Equity Residential Properties Trust (EQR) — Q2 2021 Transcript

Thanks, Marty, and thanks to all of you for joining us. Today, I will give some brief remarks on our operating trajectory and investment activity. Then Michael Manelis will follow with some top-level commentary on the current state of our operations and how we see the remainder of the year playing out, followed by Bob Garechana adding color on our guidance changes and balance sheet. And then we’ll take your questions. Also, as Marty mentioned, we are pleased to have Alec Brackenridge, EQR’s Chief Investment Officer available during the Q&A period. For those of you who do not know Alec, he’s a 28-year veteran of this company. He literally started work here the day we went public in 1993 and took over as our CIO in 2020. As you can see from the release, he and his team have done exceptional work of late on the transaction side. Turning to operations. All of our operating metrics continue to improve at a faster rate than we assumed earlier in the year. We’re seeing demand levels well above 2019 in all our markets. And this has allowed us to continue growing occupancy while at the same time raising rates. This resulted in the company materially raising annual same-store revenue, NOI, and normalized FFO guidance. While our quarter-over-quarter same-store revenue and NOI results remained negative, the decline was less than what we expected and our sequential same-store revenue and NOI showed positive growth for the first time since the pandemic began. As we have discussed on prior calls, improvements in reported quarter-over-quarter same-store numbers will lag the recovery in our operating fundamentals, as we work these now higher rents and lower concessions through our rent roll. We believe that our business is set up for an extended period of higher-than-trend growth beginning in 2022, as we recapture revenue lost due to the pandemic and continue to benefit from strong demand and growing incomes in our target demographic. Also, the more diverse portfolio we are creating should improve long-term returns and dampen volatility going forward. On the investment side, we’re active buyers and sellers in the second quarter and expect to continue being active capital recyclers. Consistent with what I’ve said on prior calls, we are allocating capital to places that are attractive to our affluent renter base, including the suburbs of our established coastal markets, as well as Denver and our two new markets of Austin and Atlanta. We are making these trades with no dilution, even given higher pricing levels for the properties we are targeting because we’re able to sell our older and less desirable properties at low cap rates and at prices that exceed our pre-pandemic value estimates. Earlier this month, we re-entered the Texas market after an 11-year absence by acquiring two well-located new assets in Austin, Texas. These properties are located in a desirable area with high housing costs that is equidistant between downtown Austin and the domain hub on the North side. We acquired these two properties for $96 million and approximately 3.9% cap rate and about $195,000 per unit. We expect to acquire a mix of urban and suburban assets in the Austin market. During the second quarter, and in July, we acquired two properties in Atlanta, Skyhouse South in Midtown for $115 million at a 3.6% cap rate. This is a deal we did previously disclose. And a few days ago, we acquired a second property in Atlanta in the bustling Midtown west neighborhood. We acquired this new property for $135 million, and it is about half occupied. And once it completes lease-up, we expect it will stabilize at a 4.1% cap rate. We also continued adding to our Denver presence by purchasing an asset in the suburban Central Park area of Denver for $95 million. This property is located just west of the large and growing Fitzsimons medical campus and draws residents attracted to its access to abundant outdoor amenities. We expect this property, which is also in lease-up currently to stabilize at a 4.2% cap rate. We’re also pleased to add to the portfolio of property each in the suburbs of Boston and Washington, D.C. The Boston property is located in Burlington, Massachusetts, and is a new asset that we acquired for $134.5 million at a 4.1% cap rate. This property is in a difficult-to-build suburb of Boston with high single-family housing costs and good access to high-paying jobs. The D.C. asset is located in Fairfax, Virginia, and is a 2016 asset that we acquired for $70 million at a 4.3% cap rate. This property is well-located with both good highway and good metro access and proximity to a growing job base in Northern Virginia. Both the Burlington and Fairfax assets are located in sub-markets where our existing assets have performed particularly well. Year-to-date, we have bought $645 million of properties and expect to close on another $850 million in acquisitions, a good number of which are in various states of advanced negotiation by the end of the year. We’ll fund these buys with an approximately equivalent amount of dispositions, mostly from California of older and less desirable assets, which we sold or are under contract to sell at significantly above our pre-pandemic estimate of value. Turning to development, we put into service and began leasing our newly developed property in Alameda Island, a short ferry ride from the city of San Francisco, built on the site of a former naval base. This property has terrific views of the skyline and an evolving restaurant and bar scene that we think is attractive to our clientele. Over the next few months, we will complete our other two current development projects, including the Alcott in Central Boston, the largest development project in the company’s history. Early leasing efforts on this project and our development project in Bethesda, Maryland are going well. And our current estimates are that these three projects will stabilize at a development yield of approximately 5%, considerably higher than prevailing acquisition cap rates. These properties will be meaningful contributors to NFFO starting in late 2022. We see development as a good complement to our acquisition activities, as we spread more of our footprint to the suburbs of our established markets, as well as to our new markets. We expect a significant amount of our development activity going forward to be done through joint venture arrangements. This allows us to leverage our partners in-place sourcing and entitlement teams in locations like our new markets, where we do not currently have a development presence. Before I turn the call over to Michael, a big thank you to my colleagues in our offices and properties across the country. You are doing an exceptional job during this particularly busy leasing season. And we’re all very proud and grateful. Go ahead, Michael.

