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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 Investors section of equityapartments.com. Please be advised that one of our peers is hosting their call at 1 pm Central, and so we want to be conscious of everyone's time, and we'll look to finish the call in 1 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 Parrell.
Thanks, Marty, and thanks to all of you for joining us. Today, I'll give some brief remarks on a 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 on 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 the 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 stages 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 homebuilder 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 built 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 1 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 3 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 are 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 1. The pandemic caused our net effective pricing to decline by $520 from March to December of 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 2 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. And 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 improvement 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 and our offsite 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 receive 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 rent 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 1. 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 intra-period 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.
And 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 2 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 artificial 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 continue to pay rent. For those that were impacted we have continued to work with them, including assisting them and 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. [Operator Instructions] Our first question comes from Nick Joseph of Citi.
Thank you. 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 how are you thinking about getting to that comment about being among the best in the industry?
Nick, it's Mark. Thanks for the question. We're not giving '22 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 is trying to figure out as we look towards '22.
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. For same-store revenue growth, I do want to give a little context. So a normal and I'll say a normal meaning the last couple of recessions for us have consisted of 2 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. And in a couple of years where we compounded 5%, mid-5% same-store revenue growth numbers for high-4s, 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 going to 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. And so I think what you see here is the confidence the team has given the demand and the occupancy numbers. That's 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. And I think a bit of it is going to end up in 2023.
And there's just customer relations issues. There's regulatory issues with some of these increases in the size of them. And Michael has done a great job with the team of retaining our residents giving them great service. So hopefully that helps.
In terms of locked in, I can't give you a locked-in number. The team is going to 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.
That's very helpful. And then you mentioned the compounding in some of those past cycles and maybe we can tie 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?
Great question. It's Mark again. In terms of the compounding the compounding is going to start with the operations with the NOI from the same-store portfolio. Look at '22 when we've given you some color. And certainly it's hard to look much further in our business. But we do look at '23 and see less supply. There were a lot of deals that were delayed the starts due to the pandemic. And while supply is likely to pick up in '24 our look at proximity of supply and other things makes us feel like we got at least a couple of years here, pretty good numbers coming at us on the same-store NOI. And that will 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. And we feel like right now, our shareholders are getting paid to take that risk with our ability to underwrite development yields at around 5 on current rents. And 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. But I think you're going to 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.
Thanks for all the details on the revenue components. I actually have a few questions on the cost structure of the business. Bob, could you give us the expense pressures hitting some other property types in the REIT world. Could you give us a sense on how bracket a reasonable worst-case and best-case scenario for same-store expense growth over the next 12 months?
I mean I'm not going to probably give specifics in terms of a range because 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 you think about the big 4 categories 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. So pretty good year means in my mind kind of sub that 3-ish or 3.5% kind of regular run-rate inclusive of 421as 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. So what Michael is doing 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. And we've been really good at it thus far. And I don't think there's anything that's 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 offset that pressure. The last 2 categories, which are R&M and utilities I think, are the ones that we're most focused on outside of like the payroll side. A big chunk of them can be passed back to the residents, but we're certainly all seeing commodity pressures. You saw what that gap has done kind of recently. And that's the one that I think is where you see higher single digits.
But put it all into the blender, I don't think that 2022 is that outsized relative to what we've seen historically in this business over time.
Okay. That certainly helps. Maybe Michael, 1 quick one. Just in terms of the posture on renewals. Could you share the renewal rate increases you're signing out today?
Sure. So this is Michael. And I'll tell you that for November, our net effective quotes were coming in or going out at 12.8%. And the December quotes are 13.2% on a net effective basis. And you could see that number is going to continue to grow, and it's going to 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.
And 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. So we're really excited about kind of working our way through the renewal performance for the balance of the year.
Understood. Thanks for that.
Thank you. We'll take our next question from Rich Hightower of Evercore.
Just a quick follow-up on development. So you started 3 new projects. Last quarter you delivered 1 of them. Obviously, the Toll joint venture is earmarked for several of your expansion markets. So 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?
And then if you had to peg a mix between on balance sheet or I should say, in-house versus the Toll joint venture? How would you see that breaking out?
