Good day, and welcome to the Equity Residential Fourth Quarter 2023 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead, sir.

Good morning, and thanks for joining us to discuss Equity Residential’s fourth quarter 2023 results and outlook for 2024. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; Alec Brackenridge, our Chief Investment Officer; and Bob Garechana, our CFO. 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.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our fourth quarter 2023 results and the outlook for 2024. I will start us off, then Michael Manelis, our COO, will speak to our operating performance and 2024 operating expectations, followed by Alec Brackenridge, our Chief Investment Officer, who will give some color on our capital allocation activities in the transactions markets. Finally, Bob Garechana, our CFO, will review our 2024 guidance and our balance sheet, and then we'll take your questions. We are pleased with our fourth quarter performance, which was in line with our October expectations. Our performance in 2023 was supported by a strong employment situation, with more than 2.7 million new jobs created. While the 2024 outlook for overall jobs is more muted, we should benefit from a continued low unemployment rate for the college-educated, currently around 2.1%, as well as continued good real wage growth. We will also benefit in 2024 from low exposure to new supply in nearly all our markets, especially compared to the Sunbelt markets, as well as customers comfortably able to pay our rents, with current rent income levels at about 20%. Overall, with low unemployment and rising real wages, our target renter demographic remains in good shape. They are likely to rent with us longer, as the prospect of homeownership in the near term seems less likely with scarce inventory and relatively high mortgage rates. Less than 8% of our residents who moved out cited buying a home as a reason to leave in 2023, the lowest we've seen since we started tracking that number. Over the next decade, the significant net deficit of housing across our country positions us for good long-term demand. Drilling down on the West Coast, we see clear signs of improvement in quality of life and energy in the urban centers of Seattle and San Francisco. We continue to believe a recovery in rental rates in the downtown submarkets of these metros is on the horizon, and we expect shareholders will benefit from rental growth in these areas, where rents remain below 2019 levels and where incomes, both nominally and in real terms, have risen substantially since then. While we haven't factored a significant improvement in Seattle and San Francisco into our 2024 guidance, we note that other urban centers affected by the pandemic, such as New York City, rebounded rapidly once quality of life and employment conditions improved. Regarding expenses, our ability to manage them and overhead growth more slowly than our competitors will preserve cash flow for our shareholders as rent growth slows nationally and positions us well once growth resumes. Before Alec discusses recent transaction activities and our view on market conditions, I want to highlight that we bought back some of our stock in the fourth quarter for the first time in many years. We repurchased over 864,000 EQR common shares for approximately $49 million, spending about $57 per share. We financed this buyback with proceeds from sales of less desirable assets, which were on average 40 years old and sold at a 5.6% yield. At this stock price, funded with these disposition proceeds, we view repurchasing our shares as a prudent investment, especially given the scarcity of available assets at reasonable prices. I want to thank our teams across the company for their hard work and dedication to serving our customers and delivering strong results for our shareholders. Now I'll turn the call over to Michael Manelis.

