Good afternoon, everyone, and welcome to Bank of America's 2024 Global Real Estate Conference. I'm Josh Dennerlein, and I cover the residential REITs at Bof A. We're pleased to have with us EQR CEO and President Mark Parrell and EVP and CIO Alec Brackenridge. Mark will start with a few opening remarks, and then we can jump into Q&A. As always, I encourage a lot of questions from the audience. With that, Mark, I'll pass it over to you.
Thanks, Josh. Thanks for including Equity Residential in the event.
Sure.
Just on the operations side, a week ago, we put out an operations update. Things are on track. Back in July, we raised the midpoint of our same-store revenue guidance by 70 basis points to 3.2%. We continue to be having a good year. There's always puts and takes. On the positive side, renewal, both renewal rate and renewal percentage are a little bit better than we had thought. Occupancy right now, 96.2%, a little better than we thought, so very good. We have begun the seasonal decline in rents. That does occur every year and occurred probably a little earlier than we had thought it would, but plateaued at that point, so it doesn't make a great deal of difference to the numbers. Makes no difference at all, really. On the delinquency side, we're on track.
We had told you we would improve that number by 30 basis points through the year, and we remain on track in that regard. That is a number that one month is great, and the next month makes a little less progress, so it is a choppy process, but we're on track, and it feels real, real solid. In terms of new lease rate, that is a little lower than we expected. That is a result of the occupancy play. We are pushing occupancy. That's a little bit better for us, particularly in Southern California. But again, all of this detail I'm giving you, you need to think about in context of the 3.2% midpoint for same-store revenue. There's always things that are a little better.
There's always things that are a little worse, and it's sort of how that interaction of those various levers that management is pulling end up, and so right now we feel like we're ending a good year on a good note and are setting ourselves up well for the future. Just in terms of market performance, the Northeast is better, so for us, that's Boston, New York, Washington, D.C., than we would have thought. Seattle as well. Those four markets together are 52% of the company. San Francisco is modestly better than we would have thought at the beginning of the year. San Francisco, though, is a market we didn't have great expectations for. We continue to be well occupied in San Francisco. It continues to be a little difficult to move rents in that market. But again, we do see green shoots.
We do see improvement in that market, downtown as well as the suburbs. But I think that is gonna continue to be a story that'll evolve. Southern Cal, there's a little bit of complexity there. We continue to work through delinquency issues in that sub-market. That is going well, but as I said, it's a process that's hard to predict, but it's, it's continuing. So these are moving out long-term delinquent folks and moving in rent payers. So you have a little shadow supply. I'd also say in Orange County and San Diego, those markets have been a little slower than we thought. Those are about 7% of our NOI, so they're not very big markets. They've performed very well for us. They've been up 30% from-- rents are from 2019 to now in a cumulative way.
But I also say sometimes you get rent fatigue, where residents will just move, and we're seeing a little bit of that. We saw that in New York last year, and then it picked back up. So this is something, again, not uncommon. It's sort of part of the puts and takes of running a portfolio our size. So that, again, is the sort of run-through. There's been a lot of discussion about credit quality. The credit quality of our residents is very good. We're not seeing any increased delinquency. We're not seeing people give us keys. We're not seeing people move down to smaller, cheaper units. None of those trends. We feel really good about the credit quality of our resident, which by and large is, you know, significantly higher than the market average in terms of income, and I think job stability.
With that, I'll turn it over to Alec to talk to you a little bit about capital allocation.
Yeah. Thanks, Mark. Well, we're excited 'cause the transactions market is moving our way. It's really a factor of a couple of things. One is that a lot of owners are putting their properties out on the market in higher volume. For the last couple of years, many of them were just not happy with the result that they would expect from a sales process, so they kicked the can down the road a little bit with their capital partners. There's some acquiescing going on right now as rates have come down. But what's exciting for us is that we have a relative cost of capital advantage, that I'll talk about in a minute, and we're also a preferred buyer. A couple years ago, everyone could be a buyer 'cause everyone had capital.
