Good day, and welcome to the Equity Residential 1Q 2024 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I'd like to turn the conference over to Marty McKenna. Please go ahead.

Good morning, and thanks for joining us to discuss Equity Residential's first quarter 2024 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer. Alex Brackenridge, our Chief Investment Officer; and Bob Garechana, our Chief Financial Officer, are 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.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our first quarter 2024 results and outlook for the year. I will start us off, then Michael Manelis, our COO, will speak to our operating performance and how we see 2024 operations playing out. And then we will take your questions. We are pleased with our first quarter performance, which was ahead of January expectations and reflects the strong demand for the lifestyle our well-located apartment properties provide as well as little new competitive supply across most of our established markets. Our same-store revenues increased 4.1% in the quarter, and our same-store expenses rose only 1.3%, which led to same-store NOI growth of 5.5% and an increase in our NFFO per share of 6.9%. So overall, a very solid start to the year across all categories, with the company well positioned to capture increasing seasonal demand as we head into our prime leasing season. As is our practice, we have not revised our operating or FFO guidance, and we'll make adjustments as we get deeper into our primary leasing season. Digging under the hood a bit, the durability of the employment picture for our target affluent renter demographic is a continuing bright spot in our business as is the cost of owned housing. Unemployment for the college educated, a very sizable percentage of our residents, remains at around 2%, considerably lower than the overall average, supporting demand. This demographic, which is well employed in the growth engines of our economy, including technology, financial services, and other professional and business services, continues to grow in both our established and expansion markets. We also see a little competition from owned housing as the high cost of homes, combined with elevated financing costs and rapidly rising insurance, real estate tax and maintenance costs combine to make rental housing a very attractive option for many people. Social factors that we've discussed on prior calls like smaller households and delayed marriage and childbearing add to the attractiveness of rental housing. In the quarter just ended, the percentage of our residents leaving us to buy homes was 7.8%, a continuation of all-time lows. Strong demand and high single-family housing costs are consistent conditions across both our coastal established markets that represent 95% of our company's NOI and our new expansion markets of Dallas-Fort Worth, Atlanta, Denver and Austin, which collectively represent 5% of our NOI. But on the apartment supply side, we see two very different pictures playing out in our established coastal markets versus our expansion markets. With the exception of Seattle and Central D.C. in our established coastal markets, we see the terrific demand I just mentioned being met with generally little new supply, leading to solid rent growth. Across our four expansion markets, we see robust demand as well, but it is being met by an overwhelming wave of new supply, leading to declining rent levels, high concessions and occupancy pressure. We expect this pressure to accelerate as units continue to deliver in these oversupplied markets, especially once the prime leasing season concludes and demand seasonally declines. Switching to expenses, Michael is going to go over all that with you in a moment. But I wanted to take a second to thank our teams across the company for their amazing work on expense management. We are very pleased to have produced a sector-leading 3.1% average growth rate of same-store expenses over the last five years. Our teams have embraced innovation and a customer service mindset and are not afraid of change, and it shows in these numbers. Well done, team. On the investment side, we're seeing properties that we would be interested in acquiring, well-located newer properties in our expansion markets in the suburbs of Seattle and Boston, trade at high prices and in very low volume compared to pre-pandemic levels. Investment sales activity in the first quarter was over 60% below average pre-pandemic levels. Estimates from my colleagues who attended the recent ULI conference indicate that there is over $200 billion of dry powder looking to invest in North American real estate, with a significant portion focused on apartments. Recent data points from the pending AIRC transaction and apartment portfolio and one-off deals are similarly supportive of much higher values than the public market is currently suggesting. While this is a huge positive signal about the underlying value of our company, it has slowed our portfolio rebalancing efforts. And while pricing in most of the apartment transaction market is strong, buyer interest is not yet fully evident for some of the large urban West Coast assets that we want to dispose of as part of our strategic rebalancing. We expect that to change as these submarkets continue to show improved operations and better quality of life conditions. In the meantime, with the lack of actionable acquisition opportunities, we saw value in our own stock. So we continue to strategically deploy disposition proceeds from the sale of older inferior properties in our portfolio into repurchases of our stock. In the first quarter, we repurchased approximately $38.5 million of our own common shares at a weighted average share price of about $59 per share. Since we began this activity in the fourth quarter of 2023, we have repurchased approximately $87.5 million of our shares in what we see as an attractive valuation level of a bit below $58 per share. We are using the remaining disposition dollars to drive down our already low leverage, which will create more internal debt dry powder for when opportunities do emerge. We are going to continue to be disciplined in our transaction activities with a focus on growing cash flow over the long term. With regard to external growth, we are on track to deliver six newly completed joint venture developments in 2024. These six properties, three located in Dallas-Fort Worth, two located in Denver, and one located in suburban New York, will be delivered at a weighted average stabilized yield north of 6% and will contribute meaningfully to our normalized FFO starting in 2025 given their completion and lease-up timing. The three Dallas-Fort Worth developments are the first completed projects to come out of our partnership with Toll Brothers. With some of the other Equity Residential executives, I recently visited all six of these development projects, and I'm inspired by the enthusiasm on display from our lease-up teams and excited about adding these high-quality assets to our portfolio. Before I turn it over to Michael, I wanted to make a quick comment on the new housing laws that were passed over the weekend in New York, though I know we are still digesting the law and its implications. The law allows for renewal increases of CPI plus 5% up to 10%, and provides for vacancy decontrol on the types of units we generally own in New York, which allows rents to move to market when a new resident moves in, and that's similar to the rent laws that were passed a few years ago in California. Overall, new price controls on an already undersupplied good, in this case, rental housing, is not an effective way to attract private capital to help solve the housing supply problem in New York State. However, there are also tax incentives in the new law for new rental construction subject to a new higher wage scale required for labor on larger buildings as well as permanent affordability rules. There are also some language on zoning reforms and some rules that aim to make office-to-residential conversions easier. While the rent control provisions are not helpful, we commend the governor and the legislature for focusing on a supply-based solution similar to recent legislation passed in such politically disparate states as Florida and California. We think focusing on supply, not heavy-handed regulation, has been recognized on both sides of the aisle as the long-term solution. While the new law adds to the complexity of operating in New York, a good portion of our portfolio in New York City is exempt either due to being built during or after 2009 or meeting the luxury exemption thresholds. We'll be happy to discuss all this further in Q&A. And with that, I'll turn the call over to Michael Manelis.

Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review our first quarter 2024 operating performance and our positioning as we start the leasing season. We're off to a very good start thus far. As Mark mentioned, demand remains good across all of our markets, supported by a continuing solid job market and high employment in our affluent renter target demographic. One of the real highlights of the quarter was our turnover, which is the lowest we have ever seen. Our focus on customer satisfaction, harnessing data and leveraging our centralized renewal team to drive results is definitely having an impact here. In the first quarter, we renewed more than 61% of our residents, which is one of the highest percentages that we have seen. A special shout-out to New York, Boston and Seattle, who set their own high marks and greatly contributed to this result. Our first quarter same-store revenue growth exceeded our original expectations, including very good performance in San Francisco and Seattle, which I will discuss in a moment. This positions us very well for the year, but we acknowledge that this is just the beginning of a critical primary leasing season. Our efforts to build occupancy in the fourth quarter of 2023, coupled with continued strong demand and high resident retention, have resulted in both slightly above-average rent growth since the beginning of the year and a 50-basis point quarterly sequential gain in physical occupancy. At 96.5% occupied this month, which is one of our highest reported occupancies in April, we have a lot of confidence that we will be able to continue to grow rates through the leasing season. The high percentage of residents renewing that I previously mentioned is also a big factor in this strength. In terms of market same-store revenue growth, the East Coast markets and Southern California are producing leading growth, as we expected, with San Francisco, Seattle and the expansion markets following in that order. As we think about these markets' performance relative to our expectations, New York and Washington, D.C. are running ahead of expectations, while Boston and Southern California and the expansion markets are in line. San Francisco and Seattle are also running ahead, but remember, these markets have been historically volatile. So we remain cautiously optimistic that we will hold on to the gains in these markets for the remainder of the year. Now a little more color on the individual markets before closing out with expenses and commentary in other income and initiatives. Starting in Boston, year-to-date revenue performance is in line with expectations. City of Boston is currently 97% occupied and we have very little competitive supply to deal with. Concession use is little to none in this market. And overall, we continue to expect Boston to deliver some of the best full year revenue growth in the portfolio. As I mentioned, New York is performing well, with both strong demand and pricing power. The market is over 97% occupied and has very little competitive new supply. So far, we seem to have moved past the rent fatigue we saw in the market in late 2023 and expect good things from this market in '24. Hats off to Washington, D.C. as this market is outperforming our revenue growth expectations even after a strong 2023. We're benefiting from a very solid employment picture here, particularly in the defense sector which is driving consistent, stable high occupancy and real strength in our retention. We see good results across the whole market, but The District has recently begun lagging our suburban assets, likely due to nearby supply. Overall, we still expect Washington, D.C. to deliver a good amount of new supply in 2024 with nearly 13,000 competitive units. So we do anticipate the pressure to continue to grow as the year progresses. In Los Angeles, we see good demand, but not a lot of pricing power at the moment due to the additional units being brought back to the market through the eviction process. Our portfolio is 96% occupied, and we continue to make progress on the delinquency and bad debt situation, which should be a tailwind for growth in 2024. Time frames for processing evictions have recently improved from 9 months to 6 months, which should help us make more progress going forward. But they still do remain nearly twice as long as they used to be. That being said, we are very encouraged by the recent improvement. Rounding out the rest of Southern California, San Diego and Orange County are continuing to be very strong performers. The general lack of housing is keeping occupancies high. Home ownership costs are also high here, which makes renting in these markets the more attractive option. San Diego will see more competitive new supply in 2024, while Orange County will see similar amounts to last year, with limited pressure at a few of our Irvine locations. Now for the markets that may be of most interest: San Francisco, Seattle and the expansion markets of Dallas-Fort Worth, Denver, Atlanta and Austin. For the two West Coast markets, remember that we entered the year with relatively modest expectations but potential for upside. So far both markets are doing better than we expected, but it's early and both remain show-me stories as we saw periods of stability and pullback in 2023. In San Francisco, we are well occupied but would like to see continued improvements in pricing power. The South Bay, East Bay and Peninsula continue to perform better than our Downtown portfolio. The situation here remains the same as the market lacks the catalysts, either