住宅地產 (EQR) 2010 Q2 法說會逐字稿

Good morning, at this time I would like to welcome everyone to the Equity Residential second quarter earnings conference call. (Operator Instructions) Thank you, Mr. McKenna you may begin your conference.

Good morning, and thank you for joining us to discuss Equity Residential's second quarter 2010 results. Our featured speakers today are David Neithercut, our President and CEO, Mike Parrell our Chief Financial Office and Fred Tuomi, our EVP of Property Management. David Santee our EVP of Property Operations is also here with us for the Q&A.

Certain matters discussed during this conference call 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, and good morning everyone. Thanks for joining us on our call. It was really great to see so many of you here in Chicago last month at the NAREIT conference, and it really gave us a great chance to introduce so many of you to our senior management team. And it was also a great opportunity to discuss with you all the dramatic improvement in fundamentals we have been seeing since January in our business. During those meetings we told you that our indicator suggested that we would continue to see steady occupancy and increasing rents during the summer months. And we're delighted to say that that did in fact happen and that the recovery in apartment fundamentals has continued right through our primary leasing season. Occupancy has held in the 95% range.

As we said on our first quarter call, entering NAREIT, the second quarter of this year would show the first sequential increase in same-store revenue, and it did coming in up 1.3%. We also said that the third quarter of this year would produce the first quarter-over-quarter increase in same store revenues in several years, and it will. With July having already delivered the first month over month increase up 0.4%. And we also said that the high end of our guidance given in February was no longer possible but was probable. And of course you noticed that we have increased our guidance. And we have also increased our same store revenue guidance now with -- from down only 0.5% to flat.

Now when you are down 2.1% in same store revenue as we were in the first six months, that means the back half of the year will have to be pretty strong. And it should be, based upon what we did in July and how August is setting up. As well as the current indicators we have for September.

Now earlier this year, Fred Tuomi talked about the key metrics that would determine revenue performance this year, and I'd like him to give you a little mid-year update on those metrics.

Thank you. As David mentioned, I'm going to provide a little more detail, a little more color on how 2010 is progressing and how our visibility into the key drivers of our revenue is shaping our guidance for the balance of this year. As we've discussed before, these key drivers are resident turnover, physical occupancy, our base rent pricing and by that I mean net effective new lease prices and then of course renewal pricing. And so I'd like to give you an update on each of those key drivers.

Starting with resident turnover. Looking back into 2009 we saw our fundamentals began to stabilize. And we noticed along with this a shift in resident behavior. People began to stay put. They just weren't moving. Our turnover levels continued to fall as more residents elected to continue to renew their leases versus moving out. And I'm happy to say that this trend has continued and is continuing. Through the end of the second quarter, our annualized turnover is 52.1%. This is 520 basis points below last year at this time and it's 700 basis points below the same quarter, meaning quarter two, for 2008. Dramatic shift in turnover.

Now we all know slower turnover is a good thing. But not only does it reduce our expenses, but it also provides a base for occupancy gains. And this in turn allows us to gain pricing power over new leases as well as renewal leases. However, looking into Q3, we do see a small increase in turnover in some markets, which is to be expected given the seasonal transaction volume we're faced with and the fact we're pushing rents very aggressively.

So next is physical occupancy. The occupancy gains we noticed starting back in Q4 of 2009 and continuing into early Q1 of this year, have held through Q2 as David mentioned. So growing occupancy, coupled with lower turnover and improving demand, we've now recovered our occupancy to normal and sustainable levels in virtually every market. The NorthEast markets in particular continue to see very strong demand and therefore have very tight occupancies. Overall as of this morning, our portfolio was 95.1% occupied, and with normal or even slightly favorable exposure levels we're 7.7% left to lease this morning. We feel very good about where we are in this leasing season.

So next let's talk about pricing, the base rent pricing. As also noted in Q1, we told you we saw early signs of improving fundamentals that allowed us to gain pricing power. We achieved very strong rent growth in base rents, from January though June of this year, and fortunately just in time for setting up in the peak leasing season.

No through July base lease have improved up 8.5% year-to-date, meaning from January 1, and stand 5.8% year-over-year, compared to the same period last July. At this point, markets like New York, D.C., South Florida, Denver are powering right through the leasing season with continued strong growth in base rents. Other markets, which basically is Southern California, have moderated somewhat on the growth of the base rents in the face of the summer transaction volume. Now, we know that the degree of these future base rent growths will be determined on individual market demand patterns. Which we know is eventually determined by job growth, but again, by market by market basis, not the national headline number.

So finally, renewal pricing. Throughout this entire recession, our renewal process and our renewal pricing strategy, have been the stabilizing factors to our revenue stream. Throughout last year, we reported renewals achieved at roughly flat, to down 1%, which was a great result at the time. Then, at the turn of this year, the firming occupancy led to strong base rent growth as I just described. And these higher base rates in turn give us the confidence and the ability to push renewal rates with little impact to turnover so far. So, July renewals, we just completed and we are up 4.9% over the entire portfolio. And for August we're quoting right now 6.2% renewal increases and will most likely achieve around a 5.2% or maybe better. On the renewal rates, Denver has led the way. We had renewal gains of up 6.7% in July. Those are both achieved renewal signed deals in Denver up 6.7%. And out of all of our core markets Los Angeles -- Los Angeles had the smallest increase. And it was only up 3.5%. So we're getting very good results on the renewals.

So we put all that in the blender, how does that impact our guidance? These factors, these are the factors we use to evaluate our business literally on a daily basis. So at this point in the year, we now know the outcome of the critical leasing season and we have extended visibility into the balance of this year. Based on what we see, we expect first continued lower annual turnover rates. We may give up some as we push rents, but we'll still be -- have very about results in terms of our turnover. We expect to sustain this occupancy level near 95%, and we expect to maintain the current base rent pricing trends we have in place in our markets. Couple this with continued strong renewal pricing through the rest of this year, we believe our revenues will be flat to down 1%.

Thank you, Dave.

Thanks, Fred. Well, so what's happened out there? Well, there continues to be very little new supply across our markets. We think that our employed residents and our employed prospects are no longer concerned about losing their jobs. Households are unbundling. And as noted in Barron's last weekend, people are not buying homes at anywhere near the rate that they had. And that's for both economic and lifestyle reasons. So the home ownership rate continues to decline, and that decline is due to that segment of the population that represents our tenancy not buying homes. As Fred indicated, the sharp increase in retention we're experiencing as a result of this. And this has enabled us to aggressively begin to recover the discounts on rents that we gave residents over the last several years. Clearly though, we need job growth to continue this trend.

