Earnings Call
Equity Residential (EQR)
Earnings Call Transcript - EQR Q1 2022
Operator, Operator
Good day, and welcome to Equity Residential's First Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Marty McKenna. Please go ahead.
Marty McKenna, Investor Relations Moderator
Good morning, and thanks for joining us to discuss Equity Residential's first quarter 2022 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; Bob Garechana, our Chief Financial Officer; and Alec Brackenridge, our Chief Investment 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.
Mark Parrell, President and CEO
Thank you, Marty. Good morning and thank you all for joining us today to discuss our first quarter results. In a minute, Michael Manelis will walk you through a market update, and then we will take your questions. The growth in our business continues as evidenced by our first quarter performance. Demand is strong and lease rates are growing faster than we expected. While we are well aware of the recent increases in economic and geopolitical uncertainties, we continue to manage our business by focusing on our operation dashboards, not on the news headlines. Those dashboards continue to nearly universally flash a green signal as our well-located properties and excellent service attract our affluent renter demographic in droves, allowing us to retain a record number of our residents and push rents up nearly everywhere we operate. All of this allowed us to increase normalized funds from operations by 13% in the quarter and we expect this growth to accelerate over the next few quarters. As we mentioned in our March operating update, our first quarter same-store revenue results were negatively impacted by an increase in delinquency in Southern California. It appears to us that a relatively small number of Southern California residents, who had previously been good payers, declined to pay rent in order to apply for state rental relief funds. While we remain open to working with residents with true COVID-related hardships, this sort of behavior is not acceptable, and we will continue to work with these residents to obtain our full rental payment. Translating all this into the numbers, first quarter same-store revenue results were about 125 basis points lower than we anticipated due to this higher bad debt, partially offset by about 25 basis points of better rate growth, leaving the final quarterly same-store revenue number about 100 basis points lower than we expected when we gave you guidance back in very early February 2022. Normalized funds from operations in the quarter ended up being about $0.01 lower than we expected with a $0.02 per share or about $6 million hit from higher bad debt, offset by the better rate performance I just mentioned, and the better-than-expected expense performance that I'll discuss in a moment. As we think about the full year, we feel that we are in a stronger operating position than we had initially contemplated in our full year guidance with a better lease rate growth trajectory more than offsetting our now more cautious view of delinquency. Turning to expenses, our residents appreciate the increasingly seamless digital experience we are providing them, which in turn allows us to have a smaller and more focused property management team. As a result of these efficiencies as well as low property tax expense growth, we're able to deliver 2.5% same-store quarter-over-quarter expense growth in an increasingly inflationary climate. We look forward to continuing to drive innovation and to expanding our operating margins over the balance of the year, while creating remarkable experiences for our customers and for our employees. On the transaction side, as we expected, we did not have much activity in the first quarter. We purchased one asset in San Diego that we discussed in the release and after the quarter end, sold one asset in New York. With that, I'm going to ask Michael to fill you in on the operating details. Go ahead, Michael.
Michael Manelis, Chief Operating Officer
Thanks, Mark. We are pleased to report that we are seeing pricing power ahead of our expectations. Strong demand is being driven by the desire of affluent residents to live in our well-located properties, both urban and suburban. We have talked in previous calls about the recovery in our business being connected more to the lifestyle that our residents crave and less to how many days workers are expected to be in the office and that pattern continues. I have visited several of our markets over the last few months, and I am excited by the vibrancy that I'm seeing. We reported 96.4% occupancy for the quarter, which is 140 basis points higher than the first quarter of 2021 and in line with our expectations. First quarter reported turnover of 8.7% was over 100 basis points lower than the first quarter of 2021 and represents the lowest reported turnover in the history of our company. This trend reaffirms the desirability of our product as our existing residents signed renewals at record levels with increases that averaged 11.9% in the first quarter. This trend continues into the second quarter with preliminary April renewal increases averaging 12.5% with approximately 60% of our residents renewing. We are limiting rate negotiations, given the strength and demand of new residents, willing to pay full price to live in our communities. As we begin our primary leasing season, we feel really good about our pricing position, which includes the near elimination of concession usage across the portfolio outside of Seattle and is translating into robust new lease change performance with April on track to deliver just over 17.5% new lease growth after posting over 15% in the first quarter. Now, let me give you some color on the markets. Beginning with Boston. Boston is following normal seasonal patterns with improving demand and pricing heading towards the spring. We're almost 97% occupied and the market is benefiting from the big college campuses being opened and the return of international students and workers and the continued strong demand drivers from lab and life sciences, financial firms, healthcare and education. Competition from new supply will be modest and market performance should be strong. New York continues to thrive and was our best performing market in the first quarter with same-store residential revenue growth of 13.6%. We're 96.9% occupied and continue to expect this market to be our best performer in 2022. Demand is robust. We're renewing about 60% of our residents, which is healthy, but 5% lower than at the beginning of the year. This is primarily due to deal seekers choosing to move out versus paying the higher current price. But it is not a concern since we are easily able to attract new residents at these higher rates. We