Equity Residential (EQR) Earnings Call Transcript & Summary

Those of you who don't know me, I'm Josh Dennerlein, and I cover the residential REITs at BofA. I'm pleased to have with us the Equity Residential team and CEO, Mark Parrell; and Marty McKenna from the Investor Relations team. With that, I'm going to pass it over to Mark for a few opening remarks. And we can definitely jump into Q&A, and I'd love to keep it interactive. So if you guys have any questions, feel free to jump in and I'll definitely ask the field. With that, Mark?

Yes. Good afternoon, everyone. Thanks for joining us. Thanks to Josh and the BofA team and Jeff for including us in the conference. Really excited to be here. So I thought I'd just talk a little bit about operating trends with you, a little bit about the setup for '24, a moment on capital allocation and then open it up to questions and whatever Josh and the rest of the group wants to talk about. So we put out our operating release last week. We're on track. We talked about in that release, we talked about our blended lease rate, we talked about so where do we sit in occupancy. So really, the year is ending as we would expect. So this time of year, we start running the business a little more for occupancy. When you get this late in a year in a normal apartment operating year, it's really hard to impact your numbers generally because any leases you write, particularly good or bad, will impact '24 a lot more than '23. So right now, you're trying to build some occupancy into the seasonally slower part of the year so that when you get into '24, you'll really be able to run the business at least in the later part of the winter, early spring for rate. So that's where we sit. Lease rates for us peaked the second week of August and have been declining. That's what lease rates do in the apartment business. So everything is kind of as we would expect on the operating side. In terms of regional trends and the like, the East Coast is stronger. It's more highly occupied. Rental rates grew more through the year. On the West Coast side, the story in Los Angeles continues to be the abatement of delinquency. So we have a lot of folks that did fall out of lease compliance during the term of the pandemic, who were working through the eviction process. So Los Angeles has lease terms and just a lot going on in that market. I think the team is doing a great job. And I think that will be a source of incremental positive strength for us next year. San Francisco and Seattle. I was out in Seattle 2 weeks ago, the team is doing a great job. I would say in some to those of you who have been in those markets, it's better than you read it about in the East Coast papers. I just can't emphasize enough the importance of going to see places like San Francisco and Seattle for yourself. I mean the ground scape is improving, crime levels are improving. It is not perfect, far from it. But what you read is not what we see. And again, I was in Seattle 2 weeks ago, I was in San Francisco in May. The teams there -- our occupancy is generally around 95% in those markets with the center city weaker than the suburbs. But again, we have decent occupancy. We just really can't move rents. So that's a little bit of color on operations. Happy to take questions in a moment. Shifting over to 2024 in the setup. We aren't giving guidance. We don't do that until the January call for the fourth quarter. But we do, do this time of the year to start talking about building blocks. Like how does the year look, what are we thinking, what is your management team thinking about next year? So I thought I'd go through those with you quickly. Use some terminology. Everyone in the sector uses a little different variation of terminology. So I'm going to start with we call embedded growth. So embedded growth, which is often called earn-in for others, embedded growth for us is when you're -- you take at the end of this calendar year our rate and our occupancy and you just say, nothing changes. No lease rates go up, occupancy doesn't go up or down, just stays the same, what would be contribution to same-store revenue be. At the beginning of this year, that -- and I call that kind of a running head start. The beginning of this year, it was 4 percentage points for us, a little bit above that. That's a very high number. That number for us is usually 50 basis points to 1 percentage point. The way we're talking about it with you all at this point is assuming the year ends as we would expect. The earn-in or embedded growth would be somewhere between those 2 poles, but further away from 4. 