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Equity Residential Q3 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Marty McKenna
    Vice President, Investor and Public Relations
  • Mark J. Parrell
    President and Chief Executive Officer
  • Michael L. Manelis
    Executive Vice President and Chief Operating Officer
  • Robert A. Garechana
    Executive Vice President and Chief Financial Officer

Analysts

Presentation

Operator

Good day, and welcome to the Equity Residential Third Quarter '22 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Marty McKenna. Please go ahead.

Marty McKenna
Vice President, Investor and Public Relations at Equity Residential

Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2022 results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; Bob Garechana, our Chief Financial Officer, is here with us as well for the Q&A.

Our earnings release and accompanying management presentation are 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'll turn the call over to Mark Parrell.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Thank you, Marty. Good morning, and thank you, all, for joining us today to discuss our third quarter results. As you can see from our press release, Equity Residential had an outstanding quarter.

Our revenue results in the quarter were driven by steady occupancy, continuing strong renewal rate growth, and decelerating, but still above-trend, new lease rate growth. We coupled that with the continuation of modest expense growth leading to same-store NOI growth for the quarter of an exceptional 16.2%. With continuing positive financial leverage, this led to a 19.5% increase in quarter-over-quarter normalized funds from operations. We are proud to have improved margins and created substantial cash flow growth in a turbulent time in the economy. I congratulate my colleagues across Equity Residential for their hard work, taking care of our residents and their fellow employees, and producing these impressive financial results.

We know at this late point in the year, the focus naturally turns to 2023. As usual, we are not giving guidance at this time but in the management presentation we posted last night, we tried to frame the material factors that will drive next year's revenue results. In a moment, Michael will take you through those factors in some detail. We remind you that the success we've had in 2022 will create a challenging comparable period, so we continue to expect a moderation in 2023 annual same-store revenue growth even if as we expect 2023 as a strong above-trend year.

Looking at it from the top of the house, we like our affluent renter customer and what we expect will be their financial and employment resiliency going into uncertain times. Our target resident is high earning and employed in knowledge industries with more durable incomes and employment prospects. The college graduate cohort, which we believe makes up the vast majority of our residents has an unemployment rate of 1.8% compared to the 3.5% overall unemployment rate. Even if layoffs materialize, we believe that the tighter-than-average labor market for these knowledge workers will allow them to find replacement jobs quickly.

Finally, although high inflation has impacted everyone's real incomes, our affluent renter is relatively more insulated due to their higher incomes and lower rent-to-income ratios. The average income for the residents who sign new leases with us in the past 12 months is $174,000 or 12% higher than the group who signed with us in the 12 months ending September 2021. These new residents are paying us slightly less than 20% of their income in rent, which is generally consistent with prior rent-to-income levels.

On the apartment supply side, we've seen national apartment deliveries reaching a cycle-high point in 2023. However, in the coastal markets where most of our properties are still located, we see supply as being lower and being delivered further away from our properties than in the past, and thus, likely less impactful. The Sun Belt markets, including the Denver, Dallas-Fort Worth, Austin, and Atlanta markets in which we are increasingly investing, will see higher relative supply numbers than our coastal established markets and likely more impact, especially if that's coupled with the job slowdown.

For us, this may turn into a nice opportunity to acquire assets in these expansion markets not necessarily at fire sale prices but at better values than prevailed in the first half of 2022 when we felt that the market was overheated and chose to stay on the sidelines. We continue to see our strategy of having more balanced portfolio between our established and expansion markets as appropriate as we follow our affluent renters in these new markets and mitigate regulatory and resiliency risks from overconcentration in any market or in any state.

In addition, other housing alternatives remain expensive and in low supply. Though they have been declining of late, current single family home prices continue to be at record levels while rising mortgage rates have further stressed affordability, particularly for first-time homebuyers. Single family housing stats are declining, existing homeowners are more reluctant to sell due to low locked-in mortgage rates along with minimal and expensive for-sale replacement options, and competition for homes from investors remain strong.

Going against these positive factors for our business is a significant impact of inflation on the economy, where job growth goes in response to the Federal Reserve's actions as well as volatility in the capital markets, the continuing impact of the war in Ukraine, and a myriad of other uncertainties. We are currently in an excellent spot but acknowledge that the risks and uncertainties are more elevated than usual.

And with that, I'll turn the call over to Michael Manelis.

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Thanks, Mark, and thanks to everybody for joining us today. I'm going to give some brief comments regarding current market conditions and then we can turn it over to the operator for question-and-answers.

We just completed one of the best leasing seasons in our history. Strong demand across our markets produced high occupancy as well as continued pricing power. As we think about the trajectory of our pricing for the full year, we clearly benefited from a supercharged spring leasing season with more robust pricing power that started earlier in the spring in many markets than we have traditionally seen. This strength led us to adjust our same-store revenues upward in July and to set our current expectation slightly above the midpoint or at 10.6% for the full year 2022, which is the best same-store revenue growth in our history.

In both the earnings release and in the accompanying management presentation, we have provided some key performance metrics, which demonstrate the strength of the leasing season and the fundamentals that position this portfolio well for 2023. This includes updates on the percentage of our residents renewing with us, which remains very healthy and is now consistent with historical levels after some moderation in the summer, which was expected as we are moving residents to current market rents. This performance supports occupancy, which continues to be solid at 96.2% even as we enter the slower part of the leasing season.

As you can see on Page 4 of the accompanying management presentation and as we disclosed in our August 31st press release, our rents peaked in the first week of August and then moderate which is typical for this time of year. Seattle and San Francisco are the two markets that stand out with more recent moderation than anticipated. Concessions are being used more than declines in rental rates in these markets to drive traffic. All other markets are basically in line with normal rent seasonality and overall, we continue to have good demand for our units in all of the markets with strong foot traffic, which is generally in line with our historical averages for this time of the year.

While we see the same headlines as everyone else on tech hiring freezes and some layoffs, our revenue performance is holding up although we readily admit that we have a lagging indicator. Right now, New York and Southern California continue to lead in both same-store revenue growth performance and our overall current pricing fundamentals. Seattle and San Francisco while producing strong annual same-store revenue growth are the markets that have struggled through the most of the year to gain meaningful momentum. Longer-term, these two markets present growth opportunities as they continue to be under-housed and have the potential to show improvement very quickly with the infusion of more certainty of jobs.

