Good day, and welcome to the Equity Residential Third Quarter 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, sir.

Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2024 results. Our featured speakers today are Mark Parrell, our President and CEO; Alex Brackenridge, our Chief Investment Officer; and Michael Manelis, our Chief Operating Officer. Bob Garechana, our CFO, is here with us as well for the Q&A. Our earnings release and management presentation are posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell.

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our third quarter 2024 results and outlook for the year. I will start us off, then Alex Brackenridge, our Chief Investment Officer, will discuss our recent acquisition of Blackstone and the overall transaction market. And then Michael Manelis, our Chief Operating Officer, will speak to our operating performance, then we'll go ahead and take your questions. We posted solid performance in the third quarter, driven by continued good demand and little competitive new supply in our established markets, which constitute 90% of our portfolio. Big picture, we continue to see a stable environment and a healthy consumer. Unemployment is low and wage growth is steady, both of which bodes well for our customers. In a moment, Michael will speak to the various puts and takes we saw in our operations during the quarter. As is usually the case, we saw some items like occupancy and retention exceed our expectations, while others like blended rate came in lower in terms of our expectations. As you can see on Page 5 of the management presentation that we posted to our website last night, this type of variability in pricing is not uncommon. In fact, pricing so far in the fourth quarter has normalized consistent with seasonal patterns and with our expectations. In sum, we remain on track with our same-store revenue guidance, and we expect to end the year in a good position for 2025. On the expense side, the machine continues to churn out terrific results with same-store expense growth of 3.2% for the quarter and our expectation for full year same-store expense growth of 3%. I want to thank the team across our organization for their continuing focus on innovation, cost control and our customer. Turning to 2025, while there remains a considerable amount of economic and geopolitical uncertainty that could impact our business and the economy generally, we like our setup. We are too early to give 2025 guidance at this point, but we have given you some insight into our preliminary thinking on some of the inputs for 2025 same-store revenue on Pages 7 through 9 of the management presentation. In sum, we think 2025 should produce solid same-store revenue results for Equity Residential. We see steady demand from a well-employed affluent renter base, a favorable supply picture and the 90% of our NOI in the less supplied established markets and continuing cost and lifestyle preferences favoring rental housing. In terms of our expansion markets, we expect that a recovery in same-store revenue will not occur until 2026, given continuing high supply levels, but we do hope to see some improvement in currently highly negative new lease rates and to see lower concessions during next year's leasing season. Now switching over to capital allocation. We accelerated our acquisitions of newer, well-located assets in our expansion markets of Atlanta, Dallas and Denver in the third quarter. We are excited to acquire these properties at a basis that we see as highly favorable and add properties with strong cash flow growth prospects as supply levels decline substantially over the next few years. The entire equity team also looks forward to demonstrating our core competencies of smartly acquiring and efficiently integrating new acquisitions. We now have approximately 10% of our net operating income in our expansion markets assuming stabilization of our assets under development. In a moment, Alex will give you more detail on our transaction activity. We are funding our expected $1.6 billion in acquisitions this year, with a mix of fixed rate debt, dispositions and the use of commercial paper supported by our unsecured line of credit. In a moment, Alex will give you detail on the disposition activity funding these acquisitions. The one source I did want to highlight is the $600 million in fixed rate debt we raised in September. These 10-year notes were issued at a coupon of 4.65%, which is the lowest 10-year coupon issued in the REIT space since 2022, and would be hard to replicate today. So, a nice job by Bob and his team on this. Before I close, a quick note on where these acquisitions fit into our overall capital allocation strategy. Our goal remains to own an apartment portfolio that has the highest long-term total return in the sector with a focus on cash flow growth and taking into account risk and with the least amount of volatility possible. We intend to achieve this goal by catering to well-earning renters in the 12 or so metro areas that we think have the most desirable lifestyles for this demographic and present the best balance of long-term supply, demand, regulatory and resiliency opportunities and risks and where we can efficiently operate our properties with our industry-leading people and systems. As the last few years have shown, there is no riskless apartment market. The volatility and negative rental growth we see in the expansion markets and the strong results we are seeing in our Northeastern markets, many of which were recently left for dead by investors, reinforces our commitment to our strategy of better balancing our portfolio between coastal markets and select sunbelt markets as well as urban and suburban locations. We expect the benefits of this balanced strategy to play out in 2025. Seattle and San Francisco, particularly our uniquely urban portfolios in those markets, should generate better same-store revenue results, which, along with the continued strength in the Northeast, and the favorable 2025 supply picture across almost all of our established markets should more than offset continued supply-driven weakness in our expansion markets. In later years, as supply wanes in our expansion markets, those markets will be more of a same-store revenue growth engine for our company. We are confident this balanced geographical strategy, coupled with our efficient operating platform will create value over the long term for our investors, and are eager to demonstrate this over the next several years. And with that, I'll turn the call over to Alex Brackenridge.