4 was a lot of the pandemic recovery, was really a lot of strength in that. So that number would be a little lower, but in that range because we still feel like we're ending the year pretty well. So then your second variable is delinquency, which is usually for us around 50 basis points. By the end of the year, as we've disclosed on the call, we would expect it to be about 1.3%. So you've got 80 basis points a pop opportunity there, but you're not going to capture it all. Because it's not like in January, we're going to flick a switch and it's going to be back to 50 basis points. But there is some opportunity there, and we'll talk about that as we get on the call more clearly, but there's something there for us. And I'm guessing for a lot of our competitors as well, occupancy. Occupancy is really interesting. Right now, we're 96.2% occupied, more strength in the East than in the West. And so what's interesting about that is when you're 97% occupied in a market like New York, the opportunity is not significant. You're almost at frictional vacancy. It's hard to be higher, but I just told you a moment ago, you're 95% occupied in Seattle and San Francisco. Those are markets with opportunity. And in the center of city, it's lower. So those are markets where we could nudge up the occupancy a little if we continue to see demand. And most of all, if we start to see some hiring by the tech giants. We really -- the impact of the layoffs and the rest have really been for us not to be able to raise rents. But we didn't lose a lot of occupancy. We just can't raise rents in Seattle and San Francisco. So again, in some places like South Lake Union, where I was a couple of weeks ago, you see the return. The South Lake Union is very vibrant, there's Amazon employees. Our submarket there is 97% occupied. But again, what our people on the ground are telling us is they are seeing people that lived in ex-urban and suburban Seattle moved back. So these were prior employees that moved out there in the pandemic, and they're moving back and they're filling our buildings up. What we're not seeing is that graduate from business school, that graduate from engineering school taking a new job. That second ingredient is, in our opinion, necessary in order to really drive rent growth, and we aren't seeing that yet in Seattle. And there's a similar story in San Francisco, though the South Bay with San Jose is better positioned than the city in the Peninsula. All right. So we've talked about delinquency, occupancy, we've talked a little bit about the last and hardest thing to handicap is your intra-period growth. What happens to rents during the year? In a normal year, we often see around 3% growth in rents. This year, we handicapped the number around 2.5%, and we're right on the mark. Our thinking was right on the mark. I don't know where to put it next year, and that's the mystery of the future, and we'll all talk more about it, but we can all have our opinions. But I think EQR is set up very well compared to our competitors, less supply, we're going to feel less of that burden. I think the demand feels good. The ability to recover both in Los Angeles, which is where most of the delinquency is, and hopefully, in the two big tech markets, some amount of job growth, I think, positions the company to outperform next year. You can see the convergence between the Sunbelt and the Coastals. I think you're going to see the coastal apartment REITs led by us sort of past that number and perform better. And the last comment I'll make about supply. Supply is a very significant input, right? And the hurricane of supply is offshore, okay? It is not yet onshore. The amount of supply in the Sunbelt markets in '24 and '25 is very significant. And because it's compounds for years, it will affect rents for several years. We like some of those markets like Dallas, we want to be in those markets more, but the results for the next couple of years are going to be very challenging. And the challenge has just begun. And that's where I think the Street underestimates. I think there's a lot of conversation that the impact is here, this is what -- the impact is just beginning. The impact will compound to get worse, likely for 2 or 3 years in our experience just because of the amount of supply being delivered in some of those markets. Quickly capital allocation, then we'll turn it over to questions here. So we haven't been very active. We want to be. We'd like to continue to allocate some capital to markets like Denver and -- excuse me, Denver, Dallas, Austin and Atlanta that are markets that have a lot of supply, and hopefully, they have a lot for sale, but there just isn't a lot for sale right now. We'd like to have more balance in the portfolio to be both in markets that have less and more regulatory risks that have less and more supply risk. We're just trying to balance those risks out between urban, suburban and between these markets as well. So we're looking and looking, but there isn't a lot for sale. I think pricing expectations continue to be unreasonable from our perspective. So you'll see us do a few things here or there. We may start one development deal, we may start none, it just depends how things come together. Hard to make development [ pencil ]. Right now, it's just the cost of building has not gone down. And of course, the cost of capital and what you think cap rates should be on an acquisition have. And so it's tough to make those numbers make any sense. All right. So that's what I got for you. I don't know, Josh, if you've got any questions you want to go through?