There is little doubt, that with the supply picture what it is, the occupancy levels we currently have, that we will continue to raise rents as we go forward. But without job growth and rising incomes, the rate of growth we are currently experiencing is not sustainable. It will be positive for sure but it will have to moderate from current levels. So we're extremely optimistic about the fundamentals of the multi-family space, particularly as the economy recovers and begins to add jobs. And we believe that the steps we've taken over the last few years, to concentrate capital in better quality assets, in higher barrier and higher growth markets, have positioned us for success going forward.

So turning now to the transaction activity. As noted in the -- last night's release, we acquired two assets in the quarter. One we discussed previously, which is our 425 Mass Ave. deal in Washington, D.C. which I'll mention in just a minute. The other, City Pointe, which is pictured on the cover of our earnings release. That is 183 unit Class A property in downtown Fullerton, California, constructed in 2004, acquired at a cap rate of 5.7% and underwritten IRR of about 10%. And quickly back to the 425 Mass Avenue deal, we've added this property to the development and lease-up schedule on page 21 of the supplemental, because as you'll recall, when we acquired this deal earlier this year it was totally vacant. And I'm happy to say that we're well ahead of our underwriting expectations on this deal. As noted at the end of June we were 30% leased, today we are 38% leased.

Absorption is averaging 56 units per month, versus pro forma of 31 units per month. Our average lease rate is right on top of our pro forma at $3.17 per foot, and concessions are averaging about three weeks versus our pro forma of slightly more than four weeks. As a result of all this, we're currently where we projected to be on December 1. And said another way, in month 4, we are achieving month 8 results. So we're obviously extremely pleased with how the team is performing at 425 Mass.

After the close of the second quarter, we also acquired a Class A property in the Wilshire Center sub market of Los Angeles, called the Versailles, which is also shown on the cover page of last night's earnings release. This was a 2008 construction. 225 units which we acquired for $55 million, a cap rate of about 5.4% and a 10-year underwritten IRR of about 9.4%. That brings our year to date acquisition volume to over $900 million.

In the second quarter, we sold only one property, and that was an unconsolidated asset in which we had a 25% interest, so there was obviously very little disposition activity. Now you might remember that we discussed on our call last quarter that we had slowed our disposition activity because we didn't have much of an acquisition pipeline into which we could reinvest disposition proceeds. Though we have seen an increase in potential acquisition activity we currently have $200 million of deals under contract and have deals under letter of intent of another $200 million. These are all terrific core assets in core markets in D.C., in Southern Cal, in Northern California, and in Seattle.

As a result we have also increased our disposition activity and now have several hundred million dollars of assets under contract to sell, or in the early stages of marketing. We also have several hundred million dollars identified and are ready for marketing. And I'll tell you, with the amount of capital out there chasing deals today, we think that our target disposition assets have great liquidity. It's just up to us to find the right reinvestment opportunities, and determine wether or not we're willing to make the trade. So, as a result, we've maintained our acquisition disposition guidance for the year. Now obviously, to achieve that disposition guidance we'll need to close a lot of deals between now and the year end. As I said, the pipeline is full of pending sales; we think we can restock that very quickly and as a result of which the disposition activity will primarily be a fourth quarter process.

On development, we continue to have great progress with our development assets. They're being completed on time and under budget. And leasing continues to exceed our forecasts, with respect to absorption, and like our stabilized assets, we're happy to be seeing a lift in our net effective rates on those deals. In the second quarter, we started construction on two projects, both wholly owned.

The first is our 111 unit $56 million development in Manhattan's Chelsea neighborhood, which we've talked about this on prior calls. And the other is a third and final phase of a property in Denver, Colorado, this is a 168 units for $24 million, and we expect to stabilize yield on current rents there of about 7.5%. Now we continue to be very active underwriting new development opportunities. Certainly looking at our own land inventory first, but we're looking at other sites as well. And we could see an increase in this segment of our business in the months ahead.

But, like everything we do, it's extremely capital intensive. We have to compare returns on capital invested in new developments, for the yields and IRR's and acquisition opportunities. In order to allocate capital in the highest risk adjusted means possible.

Now before I turn the call over to Mark, I'd like to comment briefly on the sudden collapse two weeks ago of the parking garage at our Prospect Towers property in Hackensack, New Jersey, in which fortunately no one was injured. At the present time, we have 157 units at the property that are unavailable for occupancy and will likely remain so for several months, while services are restored to the building. In the meantime, we're working with those residents to find them temporary or permanent housing in other properties in the are be they ours or be they our competitors.

Now, we've outlined in our press release what we think the financial impact of this incident will be, including rebuilding the garage, providing other housing arrangements for our residents, lost rent, et cetera, et cetera, and Mark will in just a moment take you through a high level review of how all this will be handled from an accounting perspective.

I would just like to say, in closing, how thankful we are that no one was hurt in the collapse. How grateful we are for the assistance we've received from everyone representing the city of Hackensack. How much we appreciate the understanding and the cooperation we've received from our residents that have been affected. And lastly, how proud we are, how proud we are of the dedication shown by the entire EQR team that is working 24-7, and I do mean 24-7 on all aspects of this. And you guys are all absolutely the best. Mark?

Thank you, David. Good morning everyone, thank you for joining us on today's call. This morning I'm going to focus primarily on three areas, our strong second quarter performance, especially on the expense side, our revised guidance on 2010 and our recent unsecured bond deal. Fred previously gave some terrific color on the drivers of our revenue outperformance, so I'll just move right along, new expenses.

Same store expenses increased 1.5% on a quarter over quarter basis. We think this is an impressive performance. Especially given that in the comparable period last year expenses actually decreased 0.6%. I will give you a little color on notable aspects of this quarters expense performance. As well as some perspective on how we expect our various expense line items to perform for the balance of the year.