As Mark mentioned, we are not providing 2023 guidance this quarter but we understand that 2023 is top-of-mind. As a result, we provided a framework of helpful building blocks for same-store revenue and expense growth, which you can find on Pages 5 through 8 of the management presentation. We would expect 2023 to produce quite good above-historical-average revenue growth based on activity already built into the rent roll from excellent rent growth that occurred in 2022. We call this our forecasted embedded growth, which reflects the contribution to next year's revenue growth, assuming no changes to the rent roll occur. We expect this to be about 4.5% by year end. For historical context, in a normal year, our forecasted embedded growth would be just above 1%. You can see this on Page 6 of the presentation.

In addition to this favorable embedded growth, we are positively positioned for leasing activity in 2023 moving forward. Our loss to lease, which refers to the revenue improvement we can expect from moving leases in place today to current market levels, is significantly larger than historical years as evident on Page 7. Our current loss to lease of approximately 5% will seasonally moderate through year end but certainly positions us for growth when leases mature and we capture this loss in '23. For historical context, our loss to lease would be about 50 basis points at the end of a typical non-recessionary year. With that setup in mind, let's not forget about actual market rent growth during 2023 and its contribution to same-store revenue growth.

Current visibility here is most opaque. While our business has strong long-term fundamentals, the uncertainty around future economic conditions that Mark just mentioned is high. This 2023 intra-period growth should remain healthy as favorable demographics, continued low employment rates in our target demographic, strong income growth, and less direct supply pressure in many of our markets point to the potential to see a strong spring leasing season. That being said, 2023 is unlikely to be as robust as the unprecedented rent growth numbers of 2022. On the occupancy side, general demand trends, including improving retention, support strong occupancy above 96% for the balance of 2022 and should carry through into 2023 unless there is a substantial loss of jobs in our target renter demographic.

Outside of occupancy and the core revenue drivers that I just discussed, bad debt net will likely continue to play a role in revenue growth as we expect the trend of reduced levels of resident delinquency to continue into 2023. The lack of governmental rental assistance in '23 compared to the $31 million we will receive in 2022 will require continued improvement in resident behavior -- payment behaviors in order to return us closer to historical norms and contribute positively to revenue growth. An improved regulatory environment coupled with the high quality of our affluent renter should lead us in this direction but 2023 may be a bit of a transition year to get all the way there.

Switching to same-store expense growth. As you can see in the press release, 2022 benefited from limited growth in property tax expense and great controls of our payroll expenses. And as a result, we expect to produce same-store expense growth of 3.3% for the full year 2022. As we described in the management presentation, if the inflationary environment continues as it is today, we would expect expense growth in '23 to be elevated from these industry-leading levels in 2022.

While we expect that less controllable areas like real-estate tax may come under more pressure, we remain focused on initiatives that can assist in moderating growth in areas that are more controllable, like payroll and repairs and maintenance. We have had great success in creating efficiencies in our sales and office functions with over half of our portfolio running with shared resources and we expect that to continue to benefit us in 2023 as we centralize onsite activities such as application processing and our move-out and collection process.

On the service side of the business, we continue to leverage our mobile platform to create more opportunities to pile our resources across multiple properties. We also will strategically leverage third parties for outsourcing turns in assisting with after-hours work to reduce overtime pressure in the portfolio. Overall, we are well-positioned to continue the trend of expanding our fully loaded net operating margin, which currently sits around 69% into 2023. I want to give a quick shout-out to our amazing teams across our platform for their continued dedication to the residents and focus on delivering these terrific operating results.

With that, I will [Technical Issues] the call over to the operator to begin the Q&A session.


Questions and Answers

Operator

Thank you. [Operator Instructions] We will take our first question from Nick Joseph with Citi.

Nick Joseph
Analyst at Smith Barney Citigroup

Thanks. Appreciate all the building blocks on 2023. If we're looking at kind of same-store revenue growth, obviously, the market rent will be a big determinant of it, but there's obviously these other building blocks in place already. As you think about the interplay between the ability to push renewals versus that loss to lease going in, how sticky can renewals be and how are you thinking about pricing those on a forward 30 or 60 days just given the more macroeconomic uncertainty?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. Hey, Nick. This is Michael. So I think when you're looking at the renewal performance, again, our quotes for the balance of the year have already been issued. So we have all of those quotes out there and right now, we're seeing improving retention. We're negotiating a little bit more, but that's clearly typical for the fourth quarter, and have a pretty strong degree of confidence that we're going to continue to achieve about 8% to 9% in growth from the renewals.

So we remain very optimistic about the renewal performance and clearly are seeing the trends of improving stickiness but that is a common trend to see in the fourth quarter that, that retention continues to grow.

Nick Joseph
Analyst at Smith Barney Citigroup

I guess the question was more on '23, right? So if the loss to lease trends down towards the end of this year, just with market rent growth, as you start to set rents in '23, if the loss to lease is smaller at that point, how comfortable are you going out earlier in the year with renewals just given normal seasonality on the market rent side?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. I mean I think you're going to look at what your expectations are. We'll watch what happens to us for the balance of the year, and how we start January off is going to be the indicator as to how aggressive we are in March and April. But we clearly are going to layer in intra-period growth into these quotes into the first and second quarter of next year, and then we have a great centralized negotiation team in place that we can always pivot if we need to. But right now, we're not seeing anything that tells us not to expect kind of growth in that renewal performance after we kind of start the year off.

Nick Joseph
Analyst at Smith Barney Citigroup

Thanks. That's helpful. And then just on the pricing sensitivity. You talked about San Francisco and Seattle. I think you've talked about the West Coast maybe being a driver for 2023. Does the sensitivity that you're seeing today change that overall view at all?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Well, I mean -- I think -- Look, if you back this up a few months ago where our expectations were for 2023 and I think I alluded to it in the comments. I mean we got to markets right now that are exhibiting a little more price sensitivity than what you thought that we would be sitting on in October, and most of that sensitivity, it's not necessarily that the rates are coming down. It's the fact that the concessions came kind of a little bit sooner in the year than what we would have thought, right?

