Good day, and welcome to the Equity Residential Third Quarter 2021 Earnings Conference Call. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead, sir.
Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2021 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, as well as a management presentation regarding our results and outlook, are posted in the investor section of equityapartments.com. Please be advised that one of our peers is hosting their call at 1:00 P.M. Central, so we wanna be conscious of everyone's time, and we'll look to finish the call in one hour. 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 J. Parrell.
Thanks, Marty, and thanks to all of you for joining us. Today, I'll give some brief remarks on the terrific pace of our operating recovery and our robust investment activity. Then Michael Manelis will follow with some top-level commentary on the current state of our operations and how we see next year playing out, and then we'll take your questions. We have talked about 2021 being a year of recovery for our company, and we are very pleased to report that our operating metrics continue to recover at a faster rate than we assumed back in July, with quarter-over-quarter same-store revenues turning positive for the first time since the pandemic began. Strong demand across our markets drove us to achieve physical occupancy of 96.6% in the third quarter, which allowed us to continue to push rental rates.
We also benefited from governmental rental relief payments made on behalf of our tenants. As a result of these strong continued operating metrics, we have raised our annual same-store revenue, net operating income, and normalized FFO guidance again this quarter. We now expect our same-store revenues to decline 3.7%, our expenses to increase 3.25%, and NOI to decline 7% for the full year of 2021. We expect to produce normalized FFO per share of between $2.95 and $2.97, a 2% increase at the midpoint. All of this leaves us very well positioned going into 2022.
While we won't provide guidance for next year until our next earnings release in February, in our management presentation, you can find the building blocks that point to our business being set up for an extended period of higher than trend growth beginning in 2022, as we recapture revenue loss due to the pandemic and continue to benefit from strong demand and growing incomes resulting from a very strong job market. We expect same-store revenue growth in 2022 to exceed the historical mid-single-digit range that has characterized past recoveries, leading to some of the best same-store revenue numbers we have ever seen. These expectations assume that the economic backdrop remains constructive and the pandemic remains controlled.
Please also note that while we expect to do very well next year, we will not be able to make up our entire mark to market on our rent roll and regain our entire loss to lease in a single year for a variety of marketing and regulatory reasons that Michael will describe in a moment. Beyond 2022, we see a continuing bright future for our business as the large emerging Gen Z cohort starts their careers and joins the renter population. Also, the more diverse portfolio we are creating should improve long-term returns and dampen volatility going forward. Switching to the transaction side of the business, the positive story and fundamentals has not gone unnoticed by the investment community as the overall theme continues to be enormous amounts of capital pursuing all types of apartment investment, driving cap rates to new lows.
This has caused a convergence in nominal cap rates in the 3.5% or so range for many markets and has created a positive climate for our strategic repositioning efforts. We continue to aggressively sell our older and less desirable properties at these low cap rates and at prices that exceed our pre-pandemic value estimates, acquiring much newer assets in our Expansion Markets of Dallas, Fort Worth, Austin, Atlanta, and Denver, and the select suburbs of our Established Markets at approximately equal cap rates. All of the assets we are acquiring share the common characteristic of being recently built, having no or minimal retail, and being attractive to our target affluent renter demographic. We like that these trades are not dilutive to current earnings while adding properties to the portfolio that we believe will have better long-term cash flow growth, lower capital needs, and diversification benefits.
Year to date, we have purchased more than $1 billion of properties and expect to close another $400 million or so in acquisitions, mostly in our Expansion Markets, a good number of which are in various states of advanced negotiation already, all by year-end. We have funded these buys with an approximately equal amount of dispositions of older and less desirable assets, which we sold at an average premium of 10% to our pre-pandemic estimates of value. Included in these sales are approximately $900 million of California assets. Currently, approximately 42% of our total assets are in California. As we seek to have more balance in our portfolio, you should expect our California exposure to decline over time, but to remain meaningful. Turning to development, we had a lot of great news in the quarter.
It all starts with the apartment development joint venture with Toll Brothers, the public home builder that we announced in August. We have known and respected the team at Toll for many years and have successfully partnered with them before. They build terrific properties and have a large team spread across our Expansion Markets and select of our other markets that we expect to leverage in this joint venture to create quality properties for Equity Residential to own long term. The venture is off to a quick start as we closed already in this fourth quarter on one Toll land opportunity and are working with them on many others. We also have a strong internal development team in our company that continues to create opportunities. In this quarter, that team completed the development of our Edge property in Bethesda, Maryland.
This high-end asset is adjacent to an existing EQR asset and located very near a Metro station, as well as the large amount of new office space that has recently been built in downtown Bethesda. They also sourced and structured the three new joint venture development deals in Washington, D.C., Denver, and suburban New York that began construction this quarter. Each of these joint venture development deals is with a different partner and is not related to the Toll venture. Before I turn the call over to Michael, a big thank you to all my colleagues in our offices and properties across the country. You're doing an exceptional job during what was a particularly busy leasing season, and we're all very proud and grateful. Go ahead, Michael.
Thanks, Mark. The entire peak leasing season delivered consistent high levels of demand that allowed us to continue to grow occupancy as well as rates at a pace that exceeded our expectations. In both the earnings release and in the accompanying management presentation, we have provided some key performance metrics which demonstrate the strength of the leasing season and the fundamentals that position this portfolio well for 2022. Occupancy is 96.9% today, which is 60 basis points higher than 2019, and 260 basis points higher than the same week in 2020. At this point, we expect to maintain strong occupancy through the balance of the year. Pricing trend, which includes the impact of concessions, grew throughout the entire peak leasing season and is now 28% higher than it was on January first.
The pandemic caused our net effective pricing to decline by $520 from March to December 2020, and from January 2021 to today, that same pricing trend has grown $637, which demonstrates a V-shaped recovery and shows that we have more than fully recovered what we had lost in price. Concession use, which has been a main topic of discussion for the last 18 months, is now being used on a very limited basis and in line with pre-pandemic levels, with less than 1% of our applications in September and October receiving an average concession amount of less than two weeks. New lease change was up 10.1% in the third quarter and is on track to be just over 11% in October.