I'm going to start by talking about on-site payroll and property management costs together. They collectively constitute about one-third of our property operating expense. Both on-site payroll and property management line items consist mostly of direct and indirect personnel costs. Also both line items were higher on a quarter over quarter basis for the same two reasons. Top comparable periods and increases in accrual rates for health insurance and workers comp insurance. By tough comparable periods, I mean that both of these line items declined in 2009 when compared to 2008, making further improvements in 2010 difficult. In spite of that, the salary component of on-site payroll was actually down on a quarter-over-quarter basis and the salary component of property management costs were flat on a quarter over quarter basis.

Our position management and other technology initiatives continue to bear fruit for us. And we expect overall growth and on-site payroll to be within our expectations. Property management costs will be up about 8% this year, but that brings our two-year average growth rate in this line item up to only 1.4%, a level with which we are very comfortable.

On the real estate tax side these constitute about 0.25 of our property operating expenses. These decreased quarter-over-quarter and we now expect these taxes to be flat or slightly down this year. We had originally projected about 2% increase but governments have been faster to lower evaluations than we had thought, and the counterbalancing rate increases that we expected have yet to materialize. We can't help but to think that these increases are coming, but they will likely not be here in 2010.

Utility costs, which constitute about 15% of our operating expenses, are trending lower than the up 3% we expected at the beginning of the year. And we now expect about a 2% year-over-year increase in this category. Energy costs, electric and gas, have been lower than we expected at the beginning of this year. And this trend will likely continue for all of 2010. In sum, we remain comfortable with our plus 1% to plus 2% range for 2010 expense growth, as most expenses are running at or near plan. And unanticipated increases in categories like property management are being offset by slower then expected growth in areas like property taxes.

Now I'm going to speak for a moment about our revised operating guidance. We are delighted to improve the mid-point of our same store 2010 revenue range by 1.75% and set our new goal posts at between down 0.5% and flat. I previously noted that our expense guidance range will remain at plus 1% to plus 2%. This results in a new range for net operating income of down 2% to down 0.5%, a 2.75% improvement in the mid-point of our guidance. Our strengthening revenue picture made this improvement happen. On page three of the release you can see a detailed reconciliation taking you from $2.05, the mid point of our old FFO guidance range, to $2.17, the mid-point of our new FFO guidance range. As you can see the main driver of our guidance improvement is $0.13 of better than expected property NOI. This is almost entirely due to same store revenues running ahead of our expectations of six months ago.

The timing of our 2010 transactions activity will also give us more FFO than we expected, by having acquired early in the year and now expecting to sell later in the year. The dilution from our sales activity will be less than we originally budgeted. We are now projecting most of our disposition activity to be in the fourth quarter, allowing us to continue to collect NOI from these disposition properties longer and positively impacting 2010 FFO. Also, as David noted in his remarks. the strong performance of our 2010 acquisition will drive more in FFO to us than we had expected.

On the unfavorable side, interest expense will be up about $0.03. Our recent unsecured bond issuance, which I will describe in more detail in just a moment, will cause most of this variance. Finally, we reduced guidance by $0.03 for various costs relating to Prospect Towers garage; including lost revenues, legal costs and interim resident support costs.

In total, the Company expects to spend, net of anticipated insurance reimbursements, about $12 million. The money we spend rebuilding the garage will be capitalized as these dollars are spent. Other costs, like those to accommodate displaced residents, lost revenues due to the high rise portion of the property being temporarily unavailable for occupancy and legal costs will reduce FFO as they are incurred. Generally, insurance proceeds will be recorded as increases to FFO as they are received, which will most likely be in 2011 and 2012.

Without these one-time items, our revised FFO guidance mid-point would have been set at about $2.23 per share. For the balance of the year, a $0.57 per quarter FFO number, or even slightly higher, feels like a good run rate for our operating business. However, our actual FFO results will likely be lower for the third quarter and about equal to this $0.57 run rate for the fourth quarter. Due to the one-time items I noted before. Overall, we're pleased with our FFO rates to date and look forward to finishing the year strong. On July 15, 2010, the Company closed on a $600 million, 10 year unsecured bond offering. The bonds carry a 4.75% coupon rate and a 4.84% effective yield. After the impact of fees and discounts and terminating an interest rate hedge, the all-in rate to the Company was 5.09%. This was our first unsecured bond issuance in over three years. The deal was met with an enthusiastic reception by our fixed-income investors and was a rousing success. We thank our fixed income investors for their support.

We had sufficient demand to double our deal size if we had wanted to do so and the 4.84% effective yield was one of the lowest for 10-year paper in modern REIT history. This debt deal reflects the strength and flexibility of our balance sheet and is a validation of the Company's conservative balance sheet strategy. We had said on prior calls that we were in no hurry to issue debt, but would monitor the markets as always and be opportunistic. When we saw the late June rally in treasuries, caused by increasing anxiety over Europe, coupled with our borrowing spreads remaining constant or even slightly tightening, we decided that issuing a 5% or less piece of 10 year unsecured debt was just too compelling to pass up.

We also believe that the recent increase in volatility in the markets, and mixed economic news warranted a somewhat more cautious refinancing posture. We also thought prefunding a portion of our 2011 maturities, at an accretive rate to our maturing 2011 fixed rate debt was prudent long-term planning. We expect about $460 million of cash to be in our balance sheet at year end, this is earmarked to cover 2011 debt maturities. As I mentioned before, this prefunding will have about a $0.03 per share negative FFO effect on the back half of 2010. This is net of reductions and interest expense due to lower than expected rates in our floating rate debt and all of this is included in our revised guidance range.

However, the new debt deal will be a pick-up in 2011 and later years as the 5.09% all in rate on the new debt compares favorably with the 5.5% rate on the fixed rate 2011 debt that is maturing and will be replaced. On the sources and uses side we expect our revolving line of credit to be undrawn at December, 31, 2010, with about $1.4 billion in availability. As I mentioned, cash on hand at December, 31, 2010, should be about $460 million, due to both the debt deal and because we expect to receive material disposition proceeds during the second half of 2010.

Operator, we're now happy to take any questions.

(Operator Instructions) Your first question comes from the line of David Toti with FBR Capital Markets.

Thank you. Good morning, guys. A quick question on your RMS system, I know you've seen a bit of pricing strength in recent months. What's the system telling you in the last couple of weeks, is it indicating a drop-off in occupancy in a number of markets?

This is David Santee. I would say that, again, as Fred said, you really have to go market-by-market. Typically, this is where we see strengthening in our occupancy. There is a lot of turnover in July-August, but we're seeing occupancy recover, I would say, a little quicker than we expected. We're very pleased with what we see going forward. I think Fred alluded to that in his comments with that exposure number of 7.7 that is well below where we were last year and compared to historical numbers as well.

