Q2 2023 Equity Residential Earnings Call

Participants

Alexander Brackenridge; Executive VP & CIO; Equity Residential

Mark J. Parrell; President, CEO & Trustee; Equity Residential

Martin J. McKenna; First VP of Investor & Public Relations; Equity Residential

Michael L. Manelis; Executive VP & COO; Equity Residential

Robert A. Garechana; Executive VP & CFO; Equity Residential

Adam Kramer; Research Associate; Morgan Stanley, Research Division

Alexander David Goldfarb; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Eric Wolfe

Haendel Emmanuel St. Juste; MD of Americas Research & Senior Equity Research Analyst; Mizuho Securities USA LLC, Research Division

James Colin Feldman; Equity Analyst; Wells Fargo Securities, LLC, Research Division

John Joseph Pawlowski; MD of Residential and Health Care; Green Street Advisors, LLC, Research Division

John P. Kim; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research

Joshua Dennerlein; VP; BofA Securities, Research Division

Michael Goldsmith; Associate Director and Associate Analyst; UBS Investment Bank, Research Division

Stephen Thomas Sakwa; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division

Presentation

Operator

Good day, and welcome to the EQR 2Q '23 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Martin McKenna.

Martin J. McKenna

Good morning, and thanks for joining us to discuss Equity Residential's Second Quarter 2023 results. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer. Alex Brackenridge, our Chief Investment Officer, is here with us as well for the Q&A.
Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.
Now I will turn the call over to Mark Parrell.

Mark J. Parrell

Thank you, Marty. Good morning, and thank you all for joining us today to discuss our second quarter 2023 results. As we work our way through the leasing season, the business is performing well, with same-store expenses now looking a little bit better than we thought, leading us to lower our guidance for that item last night.
As a result of this and lower expected interest expense, we are pleased to again raise our same-store net operating income and normalized funds from operations guidance after raising same-store NOI and NFFO guidance, just 2 months ago based on better expected revenue results.
In a moment, Michael Manelis will give you color on revenue drivers across our markets. After Michael's remarks, Bob will address the details of the improvement in our expense and NFFO guidance, as well as our successful pending refinancing activity.
The overall theme here is that Equity Residential continues to benefit, like most of the multifamily industry from solid demand, but with the more unique benefit of our mostly coastal portfolio being less exposed to the significant levels of supply just beginning to be delivered in the Sunbelt markets. We also continue to manage expenses well in an inflationary environment, which we expect will allow us to drive more dollars to the bottom line than our competitors over time.
In terms of specifics, in the quarter we continued to post strong same-store revenue results driven by good demand across our markets and rapidly improving delinquency in Southern California. As you may recall, we increased the midpoint of our same-store revenue guidance for the year to 5.875% in May, right before the NAREIT conference to reflect these factors. That, in turn, caused an improvement of 100 basis points in our same-store NOI guidance midpoint and a $0.03 per share improvement in NFFO guidance at the midpoint.
These continued strong operating results speak to the durable nature of our business in the face of some pretty volatile economic conditions. Despite the layoff headlines, particularly in the tech sector that dominated the news in late 2022 and early 2023, we see substantial demand from our affluent renter demographic. Also in places like Seattle, we are hopeful that the return to office mandates by employers like Amazon will drive incremental demand back into the urban areas of the city as commute times become intolerable for workers who dispersed far outside the city in response to COVID and are now required to be in the office frequently and as quality of life issues in these urban areas improve.
And while new supply is certainly pressuring the Sunbelt and Denver markets, as I mentioned before, we are seeing moderate levels of supply in most of our major markets. Even in Washington, D.C., where we are seeing the highest levels of competitive new supply is being absorbed at a good rate, and the market is performing well.
Switching over to the transactions market. That market continues to be relatively quiet. We did not sell anything in the second quarter. But we did buy a couple of deals, including a newly developed property in lease-up in Atlanta, that I spoke about on our first quarter call. The other acquisition in the second quarter is a 287-unit property located in suburban Denver, which we purchased for approximately $108 million at an acquisition cap rate of 5%.
The transaction market generally remains stuck between buyers who expect lower prices given the huge shift in interest rates and a less accommodative capital markets and sellers who remain wedded to early 2022 values and by and large, have assets that are still operating pretty well, so they feel no great compulsion to sell right now.
Our sense is that sales will pick up over the next 6 to 12 months as sellers accept the reality of rates being higher for longer as floating rate loans with expiring caps reset, and as developer capital invested in newly completed development deals becomes impatient.
Now a quick note on our capital allocation strategy. As we have discussed with you for the past few years, we continue to have a goal of having a more balanced portfolio between urban and suburban and between coastal and Sunbelt markets. We think such a portfolio will create the highest returns and lowest volatility over time. The recent issues caused by COVID in urban centers and the current issues in the Sunbelt markets due to supply are examples of the opportunities and risks we wish to balance.
As opportunities present themselves in the Sunbelt and Denver markets and in select suburban locations of our coastal markets to acquire or develop great assets at fair prices, we will be there to do so. And before I turn it over to Michael, I want to take a moment to celebrate our 30 years as a public company.
On August 12, 1993, Equity Residential went public on the New York Stock Exchange. Much has happened in the past 30 years. We grew from about 21,000 units, an initial valuation of $800 million in 1993 to more than 225,000 units across more than 50 markets at the peak, leading to our 80,000 units and a value of more than $26 billion today. On this journey, we acquired a number of other public apartment REITs as well as some very large private portfolios, including Archstone.
At the head of this enterprise for all those years was our amazing founder and Chairman, Sam Zell, who we lost in May. Sam's guidance and influence are part of our DNA at Equity Residential, and we will continue to run this company to honor his legacy of delivering superior, long-term value to our shareholders.
We thank all of you for your support over the past 30 years and for your kind words regarding Sam's passing.
And with that, I'll turn the call over to Michael.

