Good day, and welcome to the Equity Residential Fourth Quarter 2022 Earnings Conference Call and Webcast. Today’s call is being recorded. At this time, I’d like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.

Good morning, and thanks for joining us to discuss Equity Residential’s fourth quarter 2022 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer. Alec Brackenridge, our Chief Investment Officer is here with us as well for the Q&A. Our earnings release is 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 will turn the call over to Mark Parrell.

Thanks, Marty. Good morning and thank you all for joining us today to discuss our fourth quarter and full year results and our outlook for 2023. 2022 was a terrific year for Equity Residential. We finished the year, as we expected, producing same-store revenue growth of 10.6%. We continued to see good demand during the fourth quarter but certainly saw a return of seasonality to the business. Our strong 2022 same-store revenue growth combined with modest expense growth of 3.6% resulted in same-store net operating income growth for the full year of 14.1%. With continuing positive financial leverage, this led to a 17.7% increase in year-over-year normalized FFO. I want to take a moment to thank all my colleagues across Equity Residential for their hard work and dedication in delivering these terrific results. In a moment, Michael Manelis will take you through our 2022 highlights and how we expect 2023 to shape up on the revenue side; and Bob Garechana will comment on bad debt and review our 2022 expense results and 2023 expense expectations, as well as recent balance sheet activities and then we will take your questions. We have provided guidance for same-store revenue growth at a midpoint of 5.25%, which would make 2023 another good year for Equity Residential and produce same-store revenue growth well above our long-term average. We do admit to finding 2023 harder to predict than usual. On the positive side, we go into the year expecting a benefit from embedded growth of about 4.2% from leases written in 2022, and we also carry into the year an above-average loss to lease, both of which will contribute to positive momentum for us, particularly in the first half of 2023. We also feel good about the employability and earnings power of our affluent renter customer. There still appears to be plentiful employment opportunities for the highly skilled workers that form the bulk of our residents, as evidenced by last week’s blowout January employment and job openings reports. We saw big increases in employment in the professional and business services category, a smaller gain in financial activities, and only a modest decline in information services, all big employment categories for our residents. So far, the announced layoffs at tech and some financial firms while certainly creating a negative environment have not manifested themselves much in the government’s reported numbers, or thus far in our internal numbers. We’ve only seen a handful of residents terminating leases early due to job loss. Possibly, the impact is delayed due to severance and other factors. But it is at least equally possible that the workers in these categories are being quickly reabsorbed into the job market. Our renter demographic has proven resilient in the past, and we expect them to continue to be highly employable. As to renter incomes, according to the Atlanta Fed wage tracker, college graduates' wages accelerated in the fourth quarter, outpacing wage gains achieved by hourly workers despite the higher base. Looking at competition from home ownership and new apartment supply in 2023, we also generally see a favorable picture. Homeownership costs and down-payment requirements remain high in our markets, especially relative to rents, making our product a better value. According to the National Association of Realtors, for their affordability index to return to pre-COVID levels, one of three things will need to occur: the 30-year mortgage rate will need to decline to 2.6%; home prices to fall by one-third; or family incomes to increase by 50%. This is all very consistent with our internal data, which shows the percentage of residents leaving us to purchase a home fell to 9.4% in the fourth quarter from 15.8% a year ago. On the apartment supply side, we expect 2023 national new supply to run at record levels. But we generally feel good about the direct level of competition that we will face given our market mix and importantly, the location of supply within markets relative to our properties. The Sunbelt markets, including the Dallas Fort Worth, Austin, and Atlanta markets, in which we are increasingly investing, and Denver will see higher relative supply numbers in our coastal established markets and likely more impact, especially if that’s coupled with a job slowdown. In terms of supply in our coastal established markets, where we still have 95% of our properties, our internal research indicates that new apartments delivered near our properties create significantly more short-term pressure on our results. As we look at 2023’s expected deliveries through that lens, new supply within close proximity to our properties in our coastal established markets is actually forecasted to be below pre-pandemic levels, with only the Washington D.C. and Orange County market screening as delivering above-average supply close to our properties relative to these pre-pandemic supply averages. Over the next decade, the significant net deficit of housing across the country sets us up for good long-term demand. We do, however, fully acknowledge that despite what was good GDP growth in the fourth quarter and full year and continuing strong employment reports, the Federal Reserve’s rate actions are likely to pressure job growth and economic growth as 2023 progresses. We took this into account in our guidance by assuming a lower rate of rental rate growth during 2023 than usual and a decline in occupancy. But whether there is or isn’t a technical recession is of considerably less importance to us than whether job growth substantially declines and if so when. A decline at the beginning of our spring leasing season will be considerably more impactful than a slowdown later in the year. We also now expect that the elevated post-pandemic level of bad debt in some of our California markets does improve in ‘23, but at a slower rate than we previously hoped, as poor public policies encouraging delinquency continue. Bob will discuss all this in a moment. In sum, we make no prediction about a recession but have assumed some impact to our 2023 results from a job slowdown and flawed government policy and evictions, while continuing to see sources of strength in our business in the form of modest forward competition from home purchases and new apartment supply, the high employability of our residents even if the job market deteriorates from its current lofty levels, and the positive forward momentum from our strong 2022 results. On the transaction front, there was not much activity in 2022 for us. We only purchased one deal, and we sold three others, two in New York City and one in Washington D.C. We did start a handful of new developments. These were mostly in our Toll joint venture structure. As we head into 2023, the transaction markets remain unsettled, but we see higher than usual supply in the Sunbelt and Denver markets in which we wish to expand as hopefully creating buying opportunities for us later in the year. For now, our guidance does not assume any acquisition or disposition activity, but we remain committed to our strategy of shifting capital out of California, New York, and Washington D.C. and into our expansion markets of Denver, Dallas Fort Worth, Austin and Atlanta, as well as the suburbs and markets like Seattle and Boston, assuming appropriate opportunities present themselves. And with that, I’ll turn the call over to Michael.

