Equity Residential (EQR) Earnings Call Transcript & Summary

We'll go on right now. Good morning. I'm at the 8:15 session at Citi's 2022 Global Property CEO Conference. I'm Michael Bilerman, here with Nick Joseph. We are extraordinarily pleased to have with us Mark Parrell from Equity Residential. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available here and on the webcast. For those joining us today here in person, you can ask questions to management by either stepping up to the microphone in the middle or just going online in the QR code and typing the question in and those people on the webcast can just directly type it into the question box, they'll come to Nick and I. Mark, I'm going to turn it over to you just to introduce the management team that's here with you today and the company and then we'll turn it over to Q&A.

Excellent. Thank you, Michael. Great to be live and in person. I appreciate the invitation. The Equity Residential team is delighted to be out again. I have to my left, Michael Manelis, our Chief Operating Officer; to my right, Bob Garechana, our Chief Financial Officer; and in the audience, Marty McKenna, who runs Investor and Public Relations. I thought I'd make a few remarks, Michael, to open. Operations continue to improve. Pricing trend continues to go up. We have strong occupancy. The year is off to a terrific start for us. We're seeing strong demand to live in our both suburban and urban properties in our established markets, which are Washington, D.C., New York, Boston, Seattle, Southern California and San Francisco as well as our expansion markets, Denver, Dallas, Fort Worth, Austin and Atlanta. New York is a particular standout. The other East Coast markets are doing well as is Southern California with rents across the portfolio ahead of what they were pre-pandemic. The CBDs of Seattle and San Francisco continue, though to lag a little bit. But we like the recent Microsoft and Expedia announcements about return to office. And we're also excited about the San Francisco Mayor Breed's announcement as well last week about many significant employers returning to the city of San Francisco. And even more so, we're excited about some of the positive things that are going on in those cities regarding public safety and quality of life. So these cities have much to offer our residents, our affluent resident base, and we think that they're going to become increasingly activated over the next few months. And our -- I think a potential positive earnings upside later in the year if things do develop well. Our expected NOI and NFFO growth in 2022 exceed even the current inflationary numbers we're all seeing in the general economy. We expect that our ability to reprice leases will be particularly valuable as we go forward in what looks to be an extended period of inflation in the economy. Economic and market conditions are about as favorable as they've ever been for our industry and for our company. And so we see a prolonged period of above-trend growth for our company, and Michael is going to give you a bit of color on all that in a minute. So let me hit investments real quick, we'll give it to Michael and then we'll hit the Q&A. As affluent renters have moved to places like Austin, Dallas, Atlanta and Denver, we've moved some of our capital to those places as well. We are selling assets in New York City, Washington, D.C. and some parts of California to fund those efforts. And those assets are usually assets that have underperformed for us for a period of time or we think have future issues like 421a tax escalations in New York or they're older assets where we don't believe in the renovation play. We're going to continue to hold many of our assets in these established markets like New York and Boston. We'll have big portfolios still in those markets where we see a great rebound, a great V-shaped recovery going on right now and where we expect the majority of affluent renters to continue to live. We were pleased last year, we sold $1.7 billion, bought, $1.7 billion, no dilution. Most of that was invested in these new markets for us, but we did also buy some suburban properties in our established markets. So we bought assets in suburban Seattle and places like that as well. We think we own a differentiated portfolio of assets in these new markets. These assets we own are newer. They tend to have higher rents. They tend to be tied to a better, we think, long-term renter demographic. So you should expect the company to own a relatively balanced urban and suburban portfolio across what we think are the 12 best markets to live in the country, and where single-family housing costs are relatively high and other conditions are supportive of our business. Quick ESG note, we're thrilled to have won the NAREIT Gold Award for diversity, inclusion and equity. We have a lot of work to do as does the industry as a whole, but we're delighted about that. We have made a commitment to reduce our emissions by 30% -- greenhouse gas emissions by 30% by 2030 under the Science Based goals initiative. So that's a big point of focus for us as well. So I'm going to turn it over to Michael for just a couple of quick comments on operations. Michael?