Now, our capital is cheaper, and our ability to move faster is a big asset. And that's enabled us to be pretty active for the last few months. You may have read about the $1 billion in acquisitions we did through a deal with Blackstone. That turned out to be a very positive relationship for us. It's an off-market transaction. We worked directly with them on three markets that we're expanding in: Atlanta, Denver, and Dallas, and identified specific sub-markets within those markets and the kind of property we liked. They gave us a list of 17 properties. We narrowed it down to 11. We were able to come to a price agreement on those. We're actually closing the final three tomorrow. So that's about $1 billion.
On top of that, we have another $300 million that we've already closed, all of which are in the expansion markets, and another $300 million under contract. All of those transactions were priced at around a five cap, when that's been the market clearing price up until just recently. And, you know, what we're seeing in the market today is cap rates drifting down a bit, you know, down another 15, 25 basis points. What made us excited about the Blackstone portfolio in particular was the ability to get volume targeted in our expansion markets at a 15% discount to replacement cost. And we were able to match that with the sources of capital that were non-dilutive.
That came from the $600 million in debt offering that we just completing literally today, at a 4.7% interest rate, 10-year money, unsecured. So that we combined with disposition proceeds of about $500 million, that, some of which have closed, some of which are in the process, and that'll be about a 5.2%-ish. So you blend that together with the additional capital that we took off the line, and we're able to do the transaction without meaningful dilution. So that helps further our goals. Now, we do acknowledge when we underwrite all of these opportunities, all of which, the 17 I just mentioned, are in the three expansion markets, are gonna see in the next couple of years be tough. There's still supply to be absorbed.
We're fortunate in those three markets aren't as bad as other markets that have, like, historically high amounts of supply in excess of anything we've honestly ever seen. And, you know, we're one of those is a market we happen to be in. We have three properties in Austin. Austin is seeing, you know, 7%-8% of inventory delivering this year and another 10% next year. I mean, it's just overwhelming in terms of that amount. There's a couple of other markets, Charlotte, Raleigh, Phoenix, you know, that, that are in similar conditions. Ours, not as bad, but we acknowledge that the next couple of years are gonna be tough.
When we underwrite these deals, it's, you know, looking at rents coming down a bit, for the first year, then flattening in year two, which gets us, like, through 2026, or halfway through 2026. We offset that by putting them into our platform. When we do that, we see increases in occupancy, we see less bad debt. There's another step down in operating costs once we can pod everything. We're getting to a point in these markets where we have enough of a presence to share staffing with properties that are proximate to each other. You know, we're happy to be able to make progress in this journey at a time that we think will get an advantageous basis.
But we're gonna continue buying because we think opportunities over the next 12-1 8 months will be in our favor and we'll be a preferred buyer.
If I can just put a bow on that so you see where this is headed, because I think the journey is well understood by the street, but where we're gonna end may be something we need to elaborate on a little bit more. So counting the properties that are now in lease-up, and we have lease-up assets in Denver and Dallas, particularly counting those properties in lease-up, all these deals we're closing. When they are all mature in our same-store, they'd be 10% of the company. Our goal that the board set for us is 20%. We could clearly be a little higher or a little lower than that, so 20% of the whole company. The rate we're going, we would expect to get there in another couple of years.
We picked that number so that we could have a portfolio that consistently compounded cash flow growth with the lowest amount of volatility possible. Markets like New York have very little supply, but they might have more regulatory risk. Markets like Dallas have relatively little regulatory risk, but they have significant supply pressures, and so again, you know, by having a portfolio that's levered to these high-earning renters, which is what we follow, so in a place like New York, those people will make $250,000 a year. In a place like Atlanta, those people make $100,000-$110,000, but they are higher earners, more durable, able to handle inflation, able to handle rent increases if we've got great locations and great product for them, so that's what we're trying to build.
To some extent, it's a portfolio that we think will consistently finish second, but over any single year, but over a lengthy period of time, we'll finish first. That's our goal. So again, put it on that expense machine. We're the best expense managers in the business. Very good at that. We show that in and out. So that's what we hope to put together for you. A low leverage, very expense-focused portfolio that has balanced growth, both demand, supply markets, and that balances this regulatory risk, resilience issues. And again, like I said, consistently top quartile performance each year will, over any longer period of time as owners, lead to the best performance. So that's what we're trying to put together.
