住宅地產 (EQR) 2010 Q3 法說會逐字稿

Good morning. My name is Paula and I will be your conference operator today. At this time I would like to welcome everyone to the Equity Residential third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you. Mr. McKenna, you may begin your conference.

Thanks, Paula. Good morning and thank you for joining us to discuss Equity Residential's third 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 make constitute forward-looking statements with in 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 today. Well, we're extremely pleased with the operating performance of the Company thus far this year and we want to acknowledge the hard work that the entire team is doing out there to deliver that performance. So, thank you all, so very much, for what you do each and every day for us. Well, we've come an awfully long way in the last year. And this is really the result of continued strength in each of the four areas that Fred Tuomi, on prior calls, has pointed out as key factors for driving performance for us.

The first was retention, which we estimate will improve 4.5 to 5 percentage points over last year. Because our turnover in 2009 was about 61.3% and we think that will improve to around 56.5% or so, in 2010. And I want to add that both of these figures are inclusive of the on-site transfers and those between EQR properties. So that the really true net move-out is even better than that.

On renewal rates, in September, we achieved renewal rate increases of 5.1%. In October, those renewal rate increases were achieved -- were 5.5%. And on the 2,500 leases renewed thus far for November, we're achieving a 5.7% increase. Occupancy which was 93.8% in 2009 will average more than 100 basis points higher in 2010. And occupancy currently at 94.8% today is a very strong level for this time of year.

In our base rents, those being the new rents we're asking for our new residents to pay, these asking rents up 8.7% since the beginning of the year on a weighted average basis across the portfolio. And as a result of all this, we've recovered a significant portion of the discounts in rent that we gave our residents in 2008 and 2009. And we now have only about 5% more rate growth left to reestablish peak pricing across the portfolio. And that's helped by some markets that have already -- already surpassed the prior high watermarks and are now creating new peak pricing levels. So we remain very optimistic as we wrap up the year and we move into 2011.

Now, we know there's a bit of disbelief out there about how well the apartment space is doing, despite any kind of real meaningful job growth. Now, I'll be honest with you by saying that when we look at our dashboards and we see continued improvement in these four areas that I just mentioned and then we look ourselves at the newspaper headlines, we ask ourselves the same thing. We ask ourselves this question without taking our foot off the gas on rental increases, I will tell you, but we do ask the same thing.

And in addition to all of the things that we've talked about over the course of this year that have positively impacted apartment fundamentals such as the powerful demographic picture comprised of 80 million-plus echo boomers. The fact that there's been virtually no new supply added to core markets across the country, as well as the changing dynamic with respect to the wisdom and benefits of single-family home ownership. The head of the research department, a smart guy by the name of Jay Lybik, reminds us about the importance of household growth. And that while job growth certainly fuels household growth, household growth can and does occur without job growth. And in fact, markets can simultaneously experience household formations while actually losing jobs. And according to several sources, it's estimated that nationally, we formed somewhere between 800,000 and 900,000 new households this year, and that's the level that's pretty consistent with a year ago. And this compares to the recent period of economic expansion when we were forming about 1.2 million households annually. So, the number is down this year but is still very meaningful.

Furthermore, notwithstanding what the apartment capture rate might have been of these new households in the past, the likelihood of the new households being created today opting for rental housing rather than home ownership, is extremely -- extremely high. So, when one thinks about this increase in household formations at a time of significantly reduced new apartment supply and a time of declining single-family home ownership levels, this can explain a lot of the strength and fundamentals we're experiencing today in a period of little new job growth. But in any event, I'll tell you we remain very optimistic about our business prospects. And it will only get better as the economy recovers and adds more jobs.

So, on the transaction side, let me tell you that as we noted in the release last night we acquired six assets in the third quarter for a total of nearly $550 million and that brings the total for the year to 14 assets at $1.4 billion of acquisitions. The assets we acquired in the third quarter, four of those were in California; two in the San Francisco Bay area, one in Berkeley, and the other in Burlingame, near the San Francisco Airport. And one each in Los Angeles and San Diego. And we acquired two deals in the D.C. area; one in Arlington, Virginia, and the other in Alexandria, Virginia.