Michael L. Manelis

Thanks, Mark, and thanks to everyone for joining us today. This morning, I will review the second quarter 2023 operating performance in our markets. We continue to produce very solid results with same-store revenue growth of 5.5% in the second quarter that are in line with our improved May guidance expectations.
Results are driven by a continuing improvement in delinquency along with a continued healthy fundamentals in the business. As with last quarter, East Coast markets continue to outperform West Coast. Our results to date reflect our view that we have previously shared with you that pricing trends will follow a normal, albeit slightly muted seasonal trajectory. Generally, layoff announcements seem to have dissipated and our average resident remains in great financial shape with rent-to-income ratios during the quarter for new residents continuing to hover around 20%.
Resident lease breaks and transfer activities to reduce rent, often early indicators of resident economic stress remain below pre-pandemic levels and in line with seasonal expectations. The overall employment picture continues to be healthy. and young adults are choosing the attractive lifestyles available in our markets. Single-family home purchases continue to be an expensive proposition. In fact, less than 8% of our residents gave buy home as the reason for their move out in the second quarter, which is well below the 12% norm for this period.
Combine this with the overall favorable competitive new supply position we face in most of our markets, and we are on track for a good year in 2023. As a reminder, a combination of more difficult same-store revenue comparison periods, including the absence of governmental rental relief this year and a reversion to a more normal rent growth pattern will result in more moderate, but still above historical growth in the second half of 2023.
As we sit here today in the back half of our primary leasing season, the portfolio is 96% occupied with good demand and resident retention. We expect a continued healthy trajectory for the remainder of the leasing season. Our portfolio-wide occupancy is being depressed by turnover in Southern California, primarily L.A. as we work our way through the delinquency issues. In the longer run, replacing these vacant units with paying residents outweighs the slightly lower short-term occupancy.
Now let me spend a few minutes talking about market performance. So let's start with the East Coast. New York was by far the top performer for the second quarter with same-store residential revenue growth of more than 13%. We have very little competitive new supply in the market, and our occupancy sits near 97%. Demand indicators continue to be positive, making this market the expected top performer for the year.
Boston produced slightly above 8% same-store revenue growth in the second quarter driven by strong demand across the submarkets with our urban properties outperforming our suburban ones. We continue to hear stories of tough commute times for suburbanites, that are resulting in residents coming back to the city. While new supply in the market is above the 5-year average, the large majority of it is not competitive with our assets and appears to be readily absorbed.
Heading down to D.C. This market continues to impress with same-store revenue growth of 6.3% in the second quarter despite a high level of new supply across a number of submarkets. The market just keeps going, absorbing these units at a healthy pace and delivering some of the best revenue growth in the portfolio.
As an example, Reverb, our new 312-unit development in Central D.C. which is currently in lease-up is delivering weekly application volumes well above expectations, allowing us to reduce concessions and push rate. Occupancy in the D.C. market is just below 97% and we are optimistic for continued strong performance for the year, but recognize the increased volume of new supply that will be delivered in the rest of this year.
Now for the West Coast. Our Southern California markets achieved some of the strongest sequential revenue growth in the quarter, demonstrating the early financial benefits of backfilling long-term delinquent units with paying residents. Unlike the Orange County and San Diego markets, which posted good quarter-over-quarter revenue growth, Los Angeles produced slightly negative quarter-over-quarter revenue growth. This reported number, however, is not indicative of the health of the market but more noise from bad debt due to large rental relief receipts in the second quarter of 2022.
When you strip this noise out, same-store quarter-over-quarter revenue growth would have been over 5% positive for L.A. We are still seeing healthy demand in Los Angeles and have not felt any negative impact from the workers' strikes in the entertainment industry. Our direct exposure is not significant but acknowledge it may soften overall market conditions in the coming months, which could slow our ability to release some of our vacant units.
In addition to the strike, we continue to see more nonpaying residents move out which is resulting in at least 100 basis point drag to occupancy in the market. We view both of these issues as isolated short-term impacts to the market as the strikes will end and delinquency will gradually resolve itself which, coupled with the long-term demand, we see as catalyst for next year above average market growth in L.A.
Moving to San Francisco. The market reported respectable quarter-over-quarter revenue growth of 3.1%, which would have been 4.6% after adjusting for the impact of rental relief receipts in the second quarter of 2022. Overall, the San Francisco market demonstrated leasing velocity in line with normal seasonal trends and met our expectations for the second quarter. The South Bay, which represents 37% of our NOI in the market, continues to be a bright spot. Prospects are telling our local teams that the area meets their hybrid work requirements by keeping them close for in-office days and providing better lifestyle options and more space and access to the natural outdoor amenities.
Our recent resident survey tells us that 77% of our residents in the San Francisco Bay Area are either hybrid or fully in office. In downtown San Francisco, we hear from our teams that new residents say that they are leasing to get closer to work. The good news is that the quality of life in downtown San Francisco continues to improve and the local government's focus seems to be showing some signs of promise. While our pricing power in the submarket remains less than desired, and concessions are still being used, downtown has been stable and allowed us to capture demand and regain occupancy to 96% in that submarket.
The overall sentiment in the San Francisco market indicates that the tech layoffs are mostly behind us, and there's a lot of momentum around the AI, which keeps us optimistic on the continued recovery in this market.
Heading to Seattle, while there is vibrancy in the market with improvements in the quality of life issues, some return to office activity and tourism back to pre-pandemic levels, the market continues to underperform our expectations. While net effective pricing in the overall market is now 2% below the March 2020 levels, there's a wide dispersion among submarkets with the downtown Seattle well below the March 2020 levels primarily due to the continued concession use in the submarket.
Overall, Seattle has been a market that has struggled to deliver consistent strong demand over the last couple of years as its tech-heavy workforce has had the flexibility to work from anywhere. For this market to fully recover, it needs to see more consistent strong job growth with better quality of life conditions that will bring people back to the market.
The good news is that we are starting to see some positive signs in South Lake Union, which is a tech-heavy neighborhood in the city of Seattle, and this is likely due to the Amazon return to office, which began in May. We are hopeful that this activity will soon spill over to the other downtown submarkets.
Finally, in our expansion markets, which currently make up about 5% of our same-store NOI, revenue performance has been mostly in line with our acquisition pro formas and guidance expectations. Our portfolios in Denver, Dallas and Austin continue to be the most impacted by new supply like we discussed last quarter. Meanwhile, Atlanta remains a bright spot with double-digit revenue growth for both the quarter and year-to-date.
In a minute, I will turn it over to Bob to discuss our operating expense performance and the balance sheet. But let me take a minute to discuss our operating platform, which is humming as we continue to reap the benefits of our focus on innovation and the technology evolution of Equity.
We are focused on the customer experience and the feedback we receive from our customers help us in developing our platform to drive superior financial performance and customer satisfaction. The insights we gained from our resident survey, which garnered more than 32,000 responses validates our strategy of combining our growing data science capabilities with streamlined execution while delivering self-service solutions to our customers.
Leveraging data and analytics on top of our resident feedback will create further opportunities to expand our operating margin. With a fully centralized and mobile operating platform, we are in a strong position to create a seamless customer experience with a platform that continues to allow us to innovate, experiment and rapidly scale what works across this portfolio. I want to give a shout out for our amazing teams across our platform for their continued dedication to their residents and focus on delivering these terrific operating results.
With that, I will turn the call over to Bob.

