Equity Residential Properties Trust (EQR) — Q3 2022 Transcript

Good morning, and thanks for joining us to discuss Equity Residential's Third Quarter 2022 Results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer. Bob Garechana, our Chief Financial Officer, is here with us as well for the Q&A. Our earnings release and accompanying management presentation are posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I'll turn the call over to Mark Parrell.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our third quarter results. As you can see from our press release, Equity Residential had an outstanding quarter. Our revenue results in the quarter were driven by steady occupancy, continuing strong renewal rate growth and decelerating but still above trend, new lease rate growth. We couple that with a continuation of modest expense growth leading to same-store NOI growth for the quarter of an exceptional 16.2%. With continuing positive financial leverage, this led to a 19.5% increase in quarter-over-quarter normalized funds from operations. We are proud to have improved margins and created substantial cash flow growth in this turbulent time in the economy. I congratulate my colleagues across Equity Residential for their hard work, taking care of our residents and their fellow employees and producing these impressive financial results. We know that at this late point in the year, the focus naturally turns to 2023. As usual, we are not giving guidance at this time, but in the management presentation we posted last night, we tried to frame the material factors that will drive next year's revenue results. In a moment, Michael will take you through those factors in detail. We remind you that the success we've had in 2022 will create a challenging comparable period. So we continue to expect a moderation in 2023 annual same-store revenue growth even if we expect 2023 to be a strong above-trend year. Looking at it from the top of the house, we like our Affluent Renter customer and what we expect will be their financial and employment resiliency going into uncertain times. Our target resident is high earning and employed in knowledge industries, with more durable incomes and employment prospects. The college graduate cohort, which we believe makes up the vast majority of our residents, has an unemployment rate of 1.8% compared to the 3.5% overall unemployment rate. Even if layoffs materialize, we believe that the tighter than average labor market for these knowledge workers will allow them to find replacement jobs quickly. Finally, although high inflation has impacted everyone's real incomes, our Affluent Renter is relatively more insulated due to their higher incomes and lower rent-to-income ratios. The average income for the residents who signed new leases with us in the past 12 months is $174,000 or 12% higher than the group who signed with us in the 12 months ending September 2021. These new residents are paying us slightly less than 20% of their income in rent, which is generally consistent with prior rent-to-income levels. On the apartment supply side, we see national apartment deliveries reaching a cycle high point in 2023. However, in the coastal markets where most of our properties are still located, we see supply as being lower and being delivered further away from our properties than in the past and thus likely less impactful. The Sunbelt markets, including the Denver, Dallas Fort Worth, Austin, and Atlanta markets in which we are increasingly investing, will see higher relative supply numbers than our coastal established markets and likely more impact, especially if that's coupled with the job slowdown. For us, this may turn into a nice opportunity to acquire assets in these expansion markets, not necessarily at fire sale prices, but at better values than prevailed in the first half of 2022 when we felt the market was overheated and chose to stay on the sidelines. We continue to see our strategy of having a more balanced portfolio between our established and expansion markets as appropriate as we follow our Affluent Renter to these new markets and mitigate regulatory and resiliency risks from overconcentration in any market or state. In addition, other housing alternatives remain expensive and in low supply. Though they have been declining of late, current single-family home prices continue to be at record levels, while rising mortgage rates have further stressed affordability, particularly for first-time homebuyers. Single-family housing starts are declining, existing homeowners are more reluctant to sell due to low locked-in mortgage rates along with minimal and expensive for-sale replacement options and competition for homes from investors remain strong. Going against these positive factors for our business is a significant impact of inflation on the economy, where job growth goes in response to the Federal Reserve's actions as well as volatility in the capital markets, the continuing impact of the war in Ukraine, and a myriad of other uncertainties. We are currently in an excellent spot but acknowledge that the risks and uncertainties are more elevated than usual. And with that, I'll turn the call over to Michael Manelis.