Thanks, Mark, and thanks to everybody for joining us today. This morning, I will review key takeaways from our fourth quarter 2022 performance, expectations for 2023, and provide some color on the markets before I turn it over to Bob to walk through our financial guidance. 2022 same-store revenue growth of 10.6% was the best in EQR’s history of nearly 30 years as a public company. Reported turnover for both the full year and the fourth quarter was the lowest in the Company’s history, reflecting great demand that produced high occupancy and significant pricing power. In most of our markets, we had a supercharged spring leasing season with more robust pricing power that started earlier than usual in the year. Rents peaked in August, which is typical, and then started to seasonally moderate, which is also typical. The seasonal moderation was a little more pronounced than we originally expected and likely due to a combination of rents reaching such a high peak, along with less pricing power than expected as we ended the year. Given current uncertainty about the economy, including increasing layoff announcements, this moderation isn’t surprising, though the January employment report that Mark just mentioned was very encouraging. Sitting here today, we have good occupancy with solid demand across our markets. Our dashboards and current leasing momentum continue to signal a normal spring. Let me take a minute and walk through the building blocks of our guidance range of 4.5% to 6% revenue growth. This is an updated look at what we provided in our third quarter management presentation. So first, we start with embedded growth of 4.2% for 2023. This is slightly below the midpoint of the range we talked about in the third quarter of 4% to 5%, but mostly consistent with expectations and takes into account the additional concessions used in the fourth quarter. Next, we expect strong occupancy for 2023 at 96.2%, which includes a continuation of low resident turnover but is 20 basis points lower than that of 2022. Finally, we’re assuming blended rates in 2023 will average approximately 4% for the full year. This assumption incorporates capturing our 1.5% loss to lease along with approximately 2.5% intraperiod growth in rates. This intraperiod growth assumes a positive impact from less overall pressure from competitive new supply and acknowledges some potential headwinds for a softening economy. For your reference, in a normal non-recessionary year, we would expect intraperiod growth to be about 3% to 3.5% with us capturing about half of that gain in same-store revenue. The first half of 2023 will benefit from the momentum we had last year, while the back half of the year faces tougher comps and could feel the impact of the economy as the year progresses. The contribution of this blended rate growth to revenue will be approximately half, as we capture it over the 2023 leasing season. Add all of that up, and the implication is revenue growth over 6%, which would be exceptional after a remarkable 2022. The midpoint of our guidance range, however, is 5.25%, which is lower because we do not expect bad debt net to return to pre-pandemic levels in 2023, and it continues to work against us this year due to a lack of expected government rental assistance and the extension of the eviction moratoriums in both L.A. and Alameda counties. Bob will go into more detail on bad debt net, including our assumption in his prepared remarks. The outlook I just described is based on a belief that while the economy may be slowing, our business continues to demonstrate a number of favorable drivers and resiliency. As we have often said in the past, we focus on our dashboards while also acknowledging the headlines. While keeping in mind that this is very early in the year, when we look at our dashboards today, the portfolio is demonstrating sequential improvement in both pricing trends and application volume, as we would expect, which by all indications is a typical pre-pandemic setup for the spring leasing season. New York and Boston will be two of our top performers in 2023, after delivering strong results in 2022. In San Francisco and Seattle, we are seeing good demand and sequential improvement in pricing with slight reductions in both the quantity and value of concessions being offered since the beginning of the year. Even with this modest improvement, the overall level of concessions is still elevated, resulting in weaker-than-anticipated pricing power. San Francisco and Seattle have been slower to recover than the other markets, but both posted really good revenue growth in 2022. Both cities have been balancing a combination of quality of life issues in their downtown, which are getting better, and a delayed return to the office from large tech employers. In addition, there have been some layoff announcements from companies based in these two cities. These layoffs are a direct result of excessive hiring during the pandemic. This excess was spread across multiple markets and countries, not just Seattle and San Francisco. The remote nature of work in tech during the pandemic along with these hiring sprees likely means that the layoffs are more geographically dispersed than in prior periods. Both of these cities remain hubs of the tech industry and share an entrepreneurial spirit that will continue to incubate the next big idea, be it AI or other innovations we find changing our lives a decade from now. The midpoint of our guidance range assumes that these markets continue to improve modestly as we get into the spring leasing season, but overall weakness persists, which is why our intraperiod growth assumptions for the company overall are somewhat lower than the typical 3% to 3.5% range. If San Francisco and Seattle get some traction this year, that could have a significant positive impact on our same-store revenue growth as could a more rapid improvement in bad debt net, leading us to the higher end of our range. Reaching the bottom end of our range would require either rate growth to slow much earlier in the year than expected or occupancy to dip to the mid-95% range for a sustained period of time. Lastly, before I turn it over to Bob to discuss our guidance, I want to spend a minute on our focus on innovation. On the revenue side, we will continue to focus on other income items like Wi-Fi, parking, and amenity rate optimization. We will also leverage data and analytics to create opportunities to expand our operating margin. We have been a sector leader in limiting same-store expense growth, and this is attributable to our team’s willingness to embrace innovation and initiatives focused on centralized activities. We are driven to get the most out of the portfolio and continue to have great success in creating efficiencies in our sales and office functions. In 2023, we will complete the centralization of onsite activities such as application processing and our move-out and collection process. On the service side, we will continue to leverage our mobile platform to create more opportunities to share our resources across multiple properties. I want to give a shoutout for 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 Bob.