We have seen signs of seasonal softening, both in terms of pricing power and application volume, but these trends are normal to slightly better than typical seasonality patterns. More importantly, the volume of traffic and applications currently is more than sufficient given the low levels of available inventory we have in the portfolio. Renewals were a major focus for the quarter, given the rapid improvements in market pricing from a year ago, as well as the fact that we have slightly more expirations in the back half of 2021 than normal.
We have been centralizing negotiations for the San Francisco, New York, and Boston markets in our off-site call center group, as pricing in these markets were the most impacted by the pandemic, and conversations in these markets have become more and more difficult as we are dealing with residents who received large concessions and much lower rates this time last year. The good news is that the results have been great across all of our markets. We renewed 62% of residents in September, and October is on track to be just below 65%, which is much better than the 55% historical norm that we thought we were going to stabilize at. At the same time, renewal rate achieved has continued to improve, with September at 7.7% and October on track to be 9%.
We expect continued growth despite what will likely be challenging negotiations. Perhaps our biggest positive from these negotiations is that so far we are not seeing any material difference in renewal behaviors from the deal seekers who received very discounted rents last year versus our more tenured residents. Overall, they are renewing at similar paces. This is something we will continue watching very closely. Before providing color on a couple of markets, let me touch on our positioning for 2022. As we think about same-store revenue growth, we have some key drivers that should work in our favor. First, our existing leases are at a material loss to lease. What I mean by that is if we snapshot all of our leases in place today and compare them to current market prices, 86% of our residents are paying on average rents that are significantly below current market prices.
The result of this is a net effective loss to lease of 13.6%. This provides us with a significant opportunity to increase our revenue as we move these leases to market rates. That, of course, does not mean that we will capture the full 13% in 2022, largely because leases expire throughout the year, not on January first, and we currently are subject to renewal restrictions in some jurisdictions, which means the change is very dependent upon who actually moves out. Regardless, this is definitely the highest loss to lease we have ever seen with such a large majority of leases below market, and the teams are hyper-focused to recapture as much of the loss to lease as possible. Second, we expect that the significant demand and favorable fundamentals in our business will drive additional revenue growth opportunities in all of our markets in 2022.
Remember, we have seen unprecedented demand even with only modest return to office activity, so the backdrop for intraperiod rent growth expectations in 2022 is strong. Third, we expect to get a nice lift from occupancy in the first half of the year as we were at 95% in the first quarter and 96.2% in the second quarter of this year. We are currently running above 96.5% and would expect to maintain this level or better in 2022. Finally, we have regulatory restrictions that are beginning to expire. This presents an opportunity to recapture revenue through the reduction of bad debt and increased collection of late fees in 2022.
All of these factors combined put us in a position to deliver very strong revenue growth next year, assuming regulatory conditions continue to improve and the general economic conditions remain supportive. Moving to a couple of quick market comments. Starting on the East Coast, the New York market not only has fully rebounded, but it continues to have strong demand for our product despite the broader delays in return to office. At this point, New York is positioned to outperform seasonal trends in the fourth quarter. Boston and D.C. are performing as expected with great demand and strong occupancy with normal seasonality. On the West Coast, Southern California has been and continues to be very strong.
San Francisco and Seattle appear to be the two markets most impacted by the delay in return to office in terms of overall demand levels, but so far appear to be following normal seasonality trends. San Francisco, while demonstrating a good recovery, remains the only market that has not yet fully recovered from a pricing standpoint. Occupancy has been improving in San Francisco over the past month or so, and today we are 96.5% and should be well positioned to capture demand and pricing power once the tech companies begin to provide more clarity around return to office plans. Seattle has been a little more volatile than expected. Current occupancy is 95.6%, and while the overall demand level is holding up, the announcement from Amazon a few weeks ago regarding office return decisions has impacted our leasing velocity.
Our on-site teams in Seattle mentioned that prospects definitely have a lack of urgency to lease but are very interested in options for later this year or early next year. Moving on to expenses. Mark mentioned our same store expense guidance at 3.25% for the full year. We are seeing increased costs across all utility categories. However, about 65% of these costs are ultimately passed back to residents through the utility reimbursements that run through the revenue line. We are also seeing pressure on wages in this very tight labor market, but have been successful in mitigating growth in our on-site payroll numbers by realizing staffing efficiencies. These efficiencies have been achieved through the numerous innovation initiatives that we have rolled out over the past year or so. This includes moving to self-guided tours, online leasing, and utilizing our artificially intelligent leasing agent named Ella.
On the service side, we also leverage our service mobility platform and new technology to deliver the experience and service that our customers require, which is evident by the all-time high online reputation Google rating of 4.2, all while also reducing the expense pressures. We expect these efficiencies and opportunities to accelerate into 2022 as we continue to harness technology to deliver the customer experience that our residents require. Finally, I will end on an update on the rent relief recoveries. Fortunately, our affluent resident was less impacted by the pandemic as they kept their jobs and continued to pay rent. For those that were impacted, we have continued to work with them, including assisting them in applying for rent relief.
We have received $18.3 million September year to date in this rent relief, with the majority of that coming to us in the third quarter. This exceeds our prior expectations of $15 million recovered in the full year. Even with some of the eviction moratoriums expiring, our goal will be to continue working with residents to gain access to the additional rent relief funds. We continue to have good traction in this process and now expect the full year rental relief recoveries of between $25 million and $30 million in 2021. Let me close by thanking the entire Equity Residential team for their continued dedication and hard work. With that, I will turn the call over to the operator to begin the Q&A session.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to ask a question. Our first question comes from Nick Joseph of Citi.