Robert A. Garechana

Thanks, Michael. Let me start with expenses before covering our financing activities. We reported same-store expense growth of 5.5% in the quarter. The main drivers of this growth were repairs and maintenance and on-site payroll. Repairs and maintenance growth in the quarter was driven by continued wage pressure, particularly from contracted services.
Payroll growth was mostly due to elevated employee benefit costs during the quarter relative to the same period last year. Without these costs, reported payroll growth would have been 2.6%, which was more in line with our expectations and reflective of the efficiencies we have been achieving from our various operating initiatives.
For the full year, same-store expense guidance, we have lowered the midpoint of our range by 25 basis points to 4.25%. This reduction is driven by expectations of continued low real estate tax growth due to modest rate increases and successful appeals activity as well as significantly lower expectations for commodity prices, which are muting utilities expense growth. These more favorable trends will be partially offset by slightly higher payroll and other on-site expenses stemming from the elevated employee benefit costs mentioned from Q2 and administrative costs from the expiration of the eviction moratoriums, respectively.
The revised guidance implies a significantly lower rate of growth for expenses during the second half of the year relative to our results through Q2. We think that this is challenging, but definitely achievable given the easier comparable period from the back half of 2022 and the visibility we have into the items I just described.
Finally, turning to the capital markets and our 2023 refinancing activities. As we previously discussed, the company has an $800 million secured debt pool that matures in the middle of the fourth quarter. The debt originated from the Archstone transaction back in 2013, currently carries a rate of 4.21% and a portion of it needs to be refinanced in the secured market for tax reasons.
During Q2, we began marketing this opportunity to lenders, and I'm happy to report we received significant interest from a variety of capital providers. In July, we selected lenders and entered into 2 loan commitments and locked in slightly below 5.25% rate for the $530 million that we're refinancing. This was approximately 135 basis points over the 10-year treasury at the time and was lower than what we would have expected to do had we been issuing an unsecured bond.
As you may recall, we previously also entered into interest rate swaps to hedge this financing, and those were settled for an over $25 million gain. When the gain is amortized over the life of the loan, it results in an economic cost for these financings of 4.7%, which we believe is an excellent outcome, given the environment. Once these loans close, we would expect the company to end the year with approximately 8% floating rate debt, over $2 billion in immediately available liquidity and no real debt maturities outside of commercial paper until June of 2025.
This, coupled with the lowest leverage in the company's history position us very well should any opportunities arise.
With that, I'll turn it over to the operator for question and answers.

Question and Answer Session

Operator

(Operator Instructions) We'll go first to Eric Wolfe with Citi.

Eric Wolfe

Looking at your guidance, there's a nice ramp in your earnings in the back half of the year. Just curious if there's anything sort of more onetime or seasonal or nonrecurring on the expense side there? And if I were to sort of just take that at run rate, is that sort of a good run rate to think about going into 2024? Or again, is there something that's sort of elevating it?

Robert A. Garechana

Eric, it's Bob. So looking at kind of our NFFO for Q3 and Q4, it's -- there's nothing really, in particular, that's a standout on a onetime item. It's really the cumulative growth in NOI that you're seeing in Q3 and then pushing that into Q4 coming from same store.
Drilling down a little bit into that, I would say the only thing from a sequential standpoint that is maybe a little bit abnormal is the bad debt component. So we're seeing bad debt improve in the fourth quarter -- and in the third quarter sequentially as we get back to a normalization. So beyond that, there isn't really anything sequentially strange about the -- or onetime in nature about the growth or run rate.
As it relates to '24, I think it's a little early to talk about kind of '24, kind of where we are in terms of positioning. But what I would tell you is our numbers are kind of following that typical seasonal pattern that we would have seen and same-store is really driving the operational results.

Eric Wolfe

Understood. That's helpful. And then you mentioned L.A. and the writer strike, the actor strike. It doesn't sound like it's really impacting bad debt or rent growth yet, but you said it could impact in a couple of months. Just curious what that's sort of based on and that's already factored into your guidance as well.

Michael L. Manelis

Eric, this is Michael. So I think right now, of course, we're watching to see, is anybody turning keys in, breaking leases, at a pace that's kind of above what you would expect to see. And we really just haven't seen any impact from the strikes and our on-site folks are telling us just the overall direct exposure to it doesn't seem to be significant.
I think my comments in the prepared remarks were -- right now, we clearly are running occupancy about 100 basis points below normal for this time of year in that L.A. market. So the ability to lease up some of these units that have been vacant, which were from the delinquent, long-term delinquent residents moving out earlier in the year than what we thought. We just think that if the strike is prolonged and keeps going on, it could just create a little bit of a pause in people's willingness to make decisions, to move into a new place, and that could impact just the overall demand profile in the market. But to date, we're really not seeing anything, and I'm not overly concerned about it. But it is something we just got to be aware of.

