Equity Residential (EQR) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Bank of America's 2024 Global Real Estate Conference. I'm Josh Dennerlein, and I cover the residential REITs at BofA. We're pleased to have with us EQR's CEO and President, Mark Parrell; and EVP and CIO, Alex Brackenridge. Mark will start with a few opening remarks, and then we can jump into Q&A. As always, I encourage a lot of questions from the audience. With that, Mark, I'll pass it over to you.

Thanks, Josh. Thanks for including Equity Residential in the event. Just on the operations side, a week ago, we put out an operations update. Things are on track. Back in July, we raised the midpoint of our same-store revenue guidance by 70 basis points to 3.2%. We continue to be having a good year. There's always puts and takes. On the positive side, renewal, both renewal rate and renewal percentage are a little bit better than we had thought. Occupancy right now, 96.2%, a little better than we thought, so very good. We have begun the seasonal decline in rents that does occur every year and occurred probably a little earlier than we had thought it would, but plateaued at that point. So it doesn't make a great deal of difference to the numbers. It makes no difference at all really. On the delinquency side, we're on track. We had told you we would improve that number by 30 basis points through the year, and we remain on track in that regard. And it is a number that one month is great, the next month is make a little less progress. So it is a choppy process, but we're on track and it feels real solid. In terms of new lease rate, that is a little lower than we expected. That is a result of the occupancy play. We are pushing occupancy. That's a little bit better for us, particularly in Southern California. But again, all of these detail I'm giving you, you need to think about in context of the 3.2% midpoint for same-store revenue. There's always things that are a little better. There's always things that are a little worse and it's sort of how that interaction of those various levers that management is pulling and up. And so right now, we feel like we're ending a good year on a good note and are setting ourselves up well for the future. Just in terms of market performance, the Northeast is better. So for us, that's Austin, New York, Washington, D.C., then we would have thought Seattle as well, those 4 markets together are 52% of the company. San Francisco is modestly better than we would have thought at the beginning of the year. San Francisco, though is a market we didn't have great expectations for. We continue to be well occupied in San Francisco. It continues to be a little difficult to move rents in that market. But again, we do see green shoots, we do see improvement in that market, downtown as well as the suburbs, but I think that is going to continue to be a story that will evolve. Southern Cal, there's a little bit of complexity there. We continue to work through delinquency issues in that submarket. That is going well. But as I said, it's a process that's hard to predict, but it's continuing. So these are moving out long-term delinquent folks and moving in rent payers. So you have a little shadow supply. I'd also say in Orange County and San Diego's market has been a little slower than we thought. Those are about 7% of our NOI. So they're not very big markets. They've performed very well for us. They've been up 30% from -- rents are from 2019 and now in a cumulative way, but I also say sometimes you get rent fatigue where residents will just move and we're seeing a little bit of that. We saw that in New York last year and then it picked back up. So this is something that's again not uncommon. It's sort of part of the puts and takes of running a portfolio our size. So that, again, is the sort of run through. There's been a lot of discussion about credit quality. The credit quality of our residents is very good. We're not seeing any increased delinquency. We're not seeing people give us keys. We're not seeing people move down to smaller, cheaper units. None of those trends. We feel really good about the credit quality of our resident, which by and large, is significantly higher than the market average in terms of income and I think job stability. With that, I'll turn it over to Alex to talk to you a little bit about capital allocation.

