住宅地產 (EQR) 2010 Q1 法說會逐字稿

Good morning. I will be your conference operator. At this time, I would like to welcome everyone to the first quarter earnings conference call. (Operator Instructions)

I would now like to turn the call over to your host, Mr. Marty McKenna. Sir, you may begin.

Thanks, Sandra.

Good morning and thank you for joining us to discuss Equity Residential's first quarter 2010 results. Our featured speakers today are David Neithercut, our President and CEO; and Mark Parrell, our Chief Financial Officer. Fred Tuomi, our EVP of Property Management; and David Santee, our EVP of Property Operations are also here with us for the Q&A. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. 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.

And now I'll turn it over to David.

Thank you, Marty. Good morning, everyone, thanks for joining us for our first quarter call.

Well, what a difference a year makes, huh? And I'll tell you, the way things are changing today, what a difference 90 days makes. One year ago, we were facing extremely serious head winds in our business with the domestic and global recession in full swing. We had job losses of 500,000 per month, really with no end in sight. And we were rolling down our rents on average 10% to 11% across our portfolio.

Yet we ended last year with same store revenues down only 2.9%. And we shared with you in early February our sense that we were at the beginning of a recovery. We said in February that we were experiencing improving occupancy across many markets, when seasonally we would have been expecting just the opposite to be happening. We also said that our net effect to new lease rates were beginning to turn positive in many of our markets, and that we were beginning to see more renewals with an upward bias. And through the first quarter, those trends have continued and we think they are even stronger today.

Our occupancy has continued to improve. It's up 100 basis points from January 1st to 95.3% today. Our net effective new lease rates continue to increase. They're up 2.3% from one year ago and 4.6% since the beginning of the year. For the month of April, the difference between move out rents and net effective new lease rates was on average across the portfolio down only 1%. And this is quickly trending towards flat with some markets today already positive. And to put this in perspective, you'll recall that this delta was negative 10% one year ago.

We continue to renew our residents, 23,000 so far this year. And those renewals have been up 2%. And not a single market across the country is renewing leases today for less than at least a 1% increase. The 13,000 renewals that we've already done year to date that were new leases a year ago, so that a year ago the lease rates were likely down about 10% on average. Those 13,000 renewals have been renewed at an average increase of 3.2%. We're clearly beginning to recover some of the reduction in rents that we needed to give the market a year ago.

And we're delighted sequential revenues were essentially flat in the fourth quarter of '09 to first quarter of '10. This is, of course, primarily the result of the pickup in occupancy, but increasing net effective new lease rates contributed as well. Clearly, even without job growth, fundamentals are improving and our expectation today is for continued in improvement in fundamentals.

We originally thought that sequential same store revenue growth would turn positive in the third quarter of this year, and we now expect sequential revenue performance to be positive in the second quarter. Said differently, we expect to collect more revenue from same store properties in April, May, and June than we did in January, February, and March. And this will be the first time since mid-2008 that we've been able to do that.

And while we originally expected that the fourth quarter of this year would be the first of quarter-over-quarter revenue growth, it's possible that we could now see that occur as early as the third quarter. And as a result, we think the better end of our same store revenue guidance for the full year is no longer simply possible but it is now probable.

So what's happening? Why are we seeing this improvement of fundamentals without any reported net new job growth, when history would suggest that that really has to be happening for any of this to take place? Well, in prior downturns much of the pain inflicted on our space was due to oversupply; and as a result, when the economic picture began to improve, multi-family properties had three, five, seven points of vacancy, if not more, that needed to be reestablished in order to start to see an increase in rental rates. What we're seeing take place today is very much what we thought could happen given a significant reduction in new supply over the last several years, as well as the powerful impact of the echo boom generation, 85 million people strong, which is having a profound impact on rental housing, and we think will for many years to come.

Last year, we were able to maintain occupancy despite the massive job loss. We had to reduce rents, of course, but occupancy was maintained. And now with the economic picture improving, the 90% of the work force that has remained employed during the downturn, is no longer concerned about losing their job, which is enabling us to increase rents nearly across the board. We're still a long way from recovering all the reduction of rents that occurred during the downturn, and it will take a while to get it all back. But we are encouraged by what we're seeing without any real job gains, and are optimistic about the impact on fundamentals the job growth will have when it actually does return.

On the transaction side of our business. We were relatively inactive for quite some time, but a window of opportunity opened late in the fourth quarter of last year; and since then, we're delighted to have acquired nearly $1 billion of assets. Six of those were acquired in the first quarter of this year for $639 million, and all of those have either been discussed on prior calls or otherwise publicly disclosed.

Those include the three macro assets. A high rise acquisition in Arlington, Virginia that was built in 2008. A mid-rise property near the beach in Del Mar, California, and a mid-rise property in Seattle. All of these details we felt--are extremely well located, they're high quality assets and we were able to acquire them at very attractive prices at discounts replacement cost, and what we think were double digit IRRs.

We also recently announce the acquisition of another great opportunity for us in Washington, D.C. This is our 425 Mass Avenue property. This was a property that was conceived and completed in 2009 as for-sale condominiums. And we acquired the property totally vacant and have a major lease-up underway. We acquired that asset for slightly less than $300,000 a door, which represented about 80% of what we think replacement costs are; and about 70% of what it actually cost to build. So we projected an 8% if not more stabilized return on that asset three years out.

I'm happy to say that in the first two weeks of leasing, we've done very well. And I must remind you that this leasing began from a dead standing start because we bought this asset not--we didn't develop this, so we didn't have months to prepare for this leasing activity. But in the first two weeks of leases, we've written 31 leases, and those have been done at rates right on top of our $3.00 per square foot pro forma. And while we assumed an average of slightly more than one month concession on each lease during the lease-up, concessions have been for no more than one month and a third of the leases--a full third of the leases have been written with no concession whatsoever. We're very happy with the progress that Bobbi Pollard and her team have managed to date, and we continue to be thrilled about this asset.

All that said, I wish I could tell you we had a pipeline full of similar acquisition opportunities, but we don't. And it's not for lack of trying. But as you know, there's not a lot of product being offered today. There certainly is more than a year ago, but volume is still way down from normal levels. And there's plenty of capital--plenty of capital chasing these deals. So cap rates have really come. And, frankly, we think they've come in 25 or 50 basis points more just in the last few months alone. And values have increased significantly, and we're not expecting to be able to replicate the extraordinary success we've had with our last wave of acquisitions.

So while we've increased our acquisition guidance for the year, this is due more to what we've already done rather than what we are currently working on or see ahead of us at the present time. Meanwhile, like the fourth quarter of '09, our disposition activity was below our average run rate for the last several years, and this was due to the fact that the pressure on liquidity had eased a great deal. And we thought that values would likely improve so we decided to wait and see how things evolve.

In the quarter we did sell eight consolidated assets. They were a continuation of our non-core market exits with five deals in North Carolina and one deal in Dallas. It also did include a two phase asset in San Diego, which was a 30-year-old product that we thought had big capital needs in the near future and was in an inferior location. We've also increased our disposition guidance for the year, and this is a result of our renewed willingness to transact since values have increased; but much will depend on what acquisition opportunities we see. And if our disposition activity picks up, it will likely be towards the latter part of the year. In any event, we're likely to be back into a trading mode in which we'll transact if we find acquisitions that make sense relative to the pricing we can get on our disposition assets.

On the development front we've continued great progress there. The deals are being completed on time and under budget. Leasing continues to exceed our forecast on our absorption rates; and like our stabilized assets, we're seeing a lift in net effective rates there. Only three projects currently remain under construction. They range from 67% to 90% complete and only $106 million remains to be funded to complete construction on those deals.

And it's been a couple of years since our last development start and that was our Red 160 property in Redmond, Washington, which we started in June of 2008. But we do expect to soon start on our $53 million development deal in Manhattan's Chelsea neighborhood. We also have recently acquired a land parcel in Arlington, Virginia. This is a site for 188 units, and this is adjacent to our Sheffield Court property there in Arlington.

Total project cost about $67 million and adjusting for value for the ground floor retail, that's about $297,000 a unit, $312 a square foot. We've been looking at this site since 2005, and we acquired it from a pension fund at about 60% of their cost. That seller was successful in getting the property rezoned and fully entitled. We expect to receive all final approvals as early as late this year; and construction should start in the first quarter of 2011. And we anticipate a plus 7% return on the current rents on that development in Arlington, Virginia.