Thank you, Mark. As we discussed on our call in January, we came to 2024 committed to continuing to reposition our portfolio by increasing our presence in our expansion markets of Atlanta, Dallas and Denver. For the first half of the year, the market remained frozen and we made no progress. However, in the third quarter, as interest rates dropped and the possibility of a soft landing for the economy became more evident, the market opened up and we significantly stepped up our activity, closing on 14 assets with over 4,400 units and a total price of $1.26 billion. Those acquisitions were funded by a combination of the proceeds from the $600 million bond issuance that Mark mentioned, $365 million in dispositions and $295 million of commercial paper. The dispositions consisted of six assets located in San Francisco, Washington D.C. and Boston that averaged 43 years old and sold for a 5.7% disposition yield. All of the assets were noncore holdings that had a combination of significant CapEx needs and a variety of operating challenges. The acquisitions meanwhile averaged just seven years old, have limited retail and are all 100% market rate. Eleven came from an off-market portfolio from Blackstone that was tailored to fit our expansion strategy in terms of asset quality and locations. Recognizing our ability to provide speed and certainty of execution, Blackstone chose to deal directly with us rather than execute the typical auction process. The other three acquisitions were one-offs purchased for merchant building. After the end of the quarter, we closed on an additional asset in Atlanta for $89.5 million. The weighted average cap rate on all this activity was 5% and is anticipated to generate an 8% unleveraged IRR. These transactions appeal to us because they allowed us to expand our presence in markets with strong job growth, increasing numbers of affluent renters and relatively low regulatory risk at an attractive basis that is approximately 15% below estimated replacement cost. Admittedly, these markets are also seeing outsized supply relative to our coastal markets. Accordingly, our underwriting reflects competitive leasing environments for the first two years of our ownership with rental income down or flat depending on the amount of approximate deliveries. We expect that some of that back to NOI will be offset by running these assets more efficiently on the revenue and expense side as we integrate them into our superior operating platform. We anticipate having further opportunities to purchase assets in these markets as the supply pipeline is up in 2026 and more robust rent growth will be on the horizon. But at that time, pricing will likely be at lower cap rates and at a less attractive price relative to replacement costs. As we head into the end of the year and plan for 2025, we expect to continue to see attractive acquisition opportunities at around five cap rates in Atlanta, Dallas and Denver. And with a cost of capital advantage and the ability to complete due diligence quickly relative to leveraged buyers, we expect to close on a sizable share of transaction activity. We currently have an asset in Denver and one in Atlanta, totaling approximately $190 million under contract to close before the end of the year at around a five cap. Austin, our fourth expansion market, where we have only three assets remains challenged with a historic amount of deliveries that is resulting in a highly competitive rental market leading us to stay on the sidelines given how hard it is to assess when things will stabilize. With our recent closings and assuming stabilization of development deals in progress, as Mark noted in his comments, we now have approximately 10% of our portfolio in our expansion markets, toward a goal of 20% to 25% that if the transaction market remains favorable, we expect to achieve over the next 18 to 24 months. We are excited to add exposure to these high job growth markets that will see declining supply over the next two to three years. What should not be forgotten, however, is that the reduction in supply is even more dramatic in our coastal markets, where starts are down nearly 60% in 2024 after being down over 30% in 2023. With 2025 starts projected to be down again, we anticipate one of the best supply-demand balances in our coastal markets that we have seen in a very long time. Our expansion market exposure, combined with our coastal market presence, positions us to generate optimal risk-adjusted returns for our shareholders, catering to a customer with a resilient and growing income while balancing out supply, regulatory and resiliency challenges. I will now turn the call over to Michael Manelis.