So you're seeing markets even for us in like San Francisco where we're running, 50% of our applications are now receiving about a month. In Seattle, you're at like one-third of the applications in about three weeks. That's just a little bit more pronounced than what we would have thought. So I think as we think about 2023 for those markets, I said in the prepared remarks, I still believe there's a lot of potential for those markets to deliver strong growth. We just need a little bit of clarity on that job, little less ambiguity. You got good momentum with the quality of life coming back in both of those areas. So I still feel like we got the potential but sitting here today versus our view a few months ago, the markets feel a little more price-sensitive than what we would have thought.

Nick Joseph
Analyst at Smith Barney Citigroup

Thank you.

Operator

And we'll take our next question from Steve Sakwa with Evercore ISI. Please go ahead.

Steve Sakwa
Analyst at Evercore ISI

Yeah. Thanks. Good morning. Mike, I just wanted to follow up a little bit on the Seattle and San Francisco comment. Are those very specific to kind of Downtown Seattle and Downtown San Francisco? Are you seeing any of that weakness spread to kind of the east side of Seattle or down into the Peninsula?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. So we definitely felt a little bit in Redmond, little bit more softening, little bit of the concessions are in that marketplace. And I think in San Francisco, what you saw is the South Bay really kind of benefited through the year even though it was delivering all of that supply. And right now, my guess is what we're feeling is a little bit of pressure from that hangover supply in the South Bay. So it's not completely isolated to like the Downtown or the CBD areas but it is still mostly concentrated there.

Steve Sakwa
Analyst at Evercore ISI

Great. And then, I don't know, for maybe for Mark or for Bob. Just as you guys think about deploying new capital into new developments, how has your return hurdle changed just given the change in costs to capital, given the change in the economy and the outlook? How much more conservative are you being on underwriting and how high have your hurdle rates gone for new developments?

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Yeah. Hey, Steve, it's Mark. Thanks for the question. It certainly has gone up. The two deals you saw start this quarter were really things that were in play much earlier and we were kind of obligated on it, just the start that occurred. So we have let go of some deals we were pursuing. We have talked a lot with the development team about the higher hurdle. I'm not sure I have a precise number for you but it was probably a number we were looking, more like a 5% return on in-place rents, and now we're looking for something, Steve, probably a lot closer to a 6% return on in-place rents. But you've got deals where there might be a story that's particularly compelling, like your basis play or some other factor that makes it particularly interesting.

I'll also say the big competitor to development with us is acquisitions. I mean our sense is that pretty soon, pretty soon, might be a few more months though, the acquisition market will be more available to us. Again, not at free prices, not at fire sale prices, but, boy, if we can buy existing streams of income without having all that development risk, we're leaning on that. So my sense is that acquisitions of existing assets will be more available to us at more favorable prices than a correction in the development market.

So to answer your question, I think the hurdle is higher for us to start new development, both because of cost of capital and because of the ability to deploy that capital instead in acquisitions.

Steve Sakwa
Analyst at Evercore ISI

Great. Thanks. That's it for me.

Operator

And we will take our next question from Nick Yulico with Scotiabank. Please go ahead.

Nicholas Yulico
Analyst at Bank of Nova Scotia

Thanks. I just -- maybe following up on that capital markets kind of outlook. Mark, I mean how are you thinking about how cap rates maybe have changed for apartment assets given that when we look today, I mean even to get GSE debt for multifamily, the way your NAVs go, all ends could be somewhere close to 6%. We're hearing negative leverage is more of a problem for people underwriting assets. I mean what is your view on how that may affect cap rates?

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Yeah, and I'm going to take -- thanks for the question, Nick. I'm going to take cap rates and sort of make it into values in general. I mean the system definitely got a shock, we talked about that on the last call. There is a pretty big bid-ask spread out there. Sellers are saying to themselves, six, nine months ago, I could have gotten a much higher price. I'm still getting good cash flow growth as Michael Manelis just described. Maybe I'll sit on my hands for a while. And buyers are sitting there and going, while all risk assets have repriced, department should reprice too. So our sense is that this lack of activity, I mean transaction volume is just really low now. It's really hard to peg value. But our sense is that cap rates have moved from maybe a 3.5% to something like a 5% cap rate for a well located stuff. And to your point, that still requires negative leverage, negative cash flow for a bit. So that is I think a problem. I mean that's why you don't see a lot transacting.

On the flip side, people like the apartment business. I mean there is a real dearth of these sorts of inflation-protective investments in apartments, we've done a lot of research on this, have typically performed pretty well in inflationary climates. There is also by our count $375 billion or so of dry powder available in real-estate private-equity funds looking for a home, and apartments are favorite place to invest in. So we think there's a lot of supportive stuff but right now, there's just not a lot of transaction activity. And our sense is that again, values are down probably 10% plus and some of that reason they're not down more is because of this offset from increasing cash flow.

Nicholas Yulico
Analyst at Bank of Nova Scotia

Okay. Great. Thanks, Mark. Just another question on the balance sheet. You guys did I guess pay down some of 2023 maturities with the sale this quarter. Is it right that I mean just from reading this, you have something like $500 million of kind of unhedged exposure to -- on maturity next year based on the swaps you have in place?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. It's slightly less than that. We have about $825 million of debt that is maturing next year that needs to be refinanced. $800 million of it needs to be refinanced as secured, of which we've got $350 million of -- at this point, very attractively priced swaps against it managing the treasury risk.

Nicholas Yulico
Analyst at Bank of Nova Scotia

All right. Thanks, guys.

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

We'll take our next question from Chandni Luthra with Goldman Sachs. Please go ahead.

Chandni Luthra
Analyst at The Goldman Sachs Group

Hi. Good morning. Thank you for taking my question. Mark, Michael, I'd like to go back to that acquisitions points. So you guys talked about that there can be potential opportunity and therefore, the grid might look better in terms of acquisition sources developments. What sort of opportunities do you think can come from this environment, like is there a way to contextualize it?

We understand it cannot be as good as 2021 likely but can it look something like 2020 or maybe even 2019 from a volume standpoint? And then, how would you think about funding it given we are still in that negative leverage territory and you said that prices might come down but not at fire sale levels?