Thanks. I'm hoping you can dive into a little more of your 2022 expectations. I know you said the same-store revenue should be among the best in history. How much of that is locked in today in terms of the earn in? And then, you talked a little about trying to capture some of that loss to lease. It won't all come in through 2022, but, you know, how are you thinking about getting to that comment about being among the best in history?
Hey Nick, it's Mark. Thanks for the question. You know, we're not giving 2022 guidance, but as you said, we did try to lay out how we're thinking about things, what the building blocks are, what the team's trying to figure out as we look towards 2022. When we made the comment, both in the release and in my prepared remarks, that it's setting up to be the best year in the company's history, I wanna for same-store revenue growth. I do wanna give a little context. A normal, and I'll say a normal meaning the last couple of recessions for us, have consisted of two years or so of negative same-store revenue growth, and we've certainly had that this time. A year or so where same-store revenue growth was right around zero, slightly positive, slightly negative, kind of a transition year.
Then a couple of years where we compounded 5%, mid-5% same-store revenue growth numbers, 4%, high fours, those kinds of things. Given the earn-in, given this loss to lease that we see, we think we're going to skip that transition year, and that's a comment I made on the last call as well. We're gonna skip right over that zero and head right into a year that's likely to be a fair bit higher than the 5.5% or so number you would think of as a normal second year recovery. The recovery is V-shaped, just like the decline was V-shaped.
I think what you see here is the confidence the team has given the demand and the occupancy numbers, that subject to some regulatory flak here and there, we're going to regain a great deal of that loss to lease, but certainly not all of it. I think a bit of it is gonna end up in 2023. I mean, there's just customer relations issues, there's regulatory issues with some of these increases and the size of them. You know, Michael's done a great job with the team of retaining our residents, giving them great service. Hopefully that helps. In terms of locked in, I can't give you a locked in number.
The team's gonna need to work the whole year to do that, but it feels like that 5.5% is a bit of a floor in terms of next year's same-store revenue number.
Thanks. That's very helpful. You mentioned the compounding in some of those past cycles, and maybe we can tie it to development. It seems like you're getting at least more active on development. You mentioned the Toll JV, and some of the other opportunities. I mean, how are you thinking about the beginning of this cycle and getting more into development, as you try to model out some of those out years where you'll actually be delivering?
Yeah, great question. It's Mark again. In terms of the compounding, the compounding's gonna start with the operations, with the NOI from the same store portfolio. You look at 2022 when we've given you some color, and certainly it's hard to look much further in our business, but we do look at 2023 and see less supply. There were a lot of deals that were delayed starts due to the pandemic, and while supply is likely to pick up in 2024, our look at proximity of supply and other things makes us feel like we got at least a couple of years here of pretty good numbers coming at us on the same store NOI, and that'll always be the big engine at EQR. Development to us is just a great complement to our efforts to acquire assets, especially in these newer markets, these suburban markets.
We feel like right now our shareholders are getting paid to take that risk with our ability to underwrite development yields at, you know, around 5% on current rents. All of these acquisitions we're looking at being in the mid-3s. We're trying to be very thoughtful. This is an inflationary climate, and construction costs are far from immune to that. I think you're gonna see growth both from the same store portfolio and from actual net growth of the company through development that we're likely to fund with a combination of incremental debt, net cash flow, which we'll have more of starting next year, and occasional asset sale and a little bit of equity like we did this quarter.
Thank you. We'll take our next question from John Pawlowski with Green Street.
Hey, thanks for all the details on the revenue components. I actually have a few questions on the cost structure of the business. Bob, you know, the expense pressure's hitting some other property types in the REIT world. Could you give us a sense on how to bracket a reasonable worst case and best case scenario for same-store expense growth over the next 12 months?
Yeah. I mean, I'm not gonna probably give specifics in terms of a range 'cause then we're not providing guidance yet, but maybe a little bit to think about the components that are running through and where they're positioned as we go into 2022, if that helps, John. So if you think about the big four categories, you know, real estate taxes, we've had a good amount of success. That's 40% of expenses. We've had a good amount of success so far on appeals. I think we're not seeing a ton of pressure from the municipalities, and I think that could carry over into another pretty good year into 2022, right?
Pretty good year means, you know, in my mind, kind of sub 3% or 3.5% kind of regular run rate, inclusive of 421-a's and other things. On the payroll side, we've done an excellent job, I think, of managing what has been an inflationary kind of pressure over time. We're going on our third year of payroll that is sub 1% in terms of growth. What Michael's doing, you know, sometimes quietly on the side in terms of managing innovation and doing new implementation, is really offsetting what I think is something that every company is experiencing, which is payroll pressure. We've been really good at it thus far, and I don't think there's anything that's, you know, likely to change in a significant way.
It means that we feel the pressure. We're just doing things in a different way and innovating in a way to really, you know, offset that pressure. The last two categories, which are R&M and utilities, I think are the ones that we're most focused on outside of, like, the payroll side. You know, utilities are. You know, a big chunk of them can be passed back to the residents, but we're certainly all seeing, you know, commodity pressures. You saw what nat gas has done kind of recently, and that's the one that I think is where you see higher single digits.
Put it all into the blender, and I don't think that 2022 is, you know, that outsized relative to what we've seen historically in this business over time.
Okay. That certainly helps. Maybe Michael, one quick one, just in terms of the posture on renewals. Could you share the renewal rate increases you're sending out today?
Yeah, sure. So this is Michael, and I'll tell you that for November, our net effective quotes were coming in at or going out at 12.8%, and the December quotes are 13.2% on a net effective basis. You could see that number is gonna continue to grow, and it's gonna widen because concession use was really ramping up this time last year, so you're coming up against more and more of those residents that had concessions. About 25% of all the offers that went out for November and December went to residents that had concessions. I think, as I said in my prepared remarks, so far, the deal-seeking residents that we took in last year, they've been renewing at the same pace as compared to those that didn't have concessions.
We're really, you know, excited about kind of working our way through the renewal performance for the balance of the year.