Thanks, Michael. Let me start with bad debt, which should round out our thought process on same-store revenue guidance, followed up with a little commentary on same-store expenses, normalized FFO, and the balance sheet. As Michael mentioned, the midpoint of our same-store revenue guidance assumes a 90 basis-point reduction in revenue growth due to the impact of bad debt. As we mentioned during last quarter’s call, the biggest driver of this drag is the lack of rental relief payments in 2023 relative to 2022. Specifically, we received a little over $32 million in rent relief in 2022 that isn’t in the numbers in 2023. While we ended last year with more residents paying their rent than when we started the year, a trend that we would expect to continue, our forecast doesn’t assume this will be significant enough to offset this lack of rental assistance. Unfortunately, recent delays in lifting eviction moratoriums and slow processing within the courts led us to this more cautious forecast that reflects a more modest improvement coming later in the year than we had initially hoped for. We’re hopeful that this caution might be unwarranted, in which case we could achieve the top end of our guidance range. But for now, we still expect delinquency to return to pre-pandemic levels, but more likely in 2024 than in 2023. Turning to expenses, I’m proud to report that in 2022, we once again continued to execute on our strategy of using technology and centralization to reduce exposure to labor pressures. Same-store payroll expense growth was negative for the second year in a row, and even when combining payroll with repairs and maintenance, a line item with significant labor exposure and product inflation, growth was below 3% for the second year in a row again. Combine that with low real estate taxes, and we were able to deliver industry-low expense growth. For 2023, the midpoint of our same-store expense guidance is 4.5%. This forecasted growth rate is about 100 basis points higher than what I just described for 2022 but well below both inflation and our revenue guidance, meaning we expect 2023 to be another year of operating margin expansion for the Company. Of the four major categories of expenses, repairs and maintenance and utilities should grow at a pace slower than 2022, while real estate taxes and payroll should be faster. These latter two categories face challenging comparable periods given 2022’s remarkable performance, in addition to the following drivers: For real estate taxes, we expect municipalities will recognize the great strong income performance for multifamily in 2022 and as a result take a more aggressive approach to assess values and rates. Total tax growth should be around 4%, up from 1% in 2022 with California continuing to benefit from Prop 13 at the low end of growth and expansion markets like Colorado, Texas, and Georgia towards the higher end. These expansion markets are a small part of our same-store portfolio, and the expected growth is consistent with what we underwrote on acquisition. For payroll, we expect 2023 growth to be around 3.5%, up from the decline of 2% that I just mentioned in 2022 and still well below typical wage inflation. We believe we can achieve this target through our continued discipline around staffing and optimization of our workflow. Turning to normalized FFO, page 2 of the release provides a detailed reconciliation of our forecasted contributors to NFFO growth. Our midpoint of $3.75 per share includes a $0.01 of forecasted casualty losses from the California rainstorms that we mentioned in the release, and results in over 6% year-over-year NFFO growth, a very solid year for the Company. Finally, some comments on our planned financing activity for 2023 and the balance sheet. We mentioned in the past that we have an $800 million secured debt pool coming due, most of which needs to be refinanced in the secured market later this year. The current rate on the pool is 4.21%, and the maturity is in November. The pool is very financeable, given it is roughly 50% levered and covers debt service nearly 2 times. We have favorably hedged more than half the treasury risk on the financing and would expect to be able to refinance later in the year at a 5% rate or better, which is also incorporated in our guidance. After that, the Company has no maturities to speak of until June of 2025. We have low floating-rate exposure, the lowest leverage in our history, significant debt capacity, and ample liquidity supported by our recently recast revolver that will support our future capital allocation activities. With that, I’ll turn it over to the operator for questions.

Thank you. We’ll take our first question from the line of Nick Joseph with Citi.

Thank you. You talked about the innovation impact and the benefits to potential margin expansion. Can you quantify the impact of those programs, both on same-store revenue and expenses in 2023?

Yes. Hey Nick, this is Michael. So first, I guess, I would say back in the November management presentation, we highlighted this whole technology evolution of our platform. That really has been focused on creating this mobility and efficiency in the operating model. And clearly, for the last couple of years, it’s been more expense-focused, and that shows up in the numbers that we just talked about. Specific to 2023, I think we’ve included just over $10 million in the guidance with still about two-thirds of that benefit on the expense front, and that’s spread out across several various accounts in repair and maintenance along with the payroll accounts. The revenue impact is several million dollars in ‘23. But for us, it’s probably going to kick in more in the back half of the year and really start to show up in 2024 as a lot of these initiatives we have don’t get put into place until kind of the middle of the year. We got a lot of different pilots going on right now with like short-term and common area rentals, the property-wide Wi-Fi. We’ve got another 25,000 units being installed with the smart home. And again, most of this is going to contribute probably to the other income line. I think you see about 20 or 30 basis points growth in that number for 2023. I’ll tell you, we’re excited about all of this stuff. We’re going to continue to kind of look at the way we’ve been doing this in the past, which is areas that are capital intensive. The technology is like first gen. We're that signals to us that it’s okay to be a fast follower in that area, similar to how we approach smart home installations. For us, we just want to make sure that we’re going to get the appropriate return on this stuff. The foundation is almost in place. By the middle of the year, we’ll have most of the operating platform where we need it to be to capture that benefit. You should expect the $30 million to $35 million that we outlined in that presentation really to start shifting more towards that revenue front in ‘24 and ‘25. At the end of the day, the reality is you’re never done with this pursuit of operational excellence. It’s something that’s clearly wired into the DNA of our company.

Thank you. That’s very helpful. And then just maybe on supply, as you see new supply coming on, what’s the concessionary environment today for those lease-ups? And maybe you can touch on concessions on stabilized properties as well in the market, if there are some. And then, what are the expectations for the concessionary environment in ‘23 for that new supply coming on?