Thanks, Alex. And thanks to everyone for joining us today. This morning, I will review our third quarter 2024 operating performance, as well as our expectations for the remainder of the year and what the setup for 2025 could look like. As Mark mentioned, fundamentals in our business remain solid. During the third quarter, our focus on serving our customers and our corresponding strong renewal process led to the lowest reported third quarter resident turnover in our history, and strong physical occupancy of 96.1%. Move-outs to buy homes remained extraordinarily low and renewal rate achieved was strong across most markets. Blended rate, however, ended up at the low end of our expectations for the quarter, primarily from lower-than-expected new lease change driven by the City of Los Angeles and continued pressure in our expansion markets. In these markets, the pressure from excess inventory from both eviction-related, existing and new supply, has led us to prioritize occupancy to maximize revenue, which came at the expense of some rate growth during the quarter. It is also important to remember that it is often not uncommon to see variability in new lease change over relatively short periods of time. For example, while we saw a steeper and earlier decline than usual in new lease change in the third quarter, we have seen a better picture so far in the fourth quarter for this volatile statistic. Looking at the remainder of the year, our strategy of maximizing revenue by maintaining higher occupancy heading into the quieter months of the year should drive performance along with positive contributions from other income and bad debt net. We still anticipate normal seasonal rent deceleration which will result in negative new lease change in the fourth quarter. But at this point, we are seeing very stable renewal rate achieved results. And of note, Seattle and San Francisco have both a relatively easier pricing comp in the fourth quarter and have shown good early signs of improvement, including maintaining strong occupancy and reducing concession usage. Sitting here today, our net effective rents at the portfolio level are close to 2% above prior year, which is also a solid position to be in. Now let me give you some color on the market starting with the East Coast. The Boston market is one of our best performers in 2024. Both our urban and suburban portfolios are performing well, but consistent with our expectations, the urban portfolio produced stronger results in the third quarter. We like our positioning here as our urban-centric portfolio will see very little competitive new supply for the remainder of 2024 and the full year of 2025. Moving on to New York, demand feels good as we are more than 97% occupied. And as we have said on past calls, with a solid job market and very little competitive new supply, we think this market will continue to produce good revenue growth, and we'll have some of the best supply-demand dynamics in the country for the next couple of years. Rounding out the East Coast, Washington, D.C. continues to be the rock star of 2024. The market is over 96.5% occupied and is producing some of the top rental rate growth in our portfolio. Demand feels good across all of our submarkets and is expected to continue but we do expect some pressure from deliveries in the fourth quarter, particularly in the central D.C. submarket. On the West Coast, as I mentioned, Los Angeles showed some weakness in blended rate growth, particularly in the new lease change. We think there are a few factors in play here. First, our overall pricing power here was clearly impacted by less job growth than anticipated, especially office-using jobs and a bit of a pause from the L.A. studios in the content production. Second, on supply, we are seeing some competitive new supply, particularly in the downtown, Koreatown and West L.A. submarkets, as well as some excess supply coming online due to continued improvements in the eviction process, which is now taking about four months, down from six months earlier in the year. Finally, the city is still working through some quality of life issues in the urban submarkets like Koreatown and Downtown L.A. Our suburban portfolios, primarily driven by Santa Clarita and Ventura County, are performing better than our urban submarkets. The good news is that we are seeing some positive momentum across the entire Los Angeles market right now. And with our rents on top of last year, a condition we have not seen all year long, puts us in a favorable position. In addition, today’s occupancy is running 40 basis points above both the prior year and is trending positively versus the third quarter. We are also experiencing some of the highest retention rates of the year in Los Angeles. And while job growth has been somewhat muted in 2024, projections from Moody's Analytics are much more positive for growth in Los Angeles in 2025, particularly office-using jobs. Assuming that comes to pass, then along with the modest new apartment deliveries in most places across this vast geography, we think we should drive a reacceleration of results in 2025. In the rest of Southern California, San Diego and Orange County, we continue to see demand but evidence of some price sensitivity with residents willing to move further out in these markets for affordability reasons. After showing some of the best growth in the portfolio over the last few years, we are likely returning to more normal long-term growth rates. Rounding out the West Coast, San Francisco and Seattle continue to perform better than our original modest expectations. At this point, we feel good about the pace of recovery in these two markets and they are set up to contribute to growth in 2025, and we have included a page in the management presentation that highlights some of the favorable trends we are already seeing in these markets. In San Francisco, demand feels good with occupancy of 96.2%, which is 90 basis points higher than last year. Rents are following normal seasonal patterns, but we are seeing slower deceleration compared to last year and renewals are performing well. In addition, some impactful return-to-office policy from firms like Salesforce are helping to drive significant improvements to street activation. Having just spent a week in the market, you can really feel the energy and a reminder of why this market is the center of the tech universe, including the rapidly growing AI sector. On the supply side, there is very little new supply coming to the market. Overall starts are way down, and there have been almost no new competitive starts for the last year, which supports improving conditions for the next couple of years. We are optimistic about this market and its ability to drive our results in 2025. In Seattle, the recovery feels similar to San Francisco but further along. During the third quarter, same-store revenue reflected improvement driven by low turnover, strong occupancy and better-than-expected renewal rate achieved. New lease change, while still more negative than we would like, is better than last year, and we would expect this metric to improve over time. As we sit here today, demand drivers are better than we thought. Our occupancy is over 96% and our renewal performance remains strong. And looking at our migration patterns, we are also seeing more people come to us from further out suburbs, which is an additional demand driver for our assets. The big recent story here is the five-day week return-to-office announcement from Amazon, which is the 800-pound gorilla in the market. For the past several weeks, our local team have reported increased interest from Amazon folks who are living further away from the office and looking for apartment homes in the downtown and South Lake Union submarkets. With focus from city government and the local business community, along with increased business and tourist foot traffic, livability in the downtown just keeps getting better. Another reason positive is that the tech employment in the market looks solid as we see more postings for positions in both the city of Seattle and Bellevue and Redmond areas. As previously discussed, there is supply coming in the fourth quarter, and we will need to see how the demand and pricing holds. But at present, it should finish the year strong and like San Francisco, we have some real optimism on this market and what it can contribute in 2025. Switching to the expansion markets. The volume of competitive new supply continues to impact both occupancy and rate. Denver is our best performer of the expansion markets and our relatively small same-store portfolios in the other expansion markets, Dallas is producing the best revenue results in Atlanta where we have the most direct exposure to new supply right now is the worst. We continue to see demand, but it is a challenging operating environment for both new lease and retention given the amount of new supply. Similar to last quarter, the pressure on new leases makes renewing residents and maintaining occupancy, the number one priority for these markets. As you know, we added a number of new suburban assets to our portfolio in Atlanta, Dallas and Denver during the quarter that will be a while before they are in our same-store reported results. Overall, we are excited to grow our portfolio and create operating scale in these markets. While these markets have near-term supply risk, they continue to demonstrate long-term demand from our target renter demographic and provide a nice balance to our core portfolio. On the innovation front, we are very pleased with the initial results of our new AI resident inquiry application, which was able to handle almost 60% of our inquiries in our test market. We have a lot of confidence that as this application keeps learning we will get to 75% to 80% coverage, which will create an additional layer of operating efficiencies in the company. Looking ahead, now that we have centralized the support of many parts of our customer journey, we are looking forward to improving and optimizing those processes, including the upcoming efforts to streamline the leasing process to make it faster and easier for our renters. Before I discuss the 2025 building blocks, I would like to highlight our expense performance in the quarter. Continued favorable results on property taxes, low increases on repairs and maintenance and utilities and an actual decrease in on-site payroll drove the quarterly results and should get us to our expected 3% midpoint for the year. We are very proud of our 10-year same-store expense compounded annual growth rate of 3.2% and consider cost control and innovation implementation as core to our DNA at EQR. In closing, as Mark mentioned, while it's still too early to give 2025 guidance on Page 7 in the management presentation that we have published last night, we gave some building blocks for next year's revenue performance. Overall, the setup for 2025 feels solid. Today, we expect that we will start the year with embedded growth near 1% and in a very well-occupied position. We also have a very favorable setup as the expected deliveries of competitive new supply in our established markets will be lower again. And while the expansion markets still have significant supply expected, the absolute quantity is beginning to come down. On top of all of that, we like our ability to attract and retain new residents. In particular, we are most excited about the potential we see from our focus on the customer and our ability to maintain occupancy along with the upside we see from our West Coast markets of Los Angeles, San Francisco and Seattle, which make up 42% of the company's NOI. Those factors, coupled with the continued performance in our East Coast markets should deliver solid revenue results for the company in 2025. I want to thank our amazing teams across our platform for their continued dedication to innovation, enhancing customer service and their exceptional disciplined approach to expense management. With that, I will turn the call over to the operator to begin the Q&A session.

Thank you. And we'll take our first question from Eric Wolfe with Citi.

Hey, thanks for taking my questions. You mentioned in your presentation the potential for bad debt and other income to add to revenue growth next year. I know it's still early, but could you just give us a sense for what you're thinking about that potential? For other income, I would assume it's mainly tied to the WiFi program. So I think there's some good visibility there, but correct me if I'm wrong.

Yes. Eric, it's Bob. I'll start, and Michael might augment on some of the other income stuff. But starting with bad debt, we continue to expect to end 2024 around, call it, 1% or maybe slightly better than that as a percentage of revenue. So bad debt as a percentage of revenue. If normal—normal meaning pre-pandemic—is around 50 basis points. The opportunity set is the delta between there, right. We'll have to see what the progress looks like. We'll have to see what the court system looks like as to whether or not we get all the way there, but to kind of frame a construct of what the opportunity set or contributions incremental growth is, it's somewhere between that 1% and back to normalcy. We'll give you more color as we get to the fourth quarter guidance as to what's embedded in our numbers overall. On the other income side, you're correct that a lot of it is—and we mentioned this, this will be a contributor to fourth quarter performance as well. But a lot of our initiatives were back-end loaded in terms of their implementation, particularly the bulk WiFi and the adoption of the bulk WiFi. So that will start contributing in a more— it already has started in the third quarter, but will be more meaningful in the fourth quarter and will continue to contribute as you get into $25 million. With that will come a little bit of expense component, which I think you're familiar with in the industry when you implement this, but there should be good contribution that will have the potential for being greater than what you saw in 2024 because of the timing of those rollouts.

