Good day, and welcome to the Equity Residential First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Martin McKenna. Please go ahead, sir.

Good morning, and thanks for joining us to discuss Equity Residential's first quarter 2021 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 as well as a management presentation regarding our results and outlook 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.

Thanks, Marty. Good morning, and thank you all for joining us today. We are pleased to report that we are seeing significant improvement in our operations, driven by continued strong demand across our portfolio. This allowed us to extend the gains in occupancy we discussed on the prior earnings call. We are currently 96% occupied, a 160 basis point improvement since December 31, 2020. We are especially encouraged by our numbers as we enter our primary leasing season, the period of peak demand in our business, and by the continuing reopening activities in our cities. The improving pricing we noted on last quarter's call has accelerated over the past few months. The pricing trend, which is a leading indicator of where market rents are going and is computed net of concessions, is up 14% this year, and we have already recovered 60% of the pricing reduction we suffered as a result of the pandemic. In fact, on a pricing trend basis, collective pricing in our markets outside of New York and San Francisco is likely to recover completely by the end of May. The New York and San Francisco markets declined more than our other markets, so they have further to go to regain pre-pandemic pricing, but momentum is strong in those two markets, and they are making good progress towards full recovery. To provide additional color on our operating trends, we posted to our website at equityapartments.com a management presentation that provides some background on both current operations and our guidance expectations. After I give a quick overview of guidance changes and investment activities, Michael Manelis, our Chief Operating Officer, will provide more detail on our current performance and forward trajectory. After that, we'll take your questions. The encouraging trends I just mentioned led us to raise our guidance ranges for physical occupancy, same-store revenue, same-store net operating income, and normalized funds from operations as disclosed in last night's release. The midpoint of our same-store revenue range was raised 100 basis points to negative 7%, the midpoint of our NOI range was raised 150 basis points to negative 12%, and the midpoint of our NFFO range was raised by $0.05 to $2.75 per share. These improvements were almost entirely driven by stronger and earlier than anticipated recovery trends in both our residential and non-residential operations across all our markets. We are well positioned heading into our prime leasing season, but our reported same-store revenue numbers will lag the recovery in our operating statistics as we work through the impact of lower rents and of concessions. In terms of the first quarter's numbers, the impact of the pandemic is readily apparent. We said previously that our reported same-store revenue numbers would get worse before they get better, and that's exactly what happened. Same-store revenues declined 10.5% for the quarter, which, while it was a bit better than we expected, is still among the worst revenue numbers in our history. We believe that our first quarter results will be our low point for the year and that they will improve from this point on. Turning to investments. While no dispositions or acquisitions closed this quarter, we have been active in the transaction market, and we expect to have a considerable amount of activity to report on next quarter. As we've said on prior calls, in order to create the most stable, growing cash flow stream possible for our investors, we are broadening our portfolio over time to increase our exposure to suburban properties in our existing markets, where the resident demographic is similar to our existing affluent urban resident population. We are also working on increasing our investment in Denver and continuing to consider a select number of new markets that have large and growing affluent resident bases, favorable long-term supply and demand characteristics, and lower political risk. While asset prices are high in the locations in which we seek to invest, our funding source for these acquisitions comes from sales of existing properties, especially in California, where we are obtaining pricing that exceeds our pre-pandemic valuations. We expect to complete this transaction activity with minimal dilution and to stay consistent with our strategy of acquiring newer assets with modest capital expenditure burdens. The one piece of notable investment activity that did occur in the quarter was our $5 million investment in a fund that preserves affordable housing across our country. This for-profit fund is run by long-time experts in the affordable housing preservation and finance area. Using our equity capital and that of other investors as well as government financing, the fund acquires and improves the quality of existing affordable housing communities that would otherwise be at risk of either physical neglect or have affordable restrictions about to expire. We have been clear on prior calls of our steadfast opposition to rent control and other short-sighted policies that do not help solve the affordable housing shortage. Economists consistently say that rent control, in fact, leads to disinvestment in existing housing and impedes the creation of new housing. We support solution-focused investment like this fund that preserves or creates affordable housing and favor the elimination of overly restrictive zoning codes that limit housing production where it's needed most. Along with ongoing engagement with public officials in our markets, this investment demonstrates our commitment to being part of the solution concerning the affordable housing gap. To sum up, we are encouraged by the progress being made on vaccinations as well as the reopening of cities. Recent announcements from employers, particularly in the tech industry regarding return to office, are welcome news. We believe that the new operating model for most companies will be a hybrid of in-office and work from home, and that our portfolio will benefit from workers looking to live close to the office. The unique cultural and entertainment options that are becoming available again, as cities reopen, are also magnets to our affluent renter demographic and will draw them back to the cities and to the lifestyle that many of them crave. Our customer base has stayed well employed during the pandemic and can afford our current rents while absorbing future rent increases as market conditions improve. 2021 is indeed turning out to be a year of recovery for our company. As we have said before, Equity Residential's same-store revenue growth coming out of recessions has typically recovered quickly with us posting strong numbers, and I see no reason that will not occur again once the lagging impact of concessions and some of the other factors I mentioned abate. All of this is, of course, premised on continuing progress in controlling the virus and assumes that other economic conditions remain supportive. Before I turn the call over to Michael, I want to thank all of our investors for their continued support during these challenging times. We are well positioned to benefit from a return to normal as the pandemic subsides. We are optimistic about the future of our business and believe that our portfolio will thrive. I'll now turn the call over to Michael Manelis.