Yes. So again, we’re very focused on this proximity of the supply, when the first units are going to hit the market. Specific to the ‘23 deliveries, it’s pretty clear to us across our portfolio that we’re going to feel less overall direct pressure from it. What we’ve been watching is in the fourth quarter, which is really a bad time to watch for concession change because you typically see concessions inch up, but in many of the markets, you’re seeing that the new supply did absolutely grow their concessions compared to the third quarter, and tend to be in that 6- to 8-week range. What’s promising for us right now is that we did see, just like in the stabilized portfolio starting the year in January, we’re starting to see these concessions kind of fall back a little bit in both the volume and dollars of concessions being issued. So for us right now, I’ll tell you, we’re still focused in San Francisco and Seattle where we see the heaviest concentration of supply of concessions being used. About 25% of our applications in San Francisco are receiving about two weeks. In Seattle, we have about 40% of our applications receiving one month. If you put all that into the blender and think about 2023 and our expectations, right now, we kind of normalize concessions to the 2022 level, so we expect to continue to see some elevated concessions in the shoulder periods. It’s hard to say what’s going to happen with the new supply across the market. It’s clearly something we’re going to be watching.

So Nick, just from a financial standpoint, like Michael mentioned, concessions are kind of flat, so no contribution to revenue growth or decline to revenue growth from 2022 to 2023.

We’ll take our next question from John Pawlowski with Green Street. Please go ahead.

Alec, a question for you on the transaction market. I know things are pretty frozen right now. But from the trends you’re seeing in terms of buyer and seller behavior, which one or two of your markets do you think is mispriced right now in the private market, either cheap or expensive?

Hey John, it’s Alec. It's difficult to identify any specific properties that are mispriced at the moment due to the minimal transaction activity. Most of the activity we've observed is from 1031 buyers who need to reinvest funds or sellers who must sell for various reasons. However, these cases are quite rare. It's challenging to pinpoint a particular market as more favorable than others. Looking ahead, markets with significant supply are typically influenced by merchant builders who may not have the resources to hold onto properties long-term. I anticipate potential opportunities in new developments from merchant builders looking to sell quickly. Additionally, there are private REITs with redemption requests that could represent opportunities, although not all would be suitable for us. We also see players who have taken on floating-rate debt facing expiring caps. The pace has been slow, but I believe we will see increased opportunities in the next six to nine months, along with more sellers likely capitulating compared to buyers, considering the current volatility in the financing market.

Okay. That makes sense. Just a follow-up there. You mentioned the private REITs, merchant builders, and then variable rate debt, those sources of potential distress. How would you rank the level of distress or capitulation among those sources right now, 1 to 10, with 10 being the worst and 1 being no problems at all?

The merchant builders are not really in a position to handle this with the current high rates. It’s difficult to quantify that. I do believe there will be some transactions, and some private REITs have managed to find alternative sources of capital that might help them ease the situation somewhat. However, the cap rates are likely the highest among the three, significantly higher than before, as much as eight to ten times their previous levels. This is certainly going to present considerable challenges.

Hey John, it’s Mark. Just to contribute to that, because it’s hard to number order it like you said, but it’s easy to think about what it costs to wait. So that option a seller has is costly because SOFR, which is now the new index rate, is 4.5%. If you have a development loan, you’re 2.5 to 3.5 percentage points above that. You’re somewhere at 7% to 8%, 8.5%, that’s expensive debt to be sitting around hoping for an improvement. Meantime, the preferential rate on your equity is likely something like 8% as well. I do think, as Alec said, unlike in the past, that the option cost of waiting is more expensive for the seller than it’s typically been. These caps, again, a lot of these caps were struck at 4% or 5%, they’re deeply in the money now. The price of a cap that a lender would require you to get is going to be very expensive. These are significant pressures. The private REITs are out there. We see product. Not all of it’s suited to us. They have other levers they can pull as well. But I think you’ll see more from them through the year as well. We don’t see a panic sale market at all. We just expect people to capitulate and say it isn’t going all the way back to 3.5 cap rates in the next six months, so we’re going to go and sell at the market price, whether that’s high-4s, low-5s, or medium-5s will remain to be seen.

We’ll take our next question from the line of Chandni Luthra with Goldman Sachs. Please go ahead.

Just talking about Seattle and San Francisco a little bit, you guys talked about quality of living as an issue. Are you seeing any dispersion across property types in those markets, downtown versus the rest? And then, are there any signs of slowdown beyond the central business district that you’re seeing in your numbers, in your databases at the moment?

Yes. Hi Chandni, this is Michael. I think in both of those areas, clearly, you saw more of the concession use in the fourth quarter concentrated into those urban cores of those markets. The demand is there across urban and suburban across all of the submarkets. It just got a little bit more price-sensitive to it. Clearly, I think the urban still has more pronounced price sensitivity than the suburban areas. We haven’t really seen any change in the demand profile coming in; we haven’t seen any shifts like going urban or suburban in those markets, the profile seems very similar to what we are typically used to seeing. Right now, I guess I would tell you, when we look at these January stats and we think about the sequential improvement that we’re seeing over the December numbers, those urban markets are actually kind of growing at a pace a little bit faster than suburban, probably because we’re pulling back on the concession. When we think about that, if you can pull back a couple of weeks on a concession, that’s like a 4% change in pricing right off the bat. No real signals yet to any significant change other than what we have felt, which is the urban cores, which by the way, do feel better from a quality of life. You could see the efforts that are being placed in both of these cities right now on it. You can feel the improvement there. You still just have more pronounced price sensitivity in those urban areas.

That’s very helpful. Thank you. And this one for my follow-up, I’m not sure if you guys look at it that way. I know you do a lot of bottom-up stuff. But as you think about different markets, what’s your overall job growth assumption? And then, what’s your sort of top market versus bottom market as you think about job growth forecast in there, how much delta are we looking at? Are you still in positive territory on the West Coast? Any color there would be appreciated. Completely understand if that is not something that you guys look at that level of detail.