job growth or more robust return-to-office policies, to create true pricing power. Concessions remain prevalent in the Downtown submarket, but are being issued at a lower rate than they were in the fourth quarter, consistent with what you would seasonally expect. In Seattle, we carried strength from December into the early part of the year, leading to improved occupancy and the ability to move up rental rates, which is evident in our new lease growth for the quarter. That being said, we do expect a fair amount of competitive new supply in the market in 2024, which could temper growth. The East Side is performing better than the City of Seattle, and our Redmond assets are performing very well despite having some direct pressure from a new lease-up. Overall, the downtowns of both markets are showing real improvement in the quality of life, and the local political situation continues to get much more constructive as a focus on bringing these cities back to the thriving environments they were prior to the pandemic remains front and center with both policymakers and citizens. Recent primary elections in San Francisco were very encouraging as voters supported candidates who are focused on addressing safety and the quality-of-life challenges. Finally, some commentary on our expansion markets. Strong demand and a favorable regulatory environment continue to confirm our positive long-term outlook for these markets. Unfortunately, however, in the near term, we are seeing the pressures from high levels of new supply being delivered in 2024. Market occupancies are lower than our established markets and concessions are prevalent. So far, concession usage at stabilized asset properties in Atlanta, Dallas-Fort Worth and Denver are running at about 30% of applicants getting about four to six weeks. And in Austin, it's 60% of applicants getting about six weeks. Operating conditions are challenging across all of these markets, but Dallas appears to be more resilient, followed by Denver, Atlanta and then Austin. The job growth numbers in both Austin and Dallas are some of the highest in the country, which is clearly aiding in the absorption of some of the new supply. But the volume of deliveries is high and going to continue to grow throughout the year. With regards to bad debt and delinquency, the first quarter results were in line with our expectations. As I mentioned, we continue to see improvements in the time it is taking to process evictions in L.A., which is where the majority of our delinquent residents are, which is resulting in a decrease in the number of long-standing delinquent residents that we have. This is an encouraging sign and continues to support our view that we will see overall improvement in bad debt net contributing 30 basis points to our same-store revenue for the full year. Now let me hit on some highlights on expenses. Our 1.3% growth in the quarter was better than expected and driven by a decrease in both utilities and repairs and maintenance, coupled with pretty flat on-site payroll expense growth. On the utility expense, we primarily benefited from lower commodity pricing. We also intend to take advantage of federal and local incentive programs to continue to accelerate our sustainability efforts and moderate future utility growth. For example, we have 26 future solar installations planned, in addition to our 55 active systems, which will help reduce our future overall assumption. Our repairs and maintenance expense decrease was driven primarily by lower turnover costs and, to a lesser degree, maintenance expense, which was unusually elevated in the prior year. Once again, our disciplined approach to expense management has continued to pay off. On the innovation front, as we have previously discussed, we will be focused on a number of initiatives to drive both revenue growth and operating efficiencies. Specific to other income, our expectation remains unchanged that this will be a contributor of 30 basis points to our full year same-store revenue growth. During the quarter, we delivered 60 basis points, which was slightly ahead of our original expectations and mostly due to faster implementation of our parking revenue optimization program. In addition to our efforts around other income, we have been very focused on areas of opportunity like leveraging artificial intelligence into our business process. As early adopters of these AI interactions, we are thrilled with the performance of these tools. Over the past year, our AI leasing assistant, Ella, has engaged with just over 600,000 customer inquiries, set 2 million responses addressing prospect questions, and booked over 80,000 appointments. Leveraging this type of automation at the top of our demand funnel has been incredibly effective, allowing us to be nimble with increasing initial traffic demand without impacting our remaining on-site employees' ability to provide high-touch customer interactions when needed. We're excited to share that in the coming quarter we will begin testing an AI resident assistant, helping existing residents 24/7 with common questions about their community service and even their account statements. I want to give a shout out for our amazing teams across our platform for their continued dedication to innovation and enhancing customer service. As we sit here today, we're 96.5% occupied and continue to see strength in our renewal process, which positions us very well to capture the pricing power opportunities that the peak leasing season will bring. With that, I turn it over to the operator for Q&A.