Thanks, Mark. So with the first quarter now in the books and our spring leasing season ramping up, we continue to see strong performance build upon the early indicators we were seeing on our last call. The accelerated distribution of the vaccines has clearly impacted many of the states and cities where we operate as they push for a return to a more normal environment. Our teams in our various markets are sharing positive news of neighborhoods that are starting to feel alive again as more and more companies get ready to reopen offices. Regardless of the ultimate outcome of work-from-home, we see our demographic is drawn to the amazing culture, food, and art that our urban locations offer. They're excited about reopening of these experiences and feel a sense of urgency to return, especially knowing that these lower rents won't last for long. As you may remember from prior calls, we have focused our approach on maximizing revenues by balancing occupancy with rate and concessions, which have proven successful thus far. Our confidence in the recoveries of our cities, coupled with this disciplined approach, kept us from overreacting in one direction or the other, and we are well positioned as the recovery takes off to sell our excess inventory at net effective rates that are currently 14% higher than the end of last year. In both the earnings release and in the accompanying management presentation, we have provided some key performance metrics. Let me highlight a few overall trends. First, demand. Demand was strong through both the winter season and early spring, with a continued trend of increased applications and move-in activity that is well above seasonal norms and has fueled a stronger-than-expected occupancy recovery. Occupancy is currently 96%. And as of two weeks ago, is now above the prior year comp period and is for the first time beginning to approach 2019 levels. This occupancy strength is contributing to the improvement in our revenue growth recovery. The pricing trend, which includes the impact of concessions and is a good indicator of where market rents are headed, has improved across all markets during the first quarter and through April. We continue to test price sensitivity in every market by raising rates and reducing both the value and quantity of concessions being granted. In January, concessions averaged just under six weeks on about one-third of our applications. By March and into April, this has been reduced to about 20% of applications receiving on average four weeks, and we expect this to continue to decline into May. As stated in the management presentation, we have seen a 14% improvement in pricing trend from December 31 to April 23. Renewal rate negotiation pressure continues as we renew residents who signed leases at the onset of the pandemic before declines and pricing trends occurred. Outside of Southern California and Denver, our other markets have pricing trends below prior year, which put pressure on renewal negotiations. This situation is improving weekly. As Mark mentioned, we expect the other markets, excluding New York and San Francisco, to be positive by the end of May. April renewal rate achieved should be 200 basis points better than March, which was a negative 4.5%. The percent of residents renewing also continues to improve, with March and April both achieving above 55%. These levels remain below our historical average for this time of year, but the gap is closing. Blended rates, which combines new lease changes, and renewal rates achieved continue to improve with sequential improvement in new lease changes expected for the next several quarters. As previously discussed, renewal rates achieved were pressured in Q1, but the pressure will continue to moderate as pricing trends improve and as the rates on expiring leases, which were written pre and early onset in the pandemic, narrow with current market rents. On pages six through eight of our management presentation, we have provided color on pricing trends, physical occupancy, percent of residents renewing, and leasing concessions for each market. I will not repeat that here, but let me provide some brief market-specific commentary. I will start in Boston, where we are seeing an uptick in interest from students as many colleges have announced plans for campuses to open again in the fall. We may well benefit from limits on dorm occupancies as some students will need to find alternative housing. This market will face some headwinds from new supply, particularly in the city, where we are still dealing with some non-stabilized lease-ups from last year, as well as a few new deals expected to deliver in the back half of 2021. New York is starting to see positive momentum. Demand is good, driven by both bargain hunters looking to upgrade and people returning to Manhattan in anticipation of office reopenings. Specifics around office reopenings remain unclear, but indications are that it will be a hybrid model that has employees back in the office, at least part of the week, by summer and early fall. In New York, concessions remain part of the marketing strategy, even while we are raising rates. This market held on to widespread concession use through most of the first quarter, but the last several weeks have shown concession use starting to decline. Unlike any of our other markets, New York has a more significant number of local operators not on yield management, who tend to use concessions more frequently. New supply is basically nonexistent in Manhattan, however, supply pressure on the Hudson Waterfront in New Jersey in the back half of this year may impact that submarket. Our migration data suggests that this market is beginning to return to normal as applications from outside the New York MSA and move-outs leaving the MSA continue to trend closer to normal pre-pandemic levels. Turning to D.C. During the pandemic, physical occupancy held up better in D.C. than any of our other East Coast markets. Absorption of new supply also generally remained healthy but has slowed compared to 2019 levels. While demand in this market remains robust, we are facing some headwinds from new supply in 2021. D.C. has an excellent track record of absorbing new supply, but with more than 12,000 units being delivered this year, that record will be challenged. Heading to the West Coast. Seattle trends are moving in the right direction, but the market has shown periods of price resistance. Tech companies continue to hire and are moving towards reopening offices. Amazon's recent announcement of its commitment to an office-centric culture as their baseline is a very good sign for driving demand. The expiration of the H1B visa ban at the end of March should also be a good driver of demand as the tech sector heavily relied on this program for talent. On the supply front, new supply deliveries will rebound in 2021, with the largest concentration in the CBD downtown submarket. San Francisco, one of the markets hardest hit by the pandemic, is clearly on the road to recovery. Concession use in this market has shown a meaningful decline. Our communities located in the city of San Francisco are starting to feel vibrant again. Late in the first quarter, we saw a flurry of announcements from Bay Area tech firms regarding return to office. Many of the tech firms, including Google, are taking a firmer than expected stance with regards to office attendance, as they recognize the importance of in-person work in both product creation and company culture. Schools are reopening, with colleges planning for students to return to campus in the fall, and demand for our two and three bedrooms has clearly increased in the last several weeks. New supply will be elevated in 2021 with a large concentration in the South Bay, which may create some pricing headwinds for us. Southern California has been the strongest part of our portfolio during the pandemic. Los Angeles, despite being one of the most lockdown cities in the country, continues to have good demand. The city is opening back up, and the governor has set mid-June for a full reopening. The most encouraging sign in this market is the pickup in activity in the content creation sector. Television and movies that were filming in other states during the pandemic are returning to LA. 2021 new supply deliveries will be well spread out across the submarkets, with most of the expected pressure coming to us in the Mid-Wilshire, Koreatown submarket. Orange County and San Diego continue to be the real standouts in terms of performance. These markets have the highest occupancies and the best, albeit still negative, revenue performance. But we see same-store revenue growth in these markets turning positive in the second quarter. These markets should continue to benefit as the state opens back up and travel and leisure activity picks up. New supply will be at normal levels and generally well spread out across the submarkets. While Southern California is generally one of our better performing areas, it has and continues to experience the highest levels of delinquency. We have mobilized our teams to assist our residents in applying for available federal rental assistance dollars, while California was ahead of most states in creating a rental assistant application process. The state is just beginning to process applications and to send out money. We will be aggressive in pursuing these California relief funds as well as other programs throughout the country. Finally, in Denver, demand remained strong across the market, although pricing pressures and widespread concession use are common downtown. Our two suburban Denver properties have little concession use and are seeing good demand and revenue growth; new supply will be elevated from 2020 levels, but good job growth should be a driver of the absorption of that supply. Across all of our markets, our focus will remain on increasing rates and continuing to reduce and eliminate concessions. Our strategy of not chasing occupancy at any cost during the winter is paying off. So far, we have been able to grow our occupancy while recovering just over 60% of the decline in rate that we experienced from March to December of 2020. We believe that this approach will continue to benefit us as we move forward through 2021 and close that gap. Let me close by thanking the entire Equity Residential team for their continued dedication and hard work. I am confident that we have the best team in the industry, and they are demonstrating the power of working together as they lead the markets through the recovery phase and remain relentless in serving our customers and taking care of each other. Thank you. I will now turn the call over to the operator to begin the Q&A session.