Okay. Thanks, Mark. So good morning. So I will say that the lifestyle that our affluent renters seek is clearly available in most of our markets. As we head into the spring leasing season, we see increasing foot traffic and applications that are in line with our expectations and normal seasonal patterns. Our residents continue to vote with their feet and their pocketbooks to be in our locations, and this strong demand coupled with high retention has allowed us to maintain strong occupancy around 96.5%, while increasing rates. Pricing trends, which includes the impact of concessions, continues to perform and are trending slightly ahead of our expectations, especially in New York. The blended rate, February year-to-date is now 13.1% with renewal rate achieved at 12% and new lease change at 14.6%. Our collections remain strong. However, bad debt net is currently trending modestly above our expectations due to a combination of slower rent relief program receipts, which we believe is really just timing related and should catch up over the next couple of months as well as continuing high levels of delinquency in Southern California. Our residents are paying on average 11% below current market prices. As we've discussed in the past, we're not going to be able to capture all of this loss to lease in '22 because leases are going to reset over the course of the year, either through new move-ins or renewals. But all of that being said, double-digit loss to lease, strong occupancy, great momentum on rent growth has positioned this portfolio very well heading into the spring leasing season. I'm going to give you some quick color on the markets. As Mark mentioned, the recent announcements from major tech companies regarding return to office should be viewed as a positive, both in San Francisco and Seattle. We have seen for the past 90 days, a lot of hesitation from prospects willing to sign leases in these markets due to that ambiguity. So these announcements clearly should be an accelerant and serve as a catalyst to create additional vibrancy in both of the urban cores of these markets, which should result in a better quality of life and accelerate the recovery here that has lagged in the other parts of the country. Outside of Seattle and San Francisco, we continue to see strong demand and above-average pricing power in Southern California, although there are several restrictions in place that defer our ability to fully capture the strength in these markets. Heading to the East Coast, Mark and I were recently in Boston, New York and D.C. I'll tell you the markets really felt vibrant and alive. The highlight of the trip for us was New York with crowded subways, restaurants with robust demand and pricing power that is exceeding our expectations. So not only do we expect a very strong year of financial performance, but we continue to invest in our operating platform. Resident expectations are constantly evolving, and our teams have always been focused on leveraging technology to meet these demands and create and drive operational excellence. Over the past 1 year or so, we have deployed mobility to both the sales and service teams in our company. We have leveraged artificial intelligence, which now handles 85% of all of our prospect communications. We have deployed roommate matching functionality on our website. We've moved 97% of our tours to self-guide or virtual. And all of this was done while controlling payroll to less than 1% for the third year in a row by reducing overtime and creating efficiencies in the on-site sales process and maintaining our all-time high satisfaction from residents with our Google rating of 4.2 for the portfolio. So the foundation is in place, and we are further focused on process automation and continuing multisite coverage, which will create additional efficiencies in the portfolio and provide a seamless digital customer experience. So we have provided details of our enhanced operating model and the management presentation posted online, and we've identified approximately $25 million to $30 million in additional opportunities that we see over the next couple of years. It's a very exciting time at Equity Residential, and it's still early in the year, but we think this portfolio is very well positioned for the leasing season, and we're happy to take any questions you have at this time.

Mark, we're starting each of these questions asking each CEO what they believe are the top 3 reasons an investor should buy their stock over any other listed REIT?

All right. So I would start by saying we're tied to, we think, the best renter demographic. So these are the higher earning people in new media, Michael and technology areas like that who we think are going to get the best raises in this inflationary climate and are best protected from job loss. And because I think we're going to see a lot of push to automate different functions. And I think that's going to hurt folks that rent more to a B and C demographic. Second, I think we're spring-loaded in the near to medium term on the revenue side. We see terrific demand, as Michael described, across all our markets. I think you're going to see just extraordinary growth this year for our company and I think above trend growth in the intermediate term. And then finally, Michael alluded to this as well, the innovation machine at EQR is thriving. So this is our inside the company opportunity to continue to both manage expenses, improve revenues, enhance the customer experience. So I'd say best customers, Michael, best platform and then this continued just terrific demographics and demand picture.