Development very much remains a core competency of EQR. And just as we did during the last couple of years, we're going to continue to underwrite development opportunities. That will start with our own land inventory; and we'll compare those opportunities to acquisition opportunities, as well as yields and IRRs on disposition candidates in order to allocate capital in the highest risk adjusted way possible to create long term value for our shareholders.

And now I'll turn the call over to Mark to go through the quarter and our guidance.

Thanks, David. Good morning, everyone. Thank you for joining us on today's call.

This morning I will focus primarily on our first quarter performance and our guidance for the second quarter and the full year 2010. Revenues were better than our expectations. For the quarter, our total same store revenues decreased 2.9% when compared to the first quarter of 2009, which was a better performance than we expected really for four reasons. First, we had 100 basis point increase in occupancy to 94.7%. We had budgeted occupancy to go up, but it happened faster than we thought and, as David said, this trend continues as we are 95.3% occupied today.

Second factor was the 170 basis point decrease in resident turnover for the quarter. Over the past few years, we have seen a steady improvement in resident retention as our customer loyalty programs took hold and as people across the country chose to hunker down and weather the recession in our apartments. We were not expecting to be able to drive turnover down further, and our guidance indeed anticipated that turnover would be flat compared to 2009. This continued improvement is a good sign. Our residents are very satisfied in their homes with us, and happy to stay longer.

Third factor, as David noted, renewal leases were executed at better than expected increases across all of our markets. And finally, on average across our portfolio, the difference or spread between the rent we were receiving for moveouts and the lower rent we will receive from new leases on a net effected basis was smaller than we expected. In some markets like DC metro, South Florida, San Diego, and Denver, the spread was already positive in the first quarter. Meaning that new leases in those markets are being written at higher rents on average than the average rent on moveouts.

In most of our markets, the spread was still negative in the first quarter, so net effective new lease rents are still lower on average than rents on moveouts. But as David said, that gap is closing more quickly than we had expected. In several of our other markets, like Boston and Inland Empire, spreads turned positive, or are likely to turn positive in the second quarter. We find all of this very encouraging. Assuming current trends hold, which is something that we'll only be able to validate once the primary leasing season concludes, we see our year-over-year same store revenue number very much at the better end of guidance.

On the expense side, same store expenses increased 1.5% on a quarter-over-quarter basis. In this quarter, lower real estate taxes and payroll expenses were more than offset by unexpected storm costs. Without the storm costs, our quarter-over-quarter same store expense number would have been flat and same store NOI would have declined about 4.8%. However, for the year, we remain comfortable with our plus 1% to plus 2% range for 2010 expense growth.

And here's why: On the real estate tax side, which constitutes about a quarter of our property operating expenses, these did increase slightly but this increase was lower than our expectations. Because at this early point in the year, and it is early yet, government revaluations were lower than we had anticipated and because we continue to have good success in the appeals process. I do note that most of our more material property tax jurisdictions do not announce property tax rates until the second half of the year. So further movement either way in this number is possible.

Onsite payroll is the next item, and it's about a quarter of our operating expenses as well. This item was down 2.1% due to reduced head count resulting from our continued efforts to create efficiencies in our platform. We expect growth in this category to remain subdued this year.

Our third biggest expense category is utilities, which is about 15% of our operating expenses. And those expenses were up only 2.1% quarter-over-quarter. We had budgeted 3% increase for the entire year. We saw lower gas and electricity costs, but saw increases in water and sewer as municipalities looked to close budget gaps with rate increases by municipal utilities. So their increasing municipal utility rates.

Our fourth item is repair and maintenance. And the main pressure from our expense number came from this line item. Specifically from costs for snow removal from the extraordinarily severe storms that hit the East Coast this winter, as well as costs from the damage caused by rain storms in California and Arizona. The majority of these costs are included in the repairs and maintenance expense category, which grew 6.7% quarter-over-quarter. Without these unusual costs, this category would have increased about 1.5% quarter-over-quarter. Please note that we believe all out of our material storm related costs were paid or accrued for in the first quarter, and we do not anticipate an expense impact from the storms in the second quarter.

On the collection side, the field and property operations teams have done a fantastic job managing credit risk through this recession. We saw delinquencies decrease in the quarter to 2.7%, down from 3.2% a year ago, and well inside the normal historical range. Also, delinquency declined in the first quarter of 2010 compared to the fourth quarter of 2009 by 20 basis points. The usual seasonal pattern here is that after Christmas going into the new year, delinquencies actually increased. So this is a very good sign.

Bad debt was 0.9% in the first quarter, down from 1.1% a year ago and also well within historical ranges. As you saw in our release, we reported FFO of $0.49 per share for the first quarter of 2010. We had slightly higher than expected same store NOI and a terrific incremental contribution about $7.2 million in the quarter from our lease-up properties. And would have reported $0.51 per share if not for the cost from the storms I mentioned, as well as some accelerated property acquisition costs.

Last quarter, I informed you of a new accounting rule, which requires us to expense survey, title, outside legal expenses, and other similar costs we incur in acquiring existing operating properties. Prior to 2009, these costs on successful acquisitions would have been capitalized. These expenses now run through the other expenses line item on the income statement and are included in our guidance assumptions on page 23. Based on our old acquisitions guidance of $1 billion, we budgeted about $5 million of such costs in 2010 with about $2.5 million or $0.01 per share of these costs being incurred in the first quarter.

Because we closed on the long acre acquisition in the first quarter, one quarter earlier than we expected; and because in the first quarter we incurred substantially all of the acquisition costs for the 425 Mass Avenue deal, we had more of these costs earlier than we expected. Besides this shifting of transaction costs forward one quarter, we have also increased the mid-point of our other expense guidance by $1 million consistent with our increase in acquisitions guidance from $1 billion to $1.25 billion. Of course, our second quarter number will benefit from this shifting forward as well as from the fact, as David mentioned, that our relatively small acquisition pipeline means that we don't expect to incur much in transaction costs in the second quarter.

Onto guidance. On page 23 of the release, we gave guidance for the second quarter 2010 FFO of between $0.53 and $0.57 per share. The primary drivers of the difference between our first quarter 2010 actual FFO of $0.49 per share and the mid-point of our second quarter 2010 FFO guidance of $0.55 per share are as follows: We've got about $0.03 per share of an increase from same store NOI, approximately $0.02 per share increase from 2010 acquisition and lease-up activity, and about $0.01 per share increase in the timing of the property acquisition costs that I just discussed.

We have left our annual FFO range in tact for now, and we'll revisit it as we customarily do in July when we report on our second quarter results. I do note that if we're able to maintain our operating momentum during the leasing season, we would expect to be in the upper end of our annual FFO guidance range. We have revised our acquisitions guidance for the year. We now expect to acquire about $1.25 billion of operating properties, up from $1 billion.

As of today, we have acquired $806 million of operating properties, we have also increased our disposition guidance from $600 million to $850 million. We are maintaining our guidance of a 1.5% spread between disposition and cap rates because we expect, as David mentioned, that the cap rate spread between our acquisitions and dispositions will be narrower going forward than the 1.9% year to date spread.

Now, a quick note on funding and expected sources and uses in 2010. On the sources side, we have budgeted approximately $1.25 billion of 2010 sources consisting of $850 million in expected disposition proceeds and $400 million in 1031 proceeds and cash on hand that we had at the beginning of 2010. We have not budgeted any additional issuance of stock under the ATM program, and have in fact, not issued any stock under that program since January 14, 2010. It is not our intention to increase permanent leverage levels to fund incremental investment activity, though you will see temporary swings in our upstanding line of credit balance due to transaction timing issues.

Not withstanding recent problems in the overseas debt markets, it is fair to say that the capital markets, at least for a large well capitalized real estate companies like Equity Residential have fully recovered from the credit crisis. I expect that the Company could issue 10 year unsecured debt at a rate of about 5.4%. As we have not issued unsecured debt since May 2007 and have repurchased a substantial amount of our unsecured debt directly or through tenders, there is a scarcity value in our paper that would make any issuance particularly well received.