No, yes, of course. Thanks for those opening remarks. I guess maybe just thinking about the operating update in the market by market commentary, just kind of curious where has things been better and worse than kind of your expectations?

Well, again, it's not going to be like September numbers. And I want to make one little cautionary note again. You all are getting numbers now from us and from our competitors, almost on a monthly basis. And there is enough variation there that you shouldn't read too much into it. Like at least on our numbers, new lease can be a little better, a little worse by 0.20 in a month, and it doesn't mean there's an inflection point. There were commentaries made about our numbers and that of others, and I can't speak for my competitors. But again, when you have these short time periods, we last reported to you in July. So you saw some July numbers. Now you're effectively getting August numbers. It's just -- is the number on track, it always gives and takes. So I'd say the East Coast continues to feel better. New York has been stellar. Washington, D.C. has been a big surprise. It has a fair bit of supply, but it's absorbed that supply very in a very orderly fashion and done really well. The expansion markets, again, which are those 4 markets, Denver and the two Texas markets in Atlanta, they have a lot of supply. I mean we still have occupancy, but we feel the price pressure, but we don't have a lot of units. It's about -- 5% of our company are in those markets. And on the West Coast, again, we just don't have the ability to really move rents in San Francisco and Seattle. L.A. and certainly Orange County and San Diego feel better, but we're working through our delinquency issues there, no impact from the strikes. We've talked to our people on the ground, ask, do you see people giving keys back, do you see people doubling up. You see people saying, "I'm stressed out. I'm probably going to have to give back my keys." We don't see that in L.A. with the active strike and the Writers' strike and all those. So that's not something that to date has happened. So that's kind of where we sit.

Maybe zeroing in on Seattle and Northern California, you mentioned you don't have the ability to push rent. Like what do you think drives that? Like you mentioned return to office is starting to pop up in certain submarkets. Like is that just the key and we got to continue focusing out on that? Or is there something else like job growth or...

I made the suggestion about going out to these West Coast markets. I know for many of you, that's quite a commute. But what I'd say is, to answer your question, RTO matters, certainly, it matters because of activation. But New York isn't fully back, but our occupancy is great and our demand is great. So I think it's more for our demographic, I think, 25- to 40-year olds in high-paying jobs generally not with families. I think those folks are looking for exciting, interesting cultural entertainment amenities, things to do. Do they feel safe in their community? Can they go off for a run at night and feel okay with that? Can they find a restaurant? Can they meet with their friends. So these East Coast markets are attractive, Josh, in that way and are less concerning. And I think out West, Seattle and San Francisco are getting better. They aren't where they should be at, but they're working towards it. I think political leadership is focused on having a safe place for people to live. So I would disconnect a little from RTO and talk more to do you have just net job growth and is it an attractive place to live because, again, we don't have full RTO in New York, we don't a full RTO in Boston and we're doing great. And in D.C., even less so with the government. And we're doing well in all those markets. So to me, it's much more about, is the streetscape activated? Is it fun to be where you live? Is it safe to be where you live? And is there a net job growth in that area?

Do you think those markets like Seattle and Northern California, in particular, like do you think they can make it attractive and safe for 2024 to kind of get like an acceleration in the...

Yes. I heard that San Francisco hired a PR consultant. I thought that was a good move. They need to talk up what's going on. There's a lot of cool things in those markets, too. Yes, I think they can make improvements. There's an election for City Council in November in Seattle. I think that's helpful. I think for politicians, they have check-in points with voters, puts pressure on them to continue to make changes. San Francisco has a mayoral election. I think Mayor Breed has done a lot lately to try and improve the city, but the candidates against her are mostly running on a more Law and Order type format so I think that's good, too. So this is a little bit about government, a little bit about industry, a little bit about just the pandemics after effects being lasting a little bit longer and that being coupled with a secular decline in the tech sector that has really hurt those markets. But boy, you see the share price of the tech companies are doing pretty well. And usually, after stock prices, you get jobs. So my hope is that's what happens in '24, a little more job growth and just a continued improvement in quality of life.