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Yeah. Hey, Chandni, it's Mark. Thanks for that great question. You really hit on it because you really need to split this into two pieces: what do you feel about the asset price, and we'll talk about that in a second, and where are you getting the money from? And so, talking about asset price, we already like where it's headed, where these assets are being talked about. And again, not a lot of transactions, but a lot of these sales that are being discussed are -- don't have that big premium to replacement cost. At the end of '21, the beginning of this year, we saw transactions where acquisitions were being done at 25%, 30% premiums to replacement cost. You saw a stand down. We just don't see a history of making a lot of money when you pay those kind of premiums. So we see the price changes having evaporated a good amount of that and we see deals being talked about at least for-sale much closer to replacement cost. So we like that.

So when we think about asset pricing, replacement cost figures in, the cap rates certainly figures in, the price per pound, all those things matter to us, but where we get the money because we're going to continue to trade out of some of these existing markets, D.C., the state of California, New York, so where do those assets trade on a relative basis compared to these expansion markets. And if they trade in a way that makes sense to us, i.e., in a non-dilutive way, that'll be more interesting to us in terms of deploying new capital, which would have to be raised with debt. Right now, we think our unsecured debt rate's probably 5.75%, something like that. That's a pretty mighty interest rate to overcome and cap rates being around 5% aren't going to push that. And again, looking at where the stock's trading, that doesn't make a lot of sense.

So for us to be net acquirers is going to require I think some shift in our capital costs. For us to be swappers of assets like we've been traders is going to require that trade to make sense, and then for asset values to make sense. And they are starting to on a replacement cost basis, but I think your guidepost of 2018, 2019 is a pretty good guidepost because I think what happened in the pandemic with ultra-low rates, that was the distortion but I also don't think very high rates is a permanent future either.

Chandni Luthra
Analyst at The Goldman Sachs Group

That's very helpful color. Thank you. And switching gears to the expense side of the equation just a little bit. What are the markets in your portfolio where you think real-estate taxes could pose a bigger problem, and then on payroll, is there any more low-hanging fruit as you think about streamlining that line item further just given where compares are going into next year?

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

Hey, Chandni, it's Bob. I'll start with the payroll tax side. I think the most prevalent or probably the area that you see the most pressure are already is really in some of our expansion markets particularly, Texas, where you're seeing an aggressive amount of kind of reassessment activity and kind of push. So I think that's going to be an area in the expansion markets where we don't have a ton of exposure at the moment, but where you will see more real-estate tax pressure.

The state of Washington is also one that is a area because it's been so negative, right? So real-estate tax growth has actually been negative, so you have a really challenging comp. And the final area I think where you're going to see it is just we do have some 421-a step-ups in New York State, which will contribute to growth as we go into 2023. So it's a little bit of a mixed bag, but those are the three areas I'd call out specifically, and I'll pass it over to Michael, who will mention some of the initiatives in the payroll side.

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. So I think on the payroll front, I don't think I'd characterize any of this as like low-hanging fruit left. I think this is really just the strategic execution of these initiatives and if I sit here today, I would tell you we're probably about two-thirds of the way from many of these centralized initiatives and that usually yields kind of that efficiency in the on-site payroll team as we start sharing and leveraging resources across assets. So I'm pretty optimistic that as we work our way through 2023, there's probably one-third of the work left to be done with centralization and it's going to continue to yield kind of the benefits that will help mitigate some of the pressures that we're feeling.

Chandni Luthra
Analyst at The Goldman Sachs Group

Thanks, guys.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Thank you.

Operator

Our next question comes from Haendel St. Juste with Mizuho. Please go ahead.

Haendel St. Juste
Analyst at Mizuho Securities USA

Hey. Good morning, guys. So a couple questions here. I guess the first is a follow-up to an earlier question on sort of capital allocation. I'm curious, what is the best use of your capital today? You did take $500 million of business and proceeds to prepay some of the bond maturity. So perhaps some color on as you think about uses for capital today, thoughts on further debt reduction, stock buyback, and then maybe also what is the plan for the remaining $900 million of the unsecured bond maturities for next spring? Thanks.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

All right. You had like a four-part question, Haendel. Thank you. So I'm going to take parts of it all the way up to stock buybacks, and I'll ask Bob to speak to the refinancing plan for next year.

So when you talk about immediate capital allocation, our hope is that we can accelerate our renovations a little more. We've got a lot of great super well-located properties where -- with touch-ups in the kitchen and bath and stuff. Especially, if rent growth is going to moderate for a bit, our experience has been that that's a good time to do these renovations. Then when things start to accelerate again, you got some better product to sell. We're hopeful that that also means that some of these labor pressures that we've alluded to and others have too start to abate next year, you've got less action in single-family, maybe there is an opportunity because we're really having trouble getting contractors and sometimes, getting things like appliances for renovation. So renovations is a good use of capital. You should expect us to try and accelerate that. Again, these are all near-term things, innovation expenditures.

So this relates both to we had our terrific presentation inside the company this week about all we want to do relating to sustainability and whether it's solar panels and EV charging and all that. A lot of that stuff is pretty capital-intensive. A good part of it has some returns, which is great. Some doesn't. But I think we're going to -- you're going to see us lean in there both as part of our thought process on ESG in general and because of the return and the demands of our residents.

And finally, just the innovation part. We kicked off a big data analytics push inside the company that is expensive both in terms of talent and outside help. In the long run, we think it will help us drive revenue, manage expenses better, run the business better in general, but those are all areas where we're expending money.

On the share buyback, and you and I have had this conversation publicly and privately in the past, it's really hard though in this case to even think about it in a market where things are this uncertain. We just talked about how hard it is to peg underlying asset values. So to really understand the relationship of your stock to underlying asset values and sort of do that arbitrage you're referring to is a very challenging thing right now. Doesn't mean that we don't think the stock has room to go up certainly, but just at the moment, taking more risk, which would mean either issuing debt or selling assets into an uncertain asset sale environment, it just doesn't make a lot of sense. So I wouldn't say share buybacks are top-of-mind at the moment.

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

And then following a big picture on the balance sheet, we feel very good about where the balance sheet is. We expect to actually end the balance sheet at record-low net debt to EBITDA. By the end of the year, we'll probably be in the mid-4s or probably at 5 as it is. So the balance sheet's in great shape. It's very long-duration, has limited kind of interest-rate exposure, and we have almost no floating rate. So we feel really well-positioned.