The bank market is also recovering strongly, as banks try to put more money to work for desirable low-risk clients like Equity Residential. Finally, funding from the GSCs is also available to us at slightly better than unsecured rates. Our Company is fortunate to have minimal debt maturities in 2010 and to have hedged a portion of interest rate exposure. With our expectation that the line of credit balance at December 31, 2010, assuming no debt activity this year, will be only about $250 million, we can afford to be opportunistic in accepting the debt markets to refinance our maturing debt.

Now, I'll turn the call back over to David.

Thank you, Mark.

Before we open the call to questions, I want to provide a little perspective, at least our perspective on the impact of the single family housing market on our business. And I'm going to start by telling you that only 65 more of our residents told us they'd moved out to buy a home in the first quarter of 2010 versus the first quarter of '09. Only 65 more moveouts to buy a home, and that was on a base of 12,000 moveouts. Now, that activity to purchase homes concentrated in only a few of our markets: Phoenix, Inland Empire, Orlando, Denver, Northern Virginia. But it appears that much of our reconfigured portfolio seems unaffected.

With the strong increase in occupancy we realized during the quarter, it seems to us to indicate that increased new home sales, even though--that juiced by the expiring government subsidies has not hurt our operating results, and at least not in the near-term. The other question is as economic conditions improve, will the single family housing market have a material negative impact on our results. And I'll tell you that increasingly, we believe the answer is no. We certainly acknowledge that there are certainly some pent-up demand for single family homes within our resident population, but it seems that this demand has been greatly reduced.

It seems to us that the psychology of potential home buying appears to be changing. There's a much greater understanding and focus now on the many down sides of home ownership, especially the heavy anchor that home ownership can have on a generation of young adults that understand that they may work for many different employers and possibly in many different cities over their working lives. This is yet another reason we feel so very optimistic about the fundamentals of our business going forward.

And with that, operator, we'll be happy to open the call to questions.

(Operator Instructions)

And your first question comes from the line of Michael Levy.

Good morning.

I was wondering whether you can give some color as to whether there are certain unit types that are doing better than others that would signify that household formation is taking place?

This is David Santee.

When you look at our occupancy today of 95.3 most every unit type that we have is very highly occupied. And we do have some pockets of softness, whether it's penthouses in Boston or what have you, but in general, all units are in high demand. And we're starting to see increased demand for studios in the lower priced units in New York as well, which could imply that people are unbundling from roommates and what have you.

Yes.

I was just wondering if the current trajectory holds, do you have any sense or can you give any guidance as to where we might expect to see same store NOI in 2011, 2012? I'm not asking you to give guidance obviously, but just in general market trajectory, where do you guys see the market 24 months from now?

I'll tell you, Michael, we've had the improvement in fundamentals we've experienced to date without any real net job growth to speak of. So if you're going out 12, 24 months, and there are many out there--economists who think that we could be adding 3 million jobs a year, we just think fundamentals are only going to get better.

Okay.

And finally, just as I think about the CapEx on just for the rest of the year for stuff that you have--that you're planning to sell versus the assets that you're buying, is that net neutral on an AFFO basis?

I'm sorry, CapEx on assets we are disposing of whether that's neutral on an AFFO basis?

Versus the assets you're buying.

The assets we're buying generally have less capital per unit than the assets we're selling. And one of the reasons we often sell assets is because they have a disproportionate amount of capital relative to the return. So I don't know that it's fair to do that, to suggest that the disposition assets are going to have less capital. I think they probably would have more capital in general.

Right, of course.

So I mean, if you're buying assets with--with an implied cap of 5.5, and you're selling them at roughly seven is what I guess the simple math would be. I'm trying to calculate what the net impact would be on the FFO and the AFFO.

Well, clearly, AFFO is significantly less dilutive, particularly when you account for the fact, Michael, that our history has been we're seeing two if not three units of what might be averaging plus a thousand dollars of CapEx to buy one unit, which would be CapEx on the lower side of a thousand. So the numbers on an AFFO basis, that dilution is far less.

That's what I thought. I just wanted to confirm that. Thank you very much.

You're welcome.

Your next question is from the line of Eric Wolf.

Hi guys. Michael Bilerman is on the line with me as well.

And just going off Michael's question a second ago, in thinking about past 2010 and the velocity of rent recovery, what type of job recovery do you think your need to see to actually really push rents? Or do you think it's not going to too much due to lower homeless rates, low supply, etc.

I can't tell you exactly some sort of number that equates to a certain amount of rental increase. I can just tell you that we're already seeing rental increases--net effective increases in rents across all of our markets; and that is, again, with little net new job growth in those markets. So if the pattern holds with no new supply, and what we think is maybe a change in the perspective or the attitude about home ownership of many of our residents and we get job growth, obviously we think that we're going into a 12, 24, maybe even 36 month period here of some of the best rental growth that we've seen.

Right.

With the better than expected sequential improvement that you saw, was it driven by particular markets? Or was it just completely broad based, or did any of the markets come in much stronger than you originally anticipated.

This is Fred Tuomi.

It's pretty much a broad based recovery that we're seeing. We're very happy. We have to look pretty deep to find some negative news right now. We're pleased with the scope and the breadth of this recovery. Certain markets are at the leading edge and some are lagging. Those typically that went in first, are coming out the strongest. And the west coast markets that kind of went in last, fell a little bit deeper, they're going to lag a little bit on the recovery; but all markets are on the point of recovery right now.

Got you.

And then lastly, as far as the increase to your acquisition guidance, it looks like you're primarily going to fund those from increased dispositions. Given the rise in your stock prices, can you just share your thoughts on funding the increase through just dispositions versus perhaps continuing to tap your ATM program?

We'll, I guess, we'll continue to look at both and try and do what we think is the right thing for our shareholders. We're certainly aware of the increase in that stock price. We did issue stock to help acquire the Macklowe portfolio. But if we still do have a 1.5 billion if not more of assets that we'd probably like to sell, and if we can sell those at attractive prices, we think that would be the best way to fund our acquisition pipeline going forward.

I think if we were to get ourselves into a net acquisition mode, then we'd have to look seriously at the ATM; but I think that a lot of those great opportunities are behind us. We were a net-net buyer over the past four to five months. I think we'll probably look--that we're more in just a trading mode going forward.

Good, thank you.

You bet.

Our next question comes from the line of Michelle Ko.

Hi, good morning.

Good morning, Michelle.

I was just wondering if you could talk a little bit more about the acquisitions, where you're seeing the best opportunities, and which markets you'd like to increase or decrease?

Well, from an acquisition side, we're not seeing a lot of opportunity today. We did, as I said in the fourth quarter, saw some opportunities come at a time when we became far more confident in the capital markets and our ability to fund ourselves going forward. So we were able to take a lot of the cash that we recorded and jump on those opportunities. And I think the Macklowe acquisition, the deals we've done in Washington, D.C. have just absolutely been tremendous deals.

And when you think about what's happened to cap rate compression since those deals have been acquired, as well as what's happening at the top line since those deals have been acquired, we've done exceptionally well on those. I wish we had a pipeline of similar opportunities, Michelle, but with the few deals that are out there and the amount of capital that's there, those few deals that are being offered are being priced very competitively. In fact, we're looking at a deal now, and I won't say the market, but we think it's probably being offered close to replacement cost today. Recently built deal, stabilized we can sort of buy at a development cost without any of the construction risks.

But our focus continues to be on the Boston, New York, Washington, Southern California, Seattle, San Francisco markets. That's where the keen focus has been, and again, as I said, I wish I could tell you we had a lot more opportunities, but we're not for lack of trying, our guys are out there talking to everybody, underwriting a lot of stuff, but there are few deals and a lot of people looking to buy them. And we're not terribly interested in being the winning bidder of a deal that's been competed on by 100 other people.

Okay, great.

And just going back to your earlier comment about markets and you're seeing kind of a broad based recovery. Just to take that one step further, would you say for those markets that are maybe more supply constrained are you seeing more job growth pickup in those markets first? Or what is your sense of--are those supply constrained markets going to recover in terms of magnitude more so than maybe some of the other markets?

Yes. Michelle, it's Fred Tuomi again.

That's absolutely true. The supply constrained markets are leading the recovery. And we're seeing some very strong spikeups in the rent along with the occupancy. First, we got the occupancy started in Q4. It continued through Q1, and just recently we've seen the rates fall and pretty dramatically. Seattle is a good example of that. Seattle was one of the last ones into the recession, it fell hard, it fell deep. It's coming back extremely fast.