Thanks, Mark. This morning, I will review our fourth quarter 2023 operating performance and our outlook for 2024. We produced same-store revenue growth of 3.9% and same-store expense growth of only 1.3% in the fourth quarter, both in line with our expectations. On the expense side, our low growth in the quarter and 4.3% growth for the full year were supported by modest property tax costs and savings from initiatives aimed at creating operating efficiencies and enhancing customer experience. On the revenue side, December momentum was slightly better than we anticipated, allowing us to grow fourth-quarter revenue by maintaining occupancy levels while realizing positive blended rate growth. This positions us well for a strong start in 2024. Demand was solid across our markets and in line with seasonal expectations. We finished the year with same-store physical occupancy at 96%, and our portfolio is currently above that. As expected, new lease rates declined in the quarter, although renewal rates came in at 5.1%, slightly exceeding our expectations. Together, this led to a fourth-quarter blended rate growth of positive 80 basis points. Our East Coast markets generated outstanding revenue growth, while Southern California also performed well. Throughout the year, the East Coast markets have consistently outperformed the West Coast and are expected to continue doing so in 2024. As outlined in our earnings release, we provided 2024 same-store revenue guidance in the range of up 2% to 3%. The building blocks of this growth start with embedded growth of 1.4%, and our midpoint assumes both physical occupancy and cash concessions remain consistent with 2023. We expect a return to traditional pre-COVID historical patterns, with rent growth picking up sequentially in spring and likely peaking in August. Our midpoint assumes renewals for the year average just over 4% while new leases remain relatively flat, together producing blended rate growth of about 2%. This reflects more modest growth compared to the 2023 full-year blended rate growth of 3.1%, attributed to a deceleration in job growth, offset by a largely positive supply situation in our coastal markets, accounting for about 95% of our NOI. In January, we began as expected, with new lease change improving, a strong percentage of residents renewing, and a healthy renewal rate. While it is still early, all January trends support our outlook for the year, which includes expectations of strong resident retention due to our centralized renewal process, enhanced data analytics insights, and high costs of homeownership in our markets. Turnover within our portfolio remains one of the lowest ever recorded, and we expect that trend to continue in 2024. Orange County, San Diego, Boston, and Washington, D.C. are forecasted to lead with approximately 4% revenue growth. New York and LA are expected to follow closely. Currently, we anticipate slightly positive same-store revenue growth in San Francisco and Seattle, while in our expansion markets, which account for only about 5.5% of the total company NOI, we expect to see negative same-store revenue growth due to unprecedented levels of supply arriving. Specific to the individual markets, high occupancy and limited new competitive supply will allow Boston to excel in 2024. This market is backed by strong employment in finance, tech, life sciences, health, and education sectors. New supply deliveries in Boston are expected to align with last year, where our assets in the city have historically outperformed suburban locations. Meanwhile, New York is predicted to do well but may not replicate the high growth rates seen in previous years due to competitive new supply in the market. Washington, D.C. continues to exceed expectations despite seeing a significant amount of new supply in 2023 that has mostly been absorbed. As of now, occupancies are above 97%. In Los Angeles, while we expect growth tailwinds as we resolve delinquency and bad debt issues that have historically plagued the market, we anticipate slightly higher new supply deliveries this year. Rounding out Southern California, San Diego and Orange County will be among our highest growth markets, driven by strong occupancy and a lack of housing. In San Francisco and Seattle, we experienced limited pricing power in 2023, and our expectations for 2024 suggest this challenge will persist. We have observed fluctuations in concessions usage in both markets, where demand remains strong but is price sensitive. Although both markets see occupancy exceeding 96%, they continue to lack the resurgence of job growth needed to support substantial price increases. We are monitoring trends, particularly in Seattle, where there have been small improvements in inbound migration. These improvements may catalyze better performance moving forward. Our long-term outlook for expansion markets remains positive; however, the current environment reflects significant pressure from new supply, leading us to adopt a defensive posture as we commence the year with occupancies above market averages. In Denver, we anticipate slight positive same-store revenue growth, while in Atlanta, lease ups in proximity may cause challenges but should yield overall strong growth in our company's stabilization process. Looking at Texas, areas like Dallas and Austin will face greater pressure from new deliveries this year, resulting in negative revenue growth on a same-store basis. All these factors contribute to an overall revenue outlook for 2024 that emphasizes solid growth in East Coast markets and Southern California. Unique initiatives will focus on generating efficiencies while driving additional income through flexible living options, parking, renter’s insurance, and technology to help enhance resident experiences. We are nearing completion of our smart home technology rollout across the portfolio, which will streamline operations and enable more self-service for residents. Continued work with ancillary incomes is projected to achieve a total growth of 30 basis points excluding bad debt. Our positioning leads us to be optimistic about the opportunities the spring leasing season presents, which will help establish pricing power for the year ahead. I would like to recognize our teams across the company for their dedication to our residents and for ensuring excellence in our results. I’ll now turn the call over to Alec to discuss our capital allocation strategies and transaction market activities.