still expect to feel some pressure from new supply on the Jersey waterfront and Brooklyn later this year. Washington, D.C. is performing as expected with residential same-store revenue growth of 3% in the first quarter. This market was our best performing East Coast market in 2021 and, as I mentioned in the past, has the least ground to make up. As is often the case in D.C., new supply is likely to pressure rate growth in the market but the metro area continues to boast record absorption. Strong employment across job sectors in the market is driving this demand and we are 96.7% occupied. We are renewing about 60% of our residents and feel good about our positioning for the spring leasing season. Before I talk about our West Coast markets, let me give you a little color on our expansion markets. Denver continues to demonstrate very strong demand; we’re almost 98% occupied and delivered same-store revenue growth of almost 13% in the first quarter. Despite turnover being on the higher end, we are seeing very good pricing power and healthy occupancy. In Atlanta, our acquisitions are performing ahead of their pro forma performance as the market continues to produce strong rent growth. Dallas and Austin continue to enjoy robust demand driven by very good in-migration and job growth in these markets. Out on the West Coast, Seattle continues to be slow to recover compared to the other markets, particularly in the downtown submarket. The good news is that the city's new mayor is focused on the quality of life issues, which we expect will have a positive impact. Also, job postings in the market are at the highest level we have seen with Amazon leading the pack with over 19,000 positions posted with 16,000 of them being in the city of Seattle, which is a good sign for future apartment demand. Market occupancy in Seattle currently sits just above 95%, which remains behind our expectations and turnover, albeit within historical norms, was the highest of all of our markets. The suburban portfolio is outperforming the city with the Bellevue/Redmond submarket seeing immediate demand improvement in March after Microsoft announced a return to the office. Year-to-date pricing remains flat in the downtown submarket with approximately 60% of new applications receiving a concession at just over a month and occupancy in this submarket is at 93%. Overall, we expect continued strength in the suburban portfolio and remain optimistic that pricing power and occupancy will improve in the downtown submarket as we are just now beginning to see signs of increasing demand as the quality of life issues continue to slowly improve. San Francisco has also lagged the recovery, but at the moment feels on stronger footing than Seattle. We are very encouraged by the recent announcements from Mayor Breed and the local large employers about a commitment to bringing office workers back to the city, which should help address quality of life issues downtown. There has been consistently good demand and early signs of improved pricing power that the market lacked in 2021. We’re almost 97% occupied and resident retention has improved from a year ago. Google, which has asked workers to return this month, made a recent announcement that it is investing more than $3.5 billion in California, including a big chunk in the Bay Area with significant projects in Mountain View, Sunnyvale and downtown San Jose, all areas where we have a significant number of communities. Pricing trend has increased almost 6.5% since the beginning of the year, which is better than the normal seasonal expectations, which would be in the 4% to 5% range. While this market’s pricing remains below pre-pandemic levels, the good news is that initial indicators point to a continued strong recovery of the market. Now let me move to Southern California, three markets that have performed exceptionally well, but for elevated delinquency. First, Orange County and San Diego continue to show remarkable performance with high occupancy and strong retention supporting very good new lease rents. Home prices in these markets are out of reach for many of our residents, which is evident by the significant decline of move-outs citing this reason during the quarter. We expect to see continued record high retention likely impacted by the local regulations limiting our allowable increases, increasing home prices and very limited competitive new supply. The result of these factors should allow us to maintain elevated pricing power throughout the year in these markets. Next, Los Angeles. Even with elevated delinquency LA continues to be a star performer. The entertainment content creation business is really thriving and driving demand. Occupancy is almost 97% and pricing power is strong and better than expected. The urban market's performance is now on par with the suburban portfolio, a scenario which we have not seen since the onset of the pandemic. The percent of residents renewing is the highest we have seen likely due to the impact of the local regulations limiting our allowable renewal increases and we expect to continue to renew between 60% and 70% of our residents. Now that rent relief coverage is no longer available for April 2022 rents, we have seen an early uptick in payment activity but remain cautious. I was in Southern California two weeks ago and I am very encouraged by what I saw. Our onsite teams continue to actively engage our non-paying residents and are just now beginning to see a few positive signs, either through payments being made or in some cases, residents deciding to move out and give us their apartments. Overall, the strength and demand and quality of our portfolio clearly points to above average performance for our Southern California markets as the delinquency issue slowly clears. On the innovation front, we finished deploying our centralized renewal process in the first quarter and are now focused on centralizing our application process. As we mentioned last quarter, the foundation of our operating platform is in place and we are focused on further process automation and multi-site coverage that will create additional efficiencies, while continuing to meet the ever-changing needs of our customers and provide them a seamless digital customer experience. Let me thank the entire Equity Residential team for their continued dedication and hard work. These are exciting times for our industry and the overall operations of our company. Not only are we on track to have a very strong year of financial performance, but we are also advancing our platform. Resident expectations are constantly evolving and our teams continue to focus on leveraging technology to meet those needs and drive operational excellence. Thank you. I will now turn the call over to the operator to begin the Q&A session.
