Hey guys. Thanks for taking my questions. I've been hearing a lot about cost control regarding personnel. Could you elaborate on how much emphasis you’re placing on this currently, and what are your expectations for the next two years?

For the next couple of quarters, we expect to share more specific analyses related to the financial impacts of these initiatives. Several combined initiatives will produce operational efficiencies, aiming to enhance the experience for both our employees and residents. The goal is to optimize staffing levels primarily through attrition, maintain service levels, and leverage AI technology to boost overall workforce productivity in administering tasks.

Additionally, which line items do you anticipate seeing the most impact as a result of efficiency savings?

Payroll is a major aspect, as I previously indicated, with repairs and maintenance frequently seeing impacts from fluctuating contract labor use. Though we expect to notice improvements soon, the ultimate effect on each line item may take time.

While the impact from various initiatives on utilities isn’t going to yield substantial savings, we aim for further efficiency in gas and electric categories. This focus is particularly crucial moving forward.

We have implemented almost all feasible LED lighting projects. While many utility-saving measures have been executed—like solar installations—some benefits may not materialize immediately, but the sustainability strategy points us in an efficient direction.

Thanks a lot, guys. That’s all.

Thank you.

Yes, good morning, guys. Your dispositions reached about $1 billion this year targeting older non-core properties. You’ve made substantial progress and are still focused on considering acquisitions. Given the current indication that you’ve moved past targeting your non-core assets, how likely is it that you proceed as a net acquirer next year?

Yes, we have a $40 billion portfolio, so there will always be an asset or two that becomes obsolete for various reasons; whether neighborhood dynamics or underperforming assets, there’s always opportunities for disposition. Overall, our concern isn't massive, as we are engaging in new trades without overwhelming burdens in our backlog. We aim to balance future acquisitions against potential sales. So while we look to potentially acquire more than we sell, achieving that will depend on available opportunities at acceptable prices.

Understood. The ongoing turnover remains low; surprising many. With more technology coming along, are you anticipating turnover rates to drop further in 2020?

The decline in turnover aligns well with resident satisfaction, so as we enhance that satisfaction level, we anticipate ongoing turnover reductions. How much lower can it go? Time will tell; I think we will stabilize at certain levels, but it's likely we will inch down continuously.

Thank you.

Thank you.

Hi, it’s Michael Bilerman here with Nick. Mark, you mentioned Prop 10, 2.0; you spent approximately $4.5 million last year on that campaign and added that to normalized FFO. Even though it’s critical for business interests to advocate for it, I assume costs will rise with ongoing rent control initiatives. Can you elaborate on how these expenses will be treated moving forward?

That’s a good question. The majority that we spent this year on advocacy is around $200,000; it stood in stark contrast to levels last year that almost approached $5 million. There’s a great deal of variability, reminiscent of a lawsuit where we occasionally engage with costs that don’t significantly impact the core business operation of our cash flows historically. We will ensure transparency about what we end up spending next year, whether categorized as normal or extraordinary; we’ll confer with our chief accounting officer, CFO, and audit committee on what to include.

Understood; how do your decisions inform acquisition levels considering the higher cap rate assets relative to previous purchases?

Those differences in expectations reflect our conservative approach to revenue growth in our acquisitions; we consistently attempt to keep up with metrics, assess internal data, and conduct our evaluations on all existing properties as we analyze conditions and trends.

Thanks for the color.

Thank you.