Thank you, Michael. Despite an unsettled transactions market, we remain committed to repositioning our portfolio by expanding our footprint in markets like Dallas-Fort Worth, Atlanta, Austin, and Denver. We expect to identify more opportunities as the year unfolds. When we evaluate potential acquisitions, we remain aware of high supply levels putting pressure on rents in our expansion markets, and we incorporate tempered rental growth assumptions and concessions in our projections. The current transaction market is unusually choppy, with volumes down 60% to 70% compared to 2022 and down 40% to 50% relative to a standard year like 2019. Nonetheless, there is mounting pressure on sellers to transact, compounded by a significant volume of new developments being delivered in these markets. Notably, many new developments are not financed for long-term holding, despite a decrease in rates over the last few months. Carry costs remain high. Owners of stabilized assets are also feeling pressure as loans mature and extensions agreed upon with lenders last year expire. Despite the operational challenges facing our expansion markets, we are committed to broadening our presence in areas with strong job growth and household formation prospects, alongside lower regulatory risks. When it comes to our transaction activity, we did not acquire any assets in the fourth quarter, but we sold three: a small property in Seattle, one in the Bay Area, and one in LA. On average, these properties were 40 years old and generated total sales proceeds of $185 million, with an average disposition yield of 5.8%. While overall transaction volume remains light, we continue to find opportunities to divest non-core older assets primarily in our West Coast markets. In early 2024, we sold two more properties, one in Southern California and a small deal in Boston, for a total of $189 million at an average yield of 5.6%. We've allocated part of the capital from these sales toward the share buyback activity Mark just discussed. With strong access to capital through asset sales or debt issuance and a management presence in our expansion markets, we are well-positioned to capitalize on opportunities as they present themselves. Our guidance for 2024 is $1 billion for both acquisitions and dispositions, though market conditions will inform our ability to achieve these targets. In development, we plan to complete six new apartment properties this year, with a total anticipated cost of $624 million, consisting of 1,982 units. Lease ups are expected to begin for two projects in Q1 and four in Q2. Three of these lease ups, all through our joint venture program with Toll Brothers, are in Dallas, while two in Denver and one in suburban New York City are with other developers. Although completion and lease up timing means we won't realize significant contributions to NFFO growth in 2024, we expect these projects to contribute more substantially to 2025 growth. While our suburban New York project will face limited competition, we anticipate major competition for our Dallas and Denver lease ups. We accept that competition will be challenging and plan to adjust pricing and concessions to meet market demand. These lease ups, once stabilized and past the current supply glut, should yield good cash flow growth and become solid long-term investments. Beyond these deliveries, we will remain selective in starting any new projects, focusing on locations where acquisition is more challenging, like suburban Boston.

Thanks, Alec. As Michael and Mark mentioned, 2023 ended up right in line with our forecast last quarter. Let's move right to guidance. Michael outlined most of the building blocks for same-store revenue, but I'll finish up with details on bad debt, the drivers of same-store expenses, and our normalized FFO outlook, as well as a view of the balance sheet. In 2023, we significantly reduced bad debt as the regulatory environment became more favorable. While we continued to manage non-paying residents as we did during and after the pandemic, we processed a high volume of skips and evictions, around 1.5 times the pre-pandemic rate. Fortunately, we did not add many significant non-paying residents, which helped us reduce bad debt as a percentage of same-store revenue from well over 2% to just under 1.5%. This represents substantial progress overall, but we still have a way to go to reach the 50 basis points we maintained before the pandemic. We expect 2024 to continue showing improvement, although the pace of this improvement will depend on the speed of the court systems, especially in Southern California, where delinquency is highest. Thus, our guidance assumes that 2024 remains another transition year for bad debt, pegging the full-year estimate slightly above 1%, or contributing 30 basis points to overall growth. If this plays out, by the end of 2024, we would expect to maintain levels around two times pre-pandemic figures. Now shifting to expenses, managing expenses is a core strength of Equity Residential, demonstrating that consistency using the historical performance Mark highlighted. Our guidance indicates same-store expense growth of 4%. The drivers of growth this year differ from those of 2023. Generally, we expect real estate taxes and utilities to grow faster this year, mainly due to some 421-A step ups in commodity prices, whereas payroll and repairs and maintenance growth should be slower, aided by several initiatives and anticipated normalization in inflationary pressures. Insurance, though a small category at less than 5% of total expenses, will grow more slowly than last year but remains above the long-term trend, projecting growth in the low-double-digits. As for normalized FFO, page 2 of the release provides a detailed reconciliation of our forecast contributors to NFFO growth. As usual, same-store NOI performance will be the primary growth driver given our assumption of $1 billion in both acquisitions and dispositions for 2024, with limited dilution reflected in our forecast. Nevertheless, we show a $0.03 reduction in NFFO growth as we assume our acquisition activity will occur later in the year than our dispositions. This is somewhat counterbalanced by interest expense and interest income, as proceeds from dispositions will be allocated to debt repayment or invested in interest-bearing 1031 accounts until we identify acquisitions. I’ll make a brief note about the balance sheet: we're in an excellent position here, with no debt maturities until mid-2025, modest outstanding balances on our commercial paper program, and under 10% floating rate debt. Overall, we're well-positioned for growth and financial stability, in fact, more than 50% of our existing debt doesn't mature until after 2030. The proactive strategies implemented over the years have diminished our interest rate exposure and provided ample debt capacity. Now I’ll turn it back over to the operator.