Got it. That's helpful. And then you also talked about seeing more Sunbelt opportunities. I think you said low 5% cap rate range. We've seen a lot of volatility in the 10-year dropping below as I think it's 3.5%, now back up at 4.3%. I mean as it sort of oscillates back and forth, does that change your pricing that you're willing to transact at all? Or are you just less sort of focused on your short-term cost of capital?

Hey Eric, it's Alex. Rates have moved so quickly. It's a little hard to assess that. But I will tell you that as of recently as last week, there were opportunities pricing at like 4.75-ish in markets like Denver and Dallas. So there's a lot of capital, a lot of people interested in apartments. Now we're at a 10-year, it's 4.3 something, maybe that changes a little bit. The reality is with the uncertainty about rates plus the election coming up, there isn't that much product on the market right now. I think this will be a feeling out process for everyone, as we see where things end up, but there's still all this capital. I think overall, the 5% cap rate feels pretty good to me looking forward.

Thank you.

We'll move next to Steve Sakwa with Evercore ISI.

Hi, good morning. I guess, given the projections that you guys have for fourth quarter on blended leasing spreads, that's going to sort of bring the figure in somewhere just under 2% for the year, and that's down about 100 basis points from the 2023 number. So as we kind of think out into next year, I know supply is coming down, but it's still relatively heavy, and you still have deliveries that are kind of working through the back half of this year that haven't been fully absorbed. So I'm just curious, is it your expectation that leasing spreads could actually hold next year? Or do you think with slowing economy, slowing job growth. And still some heavy deliveries that leasing spreads likely moderate again next year?

Hey Steve, this is Michael. Maybe I'll just start and just say. So first, we're just—we're in the very early stages of our budget process that we're putting all those factors that you just described into. In terms of the leasing spreads and how to think about this, I revert back to that Page 5 in the management presentation that really talks more about just the pricing trend and what's happening with absolute market rent growth, kind of on a year-over-year basis because that's really going to be the catalyst that's going to drive a lot of that. Right now, a lot of the factors for the setup for 2025 feel very similar as we were heading into 2024 and how we talked about it. But I still think it's a little bit too early for me to give you guidance on where we think intra-period market rent is going to grow. We have a lot of things that are set up to be catalysts for us, but we also know we still got to work through some of the absorption of supply in some of these markets. So I think we'll just see how this plays out for the next couple of quarters.

Okay. And then maybe on the expense side, kind of following up on Eric's question about the WiFi. I know you get the benefits of revenue, but there's also a cost associated with that. You guys have done a very good job keeping expenses down around the 3% level. Is that growth rate achievable next year, you think, with kind of these added expenses? Or is it likely that we see a little bit of pressure on the expense side just due to the pickup in other income revenue growth?

Hey Steve, it's Mark. You may see a little pressure above that 3%. We talked about on the last call, we've got still pressure from the 421-a burn-off of the tax abatement in New York. So it will be a little there. Certainly, the inflation numbers this morning were a little discouraging. So there may just continue to be some cost pressure. But whatever that number is, we'll be at the low end of it. And I think we'll quantify it for you, so you know exactly what the WiFi impact is. And of course, there's an offsetting much more significant revenue benefit. But I guess, it wouldn't surprise me if the number was a little bit higher than the number we're going to put up this year. But we're still rolling numbers up.

All right, thank you.

We'll go next to the line of Haendel St. Juste with Mizuho.

Hey, good morning, guys. So first question, I guess, was just on the portfolio performance during the quarter. Maybe you could kind of walk us through how that evolves over the course of the third quarter. It seemed like there was a bit of a drop there in new lease rates. And maybe as we look ahead to the fourth quarter, I think new lease rates are expected to fall to about negative 4% from the minus 1% in the third quarter. So I'm looking for some color on kind of where you see perhaps the incremental drag? I'm pretty sure San Francisco and Seattle are pretty easy comps given last year's performance.

Yes, good morning, Haendel, this is Michael. So I think what I would start and just say is let's just back up and think about the third quarter. So what we saw in the third quarter, and it was really the later part of the third quarter is, we've had an occupancy bias. We've been leaning into that. And specific to really the City of Los Angeles and the expansion markets, we did drop some of the rates, we increased some of the concession usage. And you can kind of see that on Page 5 in that pricing trend where you just didn't have as much robust pricing power near the tail end of the quarter. And that translated right into that new lease change for us for the number. Where we sit here now in October, we've got a setup where you do—like you said, we have a little bit of an easier comp coming at us in Seattle and San Francisco. I've got a market like Los Angeles, right now have rents on top of prior year, and that's a condition we haven't seen all year long. So now you look at the October stats and you feel like you're pretty well positioned, but I've said before, these metrics are best viewed over a longer period of time versus any standalone month, especially given the quantities. And like specific to the fourth quarter and like our assumptions for that blended rate growth between 75 and 125 basis points growth. We have fairly stable achieved renewal rate increases expected, and we are allowing for some continued moderation of new lease change. But the setup right now in the first month, we still got two-thirds of the quarter to get through feels pretty good to us.

And Haendel, just to add to that a little bit. This is a give-and-take type process. I mean, we can get new lease rate to be a higher number by letting occupancy decline, and that may not benefit same-store revenue growth, which is our ultimate goal. So we're trying to make as much money as we can in the current quarter and have a nice setup for the next year. But just viewing one factor either in one month or without context to the other measures, if we were hurting on blended rate and hurting on occupancy, that would be a much more serious situation for us than what happened in September, which thus was just a blip around the average.

Got it. Got it. Thanks for the color. And then one on the Blackstone transaction. It looks like you guys used a bit more debt proportionately to fund that, I'm assuming capitalizing on lower debt costs, as you highlighted the unsecured issuance, but also the opportunity in your underlevered balance sheet. So maybe can you talk about the appetite for using a bit more leverage to fund acquisitions in the near-term? And then maybe some color on the IRR that you underwrote the Blackstone portfolio for? Thanks.