As we think about moving into 2023, the component of debt or the piece of debt that is due or the majority of it is actually a piece of secured debt that is $800 million that was done originally in context with the Archstone transaction and had some structural requirements that will require us to refinance it. So what we're anticipating is that we'll refinance that in the secured market. I think we put on some hedges -- some attractively priced hedges to manage the interest-rate risk, and thereafter, in '24, we have no maturities at all, so -- which is an anomaly, right? So when you look at the $800 million or so we need to do over the next two years, it's very manageable.

Haendel St. Juste
Analyst at Mizuho Securities USA

On the cost of the new potential debt -- the arrangement you just mentioned, where are you pegging that cost broadly for new debt?

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

Yeah. So this would be secured pricing, which is actually inside of unsecured right now. So if you looked at the GSEs for -- and relatively low leverage because this is a very well-supported kind of pool. You're probably -- without regard to the hedges we have in place, you're probably in the 5.5% range, so about 25 basis points below what Mark had mentioned on the unsecured side. But when you factor into the swaps that we already have in place that hedge a portion of it at kind of treasury rates that are effective around 3%, we should be able to execute closer to 5% or maybe even sub-5% depending on what happens. This loan matures very late in 2023, so we have a long runway before we actually need to refinance.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

And the rate, just to give you some more color, Haendel, the existing rate isn't just the listed rate there. There are hedges that went with that portfolio so the actual rate running through the P&L is...

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

4.25%.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

4.25%. So when you think about your modeling exercise, as Bob said, we really want to amount till the last month or two of 2023, and then going forward, it's really the difference between 4.25% and wherever Bob ends up financing this. And we've got the luxury of another year to see if we can pick a spot to do that in.

Haendel St. Juste
Analyst at Mizuho Securities USA

That's really helpful. Mark, one more follow up and I promise this one's a lot shorter, only maybe a two-parter. But cap rates you mentioned moving from about 3.5% to around 5% for well-located assets. I'm curious if you're seeing any distinction between coastal and Sun Belt and if so, how that might play into your plans of rotating more of your NOI into Sun Belt markets maybe a bit sooner or any thoughts on that? Thank you.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Yeah. Thanks, Haendel. I don't have any thoughts on that. Just because the transaction pool was so light, there so little going on in any market. Just sharing anecdotally, a large national broker told us that a large southeastern apartment market, they didn't have a single listing at this time, so -- and that's unprecedented. So I just got to tell you the markets are just not very liquid, and so for me to be able to peg coastal or Sun Belt, I wish I could peg anything right now.

I think right now, it's just a little bit of everyone feeling each other out, what's the Fed going to do, how is that going to feel, do operating results hold up, all of those things, Haendel, I think are a little bit in flux. But as I said in my prior remarks, we're really interested in the relationship between those two and if we can continue to non-dilutively trade, we will.

Haendel St. Juste
Analyst at Mizuho Securities USA

Wonderful. Thanks for the color, guys. Thank you.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Thank you.

Operator

Our next question comes from Rich Anderson with SMBC. Please go ahead.

Richard Anderson
Analyst at SMBC Nikko Securities America

Hey. Thanks. Good morning. So back to that kind of Sun Belt question. People think of EQR as an urban platform at this point understanding your diversifying and looking into the Sun Belt and your expansion markets. But the big fear there is supply and that now is becoming a reality and that doesn't just suddenly start and then stop. It becomes a thing to deal with for some period of time.

So is there a scenario despite what you just said that this trade idea into expansion markets where opportunities present themselves because of some of those supply pressures does not materialize and you start to look at these expansion markets and say, yeah, maybe this isn't exactly where we want to go because do we really want to get in bed with an extended standard period of supply growth, which is again the big fear of getting into those markets if there are any?

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Yeah. Great question, Rich. Its Mark. So it would require us to think about another risk differently too, and that's political risk. Because one of the things that our coastal markets have I think more of, though maybe not quite as much of as we may have thought, is risk of rent control, risk of activity by politicians that's job-destroying and growth-destroying.

So from our perspective, we'd have to be balancing that differently as well. There is no risk-free apartment market. So if you're in Texas market, you probably have less political risk, but you may have more resiliency risk and you certainly have a lot more supply risks than a lot of our markets. But our experience with supply in the locations we're trying to buy in and build in like Frisco, Texas, is you'll have a year or two of that and then demand will be debt supply.

So again, if you tell me that prices get out of whack and that somehow the Sun Belt treats tight even with all that supply, that's probably not stuff we're going to be acquiring or building much of. But if the pricing relationship makes sense, then we're trying to manage this political risk versus this supply risk and I think balancing that out makes sense to us. So that's kind of where we end up on that.

Richard Anderson
Analyst at SMBC Nikko Securities America

Okay. And then second question for me, one-parter by the way. The embedded growth math, you define it as last-month annualized and you get to 4.5% for 2023, but is there another mathematical equation where you think further back into 2022, a lease that was signed in July at 20% higher rent would compare favorably in January?

And so my question is, is the 4.5% one number, but is there another "embedded growth" calculation that might be substantially higher than that giving voice to leases that were signed late second quarter, third quarter, and so on?

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Hey, Rich. Its Mark. I'm going to start and I think Bob and Michael may end up correcting me, but I think that's the embedded growth in loss. You're talking about more of a loss to lease a little bit in there, and we split those two up. So if you think about embedded is the rearview mirror. Those are already contracts that have been written leases that exist. And in your example, that loss to lease is us writing up to market. So if January rents are say, relatively low, and then as we would expect, seasonally, they're higher in June and the lease you just referred to in June is written higher, that additional increment we were referring to is that loss to lease and as the intra-period growth. So we're talking about the same thing. We just kind of compartmentalized it a little differently because it was a little easier to think about in three pieces.

Richard Anderson
Analyst at SMBC Nikko Securities America

Okay. That's fair. So maybe my definition of embedded is loss to lease plus your definition of embedded, maybe that's the way to think of it.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

You had a one-part question and we split it into three parts, right? But we are just chopping it up a little different because it seems to us, those are different variables and are easier to explain, but I think you're on it.

Richard Anderson
Analyst at SMBC Nikko Securities America

Yeah. Fair enough. Thanks very much, guys.

Operator

Our next question comes from Robyn Luu with Green Street. Please go ahead.