Operator

We'll go next to John Pawlowski with Green Street.

John Joseph Pawlowski

My first question is on the transaction market. Alex, just curious what range of pricing do you think you could achieve on kind of large urban assets in the central business districts of San Fran and Seattle today, just given the sentiment in these markets is still pretty -- well, maybe it's proven, still pretty down. So just curious what type of bid for those types of assets is today.

Alexander Brackenridge

John, it's Alex. Yes, there would not be a robust bid today. Larger properties are harder to sell. There's some contrary and money out there, but I don't know if it's willing to make a big bet. So I really don't have an exact number because I just haven't seen a trade. I think most people, if they didn't have to trade, just wouldn't be willing to accept the number. So it's almost theoretical at this point.
I think over time, that will change as the markets continue to improve and access to capital becomes more normal. It's just such an abnormally hard time to raise sizable capital that I really think it would be a tough time. It would be -- if it was a distressed sale, it would be a pretty high cap rate and maybe not indicative of what the more -- less distressed owner would be willing to sell at.

Mark J. Parrell

And John, it's Mark. Just to add to that. I mean when you think about what supports apartment values, there's certainly a lot of unallocated private capital. I mean, we've heard numbers up to $800 billion of private capital looking worldwide for real estate exposure. So I think people, chief investment officers, those kind of funds just need to see some stability before they're willing to move. I'm hopeful that towards the end of this year and early next, we'll be talking to you about some better numbers in those markets operationally. And I think that will also encourage capital flows. But I agree with Alex. I think it'd be really hard to peg a cap rate. It's almost like on a per unit per square foot basis kind of conversation at the moment. But I think that's going to shift given the amount of capital on the sidelines. And given our hope that operating results will improve over the next 12 months.

John Joseph Pawlowski

Okay. That makes sense. I guess, over the coming months or quarters when there is a little bit more price discovery, do you expect cap rates for these types of larger gateway trophy assets to be meaningfully higher than more suburban assets in this kind of post-COVID environment?

Alexander Brackenridge

Well, what you run into is what ends up being a really compelling discount to replacement cost. So I think people will start looking at that and realize that getting in at a good basis in one of these good cities is just really compelling. So I just really think that will be a floor and we'll prevent too much of a gap from arising.

John Joseph Pawlowski

Okay. Final question, Mark. Just longer term, as you see these cities heal from COVID, what -- and not meant to be precise, but rough order of magnitude, what's the right urban versus suburban mix in the EQR portfolio 5 years from now while we're on this call?

Mark J. Parrell

Great question. We've sort of thought about, as we see ourselves as sort of 60% or so urban right now. And to get that number below 50% would probably be a goal. I think expanding into the Sunbelt markets, as you know, is a goal, and I think a great opportunity with the amount of product that's coming through. And I think in the suburban markets in some of our current coastal areas is a good idea too.
So my guess, John, is you'll see sort of 1/3 of the portfolio in Denver and the Sunbelt markets 5 years from now. And you'll sort of see more of a 50-50 split urban, suburban. But we are a creature of opportunity. And if there was an opportunity to be -- to stay more urban because it was just absolutely compelling prices, as Alex described, John, we'd certainly think hard about that. I mean we're not -- we feel like having a more balanced platform will give us better cash flow growth, more stable cash flow growth over time. But the name of the game is buying right. And if we can buy very well, we might move tactically for a while a different direction.

Operator

We'll go next to Steve Sakwa with Evercore ISI.

Stephen Thomas Sakwa

I was wondering if you could maybe just talk about where you're sending out renewal notices. I know you've provided some July data. But like what is August and September look like? And I guess, where do those discussions look like? And I guess, where are you seeing the most pressure on the new leases?

Michael L. Manelis

Steve, this is Michael. So for the renewals right now, you're right. We've got -- our quotes are out there for the next 3 months or so. It's been fairly consistent as what we've seen in the last couple of months. And right now, based on conversations we've been seeing through our centralized renewal team, we don't really expect to see a lot of variation. We think we're going to continue to renew about 55% to 60% of our residents and achieve right around a 5% to 5.5% kind of achieved renewal rate growth, which incorporates a little bit more negotiation. And typically, what you see is as you get into the beginning of the peak leasing season, our centralized renewal teams, we tightened up that negotiation range, call it to like 100, 150 basis points up-quote.
Now what we expect to see as we get in towards the tail end of the peak leasing season just to kind of drop that off a little bit and probably negotiate about 200 basis points off of the quotes that are out there. But again, I think we remain really optimistic about the performance. Centralizing this team has really given us the ability to kind of pivot quickly and really deliver consistent results.
In terms of the new lease pressure right now, I think if you would just look at some of the reported stats and you could see kind of in Seattle and San Francisco, where you're still doing that concessions in those urban centers, that's definitely weighing in on some of our ability to have a new lease change kind of go positive. But again, I think overall, where we sit today in this leasing season, it's playing out kind of exactly like we thought, where rents are sitting, where our new lease changes and the renewal performance and we just see kind of the markets reacting like they normally will through kind of the season, and that's kind of what's baked into the guidance that we have.

Stephen Thomas Sakwa

Great. And then I guess just on the development front. I know you've got a handful of projects, I think one wholly owned and several joint venture developments. Can you just remind us kind of where those development yields are likely to pencil out and I guess, Mark, how are you thinking about the prospect of any future development? If we're hearing correctly, merchant builders are starting to scale back their development teams and hopefully, over the next 18 months, that development pipeline starts to shrink. But I guess how are you thinking about the future pipeline for EQR?

Mark J. Parrell

Steve, it's Mark, and Alex may join in a second. I mean we've got -- it's good to have a solid internal team, which we have and good JV relationships with [Toll] and others. And we see all this stuff. But as Alex has said on prior calls, it's just not penciling out. There's not enough of a risk premium in what is a risky endeavor of development.
So for us, I think acquisitions seem like a better place to invest capital for the time being. I think what could change there is just some sense that either rents have moved a lot. I doubt costs are going to move down in any material regard. But I think right now, I like the development pipeline being smaller.
In terms of the yields we're looking at, it's mid- to high 5s on our existing portfolio. The Laguna Clara deal in California, which is a one mile away from Apple's headquarters deal is a little lower than that. It's an existing asset we're densifying. So there's less risk since we know the area so well. But beyond that, Steve, they're kind of high-5 type of situations and to do a development deal, we need something to get into that close to that 6 range. And I don't know, we may start a deal this year. We may not start anything. We'll see.