Okay. Specifically, maybe you could touch on two markets in particular, South Florida and perhaps a little bit more on New York relative to how those systems are performing?

This is Fred Tuomi. South Florida, after sitting on a long bottom, is doing quite well right now. We're seeing good pickup in occupancy and that should continue as we enter into Q3, and Q4 which is a strong part of the cycle for South Florida. The job situation there has been very ugly as we all know related to real estate and construction. A lot of overhang from all the condo mess with single family, but that's pretty much behind us now. They're making good strides in selling, clearing that inventory. The jobs are gone. We know that, and they're actually starting to come back a little bit now with some large infrastructure. They're getting a lot of the money from the federal stimulus money.

So, things are actually looking up at South Florida, quite well after a long kind of flat period. So, we expect some good growth there. Real increases in South Florida, we just did 5.9%. So, we're looking actually pretty good in South Florida. New York is back with a vengeance. New York is on fire. I mean, I've never seen really -- sell hard, sell deep, but in previous calls, we've said it really isn't as bad as we thought it should be and it never was, and it's very tight now, very strong demand. We're seeing evidence of jobs coming back. I mean, a lot of the firms on this call are hiring again. We're seeing that not only in Jersey, but all throughout Manhattan. We're a little nervous about supply pressure Upper West Side, which hit us last year and is continuing, and I'm sorry, Upper West Side this year, and then the Midtown West hit last year, and it's continuing, but we're powering right through it.

It is not an issue. So, rents have recovered very strong in New York. We're getting base rent growth. We're getting the premiums back. We're not paying brokers very much. And the interesting fact is that there are big tickets, high-end, high roller units are full. We just rented a double penthouse at Trump at very high rates. Our 600 Washington building down there in the West Village is 100% occupied. We're getting $7 a foot again. So, good times seem to be rolling in New York, each time we go there it seems to be a little bit better.

That's very helpful. Mark, the question for you relative to ramifications of the recent bond deal, does this change your appetite for agency capital in anyway? Do you sense that the agencies could be moving relative to rates now that the bond markets have improved somewhat on the unsecured side?

By that, do you mean do we have less interest in doing secured debt, just so I understand the question?

Exactly.

We are constantly thinking about a trade-off between secured and unsecured debt. We did about $2 billion of secured debt and also sold a good number of assets in '07 and '08 that were entirely really financed by Fannie and Freddie. So, just in terms of keeping our balance sheet balanced between secured and unsecured and keeping it flexible, I would say there is a bias to do more unsecured debt than secured at this point. I do think the unsecured market and secured market are very close in pricing right now. The secured markets for us might be an eighth of a percent lower than that 4.8%, may be a quarter at most, but they are pretty well on top of each other. So, I think we were probably a little bit more committed to the unsecured market, but I mean we'll keep our eyes open and we'll see. But the secured market is open for business and we could access it if we needed to.

That's great. Thank you for the detail this morning.

You're very welcome.

Your next question comes from the line of Swaroop Yalla with Morgan Stanley.

Hi, good morning. I just like to touch back on the dispositions program. Just wondered, given the strong interest you're seeing from the buyers, what kind of cap rates do you expect you'll€™ll see on these when they trade? I guess what I'm asking is what would be the cap rate spread between your acquisitions and dispositions?

Well, we've put in our guidance, so, we expected that spread to be about 150 basis points. I guess what I'll tell you is that the assets that we've currently under contract, generally have maybe low seven handle cap rates. The properties that we would expect perhaps to begin to try and sell would be assets that might have been more high fives and maybe even into low six handle cap rates. The deals that we're thinking about now of looking to sell are, we think, right now on the fairway for the types of small local, regional buyers that whom we've been selling a lot of our assets. They are $25 million and $30 million deals, the sort of deals that the agencies will finance very easily, and we think there is great demand for these assets and I wouldn't be surprised we wouldn't see even five handle cap rates on some of these deals.

Okay. And a small bookkeeping question, you raised guidance on interest and other income, can you give us an indication of what's driving that?

Sure. In this quarter, meaning in the second quarter, there was a settlement on a real estate tax dispute in Arizona. We recorded $2.2 million of income on that line item and we increased guidance because of that.

Okay thank you so much.

You're very welcome.

Your next question comes from the line of David Bragg with ISI Group.

Hello, good morning. Just focusing on pricing power and specifically your renewal rent rate increases. Did you say that Southern California is the only area in which you've seen this growth plateau or even decelerate in recent months?

That was on the base rent pricing increases. The renewal increase of LA was the lowest, but it was still up 3.5%. Other Orange County renewal increases were up 4.3% and San Diego was up 4.8%. So, we're still getting good renewal increases in Southern California.

And so that figures continue to accelerate if I think about August renewal rent rate increases versus July; that number continues to rise?

It's going to go up, August we're already quoting significantly higher. We're already achieving on those deals already signed for August are higher, [inaudible] handle all-in. And we think for the balance of the year, we don't really see the renewal increase rates moderating. I think, it's€™s going to be pretty much in that zone, maybe even better with the lack of supply and the recent trend that we see over the last couple weeks. So, I don't think that we're going to lose pricing power on renewals between now and the end of the year.

So nationally, you'd expect that figure to continue to rise despite the seasonally slower winter months?

Correct. Just remember that we've got these in-place leases that are at lower rates. We've established a firm new base rent in the market, so you have that gap, and we have the confidence we can make up that gap, especially when you don't have the pressure of new supply coming in and offering all these concessions and enticements.

Got it. One last question. In what markets are you at new peak rents across your portfolio?

The peak rents going back to about the middle of 2008, we've got a couple markets that have kind of crossed over the line that would be primarily DC and also South Florida. South Florida because it was flat for so long, and DC because it's so strong, so robust, and I've got to believe that we're close to it in New York.

Great, thank you.

You're very welcome, Dave.

Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Hello, good morning. Just going back to the debt deal, it's a two part of sort. The first part, first, it looks like you have about $1.8 billion coming due next or $1.3 billion if you assume that the term loan gets pushed out another year. Just want to get your thoughts on why you didn't do more of pre-funding just given the attractiveness of the rates when you did the deal or was this where you would consider using the ATM or other forms of capital in terms of refinancing next year?