Robyn Luu
Analyst at Green Street Advisors

Hi. Morning. Thanks for taking my questions. So I wanted to ask across the portfolio. As eviction processes begin to normalize in some of your markets, are you seeing an erosion in pricing power at market-level vacancies tick up?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. So, Robyn, this is Michael. Maybe let me just give you a little context overall around the eviction moratorium and kind of what we're seeing today relative to that activity. So for the most part, the moratoriums have generally expired. We still have a couple of these local areas in California where there's various proof of our chips and restrictions. And all of -- most of these exceptions are set to expire in the beginning of early 2023. I'm going to tell you right now that the teams today are all over this process of continuing to work with these residents who've experienced hardship. And once we've exhausted all those options, we're ensuring that we have everything filed properly.

We are still in the very early stages of this eviction court process and we are starting to see some traction where the courts are actually moving through and following through kind of with lockouts. Overall, this level of eviction activity in the portfolio is just -- it's not that material, and we typically average less than like 1% of our move-outs from -- for this reason.

So I would tell you, even if everything was accelerated through the court system today, the volume would be more than manageable and would actually be a huge positive to us given the strength in the demand and the confidence we have in being able to fill those units with paying residents.

Short term, I think going specific to your question, sure. We're going to feel a little bit of this occupancy pressure or loss of occupancy pockets of Southern California. But again, the demand is so strong that we're going to quickly recover from that. And I don't really see it playing into kind of the pricing. And I think our view right now is that the expectation you're just going to see us gradually fall back into this pre-pandemic level of eviction activity as we work our way through 2023.

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

And, Robyn, it's Bob. Just to add real quick. If you think about those residents that are residing and not paying, they're fully reserved from a financial standpoint. So that occupancy -- that physical occupancy coming back into the market and us kind of capturing it like Michael just mentioned is a dollar for dollar, 100% upside to financial results because whether it's $0.50 less a month or before, it's a full rental payment more than what's going through the financial statement. So it's a big net benefit.

Robyn Luu
Analyst at Green Street Advisors

Got it. That makes sense. So I wanted to touch on San Francisco and Seattle a little bit more. So can you give a sense of the retention and foot traffic trends that you're seeing in both of those markets? And how those -- does that really compare to like the 2019 levels?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. So this is Michael again, Robyn. So the Seattle market today is renewing a little bit less than what we would say our historical averages would be. San Francisco is -- again, it's more in line, but it's also a little bit lighter. From a foot traffic and a application volume standpoint, both markets demonstrate demand. And I think as I said in my prepared remarks, it's just that a little bit lower, more price-sensitive level than what we would have expected. But when we're looking at this volume and comparing it to like '19, week after week, we are seeing the foot traffic, we are seeing the conversions to applications. It's just at a little bit less of a price point.

And our hope right now as we get through this fourth quarter and turn the corner into the year, we will see this retention start to improve and take a little bit of the pressure off of the front door, and we are seeing slight trends of that right now, but we need a little bit more momentum in time to kind of clarify on that.

Robyn Luu
Analyst at Green Street Advisors

Thanks for that.

Operator

Our next question comes from Joshua Dennerlein with Bank of America. Please go ahead.

Joshua Dennerlein
Analyst at Bank of America

Yeah. Hey, guys. I just wanted to touch on supply. What are you seeing for 2023? And for Seattle and San Francisco, how much of the supply dynamic was playing into that price sensitivity that you guys were referring to?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. So this is Michael. Let me start with the Seattle and San Francisco. So I think clearly in Downtown Seattle, we're feeling some of the pressure from the new supply in that market. And San Francisco, like I said, I think earlier in one of the responses to a question, maybe a little bit in South Bay that they had a lot of supply. These markets are set to deliver less supply next year, so taking a little bit of the pressure off. And maybe with that, I'll just transition to kind of an overarching view of supply for '23, which is for us, we're very focused on this concentration, the proximity of the new supply, and from an operations standpoint, when are the first units going to actually start hitting the market to be leasing. And when we look forward, these expected starts in '23 relative to the proximity within like 1 or 2 miles of our locations, is lower than previous years, which is a really good indicator that we should continue to feel less pressure from the new supply being right on top of us.

Specific to '23 deliveries, I would say that the overall direct pressure will be less. But clearly, like the D.C. market stands out as needing to see marked improvement in absorption because it has like another 15,000 units coming online with slightly more of an impact from a competitive standpoint to our portfolio.

And then outside of D.C., look, we're going to have some pockets in L.A. like Wilshire, Koreatown, Hollywood, where we expect to have some pressure next year. And in addition to that, I think the Downtown submarket at Denver, we're going to face some direct kind of head-to-head.

And besides those buckets, every year, we have these small isolated pockets of supply but as we look into '23, we just see that we're going to have fewer of those concentrated pockets, and we're just not going to have as much kind of direct pressure on us. And I think when we stand back and look at this, this portfolio with these amazing locations are clearly in places where affluent renters want to live and still have these good demand drivers and that definitely insulates us from some of this direct pressure from the supply.

Joshua Dennerlein
Analyst at Bank of America

Thanks.

Operator

Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

John Kim
Analyst at BMO Capital Markets

Thank you. I wanted to ask about your forecasted earn-in of 4.5%. Based on leases you signed this year, I would have thought it would have been maybe 50 to 100 basis points higher than that. So I was wondering if you could talk about the factors that drove this, whether it's purely 4Q rents declining or if there are other factors like occupancy and bad debt that are in this number, and is there a chance that the earnings could come in higher than your current estimate?

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

Hey, John. It's Bob. So just level-setting real quick on earn-in/embedded growth, which we do think of them as pretty interchangeable. They don't have any regard to bad -- like this has no regard to bad debt, no regard to vacancy loss, no any of that.

My guess is, and I'm not -- and maybe you can help me a little bit on how you're getting to your number is that you're maybe taking blended rates and kind of averaging blended rates over the year and coming up with that number is my guess on how you're coming with your 50 basis points higher than what our embedded number is. Is that how you're approaching it?

John Kim
Analyst at BMO Capital Markets

Yeah, pretty much adjusting for timing of leases signed, but.

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

Yeah. And my -- I guess what I would tell you is that the difference is really waiting. So the way that we're calculating it really has actual waiting day by day as to when leases are in place. So if took my blended lease rates over the year and just kind of extrapolated and did a mid-quarter convention, etc., I probably come up with a number that's around 5%. But if you actually do the pinpoint math, which we provided you, that's the 4.5%, that number shouldn't move almost at all. It's our forecasted number for the end of the year. So that number really shouldn't move much at all as we go into -- as we finish out the year based on our guidance. Does that help?