And when I think about apartments like demographics can be a real big driver, kind of where things are going. And I think if quoting correctly, I think like the average age of a renter in your portfolio was 32. And then I look at like the next few years, the 32 like kind of bracket like towards the end of millennials and then it kind of get the next generation, it looks like it shrinks for a couple of years. Like how do you think your portfolio is positioned to weather that? And is that a concern at all as demographics kind of flow through?

Yes. Good question. Yes, I mean, demographic is hugely important to the apartment industry. I think our number has actually been trending up a little in terms of the age. I think we're going to capture 2 groups disproportionately. One, I think these older millennials are staying with us longer. I think their tenure is going to be longer because it's hard to buy a home because rates are so high, home prices haven't adjusted, not a lot of homes for sale. So I think there'll be renters longer, and I think we'll benefit from that. I also think that there's going to continue to be a good number of people that will be graduating from college. I've got a couple of kids in that bracket. Gen Z is not a small group, it is a large demographic. This millennial group is particularly large, but it's not like a tiny group here. This is a large group of renters that we don't know their preferences yet. We'll have to see, but we have every reason to believe they'll be interested in dynamic, diverse urban environments and interesting suburbs near big cities and that's where we play. So my -- I'm not worried about that. We really spent a lot of time looking at that. And at the end, it felt like between longer stays of the older millennials and between Gen Z being a pretty large group that we would be okay in terms of the demographics.

I think at least pre-pandemic, there was maybe talk of like the baby boomers kind of rotating into the cities and go more rental route. Are you seeing that? Did that kind of just fade?

It's not significant for us. Yes. I can't quite explain why. Part of that might be we have a portfolio that's more one bedrooms and studios. We do have twos as well. But I don't have an explanation for that, except to say that I think a lot of those people are pretty well off and they may be buying or they may be renting extremely high luxury stuff. And we have a lot of high-end properties, but I actually don't want to own A++ assets, that's just a very narrow part of the pyramid. So I have not seen a big boom of, call it, and so they -- now that I'm over 55, they said over 55 old, I don't like that, I'm just going to say older, more mature and grow. So no, we have not seen a big tailwind from that.

Okay. And maybe just thinking about like COVID's impact on cities and just like you're the most urban out of all the apartment REITs I cover. Just how do you think about that strategy going forward? Do you want to kind of start maybe rotating a little bit to the suburbs, Sunbelt? Like how are you thinking about that play and pushing into that theme?

Sure. So this is something we started talking to you about in '18 and '19 when we started to buy in Denver. I mean just having a little broader footprint. It helps mitigate supply risk a little bit. There certainly is regulatory risk in some of these markets and mitigates that. So they just have a little bit more balance, and balance doesn't mean being in 35 states. We were once in 30 odd states. It means being in 10 or 12 of these great cities that attract our demographic, these higher-end renters that will rent for a long time that either for lifestyle reasons or cost reasons won't buy very quickly and in markets where, again, like you're not stuck with one industry, you're not stuck with one supply dynamic. So that's our goal. And we -- like I said, we laid that out and started working on it in '18 and '19, and the pandemic has just reinforced our thinking on it.

Do you think there'll be more opportunities to grow just like given all the suppliers in the Sunbelt? You mentioned Dallas, like do you think like you'll see more opportunities over the next 2 years or...