Thanks, Mark, and thanks to everybody for joining us today. I'm going to give some brief comments regarding current market conditions, and then we can turn it over to the operator for questions and answers. We just completed one of the best leasing seasons in our history. Strong demand across our markets produced high occupancy as well as continued pricing power. As we think about the trajectory of our pricing for the full year, we clearly benefited from a supercharged spring leasing season with more robust pricing power that started earlier in the spring in many markets than we have traditionally seen. This strength led us to adjust our same-store revenues upward in July and set our current expectations slightly above the midpoint or at 10.6% for the full year 2022, which is the best same-store revenue growth in our history. In both the earnings release and in the accompanying management presentation, we have provided some key performance metrics that demonstrate the strength of the leasing season and the fundamentals that position this portfolio well for 2023. This includes updates on the percentage of our residents renewing with us, which remains very healthy and is now consistent with historical levels after some moderation in the summer, which was expected as we were moving residents to current market rents. This performance supports occupancy, which continues to be solid at 96.2% even as we enter the slower part of the leasing season. As you can see on Page 4 of the accompanying management presentation and as we disclosed in our August 31 press release, our rents peaked in the first week of August and began to moderate, which is typical for this time of the year. Seattle and San Francisco are the two markets that stand out with more recent moderation than anticipated. Concessions are being used more than declines in rental rates in these markets to drive traffic. All other markets are basically in line with normal rent seasonality. Overall, we continue to have good demand for our units in all of our markets with strong foot traffic, which is generally in line with our historical averages for this time of year. While we see the same headlines as everyone else on tech hiring freezes and some layoffs, our revenue performance is holding up although we readily admit that we are a lagging indicator. Right now, New York and Southern California continue to lead in both same-store revenue growth performance and our overall current pricing fundamentals. Seattle and San Francisco, while producing strong annual same-store revenue growth, are the markets that have struggled through the most of the year to gain meaningful momentum. Longer term, these two markets present growth opportunities as they continue to be under housed and have the potential to show improvement very quickly with the infusion of more certainty of jobs. As Mark mentioned, we are not providing 2023 guidance this quarter, but we understand that 2023 is top of mind. As a result, we provided a framework of helpful building blocks for same-store revenue and expense growth which you can find on Pages 5 through 8 of the management presentation. We would expect 2023 to produce quite good above historical average revenue growth based on activity already built into the rent roll from excellent rent growth that occurred in 2022. We call this our Forecasted Embedded Growth, which reflects the contribution to next year's revenue growth assuming no changes to the rent roll occur. We expect this to be about 4.5% by year-end. For historical context, in a normal year, our forecasted embedded growth would be just above 1%. You can see this on Page 6 of the presentation. In addition to this favorable embedded growth, we are positively positioned for leasing activity in 2023 moving forward. Our Loss to Lease, which refers to the revenue improvement we can expect from moving leases in place today to current market levels, is significantly larger than historical years as evident on Page 7. Our current Loss to Lease of approximately 5% will seasonally moderate through year-end, but it certainly positions us for growth when leases mature and we capture this loss in '23. For historical context, our Loss to Lease would be about 0.5% at the end of a typical non-recessionary year. With that setup in mind, let's not forget about actual market rent growth during 2023 and its contribution to same-store revenue growth. Current visibility here is most opaque. While our business has strong long-term fundamentals, the uncertainty around future economic conditions that Mark just mentioned is high. This 2023 intraperiod growth should remain healthy as favorable demographics, continued low employment rates in our target demographic, strong income growth, and less direct supply pressure in many of our markets point to the potential to see a strong spring lease season. That being said, 2023 is unlikely to be as robust as the unprecedented rent growth numbers of 2022. On the occupancy side, general demand trends, including improving retention, support strong occupancy above 96% for the balance of 2022 and should carry through into 2023, unless there is a substantial loss of jobs in our target renter demographic. Outside of occupancy and the core revenue drivers that I just discussed, bad debt net will likely continue to play a role in revenue growth as we expect the trend of reduced levels of resident delinquency to continue into 2023. The lack of governmental rental assistance in '23 compared to the $31 million we will receive in 2022 will require continued improvement in resident payment behavior in order to return us closer to historical norms and contribute positively to revenue growth. An improved regulatory environment, coupled with the high quality of our Affluent Renter, should lead us in this direction, but 2023 may be a bit of a transition year to get all the way there. Switching to same-store expense growth. As you can see in the press release, 2022 benefited from limited growth in property tax expense and great controls of our payable expenses and as a result, we expect to produce same-store expense growth of 3.3% for the full year 2022. As we described in the management presentation, if the inflationary environment continues as it is today, we would expect expense growth in '23 to be elevated from these industry-leading levels in 2022. While we expect that less controllable areas like real estate tax may come under more pressure, we remain focused on initiatives that can assist in moderating growth in areas that are more controllable like payroll and repairs & maintenance. We have had great success in creating efficiencies in our sales and office functions with over half of our portfolio running with shared resources, and we expect that to continue to benefit us in 2023 as we centralize on-site activities such as application processing and our move-out and collection process. On the service side of the business, we continue to leverage our mobile platform to create more opportunities to part our resources across multiple properties. We also will strategically leverage third parties for outsourcing turns and assisting with after-hours work to reduce overtime pressure in the portfolio. Overall, we are well positioned to continue the trend of expanding our fully loaded net operating margin, which currently sits around 69% into 2023. I want to give a quick shout out to our amazing teams across our platform for their continued dedication to the residents and focus on delivering these terrific operating results. With that, I will turn the call over to the operator to begin the Q&A session.