Sure. Great question. You're right, the maturity shown on page 15 of $1.8 billion are really $1.3 billion because we will push the term loan into 2012, and more than half of that $1.3 billion matures in August or later of 2011. So, we didn't collectively see a great impetus to take care of all of that right now, Alex. We didn't see that the market either on the secured or unsecured side was going away, such that we needed to do some. It just felt like a good idea to kind of dollar cost average in. And again, we have the hedges for 2011 so to the extent rates really run against us, the hedges will become positive, and we'll have a little offset there.

And then as far as buyers on the deal, did you see any new buyers coming into it like non-REIT dedicated buyers sniffing around at your offering or was it sort of the usual long time owners of your debt?

Let's not berate the usual long time owners of our debt, who we are very close with and like very much. No, we did have a great deal of interest from our new folks from investment management firms, some of whom owned our bonds already, and we had three or four really good brand new accounts, Alex, that we're very excited about, and those are people we've been speaking to and chatting with and trying to get interested in REIT debt generally and us specifically, and we were just delighted that I think a lot of good work by our Treasurer to get that to happen.

So, those are people who are new to REITs?

New to REITs and new to us, that's right.

The final question is just going to Fannie Freddie, not we, but FinReg was passed, they didn't do anything to address Fannie and Freddie, and sort of speaking to folks down there it doesn't sound like anyone really has ideas for how to handle Fannie and Freddie, but people talk about addressing it. Is your sense that this is just going to be sort of kick down the road and people will talk about doing something with Fannie and Freddie, even talk that it will just stay, and therefore, concerned about their involvement in apartments et cetera? Will it just be talk and not really materialize, or do you sense that people really will genuinely address the issues that both of those entities have?

Well, what a great question, I wish I had a better answer. I think this is entirely like a political football and people are trying to decide whether to deal with it and with the 2010 elections so close and with the possibility of a change in control of maybe the House or the Senate. I think the issue may get pushed even further out until there could be a political consensus around the solution. I will say and I just have to commend the GSE multifamily folks. In spite of all this uncertainty, they have continued to be there in the market everyday for us and everyone else in multi. So, what I'd say, Alex, is that the machine keeps running at the GSE's very well. What the future holds I don't have any special insight into. We do know that the President is convening a group in about three weeks at the White House, but I think it's a very much a political event to talk about the future, the GSE's. My sense is that's going to focus as you might guess a lot on single-family, not much on us.

Okay thank you.

Your next question comes from the line of Michael Levy with Macquarie.

Congratulations on a solid quarter, guys. I was trying to work through the math here and its really just a follow-up to Dave Bragg's question about the health of the market with respect to rates on renewals. Can you remind me what the average concession was in the June quarter of last year?

I mean we really didn't focus on a lot of moving concessions last year. For quarter two last year on the same store basis, we had $980,000, so I mean that was probably maybe $90 of move-in and then this quarter we've had $154,000 of move-in concessions.

So, when you say that you're raising rent on renewals, it's really off of a base rent that didn't include any concessions, is that what you said? How we should interpret it?

I think that's fair to say that, yes.

That answered my questions.

Even when you look at those moving concessions they were very concentrated at specific properties throughout the portfolio.

So it isn't like the 4.9% on the renewal. It's really off of a base that was on an effective basis was down 8% off the listed price and now you are just raising it back to where it was on an effective basis?

Correct.

Got it, thank you.

Your next question comes from the line of Eric Wolf with Citi.

Thanks. Michael's€™s also on the line. Just also follow-up on Dave Bragg's question. Do you think that as we move through the remainder of the year that we're going to see more normal seasonal patterns play out in terms of sequential revenue growth, or do you think that momentum you are seeing in rating occupancy right now is going to be enough to overwhelm the slowing that typically occurs later in the year?

Just to be clear, our guidance implies an increase in sequential revenues and sequential NOI both of the next two quarters. You've got an increase in occupancy and higher lease rates will roll through the rent roll. So, I appreciate the seasonal nature of your question. This year might be a little bit different and I just want to be clear on what our guidance implied.

I think the longer we're into recovery, we might see more normal seasonal influences, now the degree of the seasonal change may change for a couple of reasons. One is, I think, just the systematic shift of the prospect wanting to live in apartments versus buying homes that David referred to. I think the lower turnover rates are going to be sustainable for several years. That's going to maybe crop in some of the seasonal patterns on the shorter season, and also the lack of supply. When we look into next year and the year after, supply numbers on each one of our core markets are virtually zero, I mean, very, very small numbers of supply, and typically supply has a disruptive factor to a market and when concessions are offered and when they hit or close these from the concession using double-down or triple-down, and that causes some movement within the market. So basically, this is the fundamental shifts in our industry. I don't think, it's going to change, but it may soften some of the seasonal moves.

All right, thank you. And just on expenses, you've kept pretty low for the last four years at about 2% or lower. I guess, the other side of this is that comps become more and more difficult. I mean, do you think that as we out to next year, we're going to see a more normal type of expense growth or what do you think it keeps cost at these lower levels?

This is David Santee. Again, when you look at our expense make-up, real estate taxes, payroll, utilities make up almost 70% of our expense formula. Certainly, we don't expect real estate taxes to continue to be flat or negative, so there will be pressure possibly as early as next year. Payroll growth, we continue to leverage technology to optimize how we run the business.

We continue to focus on centralized specialization, which kind of lessens your growth at the property level and then finally utilities, we continue to see year-over-year high single-digit growth in the water sewer. I mean, we don't expect that to change as these municipalities remain under pressure. But on the other hand energy will be kind of the wildcard so-to-speak going forward. Everything else we have complete visibility, transparency into and we feel very good about how we manage that on a day-to-day basis.

And then just lastly on acquisitions, given the strong competition that you've talked about in DC, Manhattan and the Northeast in general, could we see looking more toward California where unemployment is higher and there is maybe a bit more distress?

We do have some things in California that we're looking at, but I guess while our acquisition activity might be up not only our business but just in general across the board, it still is down significantly from sort of prior high watermark certainly, and I think generally from what would have been a longer sort of general run rate. But I mean I guess you'll see us be active where we believe we can find deals and where people are offering deals. So, we're looking in Seattle, we are certainly looking in California, along with the Boston, New York and Washington DC areas.