Yes. We've been on the record saying we expected to see more even by now. So we hear brokers doing a lot of opinions, we hear a lot of conversation. But I think it's going to happen for a reason I'll talk about in a second, but maybe more slowly than we had hoped. So we thought there'd be a lot of these development deals where folks had capital structures where the debt was 3%, 18 months ago, and now it's 8% debt. Where their development capital, both the lender and the equity is itchy. They were sitting in this deal longer than they expected. And where, frankly, developers made enough money and they had cash out. Instead, what we see and hear and feel a little bit is developers that aren't interested in capitulating yet. They've made a lot of money over the last few years in the apartment business. If they think their building is worth $100 million or would have been before the Fed started to raise its rates, they now see that it might be worth $75 million or $80 million. Brokers telling them that are like, "You know what, I think the Fed's going to capitulate, rates will go down, cap rates will go down." And I'll get the advantage of that, and I'm going to wait it out a little. And so our sense, Josh, is that there'll be a point at which -- and I should also add, their NOI hasn't gone down. And only in the Sunbelt markets, has that started to occur in South Florida and in Phoenix, where NOIs are negative. So you're making money, you're leasing up your building, maybe it isn't perfectly on pro forma, your costs are a little bit higher, but you made a lot of money in the business, you're confident you can do it again. So I think people are waiting it out a little, and I think they're going to end up being motivated because of how expensive their capital is to sell. I don't think we're getting anything for free, just to be clear. What we're looking for is 10% to 20% discounts to replacement cost and stuff we can buy that's better than our cost of capital because one of the things that you should ask, I would suggest when someone says I'm buying an asset in a highly supplied market is if I tell you it's a 5.5% cap rate in year one, it's got a lot of supply. The cap rate in year two is likely to be lower. So you just got to -- that's okay. I mean we're buying 10-year buyers at least, right? But you just got to be thoughtful about what's about to happen in those markets, right? You're not -- I mean, why would your apartment building be the only one in the market with rents growing unless the prior owner was really at a pace with market rents.

So to that point, one of the things reflecting on some members of the housing panel earlier is just that the supply being offshore and that would suggest that the pace in delivery is actually slower that just because it take longer. So one, that delays the impact of supply, but also I'd say, versus 12 months ago, economic growth, U.S. generally [indiscernible] has also been stronger, migration. hasn't. So I'm kind of wondering what you're thinking about growing in your markets, understanding that there is attendant risks, but also some other things that [indiscernible] was lower. How do you kind of think about maybe averaging your way to achieve some of your growth of captives, while realizing you're not necessarily bottom to every asset? How do you do that?

The bottom ticking every asset thing is definitely not the approach. That doesn't feel right to us at all. No one is that good. So just as we look at the markets as we think about and just go through the end of that, just one more time. I just want to hear the end of that question again. I'm sorry.

Yes. So I'm thinking as like as maybe the economy holds up a little bit better, supply comes to market maybe a little bit slower, but longer. The intersection of all of those things...

Yes, that's a really good question. So if it was 1 year and supply was 6% of stock and now 6% was going to be 3% and 3%, I'd say absolutely a buyer on that. What we're seeing in a lot of those markets is supply is 5% to 8% in '24 and 5% to 8% in '25. Yes, it's just too high to begin with and the concessions will build on each other. So you're going to be out there leasing with 2-, 3-month concessions and that will damage all the properties existing in you. And then there's going to be another new property right across the street. And then in 2026, to your point, some of the 2025 supply will move. So our experience is that looking at the fourth quarter of 2024, what we think we'll deliver. We'll open and start leasing that 25% of that, so if we think there's 10,000 units in that quarter, and there's nowhere that high. But that 2,500 of them will move into '25. That makes sense. Even right now, there's going to be delays still. We totally agree with that, but it's the compounding. So getting 9% and 9% and making that 6%, 6% and 6% is not an improvement in the outcome for the apartment owners in that area or not much of one. Now if you get lucky and the economy starts to accelerate, I agree with that, that's a real bonus. That would be good all around, to be particularly good if you're 97% occupied in New York like we are. So if you're sitting where we are in our East Coast markets and you're telling me there's job growth, unless your thesis is that job growth is limited to certain places, I think we're going to benefit disproportionately from that because we have less vacancy, and we're going to have less because the supply is so much less.

Great. In the Western markets that all of a sudden...

The answer to that is no.

Any other questions from the field?