I appreciate all the building blocks on 2023. If we're looking at same-store revenue growth, obviously, the market rent will be a big determinant of it. But there are obviously these other building blocks in place already. As you think about the interplay between the ability to push renewals versus that Loss to Lease going in, how sticky can renewals be? And how are you thinking about pricing those on a forward 30 or 60 days, just given the more macroeconomic uncertainty?

Yes. Nick, this is Michael. So I think when you're looking at the renewal performance, again, our quotes for the balance of the year have already been issued. So we have all of those quotes out there. And right now, we're seeing improving retention. We're negotiating a little bit more, but that's clearly typical for the fourth quarter, and I have a pretty strong degree of confidence that we're going to continue to achieve about 8% to 9% in growth from the renewals. So we remain very optimistic about the renewal performance and clearly are seeing the trends of improving stickiness, but that is a common trend to see in the fourth quarter that retention continues to grow.

I guess the question was more on '23, right? So as the Loss to Lease trends down towards the end of this year, just with market rent growth as you start to set rents in '23, if the Loss to Lease is smaller at that point, how comfortable are you going out earlier in the year with renewals just given normal seasonality on the market rent side?

Yes. I mean I think you're going to look at what your expectations are. We'll watch what happens for the balance of the year, and how we start January off is going to be the indicator as to how aggressive we are in March and April. But we clearly are going to layer in intraperiod growth into these quotes in the first and second quarter of next year. And then we have a great centralized negotiation team in place that we can always pivot if we need to. But right now, we're not seeing anything that tells us not to expect kind of growth in that renewal performance after we start the year off.

That's helpful. And then just on the pricing sensitivity, you talked about San Francisco and Seattle. I think you've talked about the West Coast maybe being a driver for 2023. Does the sensitivity that you're seeing today change that overall view at all?

Well, I mean, I think, look, if you backed us up a few months ago, where our expectations were for 2023, and I think I alluded to it in the comments, I mean, we've got two markets right now that are exhibiting a little more price sensitivity than what you thought. That we would be sitting at in October. And most of that sensitivity is not necessarily that the rates are coming down. It's the fact that the concessions came a little bit sooner in the year than what we would have thought, right? So you're seeing markets even for us in like San Francisco, where we're running 50% of our applications are now receiving about a month. In Seattle, you're at like one-third of the applications at about three weeks, that's just a little bit more pronounced than what we would have thought. So I think as we think about 2023 for those markets, I said in the prepared remarks, I still believe there's a lot of potential for those markets to deliver strong growth, we just need a little bit of clarity on that job front, a little less ambiguity. You've got good momentum with the quality of life coming back in both of those areas. So I still feel like we got the potential. But sitting here today versus our view a few months ago, the markets feel a little more price sensitive than what we would have thought.