And our first question will come from Eric Wolfe with Citi.

If I look at your April new lease growth of 0.1% versus the 1.6% at this time last year, I'm just trying to understand why it's a bit lower given you're in a better occupancy position. I think you said record retention, record low turnover. So just wondering if we could see that catch up over the next couple of months.

Eric, this is Michael. So yes, I think one of the things you need to remember is that, relative to the first quarter in 2023, we are issuing more concessions right now. So that does impact a little bit of what you see in that new lease change. But clearly, when you just think about the normal rent seasonality curve, pricing trend or asking rents in the marketplace, we're seeing that sequentially build. And you're seeing that sequential improvement in kind of the new lease stats for April over March. So I think what you should expect for the next several months, working our way probably even through the middle of the third quarter, is that we will sequentially build new lease change up, and we will see that stability in kind of the renewal, achieved renewal increase performance. So you're right to call out that it's a little lower than norm, but right now we like the sequential improvement that we're seeing.

All right. That's helpful. And then to your point on concessions, if we look at SF and Seattle, specifically, can you maybe talk about where concession usage is today versus, say, this time last year and if you're planning to dial that back further as we get into the peak leasing season?

Yes. I mentioned this during the call in January that we made a strategic choice to increase our use of concessions to boost occupancy in the fourth quarter, and we have been gradually reducing that usage as we moved into the first quarter. The most significant decrease occurred in San Francisco, but we began using some concessions in Los Angeles to offset that decline. When comparing the fourth quarter to the first quarter, our concession use decreased slightly but not as much as it would have without the increase in the L.A. market. Currently, about half of our concessions are focused in Seattle and San Francisco, primarily in the downtown areas. Both of those markets are performing below their levels from January. However, we've experienced a very strong few weeks of leasing activity. The teams have been strategically examining ways to further reduce concession usage in recent weeks.

And our next question will come from John Pawlowski with Green Street.

First question is on CapEx, Bob. It's been running, I think, last year about 3,700 units, up to 3,800 this year, which is 40% higher than 2022. Is this a new structurally higher level of CapEx we should expect moving forward? Or should we expect a reversion to historical levels in the coming years?

John, it's Alex. There are a couple of factors at play. One is that we are focusing more on some return on investment projects, specifically renovations, solar installations, smart rent setups, and EV chargers. We can adjust these as needed since they have returns associated with them, and they are discretionary. Additionally, there is an element of catch-up from the pandemic. We had projects that we couldn't address because we wanted to avoid disrupting our residents who were home at that time. We anticipate that it will take a couple more years to catch up on these projects. So, I think the number around 3,800 is fairly reasonable.

Okay. And then a question on markets. I mean, Michael or Mark, I guess, which markets when you're looking at just in terms of the absolute level of rents are you more concerned you're getting closer to hitting the affordability ceiling?

Yes, John, this is Michael. So really, from the affordability standpoint, I wouldn't say we have any concerns at all. I mean we're not seeing a material shift. We still sit at about 20% rent-to-income ratios. And the range is fairly tight, running between like 18.5% to 24%. And the Southern California markets are sitting up at that higher range, and they really historically have always been up at that level. So I'm not concerned about us hitting that point where the affordability index. I think what we saw in a market like New York where you had such robust rent growth through the peak leasing season last year, you hit that point where kind of you felt like you hit a rent fatigue level. We're not seeing any of that right now in the portfolio, but it's still pretty early into the leasing season.

And our next question will come from Steve Sakwa with Evercore ISI.

Michael, I was wondering if you could just provide a little bit more commentary on the San Francisco and Seattle strengths, and whether you can determine if those are kind of folks that are returning to the market? Are they just kind of moving around the Bay Area and Seattle? Just how do we think about that demand that's picked up in the drop in concessions?

Yes, that's a great question. This is Michael. Currently, I observe some marginal improvement in migration patterns within the markets. We are seeing a slightly higher percentage of new residents coming from within the metro area, meaning we are mostly exchanging residents within that region. While there is some improvement, we are still above historical norms. I expect this elevated level to continue until we see job growth or a more robust return-to-office policy in areas like Downtown San Francisco. The demand isn't primarily driven by migration factors; some people are still moving in from farther out, which contributed to the recent activity. There’s also a noticeable sense of vibrancy in these metro areas, which has been gradually building over the past year. Presently, both markets are at 96% occupancy, which gives us confidence to either raise absolute rates or reduce concessions. We're seeing a sequential increase in our net effective rent, which is what we’re aiming for. As long as the demand velocity remains strong, we should do well during the peak leasing season. However, we have seen these markets experience ups and downs in the past, so it's still early to definitively classify this as a successful year.