Operator

We'll go next to Josh Dennerlein with Bank of America.

Joshua Dennerlein

Michael, in your opening remarks, you mentioned operating platform initiatives and I think you mentioned some margin expansion potential there. Any early thoughts on where the margins can ultimately go? And maybe over what kind of time frame you're thinking?

Michael L. Manelis

Josh, this is Michael. So maybe I'll just hit on overall kind of some of the initiatives and the innovations, and I'll let Bob kind of touch base on the actual margins. So I think what we put out in our May investor presentation, really just kind of highlighted the initiatives that we have keyed up. And this year, specific to 2023, we have about $10 million included in the NOI guidance with about 2/3 of that being on the expense front as we keep working through kind of the innovations of leveraging resources across assets.
And right now, we're really focused on kind of teeing up the next round of initiatives and it's really more income-based and probably other income-based items that will really kick into gear in the back half of this year and start delivering kind of results into 2024. Right now, we are literally right on track with our numbers, and we feel really confident about the incremental $10 million for '23 and maybe, Bob, if you just want to hit on the overall margin impact of that.

Robert A. Garechana

Yes. So from a margin standpoint, that will all be accretive to margin. I guess I would say that in the space, we talk -- we all talk about very different margins. So I'm going to talk about the margin, I guess, that I think is most important, which is the cash flow margin, which we highlighted at the NAREIT conference.
So cash flow margin, meaning after CapEx, after expense and all of that. We're already running at a league-leading level as it relates to that cash flow margin. And when you layer in the initiatives that Michael is talking about, and that's inclusive of what you have to spend in order to achieve that ROI in CapEx, et cetera, we think we can get a few percentage points of incremental increase there, and that's what we're striving for.

Joshua Dennerlein

Okay. Appreciate that. And then at the opening remarks on Seattle, it just seems like it's the only legacy market you're facing with supply concerns. How long will it take to kind of work through that supply?

Michael L. Manelis

Yes. So Josh, this is Michael again. So right now in Seattle, we're kind of actually in a low of going up against kind of head-to-head competitive supply. If you look at what's expected to be delivered and completed in '24, I think we're going to see that Seattle number kind of in jump on us, and it is something we're absolutely kind of watching and kind of making sure that those units will be delivered. And when we create our guidance for '24, it's something that we will fold into that market.
For us, right now, Seattle, it's just been -- it kind of gets momentum and then it stalls a little bit and then it gets momentum. So we really just haven't felt that consistent kind of strong job growth that's really needed to get us back on track and really get us out of that concessionary environment. But to date, it's not really the new supply that's been impacting us.

Mark J. Parrell

Yes, I just want to make a comment on Seattle. It's obviously, for most of us pretty far away. So people aren't out there quite as much. But there's been an amazing renaissance in the city in terms of access to the waterfront, very similar to the big dig in Boston. I think that's a very positive catalyst for quality of life in the downtown area where we have a lot of assets. I do think there's an election coming up. There's been an improvement in attitude in city government about livability and those issues. That's a positive. But I think Michael is right. I think you're going to see a lot of supply, which, on the one hand, Seattle is a market where actually, the percent of rent to income is lowest with New York for us. So there's an ability to pay more rent and there's a lot of high-paying jobs and a lot of good industry in the Seattle metro area.
And as the city gets, we hope more livable as people take advantage of these new waterfront amenities. And I think we feel good about Seattle and its ability to draw people in, again, in scale. And Amazon has just kind of called people back to the office. Our folks on the ground say there is some momentum there in South Lake Union, where Amazon has a lot of office workers. So we'll see where that takes us as well. But you asked a very narrow question. I'm giving you more, but I do have a sense of optimism about Seattle, but we have to navigate some of that supply the next, really in '24 and '25 more than in '23.

Operator

We'll go next to John Kim with BMO Capital Markets.

John P. Kim

You described the strong backdrop in your markets and potentially some demand catalysts going forward. But if we just wanted to isolate July, it looks like the blended lease growth rates had decelerated versus June. And I'm wondering if you -- has that surprised you at all or potentially -- it seems like it would have peaked now rather than peaking a month ago.

Michael L. Manelis

Yes. John, this is Michael. So I'm going to touch on a few different things here. Let me -- I'm going to start just kind of the rents first, and then I'll address the new lease change relative to July. And I'll tell you just -- we went back and we've looked at like the last 15 years of our data and our pricing trend which is that net effective price for our units. It typically peaks out somewhere in that late August to -- or late July to mid-August period. And really the first week of August is kind of that most common time frame.
I'll tell you, we've had really strong foot traffic, strong application volume. So I'm not going to be surprised that if we don't see a few more weeks of slight increases in rates kind of coming through our system. And that being said, I mean, right now, this pricing trend is up about 6% since the beginning of the year, and it's right where we thought it was going to be. So even if we just peaked out at this level right now, it's kind of right in line and we'll be just buying in terms of it flowing through the other stats.
In terms of that deceleration of new lease change, I'd start by saying I would not read too much into any single month. As this stat, it's really better to look at over time. And I think the -- what you saw in our release, it was like a 10 basis point difference. That's just a lot of noise from maybe who moved out versus who moved in and where that was being done. And right now, I'll say that the new lease change is being more impacted by that concession use in the urban centers of Seattle and San Francisco.
But again, I think as we turn the corner and we start looking at August, I wouldn't be surprised if those [numbers] inch back up a little bit. We're really in this tight band relative to our expectations of both new lease renewals and how that kind of translates into that blended new lease or the blended rate. So I wouldn't read too much into any 1 month stat.