Mike, I just wanted to follow up a little bit on the Seattle and San Francisco comment. Are those very specific to kind of downtown Seattle and Downtown San Francisco? Are you seeing any of that weakness spread to the kind of the east side of Seattle or down into the Peninsula?

Yes. So we definitely felt a little bit in Redmond, a little bit more softening. A little bit of the concessions are in that marketplace. And I think in San Francisco, what you saw is the South Bay really kind of benefited through the year even though it was delivering all of that supply and right now, my guess is what we're feeling is a little bit of pressure from that hangover supply in the South Bay. So it's not completely isolated to like the downtown or the CBD areas, but it is still mostly concentrated there.

Great. And then, I don't know, maybe for Mark or for Bob. Just as you guys think about deploying new capital into new developments, how has your return hurdle changed, just given the change in cost of capital, given the change in the economy and the outlook, how much more conservative are you being on underwriting? And how high have your hurdle rates gone for new developments?

Yes. Steve, it's Mark. Thanks for the question. It certainly has gone up. The two deals you saw us start this quarter were really things that were in play much earlier, and we were kind of obligated on. It's just the start that occurred. So we have let go of some deals we were pursuing. We have talked a lot with the development team about a higher hurdle. I'm not sure I have a precise number for you, but it was probably a number we were looking for more like a 5% return on in-place rents. And now we're looking for something, Steve, probably a lot closer to a 6% return on in-place rents, but you've got deals where there might be a story that's particularly compelling, you like your basis play or some other factor that makes it particularly interesting. I'll also say the big competitor to development with us is acquisitions. I mean our sense is that pretty soon, pretty soon might be a few more months though, the acquisition market will be more available to us, again, not at free prices, not at fire sale prices. But boy, if we can buy existing streams of income without having all that development risk, we'll lean in on that. So my sense is that acquisitions of existing assets will be more available to us at more favorable prices than a correction in the development market. So to answer your question, I think the hurdle is higher for us to start new development both because of cost of capital and because of the ability to deploy that capital instead in acquisitions.

I just maybe following up on that capital markets kind of outlook. Mark, I mean how are you thinking about how cap rates maybe have changed for apartment assets given that when we look today, I mean even to get GSE debt for multifamily, the radar on that, all-in is going to be somewhere close to 6%. We're hearing negative leverage is more of a problem for people underwriting assets. I mean what is your view on how that may affect cap rates?

Yes, thanks for the question, Nick. I want to address cap rates and values in general. The market has definitely experienced a shock, which we discussed in our previous call. There's a significant gap between what sellers want and what buyers are willing to pay. Sellers remember that just six to nine months ago, they could have received much higher prices. They are still experiencing good cash flow growth, as Michael Manelis pointed out, so they may choose to wait. On the other hand, buyers recognize that all risk assets have adjusted in price and believe apartments should follow suit. Our view is that the current lack of activity has resulted in very low transaction volumes, making it hard to determine values accurately. However, we estimate that cap rates have shifted from around 3.5% to approximately 5% for well-located properties. This, in turn, suggests negative leverage and negative cash flow may continue for a while, which is a concern. That's one reason we see less activity in transactions. Conversely, there is a strong interest in the apartment sector. There is a significant shortage of inflation-protective investments in this area, and our research indicates that apartments generally perform well during inflationary periods. Additionally, there are about $375 billion available in real estate private equity funds seeking investment opportunities, with apartments being a favored option. Therefore, while we believe there is supportive demand, transaction activity remains low, and we estimate values have decreased by over 10%. The reason they haven't fallen further is the offset from rising cash flow.