Operator, Operator
Thank you. The operator provided instructions to participants on how to ask a question. We’ll take our first question from Nick Joseph with Citi.
Nick Joseph, Analyst (Citi)
Thank you. Hoping to get more color on the Southern California delinquency issues. When did it first start to pop up? How many residents? How many are paying now and is it kind of widespread across Southern California or is it concentrated in specific buildings?
Bob Garechana, Chief Financial Officer
Nick, it’s Bob. I’ll start with that. So we’ve had a concentration of bad debt in Southern California, as you mentioned, and in particular I think Los Angeles and the city of Los Angeles specifically. If you drill down even a little bit further there’s a handful of specific assets where it’s even more concentrated, and that was true for most of 2021. It peaked in terms of severity in September of last year and then pretty much stabilized and started to improve slightly in the fourth quarter, which shaped some of our perspective in our guidance. What changed or what happened in the first quarter was you saw a little bit of an uptick in terms of—as Mark mentioned in the prepared remarks—of residents, again concentrated in those specific areas, of about 300 more people that didn’t pay. We believe that may have been driven by the fact that they were applying for more rent relief. But they had previously been paying and then stopped. So you went from that kind of increase overall. As you go into April, and again it’s early and we haven’t finished up the month, as Michael mentioned, it appears that many of those people are at least starting to pay their April rent. What’s changed also is that under the rent relief program you could only have March eligibility, so rent that was through March of 2022 was eligible for the rental relief program. April is not. And so that probably is changing the behavior as well as some other opportunities we have to just communicate with residents.
Nick Joseph, Analyst (Citi)
Thanks. That’s very helpful. And then Bob, can you just remind us the bad debt policy and then what guidance is assuming for net bad debt for the remainder of this year?
Bob Garechana, Chief Financial Officer
Yes. So our bad debt policy in terms of our reserves is once you get three times behind your rent, we would write or reserve against that. We also write off any debt associated with people who move out. So there’s that combination. Also if you were three times behind but got rent relief so you weren’t the actual payer, we also reserve against that. So it’s a pretty conservative policy and we look at what residents themselves are doing from a payment standpoint. That policy hasn’t changed since kind of the beginning of the pandemic or even prior to that. Regarding guidance, our initial guidance back in January assumed that based on our experience in the fourth quarter that we would see improvement in the first quarter and then accelerate improvement through the rest of the year. What happened based on the first quarter has made us adjust that perspective a little bit—we still think that we will see the improvement, but it’ll probably be less pronounced and it’ll be further back in the year. Offsetting some of that change is that we now think we’ll probably have higher rental relief than previously expected, based on what occurred. So net-net, bad debt is probably going to be flat to maybe marginally helpful to growth between 2021 and 2022, whereas previously we had assumed it would be a contributor to growth. The good news is that everything else Michael talked about in terms of pricing is more than offsetting that, as Mark mentioned. So we feel very good about how we’re positioned going into the leasing season.
Nick Joseph, Analyst (Citi)
Thank you very much.
Operator, Operator
Thank you. We’ll take our next question from Steve Sakwa with Evercore ISI.
Steve Sakwa, Analyst (Evercore ISI)
Thanks. Good morning. I was wondering if you could maybe speak to the June and July renewal increases that are being sent out to help us frame against the April. And maybe how those numbers compare to when you set guidance several months ago? Where are those renewals and new leases in context of the revenue growth that you have currently out there?
Michael Manelis, Chief Operating Officer
Yes. So, Steve, this is Michael. When we’re looking at renewals right now, we’re not completely done issuing quotes through July. But if we step back and look at where we are for April and May and even preliminary June, we’re still putting out quotes that range somewhere between 14% and 15% for these months, which is probably about 200 basis points stronger than what we originally contemplated—this intra-period strength that we see. We do expect achieved renewal increases will moderate, especially on a net effective basis as we get into the back half of the year. When we look at July expirations, only 5% of our expirations for the month of July had a concession when they moved in a year ago. That will put a little pressure on our ability to post 12.5% achieved renewal increases. But right now the overall performance and even what we see for the next 90 days is trending about 200 basis points higher than what we saw and contemplated in guidance.
Steve Sakwa, Analyst (Evercore ISI)
Okay, great. And I guess Bob, maybe just going back to the guidance. I know the bad debt caught you guys by surprise and probably limited your desire at this point to kind of raise guidance. You see how things play out. But sounds like all the things Michael’s talked about trend-wise are definitely better than maybe what you thought at the start of the year. So, if this 125 or 100 basis point drag in Q1 really abates in Q2 and beyond, I guess I’m just trying to think through the potential upside to the numbers that you’ve currently got out there. How much wiggle room do you have to revisit guidance next quarter?
Mark Parrell, President and CEO
Steve, it’s Mark. We feel like we’re extraordinarily well positioned. The team would actually tell you we’ve never been in as good a spot. So we feel really good about the conversation we’re going to have with you in July about where the numbers are going to go. But we are entering into the beginning of the leasing season. It’s really hard to predict on the bad debt side. We may get more reimbursements, California may slow down. It’s just really unpredictable. So the exact place we’re going to end up—I do think there’s upside to the numbers—absolutely.