Thank you. We will now take our first question today from Nick Joseph with Citi.

I appreciate all the additional operating disclosure. As you look at the pricing trends in the management presentation, and they're approaching last year's growth, at least in April. So then you look at blended rate in April, still down 7.2%. How do you marry those two things together? I know you talked some on the renewals. But how would you expect signed new leases to trend over the next few months?

Nick, this is Michael. So I think the way to think about this is pricing trend from Page five in that management presentation is the leading indicator of where the improvement is going to come to blended rate. After you see the improvement in blended rate, you start to see the improvement in revenue growth. I think there's probably about a month or two lag that you start to see as we'll start to cross over. Remember, the comp period from last year gets easier as we work our way through May and June. Our focus is really around that pre-pandemic period, which is what were rents like in each one of these assets at the very beginning of March 2020, and where we have good acceleration, we're focused on what was that high mark from '19 and how fast can we go after that. As we keep pushing forward and keep getting that momentum over prior year, you'll start to see that blended rate improvement really kick into gear. You could see what happened just sequentially from March to April. I would expect you're going to see that same kind of real big pop as you work your way, April into May.

That's very helpful. And then, Mark, you mentioned the considerable amount of activity. I was just wondering if you can give more details on that expected external growth and the size and cadence of the deal?

Nick, well, just to be clear, the growth is really a swap, right? We're selling assets, as I mentioned in my remarks, predominantly in California but also elsewhere. We're getting really terrific pricing on those properties and being able to trade into properties in Denver, for example, where we're going to expand our presence significantly over the next few quarters. We continue to look at some new markets. Again, we'll have better detail. I actually have properties to speak to, but we're well along in that process. I expect to close a bunch in the next month or two and to be able to talk about it in July.