Understood. All right, great. Thanks for the time.
Thank you. We'll take our next question from Rich Hightower of Evercore.
Just a quick follow-up on development. You know, you started three new projects last quarter. You delivered one of them, obviously, the Toll joint venture, you know, as you remarked for several of your Expansion Markets. How easy is it to crank up the development machine internally, and what volume of starts do you think that we can sort of expect over the next few years in that regard? You know, if you had to peg a mix between on balance sheet or I should say in-house versus the Toll joint venture, you know, how would you see that breaking out?
Hey, Rich, it's Mark. I'm gonna start, pardon me, and then I'm gonna give it over to Alec. In terms of how big it can get, it will take a little while to ramp up. Our expectation is this could get to $1 billion a year of starts in a year or so, and maybe, you know, $700 million of that is Toll and the rest of it is other JVs and the stuff that we create internally. I think that will be funded in a way that'll make that a pretty accretive thing. Most importantly for us, it's creating and giving us product, again, in markets, in some markets, we just don't have enough exposure. I think Alec can speak a little bit to things the internal team's doing 'cause they're very active. They're doing a lot of good stuff.
We got some great densification deals we haven't talked a lot about. I'm gonna let him speak to that, and hopefully, that gives you the color you need.
Great.
Hi. Thanks, Mark. Rich, this is Alec. We look at a lot of deals. We are a selective developer, and whether it's through the Toll JV, which has been off to a great start. They have a great pipeline, and, you know, we're actively engaged with them on each project and assessing whether it fits for us. As Mark mentioned, we have these densifications throughout our portfolio, largely in California, but in other markets as well, that we have a great internal expertise on how to assess and execute on. We're excited about that. You know, as we've mentioned in the release, you know, we're continually looking at other joint venture opportunities outside of Toll.
You know, we have a broad range of projects that we look at and are very selective on the ones we pick.
Okay, great. I appreciate the color, guys. One quick follow-up, just in terms of the recent acquisitions in the Expansion Markets. Can you give us a sense of where you're acquiring those properties versus replacement cost in addition to the yield which you have provided?
Yeah. You know, it's a range, you know, depending a lot on the project. This concept of replacement cost is an important metric. It's something we look at, but it's not an absolute thing. It's actually a little bit more challenging to calculate than you might think because if you don't always find an apples to apples, it may be a location that's really almost impossible to find similar product to build, you know, a similar location to build the same kind of product. You know, parking is another variable.
You know, surface parking, you may have an existing project that has surface parking, but the municipality won't allow you to do that or the project, the site's too dense, so then maybe you go to a structured parking, which is more expensive, or you go underground, which is yet more expensive, on top of which there are code changes, you know, that can generally make things more expensive and inclusionary housing requirements. You know, we look at it as a metric we look at, but we assess all of those things on a project-by-project basis and, you know, determine whether or not we think it fits based on that and the other, you know, the typical yield parameters that we assess.
Okay. It's hard to sort of peg a, you know, percentage discount or premium, given everything you just mentioned.
There's no absolute number.
Okay. All right.
Thank you.
Thank you. We'll take our next question from Chandni Luthra with Goldman Sachs.
Hi. Good afternoon. Thank you for taking my question. So I just wanna follow up on one of those questions that was just asked around, you know, your new development projects that you started this quarter through your internal platform. Could you perhaps talk about what are the markets where you will focus your internal development versus the focus coming in from the Toll Brothers JV? Thank you.
Chandni Luthra, this is Alec . We have specific markets that we've designated through the Toll Brothers program that we're gonna focus on. You know, for example, Atlanta is a market that we're very focused on with them. Dallas is another one. There are other markets where they don't have a presence or, you know, not part of the venture. Those are areas where we'd be more likely to invest on our own or with another joint venture partner.
Got it. You know, talking about supply a little bit into next year and perhaps 2023, what are the markets that you're feeling a little better about versus, you know, where do you see there could be more crowding, especially, you know, as you are sort of foraying into all these newer markets? If perhaps you could give some color on that would be great. Thank you.
Chandni, this is Michael. Let me just start. I'll give a little bit of kind of the takeaway from 2021, a little bit about what we're seeing from an operations impact in 2022, and then I'll let anybody else kind of pick up on some of the newer markets that we just entered. I think I would start by saying that the tagline for 2021 on supply would be that strong demand greatly aided the absorption of new supply in our markets. You know, D.C. produced record levels of Class A absorption. The South Bay, which we've talked about on previous calls in San Francisco, that sub-market had 4,000 new units being delivered. It continues on its path of recovery with strong occupancy and very limited concessions, like in the stabilized portfolio.
I think we've talked about this before, that we are really focused when we think about supply on the concentration of the supply and the proximity of that new supply relative to our stabilized assets on top of when are the first units gonna actually begin leasing. For 2021, the overall supply numbers were elevated in our markets, but we said earlier on the calls that the overall level of competitiveness against our portfolio was expected to be less. When we look forward, the data for the expected starts in 2022, so relative to this proximity of within 1 mi and 2 mi of our locations, is less, which is a great indicator that we should continue to feel less pressure in the next year or so from the new supply being delivered right on top of us.
Great. Thank you.
Just to add a little. Yeah. No, that's fine.
Thank you. We'll take our next question from Jeff Spector of Bank of America.
Good afternoon. My first question, Mark, I guess what held you back from providing 2022 guidance at this point?
I guess 17 years of experience doing this job and the CFO job. I mean, a lot. This is a pretty variable world. Lots going on. Certainly, the actions of the Fed on the taper are super relevant to how, you know, the economy recovers. I would say there's just enough variability here. We told you sort of what we know, Jeff, which is this sort of earn in, this loss to lease. We gave you, I think, some pretty specific parameters on where things like bad debt might be able to go. The big mysteries really are, you know, regulatory pressures, how the intraperiod growth feels next year, and then where we end this year.