Of the five assets that were fully leased, Cap rates on these deals ranged from the high-4%s, one of the Bay Area deals at -- near the airport, which is a value add deal that should stabilize in the mid-6%s, to the low-6%s on the Alexandria, Virginia acquisition, that was adjacent to an existing property that we already owned. The San Diego deal, which we had announced previously, is our Vantage Pointe property which was built in 2009 and contains 679 units.

Now that property was 20% leased at acquisition and is obviously subject to a major lease-up effort on our part. And very much like what is happening at our 425 Mass Avenue deal in D.C. which is in lease-up, we are off and running with Vantage Pointe. And that's from a standing start.

Like the Mass Avenue deal, from a standing start, we are just doing a phenomenal job there and thus far the team has leased 61 units in the first month of ownership. And we are extremely excited about that, at net effective pro-forma rents that were modestly above what we had projected. And we're very confident that that deal will stabilize at a 7% plus yield on current rents today.

Now, based upon what we've acquired thus far this year, and that which we are looking at today, we've increased our acquisition guidance for the year to $1.5 billion. We continue to work on a handful of deals that could close yet this year, in Boston, in D.C., in L.A and San Francisco. I'll tell you, we have seen an increase in the number of deals being offered for sale in our core markets, but there remains considerable competition for most of these assets.

Cap rates obviously compress significantly throughout the year, but we now think that they've stabilized in the low-4%s to mid-5%s, at least in our core markets. And as a result, values, which were growing dramatically for much of the year, they continue to grow today, but we think at a slower rate and a rate of growth which we think is more in line with NOI growth. I'll tell you, we continue to try to find ways to achieve better overall returns by looking at deals with the lease-up risk, like Vantage Pointe and the 425 Mass deal. Deals with value add or repositioning opportunities. But simply put, deals of all sorts other than fully stabilized core assets that will attract the interest of a lot of this institutional capital.

On the disposition side, we sold three, wholly owned assets during the quarter, as well as our 25% interest in 24 properties held in joint venture with an institutional partner that we formed 10 years ago. Two of the three wholly owned assets we sold were in Stockton, California and the other one in Dallas, Texas, which is -- we continue our exit from our non-core markets.

Now, you'll recall that we've significantly slowed our disposition pace earlier in the year because we thought that both fundamentals and values would recover as the year progressed. And as a result we intentionally sold only $172 million in the first nine months of the year. We did ramp up our offerings for sale midyear because values did in fact recover as the strong bid for sticks and bricks made its way into lesser quality assets and into non-core markets.

And we now have about $300 million under contract. We have another $300 million under letter of intent. And even more in various stages of marketing. So, we've readjusted our 2010 disposition guidance to $750 million for the calendar year. Even at this reduced level, it's obvious we've got a lot of work to do to make the number by the end of the year. And it's certainly possible that we will. But if we miss, it will only be because some of the closings have slipped into January of next year. Because we are committed to selling our nonstrategic assets. And we think that at current pricing, based a lot of which is on the Fannie & Freddie interest rates and liquidity, we think its a good time to be selling those assets we don't think we want to own in the midterm. And we certainly intend to do so.

I'm pleased to say on the development side we continue to make great progress on our development assets. Deals are being completed on time and under budget. Leasing continues to exceed our forecasts on absorption and like our stabilized assets, we're enjoying a lift in net effective rates. Thus far this year we've commenced construction on two projects, one in Manhattan's Chelsea neighborhood and the other, our third and final phase, of a property in Denver, Colorado.

We have also acquired six land parcels thus far this year. A site in Arlington, Virginia that we'd announced earlier in the year. Three sites in the third quarter -- one in Berkeley, California, one in Alexandria, Virginia, and one in Miami, Florida. And two sites in Seattle, that closed earlier this week. Now, we expect to begin to -- be able to begin construction on most of these sites in 2011. And that would represent nearly 340 million of starts next year on these parcels alone. And we expect yields at current rents in the mid-6% to mid-7% range on these starts.