John P. Kim

Okay. On the secured debt that you raised at [4.7], it looks like your unsecured notes with a similar term trades around 50 basis points above that. How does that spread you secured versus unsecured, how is that 50 basis points compared to historical? And if this continues would the secured market look more attractive to you going forward?

Robert A. Garechana

Yes. So let me break down -- John, it's Bob. Let me break down a couple of pieces. When you're comparing the [4.70] to what I'm guessing you're comparing to where our unsecured are trading today, what you're incorporating in that is the impact of the hedges, right? So in my prepared remarks, I mentioned that when we issue the secure -- we haven't issued it, but when we locked rate on the secured loan, we were at 135 basis points on the treasury at that time, which was, call it 5.25. How you get to 4.70 as you apply the gain that we got because we did some forward starting swaps at really attractive rates, and that reduced it to 4.70 .
So what we should compare is really the spread, that 135 basis points that I talked about in my prepared remarks, to where the spread that would be implied at our unsecured and that's a lot more narrow. That's probably 5 to 10 basis points hit or miss between either one. So they're relatively on top of each other. We think maybe we're maybe 5 basis points inside on secured, but that's 1 day's worth of trading activity could flip you and you could be at parity.

Operator

We'll go next to Jamie Feldman with Wells Fargo.

James Colin Feldman

I was hoping you can dig a little deeper into D.C. across the different submarkets. It seems like it held up pretty well, but there's also a decent amount of supply. So kind of what's your outlook for the back half of the year and into '24 in that market?

Michael L. Manelis

Yes. So what's amazing about D.C. and even when you drill in by submarket, you really don't see a huge differential in our performance. And I think part of that is just when we talked about new supply coming into that market, they got such a great transit environment there, that supply really in any one of these submarkets can pull from other areas. So we really haven't seen any deviation of the performance across the submarkets.
Now when you look forward to the balance of the year, like it was back half loaded for delivery. So we are aware that we're going to be facing more and more competitive supply. And it is fairly dispersed across some of these submarkets but again, I don't think we're forecasting to have like more pressure in 1 submarket than the other because of that transit environment that could pull from everywhere.
The outlook for the balance of the year, it's still good, right? We're producing really strong revenue growth, good absorption of the supply, it may soften up a little bit, but I think we still have this momentum coming in. And I think it's positioned well for '24, even though you got another round of supply coming at you again. It's a market that's been demonstrating resilience and stability.

James Colin Feldman

And there's been a lot of talk around the government not bringing certain agencies back to the office. Is that something that you -- that's kind of contemplated in the stats you're seeing already? Maybe those aren't really tenants that would be in your buildings? Or do you think that's a potential drag to come?

Mark J. Parrell

Well, it's Mark and Michael may add to this. I mean through the real estate roundtable there's been a lot of advocacy around that of trying to get federal workers back on the job. I'm hopeful that continues to push. The administration put something out. It wasn't very strong on that topic but we'll continue to push for that.
I mean the federal government is such the key employer of course, in the metro, I mean implicitly in our guidance is not much of a change in the current reality on the ground, getting all those folks back in the office would be helpful. And I remind you, there is a difference between the type of employee. If you're in the national security world, you've likely been at the office the whole time. And as that group grows, there need to be closer in and closer into their office will continue to be relatively high. Again, I'm hopeful that we get -- there's been some action in Congress by the way, some bills introduced to get federal workers back in the office.
So I'm hopeful that, that's a positive, but it isn't -- it's not inside of our guidance that we expect improvement. It's just a hope we have both, frankly, as taxpayers and as owners of real estate in D.C.

James Colin Feldman

Okay. That's very helpful. And then I guess a similar question across submarkets in Seattle, where so far this cycle, we've seen major differences depending on where in the market assets are located or even [b] versus [a]. What are your thoughts there? And what do you think the implications are as these transit matter as much? Or how should we be thinking about your outlook there?

Michael L. Manelis

I mean for us right now, it's really like Belltown CBD is where you see the pressure, where you see the prices that are still materially off from where they were in March of 2020. The suburbs there feel good, right? It's not like great and robust, but they are healthy. So it's really just a suburban versus urban kind of differential that we see across that Seattle market. And when you think about the supply that's coming, it will impact not only urban, but also the suburban areas as well for next year in that market.

Operator

Our next question comes from Haendel St. Juste with Mizuho.

Haendel Emmanuel St. Juste

Wanted to go back to the West Coast markets for a bit. Just curious if you could give us a bit more color on what you're seeing in terms of concessions maybe between San Fran, Seattle, parts of L.A. And then at a high level, what are your blended rate growth expectations for the West Coast versus East Coast markets in the back half of the year?

Michael L. Manelis

Haendel, this is Michael. So let me just -- I'll start with just the overall kind of concession use in the portfolio. Fairly consistent in the second quarter versus kind of the first quarter. Overall, we're running about 15% of the applications are receiving just about a month. About 80% of all the concessions that are being used are concentrated in the urban centers of both Seattle and San Francisco. In downtown San Francisco, it's about 50% of the applications are receiving about 6 weeks and in downtown Seattle, it's about 1/3 of the applications that are receiving just over a month.
In terms of the spreads in the West Coast markets for new lease change, I don't know if I have that, kind of handy. I will tell you that right now, the East Coast markets have been outperforming the West Coast by about 400 basis points. My guess is that spread is going to stay fairly consistent, although you definitely have some movement in L.A. with some of the changes happening with bad debt.

Haendel Emmanuel St. Juste

That's helpful. And where is the loss to lease in the portfolio today? And where is it highest and where is it lowest?

Michael L. Manelis

Sure. So right now, the loss to lease is at 3.7% which for this time of the year is actually a little bit stronger than what we have seen historically. And maybe rather than like going by market around loss to lease, I could just kind of cluster them for you and group a few by a range. So like New York and San Diego have the highest loss to lease right now, which has been running about 9%. And then that's followed by like D.C., Orange County, Boston are all very tightly clustered in this like 4.5% to 6% range. And then you go to like the Denver, the San Francisco, Seattle and L.A. Those are all in like the flat to 2% and then I have my expansion markets of Dallas and Austin are the 2 markets right now that are in a gain to lease.
I think when you put all of this into the blender, knowing where pricing trend is today, like I said, with that 6% growth from the beginning of the year, sitting with the 3.7 loss to lease, which is above kind of a normal year, it really does put us in a great position not only to finish out the year, but to have a starting point for '24, that's really above a norm.