Awesome. Yeah, thanks for those remarks, guys. A couple of questions I kind of wrote down. Maybe I'll start with just the operational ones. And, Mark, one of the... I think you mentioned there was an earlier plateau in rents-
Mm-hmm.
-in the portfolio. You know, any kind of thoughts on what might have driven that or why that happened?
It went up. See, this is, to what we could tell, natural variation, I call it, Josh. It went up faster. In a normal year, it'll go up rents from January first through the peak, will go up 6%-7%, and it'll usually plateau in, like, the later part of July and into August, right? What happened this year was it plateaued a little bit earlier, but it went there faster.
Sure.
Okay? So it got us there quicker, so the net effect of that is nothing, right, to the numbers. And there's always gonna be that little bit of natural variation because the business does just have that. It, it even could depend on things like the weather being poor in some of our bigger markets, and people just don't go shopping for apartments that weekend. You know?
Interesting. Were in any particular markets where maybe it was more pronounced than other markets?
So I'd say, you know, SoCal is one where, again, we knew about the delinquency issues, but our sense of Southern California, and for that, I'm really referring mostly to Los Angeles. There has been, you know, I think, some weakness we saw there. For us, we have a bigger downtown Koreatown portfolio than many, and I think that's where we're seeing most of the weakness compared to the suburban portfolio. But even in the suburbs, maybe a little less vibrant than we had hoped. Just to be clear, on Orange County and on San Diego, you know, our residents generally have done very well since 2019 in terms of income growth, and rents have matched income growth in those markets.
So those rent increases I talked about are basically in line with income growth because, again, it continues to be about 20% of our renters' income is given over to rent in those markets. But there's markets, and this is what's exciting about 2025 for us. Places like downtown Seattle, downtown San Francisco, some of downtown Los Angeles, rents are below what they were in 2019, but incomes are much higher for our residents, and supply is going down. So our hope, Josh, is that next year, our story to you that's differentiating from our peers is that, that improvement in conditions on the ground, that lack of supply and, knock on wood, a steady job market, doesn't have to be vibrant, but it can't be bad next year, will lead to us telling you we see that downtown urban West Coast recovery.
That's the same one that's happened, for example, in Manhattan, so two and a half years ago, we told you it was happening in New York, and we felt it. We feel really good about San Francisco. We feel really good about Seattle, and we can show you the Seattle numbers. We need L.A. to do that, too, and L.A. right now is still not downtown L.A. tracking up for us yet.
... Okay, and maybe exploring kind of the West Coast a little bit more. I think I wrote down, I think you said rent fatigue and-
Mm-hmm.
SoCal. I can't remember if it was San Diego or
San Diego and Orange County.
Okay, I guess, is that just affordability driven? And then, like, how do we tie it into last year? You mentioned, like, New York City was the rent fatigue market. Like, how did New York come out of a rent fatigue period?
Again, our experience, again, absent a recession or some macroeconomic factor, is that sometimes when you have rents go up rather rapidly in a place, you'll have a pause. That pause refreshes, people's incomes go up, and then again, if you're giving great service, great product, and depending on demand and supply, you can start raising rents again. That's exactly what happened in New York. And so I don't know why that wouldn't happen in San Diego and in Orange County, because they are very supply-constrained markets. And for us, we also have some renovations in some of those markets that can distort the numbers a little, as well. So I don't know of anything systematically wrong. It's more just, you know, the speed bumps that occur when you operate a portfolio.
Okay. Questions from the field on the... Yep.
Hey, Tom. First, congratulations on the quarter.
Thank you.
Great execution. Second, are you still feeling pretty confident in the Costa-Hawkins referendum going on?
So the question was, are we still feeling confident about the Costa-Hawkins referendum? That's Proposition 33 in California in November that would allow for local rent control. The industry defeated that twice before by 20 percentage points each time. We continue to feel like we're making great arguments to the people of the state of California, that if you want more of something, price controls aren't the way to do it. We think people hear us in that argument, Tom, and, you know, we'd expect to prevail in that. But we are spending money as an industry. We are working really hard to get out there and get our message out there.