Yes, Chandni, it's Mark. We don’t consider the national job forecast to be especially relevant to our figures. We focus more on bottom-up analysis. We spend time doing regression analysis to understand how various factors, particularly job growth and household income, affect our short-term numbers. We validate the results from our bottom-up process with insights from a top-down perspective, taking into account the forecasts from your firm and others. However, we don’t rely on a model to generate numbers because there are too many variables involved. We’ve back-tested numerous models and lack confidence that they are more reliable than our approach of assessing the market directly and understanding local employment drivers. Overall, we feel optimistic about job growth in our markets. The employment report from last week was excellent, and our residents have managed to find work after losing their jobs, with only a few individuals returning keys. If this is a recession, it's the best one we've experienced, and things are going well for us so far. I don’t have any top-down job forecast insights to share with you.

And we’ll take our next question from the line of Steve Sakwa with Evercore ISI. Please go ahead.

Mark, to stay on that question and your comments about sort of getting the keys back. Is it concentrated in any one market and are there other discussions where maybe people haven’t given you the keys back, but there’s conversations with managers and people are a bit more on edge about finding work in the tech markets? Or just how would you handicap that?

Yes. So, Steve, this is Michael. So I guess, I would say that we started this back at the end of the third quarter or early fourth quarter, just really kind of tracking that like going deeper on reasons for move out. If people said job change to understand it, and we are talking like less than a dozen. When you say concentrated, I mean, it’s such a small number, but it really is spread only in the Seattle and San Francisco markets. I think the teams, if you went across the country, would say we always have one or two that come in and say that they lost their job and they’re leaving, and that’s why. We really haven’t seen anything. Clearly, there’s some conversations when you get into the renewals with some folks that they tell us that they’re changing jobs or that they lost their job. But in the concentrations of Seattle and San Francisco, it doesn’t feel like they’re overly concerned that they’re not going to be gainfully employed quickly.

And Steve, it’s Mark. Just to supplement on that just a bit. Our transfers are low, too. Sometimes you’ll see people going down to a cheaper unit and things like that that can also be an indicator of stress. We don’t see that in any meaningful size. And we did a little research; I want to share. We asked our folks in markets like San Francisco, Seattle, New York. When a local firm announces layoffs, we tracked that using the filings, government filings or some of the layoffs, dot, whatever websites, and what we’re seeing is just like these tech jobs and a lot of these financial jobs were spread over the whole country, and these layoffs are spread over the whole country. We’ve seen a Bay Area company or a Seattle company announce layoffs, and 20% to 30% of those are in that home market and the rest are spread all over the country. What you and I recall from ‘01, if you had a tech layoff in San Francisco, that person was definitively in San Francisco; it’s much more diffused now, and it’s just a different sort of employment picture than it was in the past.

Great. Thanks for that color. And then, maybe just circling back on the transaction market for either you or for Alec. How have you guys changed your underwriting, whether it’d be IRRs or kind of growth? And where do you think the market is today for both acquisitions and for you guys to start any new development projects?

Hey Steve, this is Alec. Our cost of debt is around 5%. We expect a cap rate to be close to or above that. In the long term, we’re targeting an unleveraged IRR of about 8%, which is challenging to find in the current market. There are a few opportunities, but for the most part, sellers are still holding out for a 4.5% to 4.75% cap rate, making it difficult to make the numbers work. I believe there might be some movement on that front. The situation is even tougher for development yields. With stabilized properties pricing around 5%, development should be closer to 6%, but it's challenging to reach that figure with rising costs. They are not increasing as rapidly as before, previously rising about 1% a month; now, it’s about 0.5% per month. However, costs are still climbing, and moving from 5% to 6% is quite a challenge. Before the rate hikes, development deals were priced around 5% to 5.25%, which offered a good spread when cap rates were below 4%. That’s not true anymore, making the shift to 6% a significant hurdle, especially since land typically accounts for 10% to 15% of the total deal cost.

And we’ll take our next question from the line of John Kim with BMO Capital Markets. Please go ahead.

On the subject of bad debt, given the resident relief funds are likely not going to be there as much this year. Can you just clarify what your bad debt was in 2022 on a gross basis versus where you think it is going to be this year? We calculate it at 2.3 going to 1.9, but I’m sure there are other factors in there. So I just wanted to clarify that with you.

Hey John, it’s Bob. No, your math is actually pretty accurate. So page 13 gives you a perspective. We were 1% net. When you add back the $32 million in rent relief in 2022 that you probably used in your calculations to the bad debt, that does work out to what I would have said; 2.25% as a percentage of revenue. When you move forward based on the drag on same-store, we get to around 1.90, a little bit closer to 1.85 as a percentage of revenue on that. You guys have triangulated correctly.

Minor miracle. So, where do you see it going in ‘24? Are you saying it’s normalizing, where does it go back to normal levels? Can you remind us what that is?

Yes. Normal would have been around 50 basis points, which would have been kind of typical. We still do think that is given the quality of our resident base, that this is the likely long-term outcome. As I mentioned in my remarks, just to be fair, it is very difficult to forecast the projection of how fast this improvement that we have seen even outside of rental relief will come. We’re hopeful that it’s faster than what we put in the numbers, and that could get us there quicker and closer to that 50 basis points faster than what’s in the numbers, but you’re correct.

Just one quick follow-up. You said on the $800 million debt maturity this year that it needs to be refinanced in the secured market. Can you just clarify on that comment? Is that because the pricing is better, or are there other factors?

No, it’s structural. It’s a structural kind of tax protection component. It’s a piece of debt that was financed related to the Archstone acquisition. Certain partners in the old Archstone structure had tax protection obligations to maintain some secured debt. It’s a structural choice. When you look at the secured debt markets relative to the unsecured, the unsecured has come in a little bit, so it’s slightly more favorable than the secured. They’re all pricing in that high-4s range, especially for really low-levered products like we have in this pool. So it’s not a market decision choice; it’s more of a structural choice.

And we’ll take our next question from the line of Adam Kramer with Morgan Stanley. Please go ahead.