In addition, we have some land sites that were acquired before the downturn that are under consideration for near term construction starts. And we also remain very active underwriting new development opportunities. Of course, though, when we look at development opportunities, we do so along with acquisition opportunities during the best, risk adjusted returns we can on our invested capital. And we'll continue to deploy our capital accordingly. Mark?

Yes, thanks, David. Good morning, everyone. Thank you for joining us on today's call. This morning I'm going to focus on three areas, first our third quarter performance, especially our expense performance, our revised guidance for 2010, and then just a little bit of a discussion on our balance sheet and the impact of some of our transactional activity on the balance sheet.

Since David has already provided good color on the drivers for our revenue performance, I'm going to move right on to expenses. Same store expenses increased to 1.9% on a quarter-over-quarter basis. And we were very pleased to deliver this strong performance on expenses and this is especially true because in our comparable period last year, expenses decreased 0.6%. In fact, assuming we deliver our guidance number of a 1.5% increase in operating expenses for 2010, over the last four years, our operating expenses will have grown at an average annual rate of just 1.4%.

We have delivered consistent restrained expense growth while maintaining terrific customer loyalty. Through the efforts of our colleagues at our properties throughout the country, as well as in the property operations team in Chicago. Well done, everyone.

I also want to take a look at three of our big expense drivers, we call them The Big Three here, real estate taxes. First, on the real estate tax side, we had a 4.3% reduction in property taxes quarter-over-quarter. And this was due to changes in the cool rates. It's customary that during the third quarter of each year, we receive rate and valuation information for most of our properties and the various taxing authorities. We take that information and we use it to reset our accruals. The reason we are resetting our accruals, as we've said on prior calls, is that we continue to experience favorable real estate tax results as lower revaluations of our properties by local governments are occurring, without, at least to this point, increases in tax rates. We're also having considerable success with our appeals. We now expect real estate taxes to be down about 1.5% for the year. And I remind everyone that real estate taxes are about 25% of our property operating expenses.

Second big expense driver for us is on-site payroll, it also makes us about 25% of our operating expenses. It was up 4.7% in the quarter. And as it was true for real estate taxes, the adjustments to accrual rates, in this case, accrual rates on health insurance, workmen's compensation, and bonuses, drove most of the change in this line item during this quarter. We increased our accruals for both health insurance and workmen's comp. I don't think this is a surprise to anyone that health care costs continue to rise, though the rate of increase was more than we had expected. Also, based on improved operating performance, we are accruing for a higher level of bonuses this year, after being down considerably in this line item last year.

We budgeted for on-site payroll this year to be up 1.5%. And now see it as being up about 2.5%. Excluding the extraordinary overtime costs we incurred in the first quarter of this year, due to the big snow storms in the northeast, this line item would have been up a bit less than 2% year-to-date.

My final big expense item is utility costs, these constitute about 15% of our operating expenses. And they were up 3.5% in the quarter. One-third of our utility expenses, or said another way, 5% of total operating expenses, are directly energy related. Gas costs were lower than we expected this quarter, and we expect that trend to continue as we have locked the cost of a large portion of our 2011 natural gas usage at lower levels than 2010. Two-thirds of our utility expenses, or 10% of our property operating expenses, are water, sewer, and trash and are not directly driven by changes in energy costs. Instead, changes in water and sewer rates, cash by municipalities that are tight on cash at the moment, have driven up these numbers lately. In the quarter, they were up 6%. At the beginning of the year, we expected utility costs to be up 3%, and we now expect about a 2% year-over-year increase in this category. In summary, we're comfortable that our operating expenses will increase about 1.5% this year. Because modest growth in utilities and payroll will be offset by a decline in property taxes.

Now, I want to talk a little bit about guidance. We expect our same-store operating performance to be right in line with the guidance that we provided back in July. For the full year, we expect revenues to be down 0.25%, we expect same-store expenses to be up 1.5%, and our resulting same-store NOI to be down 1.25%. We expect same-store, fourth quarter, sequential revenues to be roughly flat, when compared to the third quarter. Pure rental revenues, which is the combined impact of rental rate and occupancy, will be up 0.5% or half a percent or better, on a sequential basis.