So I think a lot of good things have happened in California with some of the Governor Newsom's actions to increase housing, to take some control away from local zoning, so that there's more housing built by transit, that there's more waivers required of local zoning rules that really screw up the ability to build the accessory dwelling unit, the ADU stuff. So there's a lot of understanding by politicians, right and left, that supplies the answer, and we just got to keep making that argument. It's expensive for the industry to fight these proposals, but I think people hear the argument, they understand.
Maybe sticking with the regulatory environment, anything else you're watching on the ballot besides Costa-Hawkins?
In California, there's always a lot of ballot measures. You know, I think you'd be better talking to the retailers. There's a ballot measure about recriminalization of certain, theft, retail theft, things that I'm not... I know of, but I'm not terribly familiar with. So I think California is the industry focus. Massachusetts just passed, again, a very thoughtful, supply-driven housing bill. So we're active in all our markets, having these conversations, and again, I think New York in April, tried to do something that was housing supply-focused predominantly. So I think, like I said, I feel like everyone has gotten the memo that encouraging supply is the way to go, and that getting rid of as many local zoning rules, streamlining things, is the right way, and government support for affordable and low-income housing. You've seen also voucher levels go up, right?
Low-income voucher levels are up, too.
In San Francisco, we spent some time with Marty in San Francisco in March, and it, on the ground, it looked a little bit better. Like, so I'm not surprised that it's been doing better since the beginning of the year for you guys. But just, could you one thing I noticed in that meeting with Marty was just the mix of suburban versus urban in that region. I was surprised by what Marty told me. And then, just like, what do you think you need to get that market really going?
Do you want to talk about conditions on the ground then?
Yeah. So we've been, since the pandemic began, tracking very closely how stores are doing and how renovation or releasing of vacant space is going, and it's really started to pick up. So rents have gotten low enough, so it brings new restaurant operators, coffee shop people, and things like that back to the market. Crime has definitely improved. It's interesting 'cause real violent crime is relatively low in San Francisco compared to other cities, but there's certainly a lot of nuisance crime, and then this measure that Mark just mentioned would help that. So there are a lot of good things that we see happening, plus we track return to the office mandates that are coming out, and Salesforce came out with one a couple of weeks ago.
Those things, in our experience in Seattle with Amazon, take a little bit longer, but they do have an impact. And when a big leader within a city, like Salesforce, steps up, it drives other activity. So, you know, we're at 96% occupied in downtown San Francisco. There's no new supply, so every new person coming in is very additive to what we think will be a recovery. You know, and rents are down 15%-20% in the city compared to the pandemic, compared to a place like New York, where they're up 17%. So, you know, it's just a very disconnected market for some very good reasons that are going away.
Any... Sorry.
Well, just to-
Yeah
... add a little bit, like, the job machine needs to get going in San Francisco for us to really see progress. I mean, the big tech firms did let a lot of people go. They sort of overhired right during the pandemic, and then they let a lot of folks go. The good news was, we didn't see delinquency from it. Our resident has the wherewithal. They hang out a little bit, look for that new job, and they did that, and we actually had a pretty, you know, good transition, the problems. But what we track that we think is really interesting is: where do our residents come from? Where was their last address when they applied to move in with us? And what we used to see a fair amount of in San Francisco was people moving. You're the Wharton graduate, you're moving to San Francisco.
You just graduated from the University of Illinois computer engineering program, you're moving to San Francisco. You're being drawn in by this technology hub of the world that Bay Area is, and right now it's better. We see people moving in, but not enough.
... We need to see more of that. In Seattle, we are seeing people from, I'll call it exurban Seattle, folks that live in Washington State but are not even in the suburbs, like, kind of pretty far out, moving back in to the city, into South Lake Union. Those are people like Amazon workers who maybe like the state of Washington, but if they could move out to a rural location, especially during the pandemic, when the city wasn't that appealing, that made sense to them. So I think when we start talking about moving in and where those people are coming in to San Francisco, 'cause the number of AI jobs is positive, but it's in the hundreds, okay? And that is the center of AI. The number of tech jobs that continue to be lost by the big majors is in the thousands.
So we need those two things to switch, and we think they will at some point. But again, it's, that's the last catalyst, 'cause it isn't a supply problem. Conditions on the ground feel better, and the politicians feel better. Shh, don't tell them I said that. They feel more thoughtful about just quality of life concerns on the ground for their citizens.