Okay. Great. Just another question on the balance sheet. You paid down some of the 2023 maturities with the sales this quarter. Is it correct that you have approximately $500 million of unhedged exposure on a maturity next year based on the swaps you have in place?

We have approximately $825 million of debt maturing next year that requires refinancing. Of that, $800 million needs to be refinanced as secured debt, and currently, we have $350 million hedged with competitively priced swaps to manage treasury risk.

Mark, I'd like to go back to that acquisition point. So you guys talked about that there can be potential opportunity and therefore, the grid might look better in terms of acquisitions versus development. What sort of opportunities do you think can come from this environment? Like is there a way to contextualize it? We understand it cannot be as good as 2021 likely, but can it look something like 2020 or maybe even 2019 from a volume standpoint? And then how would you think about funding it, given we are still in that negative leverage territory and you said that prices might come down, but not at fire sale levels?

Chandni, it's Mark. Thanks for that great question. You really hit on it because you need to consider two aspects: your feelings about asset prices, and where the funding will come from. Regarding asset prices, we like their current trajectory. Although there aren't many transactions, most of the sales being discussed are not commanding significant premiums compared to replacement costs. At the end of 2021 and the beginning of this year, we observed transactions where acquisitions were made at premiums of 25% to 30% over replacement cost. We decided not to proceed because we didn't see a strong historical return on such premiums. Now, we see price changes that have diminished a lot of those premiums, with deals being discussed much closer to replacement costs. That's encouraging. When considering asset pricing, factors such as replacement costs, cap rates, and price per pound are important to us. As for funding, we plan to continue divesting assets in markets like D.C., California, and New York, so we need to assess how those assets compare to expansion markets. If those assets trade in a way that's favorable to us, particularly in a non-dilutive manner, then that becomes more appealing. For deploying new capital, which would need to be raised through debt, we estimate our unsecured debt rate to be around 5.75%. That’s a significant interest rate to manage, especially with cap rates hovering around 5%, which doesn't help. Given where the stock is trading, it doesn't seem to make much sense. For us to acquire assets net effectively, we would need a change in our capital costs. If we are to continue swapping assets as we've been doing, the trades need to make sense in terms of asset values, which they are beginning to do based on replacement costs. Using 2018 and 2019 as benchmarks seems reasonable because the pandemic induced distortions with ultra-low rates, but I don’t believe extremely high rates are the future either. Our next question comes from Rich Anderson with SMBC.

So back to that kind of Sunbelt question. People think of EQR as an urban platform at this point. Understanding you're diversifying and looking into the Sunbelt in your expansion markets, but the big fear there is supply, and that now is becoming a reality, and that doesn't just suddenly start and then stop. It becomes a thing to deal with for some period of time. So is there a scenario despite what you just said that this trade idea into expansion markets where opportunities present themselves because of some of those supply pressures does not materialize and you start to look at these expansion markets and say yes, maybe this isn't exactly where we want to go because do we really want to get in bed with an extended period of supply growth, which is, again, the big fear of getting into those markets if there are any?

Yes. Great question, Rich. It's Mark. So it would require us to think about another risk differently, too, and that's political risk because one of the things that our coastal markets have, I think, more of though maybe not quite as much of as we may have thought, is risk of rent control, risk of activity by politicians that's job destroying and growth destroying. From our perspective, we'd have to be balancing that differently as well. There is no risk-free apartment market. So if you're in the Texas market, you probably have less political risk, but you may have more resiliency risk and you certainly have a lot more supply risk than a lot of our markets. But our experience with supply in the locations we're trying to buy and build in like Frisco, Texas is you'll have a year or two of that, and then demand will need debt supply. So again, if you're telling me that prices get out of whack, that somehow the Sunbelt trades tight even with all that supply, that's probably not stuff we're going to be acquiring or building much of. But if the pricing relationship makes sense, then we're trying to manage this political risk versus the supply risk and I think balancing that out makes sense to us. So that's kind of where we end up on that.