Yes, I'm just going to elaborate. It's Mark, Steve. I'd add a little bit. Again, we do see that improvement in Downtown San Francisco, but it's not yet the job growth we probably need to drive rents. But we're 14% or so below rent levels that we're pre-pandemic. So there's definitely room here. Incomes have gone up, as we've talked about on the calls. The crime statistics in the city of San Francisco generally have really improved compared to last year and compared to pre-pandemic levels. And as Michael said, politically, we think the March 2024 primary was a real watershed moment. We think the citizens really took it upon themselves on both public safety and other matters to really take back their city. So we're excited about some of the progress there. The AI revolution is a big driver potentially for San Francisco, the city and the Bay Area more widely. Our numbers indicate that the Bay Area is getting 13 times more funding than the next metro area in terms of AI investment. Now that's very significant. Now those jobs aren't that many yet. I mean they are a few hundred. They're not the thousands. So we're not seeing that job growth yet that we really need to drive our numbers. But we are seeing that network effect where companies like OpenAI was incubated at UC Berkeley and it opted to stay in San Francisco. Some of these incubator firms have moved back into San Francisco from the city, from the suburbs. So that's all really positive. In Seattle, I just want to give a plug for our friends in the Northwest, I mean this enormous $700 million project, their version of the Big Dig, to take the Alaskan Way highway and put it underground and really activate the waterfront is really significant. It's driving tourism, it's driving activation slowly but surely in Downtown Seattle. Seattle's problem is really going to be the supply issues. There's just a fair bit of supply. But we do see activity levels improving. And again, politically, the city council and the mayor are much more focused in Seattle on public safety and quality of life because that's what their constituents have told them to be focused on. So again, we're pretty excited. And I guess we'd make the statement that we continue to see Seattle and San Francisco as when, not if, stories. And the when could be this year if things continue as they are, but we need to see a few more months of continued good results in a market that, again, can give you a head fake once in a while.

Great. For the second question, would Mark or Bob like to address the late fee California settlement and the related charge you took this quarter? Could you provide more details on that? Also, does this resolve the issue, or might there still be unresolved matters stemming from that lawsuit?

Steve, it's Mark. Thanks for that question. I mean we are still in active litigation, as you suggested in your comment or your question. So there's not a lot I can say. Just to give you a little background, this has been a case that's been going on for 10 years. About the amount of late fees, we just got a ruling from a judge that was adverse to our interest, so we adjusted the reserve. We are considering our appeal options. So to your point about adjustments, they could go up or down depending on our actions. Also the judge didn't give us a number. He gave us a methodology, and we're working out with claimant's council what that means. So we can charge late fees, it's just the amount that's an issue. So we need to figure that out. So there could certainly be additional adjustments. I wouldn't expect them to be terribly significant upward. But if we win an appeal, I guess there could be a downward adjustment. But this is going to go on for a little while yet, I would think.

And our next question will come from Joshua Dennerlein with Bank of America.

I appreciate all the comments on San Francisco and Seattle, definitely a hot topic. Could you just remind us your split between urban and suburban exposure in those markets?

Yes. Josh, it's Alex. In Seattle, we're 60% urban and 40% suburban. In San Francisco, it's the opposite of that. So we have a broader suburban exposure there.

Okay. Cool. I appreciate that. And then I guess just are the trends like really materially different between the urban and suburban assets in those markets? And just trying to figure out like the dichotomy going forward.

Yes. Josh, this is Michael. Yes, they're absolutely different. And again, this remains the story about kind of the City of Seattle and Downtown San Francisco is where we see kind of the least amount of pricing power, kind of lower occupancy. So the suburban portfolios are clearly outperforming the urban, and that's a trend we've seen for a while in those markets. The only thing I would call out in San Francisco is that you do have some supply coming back to the South Bay, and it is back-half loaded. So you do need to see kind of that demand pick-up because you have like 4,000 units coming back to that submarket just later on this year. But again, it's performing very well right now. We saw it absorb 4,000 units a couple of years ago. So it's nothing that we're concerned about, but it's still something that we're watching for.

Our next question comes from Adam Kramer with Morgan Stanley.

This is Derrick Metzler on for Adam Kramer. I wonder if you could tell us anything about the cadence of same-store growth for the rest of the year and kind of what to expect given the strong 1Q and full year guidance that's kind of well below that?

Yes. Thanks, Derrick. It's Bob. I'll take that. Let me start because there's a few pieces driving this, but let me start on the same-store revenue front with the residential rental component. Our assumption for residential rental income is that we anticipate a year that is pretty normal, meaning that sequentially, we expect the blended rates to continue to get better until they seasonally decline in Q4. And so you're going to see that normal kind of robust growth pattern as you work your way sequentially through. On the other income front, which also drives the same-store revenue piece, that's a little bit lumpier. So we expect to see bad debt improvement and increased income from initiatives later in the year as well. So that will all help growth as you kind of continue on sequentially as well. And then the nonresidential side, which you saw some lumpiness in the first quarter that we disclosed in a footnote on the bottom of Page 10, that is going to be a little bit of a drag when you get to the back half of the year. But when you get to the full holistic year, it doesn't really impact same-store revenue overall. So normal kind of seasonal trajectory. Given the comp period, when you put it in the blender, when you look at quarter-over-quarter, we would expect the quarter-over-quarter to be lower in the back quarters of the year than they are in the first quarter.

Got it. And anything on expenses, too? And the cadence there for the year?

Yes, we had a very strong first quarter regarding expenses, better than we expected as indicated in our disclosure. We did not change our guidance, but we are being a bit cautious about expenses. We're hopeful to exceed the midpoint of our guidance range, but it's still early. Typically, Q2 and Q3 see higher growth rates due to increased turnover as we enter the leasing season. Therefore, we anticipate those periods will show stronger growth. Additionally, the fourth quarter presents a challenging comparison as growth rates were quite low last year, so we will face a tougher comp. However, we have made a solid start on expenses, and we remain cautiously optimistic.