Hey, Rich, it's Mark. I'm going to start. And then I'm going to give it over to Alec. So 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 to $1.2 billion a year of starts in a year or so and maybe $700 million of that is Toll and the rest of it is other JVs and the stuff that we create internally.
I think that, that will be funded in a way that will make that a pretty accretive thing. But most importantly for us, it's creating and giving us product again in markets and submarkets we just don't have enough exposure. So I think Alec can speak a little bit to things the internal team is doing because 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.
So I'm going to let him speak to that. And hopefully, that gives you the color you need.
Thanks, Mark. Rich, this is Alex. Yeah, so 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 we're actively engaged with them on each project and assessing whether it fits for us. And then as Mark mentioned, we have these densifications throughout our portfolio, largely in California but in other markets as well. And we have a great internal expertise on how to assess and execute on. So we're excited about that.
And then as we've mentioned in the release, we're continually looking at other joint venture opportunities outside of Toll. So 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. And 1 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?
So it's a range, depending a lot on the project. And 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 you don't always find an apples-to-apples and may be a location that's really almost impossible to find similar product to build - some of the location to build the same kind of product.
Parking is another variable. Surface parked, you may have an existing project that has surface parked, but the municipality won't allow you to do that or the project sites too dense. So that maybe you go to a structured parking, which is more expensive where you go underground which is yet more expensive. On top of which there are code changes that can generally make things more expensive and inclusionary housing requirements.
So we look at it as a metric we look at, but we assess all of those things on a project-by-project basis and determine whether or not we think it fits based on that and the typical yield parameters that we assess.
Okay. So it's hard to sort of peg a percentage discount or premium given everything you just mentioned.
There's no absolute number.
Okay. 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 want to follow up on 1 of those questions that were just asked around 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.
So we have - and Chandni, this is Alec. We have specific markets that we've designated through the Toll program that we're going to focus on. And 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 they're not part of the venture. And so those are areas where we'd be more likely to invest on our own or with another joint venture partner.
Got it. And 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 where do you see there could be more crowding especially as you are sort of foraying into all these newer markets? If perhaps you could give some color on that, 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 '22. And then I'll let anybody else kind of pick up on some of the newer markets that we just entered.
So 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. D.C. produced record levels of Class A absorption and the South Bay, which we talked about on previous calls in San Francisco. That submarket at 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.
And I think we've talked about this before that we are really focused when we think about supply, and the concentration of the supply and the proximity of that new supply relative to our stable assets on top of when are the first units going to actually begin leasing.
So for 2021, the overall supply numbers were elevated in our markets. But we said earlier on the call 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 and 2 miles 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.
Thank you,
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 '22 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. A lot's going on. Certainly, the actions of the Fed on the taper are super relevant to how the economy recovers. So 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. And then the big mysteries really are regulatory pressures, how the intra-period growth feels next year. And then where we end this year? I mean we're going to spend the next 2 months continuing hopefully to close some of that loss to lease by writing terrific new leases with happy customers and locking in revenues for next year.
So 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. And then second, I know you touched on supply. I don't think I heard the answer on '23. And we're hearing potentially on the coast, a significant decrease in supply in '23. And I'm sorry, again, if I missed this, any early thoughts on '23 supply in your markets?
All right. It's Mark. Thanks for that, Jeff. So what we see is a pretty significant decline in '23 a lot - and this is again in deliveries, just to be clear. And that's really as a result of delays in starts or delays in completions of product that was underway during the pandemic.
And so we're going to 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 going to feel a lot better about places like San Francisco and Los Angeles and Seattle. So we feel like we're walking into a pretty good setup.
When you start thinking about what might deliver in '24, and those are things that are starting now, 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. And so 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 going to 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.
So I guess that's the color we'd give you. Denver has a lot of supply too more downtown than otherwise. But 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.
Good afternoon, guys. I 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 to $12 million of rental recovery is going to come in 4Q?
Hey, Rich, it's Bob. That's probably a little bit on the high end of the range. But yeah, I think you're in the ballpark. So we think, as Michael said, for the full year, we'll be at $25 million to $30 million. And we're already at $18 million so far through 9/30.
Got it. Helpful. And so as you think about 2022, do you think that's going to be a clean year? Or will it also have some rental assistance in it meaning is the same-store revenue number going to be - will it benefit maybe even to the upside from additional rental assistance?