Thanks, Mark. Well, we're excited because the transactions market is moving our way. But it's really a factor of a couple of things. One is that a lot of owners are putting their properties out in the market and higher volume. For the last couple of years, many of them were just not happy with the result they would expect from a sales process. So they kicked the can down the road a little bit with their capital partners. There's some acquiescent going on right now as rates have come down. But what's exciting for us is that we have a relative cost of capital advantage that I'll talk about in a minute. And we're also a preferred buyer. A couple of years ago, everyone could be a buyer because everyone had capital. Now our capital is cheaper and our ability to move faster is a big asset. And that's enabled us to be pretty active for the last few months. You may have read about the $1 billion in acquisitions we did through a deal with Blackstone. That turned out to be a very positive relationship for us. It's an off-market transaction. We work directly with them on 3 markets that we're expanding in, Atlanta, Denver and Dallas and identified specific submarkets within those markets and the kind of property we liked. They gave us a list of 17 properties. We narrowed it down to 11, and we were able to come to a price agreement on those, and we're actually closing the final 3 tomorrow. So that's about $1 billion. On top of that, we have another $300 million that we've already closed. All of which are in the expansion markets and another 300 under contract. All of those transactions were priced at around a 5 cap. When that's been the market clearing price up until just recently. And what we're seeing in the market today, today is cap rates drifting down a bit, down another 15, 25 basis points. What made us excited about the Blackstone portfolio, in particular, was the ability to get volume targeted in our expansion markets at a 15% discount to replacement cost. And we are able to match that with the sources of capital that were non-dilutive, and that came from the $600 million in debt offering that we just completed -- completing literally today at a 4.7% interest rate, 10-year money unsecured. So that we combine with disposition proceeds of about $500 million, that some of which have closed, some of which are in the process, and that will be about a 5.2%-ish. So you blend that together with the additional capital that we took off the line and we're able to do the transaction without meaningful dilution. So that helps further our goals. Now we do acknowledge when we underwrite all of these opportunities -- all of which, the 17 I just mentioned are in the 3 expansion markets are going to see in the next couple of years be tough. There's still supply to be absorbed. We're fortunate in those 3 markets aren't as bad as other markets that have historically high amounts of supply in excess of anything we've honestly ever seen. And we're -- one of those is a market we happen to be in. We have 3 properties in Austin. Austin is seeing 7%, 8% of inventory delivering this year and another 10% next year. I mean it's just overwhelming in terms of that amount. There's a couple of other markets, Charlotte, Raleigh, Phoenix that are in similar conditions. Ours not as bad, but we acknowledge in the next couple of years are going to be tough. So when we underwrite these deals, it's -- looking at rents coming down a bit for the first year, then flattening in year 2, which gets us like through 2026 -- or halfway through 2026. But we offset that by putting them into our platform. And when we do that, we see increases in occupancy. We see less bad debt. So there's another step down in operating costs once we can pod everything, and we're getting to a point in these markets where we have enough of a presence to share staffing with properties that are approximate to each other. So we're happy to be able to make progress in this journey at a time that we think we'll get an advantageous basis, but we're going to continue buying because we think opportunities over the next 12 to 18 months will be in our favor and we'll be a preferred buyer.

If I can just put a bow on that, so you see where this is headed. So I think the journey is well understood by the Street, but where we're going to end, maybe something we need to elaborate on a little bit more. So counting the properties that are now in lease-up and we have lease-up assets in Denver and Dallas, particularly calling those properties and lease-up, all these deals were closing when they are all mature in our same, they'd be 10% of the company. Our goal that the board set for us is 20%. We could clearly be a little higher, a little lower than that, so 20% of the whole company. The rate we're going, we would expect to get there in another couple of years. We picked that number so that we could have a portfolio that consistently compounded cash flow growth with the lowest amount of volatility possible. Markets like New York are very little supply, but they might have more regulatory risk. Markets like Dallas have relatively little regulatory risk, but they have significant supply pressures. And so again, by having a portfolio that's levered at these high earning renters, which is what we follow. So in a place like New York, those people will make a $0.25 million a year. In a place like Atlanta, those people make $100,000 to $110,000. But they're higher earners, more durable, able to handle inflation, able to handle rent increases if we've got great locations and great product for them. So that's what we're trying to build. To some extent, it's a portfolio that we think will consistently finish second. But over -- any single year, but over a lengthy period of time, we'll finish first. That's our goal. So again, put it on that expense machine, we're the best expense managers in the business, very good at that. We show that in and out. So that's what we hope to put together for you, a low leverage, very expense-focused portfolio that has balanced growth, both demand supply markets and that balances this regulatory risk resilience issues. And again, like I said, consistently top quartile performance each year will, over any longer period of time as owners lead to the best performance. So that's what we're trying to put together.