Operator

We'll go next to Alexander Goldfarb with Piper Sandler.

Alexander David Goldfarb

Happy 30th anniversary. So 2 questions on -- both actually around acquisitions. So Mark, Sam used to talk about trading sardines and eating sardines. As you guys look at your experience in the -- especially in the urban markets, the bigger assets, do you see those assets in EQR going forward? Do you see them more as trading sardines or eating ones?

Mark J. Parrell

Interesting. I love that analogy out for a historical reference point. I mean these -- some of the markets like New York, if you want a presence in Midtown, the assets, by definition, are mostly large and costly, all right? So it's more of a market than a type decision, I would say. I think it's more likely that you'd see us sell a large asset because we just want to lower our market exposure there, not because we're particularly allergic to a large asset in the market, if it's not performed well or if we have an over concentration in a submarket, you'll see us sell it.
So I guess I don't know what to do with that analogy in the sense that larger assets are harder to sell. We generally operate them pretty efficiently. We generally can run capital pretty efficiently to make up for that. But I don't have a sardine-type description for you. It's up to say that I think we'd sell if we don't like the spot, big or small asset.

Alexander David Goldfarb

I guess what I'm getting at is given the volatility that we've seen in the urban markets, do you think that it's better for EQR going forward to be more nimble and say, look, we have a base of assets that we like more in the suburbs where it's harder to get in, harder to get out, in the cities where you'll go up to a peak where you have record rents and it's easier to sell and then sort of trade around. That's what I'm trying to get at. If the urban markets are more like trading markets, versus long-term markets. So you're always trying to sort of arbitrage exposure.

Mark J. Parrell

I guess I don't agree with that. I'd start off by saying volatility in all sorts of assets and you're about to see volatility in the Sunbelt markets with these kind of prices. The fact that they're smaller assets just means that the prices just declined. I mean the way to protect against volatility in the market is to be in a position with your balance sheet and your strategy where you're not a compelled seller.
So for us, volatility can mean opportunity, right? If prices go down enough, as I mentioned in my remarks in -- even in San Francisco, we'd be a buyer. So I just want to make that clear. For us, volatility is opportunity, not always a negative and the way we protect ourselves is by having a broader platform. So I think with the lesson we learned over the last 10, 15 years is a broader platform, means you can act more quickly in more markets and take advantage of those volatile moments where Austin, Texas trades cheap to long-term value and you're a buyer there or New York trades cheap and you're a buyer there.
So I think as you see us balance the platform out, you're going to see us be more even more opportunistic. And I wouldn't shy away from buying a large asset. I think you just got to go with your eyes wide open about those assets being harder to sell. Is there something you'd add, Alex?

Alexander Brackenridge

Yes, Alex, this is Alex. I would just add that take Manhattan or actually Boston and D.C. really any of our urban markets to reproduce those portfolios will be virtually impossible. I mean Manhattan, I don't know how you'd find 25 really well-located assets in any amount of time. So we've got an unusual opportunity that we're taking advantage of today and you're seeing in Manhattan. It's the best performing market in the country. And you just couldn't decide all of a sudden you wanted to reproduce that.

Alexander David Goldfarb

Okay. And then the second question is, given it's a competitive market for transactions, we saw one of your peers do 2 large transactions that are basically neutral initially. Are there ways for you guys to enhance your initial yields, be it like buying it in the preferred or the [mezz] positions or junior positions? Or are there other ways that you can enhance your yield so that when you do close on a deal, it's more accretive than often, it seems like in REIT land, a transaction ends up being neutral year 1, and it's not until year 2 or 3 that we start to see the benefits?

Mark J. Parrell

Yes. I'm going to split this up a little bit for the team to answer. I think I want to start by Alex talk about cap rates certainly matters a ton, but we also think a lot about replacement costs. And I'm going to ask Michael or Bob to just talk about platform scaling, margin expansion at EQR, those kinds of things, Alex, that can affect year 2 yields. Alex?

Alexander Brackenridge

Yes. So this is Alex. What we're really focused is being a very targeted buyer right now. And what we're targeting are opportunities, where as Mark says, there's a discount to replacement cost, but also a limited supply pipeline. So that typically has been out in the suburbs and those kinds of base. So if you're getting a good basis like that, that's the best thing for your investment in the long run rather than some kind of [mezz] piece that might be a little bit of financial engineering, getting it at a good basis is just irreplaceable.

Michael L. Manelis

Yes. And I think from the operator standpoint, I think we have worked really hard over the last couple of years to build a platform that is highly scalable. So when we go into these markets, we're looking really at the ability to kind of leverage staff across properties, put them onto our platform, kind of put them into our pricing system. And it's clearly accretive from an operating margin for us when we're looking at underwriting these deals.
Right now, when we look across these markets, any of the acquisitions we're looking at, we're saying even in our existing markets, what benefits do we get by bringing this into that portfolio, whether that's at a submarket level or the market as a whole?

Mark J. Parrell

Yes. And I just think you've asked some great questions, Alex. I mean we're in a really good position where we've got teams in the markets, we can underwrite quickly, we can take over management quickly, but we're not overexposed to the supply. And there's going to be a lot that's going to be sold in the Sunbelt markets. And I think you should think not just about us selling some of these legacy urban assets and affecting, I'll call it, the numerator, but us making the company net bigger likely by using some of our debt capacity that Bob and his team have created so capably over the last few years to go out there and be a net buyer and I think what's more important to the management team and the Board is that per pound replacement cost discount.
I think we're looking for the deals to make sense on an initial cap rate basis as well. But I mean the most important thing, most important signal to us historically has been buying at a meaningful discount to replication cost. And in an environment where construction costs are high and they might be flat for a year or so, but they're likely not going to decline in our opinion much, you can get a discount to basis, you got a little moat around your asset. I like everything about that. So I think that's what you'll hear us talk about if we're fortunate to see some assets out there to buy in these expansion markets and in the suburbs of our existing markets.