But in the fourth quarter we will sign fewer new leases due to seasonally lower -- slower demand and renew fewer existing leases, due to lower expiration volume. Thus we'll have fewer opportunities to grow our in-place rents. Also, with lower levels of activity we expect to earn less in transaction related other income like application and move-in fees, during the lower volume fourth quarter than we earned in the higher volume third quarter. Lower other income will blunt the positive impact of rates and occupancy, at least between the third and fourth quarters. I do want to mention that we expect same-store net operating income to be up $4 million or so between the third and the fourth quarters, due to seasonally lower expenses. So, for the same reason our revenues go down in the fourth quarter -- or stay flat, our expenses go down. There's less transactional activity, less turnover cost, less maintenance activity.

We also revised our FFO guidance range for the year. Our midpoint is now $2.20 per share, up from the previous mid-point of $2.17 per share. Because our same-store operations for the year are going to be right where we thought they would be, a $0.03 mid-point increase is being driven by factors outside of our same-store operations. Specifically, transaction, timing, and volume, as well as lease-ups.

As David described, we purchased a substantial number of operating properties this year and we also just raised our acquisition guidance by $250 million. We also purchased properties earlier in the year than we initially expected. This means more acquisition NOI and FFO in 2010 than we had previously thought. In addition, we lowered our disposition guidance by $100 million. It is possible that some of our budgeted $750 million in disposition activity will bleed into the beginning of 2011. I would expect cash flow from disposition and acquisition activity to be lumpy and uneven. Transactions do not always neatly close prior to financial statement end dates.

Summing it up, changes in the timing of acquisitions and dispositions will result in a contribution to FFO of about $0.02 per share above our original budget. In addition, our properties in lease-up have performed better than expected, contributing $0.01 more than we had budgeted for the year. And lease-ups provide an incremental $9.3 million in the third quarter. And they will provide about $34 million in NOI for us for the entire year.

So, let's turn to the last item and talk a little bit about the impact of our various investment activities on the balance sheet. Some of our leverage statistics were slightly elevated at this quarter-end, due to the timing of our disposition and acquisition activities. We think about our credit metrics over multi-year periods, not just at any specific quarter-end date. As I have said before, over time we will fund our investment activity on a leverage neutral basis.

Getting into the specifics, last quarter I estimated that by the end of this year, we would have about $460 million in cash on our balance sheet. And that our $1.4 billion revolving line of credit would be undrawn. Due to changes in the outlook for transactions activity, I still expect that at the end of the year, our revolving line of credit will be undrawn, but that we will have approximately $135 million in cash. As I mentioned before, the precise timing of our transaction activity is hard to gauge, and we expect to receive substantial additional disposition proceeds in the first part of 2011.

We believe in having a conservative balance sheet that has both great strength and great flexibility between our current total liquidity and our ability to access both the debt and equity markets. We have great confidence in our ability to meet out upcoming obligations and to fund our investment activity. Operator, we're now happy to take questions.

(Operator Instructions) Your first question comes from the line of Eric Wolf of Citigroup.

Thanks, Michael's also on the line with me. Just a few questions on your dispositions guidance. You narrowed the cap rates there between where you're buying and selling by 40 basis points. I'm assuming the cap rates on the assets you're selling in your more secondary markets have come down significantly recently. Would that be right?

Much of what we're offering for sale now that's under LOI, under contract and in marketing, I think are probably overall better quality assets of what we had sold. Certainly, cap rates have compressed as the year as gone on. But I also think that we're -- really ended and gotten out of some of our lesser quality of assets. We're now probably selling a better quality of asset than what we had sold previously. So we're literally looking at what we expect to sell going forward as high 5%, low 6% cap rates.

Right. So I guess these are more from your core markets versus the inland empire in Phoenix that you're going to be selling out of?

Yes but we're selling probably our non -- as part of the mix, we do have some non-strategic assets of what we consider core markets.

Got you. I guess given the cap rate compression that you mentioned, I think you said earlier the growth is probably going to come from NOI. Given this favorable pricing, do you think you might pick up the pace of asset sales early next year? Or are you happy with the mix as it is right now?