Yes. So I'll start with the balance sheet, and then I'll pass it over to Alex to talk about the IRR. But we have an incredibly underlevered and strong balance sheet. As you may recall, and as those on the call may recall, we have spent a long time frankly, warehousing capital looking for opportunities. And we warehouse capital by paying down debt and going well below our own targeted kind of debt metrics of net debt to EBITDA of 5 to 6 times. And so when the opportunity presented itself on Alex's side, we capitalized on that by using the debt capacity we had, and further capitalized on it by the fact that we were able to do so at a very attractive rate overall, particularly with the use of proceeds. So we think that there is a lot more capacity given where the metrics I just outlined and the fact that we're sitting at, call it, 4.6 times. And we would look to use that debt capacity to take advantage of opportunities that make good long-term sense to lock in a really good cost of capital and allow for P&L accretion over time.

And Haendel, in terms of IRR, we underwrite to an unlevered IRR, and then we compare it to our weighted average cost of capital. In this case, that unlevered IRR was about an 8%, which at that time was in excess of the WACC at that point.

Thank you.

We'll go next to the line of Alexander Goldfarb with Piper Sandler.

Good morning. Bob, maybe just sticking with the balance sheet for a minute. You guys are one of the REITs that's got an active commercial paper program, obviously, you take advantage of the unsecured debt markets. Can you just walk us through the difference in the two programs as far as the underlying rate? And does using more commercial paper impact your ability to—the pricing that you get on unsecured? Or how about alternating between the two programs?

Yes. So I guess, let me step back and make sure I got the question. But commercial paper for us is kind of short-term floating rate exposure that we use to deal with working capital cycles and working capital for us really means transaction volume. And so the CP program is—we'll use a portion of it. We use it in the construct of our overall capital structure to balance how much floating rate we have, et cetera, and it's much cheaper than our line of credit, right? So we can borrow at, call it, SOFR plus 20 basis points and the line of credit would be contractually SOFR plus 75 or so. But we're really toggling between short-term and long-term issuance when it comes to the unsecured market by balancing a bunch of factors, right? How much floating rate exposure, what does our liquidity profile look like? What does our maturity profile look like? What does the whole thing look like coupled together, and balancing that out? And because we've done such a great job on the balance sheet over the years and extended our duration and have a lot of capacity to have some short-term usage and some long-term components, we can use a little bit of all pockets to reduce our aggregate cost of capital, which is the goal overall.

Okay. And then second question is, you guys seem to be more hopeful on Seattle and San Francisco. Over the past few years, there have been a lot of companies that have announced return to office and it's fizzled out. And obviously, we've all been collectively hoping for a rebound of Seattle and San Francisco for the past few years. What gives the team on the ground confidence that this time, the return-to-office mandates and some of the positiveness that you've seen in those two markets are actually finally truly taking hold versus this could be sort of a false start that we've seen before?

Alex, this is Michael. I could start off here. So first, I just spent a week in San Francisco, and you could feel it and the on-site teams will tell you just based on the prospects that are showing up for the tours, what's driving some of that. So the migration patterns show people from further out coming back near in; when they walk into the office, they're talking about the fact that they need to be back into the office for work several days a week, and that's driving a lot of their decisions. So it's still a little bit early in San Francisco to feel it. But when you have a big company like Salesforce making that announcement, you see the activity on the ground and the office is from the prospect. A lot of the other peripheral companies start to follow some of those bigger tech companies. And this is probably the most serious we've seen them actually talk about all of this in the marketplace. Specific to Seattle, I'll tell you, we could see it: job postings from some of the major tech providers in that market are up in the city of Seattle, job postings in Bellevue, Redmond are up. Our on-site team, we've been talking to them every week for the past several weeks once that Amazon announcement came out. And the Amazon employees are trying to get out in front of that January start date because they're concerned that there's going to be this pent-up demand coming in, and that either the rates or the availability of certain apartments won't be there in the marketplace. So they're actually signing leases early from us. So we could see it right now, and Seattle just feels a little bit further along than San Francisco and we feel like Amazon is really kind of serious about what they're saying to their teams.

And a little of this, Alex, is premised on our perspective, gleaned from the Moody's Analytics numbers for next year, that there's going to be some good job growth in the Bay Area in terms of office-using jobs. The Bay Area shed a lot of tech jobs and the jobs that have been added in AI have not been sufficient to offset those jobs, but we're hopeful that that reverses itself. So I think when you talk quality of life, Seattle is definitively better. I've been there recently as well, same thing. San Francisco is better but not quite as good. I think LA is less advanced in quality-of-life considerations being addressed. And then you got this job overlay. And I think on the job overlay side, you feel pretty good about Seattle and you're feeling better about San Francisco and a little bit of what you saw in the third quarter for us was LA being a little sideways on jobs. So we do need that ingredient to come through for these markets to fully recover, but we do see that.

Thank you.

We'll go next to John Pawlowski with Green Street.

Hey, thanks for the time. Michael, I wanted to pick up on that conversation in Seattle. I'm just trying to help—can you just frame it with some specific metrics so we understand kind of the night-and-day difference. Just trying to get a sense of is it a surge of kind of foot traffic and applicants or just a steady trickle post-Amazon announcement?

Well, I think we saw these trends in migration patterns even last quarter, and we did put some good details on Page 8 in the management presentation that talk about kind of not only that urban-suburban mix, but what we're actually seeing: the fact that concessions are down 40% year-over-year. But I think we've seen some of these migration patterns. We've heard some of this before from our new residents moving in. And I think when you look at what the comp looks like, the comp line of our pricing trends for the fourth quarter, this time last year, we were issuing concessions. We had rents decelerating. And right now, while you're still seeing some normal rent deceleration there, the concession use is actually abating or softening a little bit in the downtown submarkets. So, I think we're just seeing what we would describe as the greenest shoots that we've seen and felt in a while.

Okay. And then a question on L.A. in terms of the overhang on market vacancy and market rents from the eviction backlog, not just in your portfolio, but surrounding competitors. What's your best sense of the inning we're in on that overhang on market fundamentals? And when do you think the overhang on market rate and occupancy will finally be gone?