Thanks, Mark. As evidenced by our revised guidance, the pace of recovery has been very strong. In both the earnings release and in the accompanying management presentation, we have provided some key performance metrics. Let me highlight a few of the overall trends. First, we continue to see very good demand for our apartment homes. Our national call center and Ella, our AI leasing agent are responding to record high levels of inbound interest for our apartments, which is converting into high volumes of self-guided tours. This overall level of demand continues to drive applications and moving activity that is exceeding move-out and ultimately is delivering stronger than expected recovery and occupancy. Portfolio-wide, physical occupancy is currently 96.5%, which is back to 2019 levels. San Francisco and Seattle are still trending slightly below 2019, and Southern California markets are slightly above. At this point, we expect to run the portfolio above 96% through the remainder of the third quarter. This strength in occupancy is allowing us to push rates and drive revenue growth. Overall, we are more than halfway through the typical peak leasing season and the momentum has been very strong, providing us the opportunity to raise rates, reduce concessions, and grow occupancy. These fundamentals are delivering RV recovery from March to December of 2020 pricing trend, which includes the impact of concessions that declined approximately $500 per unit. From January 2021 to today, the pricing trend has grown $660 and is now not only above prior year levels in all markets, but every market except for San Francisco is also above 2019 peak pricing trend levels. Today, the portfolio is approximately $100 higher per unit than our peak 2019 levels. Our priority has been to test price sensitivity in every market by raising rates and reducing both the value and quantity of concessions being granted. At the end of the first quarter, about 20% of applications were receiving on average four weeks in concessions. As of July, we are now running with less than 3% of our applications receiving on average just over two weeks. And we expect this to continue to drop off even further. To give you perspective, the total dollar of concessions granted peaked in the month of February at just north of $6 million for the same-store portfolio. For July, we will be at $1.5 million for the month, and August should be less than $750,000. Last week, only 12 properties had any concessions being offered. The percent of residents renewing has stabilized around 55%, which is very much in line with historical averages, but below the record high 60% levels that we had in 2019 and early 2020. As you saw in the press release, we achieved renewal increase, new lease change, and blended rate all continued to improve in July, and we expect further improvements through the balance of the year as the comp period becomes more favorable and the business continues to strengthen. As we progress through the remainder of the year, our focus will continue to be to push rates in our markets and manage our renewal negotiations. In our management presentation, we provided color on all of our markets, but I wanted to take a minute to highlight New York and San Francisco, as they tend to be the markets we received the most questions about. Both markets are recovering nicely, with concession use nearly non-existent in our New York portfolio and declining rapidly in San Francisco. New York is seeing stronger demand right now, and we think it is primarily due to greater clarity around employer return-to-office plans. New York employers, particularly the banks and financial firms have called their employees back to the office, and you could feel it in the economic activity in many areas of Manhattan. We see it in our portfolio after nine consecutive weeks of record application volume. In San Francisco, however, the return to office and reopening is a little more ambiguous. Employers have been slower to call employees back in with many initially targeting after Labor Day. Adding to the uncertainty in San Francisco is the reintroduction of strong recommendations for indoor masking and some delays in reopening, which were announced last week. The situation in San Francisco is likely to lead to a delayed leasing season in that market and a slower full recovery of occupancy. That said, occupancy is 95.4% today in San Francisco and is growing as are pricing trends. At this pace, we expect the San Francisco pricing trend to be back to pre-pandemic levels by the end of the third quarter. Meanwhile, we are seeing some indicators that we could see an extended leasing season with a second wave of demand in New York, Boston, and Seattle. Our leasing teams in these markets have been dealing with prospects that are looking for moving dates in late August and September and hearing from them that these moves are in connection with their need to be back in the office or, in the case of Boston, back on campus. This demand is more robust than historical patterns, which could suggest an extended peak leasing season in those markets and matches up nicely with our lease expirations, which are more weighted towards the back of the year than usual. Combining all of the data points I’ve just shared and those included in the management presentation, we see an unprecedented opportunity to grow sequential revenue over the next several quarters as the impact of better rates, nearly non-existent concessions, and higher occupancy compound. We acknowledge how badly our operations declined over the last 16 months, but the current recovery appears to be strong enough to both quickly recapture all that was lost in the pandemic and take us into a new period of strong operating fundamentals. Finally, I want to take a minute and give you an update on the government assistance program for renters. As we’ve discussed on previous calls, approximately $50 billion in rental assistance for those impacted financially by the pandemic was made available in the various relief bills. We are laser-focused on accessing the rental relief funds and are working very closely with our eligible residents to apply for this relief. Processing to date has been relatively slow in our markets, but we were able to recover approximately $5 million in the quarter. Bob will provide some color on our expectations for collections for the remainder of 2021 in his remarks. Let me close by thanking the entire Equity Residential team for their continued dedication and hard work. This pace of recovery would not be possible without them, and they remain relentless in taking care of each other and serving our customers. Thank you. I will now turn the call over to Bob.