Thank you. Congrats on the strong quarter.

And we'll take a question from Michael Goldsmith with UBS.

At what point during the year do you feel confident about maybe not hitting the low end of the guidance, like recognizing you don't make adjustments for the first quarter of print, you did speak about trends being ahead of expectations, I guess maybe the question is, are you, at this point, do you feel like you're trending at the higher end of the range or above the range? Where you sit today? And what will give you confidence about adjusting that with the next quarter?

Thanks for the question, Michael. It's Mark. We typically assess this at the end of each quarter. Given the significant activity we see in the second quarter, it seems logical to focus on this period. The current environment is quite volatile, both economically and in other aspects. Therefore, we believe it's sensible to wait. We have a few markets that appear ready to bounce back, particularly Seattle and San Francisco, though those have also experienced some volatility. I'm not sure how to define whether we will meet the low or high end of the guidance, but presently, we are clearly aiming for the higher end of revenue and the lower end of expenses. However, this is just one quarter, and there's plenty of time ahead. We remain very optimistic about the fundamentals of the business and will provide an update in July on our status.

And my second question is, you sold a couple of properties during the quarter, used that to buy back some stock, paid out some debt, and possibly fund some of these developments. Would you consider continuing to sell at the current pace? Also, does the fact that there is $200 billion available to reinvest into real estate mean that you would continue to sell even if there is nothing to acquire?

Michael, it's Alex. We plan to pause our property sales until we have clearer insights regarding the acquisition market. A couple of weeks back, it seemed like buyers and sellers were starting to reach an agreement around 5 to 5.25. However, the recent inflation report was unexpectedly high and set us back to where we were a quarter ago, with a significant spread currently, and the ten-year rate being over 4.6 today. We are trying to assess the cap rate environment for acquisitions, so we will hold off on dispositions until we have a better understanding of that.

And our next question will come from Haendel St. Juste with Mizuho.

I had a follow-up on the rent reversal. Can you hear me?

Yes, we can now. Go ahead, Haendel, we can hear you.

Sorry about that. So had a follow up on the rent reversals in the quarter. The improved collectibility expectations you outlined, I assume they were tied to Rite Aid. So can you outline what's changed there and why you're adjusting your expectations? And then what's the net-net of all of this beyond this year? I think you said this year was a net neutral event. So just curious if the space now spoken for or what we should expect over the next year or two.

Yes, it's Bob. Let me clarify quickly. Regarding our guidance expectations, we mentioned the straight-line receivable reversal related to nonresidential, and there is no change to those expectations. It's also important to note that the benefit we observed in the first quarter is not connected to the Rite Aid lease we discussed last year. During the pandemic, we wrote off a significant straight-line receivable for various tenants, transitioning those nonresidential tenants to a cash basis of accounting. According to accounting principles, when the outlook on collectibility improves, you revert to an accrual basis of accounting and reintroduce that straight-line receivable. Given the nature of these tenants and the retail space, we were cautious and set a high threshold for determining that these leases would be collectible, which we validated in the first quarter. This return of the receivable balance was anticipated in our guidance, and we don't foresee much more variation in the quarterly behavior for nonresidential. Regarding Rite Aid, the lease was terminated, but we have re-leased that space to a tenant with strong credit quality. We’re currently investing in tenant improvements, and once those are completed later this year, we will begin recognizing revenue from that lease. That’s the update on Rite Aid, but there is no relationship with Rite Aid at this moment.

That was helpful. I have a question regarding the second quarter guidance. It appears to be a bit low compared to what we and the market were anticipating, particularly considering the favorable rental dynamics you're experiencing. I'm wondering if there are any one-time factors affecting this guidance. Is there anything from a dispositions standpoint that is significant, or is this guidance considered to be clean?

Yes, that's a good question. As you can see from our full year guidance, we did not change our overall projections, but for the first time, we provided NFFO guidance for the second quarter while maintaining a somewhat cautious outlook. There are a few factors in the Q2 NFFO guidance that differ from what is typically seen between Q1 and Q2, which I believe you are inquiring about. The core business is performing as we expected, as Michael mentioned. The residential NOI segment is growing normally, but we will not see the sequential benefit from the straight-line receivable that I previously mentioned, which creates some drag on the sequential numbers. Additionally, overhead is not decreasing as fast as it has in previous periods due to various factors. There is also some transaction-related noise because we are front-loading our dispositions. When we sell properties, we often invest those proceeds into 1031 accounts, which are interest-bearing cash accounts, but they generate less interest than the loss in NOI. This results in a temporary dilution for us, impacting the sequential comparison from Q1 to Q2.

Just to elaborate, it's Mark. We don't expect overheads to be higher or different than our guidance range. It's just the cadence of it is a little different where, for a variety of reasons, the first and second quarters are more similar than usual. And you should expect a real decline in quarters 3 and 4. So we'll update that all in July, but we don't have any expectation that overhead is net higher. It's just the drop between the quarters is occurring between quarters 3 and 2, not between quarters 1 and 2 as has often been the case.

And we have a question from Jamie Feldman with Wells Fargo.