Why don't we start on that first point, which is the demographics of the portfolio. You guys collect a lot of data on people moving in, moving out. What are you seeing right now from that data about this kind of affluent renter demographic.

Sure. I'm going to start, but I'm going to ask Michael to frame for a moment what we actually saw in the pandemic because our newer people -- so we did not see what some people rumor, which was this widespread departure from cities like New York without anyone -- people going here to Florida and Texas, we saw something a little different. Why don't you describe what we saw with our renters, Michael?

So we saw them move to the outer rings, the suburban. So they didn't really leave states, and we have a lot of both inflow and outflows of where residents come from and where they go. We didn't see them kind of migrating out of state. We just saw them moving a little bit further away. And as we hit the spring of last year, we started saying we were starting to see some of those trends in the demographics come back, which was they started to move back into these urban cores or into the near suburban markets. And really, as we looked in the third and fourth quarter, we're almost back to pre-pandemic levels for migration patterns right now. And that's also coupled with the overall demographics from household income, from age. We just really have rebounded almost back to like that 2019 level.

So that's about 4.3 million people a year. The rest of the decade, it will turn 18 million. So pretty strong just demographics on that side. The end of that millennial group is going to stay renters longer because single-family availability is low and costs are pretty high. So we see all that. And for the affluent demographic, we do see them spreading out. And we talked about this before the pandemic. I mean the coastal markets still have the bulk of that demographic, but there are places like Austin that are certainly attractive. And we have to look at those places and say, can we put a portfolio there that's large enough for Michael and his team to operate efficiently, and that gives us a differentiated return outcome. So being instead of in 6 coastal markets but being in, say, 10 or 12 markets altogether which we're in now, we think gives the portfolio more balance. So I think we just followed our customer, Nick. And what we see is that a fair number of them have moved to places like Atlanta, and they want that same experience, dense urban living, close in suburban living, access to amenities that include restaurants, jogging trails and the like.

How much is return to office impacting that level of demand? And are you finding any correlation whatsoever in terms of the immediate trade areas that your apartments are located in depending on where office utilization is?

Yes. I think they've disconnected a bit. I mean you see New York as the poster child for that. There was the Kastle Systems folks with their key card swipes were very low in New York. Yet we were already reporting 96%, 97% physical occupancy. I think, Michael, the key attribute there is, is the area safe, are the amenities activated. So you go to New York, you see the restaurants open. There's certainly retail vacancy and all that. But you see restaurants, you see activation, you see reasons to live there. And our demographic wants to be there when there's reasons to be there. You go to some of the West Coast cities, you didn't feel as comfortable public safety wise, you didn't feel like the amenities existed in terms of the restaurants and your favorite bar being open and just feeling like the city was the city again. So why pay the rent, why not stay where you were. So I think office helps because it does activate the street, but I think if the city is vibrant without office, we're fine, too, and I think we proved that.

So do you feel like Seattle and San Fran should begin to accelerate further? Are you seeing that at all in the last couple of weeks of data?

I'll let Michael comment, [ but ] I think we will see that, whether it's a little later in the year, that's kind of the upside surprise in our numbers that we hope for. But Michael, when you see sort of occupancy and stuff and your trends in terms of [indiscernible].

Yes. So I think both Seattle and San Francisco have been the 2 markets that stood out the most around this ambiguity around return to office or around a hybrid work model. And we saw that with our prospects last quarter and on the earnings call 5 weeks ago, I said that a lot of the prospects showing up had a lot of hesitance to sign a lease until they had some determination from their employer as to what life was going to be like. So there was demand in the markets, and there's clearly demand in San Francisco with the occupancy up back at 96.5%. But there wasn't a lot of pricing power. I look at these recent announcements, and I was on a call with our Seattle team last Friday when it started to trickle out, you already see that momentum picking up. You already see that list of prospects that have been touring 90 days ago, showing back up and saying they're ready to commit. So I think there's a little bit of an accelerant that we're going to see from this.