Any questions from the field?
Maybe I'll turn to the portfolio acquisition. You mentioned, you ended up acquiring 11 of the 17 properties that you were shown. Like, what was it about those six that you didn't like or-
Submarket specific and a little bit age. So the average age, average year of construction was 2017, and they had some stuff that was older than that. Not that we would never buy something older-
Uh-huh.
We just didn't like the mix and the rent levels relative to where we think the portfolio would be optimal.
Okay. And it sounds like the transaction you mentioned the transaction market's moving your way. Does that imply, like, you could see more from Blackstone, more from privates?
We're reaching out to everyone.
Yeah,
You know, they want to hear from us 'cause we're a really good buyer. You know, we do what we say we're going to do, and we do it very quickly. And we're not reliant on a third-party management company. We have in-house engineers. We know what our insurance costs us, so this is a time in the cycle where it's very different than two years ago, where people really like to hear from us. A couple years ago, they didn't care at all.
Yeah, 'cause our money wasn't differentiated. To the point Tom Cook made a minute ago, we just did a 4.7% 10-year bond deal. You know, people can't touch that money in the private space for 10 years, so we have a cost of capital advantage. Just to do sources and uses real quick: So we've got $1.3 billion closed or close to closed or closed, and then $300 million under contract that's likely to close. Let's call it $1.6 billion. $600 million financed at the 4.7. We've already sold and will sell, 'cause we have things under contract, $500 million-$600 million at about that sort of 5.52, probably more like a 5.2 cap rate. Then we're going to leave some of this on our line because we have almost no floating rate exposure.
So to have some when we think the Fed's probably rolling rates down and we're floating exposure to companies very, very low, feels okay to us, and then we may term it out later, we may not. But we love... You know, again, some of this is timing, and some of this is luck in life, but we think we timed this very well with buying at a good price, especially on the basis, and then rolling into a situation where we're able to source the funds in a very advantageous way for our investors, and, you know, we're going to run the heck out of these properties.
Yeah, I guess, since they tend to be in more Sun Belt markets with more supply, I guess, like, and we know that's, like, kind of been an issue in the Sun Belt. Just like, how did you guys get comfortable with the spot, the supply risk around these properties, and, like, what did you underwrite as far as, like, kind of the recovery?
So it did vary a little bit by property, depending on how close the amount of supply is, but definitely rents continuing to trend down, maintaining some of the concessions that are already there, but burning those off over time, meaning over the first year and into the second year, we're really kind of flat then. So not adding concessions, but not growing rents for it to hold another 12 months.
Okay, so that would be...
Into mid-2026.
Mid '26.
Which, you know, we just think there's going to be a bit of an overhang here, and I, you know, think the counterargument's hard because there's so much supply that is delivering in 2025, and even the back half of 2024, all that stuff that's delivering will not get absorbed. It just can't. There's just too much of it.
Interesting. Other questions from the field? Yep.
What's the incremental impact on lower mortgage rates?
The question is, what's the incremental impact of potentially lower mortgage rates? So one of the risks I think our portfolio has less of is homeownership risk, substitution into homeownership. If you look at our coastal markets, which right now are 94% of the company, but, you know, eventually will be 80%, home costs are just so high in a place like New York or San Francisco, that rate's going down a little, and the down payment is so hard that normally about 12% or so of our residents move out to buy a home. Right now, it's 7% or 8%. So it could drift up a little, but I just don't view that as a material risk.
I'm going to ask Alec to speak to it because it's a different question in Atlanta, Dallas, Denver, where home prices are lower, and I think it's worth drilling down a little bit more there.
Yeah. So when we first started looking at that market, those markets, going back to them, it was an acknowledged concern that we have that home pricing for the market as a whole can be low, and that it's driven by certain submarkets where it's very, very low. And so we've targeted specific submarkets, which in the case of Atlanta, is kind of in that funnel of from Midtown north through Alpharetta. And, you know, we see locations that have typically $500,000 as kind of the starting point for a town home or a small house, going up to, you know, well over a million. And that cost of ownership is, say, $500. If our rent is $2,200, it's probably $2,800 or $2,700 to cover the mortgage.