Thank you for taking my question. I wanted to discuss the commentary from January, particularly the seasonal aspects mentioned in the release. Mike, you noted that conditions might have been slightly worse than seasonal in the fourth quarter. However, it seems that January's new lease metrics were the strongest in the group, still showing a positive 140 basis points. I'm trying to connect the dots between the occupancy loss, strong new leases, and the seasonality comments to understand the current fundamentals better.

Yes. Hey Adam, it’s Michael. So, I think what I would look to is one, the sequential comment I was referring to is December to January, not the fourth quarter to January numbers. So, think about occupancy, our occupancy actually held flat, right? We were 95.8% in December; we’re 95.8% or 95.9% for January. I look at that and say, as you think about returning to normal seasonality, it is very common for occupancy to trade down into that fourth quarter. We saw that pattern emerge. Outside of some of the pricing pressure that I described, some of the additional concessions, the way that the rents moderated is very consistent with what you would expect. That being said, you turn the corner and you get into January; normally, what we see in January is right after the new year, you see sequential improvement every week in application volume and rents ticking up, and we got a little bit of an accelerant, as I said, in the urban because we started pulling back concessions when we saw that inbound demand doing what you would expect it to do. Now, what’s interesting is like the cold weather climates like Boston and New York kind of tend to stall in February. You get a little bit of a boost in January, and then it stalls, and then you hit March and you’re kind of off to the races for the spring leasing season. My commentary was just pointing to you if I went back and looked at ‘18, ‘19, any of those years, the trends that we’re seeing today, and again, we’re five weeks into the year or something like that is very consistent with a normal year, which would tell us you would expect a normal spring leasing season.

Great. That’s super helpful. Thanks for all that color, Michael. Just maybe switching gears a little bit to development. If I’m not mistaken, I don’t think it was mentioned much in the opening comments. I know it’s obviously not kind of your biggest part of your business, but you probably do a little bit more development than some of your peers. I’m just wondering kind of what the thoughts are there? Are there going to be starts in ‘23, or is that kind of more on the back burner now kind of given some of the uncertainties in the environment?

Yes. Thanks for that question, Adam. We have a terrific development team, both the in-house team that started and built $400 million towers as well as much smaller projects. We think development is a nice complement to our acquisitions, particularly in these expansion markets. The instruction that Alec and I have given both our outside partners as well as our internal teams is to find things that you can work on for the next few months that we can start late this year and sometime next. Maybe the capital will be a little more reasonable, maybe the underwriting will be a little bit better, maybe the cost structure will make a little more sense. Let’s be thoughtful about starting a lot right now where you really feel like your opportunity is likely to be in the acquisition market. We’d love to tactically start. We’ve got a few things already in the sort of inventory we’d like to do, but it’s just got to make sense. We’re just not going to plow ahead and put our shareholders’ money into a development deal if acquisition is a cheaper alternative or if just the costs and the risks involved are too significant. To answer your question about development, it’s very important to us. We don’t have any starts really in the budget for this year. Just like acquisitions, we don’t have any of those either. We’re happy to do plenty of them. Bob commented on the balance sheet strength. The debt markets would support a big EQR issuance to fund either of those if we thought that was a good idea. We’ll just keep watching it closely. If something comes up on the development side, like I said, we’ve got the internal team, we’ve got the Toll folks, we’ve got others. We can put that into gear. But we’re happy to have it at zero, too, if that’s the right decision for the shareholders.

And our next question comes from the line of Haendel St. Juste with Mizuho. Please go ahead.

Hey. I just want to follow up on that last question a bit first. So understanding that this early season pickup may be in line with the historical trends as you mentioned. I guess, I’m more curious about your comments about expectations for normal spring leasing season and what that would imply near-term for new lease rates. So maybe can you give some more color on how that normal trend has played out historically, what that could mean for new lease rates here into the spring season? Thanks.

Yes. Hey. This is Michael. The way to think about the modeling of what a normal curve would look like is what we will see right now is new lease change will start to sequentially grow and typically will max out somewhere in that third quarter and then will seasonally moderate as you get to the year. For our assumption of this blended rate of 4%, we’re basing that on capturing about 2.25% in new lease change across the whole year, but it’s a kind of bell curve. We’re going to work our way through the spring and keep building it, and then we’re going to let it moderate. When you think about renewals right now, we have some pretty good numbers at a 6.9% achieved renewal increase in January. Our expectation, and I’ve got these quotes out for the next 90 days, is we’re going to stay somewhere in this 5% to 6% range in this first half of the year. I would expect that number to moderate typically into a 4% to 5% range in the back half of the year. On a full guidance model, that puts renewals just north of 5%, and when you put those together and think about the retention factor, it winds up getting you to that blended rate of about 4%.

That’s really helpful. I appreciate that information. Could you provide some insights on your expectations for the stronger East Coast markets, like New York, Boston, and D.C., compared to the weaker West Coast markets, such as San Francisco and Seattle? I'm interested in the difference between those two regions and what you anticipate for this year. Thank you.

Yes. Well, maybe I’ll just kind of bucket the markets around. I think I said in the prepared remarks, I mean, New York, we expect it to be our best performing market, followed very closely by Boston and then really close by San Diego and Orange County as well. I’m going to put aside L.A. and San Francisco for a moment because of the bad debt implications. Without it, both of those markets would be in the 4.5% to 5% range as well. But with it, San Francisco, right now, we’re forecasting around just under a 3.5% growth, and L.A. is just north of a 1.5% growth.

And we’ll take our next question from the line of Jeff Spector with Bank of America. Please go ahead.

I wanted to further discuss your comments, Mark, and I understand the uncertainty regarding the macroeconomic situation. Our economics team has again adjusted its recession forecast for the second half of 2023. Considering the macro environment and what your revenue management systems indicate as time goes on, how will you manage operations at the beginning of peak leasing? Additionally, if it appears that the situation might change in the second half, how will that influence your strategy for peak leasing?