Our pace of asset sales?

Right. So you think early next year you'll be more of a net seller. Like you said, the liquidity that Fannie and Freddie are offering right now has got a pretty good bid for apartment assets so I'm just wondering whether you think it's a good time to potentially exit from some of the other markets and do some more asset sales?

So it's hard to say at this juncture whether or not we'll be net buyer or seller or neutral. As I said in my prepared marks, values have recovered to a point. And with the liquidity being provided out there by the agencies today, we're looking at our non-core, non-strategic assets and we're probably going to step up the pace of disposition again. We did take our foot off the gas a little bit earlier in the year because we thought values were at levels that we weren't willing to sell at those levels.

Values have certainly improved as the year has gone on. We're seeing more interest in the assets we want to sell. And we'll go ahead and hit that bid. I think it's the right thing for us to do at this time. How much of it gets done? We're not quite sure. I don't think it will be totally contingent on what we can find to buy at least at this juncture.

Got you. And then just question. I know that DC and New York are continuing to grow rents nicely. But looking forward to next year, how concerned are you about cuts in defense contractors, specifically, in northern Virginia area as well as potential layoffs from the banks in New York?

Eric, this is Fred Tuomi. You're right. DC and New York continue to moderate though the leasing season and poise for continued strength in terms of demand, rents renewals, all aspects of our fundamentals. Those two markets are extremely strong and favorable. And I don't see anything slowing them down. In New York specifically, I was just there last week talking to some of our managers and we're seeing on the ground good, steady, stream of new people coming into New York who formerly were not from New York, and they have jobs. And it's not just the financial sector.

It's legal, it's professional services, the entertainment business, especially on the upper west side bringing lots of people into the area. So we're not totally dependent on the financial sector. But within the financial sector, we aren't seeing any further job losses but the pace of adding has slowed. So we think that the financial sector is pretty much stable. We have heard some large firms have hiring freezes until after the election. And then we'll see what happens after that. So we don't see any decline but we see continued growth from other sectors and stability in the financial sector. If they were to have a huge layoff then I think it would be like what we had last year, it would create some softening. But we don't see signs of that coming yet.

In DC, similar story, but the lead there too obvious is the Federal Government. We're renting to a lot of Federal Government employees, a lot of contractors related to that, a lot of lobbyists, a lot of the defense industry. But also a lot of lawyers, a lot of accountants, a lot of consulting firms plus in DC there you have the health sciences with HSA, a lot of biomedical health care, health sciences. You've got a lot of tech, a lot high tech, defense tech, and non-defense related technology. So DC is more than just the Federal Government. But clearly it's the main driver. If the Federal Government were able to actually accomplish some significant cuts, it would be a setback. But as everybody knows, it's usually that's talked a lot about and not actually accomplished.

Right, understood. Great. Thank you.

You're very welcome.

And your next question comes from Rob Stevenson of Macquarie.

Hi, good morning, guys. David, in terms of development, is there anything giving you pause about sticking your shovel in the ground today or is it just a matter of all your real opportunities need until early 2011 to get everything squared away?

It's just timing. It's not that we couldn't start today. It's just getting the entitlements, getting all the final approvals, getting everything buttoned up. So my guess is if those deals that I mentioned could start in 2011, we'll start those as soon as we can.

And then you guys sold out of the JV this quarter. Given the fact that at least currently it seems that acquisition opportunities are more scarce than capital, I mean would you expect to do any joint ventures in the near term?

We have no plans of doing joint ventures on acquisitions. I'll tell you we are talking about potentially doing a joint venture on one of our development transactions. But no, we have not talked with anyone about doing anything on the acquisitions side. Just to be clear, Rob, the joint venture that was just terminated was done with an institutional investor with assets taken off the balance sheet ten years ago and what have identified at that time as non-core markets. So we had just retained a minor promoted interest in these assets and continue to manage them. But generally, they were all of assets in markets that have been identified long ago as non-core assets.