So I think that it probably will benefit from some of the rental assistance and '22 will likely be kind of a transition year. But it also is going to experience this elevated write-off too. Because you still have that is unlike like '19, similar to what we've seen in '21 and '20, right?
There's 2 things that will drive bad debt. One is the rental assistance payments; and two is just the ability to start collecting on the units that haven't been collected. And that's a small number for us. It's been a small number given the high-quality renter base that we have. But those are the 2 driving factors that I think are going to make 2022 as kind of bad debt number between what you would have seen in '19 and what we saw in maybe 2021.
Got it. And would you be willing to maybe frame how much of a headwind that might be?
I think that we'll have a better idea as we get to kind of providing guidance in general. But just to be clear, I don't think it's a headwind. I think it's a benefit to revenue. I think we kind of alluded to that. I think we should be in a better position in '22 than we were in '21.
Got it. I understand. That makes perfect sense. I thought it would be a long shot but figured I'd ask. Thanks, guys. I appreciate it.
Thank you. We'll take our next question from Rich Anderson with SMBC.
Thanks, everybody. So 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. But related is the opening up of offices. Of course, and 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.
So assuming you agree with that. Won't it be true that as things settle and you kind of have this - all this stuff be a wash 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.
So Rich, it's Mark. I'm going to start and maybe others will contribute. So the rushing back to the office thing. I'd point out, a lot of people are coming back because the city is reopened. They're not sure when they're employers 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.
And you and I have had this discussion before. I think it's 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 '21 that that's exactly what will probably occur. But what else will be going in the other direction is the normalized FFO by quarter number. Because as Michael's team writes better and better leases, as Bob does this accounting work and roll 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.
So again, the quarter-over-quarter numbers are going to be exceptional early and they're going to be merely very strong late in the year. But I think what you're going to see besides those operating statistics, Rich, is that quarterly normalized FFO number get better I think, every quarter of next year.
We should be focused on FFO anyway, I think but that's just me. And then second question on - is hybrid office like a perfect setup for multifamily? And 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 going to be spending perhaps more time there in the hybrid model.
Do you agree that hybrid office would be a particularly good thing in the sense you might get more fee income? And with that in mind, why avoid then retail at the ground floor and your new acquisitions? I guess I understand why. But just throw that question at you too on this topic.
Hey Rich, this is Alec. And 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, 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. So we're seeing the impact of that.
And we are working on making our amenities more suited to that. So we've increased a lot of our co-working space within our amenities. And we haven't said no to retail. We like ground floor retail. We like activated streets. We just would like to have a relatively small amount of it compared to the apartment business that we love.
Okay, sounds good. Thanks.
Thank you. We'll take our next question from Alexander Goldfarb with Piper Sandler.
Hey good afternoon. So I have 2 questions here. First, I don't think anyone asked about the ATM. You guys are not historically an equity issuer. No offense, but $140 million is almost a pocket change for you guys. So curious on your decision to issue equity, especially as it doesn't settle for another year and half, given that you guys are good assets sellers. You're getting cap rates that are commensurate with where you're buying. So just trying to understand how this ATM fits in and should we expect more of it?
Alex, it's Mark. Thanks for the question. So we thought it was prudent to dust off the old ATM as you put it and put it to some use here. And it's really about this increase in development spending. So our typical development spending needs the last 3-4 years have been $300 million to $500 million. And here, I'm talking about spending, not start. So of course, they correspond. And 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 or $1.2 billion a year after a ramp-up period, you need to be very thoughtful about how you match fund that. And 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 going to reach this run rate of starts.
And so 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 will 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 kind of caps.
And then we will. I think we will be issuing a smattering of equity here and there given the size of the development expectations for the company in the next few years.
Okay. But still that's - Mark, it's a pretty big shift. So is that the recent addition of new Board members? Or I'm just curious because, 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 chairs, but it's the same conversations. I mean we don't want to 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 $300 million, $400 million, $500 million a year spender of development, that was 1 thing. If you're going to double it that was a whole another thing.
And so that was the real thing that changed, Alex, it's just this magnitude of what the management team is suggesting development can be.