Okay. And then second question for me, one parter, by the way. The embedded growth math, you define it as last month annualized and you get to 4.5% for 2023. But is there another mathematical equation where you think further back into 2022? A lease that was signed in July at 20% higher rent would compare favorably in January. And so my question is, is the 4.5% one number, but is there another "embedded" growth calculation that might be substantially higher than that, giving voice to leases that were signed late second quarter, third quarter and so on?

Rich, it's Mark. I'm going to start, and I think Bob and Michael may end up correcting me. But I think that's the embedded growth in loss. You're talking about more of a Loss to Lease a little bit in there, and we split those two up. So if you think about it, embedded is the rearview mirror. Those are already contracts that have been written, leases that exist. And in your example, that Loss to Lease is us writing up to market. So if January rents are, say, relatively low. And then as we would expect, seasonally, they're higher in June and the lease you just referred to in June is written higher. That additional increment we were referring to is that Loss to Lease and has the intraperiod growth. So we're talking about the same thing. We just kind of compartmentalized it a little differently because it was a little easier to think about in three pieces.

So I wanted to ask across the portfolio. As eviction processes begin to normalize in some of your markets, are you seeing an erosion in pricing power as market level vacancies tick up?

Yes. This is Michael. Let me provide some context regarding the eviction moratorium and our current observations related to that situation. Generally, the moratoriums have mostly ended, with a few local areas in California still having certain proof of hardships and restrictions in place, but these exceptions are expected to cease in early 2023. Our teams are actively working with residents facing hardships, and after exploring all available options, we are ensuring everything is filed properly. We are still early in the eviction court process, but we are beginning to see some progress as the courts proceed with lockouts. The overall eviction activity in our portfolio is not significant, typically averaging less than 1% of our move-outs for this reason. Even if the court system were to accelerate, the volume would be manageable and could be beneficial for us given the strong demand and our confidence in filling those units with paying tenants. In the short term, we're likely to experience some occupancy pressure in certain areas of Southern California, but the demand remains robust, and we expect to recover quickly. We don't anticipate this impacting our pricing significantly. Our outlook is that we will gradually return to pre-pandemic levels of eviction activity throughout 2023.

And Robyn, it's Bob. Just to add real quick, those residents who are living there but not paying are fully reserved financially. The return of that physical occupancy to the market and our ability to capture it, as Michael just mentioned, represents a significant upside to our financial results. Whether it's a slight reduction in monthly rent or not, it's still a complete rental payment added to our financial statements, resulting in a substantial net benefit.

Got it. That makes sense. So I wanted to touch on San Francisco and Seattle a little bit more. So can you give a sense of the retention and foot traffic trends that you're seeing in both of those markets? And how those have really compared to like the 2019 levels?

Yes, this is Michael again. The Seattle market is currently performing a little below our historical averages. San Francisco is more aligned with expectations but also has slightly reduced foot traffic and application volume. Both markets show demand, but it's at a more price-sensitive level than anticipated. When evaluating this volume compared to 2019, we're observing foot traffic and application conversions, although at a lower price point. As we progress through the fourth quarter and into the next year, we hope to see retention improve, which could alleviate some pressure at the entry point. We are starting to see some early positive trends, but we need more time and momentum to gain clarity on this.

I just wanted to touch on supply. What are you seeing for 2023? And for Seattle and San Francisco, how much of the supply dynamic was playing into that price sensitivity that you guys were referring to?