So, for the $600 million that you've got under contract, a letter of intent, the inclination there is to just sell them rather than to do something similar in joint venture then and keep some residual piece?

You're absolutely correct.

Lastly one for you, Mark. When you think about the maintenance CapEx per unit on annual basis, where do you think you guys are trending today?

The maintenance CapEx. Let's flip to that page and make sure I understand which category you're in. So I think as we look at same-store CapEx spend for the year, we think we're going to roll up. Year-to-date we're at $322 million. We expect to be at $475 million, if you're talking about CapEx spend, building improvement spend, if that's what you mean by that. If you mean replacements, I would say on the replacement side, we expect to be with our rehabs, give or take $600 million. So we do think we'll add up right around our $1,075 million guidance number for CapEx.

So the $475 million number is what the recurring but non-revenue producing CapEx would wind up being for the year?

I'm sorry. Just to be clear. The $475 million is building improvement. That's the exterior stuff. And when you talk about the replacements. We break those out for you. So we think about $600 million in totality, about $250 million a unit is rehabs and the rehabs, of course, are much more concentrated, but it's hard for people to distinguish whether rehab is truly revenue creation or just value preservation, right? So you can look at that two ways. We tell you that $350 million per unit without rehabs, we'll spend on replacements. When you add rehabs in there, that gets to $600 million total on replacements. So $600 million on replacements, $475 on these exterior building improvements get you to $1,075 million.

And then one other one on that. Given the portfolio move over the last few years away from the Sunbelt markets and into a lot of northeastern and mid-Atlantic assets, is concentration of your CapEx spend getting narrower and narrower in that second, third quarter time period where the weather permits than it has historically?

Well, we did do quite a bit in the third quarter. I'm not sure that's, that unusual for us. I guess as the markets end up being more Boston and New York, you will see a little bit more concentration there, but I mean, the third quarter has customarily been a pretty big quarter for us on capital.

Okay, thanks guys.

Your next question comes from the line of Michelle Ko with Bank of America.

Hi, thank you. I was just wondering, it seems your occupancy for October ticked down slightly. And your occupancy from the third quarter to the second quarter ticked down slightly a little bit. And I know there's seasonality involved. I was wondering if you were starting to see any resistance to pushing the rents on the renewals?

Michelle, this is David Santee. We're really not seeing resistance on the renewals. David quoted some of the rates that we're seeing and as we move further into the year, we expect those types of rate increases to hold and improve in some markets. Like you said, there is a natural seasonality to our business. And the more that we get out of the Sunbelt, we're more northern focused. That seasonality becomes a little more pronounced. But I think that 10 or 20 basis points that will recover here in the next couple of weeks.

Okay. And then just in terms of some of those markets where you're maybe close to peak or slightly above like New York and DC When you get back into the higher turn quarters next year, second quarter and third quarter, what rents do you think you can push at that point?

Michelle, we're not going into 2011 just yet. I can just tell you that the statistics of occupancy, retention, renewal rates everything has been very strong to this point. Occupancy is very strong and we feel very good about the way we'll be set up going into 2011.

Okay. Great. And then I was wondering if you could tell me it sounds like you increased the acquisitions amount. Do you have any acquisitions currently under contract right now?

We continue to -- we're looking at deals as I said. We have got a pipeline and looking at deals in Boston, DC, LA, and San Francisco. Again they're in various levels stages of due diligence. There's no guarantee we'll close any of them. But we've got some assets and we'd be happy to own it if they underwrite properly and if we can come to a meeting of the minds, if this

And given that you're seeing more product come to market right now, do you think you'll do more acquisitions next year compared to this year's level? Or do you think the acquisitions might, the pace might or the amount might be a little less next year but you might do some more developments?

Well again it's hard to say what 2011 will bring and how much product would be made available and how aggressive our competitors will be with capital. I will tell you this year, at a $1.5 billion one of the reasons that we will get there is, we really did see that flow of business right out of the blocks with the [macro] portfolio. So we've done $500 million or so very early in the year. But we've done that much in the past and we're certainly capable of doing more. And it's hard to predict as to what the flow will be and where pricing will be and if we think it makes sense for us.