Great. I have a follow-up regarding the 2Q numbers or guidance. Can you discuss the core metrics? What are your expectations for rents, blends, occupancy, and same-store revenue in 2Q, just to help level set?

We usually don't give that level of guidance. However, regarding same-store revenue, typically you can expect a sequential improvement in NOI of about $0.02 to $0.03 between quarters. That’s about where we are on the residential side. On the other hand, we are experiencing a loss of approximately $0.01 from the nonresidential segment and another $0.01 from overhead in addition to various other factors in transaction activity. This is why you’re seeing only a $0.01 improvement sequentially. It’s important to note that leasing activity executed in the second quarter usually has a more significant impact on revenue in the third quarter, as those leases are ratably reset during the second quarter. I hope this provides some clarity.

Okay, that's very helpful. Regarding your debt maturities in 2025, you have $250 million due and a low leverage ratio of 4x debt-to-EBITDAre. You also have 8.25 preferred shares outstanding. It seems like you are slowing down the disposition pipeline. What are your thoughts on other investments and uses of capital? Regarding your balance sheet, do you plan to let things continue as they are through year-end without making significant changes, such as debt repayments?

Yes. As you mentioned, Jamie, the balance sheet is in phenomenal shape. I mean from an absolute leverage standpoint, it's very low. But you're also highlighting something that I think is worth noting, which is we have very little interest rate exposure because we don't have a maturity or any refinancing needs until the middle of 2025. And even when you look further out, there is a modest kind of maturity piece. So I think when you look at use of proceeds, probably in the menu of choices, debt paydown is the last one, to be frank. And we'd be more interested on the capital allocation front, whether it's acquiring assets or otherwise, even buying back shares just from a standpoint of whatever presents a better value proposition because we don't have any maturity issues and we have very limited exposure to rates.

And we'll take a question from John Kim with BMO Capital Markets.

Mark, you mentioned $200 billion of dry powder, a lot of that focused in multifamily. At the same time, we have the Blackstone-AIR transaction. How do you think that's impacted pricing or will impact pricing on sales of either assets or portfolios in the market? Could pricing be more aggressive despite the recent rise in interest rates?

Yes, I want to expand on the comment Alex just made. I believe when people observed the AIRC report, there was a sense of enthusiasm. This feeling, combined with the anticipation that interest rates might decrease soon and the stability in the financial markets, contributed positively to narrowing the bid-ask spread that Alex has mentioned for several quarters. However, when the treasury market declined, and we saw high inflation figures with ten-year rates over 460, that changed the landscape again. Currently, we are still struggling to see a substantial amount of product available. While there is evident enthusiasm for apartments in the private market, and hopefully soon in the public market, I believe there is still a significant difference in expectations between sellers and buyers. Although it seemed like this gap was closing, it now appears to still be wide.

Yes. John, this is Alex. One thing that hasn't changed, although the rate environment is confusing to many investors, is the amount of product that's delivering, particularly in the expansion markets that we're excited about. And a lot of that just isn't capitalized to be owned for the long term. I mean it was merchant built in many cases. And we're eager to pursue that. We just need to come up with pricing that makes sense in the current rate environment. And there's some other owners of more stable properties that also were seeing some debt challenges, and we just expect more opportunities where, as Bob has mentioned, really well poised to take advantage of them. We just need the right price given the rate environment.

On the rebalancing strategy, it sounds like you mentioned that pricing has slowed down those efforts a little bit. At the same time, you seem very encouraged by the political environment improving in San Francisco, Seattle and New York. Do those policy changes or anything new in data as far as net migration or any other items potentially reconsider your views on either the timing or the strategy of redeploying capital into the Sunbelt?

Yes. That's really an outstanding question. I think the really good news here is that both sides, whether it's Governor DeSantis in Florida, whether it's Governor Newsom in California or in New York or Governor Healey up in Massachusetts, everyone's thinking about supply as a solution. Where in 2018 when all the tumult happened started on rent control with California's Ballot Initiative, it was all about price controls, which obviously are not going to improve supply. So I think it's really a positive that everyone is trying to address supply in different ways, with different levels of effectiveness. I think the industry has done a good job. I give a lot of credit to Barry Altshuler who is our lead regulatory guy on that and many other people in the industry who pushed that supply argument, and we're seeing the results of that, and you're right to recognize it. But I also would say that places like New York, California, continue to need to work on being an attractive place to live and for businesses to locate. They need to be able to more effectively compete against places like Texas that are more attractive than they used to be in terms of amenities to our residents, our demographic, as well as to business leaders who just want to expand their operations in places where it's less complex and less expensive to do business. So I do say we remain open. I think New York is something we'll continue to think on. Right now, our opinion is you need to have some regulatory reforms away from housing just to make public safety better in some of those places and both to sort of encourage employers to relocate or to stay located in those markets. But I definitely see this as progress for sure.

And we have a question from Nick Yulico with Scotiabank.

Could you provide the lease rates and concessionary activity for Atlanta, Austin, and Dallas in the first quarter and April?