Awesome. A couple of questions I kind of wrote down. Maybe I'll start with just the operational ones. And Mark, one of the -- I think you just mentioned there was an earlier plateau in rents in the portfolio. Any kind of thoughts on what might have driven that or why that happened?

So it went up -- see, this is this -- to what we could tell, natural variation, I call it, Josh, it went up faster. So in a normal year, it will go up rents, from January 1 through the peak will go up 6% to 7%. And it will usually plateau in like the later part of July and into August, right? Well, what happened this year was it plateaued a little bit earlier, but it went there faster, okay? So it got us there quicker. So the net effect of that is nothing, right, to the numbers. And there's always going to be that little bit of natural variation because the business does just have that. It even could depend on things like the weather being poor in some of our bigger markets if people just don't go shopping for apartments that weekend.

Interesting. In any particular markets where maybe it was more pronounced than other markets?

So I'd say SoCal is one where Again, we knew about the delinquency issues, but our sense of Southern California and for that, I'm really referring mostly to Los Angeles. There has been, I think, some weakness we saw there. For us, we have a bigger downtown, Korea town portfolio than many. And I think that's where we're seeing most of the weakness compared to the suburban portfolio. But even in the suburbs, maybe a little less vibrant than we had hoped. Just to be clear in Orange County and San Diego. Our residents generally have done very well since 2019 in terms of income growth and rents have matched income growth in those markets. So those rent increases I talked about are basically in line with income growth because, again, it continues to be about 20% of our renters income is given over to rent in those markets. But there's markets, and this is what's exciting about '25 for us, places like downtown Seattle, downtown San Francisco, some of downtown Los Angeles. Rents are below what they were in 2019, but incomes are much higher for our residents. And supply is going down. So our hope, Josh, is that next year, our story to you that's differentiating from our peers that, that improvement in conditions on the ground, that lack of supply and knock on wood, a steady job market doesn't be vibrant, but it can't be bad next year will lead to us telling you we see that downtown urban West Coast recovery. That's the same one that's happened, for example, in Manhattan. So 2.5 years ago, we told you it was happening in New York, and we felt it. We feel really good about San Francisco. We feel really good about Seattle and we can show you the Seattle numbers. we need L.A. to do that too, and L.A. right now, still not downtown L.A. tracking up for us yet.

Okay. And maybe exploring kind of the West Coast a little bit more. I think I wrote down, I think you said rent fatigue and SoCal, I can't remember it was San Diego or...

San Diego and Orange County.

Okay. I guess -- is that just affordability driven? And then like how do we tie it into last year, you mentioned like New York City was the rent fatigue market? Like how do New York come out of a rent fatigue period?

Again, our experience, again, absent a recession or some macroeconomic fact is that sometimes when you have rents go up rather rapidly into place, you'll have a pause. That pause refreshes people's incomes go up. And then again, if you're giving great service, great product and depending on demand and supply, you can start raising rents again, it's exactly what happened in New York. And so I don't know why that wouldn't happen in San Diego and in Orange County because they are very supply-constrained markets. And for us, we also have some renovations in some of those markets that can distort the numbers a little as well. So I don't know if anything systematically wrong. It's more just the speed bumps that occur when you operate a portfolio.

Questions from the field on the...

First, congratulations [indiscernible]. Great execution. Second, are you still feeling pretty confident about the Costa-Hawkins referendum?