Plus, you have to have come up with 20% down, which, you know, is $100,000+ . So we feel insulated to a degree from that, and that's been borne out by our experience. Obviously, the market's been dislocated, as you point out, due to mortgage rates and others, but we were really intentional about that. So being in good school districts, being placed with low crime, and good access to jobs, and we think that'll protect us.
And so that 12% of homeownership-
... When did that happen?
The question was about when did the 12% number I quoted move out for homeownership? When did that happen? That would be pre-pandemic. Like, I would say stabilized mortgage rate time. You know, it's ever since we shifted the portfolio for more commodity product, it's been around that number.
Other questions from the field? Maybe, Alec, one of the things, like, I was surprised about across multiple resi meetings like this was just, it seemed like a very consistent message on cap rates, or they're in the fours now. And then you mentioned that their cap rates are going down or have gone down a little bit. Just like, I think people are a little bit surprised by, like, where cap rates are settling out in the fours. Like, where are buyers underwriting, and could you remind us what this portfolio traded at?
The portfolio was at a five.
Yeah.
That, that was priced a little while ago. And I think what I'm saying is consistent with what you've heard from other people, which is that they've drifted down into the fours-
Yeah
since that was priced.
Okay.
I think what people like is them getting in at a good basis. I think they see the recovery story in the future. They see the job story in these markets and are willing to accept some negative leverage for a period of time to get in at a good basis. I would also say that stock market's done well. People are under-allocated in real estate. They look in the real estate options, and they think about office, they think about retail, and multifamily and industrial look pretty good. So I think there's just a lot of money out there, and we, you know, we, we talked to all those folks, and I think there's more coming.
More...?
More money interested in doing it, particularly bigger deals.
Okay.
Bigger deals are the one thing that really hasn't happened. It's been very hard for people to put the whole capital stack together on something that's, say, $150 million-$300 million.
Okay.
You know, a couple of years ago, it didn't matter. Everyone could raise that kind of money. Right now, that's hard. Those and we are purposely not selling that, those kind of assets 'cause they don't get a good reception. It's the air gets pretty thin.
Okay.
But I will tell you, we have a lot of folks sniffing around, asking.
Interesting. What do you... I guess, to really get demand for those kind of assets, what do you think has to change? Just interest rates come down, or?
I think they have to buy into the story, like, they feel in the Sun Belt, you know, and they feel in the suburbs of these other markets. And I think once they see San Francisco starting to catch up from where it used to be, then they're gonna be all over it because the discount to replacement cost is massive, and there's no supply, say, in downtown San Francisco.
Yeah. Interesting. One of the things I've been asking pretty much every company is, and a big focus of mine is just on, like, operating platforms, building operating platforms, like, rates or permanent capital vehicles.
Mm-hmm.
They should be able to have a competitive edge from a better platform. So what are you guys focused on building, improving the EQR platform?
So, I mean, we have very strong expense containment measures at our company. You see our numbers on same-store expense are consistently very good. We run efficiently on overhead. So I think a little bit of this is your culture and your focus, and we've always had that focus. If you worked for Sam Zell, you were focused on expense control, so we've always had that cultural focus. But I'll also say it's this continual effort to try and run the business better, not just cheaper, but for the benefit of our residents. Like, some of this, you know, again, people use the term AI, and they hope they get two turns better in their multiple.
But I use it to say that our residents like using technology, like automated text answering, automated email, where they have questions about: "Do you have units available, two bedrooms in a particular property? You know, do you allow dogs? Can you schedule a tour?" They like all those things. Having that technology means we do have less staff, and that technology is cheaper, and it is what our residents want. We do the same thing on maintenance, where people are still calling. They need maintenance help. But if you're used to in the old days, you'd have a property with three people, and those people might not be very busy, 'cause just by good luck, there wasn't much going on that day. But maybe a mile away, there was that property was just overwhelmed and was frankly calling third-party vendors. We have software that coordinates that.
So I'll tell you, we are very committed to the idea of we can't get more capital from people in this room, debt or equity, unless we run the capital we have now really well. And so we're focused, Josh, on building that machine, and we spend a lot of time on technology. We spend a lot of effort trying to just run the properties as efficiently as possible, and that includes things like selling residents things we think they want, like Wi-Fi that's cheaper than they can buy otherwise, and we're rolling that out, parking initiatives. But a lot of it is also just expense management, being super thoughtful about all of the many things we spend money on in a year.