Thank you. Our first question is from Steve Sakwa from Evercore. Please go ahead.

Great. Thanks. Good morning. I guess, wanted to just maybe go through some of the building blocks of growth in 2024 either for Michael or Bob. But as you kind of look through the moving pieces here. It seemed like maybe the new rate growth that kind of flattish might be one that could pose maybe a bit more of a challenge here of job growth slow. So, just curious how you sort of sized all up those components and how did you think about the new lease component with the fact that you kept occupancy flat, I guess, within the guidance?

Yes. Hi, Steve. This is Michael. I'll start. Maybe Bob can chime in afterwards. Looking at the guidance building blocks, one needs to recognize we're presenting a range with several ways to achieve it, emphasizing the high-level themes driving the midpoint assumptions. Concerning new lease change, we grounded our expectations in moderating job growth this year, anticipating asking rents to generally fall below normal levels across most of our markets. Thus, we modeled a standard seasonal slope for the rent trend, and translating into approximate flatness in new lease changes for the entire year. Some markets remain positive, while others are slightly negative, but if any one factor improves substantially, then revisiting the midpoint assumptions becomes necessary. As it stands today, we're taking a defensive posture with strong occupancy levels to navigate the spring leasing season.

Great. And then just maybe one question on the transaction market. I know it's not been terribly robust, but maybe, Alec, can you just speak to where you think maybe IRR hurdles are today that the 10-year is sort of plus or minus 4% come down way off the high. I realize NOI and rent growth is slowing, but where do you think investment hurdles are today either for EQR or for the market broadly speaking?

Hi, Steve, it's Alec. Thanks for the question. Right now, the market is quite choppy with limited data points. At the NMHC conference in San Diego, we're seeing buyers typically looking for a 5.5% cap rate while sellers are leaning towards something closer to 5%. This gap isn't insurmountable, but we might land at a 5.25% cap rate. Generally, we estimate IRRs in the 8% range, depending on rent growth assumptions and the residual cap rate, with slightly lower IRRs if they're looking to be more aggressive.

Thanks. It's Nick here with Eric. Maybe just following up on that. So 8ish or so IRR, I guess, more specifically you talked about obviously the Sunbelt supply and the impact that has on your underwriting on those deals at least initially. So, when you're underwriting deals both on the buy and sell side today, what are you underwriting for IRRs in the Sunbelt? And then what are the IRRs look like for the assets you're planning to sell more coastal?

So, Nick, sorry about that mix-up. Regarding the IRRs, while there is an oversupply in the Sunbelt driving challenges in the near term, I believe the long-term demand story remains. The IRRs won't differ significantly since we're focusing on the same potential assets and long-term demand drivers, even amidst temporary performance hurdles. We're strategically selling older properties with higher capital needs, and we're choosing to preserve our capital by selling at competitive rates to buyers who may perceive more upside.

Hi. It's Eric. Sorry to keep switching people on you. But, maybe just talking about coastal rent growth for a second. You talked about supply being in check, homeownership very unaffordable, solid real wage growth, job growth okay, maybe getting a little slower. But I guess the question is why aren't we seeing stronger rent growth today given all of those positive dynamics? And is there anything you think in the future that would turn it around such that you see that more than 3% type rent growth in those coastal markets?