That's a hard thing to understand exactly when we think we'll be back to normal. I feel like when you look at the sheer number of quantities of pending evictions in the marketplace, we are more than two thirds of the way through our backlog. It was a positive sign for us to see that the duration dropped to four months from the six-month average that we saw earlier in the year. But we really need to see another drop down to probably like two months for it to get back to that normal swing of things. So my guess is, we think about our modeling for next year with L.A. besides some of those top line drivers that Mark just talked about, besides the fact that we have rents on top of prior year, we'll see how they hold up. We really are looking now at probably another couple of quarters of this pressure from this excess inventory in the market. But when you look at the occupancy for the quarter, positive is that while we're getting some of this excess inventory occurring, we are able to rent those units out and we are getting new residents in that pay the rent. So that's a positive to us. It's just taking us a little bit longer to backfill some of those units than you otherwise would have had in normal market conditions.

Thanks, Michael.

Our next question comes from John Kim with BMO Capital Markets.

Good morning. You talked about the net migration trends being favorable to Seattle and San Francisco. Where are the residents coming from? Is this a reversal of the Sunbelt migration you've seen in the last few years?

John, it's Michael. So it's not so much the migration is happening from out of state. What we're seeing is the migration patterns are shifting from being 20-plus miles out coming near in. So it could even be within the same MSA, they're just coming near or in to us. So that's another source of demand for us. You are seeing some out-of-state migration occur, but it's still not back to what we saw in the pre-pandemic era. We're still slightly elevated from getting more of our new residents from within the MSA.

Okay. My second question is on the Blackstone acquisition. I realize it's immediately accretive to earnings. You bought it below replacement costs. But the operating environment in your expansion markets are going backwards, maybe more quickly than you anticipated. Could you have waited on acquiring assets in these markets given NOI is going negative in some of these markets?

Yes. I wish we were that prescient. We've talked before about the trade-off here: you're going to get some weaker gross rental growth numbers, but you're going to get a better price now and then you'll likely continue to be a buyer, and you'll probably pay a higher price and you'll have less of that rental growth weakness. Frankly, it's very, very early on that deal, but everything is tracking very consistently to slightly better than our numbers in a pro forma sense. So again, the Sunbelt is weak, we expected it to be weak. Those are pretty much exactly as weak as we thought they'd be. And again, we do run things differently. Michael is an excellent operator, and he and his team, there are things we can do better in terms of delinquency management and vacancy management that even if rents are going down, we can underwrite, and we see those sorts of improvements. So I don't have any regrets about the timing, because I think your dollar cost into this is very attractive and we really love our basis here with that kind of replacement cost discount. And I think in a few quarters, you're going to start to see some improvement in the second derivative in the Sunbelt, but it's going to take a while for our big three Sunbelt markets to see significant improvement in same-store revenue. We did assume that would take a little bit longer.

And John, it's Alex. We are in just those specific three expansion markets, with Denver being somewhat different from the traditional Sunbelt. We're not buying in some of the markets that are seeing historically massive amounts of oversupply. So our assets are in markets we believe have digestible oversupply over time. We have not been buying in Austin as an example, where we do have three properties, but we're standing pat because the amount of supply is just overwhelming.

Thank you.

Our next question comes from Michael Goldsmith with UBS. Ami Probandt is on for Michael.

Hi, this is Ami on for Michael. Have you been seeing the same in-migration trends for the East Coast markets as you've been seeing in Seattle or San Francisco?

Ami, this is Michael. So really, when you look across the East Coast markets, our migration patterns are very much in line with pre-pandemic norms, both from how we're actually attaining new residents and we also watch when residents leave us where are they going, both the out-migration and the immigration patterns across those East Coast markets are very much in line with historical norms that we saw back in 2017, 2018 and 2019.

Okay. And then one on bad debt. How are the bad debt levels for new residents coming in the door trending? Is this in line with historical or elevated below normal?

Yes, it's Bob. So in terms of new entrants from a bad debt standpoint, it's very wise. So it's normalized back to pre-pandemic levels. So the quantity of non-paying residents that are coming in the front door has very much normalized back to pre-pandemic levels. The thing you have to keep in mind and the thing that we keep in mind as we manage this is that if eviction processes take longer, each one of those people actually still cost more. So we have a bunch of initiatives and technology that we utilize to try to actually make it lower than normal to the extent that we think the eviction process is going to be extended. But in terms of quality of resident getting in at that level, it's still very high quality, still a low percentage of people coming through that don't pay.

Thank you.

We'll go now to Nick Yulico with Scotiabank.

It's Daniel along with Nick. Maybe following up on John's question earlier. Alex, how are you underwriting rent growth on new acquisitions today in those higher supply markets? And I think you mentioned flat in the first year or two, but that probably assumes some high growth in the out year. So curious how you were maybe just generally private market players are baking in that rent growth to get the IRR math to work?

Hey Daniel, it's Alex. So every property is a little different, but certainly, all three markets are seeing higher than historic supply. So across the board, the first year has always been a little less than what the prior year was. The second year is maybe flattish to a little bit less. But part of that is offset by operating efficiencies that we have from our platform and other income that we're layering in. So the net-net is an improvement by the end of the second year. And then we do think that in years three and four, we will see outsized growth. So if you thought the historic norm might be 3% to 3.5%, I think 4.5% is going to be highly achievable. And so we do factor that in—depending a little bit on the approximate supply for each asset—but that's generally the trend that we show.

Sorry, I was on mute. I appreciate that. And then I had a follow-up maybe for Mark. Just wanted to ask your high-level thinking on the election, different legislative things. Are there different—what are the variables maybe you're focused on? Maybe what's less topical now? And do you think maybe could be more topical next week or next year?

Thanks for that question. Of course, the federal election is getting a lot of attention. I will say state and local government is generally more impactful to our business. And so most of our focus and the industry's focus has been on Proposition 33 in California, and we've been very active there, and we remain optimistic that Californians will reject for the third time this sort of anti-housing rent control proposal. So that is certainly topical. Depending on the President, there is a difference in approach there. The federal government has important levers it can pull in terms of the GSEs, Fannie and Freddie, and how they put capital into the market and FHA and HUD as well. So I guess that's an impact. So we'll have to see all that settle out. And then, of course, whoever is President will inherit some challenging budget circumstances, and we'll see how that impacts things like the voucher programs, expansions of which is the low income housing program. The middle income housing tax credit program the industry is advocating for is another topic. So there's a lot of topics on the table that I hope in a week, we know a little bit more certainty. But the main discussions that the industry is having right now and the main focus are the state ballot initiative in California. And we've had some terrific dialogue across the country in the last year or so, whether it's the Massachusetts housing bill, which was very supply focused, very much trying to generate affordable housing, whether it's in Florida, a very different government there, of course, their housing bill, which again focused on supply and zoning reform, California, transit-oriented development, the Governor is focused on. So I think everyone gets the message about supply being a solution. I think the industry has just got to push that, whether it's the federal or state level, as well as voucher enhancement and public-private partnerships like 421-a and local programs. So again, I think we're going to have a great dialogue when the smoke clears, but for a week or maybe a little longer, there's going to be a little uncertainty.