Maybe thinking about the operating OpEx stack, just, what's left as far as variability for the remainder of the year? Like, is taxes still coming in and-
I think we feel pretty good about the tax number because you've gotten most of your assessments and such, and then there's always some appeals, we guess, 'cause we don't record appeals until the money's received. But we have an idea of what should be received, so there's always a little bit of guesswork at the end. I think most of it would be like a repair and maintenance bust. So if you had some serious, serious storms somewhere, for us, we run those costs through same-store. We don't. Some others exclude them, we run them through. Storms are part of running a business up to a point. So anyway, I would say that would be a negative. On the positive side, you could see adjustments to accruals and reserves, especially payroll, 'cause again, medical insurance for our resi-- for our employees, things like that.
But I think we feel pretty good about that 3% midpoint, give or take a little bit. And then just to preview next year, just a little, I mean, the biggest number for us is always gonna be property taxes. It's 40%-45% of same-store expenses. We've got about one percentage point of growth in next year as well, relating to 421-a, New York tax burnoffs. We do get some revenue improvement there, but we have that. So that'll probably be something that'll be a little bit of a negative pressure. We also continue to roll out Wi-Fi. But again, we feel really good, and some of those Wi-Fi expenses run through repair and maintenance. But by and large, we s-...
We don't know why we can't run this thing at inflation or sub-inflation, whatever that number might be, you know, year in and year out, on average.
Yeah, maybe can we broaden that question? Like, any kind of building blocks we should think about going into 2025.
For expenses?
Everything.
Everything. We're not giving 2025 guidance, so I think really on the October call, we'll have a really good conversation, and I'm willing to just talk about what happens generally.
Yeah
But not about the year, 'cause it's just too early. There's things we got to roll up. We're not even done our 2025 budgets. Okay, so again, there's work that needs to be done here. But when we look at next year on the rev side, or we look at any year on the rev side, we always start with what we call embedded growth. What's the term others use for that?
Earn in.
Earn-in. So for us, embedded growth means that on 12/ 31 of a year, so 12/ 31/20 24, if you freeze the rent rolls, occupancy, and rate, no one moves in, no one moves out, occupancy doesn't go up or down, what would happen? How much would your same store revenues go up or down? So in a normal year, that's give or take 1% positive. And so that's sort of... You start with that, and you say, if things don't get a lot worse or a lot better, I start there, and then I'm gonna talk about intra-period growth or intra-period shrinkage, my other income, delinquent, all these other variables that are important. But at least I could start with a high confidence about my starting point.
Because I don't have high confidence yet about my starting point, it's not appropriate yet to talk about 2025 . But this year, going into 2024 , that number was 1.4%. It was higher than would be better because we were still recovering from COVID last year, so we had some additional momentum. My guess is that number would be lower this year, okay? We just did not have as much intra-period growth, 'cause again, the COVID recovery was completed in 2023. Then you got to build in everything else: occupancy, other income, continual improvements in delinquency. You know, where do rates go in some of our markets where there's very little supply, and if the job machine keeps going, you can feel really good about. You know, so those are all gonna go into the blender. So we'll go through the build.
I think we do a pretty good job on our slide deck of going through the building blocks with you, but it's just a little bit early to talk about the biggest things, which are where you start, which is embedded, and your intra-period growth, which is, of course, our view of next year's economy.
Can I ask a quick question on the cost efficiency and really sort of portfolio composition? Does the drive for cost efficiency change your thoughts about clustering of apartments of our own apartments?
So let me repeat the question, maybe Alec will answer it. Does our drive for cost efficiency change where we might want to buy or develop just to have clusters and whatnot?
Yeah, and so it actually comes about because we purposely pick submarkets that are robust enough to support one of them. If it only supports one or two properties, we wouldn't want to be there. So the job drivers have to be strong and robust enough to support that. So I think the answer is yes, but it's a byproduct of the markets that we're picking. It's not like we just add properties. We don't really like this location, but we're gonna add a bunch of properties to make it run more efficient.
Like the submarkets.
Yeah.