Thanks, Michael. This morning, I’ll cover the changes in 2021 guidance that were included in last night’s release, along with a couple of quick comments on the balance sheet in capital markets. As Michael just discussed, the recovery is well underway and is exceeding our prior expectations for the same-store portfolio. The continued strong operating momentum from this leasing season has led us to raise our annual same-store revenue guidance from negative 6% to negative 8% to negative 4% to negative 5%, and improvement at the midpoint of 250 basis points. Strong expense controls and favorable real estate tax outcomes, which I will talk about in a moment, also allowed us to reduce our same-store expense guidance range to an increase of 2.75% to 3.25%, resulting in an NOI range of negative 7.5% to negative 8.5%, which is a 400 basis point improvement at the midpoint relative to our prior guidance. Drivers of our revenue guidance increase of 250 basis points are roughly 150 basis points of improving operating fundamentals that Michael just outlined; 60 basis points or $15 million for the full year and related lower bad debt, primarily due to anticipated rental assistance collections; and the remaining 40 basis points is due to improved performance in our non-residential business. Before I move on to expenses, a quick comment on our bad debt assumptions. The back half of the year has about $10 million of additional assumed rental assistance collections, on top of the $5 million we’ve already received. We feel very confident about this amount because we either received it in July or, after some real digging, can see that it is far along in the approval process. There are other resident accounts being worked on, but they’re not as far along. Given the lack of transparency and the relatively slow processing speed to date, it is difficult to handicap how much will successfully get processed and whether we will receive these funds in 2021 or if it will spill over into 2022. On the expense side, we have also seen improvements versus prior expectations, which led us to center the midpoint of expense guidance at 3%, which was the low end of our prior guidance range. This reduction is in part due to the modest growth experience in Q2 2021, even with a really challenging comparable period from Q2 of 2020. While some expense categories experienced atypically high percentage growth change quarter-over-quarter due to this compatibility issue, overall expenses were less than originally anticipated. Key categories driving the current period and anticipated full year lower were real estate taxes and payroll. Reduction in growth expectations for real estate taxes is primarily driven by lower than forecasted assessed values in some key markets. Lower payroll growth expectations are primarily driven by our progress and optimizing staffing utilization as well as higher than usual staffing vacancies. We expect that 2021 will be our third consecutive year of low payroll growth, having delivered a three-year average below 1%, while keeping other controllable expenses like repairs and maintenance in check. As a result of these same-store guidance changes, we raised the midpoint of our normalized FFO from $2.75 to $2.90. A couple of closing comments on the balance sheet and debt capital markets. With the impact of the pandemic on our operations increasingly in the rearview mirror, it is clear that our balance sheet has held up remarkably well. Despite unprecedented pressure on operations, our credit metrics have remained well within our stated net debt to EBITDA leverage policy of between 5.5 times to 6.5 times. The debt capital markets are also incredibly attractive at the moment for issuers like us. This creates opportunities to term out commercial paper with treasuries and credit spreads at or near record lows, the potential of which has been incorporated into our revised guidance range. With that, I’ll turn the call over to the operator for Q&A.

Thanks. Maybe we start on the rental assistance. Bob, appreciate all the comments in terms of what was recovered in the second quarter and what’s assumed, and understand the kind of desire to be conservative. But can you frame kind of the total opportunity of collecting any of the back rent through these programs?

Yes. Thanks, Nick. So if you look at our disclosure in terms of our total receivables, the gross amount of receivables on the books in the same-store portfolio is about $44 million, right. So that’s – and it’s almost entirely reserved again. So that’s really the total pie of possibility if you think about it. When you break it down kind of more granularly, we always run with $10 million, $11 million worth of receivable or bad debt. So it’s probably a number that’s a little bit below that. And again, so that leaves probably another five to 10 potential long run. The really hard part, as I mentioned in my remarks is just the frequency and the process associated with this. So it’s a pretty long process. Michael’s teams all over it, we’ve gotten the best transparency we could, but it does require both the resident and us to match information to get it run through the process. And then it takes a while to even after approval have the cash come through the door, and that’s where the volatility arises in the numbers, which we wanted to highlight and be really clear about given what we have in guidance.

Thanks. That’s helpful. And then maybe just on the expansion markets, as you look at the pipeline today and you look at kind of transaction volume broadly across multifamily, particularly in these markets. How quickly do you expect to get to scale? And I guess Austin and Atlanta and continue to ramp up in Denver.

Hey, thanks for that, Nick. It’s Mark. And I’m going to answer a little bit, and then I’m going to kick it over to Alec Brackenridge, our CIO, who is on the call. So when we look at the expansion markets, we would suggest to you, they’ll probably be one or two more expansion markets, probably more news to come on that in future quarters. Some of those markets, Atlanta is a particularly large market; Austin is a smaller market, so there are different volumes there. So I’m going to kick it over to him to talk a little bit about how long it takes to kind of create a portfolio that makes sense in those markets. But I want to point out to you that it depends also on the saleability; we’re able to continue to sell properties well, that’ll fuel the engine to buy property as well. So it depends both on transaction volume in those new markets that Alec will speak to and our ability to continue to dispose as we’ve very successfully done to date, properties at good prices in places like California, New York, and D.C., where we’re trying to lighten the load a bit.

Yes, following up on that, this is Alec. Atlanta is a really robust transactions market and we have great contacts there from the past; I’ve worked in that market for almost 25 years now. And whether it’s joint venture development or acquisitions, there’s a wide range of things we can choose among. And generally the properties that we’re looking at are roughly $80 million to $100 million, and what we’re shooting to do over the next few years is to get to about $2 billion. So 20-ish properties, and we think we can achieve that. Austin is a smaller city, so that would be more in the $1 billion range, 10-ish properties, 10 to 12, maybe. But again, we have good feelers; we have a great team that has a lot of experience in these markets and that’s what we’re looking to accomplish.

Thank you.

Thanks a lot for the time. Maybe for Alec or Mark, I know you’ve made the comments in the past, given where replacement costs are ground-up development doesn’t pencil, particularly in Manhattan. Curious on more stable markets, Boston and D.C. Do you think ground-up development pencils today?