Thanks.

Thank you.

Thanks. Maybe a follow-up on that, Mark. We'll wait a few months to hear about actual deals. But just in terms of the private market pricing you're seeing evolve in these markets, which metropolitan areas do you think are the cheapest right now in terms of going-in pricing? And which markets do you think pricing is the most irrational?

Great question. I'm going to look at cap rates and talk a little bit about cap rates with you, though we all know that's only part of the picture. A lot of these markets, almost all of them that we're either in or interested in, with the exception of Manhattan, Brooklyn, and, call it, the city of San Francisco, are trading at or higher than they did at the pandemic period. We were looking at cap rates, for example, in Denver, at 3.75% to 4.25%. I mean, there isn't a market that's screening cheap. In terms of expensive, I'd say the recovery is well-priced in, that's a charitable way to say it. I think these cap rates are low because people have confidence because even in the Sun Belt markets or places like Denver, there were declines in revenue. What people are seeing is that you're going to make that up, and make that up pretty quickly. So they're willing to capitalize that into the price. So with the NOI still relatively low, that makes the cap rates low. There aren't any bargains we see, but what works for us is if we can sell some of these assets, whether it's locational or we have an over-concentration. We're able to get rid of those at pretty low cap rates too, at values in a lot of cases that are the highest, not just the pandemic, but we've ever seen and buy assets we really like at the same cap rates, even if they are, frankly, in the very low fours and in the threes, that's still a good trade for us. We still think that gives us that diversification we talk about, maybe a little better growth going forward. Again, we're always looking at newer assets, so we're not arbitraging new properties for old. We're typically buying in our markets and in Denver, for example, assets that are 2016 vintage or newer.

Okay. Understood. Final question, for either Mark or Michael, looking a few years beyond this initial rebound in rates and occupancy in your markets, which markets do you believe are well-positioned for significant multiyear rent growth? And which markets are you worried might hit a wall in comparison to the upcoming years?

Let me start. Michael may have something to add here, John. When you look at how Equity Residential performed, coming out of recessions, thinking back to the tech bust in the 2002 vintage period and great financial crisis in '09. You've had a couple of years of negative growth followed by kind of an in-between year, a transition year where we were right at zero for same-store revenue. Then you've had that snapback that you're referring to, where we're averaging 5% for three or more years of same-store revenue growth. I think this time, the decline was much larger, absolutely larger than the order of magnitude in those two prior cases. But I think we're going to skip the transition year and go straight, given the velocity Michael is speaking of. We're going to go straight to a number that's considerably higher than that sort of transitional zero to de minimis same-store revenue growth. When you look by market, one market I was thinking about before the call was New York. We certainly hear a lot about New York, and that kicked around a little bit. But when you look at the numbers after the great financial crisis, they had a couple of years. They had quarters where the numbers were 7% quarter-over-quarter, and I'd remind everyone that simply removing concessions is an 8% increase for a given lease in revenue year-over-year. I think New York will put up some pretty good numbers, but in fairness, that's based on some pretty big declines. The same is true for San Francisco. I have a lot of confidence in Southern California as that market is doing very well. I think Seattle has been a little uneven. I'll let Michael maybe comment on that. A lot of confidence in Boston; the recovery has been great there. There's a lot of good things happening in Boston. And again, in D.C., we haven't talked about it in a while, but we're still going to have Amazon's HQ2 coming, and that's very close to numerous of our assets. When I look at the markets, San Francisco and New York might post very significant quarter-over-quarter year-over-year numbers. In fairness, that must be judged by the level of decline that occurred the last few years. Just do compound numbers; I think Southern Cal is going to feel good. Boston is going to have a really nice recovery and come out of this more quickly than any place else. I'll defer to you, Michael, as you think about Seattle, because I just don't know how to think about that.

Yes. Near term, I think I said in the prepared remarks, Seattle has had these moments of fits and stops as our recovery goes. Looking a bit further out, the demand drivers are strong in all our markets. All of these markets have unique aspects of what's going to deliver that demand growth. I feel positive about our opportunity as we work our way forward. We've still got this near-term stuff we have to work through, but the momentum is on our side right now.

Just to supplement further with a conversation about Denver, this is just as applicable to Austin. A lot of these per square foot rents in those markets are $2 to $2.20 a foot per month. When you look at other markets that we think Denver will emulate like Seattle, there's a lot of room to run. When you look at single-family houses, our rents at that level compete well. I feel like you could see some real out-performance for higher-end apartments in places like Denver and presumably places like Austin. The issue is that the market is pricing that in. Cap rates are pretty darn low. But again, if we're trading out of assets we don't want, and it's at the same cap rate, we're buying a better kind of growth stream; we think that math is going to work out for us.

Thanks for all the comments and for the time.

Thanks, John.

Hey. Good morning, guys. Thanks again for all the operational detail.