So the question was are we still feeling confident about the Costa-Hawkins referendum. So that's ballot proposal 33 in California, pardon me. In November that would allow for local rent control. The industry defeated that twice before by 28 percentage points each time. We continue to feel like we're making great arguments to the people of the state of California that if you want more of something, price controls aren't the way to do it. We think people hear us on that argument, Tom. And we'd expect to prevail in that. But we are spending money as an industry. We are working really hard to get out there and get our message out there. So I think a lot of good things have happened in California with some of the Governor Newsom's actions to increase housing to take some control away from local zoning, so that there's more housing built by transit that there's more waivers required of local zoning rules that really screw up the ability to build the accessory dwelling unit, the ATU stuff. So there's a lot of understanding by politicians right and left, that supplies the answer, and we just got to keep making that argument. It's expensive for the industry to fight these proposals, but I think people hear the argument they understand.

Maybe sticking with the regulatory environment, anything else you're watching on the valet besides Costa-Hawkins?

Well, in California, there's always a lot of ballot measures. I think you'd be better talking to the retailers, there's a valid measure about recriminalization of certain theft, retail theft, things that I'm not -- I know of, but I'm not terribly familiar with. So I think California is the industry focus. Massachusetts just passed again, a very thoughtful, supply-driven housing bill. So we're active in all our markets, having these conversations. And again, I think New York in April tried to do something that was housing supply focused predominantly. So I think, like I said, I feel like everyone has gotten the memo that encouraging supply is the way to go and that getting rid of as many local zoning rules, streamlining things is the right way. And government support for affordable and low income housing. You've seen also voucher levels go up, right, low-income voucher levels go up too.

San Francisco, we spent some time with Marty in San Francisco in March, and on the ground, it looked a little bit better. Like -- so I'm not surprised that it's been doing better since the beginning of the year for you guys. But just could you -- one thing I noticed in that meeting with Marty was just the mix of suburban versus urban in that region. I was surprised by what Marty told me, and then just like what do you think you need to get that market really going?

Do you want to talk about conditions on the ground?

Yes. So we've been -- since the pandemic began tracking very closely, what -- how stores are doing and how renovation -- re-leasing of vacant space is going, and it's really started to pick up. So rents have gotten low enough, so it brings new restaurant operators, coffee shop people and things like that back to the market. Crime has definitely improved. It's interesting because real violent crime is relatively low in San Francisco compared to other cities, but there's certainly a lot of nuisance crime. And this measure that Mark just mentioned would help that. So there are a lot of good things that we see happening plus we track return to the office mandates that are coming out and sales force came out within a couple of weeks ago. Those things in our experience in Seattle with Amazon take a little bit longer, but they do have an impact. And when a big leader within a city like Salesforce steps up, it drives other activity. So we're at 96% occupied in downtown Francisco. There's no new supply. So every new person coming in is very additive to what we think will be a recovery and rents are down 15%, 20% in the city compared to the pandemic compared to a place like New York, where they're up 17%. So it's just a very disconnected market for some very good reasons that are going away.

Well, just to add a little bit, like the job machine needs to get going in San Francisco for us to really see progress. Mean the big tech firms did let a lot of people go. They sort of overhired right during the pandemic and then they let a lot of folks go. The good news was, we didn't see delinquency from it. Our resident has a wherewithal to hang out a little bit, look for that new job and they did that. And we actually had a pretty good transition to problems. But what we track that we think is really interesting is where do our residents come from? Where was their last address when they applied to move in with us. Well, we used to see a fair amount of it in San Francisco as people moving. You're the Wharton graduate, you're moving to San Francisco. You're just graduate from the University of Illinois, Computer Engineering program. You're moving to San Francisco. You're being drawn in by this technology hub of world that Bay Area is. And then we saw that really stop during the pandemic. And right now, it's better. We see people moving in but not enough. We need to see more of that. In Seattle, we are seeing people from, I'll call it, ex-urban Seattle. Folks that live in Washington state, but are not even in the suburbs, like kind of pretty far out moving back into the city into South Lake Union. Those are people like Amazon workers who maybe like the state of Washington, but if they could move out to a rural location, especially during the pandemic when the city wasn't that appealing, that made sense to them. So I think when we start talking about moving in and where those people are coming in to San Francisco, because the number of AI jobs is positive, but it's in the hundreds, okay? And that is the center of AI. The number of tech jobs that continue to be lost by the big majors is in the thousands. So we need those two things to switch, and we think they will at some point. But again, it's -- that's the last catalyst because it isn't a supply problem. Conditions on the ground feel better, and the politicians feel better. You don't tell them I said that. But they feel more thoughtful about just quality of life concerns on the ground for their citizens.