David, its Michael Bilerman speaking just following on Eric's question. You've been doing some portfolio deals in single assets. I mean, is there any sort of platform transaction that you are sort of working on that would obviously be way in excess of your $1.25 billion?

Well, I mean, I couldn't answer that question, Mike. You know that.

I'm just curious, I mean, are you thinking as you've built the company, built the platform, gotten it down to a certain amount of markets where you know you may be prepared to have larger scale of transaction, where you can really drive the efficiencies that you've been able to?

I believe strongly, and I've said lots of times. So, I think that the work that Fred and David and their teams have done on our platform over the past three or four years is just incredible, and I believe that platform is extremely scalable. I think we can put a lot of assets on that platform, extremely efficiently, extremely effectively and run those assets better than whomever may currently be owning them. I guess one of the things that I've really been pleased about this year is the acquisitions we made at the beginning of the year. One of my disappointments, whether we were able to acquire so few, but we're anxious to find good opportunities and believe we can put them on a platform and operate them extremely well, but there is not a lot of product out there. We remain ready. We're enabled to do one-off deals portfolios or larger transactions if and when they become available.

And a quick one for Fred Tuomi. Your NOI's bringing let's say July run rate, where would the revenue line be relative to peak, and where would the NOI line be relative to peak on effective same store basis?

David mentioned in the month of July we were actually positive year-over-year. August is actually going to pick up by probably another half a point. From peak on the revenue side, we're about 5% off of peak on our base rent prices, and that's the net effect of new lease prices. So, price recovery we need about another 5% to get back to peak portfolio wise. As I mentioned earlier, couple of markets are already there, some have a long way to go like Phoenix. On a NOI basis, I am not really sure where we are versus peak, I don't have that available, and we need to speak that up for.

Even that 5.8%, or whatever percent, would take a while for that to run through the whole rental.

Okay thank you.

Your next question comes from the line of Jeff Spector with Banc of America.

Good morning. I'm also here with Michelle Ko. Just wanted to talk a little bit more about your comments pushing the rents aggressively, but on the other hand recognizing that the rate of growth is not sustainable. How are you balancing that I guess in each of your markets if you could I guess address that a little bit more please.

Well, I guess what I'd say is clearly since January we've been aggressively pushing our rents and as we look at our metrics today and we look out for past weeks. We continue to believe that we have got potential to be aggressive on those rents, and I think the renewal increases that Fred had mentioned that we're currently quoting and what our expectations are for those indicate continued strength.

I guess the comments about moderation or just as we go beyond our current metrics and we get into situation in which we don't get the job growth soon, then I think a lot of us had hoped we might be seeing by now. Well, I guess it will find some sort of resistance point at some point in future where we won't continue to be able to do that, but as we look at our metrics today, as David and his pricing team look at what's happening with occupancy, we're continuing to keep our foot on the accelerator. We just have to believe that without job growth and rising incomes will meet some point of resistance some time.

Okay. So maybe we could focus on job growth. I guess what type of assumptions do you have built in to your budget or your guidance in your market?

Again, we'll go back to our February call, we don't budget with international job growth. We budget based upon every single property and what's happening with that property in its individual market, in any competition, and what's going on with new supply if any, what's going on with local employers, current occupancy, current left to lease, and that's really the foundation upon which we project our expectations for that individual property. And we add up 500 properties and that's how we come up with our number. This is not a top-down process here at Equity Residential.

So bottom's up, bottom-line, what's happening in that specific market, and then just seeing each month how far how much you can push rents versus the loss of occupancy?

Correct. Yes, we call it pressure testing. Every day, we pressure test base-rents, we pressure test renewals, and we let the customers tell us, yes or no versus the macro environment.

My last question, can you just talk a little bit more about the development projects please?

Any specific development project or development in general?

Development in general, the ones that you said you started and then in general?

We've started our deal in Chelsea, in Manhattan which is a property that we bought out of a distress situation, a leasehold interest that we tied up towards the end of last year or early this year. That was a property that we knew we'd be in a position to start this year and we have. We're expecting plus 7%, or so, stabilized yield on current rents on that deal. And then again the property that we've started in Denver which is the third phase of a three-phase deal in Denver. We've had this property for some time, and we thought it was a prudent time to begin construction there and we're expecting a plus 7% return on cost there as well.

As we wait for those things that are under construction because we haven't put anything into the pipeline for quite some time, most of what we have will soon be complete and it is generally in various stages. The lease-up absorption as I noted on those has gone very well, certainly at rental levels that were below our expectations for 2010 when we underwrote those deals, but we're happy with absorption and certainly happy to see net effect of pricing or our base-rent pricing be higher today than it was earlier this year. We continue to look for acquisition or for development opportunities. We're currently looking at some deals in Northern California, in Southern California in some land that we have there, as well as DC, working very preliminary on another deal in Manhattan and in Seattle. So again, we're very active. I think, it would be some time before we ratchet that business up, but we're certainly looking and we think it's a good way to add value.

Great, thank you.

You're welcome.

Your next question comes from the line of Connor Finnerty with Goldman Sachs.

Hello, guys, it's actually Jay Habermann here. David, you gave some interesting statistics back at NAREIT around renewals, and I'm just wondering if you could give us an update. What percent of residents are accepting the rate increases outright, and I guess what percent are pushing back a little bit, based on the rates you've tried to push through?

This is David Santee. I mean typically we manage renewals lease by lease at Equity Residential, and our metrics continue to hold through pretty much through peak leasing season and the soft season. Whereas, we know that 60% of our residents will pretty much check the box and move on with their life. The rest of the 40% they want to talk about it, they want to come in try to get a better deal, and that 40% usually ends up creating maybe 100 basis point or 150 basis point difference in what we issue those renewals at versus what we actually sign those renewals at. So, the metrics continue to hold. We don't see any significant change. We're very pleased with our acceptance and retention rate for July, and July and August continue to be our two biggest months of the year

Great. You mentioned as well, obviously all the rate increases you are achieving, but I guess based on asking rents today versus in place, is it fair to assume over the next, say, 12 months or so that you could be achieving quite easily mid single-digit NOI growth?

We are not ready to get that far out, Jay. The guidance we've given has really been through this year and we'll talk about 2011 on our call in February.

Okay, thank you.

You bet.