Good morning.

To think about the charts in the investor deck from last night, New York and San Francisco. As we think about the interplay between occupancy and net effective rents. And Michael, I think you touched on this a little bit in your prepared comments. But is there a chance or is something you're forecasting where maybe rents level off a little bit as you play more catch up in occupancy in those markets specifically over the next few months?

I would say that occupancy is improving, and we're working to recover as much of the decline as possible due to strong demand. We still have some ground to cover. For instance, in Downtown San Francisco, among the nine properties or 2,500 units we have, we are still significantly below where we were at the same time last year. The positive aspect in that market is that concessions have significantly decreased, giving us a chance to increase face rents. In contrast, in New York, concessions have remained high, and our goal is to reduce those concessions. Although concessions were still high in the first quarter, we attempted to experiment with raising rates. Each market presents different opportunities for growth. It’s not just about pausing occupancy to increase rates or keeping rates steady to boost occupancy; it requires constant adjustments in both areas.

Okay. That makes sense. In terms of the return to office trend, that's clearly a significant driver of demand, whether it's occurring now or later this summer. This situation is leading to an increase in demand across many urban core submarkets. Are there any trends you're observing in your portfolio regarding who’s moving in, whether by price point, unit mix, or different neighborhoods? Any notable insights from that data?

Sure. In previous calls, I mentioned the challenges we faced with studio demand, but that situation is changing as we progress through the first quarter and into April. Our studio occupancy has improved by 150 basis points. While we aren't back to our previous levels, we're starting to see increased demand. Interestingly, the rate recovery for studios hasn't accelerated yet, and we continue to offer an attractive price point. This leads to our focus on new residents who moved in during the first quarter. They align closely with our historical average in terms of age, with new move-ins averaging 33 years old, slightly lower in New York at 33.5, compared to our historical average of around 35. Regarding affordability, rent as a percentage of income remains at 19% across our markets with no significant changes. However, due to lower rates, there's been a slight decline in the annual household income of our new residents, but they remain affluent. Notably, New York saw the most significant decline, with an average household income of $215,000 and a rent-to-income ratio of 18.5%. We are monitoring these demographic trends closely, and the demand for larger units, such as one and two bedrooms, continues to be strong. Currently, our focus is on studios.

Okay, great. Thanks for the color.

Next, we'll hear from Jeff Spector with Bank of America.

Thank you. Good morning. One follow-up on that - the last discussion around demographics. Specifically, New York City and San Francisco, can you discuss a little bit more on who's returning, who's entering the portfolio? Any color on that to give us?

Sure. We talk about what we say is like our migration patterns. Where are people coming to us from the new residents, as well as when we look at where our residents that are leaving going? In San Francisco, we're trending back towards normal pre-pandemic levels, but applications from within the same MSA and state still remain elevated. Huge improvement sequentially from what we saw in the Q3 and Q4 period of last year, but they're both still slightly elevated, which really just means you're still seeing kind of this deal seeker or people trying to optimize it just moving within the market. The New York front has almost returned back to normal, it still has some elevated deal seekers from within the same MSA. But that is materially lower. We were up at 80% of all our applications in New York were coming to us from within the same MSA. Right now, we're back down to 65%, which is right in line with our historical norms.

Thank you. Very interesting. And then second, on renewal rates, I know you made comments on markets outside San Francisco and New York. It should return positive by May. I'm sorry if I missed this, but can you provide a forecast for San Francisco and New York? When do you expect renewal rates to stabilize or also turn positive?

That's a great question. A lot still depends upon our ability to grow that pricing trend over the prior year and back to that pre-pandemic level. I think I would look at this somewhere in the late second quarter, early third quarter to do it if that momentum stays. I could also see that number kind of moving out a few more months if we hit any section of pause in our ability to keep recovering and clawing back that rate.

Hey. Guys, good morning. Two questions. First, Mark, as you were talking about the sort of the markets or the change in the demographics of people moving in. Is your view simply that based on the commentary of the income levels that you're seeing? I'm really talking about San Francisco and New York because it sounds like the other markets are doing much better. Is your view that if you remove the concessions that the new renter profile can afford the standard face rents? Or do you think it's going to be a slow trickle of easing back into the historic face rents that, let's say, we were at in 2019?

I think from an affordability index, it's clear that the new residents moving in are going to be able to afford increases as we return to those pre-pandemic levels. We've been pulling back even sequentially into April, and we think about where we sit today, even from last week, applications coming in, we're pushing really hard, and we're not finding that resistance point yet. That's our goal, to keep pushing and trying to find that resistance point. We haven't seen a change in the demographic profile. So I think from an affordability standpoint, the applicants coming in are all approved based on the gross rent. So regardless of concessions, they're approved on that gross rent, and they're used to paying us that gross rent after they get past that first or second month. This is something we'll have to watch in the markets like New York and San Francisco where we have real momentum to dial back even more on that concession use. To date, for the month of April, we have not seen any material change in that demographic.