Mark, being a real estate company, it's very different than being a stock portfolio manager where you can change your portfolio from growth to value or value to growth or some other attribute. It takes you a long time to go in and out of markets. Equity Res has been, I think, at one point, like 45 markets and then whittled down to 6 and now growing back up to that 10 to 12 through expansion. I guess, how should investors think about your approach to figuring out what markets to go to, and do you see sort of adding more potentially? And what's that process that you go through to know that, that's the right decision given that history that you've had in the marketplace?

All right. No, I appreciate the question. So I think the part of the strategy that is evergreen and has been since really just before the great financial crisis is our focus on this affluent renter and following them. And that group was really in the coastal markets, and that's where we thought we could best deploy capital. As time went on, really late, as you saw, 2017, 2018, we started to see in our numbers a lot of those affluent renters starting to move to places like Atlanta, and we started to see single-family housing costs go up in those markets. So for us, a signal that a market is a good investable market for us, focuses a little bit on scale. We need to get to 10 to 12 properties. So if it's a good market, and we can only get 1 or 2 assets in it, that's not good enough. So as Salt Lake City is not yet big enough to qualify. But a place like Denver is. It's got well over 100,000 affluent renters. It's growing quickly. Average single-family 600,000. So I would say a market that meets those types of criteria that's supportive on the resilience and political risk front is a market we'd be interested in, Michael. So that's how we're thinking. We're trying to build a portfolio that does use a little stock theory and that we like markets that have -- the coastal markets do have a degree of correlation that we'd like to avoid. So it would be nice to have those 6 markets as the engine, but they have some ballast or offset from some of these markets that are more in the center of the country where, again, our kind of renter is headed there. We're still buying newer assets. We're still, again, catering to a renter that we think can afford rent increases pretty readily.

There's a New York Times headline that just came across, The end to pandemic rent. New York City rents have roared back to greater heights than before the pandemic, amplifying an already chronic affordability crisis. You talked a little bit about New York about selling some assets. I guess what's your push of like, do I want to take all the growth, right, and on driving the NOI versus taking money off the table and recycling that? How does that debate go through?

Yes, I tried to make this point, it's a great question. In my remarks, I mean what we're selling in New York aren't the assets that are going to be the great outperformers because they have expense pressures. They have those 421a tax pressures, Michael, I referred to. And that's a tax abatement program in New York, that once it starts to burn off, your property taxes can go up millions of dollars over the course of just a few years. That will offset any benefit we get in the rents. We also have some older properties where they need renovation where we just don't think the capital is justified. So we're going to have a big vibrant portfolio in New York. And by the way, the best time to sell is into that kind of demand. More articles like that, that are out there, the better our investment team will do selling the few assets in New York we want to sell. But again, Michael and I and the team were just out in New York. We're going to have a big presence there. We like it. It's going to be a big driving market. But instead of maybe 15% of the company, maybe it's 10% to 12% of the company.

Great. We have a question from live Q&A, kind of related to the portfolio transformation. Obviously, you've been doing it kind of asset by asset with minimal dilution. The question is specific to, are you looking for portfolio deals to do this quicker? And if so, would there -- would that be funded with dispositions? Or would it be funded either moving leverage up a bit or other capital sources?

Yes. We would do a portfolio deal if we could find one that made sense. We see all the same deals you see out there recorded. A lot of those deals are [ BNC ] assets or they have some assets we like, but they give us just as many assets we'd want to dispose of. So again, we'd be open to a portfolio transaction. We have been funding it now with just trades. I think we have room in the leverage metrics. Even my Chief Financial Officer who's very conservative is comfortable with our leverage. I'll tell you our Chairman, Mr. Zell is very comfortable with our leverage. So if there was something, our constraint is not capital, our constraint is finding things worth buying.