Okay. Great. And then the second question, and you probably could guess it. Local New York press is talking about how Governor Hochul was trying to fend off challenges for her reelection from the left. And good cause rent eviction seems to be back, and it seems to almost be given 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, New York almost becomes like a stable rent foundation market? Or does this mean like, we could actually see our property taxes go down because if they're going to limit rent increases then it's hard for them to raise property tax. So just sort of curious how - because 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 going to start though with the policy part. That good cause eviction is just rent control by another name. It's bad policy. New York said rent control, you know you live there for - since World War 2 and the housing situation in New York has not improved. This is just going to cause less housing to be built and more disinvestment in existing housing.
And there's a lot of better ideas like SP9 in California and 40 B in Massachusetts and some of these zoning reforms in Minneapolis that should have been thought about. So we're disappointed if it indeed is the direction it's going. And we'll work through our association to suggest other better alternatives. But let's assume it does go.
It was our intention to lighten the load in New York. I think New York is going to have extraordinary revenue growth next year as a result of just going back to where it was in '19, frankly. And so the idea of putting good cause eviction in where it's going to affect landlords who have been beaten up by the pandemic have property taxes to pay and all the rest seems like particularly bad timing and is going to particularly discourage production.
It doesn't make us want to own more in New York City. That's for sure and in New York State. So I guess I'd say it's 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 kind of reimburse for what's about to happen if good cause comes through.
But again, it's just a bad policy idea, putting aside the impact on EQR and we can respond to it. We'll lighten the load New York, and that's unfortunate. And a lot of other people will do the same thing and there'll be less capital for housing in New York.
Thank you, Mark.
Thank you. We'll take our next question from Brad Heffern with RBC Capital Markets.
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 it in the context of in New York, you saw occupancy and pricing come back at basically at the same time. But in the Bay, occupancies come back, but pricing really hasn't. So is it as simple as just people with higher incomes needing to come back to work at their tech jobs? Or is there something else going on?
Hey Brad, this is Michael. So 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 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.
So 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, the tech companies have been all over the place in that market. So just a little bit more clarity, probably bring some incremental demand. And that most likely will happen after we get into the New Year. And the portfolio that we own right now is very well positioned to capture that demand and recapture some of that rate.
When you look at it from a submarket basis, I said a little bit on the deliveries in the South Bay. We thought we were going to 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.
So 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. And then on bad debt, you have on the slide some of the potential there. But you also said you don't expect it to really - 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 keep it from - what else would make it play out over a longer period of time?
I think it's - it's Bob, Brad. I think it starts with just 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.
And so that can come in a few forms. It can come in the form of some of the eviction restrictions being lifted. It can come in the form of residents now being employed again because the economy is in a much better spot and they can start paying again.
But there's a process that we're all going to have to go through of kind of unwinding this or moving back to kind of a market level, and that's going to take a little bit of time. That's unlikely to be a light switch like activity, especially as we work with residents' kind of figuring that out.
And so as a result, I think '22 is going to be that transition year I alluded to. That's probably the biggest thing. And then to add a little bit - 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 going to have the trickle down of the government rental assistance payments because those programs eventually will come to an end as well.
So it's really the unwind part 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. Starting with the lots to lease. Are you able to provide that number by region? And then can you also quantify how much of your NOI is subject to those regulatory restrictions you mentioned that would constrain our ability to fully realize that loss to lease next year?
Hi, Amanda. This is Michael. So 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% and 15% with about 80% plus of the residents in those markets being below 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 and New York is the highest with 21% loss to lease with 93% of the residents paying below the current market.
And 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. And 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. But I think you need several months into next year to really understand how you're going to translate that into revenue growth and how much of that is going to roll into 2023.
And in regards to kind of thinking about the restrictions or the governors. I guess I would say it's really hard to understand because it's so subject to who is actually going to renew, who's going to move out and what your abilities are and what the caps are in place. And 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. And then just given the scale of the Toll Brothers JV, are you able to talk more about how the potential buyout would be structured in terms of the implied acquisition yield versus that 5%-plus stabilized development yield that you cited?
Hey, Amanda. It's Mark. I'm going to start and Alec may have something. But we're underwriting these deals and generally for Toll to bring them to us is we said they need to be in that 5% yield range on current rents or better. And so right now, Alec and his team are buying at a 3.5% or so cap rate on existing assets.