Our rents are up in Seattle almost 20% from the beginning of the year, and with that they did lose a lot of jobs; but we see jobs coming back. They may not be reported in the national statistics yet, but just anecdotally on the ground, we're hearing and we're seeing examples such as technology jobs coming back. In Seattle, Microsoft is certainly stable and is adding to their new hiring and their interns. Amazon is bringing a lot of new people in, the biosector is hiring. Boeing is stable and probably will start ramping up.

In San Francisco, we're seeing on the leading edge the return of temporary tech workers. And that's a leading indicator that the tech sector is recovering and is going to continue to hire as they invent new ways to deploy the technology, both on the software and the hardware side. And the same thing in New York, on the ground we're seeing new people coming in with fresh new jobs, new paychecks, they may not be as high as the other folks a few years ago; but we're seeing new people in terms of consultants, accountants, attorneys, professional services coming in to New York, coming in to Virginia.

So we're seeing lots of little examples out there of leading indicators of job growth in those supply constrained markets because that's where the job centers are, that's were these people want to live; and we're very excited about this trend.

Great. And just last question.

Given the improvement that you're seeing in fundamentals at this point, what do you think is the biggest risk now?

Well, I guess our biggest concern for a long time has been a double dip and it looks like that's behind us. We're delighted that we're seeing the improvement in our business that we are without a lot of job growth. And so we will not get the kind of inflection that we're hoping that we'll get along with that job growth. We're certainly concerned about interest rates and interest expense going up; And Mark has done a great job of hedging some of the exposure for us going forward, but we are certainly aware of the impact that could have on our balance sheet going forward.

Great. Thanks so much.

You're very welcome, Michelle.

Your next question comes from the line of Dustin Pizzo.

Hey, good morning guys.

David, not to beat the acquisition question to death. But given your statement that you're not as big a buyer at this level and your answer to Eric's question earlier that you may be a net seller in near term, should we just infer from that that the current cap rate levels, or that you view the current cap rate levels in the private market as being somewhat unsustainable and more a function of that supply of capital simply outbasing the level of assets that are out there?

Well, that's an interesting question.

We've asked that ourselves. Is the change that we've seen in cap rates--would that have happened if there was a normal level of supply being offered in the marketplace? But I tell you, I think that that's been--it's been a function of the amount of capital versus the little supply as well as just the expectations of the improving fundamentals that we're seeing. So I'm not sure that it's solely because there's been so much capital and little supply, Dustin, I think it's also just a recognition that we are at the beginning of some serious improvement in operating fundamentals.

What type of IRRs are you underwriting to on potential deals?

All the acquisitions we've done over the past five months, we are underwriting in the low double digit IRRs. And I said quite strongly on our prior calls that I saw no reason why we couldn't significantly outperform those. With pricing where it is today, with initial yields having gone down 75 basis points, maybe even 100 basis points in some of these markets, I hope we can underwrite to a nine handle IRR, but it might even be south of that.

Okay.

And I believe Ross has a follow-up as well.

Yes, I do. Good morning.

I'm just thinking through. You were able to achieve occupancy increases. You pushed new rents up 4.5%. Your renewals are up 2%, and you did all that with no job growth in the economy. What's to stop you 12 months from now from having 5% growth on renewals, and 10% growth on new rents, and occupancy up another 100 basis points? If we get 300,000 jobs a month.

Hopefully, nothing.

I say it half jokingly.

I tell you. Fred just said we're doing 20% in Seattle. But you're seeing some retail sales up, you're seeing fine dining is up without any of the job growth. So I think people that have been hoarding their cash, sitting on their savings worried about going outdoors are finally realizing that the sun is starting to come out and it's maybe start time to live again.

And again, with occupancy as tight as it is in many of these markets and very little new supply, we're being able to push this through. I think there's very little out there that is going to keep us from really being able to push rents going forward, particularly when we get some of this job growth happening again. It's going to be a long lag before any new supply comes on line. We have 36 months before anybody can start delivering any meaningful supply.

In New York, maybe we got a little bit of supply coming on now. Longer term, across the portfolio, we think that the fundamentals are looking absolutely tremendous.

I go back and look at early 2006 when the economy was doing quite well, you guys put up 6% rental rate increases back in earl '06. I think that was the peak of the last cycle in terms of your growth. Do you think you're going to beat that at some point during--?

I don't know. I'm not going to forecast that. There were markets in which we had double digit year-over-year rental growth for two, three years in a row. I tell you, if there's one thing out there, maybe this goes back to Michelle's question and Fred already alluded to it. We just don't know how much money these new jobs are going to be paying.

And we were able in a place like New York to get double digit revenue growth for multiple years in a row because incomes were high and really growing. Not quite sure what's going to happen to income and maybe what kind of impact that could have on some of our increases. But I'll just tell you that I think people are going to be cognizant in acceptance of the fact that they may have to pay more of their income for rent going forward.

Do you worry at all that in an environment where you're jacking rents, that that's a signal that there's more inflation out there in the economy than perhaps we're all seeing today?

How much of CPI is rent? It's a big number. It's 30 or so percent. If you ex that, then you have to look at CPI impact, and what you might be able to get from the efficiencies and economies, and what have you. But I think that putting all that aside, I just think that we've got fiscal issues in the country that are going to have an impact on inflation at some point in time and it could be in the very near future.

I'll end with this.

So is it safe to say you don't think the 10-year treasury is going to be a 3.7% in an environment where you're pushing rent?

I think that's probably a safe assumption and our hedging strategy would support that notion.

Thank you.

You're welcome.

Your next question comes from the line of Shane Buckner.

Yes. I'm staying along the same trend of the questions so far in terms of underwriting criteria and cap rates. Looking at the past 10 years, you've had a few years of mid-single digit NOI growth and a few years of--a couple years of down NOI. And you're talking about low double digit IRRs. I'm assuming those are un-levered.

Yes.

And you're buying properties at 5.6% cap rate. Is it safe to say you're assuming 4.5% growth rate in NOI from those properties? Is that how you're looking at it from an underwriting standpoint? And have you gotten more conservative given the downturn in terms of your underwriting criteria and long term growth expectations?

No. I think that we probably got more aggressive on our underwriting expectations given the low starting point and the improvement in fundamentals that we began to see as early as the fourth quarter. So while we might have underwritten some of these acquisitions, a decline in revenues in the first year, meaning 2010, we underwrote probably in every single acquisition a five or up six year at least one year. And then we would have stabilized. We would have stabilized maybe at a 3%, 3.5% maybe year five going forward.

I'm happy to tell you that the Macklowe portfolio that we acquired in New York, our current street rents there today are about 4% higher than what we had underwritten back December, January. So I tried to stress in the discussions we've had about those acquisitions, that I had every expectation that we should outperform, just given the way that we had looked as those in the early years and the improvement that we thought we were seeing right around the corner.

Okay. And following up on the last question about interest rates. What is your view about its impact on cap rates? Or do you think the supply of capital out there will keep cap rates constant even if rates rise?

Clearly, we're a yield generating, cash generating asset and interest rates will impact a yield requirement. But increasing interest rates and inflation are good for real estate and increasing interest rates will impact single family home mortgages, which is not a bad thing for us. There is very little--there's very few sticks and bricks available for the amount of capital that's out there today, and there's no more being built. And so while cap rates or yield requirements might have to go up, I don't think that they'll go up at the same rate as they might have in the past with an increase in interest rates.

I guess I would just add, if interest rates go up for what I'll call a good reason, because of growth in the economy. That means our rents are going up hopefully a lot more, given the supply constraints and the demographic advantage we have at this point. So for us, that would be just fine. If interest rates are going up because there's inflation in the economy, I'm not sure there's a single business in the country that would be pleased to hear that. We're obviously thinking about it as the first, not the latter.

Thank you.

Your next question comes from the line of Jay Habermann.

Good morning, everyone.

Good morning, Jay.

David, a lot of focus on acquisitions. Can you talk about development a little bit? I know with cap rates obviously moving lower and the capital that's on the sidelines, and you've talked in the past about the eco-boom generation, and the positive impact there, and can you expand a bit on perhaps your willingness to allocate additional capital to development and the types of returns you think you'd need?