Hey Jeff, it’s Mark. I’m going to start. I’m going to turn it over to Michael. We’re fortunate to have a highly experienced team both in Chicago and nationwide, along with a strong system for monitoring the markets. When we observe a market improving or deteriorating, we can respond in real time without waiting for macroeconomic data. We stay informed and closely monitor employment reports. We’re able to anticipate changes in our leasing activities. If someone loses their job but quickly finds another, government data may not reflect that immediately. The unemployment reports have been positive. As we progress through the year, we will rely on Michael and his team, who will provide more details shortly. We have an effective revenue management process and excellent communication on-site to observe conditions in real time and make necessary adjustments.

Yes. I think, Jeff, the only thing I would add to that is clearly, you’re going to try to maximize rate, and you’re going to see whether or not you’re getting that corresponding closing rate or the application volume that you need based on how many units you have to sell. That’s typically what we’re looking at week in, week out, which is that ratio, and then we’re making decisions whether or not we’re leaning in on rate or kind of letting the rates soften a little bit and repositioning ourselves differently. On top of just that feel that you have, we’re watching these demographic changes, income ratios. We’re hyper-focused on transfer activity; are they moving up in size, down in size, what are they doing, roommate activity. Of course, we’re watching that new supply in these markets. The concession volume that they’re issuing is a signal to us whether they’re getting the velocity they need because that absorption rate of that supply is going to tell us whether we’re going to feel more or less pressure from it.

To add one last thought, it’s Mark again. We do think about overarching themes. Michael has been running the business ever since the economy started to feel a little shakier, focusing on occupancy and retention. He’s opened up some of his renewal ranges. We do inform some of those decisions, Jeff, with the big picture. In places like New York and Boston, we feel good about the supply picture and the jobs picture that those markets are places where our lean will be more aggressive than a place where we might have more anxiety like downtown San Francisco or downtown Seattle.

Thank you. That’s really helpful. So I guess, just to confirm then, as we think about the guidance and the upper half of the range, if this recession is pushed out to the second half, is that kind of the upper end of the guidance range scenario?

If we get through the bulk of the leasing season into July and August, and the job numbers are still pretty good, and unemployment claims are still pretty low, then I’m very much of the mindset that we’ll have a really good year. If you start to feel those numbers roll over in March, then the year for us and everybody else in the apartment industry is going to feel a little different.

And we’ll take our next question from the line of Nick Yulico with Scotiabank. Please go ahead.

Thanks. My first question is for you, Mark. How are you considering the potential for stock buybacks? It seems there are fewer acquisitions planned, which you mentioned is challenging. Given that you have a decent amount of free cash flow after the dividend and a low leverage balance sheet, at what point do stock buybacks become appealing? Will you need to sell assets to facilitate that, or is the balance sheet already structured to support stock buybacks?

Thank you for the question, Nick. We've discussed this topic before. The distinct aspect of a stock buyback, compared to other investments, is that it has implications for both capital allocation and capital structure. As a REIT, we don’t hold onto much cash flow after capital expenditures because we need to distribute all our income. Therefore, in order to have a significant effect on a company of our size, it would require taking on a considerable amount of debt. We have the capacity to do that at this moment, but it's a one-time action before it impacts our ratings and valuation. It's commonly understood that riskier companies with higher debt face lower valuations. While increasing debt is an option, it carries risks. Regarding asset sales, Alec and his team have made solid investments over the years, including numerous 1031 exchanges, which result in substantial embedded gains. For instance, selling an asset for $100 million could yield $75 million to $80 million in gains, but there isn't much cash flow left after necessary distributions. When our stock price is significantly lower than NAV, it signals to us not to use equity markets for funding growth. We periodically discuss buybacks with the Board, and it's not completely off the table, but it is more of a strategic financial move. If the buyback isn't substantial, it loses its significance. I've seen many REITs buy back substantial amounts of stock, typically from outside our sector, and it hasn't always ended well. I believe it's more effective as a guideline for when not to issue equity rather than as a push for a large stock buyback.

Thank you for your insights, Mark. My second question is regarding the multifamily sector. I'm concerned that while it may not be an immediate issue for 2023, a potential recession in the next year could have an effect on rents, occupancy, and revenue. I'm trying to understand how you perceive this risk, especially since the last two recessions had atypical impacts on multifamily housing. Is there a way you can assess the potential downside for your company in a more standard recession? Specifically, I'm interested in the possible corrections in rents, revenue, or net operating income.

Yes. I’d just make a few comments on that. Obviously, my crystal ball is as blurry as yours. A lot of these more recent recessions, there were huge excesses in the economy or, like the pandemic, just a panic that made the whole thing very unusual. I don’t feel like we’re terribly out of whack. Any recession that occurs, feels to me like it will be more like a slowdown in jobs as opposed to some negative 400,000 jobs a month type numbers. If 2024 comes around, the business will perform relatively well and certainly better than the last downturn or so. I think you have to compare it to what else is going on in the economy. We’ve typically been a pretty good inflation hedge. If you think you’re going to have a slowdown in the economy and you’re going to continue to have some inflation, our business has been able to raise rents in excess of the inflation rate in our kind of business. Michael and his team do a great job managing expenses. I look at it, and I think in a slow growth economy, maybe with a little inflation, I think we can still do well on a relative basis. The next recession, if there is one late this year or next, is likely to be less about excesses and dramatic downturns and a little more gradual. I believe our numbers will reflect that. But it’s hard to predict, and nobody knows for sure, right?

And we’ll take our next question from the line of Alexander Goldfarb with Piper Sandler. Please go ahead.