Great, thank you. Lastly, if you had the information, I know you gave us that total portfolio, the rents are off about 5% from peak. Do you have some of your major markets, how much they are off from peak?

Michelle, this is Fred Tuomi. On the relative to peak, as a general rule, most markets peaked back in the middle of 2008 around June or July. Those markets that we have right now that have actually established new peaks include south Florida, it was very good to see. South Florida was flat for a long time and now it's had a good steady run of sequential improvements in south Florida. It established a new peak here in October. Boston, which has been a leader through the entire process, has already established a new peak. Denver, Colorado, the same story, good, steady, consistent growth establish a new peak, as well as DC on the Maryland side. Virginia's close but not quite there yet.

And then on the flip side, those furthest away that have the longest recapture to go yet is not surprising on the west coast and specifically in the southwest. So, there we have Phoenix, it's still about 12% off, San Diego about 11% to go, Orange County about the same about 11% to 12% to go yet. And then Seattle is the leader in that respect, it's got 15% or so to go before establishing a new peak.

Okay, great. Thanks so much for the detail. Appreciate it.

You're very welcome.

And your next question comes from the line of David Toti of FBR Capital Markets.

Good morning, everyone. Just a quick question. Is it possible for your guys to go into a little bit of detail, maybe choose one of your acquisitions that was done recently, perhaps in San Fran and DC and walk us through the underwriting details relative to rent growth for the next couple of years? Any changes to occupancy? How you think about the terminal value and your internal hurdles. Given that you framed the acquisition environment as competitive. I was just curious as to how you think about these deals in a very specific example?

Without getting into any of the real specifics, I'm not going to get down to that level of detail for you, but I will tell you that in nearly any acquisition that we're buying today, at some point in the near future be it next year or the year after or the year after that. I'm sure we've got 4% to 6% increases. In the markets in which we're buying with occupancy the way it is and single family home situation, all the things we're talking about. There's no doubt that we'll see very attractive rental rate growths going forward and improvements in revenue on the assets that we've been acquiring.

When we buy assets, Like I've been saying, we've been buying high 4%, maybe low 6%, we think we'll get into the high 6%, and 7% in some of these fairly promptly. IRRs we've been underwriting have been low 9% to maybe low 10%. And we look at what we think is -- what a price per door is today and what the terminal value price per door will be and that value compound average growth rate of that has been 3% or 4%. So, we think that the assumption we've been making have been very reasonable given what's going on in the supply and demand fundamentals across our major markets.

That's helpful. And then in terms of the financing environment, do you assume a static financing environment at the time of the terminal value estimation?

I guess we don't really make any assumptions or estimates about what we think the financing market will be at that time. We just look at what's historically in the markets, what deals have traded for on a cap rate basis and look at again, prices per door and prices per square foot and try to get comfortable as to what those terminal values would be.

That's helpful. And my last question is relative to price points. Have you seen any trends in the last couple of months relative to price point divergence relative to your more expensive apartments versus some of your lower B quality apartments?

In terms of valuations?

In terms of rent growth, your ability to push rents at the high end versus the low end? Do you count it that way?

This is Fred Tuomi. I don't have an exact statistic for you but I can just tell you anecdotally and what my sense is that the bigger tickets unit seems to be selling extremely well. Again as I mentioned before, I was in New York last week. And what they told me was there was actually a waiting list for some of our penthouse units. So our penthouse units which are at the entire floor, lots of premium rents added to them. Those units are full. In fact, we have a waiting list at Trump for some combined units.

Same is true in downtown Boston. The penthouse units leased extremely well during the leasing season and we now have maybe one left. So the premium pricing which we add for premium units such as views, floors, other amenities has recovered fully in those markets. So I feel very good about the ability to rent at the high end. Some of the lease ups that David mentioned, for example, 425 Mass in DC, that's an expensive building. It's a high rent district. We've got very high-wage earning people living there and we've been able to rent those at a very fast pace. So, there doesn't seem to be price resistance at the higher level.

That's helpful. Thank you.

You're welcome.