We do have some deals we’re working on, John. So thanks for that question. It’s Mark. And we do think in some cases, it does. We’ve got some deals in the Northeast, a couple that we’re likely to start in the next quarter or two, where on current rents, we’re looking at yields around five and a little bit higher. We like the locations. We have to constantly refresh the portfolio. So I would say right now, with us feeling a little better about construction costs, and we can get into that—it’s not that they’re not going up, but we have a better handle than maybe we did in the middle of the pandemic. Our sense is that some of this development is going to make some sense to us and that we are going to do some of it selectively. And it’s really going to help, I think, get us exposure in some of the suburbs of these established markets and some of these new markets we’re trying to enter into.

Okay. And then last one from me on operations. Michael, given all the leading indicators you see today, do you think you’ll have to ramp up concessions back up in any markets later this year?

Based on what you see today, I would say no, we do not. There’s a couple of areas I will tell you, like the South Bay and San Francisco, which I think I’ve said on previous calls, just from the volume of new supply being introduced into that sub-market and the proximity to some of our properties. I could see a little bit of that pressure from the new supply bringing concessions back to some of the stabilized assets in that sub-market. But I don’t see us reversing trend right now, given the strength that demand that we see. It’s really more if the demand stays strong enough to aid the absorption of the supply that’s coming in the back half of the year. That would be the only thing that could kind of impact the concession use on stabilized assets.

Okay. Thanks for the time.

Thanks, John.

Hey, good morning, everybody. Thanks for taking the questions here. I think as we think about guidance through the back half of the year, I’m wondering, which markets sort of assume normal path of seasonality and which I think you mentioned a couple of which maybe aren’t going to be on that normal seasonal path. And then how do we think about that setup for 2022? Do you expect all your markets to sort of resemble normal seasonal path in terms of market rents and so forth?

Yes. So I think first for the balance of this year, I would look at the Southern California markets and say, they’re probably kind of going to be more in line with normal seasonal trends. And again, a lot is going to depend on what that strength the demand is; if you have a second wave of demand coming into these markets that is going to change the profile through the fourth quarter. And you think about next year, we are doing some things now with some lease terms for the new leases we’re writing, but, again, we saw about a 5% shift. So we meaning, we have about a 5% more explorations in the back half of 2021 that we normally would have otherwise seen. My guess is over the course of 2022 that clearly starts to mitigate back towards a normal pattern. But again, the strength of the fourth quarter this year could put us in a situation where we’ll have more explorations in the fourth quarter of next year as well. So I still think it’s a little too early to tell what – how fast you’re going to get back to a normal profile in the portfolio.

I guess, just to follow-up on, Michael, there are a lot of drivers of this sort of extraordinary demand going on right now, right. You’ve got two cohorts of college graduates filling the pipeline. You’ve got people decoupling from mom and dad’s basement and so forth. I mean, do you think that – does that set up a risk next year that there’s going to be an air pocket relative to what’s happening right now? Or do you think that’s not a reasonable, maybe not an expectation, but a reasonable guess at what might be the case?

I think when you look through our markets, we have such strong demand drivers and fundamentals, job growth; you have constrained housing. So I don’t think this is like pulling future demand forward right now, what we’re feeling. This is like our catch-up period. And then I think, again, a lot is going to depend on what does this second wave look like of demand coming to us in late Q3 and Q4? How strong is that? We’ll play into kind of what we should expect for next year.

And Rich, it’s Mark. Just to build on that. I do think next year, if you recall, late in 2019 and very early in 2020, we were doing well. The industry and this company we’re doing well, we had good solid demand—our own internal statistics, as well as all the stuff we read from the analyst firms we subscribed to. So as our residents have kept their jobs, they have good income growth. So we’re going to have the ability we think to access that demand, access that income growth, and just kind of not just catch up, which seems like to some extent, absent a real reversal in the pandemic, a foregone conclusion that we will get back where we were. We think we’re going to keep right on going. And we say that with confidence now, again, assuming conditions in the economy are generally supportive, because we saw that great demand in 2019 and 2020 before the pandemic. I think that demand is still there, job growth is still good. And we see that our demographic keeps getting raises, keeps being in demand and the shift to technology into the kind of jobs that make up our resident base continues. So we have a lot of reasons that we feel like this thing will have this big catch-up and then it’s just going to have this continuation to it.

All right, great. Thanks for the comments, guys.

Thanks, Rich.

Great, good morning. Along those lines or similar question, I was going to ask if you can point to maybe something in the past or thoughts on the extended leasing season in 2022, but in particular, do you think it’s a good indicator for renewals? You mentioned you’re at 55%, but talk to your point, things were really strong pre-COVID at around 60%. I was just curious if you – what are your thoughts on extended leasing season and maybe in a positive way could lead towards higher renewals in 2022?

Absolutely. I mean, as you keep seeing the strength and demand coming in and you look at the recovery in these markets, you have to assume that we will fall back to kind of that higher retention level, which was renewing 60% of our residents. Right now, we are going to have a little bit of noise as we think about the back half of this year and those residents that moved in with us with concessions, moved in the second half of last year, came in with concessions at low rates. That’s going to put a little bit of pressure on us from a retention perspective in the back half of this year, but again, the strength of the front door or that demand coming in is strong enough to backfill kind of that pressure on the renewals right now.