And as you think about these new markets, I think historically, there's been a concern about supply in some of the Sunbelt markets. How are you thinking about supply, particularly given the population growth and some of the positive trends that we've seen really across the board? But if you can talk about supply, both for coastal versus Sunbelt and how you're more comfortable with the supply outlook as you enter these markets.

Well, we had a couple of thoughts about supply as we went through this process. I mean the coastal markets do get supply as well, and we saw that. We had a bit of a disconnection back in 2016 in San Francisco, where we had supply. And what the conclusion we came to is what matters most on supply is concentrated supply. So for example, we have a portfolio on the Upper West side of New York. It's fairly concentrated. At one point, it was 3% or 4% of the entire company. Good properties, good submarket, but there just happened to be a ton of supply when the 421a program was going away and it really hurt our numbers. So our sense of the right thing to do is to be just a little bit more spread out even in the supply constrained or the more supplied markets like Dallas, I think you need to be cautious. I mean, Denver and Austin are going to have a lot of supply, and we're aware of that. So we've been a little more deliberate in some of our investments in those places. But again, I think it's going to be met by a great deal of job growth, a great deal of demand. And I think it will be okay. And I think the important thing to avoid is concentrations of ownership so that when you have concentrated supply, you're not hurt as much. We have supply in the general market, it will usually adjust over time, Nick, because the developers will see over time that they're not able to hit their returns. It will just be a year or two of dislocation. And if the dislocation is big enough, it's an opportunity for us.

I want to turn to the operating initiatives. Michael, you spoke about $25 million to $30 million opportunity over the next few years. How do you think about that from a revenue versus expense standpoint and capturing some of those opportunities?

So I think on the revenue side, the biggest lift comes from like next-generation kind of pricing or yield management systems. And I'm guessing it's probably about $10 million of the $25 million to $30 million is forecasted from that kind of revenue lift. So I still think we have a lot of the operating efficiencies to work through. I talked about multisite coverage. So in the near term, you're going to see a bigger lift come from the expense side. And then I think as you work your way into the second year, it shifts to be more of that revenue lift.

And you've been at the forefront of kind of implementing new technologies. How do you think about being either kind of a leader of doing that versus waiting a year, seeing what works and then implementing it at that point?

Yes. I mean I think it's a balancing act. A lot depends on where you're starting from, like where your opportunity sits in the portfolio. So for us, right fortunately pre-pandemic, we saw that opportunity with artificial intelligence into the leasing process, which is we had a lot of phone calls coming in, a lot of e-leads, which is people that find you on the Internet, submitting request. And we had a lot of our personnel time being spent on that initial wave of response. So seeing that opportunity, we wanted to be leaders in the market of that. We saw that opportunity. It was very clear to us. We knew it was going to generate an efficiency and the capital outlay was not as intense. Areas where you see the innovation or the initiatives that have a huge capital downstroke or what I would say, first-gen technology of hardware. I think we're okay sitting back and watching it play out for a year or two and then getting in and really building the model around it to make sure that we can leverage enough of the opportunity to cover that capital outlay.

We have a couple of questions related to kind of capturing that loss to lease and the timing it takes. And obviously, it's a moving target. Base rents move one way or the other, probably up. How do you think about the ability to capture that? How long does it take just given the lease roll and what regulatory or either self-imposed regulatory or self-imposed renewal caps or regulatory kind of prevent you from moving at least as much as you can at any time?