Any questions from the field? Maybe, Alex, turning to the portfolio acquisition. You mentioned you ended up acquiring 11 of the 17 properties that you were showing, like what was it about those 6 that you didn't like or...

Submarket specific and a little bit age. So the average age -- average year of construction was 2017 and they had some stuff that was older than that. Not that we would never buy something older. We just didn't like the mix and then the rent levels relative to where we think the portfolio will be optimal.

Okay. And it sounds like the transaction -- you mentioned the transaction markets moving your way. Does that imply like you could see more from Blackstone, more from privates...

We're reaching out to everyone. And they want to hear from us, because we're a really good buyer. We do what we say we're going to do, and we do it very quickly. And we're not reliant on a third-party management company. We have in-house engineers. We know what our insurance cost us. So this is a time in the cycle where it's very different than 2 years ago where people really like to hear from us. A couple of years ago, they didn't care at all.

Because we -- our money wasn't a differentiator. The point Tom Cook made a minute ago. We just did a 4.7% 10-year bond deal. People can't touch that money in the private space for 10 years. So we have a cost of capital advantage. So just to do sources and uses real quick. So we've got $1.3 billion closed or close to closed -- or closed and then $300 million under contract that's likely to close. Let's call it $1.6 billion, $600 million financed at the 4.7%. We've already sold and will sell because we have things under contract, $500 million or $600 million at about that sort of 5%, 5.2%, probably more like a 5.2% cap rate, then we're going to leave some of this on our line because we have almost no floating rate exposure. So to have some when we think the Fed is probably rolling rates down and where floating exposure to company is very, very low, feels okay to us and then we may term it out later, we may not. But we love -- again, some of this is timing and some of this is luck in life, but we think we timed this very well with buying at a good price, especially on the basis and then rolling into a situation, we're able to source the funds in a very advantageous way for our investors. And we're going to run the heck out of these properties.

Yes. I guess since there tend to be in more Sunbelt markets with more supply. I guess like -- and we know that's like kind of an issue in the Sunbelt. Just like how did you guys get comfortable with the supply risk around these properties and like what did you underwrite as far as like kind of the recovery?

So it did vary a little bit by property depending on how close the amount of supply is, but definitely, rents continuing to trend down, maintaining some of the concessions that are already there. But burning those off over time, meaning over the first year and into the second year, we're really kind of flat then, so not adding concessions, but not growing rents for the whole another 12 months.

Okay. So that would be...

In the mid-26%, which -- we just think there's going to be a bit of an overhang here. I think the counterargument is hard because there's so much supply that is delivering in '25. And even the back half of '24, all that stuff that's delivering will not get absorbed. It just can't. There's just too much of it.

Interesting. Other questions on the field?

What's the potential incremental impact on lower mortgage rates?

The question is what's the incremental impact of potentially lower mortgage rates. So one of the risks, I think our portfolio has less of is homeowner risk, substitution into homeownership. If you look at our coastal markets, which right now are 94% of the company, but eventually will be 80%. Home costs are just so high in a place like New York or San Francisco that rates going down a little and the down payment is so hard that normally about 12% or so of our residents move out to buy a home right now it's 7% or 8%. So it could drift up a little, but I just don't view that as a material risk. I'm going to ask Alex to speak to it because it's a different question in Atlanta Dallas, Denver, where home prices are lower, and I think it's worth drilling down a little bit more there.