Thank you. And then just one question wanted to clarify dispositions, Mark, you specifically had mentioned California to confirm, are you thinking of selling similar older assets – lower growth assets in other parts of the country or just California?

Hey, Jeff, this is Alec. Yes, we are considering other markets. We’re selling in California right now because the bid is just so hot for it. But as that moves around the country, and we think markets like D.C. and New York with this improving fundamentals will also become harder investment markets and we’ll list properties there. And we expect to move some property there.

Great. Thank you.

Thanks. Hi, everyone. In terms of the residents that are moving back into the portfolio in a couple markets, such as New York and San Francisco. Can you just give us a feel for what you’re learning about those incoming renters? Did they used to be in the portfolio or are they younger? Anything sort of about the profile of the renters in those two cities would be helpful?

Yes. So not a lot of change, and I would expand beyond just those two cities in any of our markets, right. When you think about the demographics coming in, and by that, I’m going to refer to not only the age of the new residents that moved in the quarter, but also the average household income for those residents. So during the second quarter, our average age for move-ins was just over 33 years old, slightly below the historical average for second quarters in previous years; that was at 34, but pretty much right in line. And when you think about the overall affordability index, I’ve said on previous calls, our range of rent as a percent of income between all of our markets goes between 17% at the low to 23% at the high. As a portfolio for the move-ins that occurred in the second quarter, we were just over 19%. And that is very much in line with the historical averages for this portfolio. So I think what you take away from that is our rents clearly have increased sequentially, but so have the average household incomes for the residents that have been moving in. So sequentially we averaged at $152,000 was the average household income in the second quarter. That’s up from just under $150,000 for move-ins in the first quarter. So you can kind of see that balancing out and New York and San Francisco really kind of just fall right in line with the statements I just said.

Okay, great. Thanks. And then in terms of the moves into land to Austin, I know you talked some about this earlier about creating scale. I guess I’m wondering if instead, there’s any potential to do a larger portfolio transaction across the Sunbelt, maybe work with a developer or any sort of M&A potential that would be possible to kind of speed up some of that process, instead of buying individual assets in most Sunbelt markets.

It’s Mark. Thanks for the question, Nick. Alec and his team look at everything. So we’re certainly open to portfolio transactions, and indeed the Austin deals, we’re a portfolio deal effectively. We’re kind of bundled together. But again, when you start doing large scale transactions, you can end up competing against different groups of people. Some of the deals we’ve done were off-market transactions, where we located them on our own. So we’re very open to portfolio transactions. We’re open, for example, to OP unit, operating partnership unit deals, which often end up being larger deals as well. But we just haven’t seen a lot of that offered. And a lot of the portfolios we do see have some assets we like and a lot of assets we don’t. So buying them one at a time gives us an advantage. And M&A is just a totally different conversation that requires a willing participant on the other side, often the payment of premiums and other things that can make the deal less economically useful, but still we underwrite that stuff too and think about it as well.

Okay. Thanks, Mark.

Hey, thanks. Good morning. So when I think about all these building blocks of improving fundamentals that don’t yet matriculate to the bottom line, you still have negative same-store growth, of course. But if you were pre-pandemic sort of 3%-ish, 4% type NOI same-store growth and you’re down 8%, in the midst of it now or in the tail end of it, hopefully. Mark talked about the bounce back opportunity. Is there any reason mathematically that we wouldn’t be talking about a mirror image of that move? So in other words, something like in the range of 10 double-digit type of a bounce back in 2022. Maybe not sustainable, but that’s the kind of sort of correction that might happen. And then we go back to more normal type of growth in the years afterwards. Is that a reasonable way to think about it?

Hey, Rich, it’s Mark. Thanks for the question. Bob may supplement or correct me as needed here. We’re not going to give 2022 guidance, but I think your thought process, if conditions continue as Michael has described. The last two years we acknowledged 2020 and this year 2021 had been among the worst. There are a lot of reasons to believe 2022 will be among the best years for EQR, not the best, and an exceptional year for same-store revenue growth and NOI. I think we’ve got good discipline on the expense side. And so getting to double digits would require excellent expense controls as well. So we’re not going to commit to a specific number, but the way the numbers just set themselves up is as these concessions go away, we report on a straight line basis. As we move rents up in a lot of cases beyond pre-pandemic numbers, the kind of math you’re putting out there is certainly attainable.

Okay, great. The second question relates to the delta variant and the uncertainties that remain. Clearly, California has taken some actions, and places like Los Angeles and San Francisco are similar socially. Are you concerned about moving too quickly and the potential for further challenges ahead? Is that something you're considering at this stage?

Yes. Rich, a very fair question. None of us here are experts. I’m not an immunologist, but it seems to us that if the vaccines continue to provide protection to the vast, vast majority of people that are vaccinated, then you’re going to have a situation by protection, I mean protection from serious illness or death. I think businesses are going to remain open. Cities are going to remain open. Things are going to continue to progress and our business will continue to improve. I’m not as anxious about mask mandates, whether what the CDC did yesterday or some localities have done. I think to your point, we need to learn to manage this and live with this virus as much as we all were hoping it was just done and over, I think it’s going to be part of our lives for an extended period of time. On the good side, we’ve all sort of learned or many of us have learned how to live with it. And I think society will manage through it. I think if you do have widespread city closures, that could be a concern and would certainly be a derailer for us. I would say, though, that as you think about the way we’ve all learned about how lockdowns work, the mental health impact on people, the economic disarray that lockdowns cause, these sort of city-wide shutdowns, the deferral of other needed medical procedures. There are a lot of good reasons, especially when you have a vaccine that 60% of the population over 16 has taken at least one dose of, that seems like a more thoughtful way to proceed along with masks to us. So we’re not trying to whistle past the graveyard or otherwise ignore the Delta variant. It’s just our sense that policymakers have different tools at their disposable, disposal, excuse me, in better knowledge than they did back in 2020. And that widespread lockdowns are not as likely as they were in the past.