Sure. I guess I've said a lot lately that with the improvement in fundamentals and with the compression in cap rates on existing assets, that development could make sense more quickly than what a lot of people thought. And again, we're doing our deal in Manhattan, and we just bought that parcel in Virginia.

We continue to look at buying existing streams of cash flow and comparing those yields and IRRs to create building or creating new streams of cash flow and making--needing to make sure that those make sense. If initial yields continue to go down and IRRs are in the eight range, it could make development make more sense sooner. And again, it's a core competency of ours. We have got a terrific team across the country. And if it makes more sense on a risk adjusted basis to pursue development, we won't be afraid to do that.

I think that we've demonstrated with the properties that we've delivered recently and those that we'll soon deliver, that it's a core competency that we have the ability to deliver terrific assets. Assets today that I'll tell you that a year ago we would probably deliver at a value that was less than cost. But today, given where yields are and leasing, we're probably going to deliver these today at cost, which is a terrific turnaround for that portfolio. Again, we're going to look at what we have to pay for just in terms of income versus the billed streams of income and we're not afraid to do either.

Okay.

And then just switching to the D.C. acquisition. To get to your 8% stabilized yield, what rent growth assumption are you assuming for the next two years?

None. That's a current rent expectation.

That's just a current rent?

Yes. If we lease that up at current rents today, we're just a little under 8%. And if you trend those at all, we're over 8%.

Are you seeing more willingness on the part of the banks to move product like that? Are you seeing more of those discussions take place?

We aren't seeing a lot more. We're involved in a lot of discussions, Jay, with a lot of banks, and we keep up with a lot of other financial institutions that have troubled books. But really, with LIBOR as low as it is and their cost to fund so low and the banks really not wanting to raise capital against some of the losses they would then have to realize, there just has not been a lot of product that's really been offered frankly.

We speculate, we wonder internally whether an increase in LIBOR might force the banks to get rid of some of these assets they have on their balance sheet. It makes it harder for them to carry those assets. Makes it harder for them to pretend that the asset is carrying. Because they restrike these loans at LIBOR plus 300, which is great when LIBOR is 25 basis points. It would be a lot harder when LIBOR is 2%.

We're vigilant, we're out there, we're talking to every bank as much as we can; but the truth is not much has happened of late.

Okay, and just last question for me.

In terms of rising interest rates, you do have a billion plus maturing next year. You mentioned the scarcity value for your unsecured notes. Would you consider issuing sooner than later? Giving that you can issue today at about 5.5%.

So we think about a couple of things when we consider whether to issue now or later. First is the existence of our hedges. We have about $900 million of hedges that exist right now that hedge some of that risk. Some of that risk is 2011 risk, some is '12, some is '13. So not all of it applies to the debt that we need to refinance. Some of our debt next year must be secured debt because of the structure in which it is. So 300 of that has to be secured debt. So that won't be financed unsecured.

As a final sort of factor. If we refinance the debt now and carry it so it just sits on our balance sheet as cash, there's certainly a great amount of dilution. And we calculate that to mean that we would be paying 30 to 40 basis points more for the money. So effectively right now, EQR can borrow at 540, have that cash sit there to the middle of 2011, and the real cost to us is about 570. So I can wait until rates move to 570 and I'm ambivalent in terms of the cost to our shareholders. We just balance those two out, Jay, because we just don't have a use for the money on the debt side right now.

Thank you.

You're very welcome, Jay.

Your next question comes from the line of Rich Anderson.

Good morning, everyone.

Good morning, Rich.

I'm just trying to--again on the topic of acquisitions and specifically, the Manhattan deal. I hear you on the discount to replacement cost and the IRRs and all those are kind of long term value creation numbers that no one can really argue too much with them. But in the near term, how accretive are those, if at all, are those acquisitions to your bottom line? And before you answer, I would think funded conventionally with 50/50 debt and equity would probably break even at best. But if these are 1031 proceeds that were sitting in some escrow, you took the dilution in '09 and then you get the full amount of the five, six cap rate in 2010. Am I thinking about that right?

I think you're right. We sold--we were selling deals in 2009 late '09 with a seven handle and we bought this deal, the Macklowe transaction to 5.5. But that's on an FFO basis, and I forget who it was that asked about AFFO, it was Michael I think. The real dilution is less net but it is dilutive. And it can be dilutive for longer than just one year. But we think that that gap will rapidly close, and certainly from a total return basis, we will do significantly better with the assets that we've been buying versus those that we've been selling.

But it is fortuitous, right, that the sale happened last year and the accretion kind of happened this year in terms of your annual FFO estimates?

Timing matters a lot, Rich, as you're suggesting. Our dispositions are back end loaded, our acquisitions are front end loaded.

Okay. I'm just making sure.

Because of that, our line is going to carry some of these deals for a quarter or two as we go ahead and sell some assets.

If you track some of these acquisitions solely to the most recent use of the cash that was used to fund them, they've been very accretive because the cash, as Mark noted, was sitting on our balance sheet earning 60 basis points; and at some point, 20 basis points. If you track that cash all the way back to its prior source, which was a deal earning 7.5%. Then it is dilutive.

A lot of that dilution came in '09 when we sold seven handled cap rates and invested the money in cash at less than one; and now we took it off the balance sheet at one and invested at 5.5, it does have the immediate impact of that accretion. We also track it all the way back to its original source.

A final point on the $0.02 you see that we guided you to in terms of increase in NOI in the second quarter for lease ups and acquisitions. The acquisition number, just to be clear, that's our 600 and some million dollars of acquisitions that occurred in the first quarter. The 425 Mass Avenue deal, which really does not produce any income, in fact, it's dilutive in the second quarter, offset by all that disposition income already. So we've already sold $150 million of assets. It's the difference between those two numbers, Rich, that we guide you to in terms of acquisition accretion.

Okay.

On the net effective new lease statistics that are looking better and better every day, how much of that kind of reduction in that spread to now negative 1% from negative 10% has been a function of burning off some of the exposure from your pure leasing activity? And how much has been from market rents actually going up?

It's a combination. This is Fred Tuomi.

It's a combination of a couple factors. One is it's a significantly lower turnover. One thing we're seeing in the marketplace is people are not moving, they're not transferring within our communities to lower priced units, they're not taking on roommates, they're pretty much staying put and they're renewing they're leases; and on those renewals, that higher retention rates, we're getting higher increases. So you're seeing the renewal increases up 2.6 in April that we just finished, and May and June are looking like they're going to be 3, maybe 3.5. So we're getting good lift from the renewal base.

Traffic overall has increased over last year, so the demand is there. But we're actually leasing fewer apartments so our occupancy gain is really a function of increased retention or lower turnover primarily. That gives us the opportunity then to start pushing the new lease rates. So our net effective new lease rates, as David mentioned, are up year-over-year, we crossed the line early March. And they're up significantly year to date from January to now. And that trend is actually accelerating as we speak.

It's a combination of the rotation of the rent roll. People are staying put at a higher proportion, they're paying higher rents, and those coming in paying closer to the rents of those that do move out. Put all that together and it's building a good, firm, steady, consistent growth in our rent rolls.

I'll get transcript for that.

You asked.

And finally, for all this good stuff going on, is Florida still the thorn in your side?

Florida has been interesting. It's been in dislocation for quite some time. It's one of the first ones to enter trouble. We're happy to see south Florida is quickly coming back. It's one of our leading recovery markets right now. Occupancy firmed up, and now we're seeing some good strong rate growth in south Florida.

Rates are up. The net effective new lease rates are up 6%, a little bit more than 6% year-over-year from this time last year. And since the beginning of the year, up almost 5%. So we're seeing a good stable occupancy and a good rapid current lease rates and renewal rates in south Florida. I think the single family is clearing right there, the job losses have stabilized. They have infrastructure projects going on that might give us a little bit of job growth. Long term, I'm still worried about south Florida because population and household formation data is still slightly negative.

Going up the state, northern Florida is a little bit behind that. Orlando is getting a little more--having a little more problem getting liftoff in Orlando. It's starting but it's starting very recently. We had okay occupancy, but rates--it's been tougher in Orlando to push the rates. There they have a significant single family overhang and very cheap single family, a lot of people are still buying homes. A lot of investors are buying homes and putting them in the rental market.