Steve Sakwa, Analyst (Evercore ISI)
Great. And then just one last question on transaction. Given the move we’ve seen in the bond market in the last six to eight weeks, are you seeing unlevered IRR hurdles change at all, levered buyers dropping out? I’m curious the transaction market dynamics with the sharp move in bond yields, and how that’s influencing your desire to put capital out.
Alec Brackenridge, Chief Investment Officer
Sure, Steve. This is Alec. You’re right. The market has changed a lot in the last three or four weeks from an interest rate standpoint. But there are countervailing forces at work. There’s still a lot of capital flowing into our sector, and operating results are still so good. It’s a really attractive place for people to put money. I would say the frostiness is gone, where a month or two ago we had multiple bidders going in and over ask and really bidding pricing up. Frankly, we didn’t buy in that environment because we thought it got overheated. So right now it’s kind of a feeling out process. But I don’t see distress sellers out there. Operations are really strong and there’s still a lot of interest in buying. So I don’t see any fire sales coming and certainly not for us. And when you ask about cost of capital for us, that really comes from our dispositions. We expect to continue to be able to sell at low cap rates and redeploy that money non-dilutively into our expansion markets.
Mark Parrell, President and CEO
Steve, to build on that, interest rates right now—the two-year and 10-year Treasury—are just back to where they were in early to mid-2019. We’re not at some crazy new interest rate level, yet our growth prospects are much better now for the industry and for our company than they were in 2019. A lot of that has been capitalized into the value of these assets being much higher now than in 2019. But I still think the growth picture, which doesn’t have any fractures in it for us, and I think for most of the industry, is very supportive of values. I’ll also add that I think the private market has recognized, and the public market is increasingly recognizing, that apartments are very resilient. This pandemic was about the worst thing that could happen to an urban apartment owner, and yet 25 months out we’re telling you about how well everything’s performing, how well occupied we are again, how we’re moving rents up. The combination of the market’s perception and the resiliency of the product, compared to other investment alternatives combined with growth prospects, makes us feel pretty good about value going forward. If you get into a stagflation environment the pressures would be different, but we feel strongly that values will hold in our portfolio.
Steve Sakwa, Analyst (Evercore ISI)
Great. That’s it for me. Thanks.
Mark Parrell, President and CEO
Thank you.
Operator, Operator
We’ll take our next question from John Pawlowski with Green Street.
John Pawlowski, Analyst (Green Street)
Thanks for the time. Alec, a few follow-up questions on the transaction comments. The dispositions you have teed up out in the market right now, could you give us a little color on how bidding intent for those assets has changed in terms of any rerating you’re seeing or the number of bidders getting whittled down, particularly on the levered buyer side?
Alec Brackenridge, Chief Investment Officer
Sure, John. I would say at this point there are some bidders stepping back who rely on higher leverage; it’s harder for them to underwrite. But both what we’ve been competing to buy and what we’ve had on the market has seen a lot of interest and a lot of tours on recent listings. So far we haven’t seen a dramatic move in pricing. I would say buyers and sellers are feeling out the market right now. It feels like there will be a market; there’s still a lot of capital out there.
John Pawlowski, Analyst (Green Street)
Okay. New York, specifically the additional sales that we can expect in the coming quarters—should we expect these low to mid-3% cap rates that we saw on 140 Riverside assets?
Alec Brackenridge, Chief Investment Officer
Yes. That’s generally been the case in the market and certainly for the properties that we’re thinking about selling. That would generally be the case.
John Pawlowski, Analyst (Green Street)
Okay. Thanks for the time.
Mark Parrell, President and CEO
Thank you.
Operator, Operator
We’ll take our next question from Rich Hill with Morgan Stanley.
Rich Hill, Analyst (Morgan Stanley)
Good morning, guys. I wanted to maybe talk about turnover for a second. I think on an annualized basis you were just shy of 35%. Do you think that’s sort of the new normal? Or do you think that will pick up in the peak leasing season? More specifically, can you walk through what’s driving the collapse in the turnover rate? Is it really because there’s no place to live and so people are just taking the renewals that you’re giving them and saying, well, it’s better than trying to find another apartment?
Michael Manelis, Chief Operating Officer
Rich, this is Michael. There is normal seasonality to turnover by quarter. The first quarter typically is one of the lower reported turnover numbers and it will tick up as you work your way through the leasing season and then fall back off again in the fourth quarter. We reported 8.7% in the first quarter; historically the first quarter is around 10%, so you could see the improvement that we’re seeing. My guess is as we work through the second and third quarter it will tick up, but it will stay relatively low compared to comparative norms. Part of the reason is the optionality—where are residents going to go? We’re delivering great service; our customer service scores are at all-time high levels. The price point we’re offering is competitive in the marketplace. There’s also regulatory limits that we bump up against in some markets which keep some residents renewing at increases below what otherwise might be market price. Over time, as we go through another cycle of renewals, those residents will catch up to market rates.