But, I mean, in those submarkets, you're focusing on purchasing in those submarkets you like.
Yes.
But you're getting sort of both answers, really, one on the revenue side, one on cost.
Yep.
And it may be eventual, right? We may buy an asset in a submarket. There's always a first asset in a submarket, right? So, you know, we bought an asset in Atlanta, in Sandy Springs, and we're buying more. That's at the very-
Yeah
... sort of directly north of downtown, Atlanta. So the answer is yes. So again, that's a big submarket. There's a lot of assets to buy, a lot of jobs, a lot of all that. But there's always a first asset. That one runs with a lower operating margin, and then you keep adding them, and you have this incremental improvement. And when he's buying them, in the back of his head, he's gonna underwrite current spot margin, but every asset after that will have a better operating expense profile.
Just another one, small one on portfolio composition. 94% coastal, 6% expansion markets going to 80/20. Is that happening through... What percentage do you think is acquisition versus disposition?
Sure. So the question is just the composition, and I think I'll give that to you again, but the composition of, you know, us being 6%. The 6% right now is same store, so that means assets. So in, for example, Atlanta, four of the 12 assets in Atlanta are same store. So we have a lot of non-same store assets in our expansion markets. So just to give you the numbers, we have 12 assets in Atlanta, counting developments that are still in process, 12 in Dallas, and 14 in Denver. So this has gotten to be pretty significant. You're up to a pretty good unit or unit and property count in these markets, but most of them aren't in same store.
If you roll all that forward in the same-store, we would expect 10% of the company would be in same-store, you know, in a year or two when they're mature, and then we want to get to 20%. Just to give you a sense of kind of where we are in same-store, where we are portfolio, and where we're going, but how we get them.
Given the robust pipeline in these markets, I anticipate the vast majority of the next 10%-15% will come from acquisitions. I just think there's gonna be so many good opportunities that we'll do that rather than take on the risk of building in those kind of markets. Our building is primarily being in locations where we find it really hard to buy. So for example, we're gonna start two deals in... Or we have to start two deals in suburban Boston, and we have one in suburban Seattle. Those are the kinds of places where we feel like our development capital is better spent.
I apologize, because the second part of it, the disposition, disposing of current rather than-
Oh.
Sorry about that.
Do you mean funding the acquisitions? I mean, we would fund both-
Meaning that-
Sorry
... you're selling things you non-strategic or less strategic.
Yeah.
That's on the coastal to fund or potentially.
Yep. Yep, or where we have an overabundance of properties in a particular location.
We paid $2 billion of debt down with disposition proceeds in 2021, 2022, and 2023. We'd be happy to borrow all that back and buy assets, too. So we're open to additional debt, and we're open to, you know, swapping, selling less desirable assets and buying more desirable. You may see us. You likely will see us do both. That's what we just did, right? We just did the debt issuance, and we just did some dispositions.
So we'll-
Quick one. Just on the replacement costs, rising replacement costs, where are you seeing, which markets are you seeing that sort of as a, as a thing, and when will that show up in the portfolio level?
So which markets have rising replacement costs, and where are we seeing that, and where aren't we across the markets?
And then would show up in a portfolio, by the way, kind of right away.
And when will it show up? So I'm gonna answer a little bit of that now. Replacement cost does a couple of things. First, for us, that the best IRRs for us, just looking back in our history, are where you start with a great basis, 'cause it's the only number you know, right? And these discounts to replacement costs we're buying at, have typically been indicative of very good investments on our part in the long run. The second part is, with replacement costs lower, people don't build. If you're a developer, you're a very mathematical individual. So if you're gonna build something for $50 million that I can buy for $40 million, you're not going to build it, right? Your capital won't do it. You won't do it. It's when you start to get those big premiums.
So in 2021, you saw people buying, and we didn't, at 20%+ premiums. That really attracts developers. So to me, replacement cost is both an indicator when it's at a discount of an investment advantage, but it's also a bit of a moat. Like, it just deters development, and over time, values will change, costs will change, rents will go up, and then people will develop again. You know, but I see an advantage for the next, call it 2026, 2027, and with less development.
Yeah, we'll have to wrap it there. Thank you, guys. Appreciate it.
Thank you.