Your next question comes from the line of Andrew Fenton with Credit Suisse. Come in Andrew. Andrew your line is open.

Can you hear me now?

Yes, we got you.

Sorry about that. Speaking with private side contacts lately, it sounds like construction loans may start to become available soon for private developers. Is this consistent with what you're seeing?

Yes. Well, go ahead mark.

It is Mark Parrell. What we're hearing is there are more banks willing to make loans. They are more at the 50% to maybe 60% leverage level. They do require recourse to someone who has some liquidity in that worth, which is a big change from the past. I don't think those sorts of loans are going to create a huge momentum in the development business. I think our developers need loans and banks that will accept pretty high leverage, and frankly, pretty inferior guarantees, and I don't think the banks are to that point yet.

We're also hearing that pricing continues to be kind of L plus 300 to 400. There are floors in the market still as well. So, our information is the same as yours. Things are improving, but it is not yet at the point of creating any avalanche. Also point out that a couple of the larger banks and really the biggest lenders in this area, which were Bank of American and Wachovia, and now Wells Fargo, are burdened with a great deal of old loans let us say that they have issues with and they need to work through those loans. So I don't think every bank that was in the market before is in the market now as aggressively as they were.

The next question I have given where home affordability metrics are, are there any specific markets where you are seeing an uptick and move-outs for home buying?

This is David Santee. Really there is no material change in any other markets. I mean we saw a typical seasonal uptick in Q2, but the difference between this Q2 and Q2 of '09 amounted to 200 units. So, we just don't see anything material in any of the markets.

Okay, great, thanks for your time.

You're welcome.

Your next question comes from the line of Richard Anderson with BMO Capital Markets.

Thanks, good morning everybody.

Hi rich.

The base-rent, I got on late, so I apologize, but that's basically net effective new lease rate, is that right?

Yes.

So you mentioned up 5.8% January to July, and obviously that's a good sign, but what's the metric what will be that number on a same unit basis. In other words, unit goes week and how much lower is the rent than it was before the vacancy happened?

First of all, you got the numbers a little mixed up. The base rent movement that I quoted in the prepared remarks is year-to-date, meaning from the 1 January 2010 through end of July, those rates are up 8.5%, and then year-over-year meaning end of July this year versus end of July last year, the same period a year ago, they were up 5.8%. So, 8.5% and 5.8%

Okay. I meant to say, 5. I'm sorry. So, then would new leases still be down like on a same unit basis?

No, if you look at kind of what we call the move-in/move-out differential. You just must take the specific apartment that vacated and take that same apartment and look at the lease rate of the person re-occupying that same apartment and add that up over our entire portfolio, we've actually turned positive. If we can see the erosion through the recession, it flattened out and it's now gaining again. So this month, we're actually up 2.3% in terms of the net change between move-in to move-out.

On an apple-to-apple basis, we're at 2.3% on new leases, and in July 4.9% on renewals?

Correct.

Okay. So, I just want to kind of compare the two same sorts of metrics. So, the long question is, when do you want to see turnover actually increase, right? I mean, at some point, it becomes beneficiary to you seeing turnover increase, and so you can capture some new lease increases. It's not happened yet, but it's getting close?

We're basically taking people to market. If we take people to marketing that new lease to market, versus negotiating a big discount, giving concession, or just being afraid to ask for it, you're not going to have that erosion. So our renewal pricing, our renewal process really gains. The goal is to take people to market, especially in a rising market.

So if that's true, why are the numbers not the same? That's a simplistic question, but -- ?

Rich this is David. I think, it's more about mix of markets at this point. We don't like to use the term gain/loss because that's not really a meaningful term in the world of yield management, but if you want to use that term look at both of the extremes. If you go to New York City today our loss to lease is almost 10%. So, we have a 10% opportunity on the upside. If you look at some of the So-Cal markets, you actually still have a gain to lease. So, more often than not when that person moves out and that apartment is re-occupied, we're probably going to take a 1% drop. When you put all of that in a blender across the entire portfolio, you get the numbers that Fred's talking about.

Yes, you also have to appreciate, Rich, the fact that when we're quoting renewals, we're quoting some of these markets 60, and maybe even 90, days out. So, we're trying to estimate what we think spot market will be at that point in time, and depending on what actually does happen in that marketplace that offer could be high or low when you actually get to the point of actual lease expert.

Whereas the new lease is by definition the spot today.

Correct.

Okay. Then last question on Hackensack, if I may, who built the parking deck?

I don't know. We acquired this property 10 or 15, or so, years ago. I don't know off the top of my head.

Okay. Are you kind of looking around at your other parking, I mean is it something that you kind of reacting to and looking at the rest of your portfolio that kind of thing, or you?

Well, I certainly don't believe we've got similar problem in our portfolio, but as a result of this we're having to take a step back and asking ourselves, do we have the appropriate procedures and policies and things in place? Was there something that was foreseeable or not and making sure that we're doing the right things.

Okay sounds good, thank you.

You bet.

Your next question comes from the line of Jeff Donnelly with Wells Fargo.

Good morning guys. Fred, your opening remarks on fundamentals were helpful. I'm curious has the monthly progression improvement been fairly smooth or has it been choppy so far to-date?

I got to tell you it's been fairly smooth. I mean, David and I look at this every day, and we're too nervous daily to have watching this and we've been very pleased. Every day we see good, solid fundamentals and its market-by-market, property-by-property, lease-by-lease like David said. But we like to see on a daily flow basis.

I know what it is tide into what you guys are doing on rent as well, but where do you think we could go on turnover, especially given that it seems fairly stagnant out there on normally home buying activity, but just job-related moving activity in the country seems fairly low. Can you give us some historical perspective. I mean could we actually see a drift lower to the extent you're not being as aggressive as maybe you should be on pushing renewal rates?

Well, like I said we're down 700 basis points from 2008 this quarter. That's a dramatic shift. I don't think I've ever seen in this industry ever that can move that big and a key statistic like turnover. We'll have to wait and see. People aren't buying homes, they are not moving for jobs. You don't have the society rotation going on. I think they're comfortable with where they are, and I think we give them good service, good properties, great locations and they are electing to stay put and willing to pay more for that.