Yes. So this is Michael. Let me start with Seattle and San Francisco. So I think clearly in Downtown Seattle, we're feeling some of the pressure from the new supply in that market. And San Francisco, like I said, I think earlier in one of the responses to a question, maybe a little bit in South Bay that they had a lot of supply. These markets are set to deliver less supply next year, so taking a little bit of the pressure off. And maybe with that, I'll just transition to an overarching view of supply for '23, which is for us, we're very focused on this concentration, the proximity of the new supply, and from an operations standpoint, when are the first units going to actually start hitting the market to be leasing. And when we look forward, these expected starts in '23 relative to the proximity within one or two miles of our locations is lower than previous years, which is a really good indicator that we should continue to feel less pressure from the new supply being right on top of us. Specific to '23 deliveries, I would say that the overall direct pressure will be less. But clearly, like the D.C. market stands out as needing to see marked improvement in absorption because it has like another 15,000 units coming online with slightly more of an impact from a competitive standpoint to our portfolio. And then outside of D.C., look, we're going to have some pockets in L.A. like Wilshire, Koreatown, Hollywood, where we expect to have some pressure next year. And in addition to that, I think the Downtown submarket in Denver, we're going to face some direct kind of head to head. And besides those buckets, every year, we have these small isolated pockets of supply, but as we look into '23, we just see that we're going to have fewer of those concentrated pockets, and we're just not going to have as much direct pressure on us. And I think when we stand back and look at this, this portfolio with these amazing locations are clearly in places where affluent renters want to live and still have these good demand drivers and that definitely insulates us from some of this direct pressure from the supply.

I wanted to ask about your forecasted earnings of 4.5%. Based on leases you signed this year, I would have thought it would have been maybe 50 to 100 basis points higher than that. So I was wondering if you could talk about the factors that drove this, whether it's purely 4Q rents declining? Or if there are other factors like occupancy and bad debt that are in this number? And is there a chance that the earnings could come in higher than your current estimate?

John, it's Bob. I want to clarify our thoughts on earn-in and embedded growth, which we consider similar concepts. They don't factor in bad debt or vacancy loss. My guess is, and maybe you can clarify, that your number is derived from taking blended rates and averaging them over the year, which could explain why your estimate is 50 basis points higher than our embedded figure. Is that your method?

Yes, that sounds about right. Considering the timing of lease agreements, but

Yes. I would say that the key difference comes down to the waiting period. Our calculations take into account the actual timing of when leases are established on a daily basis. If I were to average the blended lease rates over the year using a mid-quarter convention, I might arrive at a figure around 5%. However, using the precise data from the pinpoint map we've shared, the figure stands at 4.5%. This number is expected to remain stable and is our projected figure for the end of the year. As we approach the end of the year based on our guidance, this number should not change significantly. Does that clarify things?

Yes, it does. And Bob, while I have you, the Loss to Lease, I know it's come down from 12.5% to a little bit over 5%, and a lot of it was the leases you signed during the quarter to realize the market rents. But can you also talk about how much market rents have declined as part of that Loss to Lease number since your last update?

Yes, I'll pass it over to Michael. I think if you look at a good visual as I pass it over to him, is that pricing trend page, which is a couple of pages before, maybe Page 5 in the management presentation, and you can kind of see that sequential trend, but that will help you directionally. And Michael, you probably have that.

Yes. No, John, I was just going to point you right to that page. And if you look at the month-end rent numbers, down below in that chart, you can kind of get yourself a proxy to understand depending on which month you pick up the peak lease, it's 4% or 5% off of that August number and just work your way through that. But I'll tell you, when you think about that Loss to Lease and you think about the shifts that have occurred with the deceleration in that number, it's really important to understand that comparative period. If you're looking back to that summer period and saying, boy, you guys were 11% or 12%, and now you're sitting down closer to 5%, you need to remember that the majority of this decline is this seasonality that you can kind of see evident on Page 4, but also every lease and every renewal that we have done since that point, we are capturing that Loss to Lease that we shared from a while ago. And overall, the Loss to Lease may be a little bit lighter than where we thought it was going to be a few months ago. But I'll tell you, it is definitely right in the ballpark of where we modeled this thing for a few months ago. So we're just not seeing it. And I think that Page 4 really highlights how you can think about that trend.

It's Michael Goldsmith. Over the last couple of years, residents have been looking for more space and separating from others. Have you noticed any changes in that trend as we've moved past COVID? Additionally, regarding high rent, have move-outs increased because people are no longer relocating to buy new homes? So, where are those individuals moving to now?