So that's at 3.5% to 5% difference, that 150 basis points or so of margin that again, we think is compensating us for the risk. So when we buy the asset, we will be paying Toll of promote presumably. And so we'll be buying it at a slightly lower cap rate than that 5% in my example, assuming no intra-period rent growth. But again, because of the way the promote is 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. So 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 conversions to around 3.5% across your markets. And I realize multifamily is a very hot asset class. But with rates rising and now 20% rental growth achieved in many of the submarkets. Are you seeing any upward pressure in cap rates in your markets?
Alec give you detail in a second because I have been a little shift here and there. But it's interest rates matter, but fund flows matter more. And fund flows right now are highly favorable into the space because of the performance matters you mentioned. Though there were significant declines in urban apartments, they came back pretty quick. And because the GSEs existing as a financing option that no other sector has.
So I think when we look back at our research, there was generally a 200 basis point difference between whatever cap rate we thought we were underwriting on acquisition whatever the 10-year spot treasury rate was. Right now the 10-year spot treasury rate is 1.5%, a lot of what Alec buying is very much close to that 3.7. So it might be a little lower, but it's not a lot lower.
So 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. And I don't think that interest rates rising alone as long as cash flows increase will drive values down.
But Alec, I don't know if you want to talk about the bidding cash you're seeing?
So John, this is Alec. There are in some cases, slightly fewer bidders showing up at the auction. That's kind of the feedback we get from brokers. But I'll tell you, the pricing hasn't gone down. In fact, it's continued to edge up. So there are some participants who have kind of stepped back and said, Well, I'm not going to win anyway. So I'm not going to spend my time underwriting this, but 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, 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. And in the sort of spirit of full disclosure on this. A lot of our buyers are leveraged buyers of our assets. So if the Fed raises floating rates, but if they stay still relatively low compared to the cap rates, these are good leverage buys. So that's one of the other thing that continues to force capital into our space.
That's great color. Thank you. In your presentation, you talked about maintaining occupancy at high levels for the remainder of the year. And then Michael talked about 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 expecting turnover to increase?
This is Michael. So 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. We're in the mid-60s right now for October even the trends for November are very promising.
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 going to push property taxes up? And are we going to be at 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 going to be higher just simply by trading California for elsewhere?
And so 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 in our - 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-net, then those assets aren't going to be appealing to us.
So 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. So 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 going to be that much of a difference in same-store expense growth. But Alec, do you have a -
Well, the other thing I'd add, Rob, this is Alec is that we're buying properties at on average 2 years old and selling properties that are 30 years old. And that expense load on the older properties tends to accumulate over time. And so that there is a very significant trade-off there.
Okay. And then the other 1 for me. I don't - I mean it doesn't sound like that you have an exact number. But 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 that you're having 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 we should be focused on?
It's Mark. I'm going to start and if Bob or Michael have anything they'll add. But I'm on Page 12 of our press release, we give you a bunch of disclosure about residential bad debt and maybe this will bound 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 burden same-store revenue.
When you look at what happened last year in '20, where there were no recoveries and the pandemic was 3 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 is a headwind.
Now the problem we're having is forecasting for you, where between 40 basis points and 2.5% does next year fall. And that depends on how quickly the court's process evictions, our success in continuing to work with our residents, which is always our first goal whether government revenue - government rent relief programs kind of leak, Robert, into next year or mostly are covered this year. So that - 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.
And part of that is also the remainder of the rental assistance, the other sort of $8 million to $10 million that you guys expect in the fourth quarter?
Very much so. And you can see what it did to our Q3 number went down to 70 basis points. So we can have a - but yeah, we told you that we continue to collect all but 2.5% or so of our rents. So when we're - that changed a little. It's getting a little better collections are every month from what is still a very good collection level already. But this government money is definitely hard to predict. And 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 at year-end or over the next 3 or 4 months without renewal by either a governor or legislature?
So the New York Eviction moratorium we understand expires in the middle of January '22, 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 of their commercial and residential eviction moratorium in the middle of January of '22 as well.
So you could see I'm giving you a hodgepodge of dates, there's local overlay. There's a lot going on here. So that's why you're getting a range from us and not the precision that we usually try and give you.
Okay, thanks guys. Appreciate it.
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.
This concludes today's call. You may now disconnect.