Yes. So when we first started looking at that market -- those markets going back to them, there was an acknowledged concern that we have that home pricing for the market as a whole can be low and that it's driven by certain submarkets where it's very, very low. And so we've targeted specific submarkets, which in the case of Atlanta is kind of in that funnel from Midtown north through Alpharetta, and we see locations that have typically $500,000 is kind of the starting point for a townhome or a small house going up to well over $1 million. And that cost of ownership is, say, $500. If our rent is $2,200, it's probably $2,800 or $2,700. To cover the mortgage, plus you have to have come up with 20% down, which is $100,000-plus. So we feel insulated to a degree from that and that's been borne out by our experience. Obviously, the market's been dislocated as you point out to mortgage rates and others. But we were really intentional about that. So being in a good school district, being placed with low crime and good to access to jobs, and we think that will protect us.

[indiscernible]

So the question was about when did the 12% number I quoted move out for home ownership. When did that happen? That would be pre-pandemic, like I would say, stabilized mortgage rate time. So it's -- ever since we shifted the portfolio for more commodity product, it's been around that number.

Other questions from the field? Maybe, Alex, one of the things like I was surprised about across multiple resi meetings like this was just, it seemed like a very consistent message on cap rates or they're in the 4s now. And then you mentioned that their cap rates are going down or have gone down a little bit, just like I think people are a little bit surprised by like where cap rates are settling out in the 4s. Like, what are buyers underwriting? And could you remind us what this portfolio traded at?

The portfolio was at 5%. That was priced a little while ago. And I think what I'm saying is consistent with what you've heard from other people, which is that they've drifted into the 4s since that was priced. And I think what people like is that getting in at a good basis, I think they see the recovery story in the future. They see the job story in these markets and are willing to accept some negative leverage for a period of time to get in at a good basis. I would also say that stock market has done well. People are underallocated in real estate. They look in the real estate options and they think about office, they think about retail and multifamily and industrial look pretty good. So I think there's just a lot of money out there. We talk to all those folks, and I think there's more coming. More money interested in doing it, particularly bigger deals. Bigger deals are the one thing that really hasn't happened. It's been very hard for people to put the whole capital stack together on something that's say, $150 million to $300 million. And -- a couple of years ago, I didn't matter everyone could raise that kind of money. Right now, that's hard. Those -- and we are purposely not selling those kind of assets because they don't get a good reception as the air gets pretty thin. But I will tell you, we have a lot of folks sniffing around asking.

Interesting. What do you -- I guess, to really get demand for those kind of assets? What do you have to -- what do you think has to change, just interest rates come down or...

I think they have to buy into the story like they feel on the Sunbelt. They feel in the suburbs of these other markets. And I think once they see San Francisco starting to catch up from where it used to be, then they're going to be all over it because the discount to replacement cost is massive and there's no supply, say, in downtown San Francisco.

One of the things I've been asking pretty much every company is a big focus of mine is just on like operating platforms -- building operating platforms like REITs are permanent capital vehicles. They should be able to have a competitive edge from a better platform. Because what do you guys focus on building -- improving the EQR platform?

So I mean we have very strong expense containment measures at our company. You see our numbers on same-store expenses are consistently very good. We run efficiently on overhead. So I think a little bit of this is your culture and your focus, and we've always had that focus. If you work for Sam Zell, you were focused on expense control. So we've always had that cultural focus. But I also say it's this continual effort to try and run the business better, not just cheaper, but for the benefit of our residents. Like some of this, again, people use the term AI and they hope they get 2 turns better in their multiple. But I use it to say that our residents like using technology, like automated text answering, automated email where they have questions about, do you have units available, two bedrooms in a particular property? Do you allow dogs? Can you schedule a tour? They like all those things. Having that technology means we do have less staff. That technology is cheaper, and it is what our residents want. We do the same thing on maintenance, where people are still calling, they need maintenance help. But if you used to in the old days, you'd have a property with 3 people, and those people might not be very busy because just by good luck, there wasn't much going on that day. But maybe a mile away, there was that property was just overwhelmed. It was frankly calling third-party vendors. We have software that coordinates that. So I'll tell you, we are very committed to the idea of we can't get more capital from people in this room, debt or equity, unless we run the capital we have now really well. And so we are focused, Josh, on building that machine. And we spend a lot of time on technology. We spend a lot of effort trying to just run the properties as efficiently as possible. And that includes things like selling residents things. We think they want like WiFi that's cheaper than they can buy otherwise. And we're rolling that out, parking initiatives, but a lot of it is also just expense management being super thoughtful about all of the many things we spend money on in a year.