Yes. So I mean, I think when you look at that 11% loss to lease, over the next, I would say, 1.5 years to 2 years, you fully capture that even with the regulatory. So the regulatory kind of constraints that we see that we're bumping up against. Most of that sits in Southern California right now, where you've had just robust rent growth and you have a limit as to what an allowable increase is at either CPI plus 5% or a 10% cap. So if the market is up 20% and you're governed to be at 10%, the next year comes around, you're getting that additional 10% or that residents moving out you're bringing that unit to market. So I would think about that pendulum for the loss to lease is, anywhere that you're not regulated, you're going to capture a large chunk of that through the course of the next 12 months. It's just how much of that manifests itself into revenue this year. If I'm writing leases in July, any gain I get, I only get 50% of that revenue this year, it will flow into next year. But over the course of the next 2 years, you will fully capture that. You will get the rent roll to wherever that market price is.

Mark, can you talk a little bit about sort of activating additional development in an environment where construction costs are rising pretty materially. And I recognize rents are moving up too, so you should be able to maintain a certain level of yield. But obviously, rents can change quickly, and you can't change a construction project that quickly. So how are you sort of approaching new development today using other people's money? I know you have some joint venture projects, but also maybe talk a little bit about the total partnership and how quickly you want to activate that, letting the market know what markets and how big that could become in the near term.

Yes. So we'd love to grow that a little more quickly. I will say that the process has slowed a little bit of late, and that's mostly a result of just the competitiveness of opportunities. I mean tolls are out there, and we're out there chasing things. So this year, you should expect, and I said this on the call, $500 million to $600 million of starts and then we should get to $1 billion, we hope, next year. We talked about what the markets are that toll focuses on. So those are the Texas markets for us, Denver, Atlanta, Boston and Southern California. And they are producing in Seattle. They are producing opportunities there, Michael. So our hope is that toll ends up being 2/3 or so of that start total of $1 billion a year, but they're working up to that. We have about 3 deals all in Texas we expect to start in the next few months with toll. So we have some descriptions of a couple of those deals in our materials. So I think that's gotten off to a good start. I will tell you we do hear from our development team internally on one of our densification deals out in California and from our partners at toll about pretty significant cost increases. We're talking through that with them. Rents are up to, but I will say we're seeing pressure on lumber. We're seeing pressure in almost every category and those pressures are substantial.

So can you quantify it a little bit in terms of it was -- if it's $500,000 per unit, is it now $600,000? Like where are -- where is the value change? And how much are you picking up in terms of the forecasted rents or the operating expense savings that you have elsewhere to get to that targeted yield that you want?

And there's one other input besides -- you can engineer the project a little differently.

In terms of studio 1-bed, 2-bed and you can try to get it that way.

Different materials, you can do all that. So what we usually see is and what we've seen lately is 5% to 10% increases on the total project cost usually with a specific line item driving that, and then you manage that down. Then you have -- and what usually you see right now, at least as rents are up so much that your yield didn't change at all, but you need to be very thoughtful about that because you have a lot of risk. But what's great about having toll in front of us is that once we start that deal, that's their risk, Michael. They have cost overrun risk. But until we contract with the general contractor or [ toll does ], that risk belongs to the partnership. So we're reengineering a few projects and moving along. And I think our pressures are the same, everyone else is feeling. I mean there's a lot.

So do you feel that the yields are going to come out where you thought they were targeted? Or do you think that there is potential downside on those yields?

I don't see any downside now because, again, the rents are up. So we're feeling the cost pressure, but the rents feel okay, and we're not being wishful. These are current rents. We always underwrite to current rents. We don't underwrite any trended rents. So again, we look at it. And we also have a contingency in there already. So preserving that contingency, Michael, we feel like -- we thought the deal was a 5.2%, it might be a 5.1% or 5.3%, but it's still that kind of initial yield.

Right. And different than other product types, the fact that you can release your assets every year potentially gets you out of a situation where you may over-improve an asset or have too high of a construction cost.

Right. And we're also -- we're committed capital allocators. We're not committed developers or committed transactors. So if it becomes better for us to acquire versus develop, we'll do more of that. But right now, again, you acquire assets 3.25% cap rates to 3.75% is what we're seeing. And so that feels like enough of a risk premium to reward our shareholders.

We are asking a handful of questions in every session. What's the biggest growth opportunity that you believe the market is not giving you credit for?