I mean, we're gonna spend the next two months continuing, hopefully, to close some of that loss to lease by writing terrific new leases with happy customers and, you know, locking in revenues for next year. There's just enough variables where any guidance I'd give you would be too wide to be meaningful on same-store revenue, and I think the conversation in February will be much higher quality.
That's fair. Thank you. Second, I know you touched on supply. I don't think I heard the answer on 2023, and we're hearing, you know, potentially on the coast a, you know, significant decrease in supply in 2023. I'm sorry again if I missed this. Any early thoughts on 2023 supply in your markets?
All right. It's Mark. Thanks for that, Jeff. What we see is a pretty significant decline in 2023, a lot. This is again in deliveries, just to be clear. That's really as a result of delays in starts or delays in completions of product that was underway during the pandemic. We're gonna get a break, more of a break in New York, for example, but even that is a little bit by area. There'll be a fair bit delivered in Brooklyn. There'll be a fair bit delivered in the Jersey Coast, but in Manhattan, almost nothing. D.C. will kind of continue doing what D.C. does and deliver a lot, but we're gonna feel a lot better about places like San Francisco and Los Angeles and Seattle. We feel like we're walking into a pretty good setup.
When you start thinking about what might deliver in 2024, and those are things that are starting now, you know, there is a lot of development activity. The space is in great demand. The investment community hasn't not seen the strong recovery and the stability of the sector. We think there'll be a good amount of demand, or excuse me, a good amount of supply, but probably more spread out. The market that's most on the watch list of our new markets for supply is certainly Austin. Austin has a lot. We're being very thoughtful about adding exposure there. You may see us slow that down and add it a little bit later. There's just gonna be 30,000 units for some number of years there. Atlanta feels pretty good to us on supply. Dallas has supply, but it's spread out, and it's a big demand market.
I guess that's the color we'd give you. Denver has a lot of supply too, more downtown than otherwise. Again, we have a portfolio we're building that in Denver will be a pretty diversified portfolio when we're done.
Thanks. Very helpful.
Thank you. We'll take our next question from Rich Hill of Morgan Stanley.
Hey, good afternoon, guys. Wanted to come back to talk about the disclosure that you provided on rental assistance, which was really helpful. If I'm looking at the numbers correctly, does it imply that another $10 million-$12 million of rental recovery is gonna come in in 4Q?
Yeah. Hey, Rich, it's Bob. That's probably a little bit on the high end of the range, but yes, I think it's that. You're in the ballpark. We think, as Michael said, for the full year, we'll be at $25 million-$30 million, and we're already at $18 million so far through 9/30.
Got it. Helpful. As you think about 2022, do you think that's gonna be a clean year or will it also have some rental assistance in it? Meaning, you know, is the same-store revenue number going to be, will it benefit maybe even to the upside from additional rental assistance?
I think that it probably will benefit from some of the rental assistance, and 2022 will likely be kind of a transition year. It also is going to experience this elevated write-off too, right? Because you still have that is unlike 2019, similar to what we've seen in 2021 and 2020, right? There's two things that will drive bad debt. One is the rental assistance payments, and two is just the, you know, ability to start collecting on the units that haven't been collected. That's a small number for us. It's been a small number given the high quality, you know, renter base that we have.
Those are the two driving factors that I think are gonna make 2022's kind of bad debt number a tweener between what you would have seen in 2019 and what we saw in maybe 2021.
Got it. Would you be willing to maybe frame how much of a, you know, headwind that might be?
I think that we'll have a better idea as we get to kind of providing guidance in general. Just to be clear, I don't think it's a headwind. I think it's a benefit to revenue. I think we'll have. I think we kind of alluded to that. I think we should be in a better position in 2022 than we were in 2021.
Got it.
There's opportunity there.
I understand. That makes perfect sense. I figured I'd ask. I thought it would be a long shot, but I figured I'd ask. Thanks, guys. I appreciate it.
Thanks.
Thank you. We'll take our next question from Rich Anderson with SMBC.
Thanks, everybody. When you think about the surprising pace of demand improvements, obviously the economy turning on after shutting down so rapidly is a big part of it. Related is the opening up of offices, of course, universities and people rushing to get back to be close so they can be present when the time comes that they have to be in the office. Assuming you agree with that, won't it be true that as things settle and you kind of have this, all this stuff be awash in terms of year-over-year comps, that the cadence of 2022 would be super strong year-over-year growth in the first half, but a return to earth in the second half? I'm not looking for a guidance question here, just sort of speaking out of logic.
Rich, it's Mark. I'm gonna start, and maybe others will contribute. The rushing back to the office thing, I'd point out a lot of people are coming back because the city's reopened. They're not sure when their employer's coming back to full-time, but they want to be back because they love the lifestyle in West L.A., and they love living in downtown Seattle, and they want to go back to their favorite coffee shops. You and I have had this discussion before. I think it's, you know, a little bit about return to office, but it's also about just energized cities attracting our kind of residents. In terms of the shape of the curve, I don't think you're wrong about that.
I think the numbers early have to be extraordinary because the comp period is so poor in 2021 that that's exactly what'll probably occur. What else will be going the other direction is the normalized FFO by quarter number. Because as Michael's team writes better and better leases, as Bob does his accounting work and rolls those numbers up, you're likely to see the earnings power of the firm in the middle part of the year revert back to what it was in 2019. Again, the quarter-over-quarter numbers are gonna be exceptional early, and they're gonna be merely very strong late in the year. I think what you're gonna see besides those operating statistics, Rich, is that quarterly normalized FFO number get better, I think, every quarter of next year.
Yeah, we should be focused on FFO anyway, I think, but that's just me. Yeah. Then, second question. On, is hybrid office like a perfect setup for multifamily? The reason I say that is people will be more inclined to choose a nicer place to live with amenities and other conveniences just because they're gonna be spending perhaps more time there if in the hybrid model. Do you agree that hybrid office would be, you know, a particularly good thing in the sense you might get more fee income? With that in mind, why avoid then retail at the ground floor in your new acquisitions? I guess I understand why, but figure I'd just throw that question at you too on this topic.