Rich Hill, Analyst (Morgan Stanley)
Got it. So pricing power is significantly in your favor. If we’re thinking about new leases and renewals, I have a hard time believing that something could lead that to start to roll over. Is that fair?
Michael Manelis, Chief Operating Officer
I don’t know exactly what you mean by rollover, but looking at the strength of reported new lease, renewals and blended rates and knowing where intra-period rent growth is today, we are going to produce stronger results in the second quarter than what we originally anticipated based on that strength. We still have a difficult comp period as we turn into the second half because of the recovery of rents last year, so increases will start to moderate in the second half. But relative to our original expectations, the strong early intra-period rent growth is the biggest catalyst for revenue growth this year, and that’s what we’re seeing.
Rich Hill, Analyst (Morgan Stanley)
Understood. One more: supply—starts and permits across the United States are pretty high. Do you think all those permits are going to become starts, and will those starts be delivered on time?
Alec Brackenridge, Chief Investment Officer
Rich, generally there haven’t been many projects that have stopped, but everything’s gotten harder and things are taking longer to deliver. There’s about a three-month lag typically, so pipeline delivery will be slower. It’s also gotten more challenging to underwrite future supply because costs are rising faster—costs that might have been increasing 0.5% a month are now increasing 1% a month—and materials like steel have increased while lumber may have abated. Interest rates are up, so development is more challenging to underwrite. We haven’t seen projects stop en masse yet, but it’s getting harder to make the numbers work.
Rich Hill, Analyst (Morgan Stanley)
Got it. Thank you, guys.
Operator, Operator
We’ll take our next question from Chandni Luthra with Goldman Sachs.
Chandni Luthra, Analyst (Goldman Sachs)
Hi. Thank you for taking my question. I wanted to talk about rent control. The narrative has heightened as we have seen large rent increases. Could you talk about what you are seeing in your circles—not necessarily in the markets you are in already, but generally in markets you are planning to expand in—and how you think rent control being offered as a solution to the housing crisis might play out?
Mark Parrell, President and CEO
Thank you, Chandni. Rent control continues to be a conversation not just in coastal markets but also in places like Florida and other jurisdictions because rents are up significantly in many areas. In some coastal markets these increases are just recovering rents to pre-2019 levels; in some places they’re significantly higher such as Southern California. Our residents’ incomes have continued to rise, which helps offset pressures. The biggest thing is we need to keep as an industry focused and have productive conversations with policymakers and voters about how rent control doesn’t work. The industry is organized on these topics and we’re continuing to advocate for zoning reforms, regulatory reforms, and public-private partnerships like 485w in New York. We acknowledge the lack of affordable housing is a serious issue that requires effective public policy rather than blunt rent control measures. That is one reason we are diversifying our strategy to mitigate political risk. New York will remain a great market and a leading revenue growth driver, but we are selling some assets we intended to sell before the pandemic for reasons like tax abatement expiration or ground leases. Diversifying helps reduce exposure to political risk and creates a more balanced company with more reliable cash flows. Rent control is a risk and it influences our capital allocation decisions.
Chandni Luthra, Analyst (Goldman Sachs)
Thank you. And a follow-up on seasonality now that you’re entering peak leasing season. Is seasonality typical or still atypical? Are we back to 2019 patterns? Any color would be helpful.
Michael Manelis, Chief Operating Officer
Chandni, typically transaction volume seasonality is about 20% in the first and fourth quarters and about 30% in the second and third quarters. We did see a little shift during the recovery in 2021, but right now we’re getting very close back to those normal percentages. We had slightly more expirations in Q1 of this year—about 24% versus the 20% norm—but as we work through new leases and renewals we expect to be back in line with normal seasonality by next year.
Chandni Luthra, Analyst (Goldman Sachs)
Okay, thank you so much.
Operator, Operator
We'll take our next question from Nick Yulico with Scotiabank.
Nick Yulico, Analyst (Scotiabank)
Thanks. I wanted to go back to the bad debt number. I think you said $6 million was the uptick in bad debt versus what you expected. Is that $6 million only applying to the 300 additional people in Southern California that didn't pay, or are there other pieces within that $6 million?
Bob Garechana, Chief Financial Officer
Hi, Nick. There are other pieces associated with it. It’s probably about half attributable to the 300 additional people that didn’t pay and the other half is that we had anticipated improvement based on our fourth quarter experience and we didn’t see that improvement—so it stayed flat relative to our expectation that it would decline, and then on top of that, we added the 300 people.
Nick Yulico, Analyst (Scotiabank)
Got it, thanks. And another question—some residents moved in over the last year and a half with concessions like free months. As those leases turn this summer and are pushed up to market, do you have any early read on how those negotiations are going? Are people moving because they had those concessions last year and now face higher rents?
Michael Manelis, Chief Operating Officer
Nick, in New York in the first quarter we were renewing about 60% of our residents versus higher levels late last year. We started to hear in late February and early March that some Manhattan residents facing increases chose to move across the river to the Hudson Waterfront to trade down for rent. Given our strong demand, we’re comfortable with that trade-off and we are centralizing our renewal negotiation team to be strategic and consistent in markets. The results appear consistent. Also, concessions ramped down last year, so by July there will be very few residents with big concessions when they came in.