So question was about expense growth for '23 and just thoughts on '24. So our guidance midpoint is 4.25%. We've been very good compared to the industry and managing expenses, a little of that is the benefit from Prop 13, we're 40% California. 40% of our expenses are property taxes, so we do benefit from that. But we also are very good at managing our payroll line item and our repair and maintenance line item and all that. So I think we'll put that number up. I mean, I feel good about our number on expenses. This year, the pressure has come from insurance. So though we don't have windstorm risk, we don't have properties in places like Florida. Our insurance costs were up 20%. I would expect a similarly strong number or high number next year. Unfortunately, I think we won't have as high a number on -- there's a line we call other operating costs, which is usually pretty low, but it does include legal costs from processing evictions. I think next year will be much, much lower. That's a line item as millions of dollars running through it. Property taxes for us this year are about 2.5%. I think they'll be a little higher next year. But again, a lot of work gets done between now and the end of the year because you talk to your experts. It's not so much you talk to the assessor, you talk to the people who are talking to the assessor who feel the budget issues in the market and can give you a little bit of feedback what's going to happen to rates and assessments. So we got a little work to do there. I think we'll do better on payroll. This year is going to be a 5% payroll year for us that's higher than we usually put up. There's some special reasons for that. I think next year will be lower and hopefully, the same on repairs and maintenance and utilities. So I'd say it will be above what it was the last 5 years for us. We had years where same-store expense growth was 1.5%. It's going to be higher than that, I would think. But I think the number we put up this year is probably the high end of the range for next year. Is that good? All right.

Any other questions from the field? How are you thinking about regulatory risk in the years ahead? In California, it's got, I think because the Hawkins is back. But then I think like in New York, there's a case working its way up that would get rid of any kind of forms of rent control or rent stabilization, I guess, depends on how you read it. Just kind of curious.

Yes. I mean regulatory risk is significant in some of our markets. There is government risk in all markets. I mean we talk about some of the markets in states like Texas have different risks. They may become less appealing to our demographic, depending on social and economic policies. Some of those cities, places like Dallas have pretty significant pension issues of their own, by the way. So it isn't limited to the big northern cities in California where maybe there hasn't been as much spending discipline as some of us would like. So you got to be mindful that regulatory risk exists in many forms. There will be a ballot measure in November of '24 in California, the third one proposing to allow local rent control. The industry is super well organized, and we'll fight that. I was in D.C. yesterday for the meeting of the Industry Association. So we're really well organized. We've done it twice. We've won it by 20 percentage points. I don't know if we'll do that well. But again, it is a bad idea. It does not solve the problem of affordable housing or homelessness, it makes it worse. Every reasonable legitimate economist degrees. So the industry, though, has to say yes to the right things. And yes, it's the more supply. We need a lot more building in these markets. I mean the Sunbelt markets are about to prove what happens when there's a lot of new construction. But we need new construction of Class A, workforce housing, everything. And I think some of these zoning reforms, they're governed by DeSantis' new rules down in Florida. I think what the state of California did on the other political spectrum on a bill called SB9, which was a bill about deregulating zoning near transportation nodes. Those are all really good ideas. I think Governor Hochul's proposals were very thoughtful. They weren't put in the law, but I know the legislature is going to consider them along with some other things. So I think those are all really important things to do. So we're thinking a lot about California. I certainly think that New York is always something that merits conversation. There's been a lot of talk of what they call good cause eviction, which is just rent control by a different name. And the industry will continue to suggest again reinstalling 421a, which built a lot of units in this market. Public-private partnerships like that can be pretty effective and doing other things like that. But those are the main things we're mentioning, but it's mostly about education and a lot of the folks we talk to understand the point by these public policymakers. They don't argue with us on the merits. They're more just terribly frustrated. They're more really anxious about homelessness or housing in their markets. So like we get it, we're just trying to come up with an effective solution for them. As for the court case, we'll see what the court says.

Maybe just sticking with New York on your comment on the 421a program. Any -- is that something like that being considered by the legislative?