Sure. I think it's the cash flow growth that's embedded in the company from Michael's excellent management on the expense side. But again, I think are just very strong demand characteristics that will drive revenue for the near term. I think we feel really good about the next few years.

And then what is your #1 ESG priority in 2022?

Sure. I alluded to this in my opening remarks. This is that 30% reduction in greenhouse gases, which is a Science Based target initiative that we put out in October of last year, and we'll be pursuing and working hard on for years to come.

Is there anything in the development process in terms of what you're constructing that's different from where you were constructing pre-pandemic in terms of the mix of types of units? I don't know if hybrid work is playing a bigger part in that. But just overall, are you engineering the buildings differently in any way?

Well, tying it to the sustainability remark, we are really thoughtful about the use of natural gas in buildings. In some places, you can't do it. In others, we wonder, we don't want to build a building that's going to feel functionally obsolete in 10 years or regulatorily obsolete. So we're very thoughtful about the use of natural gas in our buildings, whether to heat or cooking gas or whatever. In terms of units, we've always not liked large units. So we don't put a lot of 3 bedrooms generally in our properties. So I wouldn't say, Michael, we've shifted to all, say, 1 bedrooms because of the pandemic because folks will pay up for a 2 to have like an office space as well. So it's just having a good mix. So we haven't changed dramatically our mix thought process. But our amenity thinking has changed to have a lot more office shared workspace, but shared from a distance, pods, things like that have become bigger parts of our construction process.

And where was that -- I guess, how do you figure out the return on that? Where are you grabbing that space from?

Sure. Sure. Well, some of that is just making better use of the space we have. And some of it is, we used to do a lot of, I would say, social space like long picnic table like feelings. The thought was you and I would chitchat and we'd sit relatively near each other. That may come back, but I think people do like a little more space. So it's breaking up space a little bit more.

How are you thinking about densification opportunities within the existing portfolio?

Yes. We have some great ones. There's one in particular we've talked about for a bit, that's right near Apple's headquarters, about a mile from that. So we're likely to start. So we have a number of those on the Peninsula. We've got Seattle, Southern Cal. So they're great because it takes a while to get these permits. So meantime, you've got 40 or 50 units creating revenue for you. And then usually, you need to replace them, Nick, with something like 5x as many units to make it worthwhile. So what often happens is the property is a garden property, the ring of garden units on the perimeter remain. And in the center, you tear down the garden building and put in a mid-rise. Generally, you don't get a lot of pushback on the regulatory side because the adjacent residents can't even see that building because it's tucked back a bit.

Right. We got about 1.30 minutes to go, I want to take this question from the audience. Is there a risk that single family is growing too much and how much of your demographic [ leads ] for that type of product.

So people purchase homes, if we're talking about purchasing, people purchase homes not just for financial reasons and with rates going up, they're feeling that pressure. Single-family prices are going up big. They buy it for lifestyle reasons. And lot of our residents like living in our cities. They like the flexibility we afford. So I'm not worried about single family. In our markets, we designed the portfolio to be in places where people want to rent.

All right. Rapid fire. Same-store NOI growth for the apartment sector overall, not equity residential in 2023. And I think the average for 2022 is 12% for the apartment sector.

All right. So we typically have not answered this question, but we're going to go crazy and try and answer it this time.

Right. Benefit to being in person.

You've beat us down. Now I think we're going to be well above trend in '23. I feel really good.

Above trend. So you'd be at like 5%?

I just said above. You got to work slowly. I'm coming slowly, okay?

What would trend be? Trend is like 3% to 5%, Okay. 10-year treasury yield a year from now, it's about 1.8% today.

I haven't read the headlines, but I'm still going to stick with 3.25%.

3.25%? Bob's going high. All right. Will your property sector have more or fewer public companies a year from now?

I think the same. I don't see any reason for it to change much.

You already had M&A. You had companies, it's an easy thing to say, come on.

That's why we say it.

All right. Thank you very much.

Thank you.