Thanks, Rich.

Hey, everyone. Going back to the recoveries, I appreciate all the color on that. Was there any portion of that $15 million that was in the prior guide? And then additionally, is there any assumed improvement in the guide just from day-to-day collections in the second half?

Yes. So the $15 million referring to the rental assistance that was added to the guidance. It was not in the prior guide. We had kind of telegraphed on the first quarter call and even back to original guidance that we had assumed that collections would remain the same and that the bad debt level would be the same. So the $15 million is incremental. We’re also adding to the guidance. It was not in the prior guide also assuming that the collection rate, the 97% stays the same. So the only real change we made to the guidance was adding the $15 million application on the rental assistance side.

Okay, great. And then on California, you talked about how aftermarket is. Can you just walk through maybe any rationale for why that would be, because obviously we all know about the regulatory risk and sort of the lagging recovery in that market. And then is there sort of a minimum size that you think about California representing in the portfolio?

Hey, Brad, it’s Alec. California is such a big state that I can’t say that all parts of California are high. San Francisco right now has not had trades, downtown San Francisco as an example. But we have a broad portfolio, and we find, particularly for value-add opportunities, there’s just a wide, wide better pool. So that’s what we’re seeing in, as we’ve mentioned, we’re selling properties that are typically 18, 20 years old, and that appeals to that value-add group.

And just to add a little bit and answer the rest of the question. We think about what percent California could be of equity residential a few years into the future. Again, we’re in the Bay Area, we’re in Los Angeles, we’re in San Diego, we’re in Orange County; great people, great properties in those markets. I think what you’re going to see is we’re going to do a little building. We’re going to do a little buying in those markets, but generally speaking, will be a net seller and our 45% asset exposure will go down below 40. And some of that capital will be redistributed to these expansion markets. And whether we get to the mid-30s or whether it’s the high thirties, we’ll just have to see. But we do want to mitigate a little of this regulatory risk in California. We want to be thoughtful about balancing out the portfolio. 45% is a pretty high concentration in any one state, so we think that’s sort of a thoughtful way to balance things out a bit.

Okay. Thank you.

Hey, guys. Thanks for making the time. Hey, I’m looking at your charts and your presentation where you compare your various different markets. And obviously Orange County, San Diego, and Denver are doing really well. I’m wondering, do – does that strike you as a leading indicator for San Francisco, Los Angeles, Seattle, New York, where as people begin to move back rather than just moving out, we could see a sustainable shift higher in pricing trends? So long story, long question, but is the hot markets a leading indicator for some of the coastal markets that were weaker but might have a sustained trajectory?

So Rich, it’s Mark to start. And Michael may you or Alec correct or supplement, but Orange County and San Diego for us are almost entirely suburban portfolios. And Denver is a little more urban than suburban, but has a big suburban component as well. So those markets have just really not been as affected and continue to progress right on straight through 2019 numbers. We think the leading indicators on coastals are what’s going on in New York. So with the city not even all the way opened a few months ago, we started a strong recovery. Now that recovery is in full swing. You see that recovery in San Francisco; Michael and I were there a month ago. And all our buildings are 95% occupied. Concessions are nearly non-existent. And that’s before the city, at the end of June, it had just reopened. And it wasn’t very activated to be honest. And the office population wasn’t that high. So I would say to you, there are leading indicators to us. So the coastal markets are the coastal markets. I mean, they are already recovering and doing very well. I think what you’re going to see a year from now is that if things again continue to be supportive, as the coastal markets will just keep going, like they were in late 2019, early 2020, and that the recovery from the pandemic is not the limit of the upside in those markets.

Got it. That’s very helpful. Hey guys, maybe just a question on underwriting, not necessarily what you’re underwriting, although I’d love to hear it from you, but when you’re selling a property, what do you think your buyers are underwriting? Because obviously buyers don’t underwrite happening this quarter, next quarter, next year; they’re taking a longer-term view. So as you think about the trends that buyers and sellers are underwriting in the current market, what does that look like in the out years?

Well, Rich, this is Alec. I mean, buyers are optimists, right? I mean, that’s why they’re buying. And typically with a value add, they’re pricing that in, but the only successful bidder right now is assuming a full recovery, or you’re not going to be able to be the prevailing bid without doing that. And so that’s what we’re seeing. And in terms of further out years, I really don’t know per se each deal. I think everyone has their own view on long-term inflation, but what drives the cap rate in the short-term return are these either a value add return or a return to pre-pandemic rents or plus on that.

Got it. Okay. That’s helpful. I think that’s it for me guys. Congrats on the nice quarter.

Thanks.

Yes, thanks, Rich.

Thank you. And good morning out there. So two questions, first, just going back to a few analysts ago when you guys were talking about managing the heavy two to three months pre-expirations this fall. Is it your view that you are going to bring basically all of those to market like forced turnover? Or is it your view that will be sort of split some you’ll stair-step, some you’ll first force turnover, just trying to understand how much of that, given the strong market demand you guys talked about, how much of that you think you’ll be able to get this year versus having to wait until next year to get it?