Michael, this is Michael. So on a decoupling or even a recoupling basis, we're just not seeing a material change. I think during this pandemic recovery period we've alluded to on the last call, we saw a slight decline in like the average adults per household. We ran about 1.65 and we were down at like 1.57. And that was really more prevalent in our one-bedroom unit types where we used to have two adults, and they moved into a two-bedroom or did something different. So we looked at this even for the third quarter of these move-ins, which there's some seasonality of that when do the three-bedrooms fill up and stuff like that. And we're right on par with where we were in the third quarter of last year. So we haven't really observed any of these material changes. But I'll tell you, we've got great insight into it. We're watching the transfer behaviors. We're watching roommate activity. We're looking at unit type preferences on our website for prospects. And we'll be on it if we see anything shifting; we just haven't seen anything shift yet. And then in terms of reasons for move out, I mean you alluded to the home buying; you're absolutely correct. That number is materially down. During the third quarter, we're at like 8% of our move outs cited home buying as the reason for move out. That's compared to like a 12% norm. But we did see a tick up in that rent being too expensive as a reason we're up at like 25%. Part of that was by design. We said this at the end of the second quarter that we were going to be fairly aggressive in July and August kind of pushing these renewals and holding the line and getting people up to market. So we knew we were going to take a little bit of that hit, and we expected that number to go up. As we work our way through the fourth quarter and first quarter, my guess is we're going to continue to kind of see that number moderate down. But I don't anticipate seeing reasons for move-out to buy a home materially change at all. My guess is it's going to stay very low.

As a quick follow-up to that. With those that indicated that rent was too high, did you see any variations by region? Presumably, certain areas of the country are used to elevated rents and rents moving higher over time, whereas maybe this phenomenon is relatively new. So did you see any difference by market or region?

Not a huge difference. In California, where rents were higher, we saw CPI plus 5 caps, maybe slightly less. We're noting this because rent increases were at 9% or 10%, while the market was up 19% or 20%. As a result, those residents typically stayed because they had limited options. Overall, the health of the new residents moving into this portfolio from an income perspective is solid. Rent as a percentage of income is at 19%, which indicates that these new residents will likely be able to absorb future rent increases we implement. Got it. As a follow-up question, suburban properties have generally been outperforming since the initial COVID period. However, we are observing a shift back to urban areas. What does the current demand look like for suburban versus urban properties? Is there a difference in this demand across various markets, where some are leaning toward urban and others toward suburban? Yes. So I mean, overall, we're not seeing a significant shift of urban and suburban. We look at migration patterns, where are people coming to us, where are people leaving and what does the renewal patterns look like? And there's nothing that really pops out. I think clearly, when you look at like a Seattle, San Francisco and some of these urban markets, we continue to see this trend where we are drawing in new residents from a wider area from outside of the states, from outside of the MSAs, which we view as a positive, meaning that these markets are continuing to draw people from all over kind of the country and even the foreign markets. But nothing that's really like a delineation that I can point to between urban and suburban that says they're acting materially different.

I have two questions. First, I do just want to revisit the San Francisco and Seattle price sensitivity once more. And I guess my question is, what do you guys see as being the largest reason for the price sensitivity? I know we talked about the supply pressure compared to other markets. It's also more concentrated in the urban areas. So does this seem that the supply pressure is the primary cause? Or is there pushback to return to office a large reason or perhaps another reason for the sensitivity and the concessions in these markets?

Yes, this is Michael. I think you mentioned several reasons regarding San Francisco and Seattle. Initially, there was uncertainty about returning to the office, and there remains a lingering question about what hybrid work truly entails. The various press releases and articles about recent announcements contribute to uncertainty surrounding jobs and ongoing layoffs and growth. From my perspective, the changes we are observing are not significant. The markets haven’t bounced back as much, and it appears they are trying to maintain rates as they are while relying more on concessions instead of allowing rates to decrease.

Thank you all for your time on the call and your interest in Equity Residential, and we look forward to seeing everyone during the conference season. Thank you. Bye.