Right. Thanks for the time.

We'll go next to Adam Kramer with Morgan Stanley.

Great. Thanks for the time. I wanted to ask maybe a couple of quick ones. Where is the loss to lease in the portfolio today? And where are you sending out renewals for November, December here?

Hey Adam, this is Michael. So first, I'll just start off. At the beginning of the year, we actually started in a moderate gain-to-lease position at about 60 basis points. And then as that pricing can improve we moved ourselves back into a loss-to-lease position. As of the middle of the month, October 15, we were in a slight gain-to-lease of about 10 basis points which, again, it tells us that we're going to wind up at the end of the year in a normal range. Because any given year, you can start in a slight gain or a slight loss to lease position, but that's kind of where we're positioned right now. We do have a little bit of that easier comp in the fourth quarter in a couple of these markets. So we'll see how that plays into the final year-end number. In terms of the renewals, right now, our quotes are out in the marketplace for the next 90 days. We still expect to continue to renew a high percentage of our residents. We put some stats in there. We've been really focused on that, the customer service side of the business and leveraging our centralized team. With the quotes that are out in the marketplace that are around a 6.5% or 7%, we expect to achieve around a 4.7% renewal increase, or a little bit better because, obviously, if the markets continue to improve in some of those West Coast markets, we have the ability to dial down some of the negotiations that we're doing, which could produce a little bit higher results in the quarter for us.

Great. That's really helpful, Michael. Thank you. And just maybe switching gears on kind of external growth, maybe a two-parter here. I guess first part is just when you're thinking about dispositions going forward, which markets are you focused on? And then the second part of that is, obviously, pretty quiet here with this large portfolio. Is there more to come? And if so, is it kind of more on the one-off side of things? Or is there the potential for kind of further portfolio opportunities here?

Hey Adam, it's Alex. First, on the disposition question. As we've talked about in the past, we are focused on decreasing the exposure in California, and we've done that recently, and we'll continue to do that. We'd also decrease more in the urban core of a couple of other cities as well outside of California. It's just not a great bid right now for that yet. But we're starting to hear requests for information about properties. We're talking to people who are kind of taking a contrarian view. But as you know, we're never in a position where we have to sell something. So we're just kind of waiting for the market to come to us a little bit on that. But I think you'll see us continue to spread our footprint into these expansion markets and then within our coastal markets become a little bit more suburban than we are right now. So a little more suburban, a little less urban perhaps. In terms of one-offs versus portfolios, we're out there trying to create opportunity every day. That's how the Blackstone deal came about, and we're talking to any of the major developers or owners and we would love to do business and volume. And if not, we'll keep doing the one-offs, but we expect to be able to find more opportunities like the Blackstone deal.

Great. Thanks for the time.

We'll go next to the line of Josh Dennerlein with Bank of America.

Hey guys. I just wanted to follow up on one of the opening remarks about the resident AI rollout and how you're going to get to 75%, 80% coverage pretty shortly. I guess—just how should we think about the benefits of this rollout impacting the P&L? And then maybe any thoughts on potential margin improvement opportunity here?

Hey Josh, this is Michael. Maybe I'll start with what we're doing. We were early pioneers of leveraging AI into our leasing process back in 2019. And you saw that benefit almost immediately in the reduction of on-site payroll or mitigating payroll growth on site as we continue to centralize a lot of those customer experiences. Right now, in this last quarter, what we're doing is rolling out an AI tool that deals with resident inquiries—questions that residents have, not necessarily prospects. And what we hope to see with that is that as these machine learning applications get in there, they get better and better. Out of the box, we started with about 60% coverage of being able to answer inquiries from our residents. We think over the next couple of quarters, we'll get to that 75% to 80% range. And really, what you get then is you get another layer of operating efficiencies, whether that's on the on-site side, where we're able to pool or flex staff across multiple properties even further than what we've already done, or you start looking into our centralized teams and you say where can we create efficiencies there so we could take on new tasks. So we're really excited. This is something that we're never done with, but you're seeing some of these applications come to the market that really do have a pretty quick impact on the operations of the company. If you were asking about margin expansion specifically, part of this is bluntly blunting payroll inflation and allowing us to control on-site costs which supports margin preservation and potential modest margin improvement over time as revenue grows.

Thanks guys.

We'll go next to the line of Julien Blouin with Goldman Sachs.

Yes. Thank you for the question. Bob, you talked about an openness to continue to deploy leverage capacity here. Maybe, bigger picture, I get the geographic mix reasons for the acquisitions. But why does now feel like the right time to be deploying your leverage capacity into acquisitions when maybe the spread between cap rates and your cost of debt remains at some of the tightest levels in maybe the last decade?

Interesting. I'm going to start, and Alex may add to it. Cap rates aren't the only inputs to this calculus. Replacement cost is really important, too. And as we've said on prior calls, the replacement cost thing isn't just about buying an asset at a good basis; it means it's unlikely there will be a lot of supply there because it's not an economic incentive to build. So in our minds there are probably much better revenue growth prospects, especially in the outer years as Alex described—years three and four—than what we've underwritten. That's part of what we're buying as well here. In terms of the spread between our cost of funds and the disposition assets and the like, you also have to think about CapEx. The assets we're buying generally are pretty new and have relatively little capital. You saw us sell and we'll continue to sell these much older assets with a bigger capital load. So when you think about AFFO yields, those are better than they look on the surface on the FFO side. Apartments are such a desirable and liquid asset class, the idea that you will get very large spreads between your cost of capital and what you can invest at is uncommon. We just don't see that happen often in the last decade. So some other sectors may have that phenomenon more frequently, but for apartments, the market is very liquid and competitive, so compressions to cost of capital tend to happen quicker.