Mark, definitely seems like between the bookies making bets on the Super Bowl, we could have the same bet here on whether or not this recession has been affected summer leasing. So certainly a topic we’re all watching. Two questions here. The first question is a lot of regulatory focus recently, the White House, obviously, on fee income, President mentioned it as far as hotels go in the State of the Union. More importantly, apartments are under a lot of regulations already. So, as you guys think about your fee income that you charge, your new lease fees, the pet fees, and all that stuff, do you feel comfortable with where you are? You’re like, look, we comply with all the regulations, or is there a concern that the regulators could push harder on some of these line items?

I’m going to split that question up. If you’re asking whether we think we comply with the law right now, we think we do. We’ve done extensive reviews on that because we feel like you do; there’s more regulatory sensitivity. A lot of these rules, by the way, are very complex or very judgmental. They may say you can’t charge unfair fees and things like that that are harder for us to peg. Our legal team has worked really hard with operations to make sure what we’re doing right now makes a ton of sense. I believe Michael or Bob could talk about what percent of total revenues are the kinds of fees you’re talking about. I think it’s in the 3% neighborhood. So it’s meaningful and can grow faster than the remainder of the portfolio. If we had to moderate it, we’ll deal with it. It’s just not a good idea. It’s another one of those sort of why shouldn’t the cost of someone’s pet be borne by the pet owner as opposed to borne by the entire complex, for example.

Okay. No, makes sense. And then second question is, the recent L.A. good cause eviction, one of the items, if I read it correctly, was that basically a tenant cannot pay a month and be fine and not be deemed to be in arrears or anything. Is this the correct understanding? If so, does that mean that in L.A. County and, unfortunately, if other markets adopt this, that bad debt could now seem to be the sort of elevated thing versus historic? Or is there a way for landlords to make sure that someone just isn’t getting a free month for no reason other than they can get a free month?

Yes. Thanks for that question. I don’t have that right in front of me. I did read the general idea that there is a permissible amount of defaulted debt that a resident could have. Our rents on average approach $3,000, in that market a little bit lower, but they’re significant. If it was a dollar limit, I thought it was a dollar limit, not a month’s rent limit. I’d have to look into that; we’d have to have another conversation. The theme here is the more you regulate things like this, the less capital will go into the industry to renovate properties or create more housing. It’s just a bad idea. We have a really good team that is pushing this. People hear us. The Biden administration’s Build Back Better Act had terrific stuff about zoning flexibility and encouraging at localities. The Governor of California and the Governor of New York have been pushing supply and more units being built and trying to work with the industry, both on the for-sale and rental side. People are listening to us. We just have to keep it up because a lot of the ideas you mentioned are not constructive.

And we’ll take our next question from the line of Sam Cho with Credit Suisse.

Hi everyone. I’m here for Tayo today. Thank you for continuing with the call. I believe one of my former colleagues inquired about the supply pressure. Could you clarify how you assess the threat from new competition and how that influences your portfolio exposure? It's difficult for us to gauge that from our perspective, so it would be helpful to understand the qualitative or quantitative metrics you use to evaluate that threat factor.

Hey Sam, it’s Alec. We spend considerable time analyzing supply, and as Michael mentioned earlier, we focus on how close the supply is to our properties. We’ve found that this proximity has put pressure on our ability to increase rents. The situation varies by location; in Manhattan, the nearby supply is much tighter than in California, and we adjust for that. In our portfolio, in 2022, there were about 110,000 units near us, and that number is decreasing. Historically, the average has been around 86,000 units, which is also declining significantly. We are noticing much less immediate supply, and our measurement approach relates more to proximity rather than the broader market trends.

Yes. I’d add one thing. In markets like D.C., we’ve found that because there’s such good transit, that mile radius doesn’t hold as well. We would say we’re going to cast a much wider net and assume that people will move between markets due to transit. Every market has a rule of thumb that we use, and then we drill in and go deep with the investment officers doing their drive-bys and giving their input, and then the property management team weighs in. We ultimately get to this consensus view. We’ve been doing this for a long time, and it proves to be reliable. In ‘21 and ‘22, even with elevated supply right on top of us, if the inbound demand is strong, it doesn’t matter. That’s why that absorption rate matters.

That’s really helpful color. One more for me. You touched on overall concession still being pretty elevated. So, I know all recessions are not created equal. But from a historical context, how have concession strategies looked during the spring leasing season during a recession? Whether we can draw any lessons from the past to imply what could happen if things go sour? Thank you.

Yes. This is Michael. I don’t know if I have that in front of me to look at what the concession dollars were across previous recession periods or by quarter to understand the seasonality of them. I guess, what I would look at is it’s very common to see concessions in the stabilized portfolios in the shoulder period that are used strategically to hold up base rent. When you see it spread where 60%, 70% of the properties that we compete against are offering some form of concession, that is a signal of something in that market. The good news is we’re seeing it dial back, and clearly, we’re seeing demand softening. You wouldn’t feel a dial back in that concession amount. So how you would frame the spring? I guess I would tell you I would expect concessions to continue to dial back, both in volume and dollars. Clearly, if you hit a significant recession period, maybe they sustain and hold at this level. It’s hard for me to say.

And we’ll take our next question from the line of Ami Probandt from UBS. Please go ahead.

Thanks. The first round of requirements for compliance with the Local Law 97 in New York City are scheduled to take effect in 2024. Do you have any estimates on the impact for your portfolio?

Hi Ami, it’s Alec. We’ve looked at that, and we don’t have an impact right now. We can reach those thresholds. It gets challenging, as you know, over time, and ‘23 is another benchmark year that we’re working towards.

That concludes today’s question-and-answer session. I’d like to turn the call over to Mark Parrell for closing statements.

We’re excited, as you can tell from the call, about our 2023 prospects, the Company’s long-term positioning, and we’re looking forward to delivering a really good 2023. So, thank you all for your time today and your interest in Equity Residential.

This concludes today’s conference call. You may now disconnect.