Mark Parrell, President and CEO
Nick, I’ll add: we qualify everyone on the basis of their base rent. They may have gotten a one- or two-month concession from us, but they can afford to pay the face rent. The disappearance of a one-month concession is an 8% increase in revenue from an accounting standpoint, but those residents had been paying us at the face rent level for 11 months out of the year, so for many residents there’s no material change beyond the renewal increase. Also, the concessions diminished through last year so this is a tail issue.
Nick Yulico, Analyst (Scotiabank)
Okay, great. Thanks.
Operator, Operator
We'll take our next question from Brad Heffern with RBC Capital Markets.
Brad Heffern, Analyst (RBC Capital Markets)
Hi, good morning. You mentioned a decline in residents moving out to buy a home in San Diego. Is that trend seen across the portfolio as well?
Michael Manelis, Chief Operating Officer
During the first quarter we did see a decline in the percent of move-outs citing buying a home—turnover was low, so the absolute number leaving to buy a home is materially down. The percentage ticked down to about 11.5% of moves citing that reason, in line with historical norms of 11% to 12% and reduced from about 15% in late 2021. Supply constraints, high single-family costs, and rising mortgage rates should keep this percent low and reduce pressure on move-outs from this reason going forward.
Mark Parrell, President and CEO
Because renewals are so high the absolute number actually moving is really small. A percentage can be misleading when applied to a much smaller base of people leaving for any reason.
Brad Heffern, Analyst (RBC Capital Markets)
Okay. Have you seen any change in demand for one-bedrooms versus two-bedrooms? Are people doubling up again given rent increases?
Michael Manelis, Chief Operating Officer
We really haven't seen much change. We're back to pre-pandemic levels averaging about 1.7 adults per occupied unit. During the pandemic studios were the lowest occupied unit type but they’re recovering: studios were 95.9% occupied in Q1 and today at about 96%. Studios still trail other unit types, which is fine if vacancy is to occur at the lower price-point unit type.
Brad Heffern, Analyst (RBC Capital Markets)
Okay, thank you.
Operator, Operator
We'll take our next question from John Kim with BMO Capital Markets.
John Kim, Analyst (BMO Capital Markets)
Thank you. You have a fair amount of debt expiring this year and next. There is no debt offering in your guidance. What are your thoughts on refinancing some of that debt with equity given your implied cost of equity is lower than your long-term cost of debt?
Bob Garechana, Chief Financial Officer
I'll start with the debt maturity profile. This year we don't have much debt maturing and next year is the larger amount—about $1.3 billion or so—some of which is secured and needs to remain secured for structural reasons. We have no debt maturing in 2024. Over a three-year horizon it's an average to below-average maturity profile. We have lots of flexibility in the debt markets to refinance—short- or long-dated, fixed or floating, secured or unsecured. Our leverage is low relative to targets and we expect it to remain low, particularly as recovery continues and performance is strong. Mark can address equity more directly.
Mark Parrell, President and CEO
Thanks, John. While the FFO yield compared to interest rates may look lower, the long-term cost of adding partners—equity—is different. Given the debt capacity we have and access to the whole curve—with some debt issued at 30-year maturities and a low percentage floating—we have many options. We can manage rate increases without issuing equity. Also, we don’t believe the stock is trading above our internal NAV estimates, so issuing equity right now would likely be dilutive. We prefer to use the debt markets and other options rather than equity issuance.
John Kim, Analyst (BMO Capital Markets)
Okay. Mark, you mentioned reasons for selling more New York assets and deemphasizing the market. Has a strong rebound in rents in New York caused any reconsideration?
Mark Parrell, President and CEO
We remain very positive on New York. We have great properties and a strong team. The assets we’re selling were intended to be sold pre-pandemic for reasons like tax abatements expiring, ground leases, or heavy renovation plays that are better suited to other owners. We're keeping the assets that will drive performance; New York will continue to be a growth driver. We did sell and will sell some assets to harvest gains and to diversify away from regulatory risk, but it doesn’t change our view on the long-term value of New York.
John Kim, Analyst (BMO Capital Markets)
I appreciate it. Thank you.
Mark Parrell, President and CEO
Thank you.
Operator, Operator
We'll take our next question from Rich Anderson with SMBC. Your line is open.
Rich Anderson, Analyst (SMBC)
Apologies, I was on mute. On guidance and your decision not to raise it—two of your peers did this quarter and you had done it last year. Is it entirely the unknowns around bad debt that caused you to hold the line? Or were there other factors behind your decision to wait until next quarter to reassess guidance beyond just the bad debt issue?
Mark Parrell, President and CEO
Rich, last year was unique and guidance dynamics were special. Since early in my tenure we typically don’t adjust guidance in April because it's early in the leasing season; we try to give a high-quality view when we issue guidance in February. Other companies have different processes. We started with a higher range in February so we don't need to adjust in April. We'll have a much clearer view in July and will address guidance then. It's not about whether we can raise every quarter—our approach is to give meaningful updates at the right time.