Orlando's going to take a little bit longer to clear the single family issue, but I'm optimistic on Orlando because their economy is really well positioned. They've got well diversified, it's not just tourism anymore. UCF is now the third largest university in the country. They've got Lockheed getting a lot of good contracts. They've got a biomedical facility, a new medical school, tourism has stabled, Disney has now stabilized in terms of employment and growing hours. So lots of good things on the horizon for Orlando.

Great, thank you.

You're welcome, Rich.

And your next question comes from the line of Alexander Goldfarb.

Good morning.

Good morning.

I just wanted to follow-up on Jay's question for you, Mark. I hear you on the hedges that you put in place and sort of limited use of proceeds this year. Why issue if you don't have to? But I'm just curious, is there sort of a tenure or a credit spread where if it suddenly hit that level sooner than that, like this year, you'd go early and take the dilution just to lock in some money?

Yes. You've seen us of late do that. We have not been hesitant about prefunding where we thought that was a good idea. There isn't a magic number that we have in mind. There isn't some level with an all in rate something on a 10 year basis we would hit it. It's more of just looking at our funding sources and uses, the feel we have on the investment side. If there are any other issues in the capital markets we see coming. I would tell you there isn't a magic formula. But we do talk about it internally on a constant basis.

Okay.

So it's pretty safe to assume that in your guidance there's no sort of cushion in there for any prefunding in this year?

No debt issuance is assumed at all in our 2010 guidance. Okay.

And then switching to the development side. Are you seeing any of the merchant guys sort of get the band back together as far as like the JPIs, Lincolns, Hanovers? Are you seeing any of those guys suddenly being able to access capital and put deals back together?

There has been some chatter about a little bit of that happening. There was some talk at ULI about some institutional capital being made available to some of the people who had been some of the larger builders. How much of that will take place, I don't know. How that's going to be debt financed, I don't know. But there had been some conversation about some of those guys having some access to at least some equity capital.

Okay, but it sounds like nothing is imminent this year, but something to watch next year?

I guess if you're asking me are they going to get back to that 12,000, 15,000, 18,000 a year run rate, I think we're a long way from that happening.

Okay. That's good.

And last question is--it's just sort of a footnote question on page 18. You guys are buying back a JV interest or buying out a JV partner. It's small but just curious if this was like a deal where the other side could no longer fund or a little perspective on that?

This was just the end of a 10 year run. And we had a mechanism to do a buy, sell if we chose to go down that route. And we had a view that valuations were improving and we had the ability to buy this at what we thought--at least buy out their interest at an attractive implied yield. And we'll hold some and sell some, but we thought we had an in to buy these at pretty attractive prices, or at least buy their interest out at some pretty attractive prices.

Okay. Appreciate it, thanks.

You bet.

Your next question comes from the line of David Bragg.

Thank you. Just a few occupancy questions.

So you're at 95.3% today, and I think your guidance level for the full year is 100 basis points below that. Could you talk about what you plan to do from here? What's your strategy? Where would your like to be occupancy-wise for the full year? Would you like to run ahead of where you originally planned or will this enable you to get more aggressive on rates and we could see occupancy come back down.

This is David Santee.

I would say that our targets--we don't necessarily focus on occupancy. Obviously, it's important, but our kind of daily number is our level of exposure. And that's really--that's what gives us the confidence to determine what levels of renewal increases or aggressiveness that we do. And exposure is really just our left to lease, how many unrented apartments we have.

So while we're at 95.3 today, we would be comfortable running in the high 94s as long as we're seeing aggressive rate growth. And I believe that's what we're seeing today. Every day I'm upstairs with the pricing team going push it, push it, push it. And we just don't--LRO optimizes rate and occupancy together. So we're not focused on occupancy.

And then just thinking about occupancy levels historically back in, I believe, 2003 when the national market seemed to bottom at around 93%. Your portfolio was right there with the national level, whereas today at least according to one third party provider, the national level is 92% and you're obviously well above that. So given that--first, maybe the question is could you just looking back over the past year or so, how have you held up as it compares to the rest of the country? And then second, what are the implications for lower occupancy levels nationwide on your ability to push rents from here?

I look at the dynamics going back to 2003 versus today and I think what's going on is completely different. Back in 2003, you had many markets that, as Mark had mentioned earlier, that had tremendous oversupply. Places like Atlanta had 12,000, 14,000 units coming out of the recession, and that was pretty consistent in many of the markets. Additionally, you had the beginnings of the housing bubble. People started to buy single family homes. So we had those two headwinds at that time. Today it's different.

Our turnover is significantly lower today. Our net turnover, when you exclude transfers within same properties on an annualized run rate of 42%. That is phenomenal. And then as Mark said earlier, there's just no supply. So I think the dynamics are completely different, I think the prospects, just a little bit of job growth, and I think everyone will benefit from increased occupancy.

And we do have a significantly different portfolio today, Dave, than we had back in 2003.

Just thinking about a couple of specific markets, Orlando is one that you've mentioned on this call that you seem a little less optimistic about near term. Just so happens that that market level occupancy rate is below 89%. Can you just compare that market to two others where occupancy levels are low at the market level and those are Phoenix and Atlanta?

Phoenix, Atlanta, Orlando, pretty much similar dynamics. Phoenix, actually, it's been dragging along the bottom for quite some time. Significant job losses and lots of supply coming in right at the same time, it really got hammered. But right now, today, believe it or not, Phoenix, we're sitting at 95% occupied, and it's up almost 200 basis points from this time last year.

So we had a decent winter season in Phoenix. And we're headed into the typically slower summer season at a very high occupancy, a pretty low left to lease; and we're actually getting little signs of rent growth in Phoenix. I think Phoenix after a long time kind of in the ditch, we're seeing--we could have some good things to report here the balance of the year in Phoenix. Now, given that, it's still got a ways to go on job growth and the single family is really still pretty much a mess.

Atlanta, throughout this thing we've significantly outperformed the market in occupancy and in rent growth if you look back. Atlanta, we're sitting at 95.8 right now. Exposure a little bit higher at 9%. We had some good occupancy firming up, so we pushed rates in Atlanta. We actually got a little bit of lift during the middle of first quarter, but then it kind of flattened out and we had to take it a little bit back down. So, Atlanta is getting better, but it's not on a sustainable trajectory right now. It may actually take a little bit longer.

Again, these are the supply shock markets, not the supply constrained markets. The supply constrained markets, we're seeing the good fundamental uplift and then accelerated momentum from where we sit today.

Rates are up 20% in Seattle year to date. Could you just talk a little bit about that market?

Yes.

Going back to Orlando, you have to be careful of these overall statistics: Nationwide at 92, Orlando at 89. They must be putting everything and the kitchen sink in there, including mobile homes. If you look at just institutional quality, investment grade assets, the markets are doing much better than some of these statistics would imply.

Let's see. Seattle--we got to explain a little bit what's going on in Seattle and it's all good. First of all, our number of down 7.1 for the quarter in revenue, that's parsed out a little bit. We own significant portfolio in Tacoma, Washington. It's far south, it's a military town. We own 2,000 of our 8,400 units are in Tacoma. And we include the Tacoma results in with our Seattle reports.

Tacoma is going through a major downturn right now. A lot of the military rotated out of Ft. Lewis and Macord. Last summer, we lost maybe some reports 15,000, 20,000 soldiers were rotated out and none came in. We had some very large assets there on the market rate side that were in the 70s in occupancy. So Tacoma revenue is down almost 15% for the quarter, included in the seven.

If you take that out and just look at the core of Seattle, which was CBD, East Side, Sonomish and other north and a few in the south, our results were negative 5.5% for the quarter, so a little different story there. Central business district is on fire right now. Downtown Seattle, where we own 2,186 units, is showing a dramatic, really unbelievable recovery. Rents are up 20% since the beginning of the year, renewals are up 5%, occupancy is very high, demand has really surprised us how strong it is. And given that, we've got a couple things coming that's going to make the situation even better for us, there's a property that was only nine years old that has to be demolished, 272 units of very nice luxury assets coming out of the market.

And then the Russell relocation from Tacoma to downtown Seattle in the old WaMu building is just getting started this summer. So we see nothing to hold us back in the CBD of Seattle, which will be fantastic. East side is doing well, but a little more--actually a lot more supply pressure in Bellevue and Redmond, so that one's holding back a little bit, but still we're seeing on the east side some good occupancy and rents are just--after being flat for two quarters are just beginning to move up.