Hey, Rich, this is Alec. You know, I think San Francisco is an example where people aren't back in the office, but they still want to be in the cities. To your first part of your question, yeah, I think the hybrid model does work well because it enables you to do both, enjoy the city and also be close enough to work to get in when you have to go in. We're seeing the impact of that. We are working on making our amenities more suited to that. We've increased a lot of our co-working space within our amenities. You know, we haven't said no to retail. We like ground floor retail. We like activated streets.
We just would have like to have a relatively small amount of it compared to the apartment business that we love.
Yeah. Okay, sounds good. Thanks.
Thank you. We'll take our next question from Alexander Goldfarb with Piper Sandler.
Hey, good afternoon. Two questions here. First, I don't think anyone asked about the ATM. You guys are not, you know, historically an equity issuer. No offense, but $140 million is almost, you know, pocket change for you guys. I'm curious on your decision to issue equity, especially as it doesn't settle for another year and a half, given that you guys are good asset sellers, you're getting cap rates that are commensurate with where you're buying. Just trying to understand how this ATM fits in, and should we expect more of it?
Yeah. Hey, Alex, it's Mark. Thanks for the question. We thought it was prudent to dust off the old ATM, as you put it, and put it to some use here. It's really about this increase in development spending. Our typical development spending needs the last three, four years have been $300 million-$500 million. Here I'm talking about spending, not starts, though, of course, they correspond. We were funding that out of free cash flow and a little incremental debt that didn't change our ratios because you had the new development assets on your books creating income after they were stabilized. Going forward with the idea that we're likely to start $1 billion-$1.2 billion a year after a ramp-up period, you need to be very thoughtful about how you match fund that.
When you look at 2023, we have a pretty significant amount of debt maturities in that year as well, and that's probably the first year we're gonna reach this run rate of starts. It seemed prudent to us, after consulting with the board, to take a little equity into the mix. I think you're right that it'll predominantly be funded with free cash flow, and we expect to have that again next year and, hopefully in some good abundance, incremental debt, occasional asset sales as long as we can stay within our taxable income kinda caps. I think we will be issuing a smattering of equity here and there, given the size of the development, expectations for the company the next few years.
Still, that's a pretty big shift. Mark, is that the recent addition of new board members? I'm just curious, 'cause historically you guys really haven't been equity issuers, so it does sort of represent a shift in your financing strategy.
I guess I don't view it as a shift. It's the same group of people, maybe in different shares, but it's the same conversations. I mean, we don't wanna dilute our current investors. That's an important priority. But we do think that when you're creating new assets, having a little equity foundationally makes sense. We know what the cash needs are to fund the development pipeline. So the conversation with the board was very easy on this point. They felt that if you were a $300 million, $400 million, $500 million a year spender on development, that was one thing. If you were gonna double it, that was a whole 'nother thing. That was the real thing that changed, Alex, was just this magnitude of what the management team is suggesting development can be.
Okay, great. The second question, you probably could guess it. You know, local New York press is talking about how Governor Hochul is trying to fend off challenges for her re-election from the left. You know, Good Cause Eviction seems to be back, and it seems to almost be a gimme for Albany. Your view, if that goes through, is, does that change your plans as far as selling down New York more? Or does that make it say, like, "Hey, New York almost becomes like a stable rent foundation market"? Or does this mean, like, "Hey, we could actually see our property taxes go down, because if they're gonna limit rent increases, then it's hard for them to raise property taxes?" Just sort of curious how.
'Cause it does look like there's a pretty good chance Good Cause does pass this time.
Yeah, a lot of parts to that question, so I'll try. I'm gonna start, though, with the policy part. Does Good Cause Eviction is just rent control by another name? It's bad policy. New York's had rent control, and you know, you live there for, you know, since World War II, and the housing situation in New York has not improved. This is just gonna cause less housing to be built and more disinvestment in existing housing. There's a lot of better ideas, you know, like SB 9 in California and 40B in Massachusetts and some of these zoning reforms in Minneapolis that, you know, should have been thought about. We're disappointed if it indeed is the direction it's going, and we'll work through our association to suggest other better alternatives. Let's assume it does go.
You know, it was our intention to lighten the load in New York. I think New York is gonna have extraordinary revenue growth next year as a result of just going back to where it was in 2019, frankly. The idea of putting Good Cause Eviction in where it's going to affect landlords who've been beaten up by the pandemic, have property taxes to pay, and all the rest seems like particularly bad timing and is gonna, you know, particularly discourage production. It doesn't make us wanna own more in New York City, that's for sure, and in New York State. I guess I'd say it's a, you know, a negative to investment in the city and in the state. In terms of lower property taxes, I love that idea.
They did come with lower taxes than we expected for the most part this year in general. We'll see. I don't know many municipalities that like to keep their property taxes low if they can raise them, so I'm guessing they won't lower them for us enough, Alex, to, you know, kinda reimburse us for what's about to happen if Good Cause comes through. Again, it's just a bad policy idea, putting aside the impact on EQR. You know, we can respond to it. We'll lighten the load in New York, and that's unfortunate. A lot of other people will do the same thing, and there'll be less capital for housing in New York.
Thank you, Mark.
Thanks, Alex.
Thank you. We'll take our next question from Brad Heffern with RBC Capital Markets.
Yeah. Hey, everyone. You talked a little bit about the Bay Area already, but I was wondering if you could put some more color around your expectations as to how the recovery plays out over time. I'm just thinking about in the context of, you know, in New York, you saw occupancy and pricing come back at basically the same time. In the Bay, you know, occupancy's come back, but pricing really hasn't. Is it as simple as just, you know, people with higher incomes needing to come back to work at their tech jobs, or is there something else going on?