I think again with no new supply coming into the system on just a financial basis, you are going to see more stability. The daily counter action is the rate. During the recession when rates fell, some people were able to upscale their living and maybe as we recover these rents, they chose not to pay that rate and we have to down fill, but that's natural and we replaced them with people who are willing to pay that rate because of the demand is less. So, we will have to see how this plays out over the next several quarters, but what we see on the ground today on the turnover to renewal and the pricing fees, again, it's all very favorable.

Maybe a more of a theoretical question, but when you think about that and I guess call it the your share of consumers' wallet, effective rent growth historically for very long periods of time grew in line with income, but beginning with those housing boom five, six, seven years ago that apartment rent growth really began to lag. I know you have commented on moderation, if we don't see job growth, but despite the fact that I guess housing doesn't have the load that it once did. I guess it doesn't sound like you guys think that apartments can refer to the need, if you will, or reclaim that lost wallet share all else equal, is that right?

I guess what I would say is that we've not yet gotten back to that percentage of the wallet share that we had. It's a high watermark. So, I think what's happening now is we're recovering that market share of that wallet and we're not there yet and it will take some time for us to get there. We do believe that these residents are hunkering down, we do expect our retention to be up, we do expect there to be somewhat of a mental shift for much of our tenancy with respect to the wisdom about finding a single family home.

And as a result I think it's very possible that percentage of market share just could increase, that people will be willing to spend a little bit more or will have to spend a little bit more off their wallet on their housing, but for us to sort of realize the kind of growth rates that we had seen kind of back at '06 to '07, and then currently maybe what we're seeing most recently, as we're now recovering. We do believe that we need to see job growth and the resulting increase in incomes to actually allow that to happen.

Great, thank you guys.

You're welcome.

Your next question comes from the line of Michael Salinsky with RBC Capital Markets.

Good afternoon. You talked about $600 million of disposition here in the back half. I think, a significant amount will be single property, but should we also expect some portfolio transactions?

I don't think so. We have had some conversations with some folks about new properties, but right now, absent one day a week, we are working on a transaction. It's actually under contract for a portfolio of assets in New England that are highly structured finance transaction with the multi-family Massachusetts Finance Authority, but absent that most of the things that we're working on are one-off transactions, Michael.

Second of all, you talked about a pipeline of acquisitions. Where are the IRR on those right now that you're underwriting versus at the beginning of the year? Have you seen those come in at all?

Yes, for sure. The deals that we underwrote earlier in the year were double-digit IRRs, so low double-digits and as I think I've said several times, I thought that we would significantly exceed those. Today, the deals we're working on all have nine handles on an IRR and I think that those are with reasonable exit assumptions and so that's what we're€™re working on deals. A lot of direct deals, and I think that's one reason maybe we've been able to manage that. We've not yet kind of gotten into transactions with ATMs.

Okay. I think you had talked about a couple markets in terms of loss and gain to lease, where does the portfolio stand right now in terms of overall loss to lease?

This is David Santee. Again, that's no longer a meaningful metric in the world of yield management, because rates change daily, but if we take that four week out price it's in the 3% range.

Okay. Just finally just I wondering if you guys can provide a little bit of extra color on the joint venture purchase during the quarter maybe where those assets were located, I mean, at an 8.4% cap rate that seems pretty attractive.

Well those have disparate markets. Those are deals that we had put in a joint venture 10 years or so ago, and we had kind of a buy-sell situation with our partner, and we acquired their interest. There were some deals in Seattle and Denver and so how many assets total was it, Mark?

I think it was seven.

Seven assets, and those were different in our markets across the country.

That is all for me guys thanks.

Your next question comes from the line of [inaudible] with Jeffries and Company.

Yes, good afternoon my questions have actually been answered, thank you. Thank you.

Your next question comes from the line of Haendel St. Juste with KBW.

Good afternoon guys. Just want to follow-up on Michael's question here on portfolio buyers. Is there a general lack of interest in portfolios, is it still just too difficult with getting credit given the LTVs and who are some of the portfolio or could you characterize some of the portfolio people you've been talking to, what type of buyer they are?

Again, as we've got one transaction that was a portfolio and that was a local New England people that sort of specialize in these types of highly structured low/moderate income properties. Beyond that, it was just one-off transactions, and much of the group that we've been selling these assets to over the past several years and they are local and regional players, and as a result of that they are not interested in buying a property in across four or five different markets. So, as we look at our non-core assets across the marketplace, it's just a couple here and a couple there and there has not been any one at least at the present time who would be interested in buying properties across multiple markets.

So, no institution is really interested in buying a larger portfolio out there?

There are certainly institutions interested in buying larger portfolios, but not in the types of properties that we've€™we've been selling.

I understand. Just following-up or I guess posing an earlier question in a different way. Can you guys give us a sense on where your rents are today versus your resident income levels and whether that's been historical? I guess what I'm really trying to get at is, where do you think you could push rents the most aggressively over the next couple of years, other than say, New York and perhaps Seattle?

Well, just as a percentage of income?

Yes.

Well, I think our qualifying standards haven't changed. We haven't seen any erosion in terms of our income to rent level even as we're ncreasing these. I don't think it's going to be a governor or a constraint on our ability to push rents. Just think about, we're still in the recovery mode, like David said, and not everyone lost their job, and not everyone had a reduction in income. So, last couple of years people have had stability in income, stability in jobs, they really had a net benefit at our expense in terms of rents going down, I'd see this next phase is really recovering back where we were and then have a established road from there.

Okay, fair enough. Last question, what's the current view on I guess on the dividend given your strong liquidity here in the improving growth outlook?

Well, I guess I'll just tell you that, obviously that's €™s a discussion that the Board will have at our next several meetings. When we reduced the dividend a year ago that was based upon not only our expectations for 2009, but based upon potential outcomes for 2010. Certainly, I will tell you that 2010 is outperforming our expectations back at that time, and so we do hope that we're at a place where we can begin to raise our dividend and consistently do that going forward.

When that will start I can't tell you, but much of the discussion is at the Board level and establishing this new dividend was let's get back to a place where we know we'll comfortable for 2010. We know that we can cover that based upon certain operating assumptions, and let's get ourselves in a position where we can soon begin to raise that out a regular basis and we hope to do that, but I can't give you any indication about when that might happen.

Okay. Well, appreciate the call guys.

You bet.

There are no further questions at this time. Would you like to make any closing remarks?

No, I just want to thank everybody for their time today, and we look forward to seeing you all in the fall. Thank you.

This concludes today's conference call you may now disconnect