Hi Eric, it's Mark. To kick things off, the numbers for DC, Boston, and New York last year were exceptional. We are cautiously optimistic as we step into a volatile year. As you've outlined, those northeast markets maintain steady demand, minimal supply, and in DC's case robust absorption characteristics. Although we have high hopes for these markets, we are mindful that certain areas, such as New York, could be approaching pause to evaluate and allow resident incomes to catch up with rental growth. However, we maintain an optimistic outlook for the northeast markets and believe they will continue to perform well despite the various economic currents we must navigate.

Great. Thank you. My first question is a follow-up. I heard a comment and I think it was on the Sunbelt that it could be a couple of tough years. Can you expand on that? And then, maybe most importantly, can you talk about when you expect supply pressure to peak, let's say, in Seattle? I know again, Sunbelt is a smaller market for you. But if you have a view on the Sunbelt, it would be appreciated? Thank you.

Yes. Hey, Jeff. This is Michael. Regarding Seattle supply, we expect concentration in the back half of the year. Looking at historical trends, we anticipate 2024 will be the year we experience peak supply pressure as new competitive products arrive. However, supply deliveries will decline considerably by 2025, leading to better competitive conditions long term. As for the Sunbelt, it's clear that the time required to absorb existing units will extend, as the supply numbers are constant. This year will certainly be challenging, but post-2024, we could see improvements.

Yes. Just to add nuance, the expected delivery numbers for 2025 are projected to be similar to 2023 levels. As observed previously, robust demand remains in markets we favor, like Dallas, Fort Worth, Denver, Austin, and Atlanta. We expect that occupancy and rent growth challenges in 2024 may lead to better conditions to recognize additional opportunities as we navigate through this year. However, our outlook does suggest that same-store revenue growth may be lower in 2025 compared to current performance as previously established lease contracts turnover. While we anticipate some improvements in pricing power for properties at that time, we are currently aligned for challenging conditions this year.

Hi, thanks. Good morning, everyone. On the topic of expansion markets, is it absolutely a fee-simple type of investment? Or would you be open, given the complexity of the lending environment and some balance sheet distress and such, to an investment in different areas of the capital stack with an intention to ultimately own? Or would you have enough opportunity to keep it simple and just go through equity channels?

Hi, Rich. It's Alec. We prefer sticking to fee-simple investments when feasible, but we remain open to participating in other areas of the capital stack if these investments lead us towards ownership. There will be ample fee-simple opportunities arising in the coming years, but we will assess each opportunity case by case.

Hi, good morning. Mark, I guess the first question for you, following up Rich's earlier question about your potential interest in stepping into other parts of the capital stack. It seems a bit of a departure from how you've responded to mezzanine investments in the past. Is that fair? What's the change of heart?

I would agree with that observation. We have been hesitant to engage in mezzanine loans primarily due to concerns around consistently generating returns. However, when developments allow for a high probability of converting roles from lenders to owners through collaboration with developers and the investors, we see potential. This change has become essential as we select our strategy moving forward.

Hi, Haendel. It's Bob. To provide some clarity on expenses, we expect characteristics like utilities and real estate taxes to grow at a more accelerated rate than demonstrated in 2023. We predict real estate taxes at around 3% and utilities at approximately 6%. Repairs and maintenance growth will be steadied at 4%, with insurance rising in low-double digits. Regarding operational initiatives, approximately $10 million in enhancements in NOI can be expected this year as well.

Hi. Thank you. Just one question. In your prepared comments, you highlighted seeing stability and pullback in Seattle and San Francisco. Could you discuss that dynamic more? Is this volatility associated with job loss and return-to-work mandates or perhaps provide examples of what drives this push and pull?

Yes. Hi, Linda. This is Michael. Job growth is a significant catalyst influencing both the stability and volatility of the market. Migration patterns also play a factor; move-ins driven by deals typically point toward competitive pricing strategies that exacerbate cyclicality. We're monitoring this closely to determine how conditions evolve as we transition into spring leasing season. We have established a solid foundation that, while impacted by temporary fluctuations, positions us well for sustained occupancy.

I have no further questions left in the queue. I'll turn it back over to Mark Parrell for closing comments.

Thank you all for hanging in there on this long call. We appreciate your interest and your time today. Good day.