So if I understood you correctly, all the tenants are approved based on their ability to pay the non-concessionary rent, the full-face rent, is that correct?

That is correct.

Okay. That's actually pretty big. So it's on the total rent, not the effective rent. Okay. It's interesting. Mark, it wouldn't be a conference call without a rent control discussion. I see that Albany is still kicking around a good cause eviction potential for basically rent control in New York. You didn't mention it in light of assets or markets that you would sell down. Given that New Jersey and Connecticut don't seem to be in that same vein, would you have a view of selling down your New York and Manhattan exposure and increasing New Jersey and Connecticut?

You're going to ruin all the news for next quarter, but we did sell our last asset in Connecticut. That was really an asset decision. It just wasn't a property that we thought had the renovation potential that the buyer did. It was just an older property. We are interested in a deal and will likely close shortly that is a New Jersey higher-end affluent renter base. You can certainly commute into Manhattan, but there are a lot of folks that live at this property that are going to work in that area. So we are open. Again, New York has some huge advantages in terms of supply dynamics, in terms of having the largest base of high-income renters in the country by a long shot. We see whatever we all might say about this President and the prior President's actions. As it relates to infrastructure and spending, New York City, state of New York, and the states around it needed a lot of money is coming into these states to heal, so we're still open very much to investing in the greater metro area in New York.

Okay. But it sounds like you may be open to further selling down your direct New York exposure. Is that fair to say?

That's fair to say. We have 27 buildings in Brooklyn and Manhattan. I can't tell you how many we'll have in two years, but it will be somewhat less. We've got some of that 421a stuff that we've spoken of, that's just hard for a public reporting company to own. I just think we're probably just a little over-concentrated in Manhattan. You may see a slight net reduction. You'll see us find deals that we like in the metro area, and we'll buy those. We have a development deal in the New York metro area as well that we'll talk about next quarter or the quarter after. We're willing to do both, but this trend of spreading out our capital is true in every market, and that definitely includes New York. I think New York net will be smaller than metro.

Hey. Good morning, guys. I want to go back to maybe comment or question Nick was talking about at the beginning. Thank you very much for the additional disclosures. I recognize Marty might feel differently about putting it together, but we certainly enjoy it. As you think about pricing trends, the slide on Page five talks about all of your markets. I'm struck by how all Orange County and San Diego have done well above pre-COVID markets. Denver is starting up fairly well. As you think about the ability to push before return to work, let's use New York as an example. Given the demand that you're seeing from people optimistically moving back to major markets like New York City, there's still healthy room for you to push that. Is that the right way to think about it?

Yes, absolutely. You could just look at the slope. I would say we have been pushing. If you just look at the slope of the line that's occurred, our goal is to keep being as aggressive as we can, while we have that demand kind of coming in that front door.

Got it. As we think about these pricing trends, given the NOI contribution from markets like New York, Washington D.C., San Francisco, you could actually see those pricing trends go well above where it was this time last year for a variety of reasons, but primarily due to mix. Is that the right way to think about how that pricing trend might look like in 2Q or 3Q, assuming that you put this slide in your deck again?

It's Mark. I want to make sure we're answering the right question for you. When you start comparing price trends in July of 2020 in any of those markets, the price trend in July of '21, because '20 kept going down and '21, we believe and hope and feel is going to keep going up, those numbers will cross. Soon, it won't be relevant to judge us against 2020 anymore. When do we get back to pre-pandemic 2019, early 2020 type pricing? We're making progress towards that. Yes, that will probably happen, and those lines will cross. That's partly because we feel like we can keep pushing pricing trends, that's partly because it went down so hard in 2020, but I think you're going to see us talk more and more if things keep going this well about how and when we'll get back to late 2019, early 2020 pricing. Is that helpful?

That's absolutely helpful. That leads me to my next question. If I can, the forward outlook. Obviously, the market wasn't weak in 2019 prior to COVID. Is there a scenario where you can actually really begin to push rents pretty heavily once you normalize back to 2019 levels, given a combination of strength that you're seeing in already strong markets? Also on millennial and Z generation, that should create heavy demand in urban markets?

We certainly hope so. You're asking a question that's probably more applicable to 2022. But we've all read the articles. Yes. The setup is good. You got great occupancy in New York, just a few weeks, will open up to 75% occupancy in office space. Legally, it's not open for more than 50% occupancy. That feels terrific to us. We all read about what happened after the Spanish flu epidemic. There was a lot of pent-up demand for things. I think we're going to see that. Young people have been stuck at home with their parents. My kids included, one out, and they want to live where we own properties. We'll feel all of that, which is your Gen-Z comment. I think we have a long runway ahead of us as we get through this year, put the pain of 2020 behind us as a company and society. You're going to see some pretty good numbers from apartments in these big cities.

Thanks, guys. I was indeed asking a question about '22. I'm just trying to think about once we get the inflection in the second half of '21 and the first half of '22, what do we look like going forward. That's quite helpful.