So again, I'm sort of going what was in the paper a little bit. You never know exactly what happens. Albany has a little bit more of a closed system than California, for example. It's much more of a backroom process. But there was a big trade that was proposed to reinstall 421a which, again, to remind people, 80% market rate, 20% affordable, and I think it was 80% or 50% of area median income. And in exchange, you got a big property tax break that burned off over time. So that was the 421a program. A lot of units were built under that program. That program has now expired. There's some transitional stuff. So they wanted that program back. The other side wanted rent control in exchange for it. So that didn't work. So they're going to have to go back to the well and figure out if there's some compromise they can all live with.

And then any questions from the field? Just maybe thinking about the platform at EQR, any kind of initiatives that your team is working on? Anything that you're focused on in the next 12 months?

Sure. So what we've talked about for the last few years have been more about expense limiting. So we call it podding, other people use other terms, but just running properties jointly. So we often have assets near each other. So maybe you have one large asset, one smaller asset and a smaller asset may have no staff assigned to it anymore, but the larger asset staff will come service that asset, take your maintenance issues, lock the property at the beginning end of the day. A lot of our leasing now has done really all of it remotely, meaning tours are done using an app on site. And so we do follow up in person on that. We think that, that's an important touch point. But that's allowed us to really lower the amount of staff on site. And again, it's kind of common now in the industry that, that's been the case. Some of these revenue enhancements, we've got a lot of storage space in our buildings. We've got a lot of conference rooms we can rent out during the day when our residents are often at work. So all of those initiatives, short-term housing stuff, WiFi, there's all sorts of opportunities that we're focused on. So think of us as a little more focused on revenue now versus the expense control because we feel like utilization of staff is pretty high in our company.

What if -- for the revenue side, like should we expect things to kind of be rolled out in 2024? Or is there a little bit of longer dated?

A little bit this year on the revenue. I think the number we promised was something around $10 million over the course of this year and next, and we revised that number up, and we tell you where we go. We'd benchmark and let you know. So I'd say it's a couple of year process.

So insurance has been a hot topic. Just curious if there's -- can you remind us when your renewal is? And then just kind of any early indication of where it might go? And if there's anything you can do to control that?

Sure. so our property insurance renewals in March of each year. And again, it was up 20%. We didn't materially impact our deductibles or anything else. So it's kind of a clean number. Important question to ask people and when they tell you their insurance number is, did they change the risk profile? Because if they took more risk, then the premium should have gone up less and they may have mitigated some premium dollar increase by taking more risk on. But any event, that's where we sit. Right now, we're exploring other alternatives. Our biggest risk, given that we're not in windstorm hurricane areas, is earthquake, which is not climate related, but it's a material risk for us. And getting earthquake insurance is going to get harder just because the whole industry is stressed. So thinking about alternatives is useful, like there are other places we can tap, cat bonds and things like that, that's a useful thing for us to think on that we're thinking at.

Would you take on more risk? Or do -- sorry, do you have a captive as well?

We do. We take on more risk if the premium was out of line with the cost, with the risk being assumed. The only transfer risk when it makes sense and it's fair or when you can't afford the risk. So with EQR's balance sheet, we can afford the risk. We can take a certain amount of deductible risk, but a significant earthquake in California may create significant damage in the portfolio, you'd want to have some insurance for that.

And then we're about out of time. We've been asking 3 rapid fire questions. They're very difficult, no one knows them, plus you're in another panel, like some people around here. But the first one is, do you believe the Fed has done hiking, yes or no? And do you expect the Fed to cut rates in 2024, yes or no?

I think rates are going to go up again, and I don't think they're cutting rates in '24.

Do you believe real estate transactions will meaningfully pick up by, a, the fourth quarter of 2023; b, the first half of 2024; or c, see the second half of 2024?

Let's go with the first half of '24.

Are you using AI today to help run your business, yes or no? And do you plan to ramp up spending on AI initiatives over the next year?

Yes. And I'd expect our multiple to immediately increase by 2 turns. So we've used AI and a lot of others have -- to help answer resident inquiries and do other things. We're using it for more advanced stuff now experimenting like everyone is.

Awesome. Thank you, guys.