So, uh... Hey, Brad. This is Michael. I think you have a little bit of everything going on. I think right now, as I said in the prepared remarks, we're pretty well-positioned in San Francisco. There is demand, right, coming back to our product.
It's just the pricing power wasn't quite where it needed to be to kind of recapture everything that was lost through the pandemic. I think right now, when you look at the portfolio and you look at how it's positioned, as there's some, I guess, additional clarity around what return to office looks like, you know, the tech companies have been all over the place in that market. Just a little bit more clarity probably brings some incremental demand, and that most likely will happen after we get into the new year. The portfolio that we own right now is very well-positioned to capture that demand and recapture some of that rate. You know, when you look at it from a sub-market basis, I said a little bit on the deliveries in the South Bay.
We thought we were gonna have pressure in the South Bay because of the new supply being delivered. We're really holding up really well there. Now, the rate hasn't fully recovered, but the rate recovery in the South Bay is better than the rate recovery in downtown San Francisco. I think we need a few more months to just see how some of this ambiguity kind of flushes out, and then we'll have a better feel as to what that means for next year.
Okay. Perfect. On bad debt, you know, you have on the slide some of the potential there, but you also said you don't expect it to really, you know, fully get recovered in 2022. Can you just talk about what some of the impediments are there? I mean, is it strictly just eviction restrictions, or what else would make it play out over a longer period of time?
Hey, it's Bob, Brad. I think it starts with just, you know, getting to the point where these residents that haven't been able to pay start making different housing choices or are in a position to start paying, right? That can come in a few forms. It can come in the form of, you know, some of the eviction restrictions being lifted. It can come in the form of residents now being employed again because the economy's in a much better spot, and they can start paying again. There's a process that we're all gonna have to go through of kind of unwinding this or moving back to kind of a market level, and that's gonna take a little bit of time, right?
That's unlikely to be a light switch-like activity, especially as we work with residents kind of figuring that out. As a result, I think 2022 is going to be that transition year I alluded to. That's probably the biggest thing. To the financial statements, to add a little bit more noise associated with it or make the forecasting harder, as I like to say around here, you're gonna have the trickle-down of the government rental assistance payments 'cause those programs eventually will come to an end as well. It's really the unwind of that that's likely to occur in 2022.
Okay. Thanks.
Thank you. We'll take our next question from Amanda Sweitzer of Baird.
Thanks. I know there's a loss to lease. Are you able to provide that number by region? Can you also quantify how much of your NOI is subject to those regulatory restrictions you mentioned that would constrain your ability to fully realize that loss to lease next year?
Hi, Amanda. This is Michael. Maybe rather than going by every market, I'll just start by saying that the majority of our markets, so Boston, D.C., Seattle, Southern California, and Denver, all fall within a range of a net effective loss to lease between 11%-15%, with about 80%+ of the residents in those markets being below current market prices. Not surprising, San Francisco has the lowest with a 5.7% net effective loss to lease, with 67% of residents paying below current market prices. New York is the highest with 21% loss to lease, with 93% of the residents paying below the current market.
You know, as I stated in my prepared remarks, the loss to lease is a snapshot of today, and it never has translated into full year revenue growth because you have to work your way through those expirations. I guess I'll just stop and just say that all of that being said, this is the best position the portfolio has ever been in for the ability to capture it. I think you need several months into next year to really understand how you're gonna translate that into revenue growth and how much of that is gonna roll into 2023.
In regards to kind of thinking about the restrictions or the governors, I guess I would say, you know, it's really hard to understand because it's so subject to who is actually gonna renew, who's gonna move out, and what your abilities are, you know, and what the caps are in place. There really are so many different programs out there, so it's really difficult to try to quantify that for you.
Okay. That's helpful and makes sense. Just given the scale of the Toll Brothers JV, are you able to talk more about the how the potential buyouts would be structured in terms of the implied acquisition yield versus that 5%+ stabilized development yield that you cited?
Yeah. Hey, Amanda, it's Mark. I'm gonna start, and Alec may have something. We're underwriting these deals, and generally for Toll to bring them to us, as we've said, they need to be in that 5% yield range on current rents or better. Right now, Alec and his team are buying at a 3.5% or so cap rate on existing assets. That's that 3.5%-5% difference, that 150 basis points or so of margin that, again, we think is compensating us for the risk. When we buy the asset, we will be paying Toll a promote, presumably, and so we'll be buying at a slightly lower cap rate than that 5%, in my example, assuming no intraperiod rent growth.
Again, because of the way the promote's structured and all of that, it's not that meaningful a difference. I mean, we're 75% of the capital in the deal or the equity capital in the deal. Is that helpful to you?
It is. Appreciate the color.
Thank you.
Thank you. We'll take our next question from John Kim of BMO Capital Markets.
Thank you. Mark, you mentioned in your prepared remarks about cap rate convergence to around 3.5% across your markets. You know, I realize multifamily is a very hot asset class, but with rates rising and now 20% rental growth achieved in many of the Sunbelt markets, are you seeing any upward pressure in cap rates in your markets?
I'm gonna let Alec give you detail in a second because there have been a little shift here and there, but it's. Interest rates matter, but fund flows matter more. Fund flows right now are highly favorable into the space because of the performance matters you mentioned. Because there were significant declines in urban apartments, they came back pretty quick. Because of the GSEs existing as a financing option that no other sector has. I think when we look back at our research, there was generally a 200 basis points difference between whatever cap rate we thought we were underwriting on acquisition and whatever the 10-year spot Treasury rate was. Right near the 10-year spot Treasury rate's 1.5%.
A lot of what Alec's buying is very much close to that 3.7%, so it might be a little lower, but it's not a lot lower. I think, you know, I don't feel like we're that far out of whack, and I do feel like generally speaking, when we look at the whole sort of situation, it generally seems to make sense to me. I don't think that interest rates rising alone, as long as cash flows increase, will drive values down. Alec, I don't know if you wanna talk about the bidding rents you're seeing.