Operator

We'll go next to Michael Goldsmith with UBS.

Michael Goldsmith

My first question is on bad debt. Can you provide some context in terms of what's included or implied that happens to bad debt in the back half of the year in your updated guidance?

Robert A. Garechana

Yes. So good question, Michael, it's Bob. So in the back half of the year, we will actually finally switch to bad debt, helping with a growth rate by about 30 basis points. And the reason is because we continue to see that sequential improvement of bad debt, and we'll cross over the difficult comparable period that relates to the rental relief payments we had in the prior year.
That accretion or that benefit to total revenue growth is likely not going to occur until the fourth quarter because in the third quarter of 2022, you still had elevated rental relief but we think we'll cross over there. We think at least by the end of the year, when you look at the full year basis, we'll end the year around call it, 125, 130 basis points as a percentage of total revenue and bad debt, which is still elevated relative to the historical norm of 50 basis points and leave the opportunity for more contribution to growth as you go into 2024.

Michael Goldsmith

Got it. And my second question is more of a strategic question. Arguably, you have one of, if not the best positioned portfolios for the market right now, given the strength in coastal, urban areas and then we consistently are being told that you're looking to have a more balanced portfolio between urban and suburban, coastal and Sunbelt. So can you just talk a little bit about like how should investors reconcile kind of the strength of the portfolio now to kind of the overall strategy of diversifying away from what's working right now?

Mark J. Parrell

Yes. Great. Great question, very fair. I think you're going to see the baton kind of path. So I think for a few years, these Sunbelt markets are going to be pretty stressed. And I think a lot of the owners of these assets aren't long-term owners, they're developers with [impatient] capital, expensive development debt. And we can buy those properties again for a good basis as we just discussed and add them to the portfolio. I think our kind of resident is increasingly in some of the Sunbelt markets. But yet the coastal markets have real supply advantages that you're seeing right now. So creating a real balanced portfolio for our investors, I think for the next year or so, they're going to benefit from just better coastal dynamics on the supply and demand side.
I think after a while, those things will even out. And I think they have a portfolio that year in and year out outperforms not just in certain periods, but year in and year out. It just requires more balance between urban, suburban and coastal and Sunbelt, and we're really balancing the demand and supply risks and opportunities. We're thinking a lot about regulatory risk. And we're thinking a bunch about resilience. The cost, for example, of insurance in Florida, the cost of casualty, repairs and things like that are getting more significant.
So I think as we talk to our investors, and I think this has been well received and the instruction we've received from the Board is to again, try and create this portfolio that's a little more balanced as to opportunities and risks. And I think what our investors will get are hopefully gleaning numbers for the next, I don't know how many quarters, 18 months to 24 months. And then hopefully, at some point, we'll start to see supply abate and these other new markets, and we'll be there to take advantage of that, having purchased at an attractive basis. So in my hopes and dreams, that's how it would play out.

Operator

Our last question comes from the line of Adam Kramer with Morgan Stanley.

Adam Kramer

I think you've done a really good job of kind of presenting pricing trends on a kind of a seasonal or sequential basis historically. Thinking about Slide 24 in your most recent deck, for example. Just wondering, thinking about kind of the late summer months and into the fall, maybe just walk us through your assumptions for kind of growth relative to the normal seasonal pattern.

Michael L. Manelis

Adam, this is Michael. So I think what we've said is we expected this year to follow normal seasonal trends, both on a rent seasonality, a demand seasonality and right now -- and we said it was going to be a little bit muted. We didn't expect rents to peak quite as high as what they would normally peak.
Right now, we're doing kind of right where we thought we would be, turning the corner, heading into August. We would expect, just given the application volume and the foot traffic we're seeing that we've got several weeks left of what I would say is the peak leasing season where we'll continue to inch up a little bit of rate and then as you turn the corner and you walk your way in through September, we do expect that rates will start to moderate a little bit.
We have so many years of data. We're looking at all of these stats, and we haven't really seen anything that tells us not to expect that normal kind of softening that occurs in the late third quarter and into the fourth quarter, both from the pricing trend standpoint, little bit on the occupancy standpoint. But right now, we feel pretty good because of the Southern California situation that occupancy will continue to improve and be stable for us for the year.
So I just think you just got to look through all of those stats and just put yourself into a bell curve and allow both rent seasonality and demand seasonality to kind of tail off in the third -- late third quarter and fourth quarter. That's what we're modeling. We've seen years clearly where we've been able to defy that and hold the line with rate or have good demand kind of going all the way through the fourth quarter. I just don't have any insight right now to say that this is going to be the year that does that.

Adam Kramer

That's super helpful. I really appreciate that color. And then I guess it's frankly kind of a similar question. But thinking about back earlier in the year, I think you guys put out a kind of 2.5% market rent growth forecast for the full year. Wondering if at this point in the year, kind of knowing what you know, half year results in so far, would you make any kind of changes to that number? Or is that kind of still how you think about for the full year on average, 2.5% market rate growth?

Michael L. Manelis

So Adam, this is Michael again. No, I think we're like -- we're running right at it. Like we're right on top of these numbers. I think that market rate growth you layer on top of where our embedded growth was in the beginning of the year, our ability to capture the loss to lease and then you had that intra-period growth. You put all of that stuff into the blender together and it was pointing us to this like 4% blended rate growth for the year. And right now, that's like exactly where we're headed. So I wouldn't change that number or outlook at all.

Operator

This does conclude today's question-and-answer session. I would like to turn the call back over to Mark Parrell. Please go ahead.

Mark J. Parrell

Thanks, Ruth. Thank you all for your time and interest in Equity Residential today. Enjoy the rest of your summer, and we look forward to seeing many of you out on the fall conference circuit. Thank you.

Operator

This does conclude today's conference call. Thank you for your participation. You may now disconnect.