John Kim
Analyst at BMO Capital Markets

Yeah, it does. And, Bob, while I have you. The loss to lease, I know it's come down from 12.5% to a little bit over 5% and a lot of it was the leases you signed during the quarter to realize the market rents. But can you also talk about how much market rents have declined as part of that loss to lease number since your last update?

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

Yeah. I'll pass it over to Michael. I think if you look, a good visual as I pass it over to him is that pricing trend page, which is a couple of pages before, maybe Page 5 in the management presentation and you can kind of see that sequential trend, but that will help you directionally. And Michael, you probably have that.

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. No, John, I was just going to point you right to that page. And if you look at kind of the month-end rent numbers, down below in that chart, you can kind of get yourself a proxy to understand depending on which month you pick up the lease, it's 4% or 5% off of kind of that August number and just work your way through that.

But I'll tell you, when you think about that loss to lease and you think about the shifts that have occurred with the deceleration in that number, it's really important to understand like that comparative period. If you're looking back to that summer period and saying, boy, you guys were 11% or 12%, and now you're sitting down closer to 5%, you need to remember that the majority of this decline is this seasonality that you can kind of see evident on Page 4, but also every lease and every renewal that we have done since that point, we are capturing that loss to lease that we shared from a while ago.

And overall, the loss to lease, it may be a little bit lighter than where we thought it was going to be a few months ago. But I'll tell you, just it is directionally and definitely right in the ballpark of where we modeled this thing for a few months ago. So we're just not seeing it and I think that Page 4 really kind of highlights as to how you can think about that trend.

John Kim
Analyst at BMO Capital Markets

That's great. Thank you.

Operator

And we'll take our next question from Ami Probandt with UBS. Please go ahead.

Michael Goldsmith
Analyst at UBS Group

Hey. It's Michael Goldsmith. Over the last couple of years, you saw residents requiring more space and decoupling. Have you seen any of that reverse as we've moved past COVID? And then related to that, has move-out due to high rents -- do rent being too high increased, presumably, people aren't moving out to purchase a new home anymore. So where are they now moving to?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Hey, Michael, this is Michael. So on a decoupling or even a recoupling basis, we're just not seeing a material change. I think during this pandemic recovery period we've alluded to on the last call, we saw a slight decline in like the average adults per household. We ran about 1.65 and we were down at like 1.57. And that was really more prevalent in our one-bedroom unit types where we used to have two adults and they moved into a two-bedroom or did something different. So we looked at this even for the third quarter of these move-ins, which there's some seasonality of that, when do the three-bedrooms fill up and stuff like that. And we're right on par with where we were in the third quarter of last year.

So we haven't really observed any of these material changes. But I'll tell you, we've got great insight into it. We're watching the transfer behaviors. We're watching roommate activity. We're looking at unit type preferences on our website for prospects. And we'll be on it if we see anything shifting, we just haven't seen anything shift yet.

And then in terms of kind of the reasons for move-out. I mean you alluded to the home buying, you're absolutely correct. That number is materially down. During the third quarter, we're at like 8% of our move-out sited. Home buying is the reason for move out. That's compared to like a 12% norm. But we did see a tick-up in that. Rent is too expensive and is the reason we're up at like 25%. Part of that was by design. We said this at the end of the second quarter that we were going to be fairly aggressive in July and August kind of pushing these renewals and holding the line and getting people up to market. So we knew we were going to take a little bit of that hit, and we expected that number to go up. As we work our way through the fourth quarter and first quarter, my guess is we're going to continue to kind of see that number moderate down. But I don't anticipate seeing reasons for move-out to buy home, materially change at all. My guess is it's going to stay very low.

Michael Goldsmith
Analyst at UBS Group

As a quick follow-up to that, those that indicated that rent was too high, did you see any variations by region? Presumably, certain areas of the country are used to kind of elevated rents and rents moving higher over time, whereas maybe this phenomenon is relatively new. So did you see any difference by market or region?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Not a huge difference. I'll tell you, in California, where you had $1,482 and you had some of the CPI plus 5% caps, maybe a little bit less. We're citing that because they were going out at 9% or 10% increases against the market that was up 19% or 20%. So those folks typically stuck around because they didn't have a lot of options.

I look at like overall, I will tell you when you just look, and Mark alluded to this in his prepared remarks, is the health of the new residents moving into this portfolio from an income standpoint, our income -- rent as a percent of income is right in line at 19%, which, to me, kind of points to this fact that these new residents moving in are clearly going to be able to absorb kind of future increases that we push through into the portfolio.

Michael Goldsmith
Analyst at UBS Group

Got it. And as a follow-up question, suburban properties have been generally outperforming kind of in following kind of the initial COVID period, but will we be seeing a shift back to urban? Like what does the current demand picture look like for suburban versus urban? And does that kind of -- does it look different in different markets where there's -- where some markets are favoring urban more than suburban and the reverse is true?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. So I mean, overall, we're not seeing a significant shift of like urban and suburban. We look at migration patterns, where are people coming to us, where are people leaving, and what is the renewal patterns look like? And there's nothing that really pops out. I think clearly, when you look at like a Seattle, San Francisco, and some of these urban markets, we continue to see this trend where we are drawing in new residents from a wider area from outside of the states, from outside of the MSAs, which we view as a positive, meaning that these markets are continuing to draw people from all over kind of the country and even the foreign markets. But nothing that's really like a delineation that I can point to between urban and suburban that says they're acting materially different.

Michael Goldsmith
Analyst at UBS Group

Thank you very much.

Operator

Our next question comes from Connor Mitchell with Piper Sandler. Please go ahead.

Connor Mitchell
Analyst at Piper Sandler Companies

Hi. Thanks for taking my questions. So I have two questions. First, I do just want to revisit the San Francisco and Seattle price sensitivity once more. And I guess my question is, what do you guys see as being the largest reason for the price activity? I know we talked about the supply pressure compared to other markets. It's also more concentrated in the urban areas. So does this seem that the supply pressure is the primary cause or is there some push back to return to office as a large reason or perhaps another reason for the sensitivity and the concessions in these markets?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Yeah. So this is Michael. So I mean clearly, I think you cited a lot of those reasons. In San Francisco and Seattle, early on, there was an ambiguity around return to office. There's still a little bit of a -- kind of sense of, okay, what does hybrid work really look and feel like across the techs. Clearly, you've seen the press releases out or the articles being written on all the recent announcements, which just creates a pause in people's minds around jobs and what are these folks doing with layoffs and growth.

