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 first quarter 2023 results.
We had a very good quarter to start the year with same-store revenue results exceeding our expectations. And while same-store expense growth was higher than we projected, due in large part to the California storms, that still left us with first quarter net operating income and normalized FFO better than we expected. The moment Mike will take you through our first quarter operating highlights, the strength of our revenue results point to the durable nature of our business in the face of volatile economic conditions.
We continue to see substantial demand from our affluent renter demographic and moderate levels of supply in most of our major markets, with the new news in the quarter being the rapidly improving regulatory conditions in California. Based on these continuing positive business conditions and the good prospects we see for our business going forward, during the first quarter, our Board raised our common share dividend by 6% on an annualized basis.
Despite the headlines and layoffs, demand feel solid. The unemployment rate, particularly for the college educated, remains very low, which gives us a good feeling about the employability and earnings power of our affluent renter customer. And our portfolio, we are not seeing increases in residents downsizing their units, are giving us their keys because of job loss.
In terms of competition from home ownership, monthly cost and down payment requirements remain high in our markets, especially relative to rents, making renting a high-quality Equity Residential apartment a better value. Only 8% of our residents who moved out in the first quarter bought a home, and that's down from 12% in the first quarter of 2022.
On the apartment supply side, as we have discussed with you on previous calls, we expect 2023 national apartment new supply to run at record levels, but we generally feel good about the level of direct competition this supply will post to us, given our market mix and, importantly, the location of supply within markets relative to our properties. And our coastal markets, where we still have 95% of our NOI, we see very manageable competitive new supply in most markets, with Washington D.C. being the exception. So, D.C. is holding up remarkably well so far.
In the Sunbelt markets, including the Dallas Fort Worth, Austin and Atlanta markets in which we are increasingly investing, and in Denver, we're seeing higher relative supply and more impact. We anticipated this when we acquired our Sunbelt in Denver properties, and these properties are generally tracking consistently with our underwriting. As we look to expand our portfolio in these markets, we expect that these new deliveries will present buying opportunities for us.
Michael will also discuss first quarter same-store expense growth, which was higher than we expected, especially in the repairs and maintenance, and other on-site operating expenses lines. We think this growth was inflated for discrete reasons that will pass. And we continue to be comfortable in attaining our full-year same-store expense range in part due to lower than previously anticipated real estate tax growth, combined with modest on-site payroll expense growth.
We have created in our company a culture and system that uses technology and centralization to improve the customer and employee experience and the container payroll costs. While the transaction markets remain unsettled, we did do a couple of deals to start the year. We sold a small collection of 25-year-old properties that totaled 247 units in Los Angeles for about $135 million in advance for the transfer tax increase.
Also, after the end of the quarter, we purchased a newly developed property in Atlanta for about $79 million that is currently in lease-up [Phonetic]. The property is located directly on a portion of the Atlanta BeltLine that is being improved and paved. The BeltLine is a desirable amenity to our demographic and has been a catalyst for economic growth and densification across the area. The property's economics benefit from various tax credits, and we fully stabilize next year. We expect to attain a 6.6% acquisition cap rate.
Removing the tax benefits, which will burn-off over time, we see the stabilized fully taxed acquisition cap rate at 5.7%. We also love [Phonetic] our basis in this property, which is at $288,000 per unit, and we see that as a 15% to 20% discount to current replacement costs. Alec Brackenridge, our Chief Investment Officer, is here with us to answer your questions on the transaction market.
And with that, I'll turn the call over to Mike. Thanks, Mark, and thanks to everyone for joining us today. This morning, I'm going to review key takeaways from our first quarter 2023 operating performance in our markets, along with same-store operating expenses. As Mark mentioned, we produced very good same-store revenue growth of 9.2% in the first quarter. These results were ahead of our expectations, primarily due to continuing improvement in delinquency, along with continued healthy fundamentals in the business. Before I get into more details on these topics, I want to emphasize that as we sit here today, the early stages of the leasing season and its setup remain strong. With year-to-date pricing trend improvement just above 3.75%, which is where we would expect it to be at this point in the year, and is also consistent with expectations underpinning guidance. During the quarter, we continue to see good demand and strong resident retention that produce low turnover, stable occupancy and solid pricing power. Despite some recent negative job headlines, 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 due to job loss and transfer activities to reduced rent, often early indicators of resident economic stress, remain below pre-pandemic levels and in line with seasonal expectations. A resilient labor market, along with a large number of young adults choosing the exciting attractive lifestyles our markets provide, along with the convenience and cost benefits of renting, continues to result in application volumes that are on par with the same period last year and continue to grow as expected into the leasing season. Couple this with the favorable supply position and lack of single-family homeownership, competition that Mark outlined, and we should be positioned for another good year. Results to-date support the view we shared on our February earnings call that we expect pricing trends for this year to follow a normal, albeit slightly muted, seasonal trajectory. Given the difficult comparison periods for 2022 for the back half of the year, along with the return to normal rent growth patterns, we expect that the first quarter will be our highest reported same-store revenue growth with