Rich Anderson, Analyst (SMBC)
Understood. Second question: given the incredible environment you're in, are you doing things differently to lock in growth for 2023 and beyond—longer lease terms, other strategies—to protect against potential deceleration?
Mark Parrell, President and CEO
We considered longer-term leases, but the one-year lease custom is deep in our business and in most markets there’s not much uptake. In New York we must offer two-year leases and uptake is low. Operationally we are focusing on efficiencies and managing payroll given inflationary pressures—we expect inflation to persist and we're adjusting processes and people to that environment. On the transaction side, the opportunity to sell older, more capital-intensive assets in markets with regulatory risk and redeploy proceeds into expansion markets with newer, less capital-intensive product without dilution is a powerful advantage. We’re taking full advantage of that.
Rich Anderson, Analyst (SMBC)
Okay, fair enough. See you in New York.
Mark Parrell, President and CEO
See you there.
Operator, Operator
We'll take our next question from Joshua Dennerlein with Bank of America.
Joshua Dennerlein, Analyst (Bank of America)
Hi, everyone. I appreciate the market color. Curious on the LA market: year-over-year same-store revenues were up 8.6%. What would that have been if you backed out the delinquency impacts?
Bob Garechana, Chief Financial Officer
That would have been a little over 200 basis points better, so something around 11%—not dissimilar to Orange County and San Diego.
Joshua Dennerlein, Analyst (Bank of America)
Okay. Michael, you mentioned centralizing the application process. What's the benefit—expense front, revenue growth, or something else?
Michael Manelis, Chief Operating Officer
It’s part of the plan to centralize on-site tasks into a group where we can create operating efficiency and run assets with fewer people in the office using a multi-site coverage model. We started with renewals and saw immediate benefit by creating guardrails in negotiations. Centralizing application processing creates efficiencies and fewer touch points for prospects, more seamless experience, and we’ll also centralize evictions and delinquency processes. We're reviewing every on-site task for opportunities to streamline and reduce touch points.
Joshua Dennerlein, Analyst (Bank of America)
Awesome. Thanks for the time.
Operator, Operator
Next we’ll go to Haendel St. Juste with Mizuho.
Haendel St. Juste, Analyst (Mizuho)
Hi. A couple questions. First on transactions: it’s almost May and you've only done about $100 million in acquisitions and $200 million in dispositions, well behind the $2 billion annualized pace. Are you waiting for the market to settle? Are you looking to sell more aggressively now and buy later given rising rates? Is anything under LOI or far along?
Alec Brackenridge, Chief Investment Officer
Haendel, the whole market took a pause at the start of the year after a busy late 2021 when we closed multiple deals. The market resumed in February but it was frothy with many bidding wars; we didn’t step into that environment. Now the market has calmed down a bit and we expect to pick up pace. Last year we bought and sold about $1.07 billion each, and picking up to that pace is our goal. We are actively pricing deals right now.
Haendel St. Juste, Analyst (Mizuho)
Thanks. Based on your comments, San Francisco might be standing out in terms of expectations versus now. Is that fair, and what’s your sense of same-store revenue potential today in San Francisco versus the 7% you outlined a few months ago?
Michael Manelis, Chief Operating Officer
This is Michael. San Francisco is improving and we’re starting to see the pricing power come back. From our full-year expectation of about 7% at the beginning of the year, we see a 50 to 60 basis point improvement to the full-year projection right now. More importantly, pricing power is improving week to week, so heading into May and June we have a great opportunity to write leases at higher rates than we previously thought.
Haendel St. Juste, Analyst (Mizuho)
Can you give an updated loss-to-lease quote for the portfolio?
Michael Manelis, Chief Operating Officer
As of April 15, the portfolio loss-to-lease remains at 11% for all leases in place. The strength of intra-period rent growth has allowed us to maintain that high level. Approximately 85% of leases in place are below current market pricing. We won't capture the full 11% this year, but maintaining that number positions us well for 2022 revenue and embedded growth into 2023.
Haendel St. Juste, Analyst (Mizuho)
Great color. Thank you.
Operator, Operator
Next, we’ll go to Connor Mitchell with Piper Sandler.
Connor Mitchell, Analyst (Piper Sandler)
Hi, thank you. How soon can EQR turn delinquent tenants over to the credit agencies?
Michael Manelis, Chief Operating Officer
Connor, there are nuances. For residents who have moved out and owe balances we can turn them over to a collection agency now and that process can begin. There are protected rent periods so it’s not as clean as pre-pandemic. What we started doing in April is credit reporting for folks with their April rent payments; the law shifted and we now report monthly our residents' payment behavior and any balances they owe to the credit agencies.
Connor Mitchell, Analyst (Piper Sandler)
Okay, thanks. As EQR moves into Sunbelt and non-coastal expansion markets, are you seeing different affordability dynamics—rent as a percent of income, tenant willingness to spend more?