When I look at it right now, again, I think this is like a material -- immaterial kind of change that we're seeing. It's the markets that didn't really recover as much and I think what you're seeing is a market trying to hold on to rates where they are and use concessions more than let that rate kind of moderate down.

Connor Mitchell
Analyst at Piper Sandler Companies

Okay. That's helpful. And then my second question is regarding the Toll Brothers JV. And then in the current environment with the rapid rise in mortgage rates, has it impacted their willingness to do JVs with you guys? Does it mean more or less demand for the products and then whether they're more or less eager for a JV?

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

It's Mark. Thanks for that question. We were just with them last week, and they remain very committed to the joint venture as do we. Like us, they realize the market's moved and new deals have to hurdle over a higher number and have to make sense in this new environment. So they're adjusting, but there's no -- we sense no lack of commitment either on the personnel or capital side from Toll and there's none from us as long as the deals make sense. And I think that's the challenge right now. We're just not seeing deals that make sense because they're kind of priced in the old scheme. And as I said earlier in my remarks, the price system has changed and development yields need to be higher.

Connor Mitchell
Analyst at Piper Sandler Companies

Okay. That's helpful. That's all for me. Thanks.

Operator

We'll take our next question from Adam Kramer with Morgan Stanley. Please go ahead.

Adam Kramer
Analyst at Morgan Stanley

Hey, guys. Thanks for the time. I'll keep it quick here with just one. Maybe just looking at kind of the drivers of the same-store revenue growth for 2023. Look, I think the embedded growth, appreciate the color earlier. I think that's hopefully should be kind of well understood. But wondering though in kind of the occupancy and then the bad debt sides, occupancy may look like it was just a very moderate kind of step down in September versus -- October versus September. Wondering kind of what the view is as we kind of get into next year and kind of the view on occupancy, I think you called it healthy physical occupancy? Would love if you just kind of elaborate on that.

And then I guess similarly on bad debt, right, currently 225 basis points versus historical norms of 50. Does some of these kind of improved regulatory environment, where could that potentially take bad debt next year? And again, kind of just thinking about potential impact on same-store revenue growth in those building blocks?

Michael L. Manelis
Executive Vice President and Chief Operating Officer at Equity Residential

Hey, Adam. This is Michael. Maybe I'll start and just hit on the occupancy and I'll turn it over to Bob to talk about the bad debt. So for us, when I'm describing healthy occupancy, to me, that's running in a range of 96% to 96.5%. And I think right now, it's too early for us to say. We'll expect in the fourth quarter, occupancy does tail off a little bit. You're seeing it in this portfolio. It's not unusual, what we're seeing. The health when you turn the corner into January and how we're looking and feeling about that intra-period job growth is really going to be how we kind of put into our model as to what the expectations are. But right now, I will tell you, we still feel very comfortable saying that we expect next year to be in that range of what we would define as a healthy occupancy.

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

Yeah. And from a bad debt standpoint, we do think over time that we should see a return back to kind of our normalized levels, which were pre-pandemic, the 50 basis points you highlighted. Just given the nature of our resident base and their rent-to-income ratios and all the positive things that we've talked about on this call, the challenge from a financial standpoint or a financial statement standpoint or something to keep in mind is that in 2022, we had about $31 million worth of rental assistance and that's not going to repeat itself in 2023, right? So in order for you to break even from a growth perspective on same-store revenue, organic kind of bad debt has to improve by at least $31 million, from there is when you would then see it start -- be a contributor to growth.

All that being said, we have seen improvement in just the actual payment from our residents every month kind of sequentially since June or so and would expect that trend to continue. But it's a little bit of a race between that trend and this bad debt or this rental assistance that we won't have in 2023. But we're optimistic that we will return over time to normalized levels.

Adam Kramer
Analyst at Morgan Stanley

That's all really helpful, guys. Appreciate it.

Operator

Our next question comes from Linda Tsai with Jefferies. Please go ahead.

Linda Tsai
Analyst at Jefferies Group

Hi. Thanks for taking my question. Just one. I know you're indicating that expenses go up for next year, but can you remind us why you've had greater success than competitors in capping expense growth and whether these competitive advantages are intact on a relative basis for '23?

Robert A. Garechana
Executive Vice President and Chief Financial Officer at Equity Residential

Yeah, I'll start and Michael can add in if you like. I think in the areas that are controllable -- are most controllable, our innovation focus has really been on eliminating or reducing the amount of labor cost exposure, which has been something that has been very prevalent in the inflationary environment. So I think that we've done an excellent job of rethinking where we can use technology, where we can mitigate labor exposure, ours or contract labor. It doesn't really matter what labor there is. Just by being more efficient, by using technology, by increasing visibility, and a lot of the initiatives we've had have really helped us deliver what has really been record kind of payroll growth and has kept the R&M line on the contract side a little bit more in check, even though there are other pressures there. So that's certainly been a big help and something that we are going to continue to focus on as we go through generation, I'll call it, 3.0 of innovation.

The other area that in all candor has also helped us is real estate taxes, right? We have benefited from in our jurisdictions having lower real estate taxes overall, and that was I think, very prevalent in 2022. It's not as likely to repeat itself as we go into 2023 because I think as assessors look back, they typically look back at historical performance, and we've had record performance in our markets in 2022. And so that's going to put pressure on the real estate tax side that is a little less controllable.

And I guess the final part on real estate tax side is that in California, of course, you do benefit from Prop 13, so you've got kind of 2% baked in there. But in the other jurisdictions, we'll have some pressure.

Linda Tsai
Analyst at Jefferies Group

Thanks.

Operator

This concludes today's question-and-answer session. I will turn the call back to Mark Parrell.

Mark J. Parrell
President and Chief Executive Officer at Equity Residential

Thank you, all, for your time on the call and your interest in Equity Residential, and we look forward to seeing everyone during the conference season. Thank you. Bye.

Operator

[Operator Closing Remarks]

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