Yes. Hey, good morning. So a great question. And I’ll tell you so far, we remain optimistic about the renewal performance for the remainder of the year. We just started in July and August to see the renewal quotes going out to folks that had previously come in with concession. So about 17% of our offers for July and August went out to those folks that received a concession. And so far the retention and ability to bring them up to market has played out. Now as we progress through September and into December, that number 17% grows to about 25% of our offers will be to individuals that came in on a concession. So the strong demand that we have right now is really driving the confidence in our ability to backfill at current rates. So while we don’t want to drive the additional vacancy, we’re going to work with residents and potentially stair-step; if the demand remains as strong as it is, we will bring everybody up to market, or we will have some increased turnover because we can replace those units at higher rates in a very short order of time. So the other thing I just want to call out is, our residents are used to paying us that gross rent amount, and the concessions that we granted were granted in usually the first or second full month of occupancy with that. So our challenge and our opportunity is really more around bringing them up to the gross street rent that you see today. And like I said, if the demand at the front door remains as strong as it is, we have a high degree of confidence because there are options to go elsewhere in that market are going to be very limited, because we’re at market rates now.

Okay. So basically you’re saying that when you guys offer the whatever two months free, three months free, that was at the initial first month. And since then the people have been paying the full freight.

That is correct.

Okay. Second question is, as you guys have returned to markets like, I mean, you’ve been back in Denver a while, but Austin, Atlanta, et cetera, when you compare now versus when you were previously in those markets, what would you say is your biggest sort of shock, if you will? Is it household income? Is it how the areas have built up, lack of supply? Is it better product than what you used to own? I’m just sort of curious how you compare when you guys left those markets to now and what’s been the most, the biggest change that you’ve encountered, obviously that makes you excited to reenter, but I’m just curious the biggest change that you’ve noticed.

Yes. So there are quite a few of those things in—Alexander, this is Alec. The change, but the primary thing that we look for in a new market is that renter, the knowledge-based industry renter who’s got a resilient job, growing income. And on that, that those numbers are up dramatically in Atlanta and certainly in Austin, but also in Denver. And that comes then with these much more vibrant urban settings that they’re choosing to live in and kind of foster and be part of. And that’s a big part of why they stay in these neighborhoods longer than in the old days. And we had a lot—we had much lower rents. We had much more turnover and single-family home prices were so much lower, particularly in the kind of neighborhoods that folks were living that already there was choosing to live in. So that was a big source of competition. Whereas today, in a market like Atlanta, to find an affordable house, you have to go out really far. And a lot of people just don’t want to make that trade-off when they’ve been living in Midtown or Midtown West or Buckhead; they’re enjoying the life that they have, and they’re just less likely to move out. And that’s been a big change from the way it was when we were there 10 to 15 years ago.

Yes. And that’s a great question now. So I’m just going to build on it. It’s Mark. I mean, rents that we used to charge were a $1, $1.50 rents. And our situation when we exited those markets was our best renters could immediately afford to purchase a home. And our worst renters didn’t pay us and left in the middle of the night. And it was a whole different demographic. And now this demographic is much more like a coastal demographic. They’re well employed in financial technology, new media, and other fields; they enjoy these urban amenities and these dense suburban amenities. They might want to buy a home, but home prices, we spent a lot of time on this in Atlanta because average prices in Atlanta for the metro aren’t very high for homes. There were about the national average, but any areas near where the employment centers are people work and the neighborhoods that Alec mentioned they want to live, it is quite high. Atlanta has got a lot of traffic. So if you want to move, just like you can move in New York, you can move to – you qualify, but it’s a good distance where in before in Atlanta, it wasn’t much of a distance. So again, we got a lot of our folks siphoned. So we’re looking at rents in a $2 to $2.5 a foot in these areas, double what it was before with a demographic that’s got much higher incomes, single-family situation that to us looks a lot better than it did when we left these markets a decade or a decade ago. And then again, that combines with the political risk that you and I and others have talked about on these calls for a long time. That’s considerably more favorable than some of the other markets were.

So just to sum that up, would you guys look at some income like you guys, which I think sort of the team at 23 year or 17 to 23 in general, are these markets where you see are now in the lower end of there, therefore you see more of an opportunity to push growth—or are those markets just more structurally the rental income levels are structurally lower versus the New York, et cetera.

Yes. I missed a little of that question, but generally speaking, the rental income ratios are higher in the markets we’re going into. We think that’ll be offset a little bit by pretty good growth in incomes by those residents, because those areas are growing so much. I’ll also say that some of the cost structures, like the fact that there are no tech taxes in Texas matter as well. So it isn’t an apples to apples comparison, but the ratios in places like New York are lower than places like Atlanta.

Hey guys, I guess it’s still a good morning out there. Just two quick ones from me. I want to ask you if you could talk a bit more specifically or share the math on how you underwrote the IRR on the assets you bought here in Atlanta and Austin. And how that compares to the IRRs on the assets that you underwrote when we sold that.

I’m sorry. Can you repeat the question?

Can you hear me?

Yes, I’m sorry.

So my questions on the comparative—my question is on the comparative IRRs, if you could talk a bit more specifically on how you underwrote the IRRs, but what you’re buying in Atlanta and Austin and how they compare it.