Alec Brackenridge, Chief Investment Officer
Connor, when you look at rent as a percent of income, we’re generally tracking in the low 20s. We’re finding the same general renter profile—knowledge-based industries with growing incomes—which supports rent growth over time. We’re also growing off a lower rent base in many Sunbelt markets; if average rent is $2,500 versus $4,000, that’s an attractive spot for renters with good incomes.
Connor Mitchell, Analyst (Piper Sandler)
Okay, thank you.
Operator, Operator
We’ll go next to Anthony Powell with Barclays.
Anthony Powell, Analyst (Barclays)
Hi, good morning. A question on Los Angeles: you cited streaming content creation as a source of strength. There's been talk of streaming providers cutting content spend given competition—how much of LA's strength is driven by content creation and how do you see demand generators in LA overall?
Michael Manelis, Chief Operating Officer
Anthony, some announcements you read may impact 2023. Current demand in LA is strong. I wouldn’t quantify exactly how much comes from content creation, but West LA shows strength and inbound leads are strong across the LA market. It’s too soon to understand the long-term impact of recent industry announcements, but today demand is robust.
Mark Parrell, President and CEO
I’d add that entertainment is changing and LA remains a worldwide center for content creation. Even if big streaming budgets moderate, creators and production needs may evolve—short-form, independent production, and other avenues still support demand for services and talent in LA. One way or another, LA should continue to benefit.
Anthony Powell, Analyst (Barclays)
Got it. And rent as a percent of income remains low 20s—no movement even as you push rents higher. In inflationary times, might that change if other cost pressures hit renters?
Alec Brackenridge, Chief Investment Officer
Our typical renter is seeing income growth as well, particularly in the segments we serve, which helps keep rent as a percent of income stable.
Bob Garechana, Chief Financial Officer
At the portfolio level we’re at about 19.5% rent as a percent of income. For move-ins in Q1 the only notable change was New York moving from about 17.5% to 18%, indicating residents can absorb additional increases.
Anthony Powell, Analyst (Barclays)
Got it. Thank you.
Operator, Operator
Next we’ll go to Omotayo Okusanya with Credit Suisse.
Omotayo Okusanya, Analyst (Credit Suisse)
Good morning. Back to bad debt—why did this happen particularly in LA? If the eviction and rent protections were extended statewide through June 30, why is it only happening in LA? And when protections expire June 30, do you expect a repeat of Q1?
Michael Manelis, Chief Operating Officer
Omotayo, the concentration has been in Southern California and LA has the highest concentration. In January we saw rent relief payments slow as programs focused on first-time applicants and put recertifications on hold. In March the programs started to work those cases and overall for the quarter we came out about where we thought, but April has already shown more than $5 million in rent relief payments. The concentration in LA is due to where delinquency is higher and there’s more publicity around rent relief programs influencing behavior.
Mark Parrell, President and CEO
I'll add that in Los Angeles there are eviction moratoria elements and other protections that in some cases have created a moral hazard where residents may think they don’t need to pay. There are exceptions and legal avenues we can pursue, and we are actively engaging non-paying residents. We believe these emergency measures have served their purpose and should lapse; many of these protections remaining in place much longer would be unjustified. We are persistent and will follow the rules, but a vast majority of our residents are paying on time and like their communities. We expect the situation to improve, albeit slowly in LA compared to other markets.
Omotayo Okusanya, Analyst (Credit Suisse)
Great, thank you.
Operator, Operator
Next, Michael Goldsmith with UBS.
Michael Goldsmith, Analyst (UBS)
Good morning. First quarter same-store revenue and NOI were below the low end of the full-year range for reasons discussed. How should we think about the pace of acceleration through the year given tougher comps in the back half? When does this peak and what’s the exit rate into 2023?
Bob Garechana, Chief Financial Officer
Michael, the shape hasn't changed materially despite the Q1 bad debt impact. Q1 was always going to be lower given the compounding effect of rent roll and the comp period. Q2 and Q3 should be the peak relative to the full-year guidance range due to the comp period and compounding, and Q4 will have a more normal seasonality dip. Given the strong leasing season we may see normal seasonality less pronounced than assumed. We'll have more detail in July when we can give a more robust view.
Michael Goldsmith, Analyst (UBS)
Helpful. You’ve invested in technology initiatives and still have higher-than-usual staff vacancies. When does the new equilibrium between technology and staffing normalize?
Michael Manelis, Chief Operating Officer
Staff vacancies on site are just below 7%—about 100 basis points higher than historical first-quarter levels and much lower than the 10% to 11% we saw mid-pandemic. Recruiting and centralization efforts have reduced vacancies. We’re still in early innings of the broader centralization and process changes, and benefits will continue to flow into 2023. Much of the payroll improvement we reported in Q1 was from efficiencies created, not just vacancies.
Michael Goldsmith, Analyst (UBS)
Great, thank you very much.
Operator, Operator
There are no further questions. I will turn the call back to presenters for closing remarks.
Mark Parrell, President and CEO
Thank you all for your time on the call today. We look forward to seeing many of you at conferences and in your offices over the next few months. Stay well. Thank you.
Operator, Operator
That concludes today's call. Thank you for your participation. You may now disconnect.