Maybe thinking about the operating OpEx stack, just what's left as far as variability for the remainder of the year? Like, is taxes still coming in and...

I think we feel pretty good about the tax number because you've got most of your assessments and such. And then there's always some appeals we guess that because we don't record appeals until the money is received. But we have an idea of what should be received. So there's always a little bit of guesswork at the end. I think most of it would be like a repair and maintenance bust. So if you had some serious, serious storms somewhere for us, we run those costs through same-store. We don't -- some others exclude them, we run them through, storms are part of running a business up to a point. So anyway, I would say that would be a negative. On the positive side, you could see adjustments to accruals and reserves, especially payroll because again, medical insurance for our employees, things like that. But I think we feel pretty good about that 3% midpoint, give or take a little bit. And then just to preview next year just a little, I mean, the biggest number for us is always going to be property taxes. It's 40%, 45% of same-store expenses. We've got about 1 percentage point of growth in next year as well relating to 421a New York tax burn-offs. We do get some revenue improvement there, but we have that. So that will probably be something that will be a little bit of a negative pressure. We also continue to roll out WiFi. But again, we feel really good and some of those WiFi expenses run through repair and maintenance. But by and large, we don't know why we can't run this thing at inflation or sub inflation, whatever that number might be year in and year out on average.

Yes. Maybe can we broaden that question, like any kind of building blocks we should think about going into 2025?

For expenses?

Everything.

Everything. We're not giving the '25 guidance. So I think really on the October call, we'll be -- we'll give -- we'll have a really good conversation. And I wanted to just talk about what happens generally but not about the year because it's just too early. There's things we got to roll up. We're not even done our '25 budgets, okay? So again, there's work that needs to be done here. But when we look at next year on the rev side or we look at any year on the rev side, we always start with what we call embedded growth. What's the term others use for that?

Earn-in.

Earn in. So for us, embedded growth means that on 12/31 of a year, so 12/31/24, if you freeze the rent rolls, the occupancy and rate. No one moves in, no one moves out, occupancy doesn't go up or down, what would happen? How much would your same-store revenues go up or down? So in a normal year, that's, give or take, 1% positive. And so that's sort of -- you start with that. And you say if things don't get a lot worse or a lot of guys start there, and then I'm going to talk about intra-period growth or intra-period shrinkage, my other income, delinquency, all these other variables that are important. But at least I could start with a high confidence about my starting point because I don't have high confidence yet about my starting point. It's not appropriate yet to talk about '25, but this year, going into '24, that number was 1.4%. It was higher than we did better because we were still recovering from COVID last year. So we had some additional momentum. My guess is that number will be lower this year. okay? We just did not have as much intra-period growth because, again, the COVID recovery was completed in '23. Then you got to build in everything else, occupancy, other income, continual improvements in delinquency. Where do rates go in some of our markets where there's very little supply. And if the job machine keeps going, you can feel really good about. So those are all going to go into the blender. So we'll go through the build -- I think we do a pretty good job on our slide deck of going through the building blocks with you. But it's just a little bit early to talk about the biggest things, which are where you start, which is embedded in your intra-period growth, which is, of course, our view of next year's economy.

[indiscernible] Does the drive for cost efficiency change your thoughts about clustering of apartments -- of old apartments?

So let me repeat the question, maybe Alex will answer. Does our drive for cost efficiency change where we might want to buy or develop just to have clusters and whatnot.