more moderate but still above historical growth in subsequent quarters. While there may be some uncertainty about the economy, including increasing layoff announcement, as I said previously, we are not seeing this impact our day-to-day operations. While we acknowledge that we are generally a lagging indicator, so far so good as we head into our primary leasing season. Now, let me spend a few minutes talking about our market performance. Let's start with the East Coast. New York and D.C. are both exceeding expectations, while Boston is in line. New York was by far the top performer for the first quarter with same-store revenue growth of over 19%. With very limited and isolated supply, the outperformance in this market is consistent across all sub-markets. Occupancy is currently 97.5%, and all demand indicators continue to flash green, making this market the expected top performer for the year. Turning to D.C. Performance has thus far been a pleasant surprise with the market continuing to absorb significant new supply, while still delivering good revenue growth. Similar to New York, occupancy is strong, and so far all sub-markets remained resilient in the face of new supply. Now, for the West Coast, Southern California continues to post good numbers. And most notably, we are starting to see improvement in delinquency, particularly in Los Angeles, which has the heaviest concentration. As the eviction moratorium expired, we are seeing more of our delinquent residents figuring out the best option that works for them, which is either paying rent or moving out. This activity started to pick-up pace late in the first quarter, which was sooner than we expected and has continued into April. While these move-outs are pressuring physical occupancy, it will benefit our financial results later in the year as we have good demand in the market to replace these residents with new residents that will pay their rent. Our remaining two West Coast markets of San Francisco and Seattle have posted respectable quarter-over quarter revenue growth with good demand but pricing power remained less than desired, especially in the urban centers of both of these markets. The San Francisco market is performing in line with our expectations, which already assumed a slow recovery. Use of concessions, mostly in the downtown submarket, remains common along with limited pricing power. Meanwhile, the South Bay submarket is demonstrating signs of improving pricing power and stronger occupancy with less widespread concession use based on a combination of factors that includes a greater variety of stable employers who are committed to the area, coupled with just a better overall quality of life. Heading to Seattle. The overall market continues to demonstrate a lack of recovery, which wasn't completely unexpected, but is behind our forecast. Similar to downtown San Francisco, downtown Seattle lacks pricing power with concessions being used in over 70% of our applications. The east side, which we felt may hold up a little bit better, is still outperforming downtown, that is a little more challenging than we thought based on supply pressure, layoffs and overall just less hiring in the submarket. Amazon's May 1 mandatory return to the office date has a potential to be a catalyst for this market. Finally, in our expansion markets which currently make-up a little less than 5% of our same-store NOI, revenue performance has mostly been in line with our acquisition performance and guidance expectations. As we expected, we are being impacted by heavy new supply in Austin, Dallas and Denver. Meanwhile, Atlanta remained strong with double-digit revenue growth for the quarter. Now moving to expenses. We reported same-store expense growth of 7.2% in the quarter, which was slightly above our expectations. We had always expected Q1 growth to be higher than our full-year guidance range, mostly because the growth during the first quarter of 2022 was so low, but also from pressure on a few specific items that outpaced positives in a few other expense categories. On the favorable side, we continue to benefit from good performance in real estate taxes and payroll, along with utilities, which were still elevated but lower than expected. On the unfavorable side, incremental cost and repairs and maintenance, other on-site costs and higher-than-anticipated insurance cost drove higher-than-expected first quarter same-store expense growth. For most of these costs, we had anticipated an increase, but not quite to this degree. Elevated repairs and maintenance was in large part due to increased outsourcing in the quarter, much of which stems from our own internal teams in California focusing on the aftereffects of the severe rainstorms, which resulted in incremental outside vendor assistance. Higher legal and administrative costs related to faster progress in response to the expiration of the eviction moratorium, the benefit of which can be seen in our bad debt net. Insurance expense was higher due to tougher conditions than the already challenging environment we assumed on the renewal of our property insurance policy, which was completed during the first quarter. Despite this pressure, we've remained comfortable with our existing guidance range on the full-year same-store expense growth. At this point, we expect slower full-year growth in real estate tax and utilities than we initially expected to offset the overages experienced in other categories in the first quarter. Lastly, I want to spend a minute on our focus on innovation and the technology evolution of our platform. In 2023, we have a positive NOI impact of just over $10 million included in our guidance, with about two-thirds of that coming on the expense side, primarily in payroll and repairs and maintenance. This benefit will mostly be realized in the second half of the year, which will contribute to lower expense growth for that period. On the revenue side, we will continue to focus on other income items like WiFi, parking and pricing optimization. We will also leverage data and analytics to create opportunities to expand our operating margin. Our vision is to augment pricing and renewal strategies by combining our growing data science capabilities with streamlined execution, while delivering self-service solutions to our customers. We will continue to leverage our mobile platform to create opportunities to share on-site employees across multiple properties. 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 the portfolio. This uniquely positions our company to continue to create additional revenue streams, while managing expenses to maintain and grow margins even in an inflationary climate. 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, we will turn the call over to the operator to begin the Q&A session. Thank you.