Dennis, this is Michael. So in my prepared remarks, I kind of gave you some clustering around the expansion markets' concession use. Right now, for us, I would kind of cluster Denver, Atlanta and Dallas together with about 25% to 30% of our applications receiving right around anywhere between four to six weeks. And in Austin, it's 60% of our applications with almost six weeks of concessions. But again, we only have three assets in Austin, so I don't think it's kind of overly indicative of what may be happening in the broader market. I'll tell you, we've been watching the new lease-ups and the concessions that we see. And right now, they really seem to be in line with what you would expect. There's nothing like out of the norm that's running anywhere between 4 and 8 weeks across all of those markets. And that's kind of one of those positive signs for us. Relative to the first quarter, I'll tell you, we've ticked down a little bit of our concession use. Most all of these markets have occupancies above 95% right now. So as soon as we get to that threshold, we kind of pulled back a little bit of the concessions and see what does that velocity look like. And we've had a couple of strong leasing weeks. So I think the teams are dialing it back. But we do expect concessions will remain in place in those expansion markets throughout the year because the levels of supply is going to continue to increase, which means we're most likely going to see these concessions stay. As long as they stay within the realm of reasonableness in this 4- to 8-week range on the new lease-ups, I think we're okay. That's kind of how we've modeled it.

Follow-up question, maybe at a higher level for Mark. You talked about this in your prepared remarks, turnovers at historic lows is a real affordability benefit for the rental product versus homeownership. Just curious if you could share any high-level thoughts on how you see this dynamic evolving in the near to medium term? Could this in theory be a durable demand and profitability tailwinds over the next cycle?

Yes. I think two of the biggest structural advantages to the rental housing business and the apartment business are what you just identified, the fact that home ownership is just tough. And that's for a lot of reasons. So many people are locked in with the real low rates on mortgages. It makes it very attractive to stay in place even if they might move or downsize. So that will slow things down in that market. I think the amount of production by the homebuilders is just a lot lower than it was pre-GFC. I think the cost of ownership, including things like insurance, are significantly higher. And I think all of that together makes rental housing a lot more attractive, and that's likely to be a persistent benefit. And embedded in that is just a lack of supply. So even though Michael just talked about some of the impacts of supply in these expansion markets for us and for people that own in the Sunbelt, that's certainly a pretty profound impact for the next couple of years. It still means that the U.S. as a whole is undersupplied in housing. And I think at 1.5 million units a year of owned and rental housing supplied, the same as the number was in 1960 for a population twice as big, you can see the opportunity there if you own like we do, 80,000 well-positioned nice units to rent in some of the higher growth parts of the country. So I think those are huge secular tailwinds to our business and are likely to persist. And that's why, again, we want to stick with our strategy of having balance, being in the 12 best markets, these expansion markets, for 20%, 25% of NOI, and the remainder in these established markets where our higher-end resident wants to be and take advantage of the supply imbalances, and frankly, the preference that we think is going to be pretty persistent for rental housing.

And we'll take a question from Linda Tsai with Jefferies.

Where are renewals going out in May?

This is Michael. So I'll just give you a sense. So renewals right now are out in the marketplace for the next 90 days. For the next three months, very consistent right now, the quotes are running between 6.5% and 7%. And that gives us a lot of confidence that we expect to achieve somewhere right around that 5% on the net effective side.

Thanks. And then just on bad debt, there's going to be a 30 basis, I guess, contribution. What's the cadence of like that is as you move through the year?

Linda, it's Bob. We would expect to start seeing improvement in the second quarter because you saw Q4 to Q1 was relatively flat. But we're seeing some of the lead indicators, as Michael mentioned, in terms of the timing of the courts and other things, indicate that we should start to see some sequential improvement in Q2. And then we would expect it to continue on that process, although it can be volatile in Q3 and Q4 such that, by the end of the year, Q4 is maybe ends at, call it, 90 basis points of total revenue. That means for the full year, you're getting that 30 basis points of improvement.

Helpful. And then one last one. On the NYC housing laws, do you view that as more of a net benefit or a detractor for your apartments in that region?

Yes. I'm going to answer your question very precisely because I take it to mean impact on Equity Residential, and I'd say the impact on Equity Residential is pretty modest, pretty insignificant. That's because about 40% of our units are either called luxury units under the law, meaning the rents are at higher levels, or that we own newer buildings, buildings built in 2009 or later. And for the other units, for us to get over an 8% or 10% renewal increase, which is what the law would limit, 2023 was a great year in New York, so just looking backwards, but it wasn't that great. And it would be more impactful to us in a year like late 2021 or 2022 when we were trying to recover from the pandemic and rents were going up more quickly on renewal and we were taking away concessions. That market is not that kind of market right now. So I would expect right now for it not to be terribly significant to us. And again, a great benefit, I think, in trying to encourage supply, which I noted in my remarks. I just think rent control in general does not encourage more supply into the market. So we got to work through that in New York. But I do think having some certainty here for everyone involved is a plus.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mark Parrell for closing comments.

Thank you all for your time and your interest in Equity Residential. Have a good day.

Thank you and that does conclude today's conference.