If you take out Tacoma and just think about the broader Seattle portfolio, how does that compare the the plus 20 and the plus 5 you gave for downtown?

It's not all going to be plus 20. Right now for--running in the current month on a year-over-year basis, meaning looking at where we think May's income will come in versus last May. Downtown is down about 2%, east side down about 8%, and the other markets down about 5%. But Tacoma is down 11%, so that can give you an idea for the relative performance there.

Thank you.

You're welcome.

You're next question comes from the line of William (inaudible).

Okay. Thank you, guys.

Great to see the turn in fundamentals here. I just wanted to make sure that we have our shorter term expectations in a more reasonable manner here. In the first quarter, one thing that I read about and I heard a lot about, was there was a lot of perspective renters that were out there hitting the streets looking at apartments, because they had the feeling that all the best deals were drying up. So that increased traffic. Is there any chance or possibility that that might make the second quarter a little bit more muted? And of course, that's a period where you have a lot more leases coming up for expiration.

Bill, this is David Santee.

You're definitely right. When you start looking at some of our areas of demand. As an example, our internet sources were up 30% over last year for the quarter. Our initial contact via phone was up 55%. When you start looking at numbers that translated into an increase in foot traffic, people that actually walked through door as a result of sending an e-mail or making a phone call, that was up 9%. But I think, as you said, a lot of these folks were shopping.

I don't think we stole from future quarters because our net applications were down 7%. And that kind of plays through the move-in number too. The number of move-ins that we had for Q1 of 2010 were really identical to the move-ins that we had for Q1 in 2009. So what's driving the occupancy, as Fred said earlier, is really the initiative in keeping the residents living with us. So I think people were just preparing for the spring leasing season, and recalibrating what they're going to have to pay.

Bill, this is Fred Tuomi.

We were talking about this phenomenon recently. And we feel also what's happening out there is just a rotation of our renters. In the downturn, we had the rotation against us. People were moving out, they were going home to their parents. They were doubling up or tripling up households. They were going to more cheaper living accommodations. We had people through moveouts and transfers, we could see a reduction.

Now, I think we're beginning to see the unwinding of that. And this anecdotally, comments we got from people in our field, people are starting to uncouple these roommates. We're selling a lot of studios right now in New York like David Santee had mentioned. That's an indication that people feel confident that they're willing to take on a living space by their own--on their own.

And maybe they're just getting sick and tired of those roommates after six months. And the people living at home with their parents, probably the parents are sick and tired of them. I think people are a little more confidence in the economy. Those that have jobs are feeling more secure. Those perhaps without jobs are a little more optimistic, and now we're seeing a little bit more rotation or movement within our sector.

Okay.

You mentioned Manhattan right there. The Real Estate Group of New York came out with some figures just yesterday and actually showed that depending on what type of unit you were looking at, doorman, non-doorman, rents from January were up 1.5% to 4%. Your comments are well taken.

One last question. On the acquisitions, how would you compare the quality of the acquisitions you made in the first quarter to that of the overall portfolio?

It's at the high end. It would be very equivalent to the highest quality properties that are currently in our portfolio, Bill.

Okay.

And I think I heard you say that if you had to buy those properties today, the cap rate could be down 25 basis points?

I don't think there's any question that as a result of better underwriting. As I told you, our Macklowe deals that are asking rents today are consistent with what you said you heard in Manhattan, 4% higher market rents today than what we underwrote. As well as cap rates come in 25, 50 basis points plus. It would have been significantly more expensive to acquire those assets today, and my guess is you could say that about every asset that we bought.

Thank you, gentlemen.

You're welcome, Bill.

Your next question comes from the like of Michael Salinsky.

Good morning, guys.

Hi, Mike.

Going back to development real fast here. Given your comments about not seeing a lot of acquisition opportunities right now, what spread do you need to see on development to warrant getting more bullish on development versus buy right now?

It depends on a market by market sort of analysis. The deal we did in Manhattan with the deal in Chelsea and a place like that would probably be much narrower than if you were trying to do something in what would be considered a non-supply constrained market.

So it depends on each individual situation. And frankly, it also depends on whether or not there really truly are acquisition opportunities. Sometimes we've gone forward with development deals when there have been absolutely no acquisition opportunities available in those marketplaces. So there really was nothing to compare that development deal to at that particular time. But clearly, you need to make sure that you're getting some premium when you're billing stream of income as opposed to being able to buy an existing stabilized stream of income. Whether or not that's 100 or 105 or 150, I'm not so sure it will be dictated by each individual situation.

On the Chelsea and Arlington ones, which I think you mentioned north of the seven, where's the rest of the pipeline stand today if you put the shovel in the ground today?

If I were to put the shovel in the ground today, we'd be building those at less cost than what we actually did build them at. I'll answer the question a little differently by telling you that what kind of yields we think we'll now achieve on those deals at the actual cost that we incurred; again, which would be a premium to current replacement costs. And those are probably low five handles, but those are markets where cap rates are low fives if not fours. Which is why I say I think we're back to a point where values are close to cost.

Switching over to dispositions there. This past quarter you revised your disclosures down from the top 20 markets you disclosed before, down to 15. Have you--in the previous year you talked about trimming market exposure. Is it those 15 markets? Or are you still comfortable in 20? Or have you actually revised that down to 15? And the five that were cut off is where you're going to be focusing your disposition efforts going forward?

I think that's a pretty fair characterization. It's only 7.5% of our NOI that sits in those other markets. When we look at the, really incredible transformation of the Company over the last few years, the concentration of our efforts, the concentration, frankly, of your question, of our investors' concerns are all in those markets listed from 15 up. That's really where we focused it. It's not necessarily true that every single asset in that 71 property list that is in the all other category is a disposition target. But many of them are.

Finally just from an operational standpoint, you talked about seeing very good rent growth and seeing market trends improving. Just curious as to where the mark to marketer gain or loss to lease in the portfolio is right now versus where you're seeing the market moving. How is your portfolio performing relative to the market? And do you see the market also moving the same direction as you guys have been able to move?

Well, I'm not sure I understand the question. The last part of that. But just in terms of gain to lease or loss to lease, that's not anything that we've calculated, Michael. Clearly, we have some markets where rents are still rolling down to lower numbers. But we've got more and more markets every single day in which expiring leases are now going to be rewritten at higher numbers. But just in terms of taking the entire portfolio and looking at it in that manner, we've not bothered to do that.

Maybe a better way to say it would be if you're looking at your comp set for each of the individual markets, essentially, are you seeing outperforming by a significant amount or is this what you're seeing across the board in these markets?

I guess people will be reporting over the next week or so and I think you'll have the opportunity to compare our results versus at least those, other public company that is do report. I think that certainly with respect to the larger sort of survey data that you see as mentioned earlier, we're outperforming them from an occupancy standpoint. From a rental growth standpoint as well.

Thank you.

You're welcome.

Your next question comes from the line of (inaudible).

Close enough, thanks. Hey, guys.

Given the activity in the marketplace in the acquisition and disposition side and in markets across the country, can you talk about the demand for assets? Are institutional buyers concentrated on the coast or are you seeing them migrate more to the interior secondary markets given the more pronounced cap rate compression that's taken place in the coast?

Well, I think you will have been seeing--essentially what happened is that as we got in towards the end of 2009 and early 2010 you saw cap rate compression in the more higher, barrier, more institutional quality markets, and did not see much of a change in the secondary or tertiary markets. And that's one reason we slowed down our disposition process, because we thought that delta had widened out. And essentially what happens I think is that as that capital sees how competitive pricing is in the better quality assets and those better quality markets, it seeks a more appropriate yield elsewhere. And so we're starting to now see those cap rates come in a little bit and the lower quality or secondary tertiary markets. And you're starting to now see more imbalance between the spreads on the cap rates between those two markets places.

The answer to the question is yes, you are seeing that capital go elsewhere. It just finds its required yield, and has to go down quality to do so, it will.

Can you talk about the difference in growth rates that perspective buyers are underwriting on the coast versus the non-coastal markets?