Got it. And maybe thinking about the other potential use of capital—development. I know your view over an entire cycle is that acquisitions produce better risk-adjusted returns on your capital. But I guess at this point in the cycle, why not tilt more aggressively towards developments? I know you expect to complete $780 million in 2024 and 2025. But why not bring that a little bit higher?

Hey Julien. The markets we're particularly interested in like Denver, Dallas and Atlanta have all the supply coming. So sure, we could look at building into those markets. But I'm not sure that's the best risk-adjusted return when you compare to buying existing properties at attractive bases in the markets we like. Our development is instead focused on places where we don't see those buying opportunities. That's why you saw us with starts in suburban Seattle and suburban Boston, where historically it's hard to amass a portfolio with one-off acquisitions. So development will remain targeted, not broad-based, and focused where it complements our acquisition strategy.

Got it. Thank you.

We'll go next to Jamie Feldman with Wells Fargo.

Thanks. I know we've covered a lot of ground here. I guess, just thinking about insurance, I know your renewal doesn't come up until March, but can you give us any initial thoughts just where you think property insurance or commercial property insurance rates are heading and what your conversations look like?

Hey Jamie, it's Mark. Coincidentally, I was just talking to the risk management team yesterday about that. Our renewal on our property insurance is due in March each year. Just to remind everyone, our increase was about 10% year-over-year, and that included us increasing our coverage a bit as well. We had a pretty good renewal. Remember we didn't have those giant renewals that others with more hurricane exposure had. We don't own in places with windstorm risk, so that's a huge benefit to us. Having spoken through our risk management team, the two big storms this year didn't have a big impact on 2025 renewals at this point because insurers had relatively little exposure to Hurricane Helene, and the exposure that was triggered on the other storm was within what they thought they would underwrite to. So it appears to us that the insurance market was mostly prepared for what occurred. I can't give you an exact number because we're still rolling up budgets. But we haven't heard from insurers that this is going to be another catastrophic increase in insurance rates like after Hurricane Ian.

Okay. Thank you for that. And then I guess just quickly for Bob, the debt coming due in 2025, any initial thought on timing of when you'll try to address that?

Yes. So we have about $500 million coming due in 2025, which is in the middle of the year. We'll look at the market opportunistically. $500 million for a company of our size, given our liquidity and credit rating, is manageable. We'll be opportunistic in minimizing the cost. We have many variables we can pull—tenor, size, and composition. Our target for floating rate exposure is around 15% and we're under that right now. If the Fed starts cutting aggressively, having a bit of floating exposure could be useful. We have a lot of options and excellent access to capital, so we'll be practical and opportunistic on how we address that maturity. The June maturity is manageable.

Are there any types of instruments that look particularly interesting to you now?

It's so volatile that it changes almost daily. The 10-year $600 million we issued in September was very attractive when the treasury rates looked favorable. As the curve steepens, shorter tenors become more interesting because you get paid for duration. Because our duration is long and we have some 30-year outstanding, we can take advantage of that. We also have capacity for some short-term usage via commercial paper. So it's a mix—tenor, price, floating rate mix. We'll see what the market offers as we get closer.

Okay. Great. Thanks for your thoughts on it.

Our next question comes from Linda Tsai with Jefferies.

Sorry, if this question has been asked already. Is there a sense of when new lease spreads get more positive?

Hey Linda, this is Michael. There's a lot of seasonality in new lease spreads. You should expect, as we typically say and as shown on Page 5 of the management presentation, that pricing trends decelerate in the fourth quarter and then start to accelerate in the first part of the next year. Typically you start to see positive new lease spreads in the later part of the first quarter as leasing season ramps up.

Thank you.

We'll go next to Alex Kim with Zelman & Associates.

Hey guys. Thanks for taking my question. I'm going to piggyback off Julien's second question a bit here. Can you talk through what you're seeing in your expansion markets that makes them so attractive on a long-term basis and then, I guess, any other markets you're looking at that fit that criteria as well?

Hey Alex, it's Alex. We're really following our customer. We see high-quality jobs infusing markets that didn't have them in volume like Denver, Dallas and Atlanta. That drives demand from our target renter demographic. Other markets we look at are Charlotte and Raleigh in North Carolina—both have growing tech and finance bases. But we've been slow to enter some of these markets like Austin because the amount of supply is daunting. We'll enter when supply conditions are more digestible. We may also be opportunistic in others over time.

Got it. That's it for me. Thanks for taking my questions.

We go next to Rich Anderson with Wedbush.

Hey, thanks. Good morning. So first question on the Blackstone deal. Bob, what's the longer-term plan on the commercial paper side of the financing?

In the near term, a good component of it will be disposition proceeds because the CP balance was partially elevated just from timing and disposition. We still have about $400 million of dispositions planned for the back half of this year or fourth quarter which could slip into early Q1 of next year. That will bring our CP balance back to a normal range of around $500 million to $700 million. So it's really disposition-driven in the near term.

Okay. And then a bigger picture perhaps for Mark. In 2016, the company sold a chunk of Sunbelt properties and now you're kind of reversing course with the expansion today. Is this all a function of how tech businesses have moved and business-friendly climates have improved, or is there something else that has caused the company to reverse course on the Sunbelt? Why now versus the decision you made eight years ago?

Thanks, Rich. Everyone adjusts their market mix over time. Regulatory risk increased in some coastal markets. Also, our customer has changed—there are more higher-end jobs in Sunbelt markets like Atlanta than there were when we reduced exposure. Single-family housing costs in some Sunbelt markets have increased, meaning renters are staying renters longer in desirable areas. So it was a combination: regulatory risk in coastal markets, following our residents, and higher housing costs in desirable Sunbelt areas. That all supports the move to selectively increase exposure in those expansion markets.

Okay. Good luck. Thanks very much.

We have no further questions. I'd like to turn the floor back to Mark Parrell for any additional or closing remarks.

Thanks, Melinda. As we close the call, I want to thank my colleagues at our Augusta, Georgia Accounting Center for the work above and beyond the call of duty to close our books in the aftermath of Hurricane Helene's terrible damage to that city. I salute all of you and the folks in the accounting here in Chicago; we picked up the slack and got all our quarter-end financial work done on time. There are other conference call listeners, thanks for your time today, and we'll see you on the conference circuit for the rest of the year. Thank you.

This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time.