John, this is Alec. There are in some cases, slightly fewer bidders showing up at the auctions. That's kind of the feedback we get from brokers. I'll tell you, the pricing hasn't gone down. In fact, it's continued to edge up. You know, there are some participants who have kind of stepped back and said, "Well, I'm not gonna win anyway, so I'm not gonna spend my time underwriting this." There's still enough, as Mark says, funds flowing in to make it for a very competitive bid to be able to prevail. On our end, you know, what we're trying and are doing is matching up the timing of our dispositions and our acquisitions, so we're effectively making a neutral bet. We're not going out on a limb, so that's protecting us.
In the sort of spirit of full disclosure on this, you know, a lot of our buyers are leveraged buyers of our assets. If the Fed raises floating rates, but if they stay still relatively low compared to the cap rates, these are good leverage buys. That's one of the other thing that continues to force capital into our space.
That's great color. Thank you.
Thank you.
In your presentation, you talked about maintaining occupancy at high levels for the remainder of the year, and then Michael talked about sending renewals out at 13% in November, December. Are you basically saying that you're not seeing much resistance to this level of renewal increase and you're not expecting turnover to increase?
This is Michael. I would tell you our expectations are the continued success that we've seen in retention will balance out the rest of the year and probably even next year, right? We're in the mid-60s right now for October. Even the trends for November are very promising. You know, the increases are getting more significant. We're having more conversations around negotiations, but just feel really positive about the ability to deliver results from that process.
Great. Thanks.
Thank you. We'll take our last question from Rob Stevenson of Janney.
Good afternoon, guys. Given Prop 13, as you continue to trade $1 billion of California assets for $1 billion of Sunbelt, how much is that gonna push property taxes up? Are we gonna be at an elevated same store expense level because of that going forward? Presumably, you'll have higher revenues to offset that, but is same store expenses just gonna be higher just simply by trading California for elsewhere?
It's Mark. Just to clarify that, Rob, you mean that in California, because of some of these Prop 13 limits, property taxes can't grow as much going forward. I mean, as maybe in Atlanta, they wouldn't be bounded by that. Well, I guess I'd say a couple of things. First, for example, in Texas, there's a whole bunch of property tax limitations that are coming into place on both commercial real estate, residential real estate. Alec and his team underwrite these increases, so if cash flow isn't going up net, then those assets aren't gonna be appealing to us. I'm not sure what you said is certain, because when you say same store expenses, maybe property taxes go up more. But I'll tell you, California minimum wage is a lot higher.
California, all the other compliance costs that go with owning in California are much higher. I think if you're talking about holistic same store expenses, I'm not sure I believe, at least for the first 10 years or so of owning a California asset, that there's gonna be that much of a difference from same store expense growth. Alec, you have a
Well, the other thing I'd add, Rob, this is Alec, is that we're buying properties that are on average two years old and selling properties that are 30 years old, and that expense load on the older properties tends to accumulate over time. You know, that there is a very significant trade off there.
Okay. The other one for me, I mean, it doesn't sound like that you have an exact number, but what are you sort of figuring out as a percentage of revenue that you're still losing today as your loss to regulation, executive orders, eviction restrictions? How material in general is that? Is that 1% of your, sort of, call it $625 million of quarterly revenues? Is that 2%? Is that 0.5% ? In terms of ballpark, how big is that you're either foregoing or you're incurring additional expenses to comply with, et cetera? How material is that, or is that an immaterial amount that should be-- we should be focused on?
No, it's Mark. I'm gonna start, and if Bob or Michael have anything, they'll add. I'm on page 12 of our press release. We give you a bunch of disclosure about residential bad debt, and maybe this will tie this up for you. In 2019, our write-offs, so that would be a direct negative against residential revenues, were about 40 basis points. That's a good run rate of delinquency in our portfolio, rents we never receive, and that burdens same-store revenue. When you look at what happened last year in 2020, where there were no recoveries and the pandemic was three-quarters of the year, and this year, you see on the bottom of 12, we're talking about numbers that are in the 2%-2.5% range as a headwind.
Now, the problem we're having is forecasting for you where between 40 basis points and 2.5% does next year fall. That depends on how quickly the courts process evictions, our success in continuing to work with our residents, which is always our first goal, whether government revenue or government rent relief programs kinda leak, Robert, into next year or mostly are covered this year. Hopefully, that gives you a boundary, but that's what we have to be a little general about because there just isn't certainty in our mind and across so many court systems and so many jurisdictions for us to know how all that stuff plays out.
Part of that is also the remainder of the rental assistance, the other sort of $8 million-$10 million that you guys expect in the fourth quarter?
Very much so. You can see what it did to our Q3 number. It went down to 70 basis points.
Okay.
Yet we told you that we continue to collect all but 2.5% or so of our rents. You know, that changed a little. It's getting a little better, collections are every month from what is still a very good collection level already. This government money is definitely hard to predict. Then when we can start working with people more directly and getting them into a housing situation that's stable for them long term, I don't know when that is exactly, but we think it's coming up.
Is there anything of any material substance to you that's expiring either year-end or, you know, over the next three or four months without renewal by either a governor or a state legislature?
The New York eviction moratorium, we understand, expires in the middle of January 2022, both commercial and residential. California's statewide eviction moratorium has expired, but there are some City of Los Angeles rules out there still. Boston instituted an eviction moratorium that has no set expiration date. They have an election in a week, and then after that, we'll see. Seattle has an expiry, excuse me, of their commercial and residential eviction moratorium in the middle of January 2022 as well. You can see, I'm giving you a hodgepodge of dates. There's local overlay. There's a lot going on here. That's why you're getting a range from us and not the precision that, you know, we usually try and give you.
Okay. Thanks, guys. Appreciate it.
Yeah. Thanks, Rob. Well, I think that's the end of the call. We're appreciative for everyone's time and attention on the call today. Have a good day.
Thank you. This concludes today's call. You may now disconnect.