That was shifty of you. But I mean, I'd just tell you, obviously, progress in the pandemic has to continue. Economic conditions have to remain generally supportive, but there's good momentum. The single-family market is very expensive still. I understand all the return to office, work remote arguments, but there’s still a very large constituency happy to live in our urban locations.

Thanks, guys.

Thank you.

Next question comes from John Kim with BMO Capital Markets.

Good morning. Question on concessions. In New York, you mentioned that 55% did not receive a concession and 45% got six weeks on average. What's the difference between the haves and have-nots? Is that a neighborhood discrepancy or price point?

I think it's a little bit of both. We have some markets like the Upper West Side and Upper East Side, where we really have pulled back using concessions. You still have submarkets like Chelsea and Gramercy where you see concessions are used widely across most of the applications. We're seeing momentum in the last three weeks even in those tougher hit areas. Concessions are often in place on vacant units to create the sense of urgency to fill them. We will not offer concessions on noticed units, which is residents that said they're moving out at the end of May or into June, and we will lease those units without concessions.

Okay. And then how long do you think it will take to reduce the concessions back to pre-pandemic levels? Is it going to be more than one lease cycle?

I think that's too early to tell. You could see the momentum in a market like Downtown San Francisco, how fast you can pull back. I think New York, or the Manhattan submarkets clearly have the opportunity to pull back at the same pace. They haven't done that yet. A lot of that has to do with the type of ownership we have. We'll have to see how that plays out.

You mentioned that the portfolio repositioning this year will have minimal impact on earnings. Do you see this new market concentration providing more earnings growth potential? Or is the benefit really diversification and stability going forward? A little bit of both. When you think about growth, as I said in some of my prior answers, it's likely that New York and San Francisco will post absolute numbers that are somewhat higher in the near term, let's call it '22-'23 periods, just because the decline, John, was so significant before. I think that when you start to talk about a longer period of time, it’s probably better to be in a few of these growth markets and be a little spread out. Just having capital in six or seven markets is probably better than 10 or 11, but I don't see us going back to 30 like we were in the late '90s; that's too many to keep track of and to be on top of.

Thank you.

We'll now hear from Amanda Sweitzer with Baird.

Thanks. Good morning. Can you guys provide an update on your ancillary income trends? Do you have pricing power to implement some of those fees today? Any thought to bring in more short-term rentals?

As for short-term rentals, I would say, at this point, we're not doing that. We see enough demand for conventional renters, so we're going to hold off on going back to that type of rental. As far as the ancillary income, I think we're still being aggressive where we can with all of our amenity fees, whether that's raising the parking. We've improved how we price our parking spaces and how we kind of optimize the revenue from that. There's still a little bit of opportunity left, but not a lot there. The other area that feeds into those ancillary incomes is our settlement fees. When people break leases, we charge those fees. We've clearly increased those throughout the COVID period, and we'll keep them at that elevated level. The other areas we have right now are some things in place pre-COVID that we're just not ready to go back to yet.

That's helpful. Have you given any thought to repurposing some of your existing commercial space? If you have, what uses are pure interest, and any prospective ROIs on those conversions?

We have given some thought. We've talked on prior calls a little bit about that. This would mostly be for our current residents. Our thought isn't to compete with remote work providers. It's more to provide an amenity to our residents that they're either paying for directly on a per-use basis or repurposed ground floor retail that we put a great Internet hub and furniture to. I don't really have an ROI for you as much as its stickiness. We don't want to hold on to empty retail for too long, assuming we can get cities to let us rezone it. We do have retail space that was vacated, and we're giving a lot of thoughtfulness to whether we're just going to put new retail tenants in that space. You haven't forbid, two, three, or four years later, go through the same experience again. Retail is a tough business, and we're glad we have very little of it. We may repurpose some of that additional space as potential amenity space for our residents. You shouldn't expect us to use it significantly as an independent rental stream.

Makes sense. Appreciate the time.

We'll now hear from Haendel St. Juste with Mizuho.

Its Haendel. Thank you. Good morning. I was curious, maybe you guys can talk a bit about the outlook for bad debt in the portfolio given the recent extension of the Eviction Moratorium? How that plays into your same-store revenue picture for your California and overall portfolio? What’s reflected in the guide?

No problem, Haendel, it's Bob. From a bad debt perspective, not a lot has changed, and you kind of saw that in the reported numbers from sequentially Q4 to Q1. They're relatively flat. That's what we assumed in our guidance, that they kind of stay the same. We do not assume any kind of material level of improvement. That's a potential green shoot. We're very active in working with our residents regarding these federal rental assistance programs, particularly concentrated in Southern California where we have elevated amounts of bad debt. That’s a possibility, but not incorporated into the numbers themselves. Our best guess is just assuming things stay the same throughout 2021.