Yes. And so it actually comes about because we purposely pick submarkets that are robust enough to support one of them. If it's going to support one or two properties, we wouldn't want to be there. So the job drivers have to be strong and robust enough to support that. So I think -- the answer is yes, but it's a byproduct of the markets that we're picking. It's not like we just add properties. We don't really like this location, but we're going to add a bunch of properties that may run [indiscernible].

[indiscernible] I mean in those submarkets, you're focusing on purchasing in the submarkets you like. But you're getting sort of both, the answer is really one on the revenue side and one on the [indiscernible].

And it may be eventual, right? We may buy an asset in -- there's always a first asset in a submarket, right? So we bought an asset in Atlanta and Sandy Springs, and we're buying more. That's at the very sort of directly north of downtown. Atlanta. So the answer is yes. So again, that's a big submarket. There's a lot of assets to buy, a lot of jobs, a lot of all that. There's always a first asset. That one runs with a lower operating margin. And then you keep adding them and you have this incremental improvement. And when he's buying them, in the back of his head, he's going to underwrite current spot margin, but in the back of every asset after that will have a better operating expense profile.

[indiscernible].

Sure. So the question is just the composition, and I think I'll give that to you again, but the composition of us being 6%, that 6% right now is same-store. So that means assets. So -- for example, Atlanta, 4 of the 12 assets in Atlanta are same-store. So we have a lot of non-same-store assets in our expansion markets. So just to give you the numbers, we have 12 assets in Atlanta, cutting developments that are still in process, 12 in Dallas and 14 in Denver. So this has gotten to be pretty significant. You're up to a pretty good unit and property count in these markets, but most of them aren't in same-store. If you roll all that forward in the same-store, we would expect 10% of the company would be in same-store in a year or 2 when they're mature, and then we want to get to 20%. So just to give you a sense of kind of where we are in same-store, where we are portfolio and where we're going, but how we get it.

Given the robust pipeline in these markets, I anticipate the vast majority of the next 10% to 15% will come from acquisitions. I just think there's going to be so many good opportunities. that we'll do that rather than take on the risk of building in those kind of markets. Our building has primarily been in locations where we find it really hard to buy. So for example, we're going to start two deals in -- or we have to start two deals in suburban Boston and we have one in suburban Seattle. Those are the kinds of places where we feel like our development capital is better spent.

[indiscernible].

You mean funding the acquisitions? I mean we would fund both...

[indiscernible].

Yes, more where we have an overabundance of properties in a particular location.

We paid $2 billion of debt down with disposition proceeds in '21, '22 and '23. We'd be happy to borrow all that back and buy assets, too. So we're open to additional debt. and we're open to swapping, selling less desirable assets and buying more desirable assets. You may see us -- you likely will see us do both. That's what we just did, right? We just did the debt issuance, and we just did some dispositions.

[indiscernible] replacement costs -- rising replacement costs. Where are you seeing -- which markets are you seeing that sort of the [indiscernible].

So which markets are -- have rising replacement costs and where are we seeing that and where aren't we across the market?

[indiscernible].

So I'm going to answer a little bit of that. Replacement cost does a couple of things. First, for us. That the best IRRs for us, just looking back in our history, are where you start with a great basis because the only number you know, right? And these discounts to replacement costs we're buying at have typically been indicative of very good investments on our part in the long run. The second part is with replacement costs lower, people don't build. If you're a developer, you're very mathematical individual. So if you're going to build something for $50 million that I can buy for $40, you're not going to build it, right? Your capital won't do it, you won't do it. It's when you start to get those big premiums. So in '21, you saw people buying and we didn't, at 20%-plus premiums, that really attracts developers. So the mean replacement cost is both an indicator when it's at a discount of an investment advantage. -- but it's also a bit of a moat. Like it just deters development. And over time, values will change, costs will change, rents will go up, and then people will develop again. But I see an advantage for the next, call it, '26, '27 and with less development.

Yes. We'll have to wrap there. Thank you, guys. Appreciate it.

Thank you.