Got it. Got it. I missed the first part. Yes. So the big—one of the big differences is the age of the property. So we’re selling properties that are a lot older that typically have capital needs. And again, we find buyers who look at the future a little differently than we do, want to invest the value add money. So when we look at that, we’re not sure you’re going to get the return on that. So it ends up in a lower IRR. The properties we’re buying, we just see such strong demand for that. We think that that IRR over time will exceed the one we’re seeing. As a result of a combination of higher rent growth and less CapEx.

So to be a bit more specific, I think you bought assets at 3.8 in a quarter you filled at 4.0, you’ve mentioned in the past that you were looking to do these max-funded deals on a net-neutral to IRR basis. So I was curious if that was indeed the case here, are you able to underwrite where you’re basically.

So the numbers here exciting with the cap rates going in yields. What I was referring to as the longer-term IRR. You think the IRRs are higher and what – yes, Haendel, IRRs are higher on what we’re buying and what we’re selling, and the cap rates are the same. So one good question that we’ve been talking about on these calls is, are our shareholders going to miss out on some of the recovery on some of these assets we’re selling, because we’ve talked, it’s going to be pretty strong income growth in California and New York. And I’d say that there’s not going to be the case because we’re not selling the best assets with the best income growth. Our selling assets that have regulatory challenges or concentration issues where we own so much already in that submarket that the shareholders will get the benefit. Whereas Alec said, we just don’t believe in the renovation play. So I think just again, we’re selling what we believe are lower IRRs and buying higher, and we believe that’s true both on the NOI side and on the net cash flow because of the CapEx.

Got it, Mark. Thank you. That’s helpful. And then you’ve mentioned development entities a few times here in your remarks and the Q&A, and you’ve got to line the risk on bouncy development. So certainly it sounds like building out an internal platform is just not in the cards near-term. I guess my question is how much more fruit do you think there’s less to shake from your existing relationships like say toll brothers. You guys have a history of working together, looks like you bought one of your Atlanta assets from them. They have a large development footprint, a lot of – let’s call it attractive markets. So they seem like an ideal partner. So I guess what’s the perceived opportunity there? Are you having conversations, and does that kind of fit the profile of the apartment you’d be looking for?

Yes. More of the former, we’re partnering with local or regional or maybe even national developers who have an embedded existing infrastructure of deal finders, entitlement experts in markets, particularly the suburbs where we have less of a presence. Our development focus of late has been doing our own wholly-owned deals in urban centers, but in the suburbs, our established markets and in some of these new markets. So it would be us sort of renting that expertise in exchange for a promote, the developer building the deal as being the capital and having the right to purchase the asset at the end. So it’s not a merchant build program in a sense that we’re certainly happy to make money, but we want to end up with the asset at the end and add it to the portfolio and kind of help us fill things out.

And so what would be the yield differential between joint ventures and on-balance sheet developments?

Yes. That’s a great question. We spent some time talking about that in some real-life examples. So I’m going to ballpark some of these numbers and would ask you to stick with me for a minute, and Alec can sort of supplement that. But paying promote does not have a terribly material impact on the yield, even in a fairly successful deal. So we thought about a deal where the unlevered IRR of the deal was something like 11% or 12%. And I believe it changed the acquisition yield for EQR from a 5.4% to a 5.2% cap rate of data. That’s not 0; 20 basis points is real, but it – when you think about the fact that EQR doesn’t have to carry all that overhead, it doesn’t have good debt deal costs. Doesn’t have failed deal costs and can be expert capital allocators. I mean, we all learned about some costs in business school, but it’s still really hard to let go of a deal you’ve worked on. When you’re in our position as a capital allocator, not as only a developer, you’re in a better position to pick and choose the opportunities that suit us best. Alec, you have anything?

I would just add that the developers are typically a really small part of the equity – overall equity, typically, 5% to 10%. We’re 95% to 90%. So that’s why it doesn’t really change the return to us as much as you might think.

Thank you. On developments, Mark, I think you mentioned in your prepared remarks doing more through joint venture arrangements. Can you provide some more color on what this may look like? Are you just a funding partner and you have the option to take it out, or do you see them being long-term partnerships?

Yes. More of the former, more we’re partnering with local or regional, or maybe even national developer who has an embedded existing infrastructure of a deal finders, entitlement experts in markets, particularly the suburbs where we have less of a presence. Our development focus of late has been doing our own wholly-owned deals in urban centers, but in the suburbs, our established markets and in some of these new markets. So it would be us sort of renting that expertise in exchange for a promote, the developer building the deal as being the capital and having the right to purchase the asset at the end. So it’s not a merchant build program in a sense that we’re certainly happy to make money, but we want to end up with the asset at the end and add it to the portfolio and kind of help us fill things out.

And did not mean to diminish the team in any way. I was just making the point that obviously it could be largely given a company of your scale and just probing on if there are any opportunities under discussion today with, with toll brothers as I indicated, you – if you know, obviously you’d be bought the asset in Atlanta from them, was curious on it that was a fruit, the tree that could bear more fruit.

Sure. Haendel, I don’t mean to be defensive. I just want to acknowledge the contribution of the team. We got a lot of people working hard, a lot of people listening to this call. As it relates to any specific party, I mean, if we were doing something, I couldn’t tell you, and if we’re not, it wouldn’t matter. So I just would say, we’re out there, we’re always talking to people and that’s Alec’s job. He has a whole team that is out there talking to developers of all shapes and sizes. Well, I have to ask. But thank you for taking my questions and response.