Well, I'm not quite sure exactly what people are underwriting on the non-coastal markets, because we're not underwriting ourselves. But I will tell you that what we've seen across our portfolio, as Fred said earlier, is pretty consistent across all the portfolio, and I would expect that even in those non-core markets, what we consider our secondary markets, you're seeing a fundamental improvements there. I would not expect those to be quite the same because I think that they don't have the barriers to supply, and I'm not sure they're having some of the job growth at the price point of jobs that we might see in some of our markets; but I certainly believe you'd be seeing some improvement in fundamentals in those other markets as well.

Thanks for that. One more bigger picture question here.

Given the sizable delta between the low cost to capital available today for a quality apartment and the strong prospective IRRs, are you surprised we're not seeing more talk of some of the private portfolios perhaps coming over to the public side?

I mean, we have heard that there are conversations of those sort going on with all sorts of private folks who look at their portfolios. Sometimes it's an exit from being overleverred, frankly, which is a lot of what occurred back in '93. In some cases, I think these folks are going to realize the amount of G&A involved in that exercise, and the amount of effort involved in that exercise and those companies may become available to us in others. But there is more buzz about that, thought not a lot of posted activity yet.

All right. Thank you, guys.

You're very welcome.

And your next question comes from the line of (inaudible).

Close enough.

She's trying.

So David, very quick question. I'm surprised about the low (inaudible) home buyers. You mentioned 65 moveouts--

No. Only 65 more in the first quarter of 2010 versus the moveouts in the first quarter of 2009. Okay.

So I was just wondering if the tax credit had to be signed by tomorrow. And transactions have to be completed by end of June. So I was just wondering if you anticipate any pickup in that rate in the second quarter of this year? Are you seeing any trends like that?

This is David Santee.

Many of our markets are 60 day notice markets. So we can look out 60, 90 days from now and look at the reasons why people have given notice, even though they haven't moved out. And we really just don't see any significant material change in any of these numbers. No matter which way you look at it.

Okay. That's helpful.

And very quickly on the turnover, the improvement in turnover. How much of that is attributable to the bad weather in the early part of this year versus the retention program?

This is Fred Tuomi.

Looking at the turnover on a quarter versus quarter basis, so same seasonal period, first quarter of this year versus the same period last year. So you don't have to worry about the seasonal differences of our cycle. We were at 13.5 last year and we're at 11.8 this year, so it's an improvement of 170 basis points, as Mark had mentioned earlier. So it's a season to season, quarter-over-quarter improvement in resident retention.

And what causes it? We're working on resident retention on a number of fronts. We can't really say one specific thing improves. But you put all that together, and we're seeing the behavior of the consumers. We've put a lot of emphasis on our customer service, customer loyalty over the last two years. We have programs to improve our customer loyalty. We have ways of measuring it in real time from our customer surveys and we have a lot of recognition programs through our Company based on that.

We've seen significant steady climbs in our customer loyalty scores. In fact, March we just hit an all time high. We also note through our research that those that say that they're very loyal to us, they refer people, they pay higher rents on the margin and they stay with us significantly longer. So we know that's a contributing factor.

Also what's going on with the economy right now. People are staying put, they're not moving. And we're seeing our renewal retention rates go up and with that, we're able to increase our--increase rates on our rents.

That's very helpful. Thank you.

You're very welcome.

Your next question comes from the line of Michael Levy.

All my follow-up questions have been answered. Thank you very much.

Your next question is a follow-up from Eric Wolf.

It's Michael Bilerman.

David, I just want to come back to the supply question and we totally agree with you in terms of looking at the fly, not only multi-family, but across all the commercial real estate sectors being at 40 year lows. The unique thing within your sector and clearly you took advantage of it this past quarter is being able to purchase the broken condo deal and turn it to rental. And we're clearly seeing other multi-family units pursue a similar strategy. How much supply do you think comes into the multi-family space from those sorts of deals, which clearly are going to be at the higher end and more competitive space to what you own today? And probably in your core market?

A very good question, one that I'm not going to be able to answer with a great deal of accuracy. For several reasons. A lot of those condo deals that might be out there have had a lot of retail sales done in them. And there are just remaining units and some third parties may buy those inventory of units and turn them into some sort of rental operation. The ability to actually find a 100% vacant property that had been conceived as condo and converted in its totality into apartments, we've not seen a great deal of opportunity there.

We have seen some over the last few years. And obviously, we've just struck this once. There are other things in those condos that don't make sense for apartments, to be operating as apartments. Some of those condo deals are just--the individual apartment units are just too large. We'd like to operate one bedroom apartments that are 600 or so square feet and some condo properties have been conceived and built as 900 square foot one bedroom.

And where we'd like to operate two bedroom properties at 950 square feet, some of those condo deals can be 1,500 square feet. They don't work as apartments. The number of those that really do work as apartments, I can't tell you that. We've worked on--probably over the last year looked at maybe a half a dozen opportunities, and we just struck on this one.

And I'm not terribly optimistic that there'll be a lot of other such opportunities. But if we could find them that were totally vacant that had apartment sizes--or unit sizes that made sense for apartments, we'd be happy to do it again.

You don't see that as negatively impacting the growth trajectory that you're now on?

I beg your pardon?

You don't view the condo to rent as being a negative impact to the trajectory that you're on today? More of these deals occurring.

This is Fred Tuomi.

We track these buildings, initially going through conversions and then new construction. We track these buildings. Our investment officers in the field know where these assets are. In our key core markets, there's very few remaining that can come back and have a threat in terms of the rental market. One or two still in Virginia, there's some downtown San Diego, there's one in Bellevue that just announced. Just a handful of key assets, a couple of hundred units each.

And we do include those in our supply numbers that we track. And with those added in, the supply number for 2010 is almost half of what it was in 2009. And when you look at 2011, there's a significant off the cliff drop of all end supply from any source. So no, I don't think it's a--it could be a disruptive factor to us. Maybe one lease-up here and there, but certainly not on an overall basis.

And just going back to the occupancy of 95.3 relative to, again, the broad market at 92. When you look at your competitive set of your current portfolio today, where do you sort of see market occupancy for your portfolio today?

I think if you just look at our competitive set over the past year, our peers--our occupancy in many, many markets has been low. And that was part of our strategy last year.

If the broad apartment market, which includes everything, is at 92 and you're at 95.3, would you say your direct competitive set is 94? Is it right on top of you? Is it 95? Is it 93? I'm just trying to get a sense of--?

I would say that there's not a material difference between our direct competitive set. That is one of the things that we track on a weekly basis. It's inputting our competitor rents and understanding what their occupancy is, is part of our data collection process each and every week. The unique algorithms within LRO are such that once your exposure, your available units to lease, fall below a certain point, you break away from that competitive set. You're constantly pinging your competitive set but you're not competing for occupancy with your competitive set if that makes sense.

Okay, thank you.

You're very welcome.

Your next question comes from the line of Andrew (inaudible)

Do you have a concern that if the market continues to improve that Fannie, Freddie, and the major banks may start to aggressively release their REO inventory creating an unexpected headwind?

It's Mark Parrell.

Fannie and Freddie don't have effectively any substantial REO inventory, and certainly what they do have is not competitive with our product. What they do have is walkups and five, six, eight unit multi-family stuff. The multi-family business at Fannie and Freddie was run in a different manner and with tighter underwriting than single family, and there just isn't a big pile of things waiting to fall on top of us and our competition. I would say that the banks have a lot of loans outstanding that are in default or are close to being in default or have reworked in some way to be extended.

But again, as Fred said, most of those buildings are occupied or close to occupied already. The bank may want to change its situation, but it isn't like those units are going to suddenly be put on the market, they're already in the market. The question is the ownership of the building. So I guess I don't fear that at this point.

Any concerns on the single family front? Obviously, a little different situation.

I think that we are impacted I think ever so little really about single family product being made available for rent in certain markets. But again, we've not seen a big moveout, as I mentioned earlier, of people moving out of our apartments to buy single family homes nor to move out to rent single family homes. It doesn't mean that can't happen--that it won't happen. But I will say, even if it does, we think it's going to be in an economic climate and in a job climate in which there will be more than enough new prospects to back fill that vacancy.

Great, thanks.

(Operator Instructions)

Well, good, thanks.

We have no further questions, sir.

Okay, well, great.

For those of you who gutted it out today, thank you very much. And we appreciate your time and look forward to seeing many of you here in Chicago at the June meetings. Thanks very much.

Thank you for your participation in today's teleconference. You may disconnect at this time.