Okay. And maybe can you talk a bit about if your funding thoughts for potential acquisitions have changed at all, given the continued improvement of your cost of equity? I know the plan this year was to use proceeds from dispositions to buy. But just curious if there's been any shift in thinking about perhaps being more of a net acquirer given the improvement of cost of capital? As part of that, can you also talk about your plan to get bigger in Denver and Austin if development will play a role in that in your overall income development here?

Well, it's Mark. Thanks for that question, Haendel. Those are a little bit linked. The one thing we can't do with recycling is development. If the 1031 rules continue to be in effect, that's pretty efficient for us. We do have assets we want to exit in markets we want to lower our exposure. We can do a tax-free exchange and then move the money over. Development, that's an area where we have used the ATM or raised money because you can't 1031 into developments; you need to have independent capital and use debt capital. We're open to it. As our cost of equity improves here, as our cost of capital becomes a more relevant funding source, I'm open to it. A way to address our market concentration, our desire to rebalance is to make the whole company bigger. We could use the ATMs and issuances to buy assets and not recycle, but that's a process that could have more dilution associated with it.

That is helpful. I have one last question. Can you help me understand something better? The discussion about reinvesting the potential proceeds from California into areas like Denver, in terms of internal rate of return, is confusing for me. I'm having difficulty reconciling the numbers because cap rates in both Denver and California are in the low 4% range, maybe even below 4%. Rents in much of California are still significantly lower than they were previously, while it seems that Denver has moved past that issue. I understand the lower capital expenditures, but how is the internal rate of return different or even better in Denver when the cap rates are already quite low? Could you help me see what I might be missing as you consider reallocating capital from California to Denver?

You're asking a very fair question. I think you're starting at about the same place as you suggested. The assets we're selling often do have significant capital that needs to be invested. I appreciate that's more of an AFFO thing than an FFO thing. We think a lot about CapEx at EQR. We're buying new product in Denver and selling old product in California. I feel like shareholders are much better off on an AFFO basis. When we look at Denver, a lot of the per square foot rents in those markets are $2 to $2.20 per foot per month. When you look at other markets, such as Seattle, there's a lot of room to run. If we're trading from assets we don’t want, it's at the same cap rate, and we're buying a better kind of growth stream, we think that math is going to work out for us.

That is. It sounds like there's a CapEx element in your comments about AFFO. I'm curious; as we look back over the prior decade, and we’ve seen cap rate compression between the coastal and non-coastal. Years ago, it used to be 50, 75 basis points. A few years back, maybe 25, 50. Today, we're sitting right on top of each other. I'm curious where you think cap rates in places like Denver are 3-5 years from now versus today compared to, say, New York or California?

We got to start by knowing what interest rates are doing, what growth is – I wish I was that good. That's the big corona question. By the way, do I have to know the answer for sure? If I'm spread out in places where there's knowledge workers and general economic growth, we'll draft that no matter where it happens. There's no riskless apartment market. A more balanced approach is a good idea.

Much appreciated. Thank you for the time.

Thank you.

Our next question comes from Brad Heffern with RBC Capital Markets.

Good morning, everyone. A question on office conversion. We've heard some reports in the press that some major metros are considering converting offices into apartments or typical housing. Do you see that happening? Could it potentially have any meaningful impact on supply that we wouldn't see in typical supply numbers?

Yes. First off, anything that helps the affordable housing shortage is worth trying. We've talked a bit about that. The problem with converting offices is often, these are older office buildings with large floor plates and limited windows. Most people want to see the outdoors, that's not a small issue. We have a couple of buildings repurposed for our portfolio that work. I think Michael would tell you, those will be hard units to rent. I am not that concerned with it being competitive to higher-end apartments. We may repurpose some of that as potential amenity space for our residents, but you shouldn't expect us to use it significantly as an independent rental stream.

Yes. Okay. I think we can all agree on the windows. I guess a question on the guidance. I was curious why the top end of the AFFO guide stayed the same, just given that all the underlying contributors moved up at the high end. Is there something you guys don't guide to that's depressing the top end of the range? Or is there some conservatism built in, given we're so early in the year?

There's nothing that depresses the high end of the range. The initial NFFO range at the beginning of the year was very wide. It was probably abnormally wide relative to other years. So with a $0.20 difference. But I wouldn't read anything into it since we shifted up the guidance range on revenue and NOI, and we pared off the bottom end of the NFFO range.

Yes, I mean it's still a math equation.

Yes, okay. Got it. Thank you.

Thank you.

Upal Rana with UBS has our next question.

Hi. This is Upal in place for Brian. Could you give us some color on how much the impact on the extreme residential housing environment has on your business? Are you making decisions as far as rents or potential acquisitions or dispositions given what's going on? Or are you taking a wait-and-see approach?

You're referring to single-family housing. The whole portfolio is designed not to have a lot of impact from single-family. The fact that single-family prices are going up and availability is tight is somewhat helpful to our business, but it's not as helpful as if we had a portfolio in a market where everyone wanted to be a homeowner right away. Our residents are thinking about lifestyle and job proximity. Single-family issues are not terribly relevant to us right now.

Okay. Thank you.

Thank you.