And your next question comes from the line of Swaroop Yalla of Morgan Stanley.

Hi, good morning. David, you talked about the land parcels you acquired throughout the year and you are looking at more. Just wanted to get a sense of how is the market there? How are the prices trending for the land pricing and what competition you are seeing? Is that the same level of competition for the multi-family assets for the land?

I don't believe there is as much competition for the land sites. But there certainly is competition. There are -- just anecdotally through conversations that I've had with various people at National Multi-Housing Council meetings and the recent ULI meetings, there are awful lot of people that are working on trying to arrange capital to buy development parcels. So land prices have not recovered back to where they were by any stretch. Sellers were never giving it away when prices were very low that the levels that would only make sense for developers to pay. But there are land parcels being made available. And there's certainly competition. But it would not compare to what you're seeing the level of competition for completed stabilized core assets.

All right. And you mentioned a handful of deals for the remainder of the year. Can you tell us if these are the stabilized type deals? Or are more newer construction and condo conversion type assets?

What we have in the pipeline today does not include anything that would be similar to the Vantage Pointe or the 425 Mass avenue transaction. That's not because we've not underwritten them. We have looked at some and we've -- just haven't come to meeting the minds with the seller and frankly, I would like to do more of those. I think we've established a real core competency in leasing these things up. I would be delighted to have more opportunities. But even at that -- for those types of property I would tell you there is competition out there for those.

Great. And just to quickly touch upon the pricing again. You mentioned 8.7% rent year-to-date. I was wondering what those are from the trough?

Just to be clear, I will let Fred answer the question. The 8.7% is what we said our asking rents increase from January to-date.

Right. I was just wondering from the trough of the rental -- rent cycle, how much have those -- how much have those risen?

This is Fred Tuomi. That's one way of looking at that is, as David mentioned, we're about 5% off the peak and probably at the trough portfolio-wide, we were down about 10% to 12% in terms of our rents. So we got 5% more to go.

Okay. Okay. So the trough was around January of this year.

More like probably December of last year.

Got it. Thank you.

And your next question comes from the line of Rich Anderson of BMO Capital Markets.

Thanks, good morning. I'd like to just ask another question about this peak rent concept. I'm wondering why you sound excited that you're approaching peak or beyond peak. Is there something about that, that's a good thing?

Just giving you a frame of reference. We were down 12% and giving you a frame of reference about where we are relative to some point in time. Clearly we're delighted about rents being up 8.7% year-to-date and we like where we sit. We just think it's an appropriate and useful frame of reference.

Okay, just wanted to clarify that and you gave the renewal statistics over 5% in the last few months. What is the unit-over-unit new lease change? I know you gave 8.7% in asking rents since the beginning of the year. But on equivalent basis to your renewal increases, what's the new lease number?

This is Fred Tuomi again. I assume you're asking about replacement rent?

Yes.

Yes and we do have those numbers. Those get a little mix-y because it depends on when someone moves out, how long is it vacant before someone moves back in? What unit type is it? Were they're coming from a three-month lease going to a 12-month lease or vice versa? There's a lot of noise and chatter in that. It's not a clear 12-month, the next day thing. But overall portfolio-wide, we're up about 2.5% to 3% gain on the total mix of our replacement rents and it will vary by market and actually by property and by day of the week.

Okay. On the -- let me just stay on the internal growth story for a moment. If you were to take what you've done this year in terms of rent growth on a sequential basis and just extrapolate that to 2011, do you guys get positive same-store growth in that math?

As David mentioned, we're not going to talk about 2011. But I can certainly say, I think without getting in trouble with David that it's certainly going to be a sizeable number.

Well, just on a pure easy comp perspective, correct? I mean, that's what I'm trying to get at.

Yes. If all current leases were marked for today's market, the answer would be yes.

And I guess the real question is how positive?

Well, if it's in 2011, that's not where we're going.

I'm trying to lead you guys.

I got your note yesterday. I'm very much aware of that.

Then the question on household formation, are they -- when you said the 800,000 to 900,000 new household this year. Where are they coming from, is that the unbundling thing or is there more to it than that in your minds?

I think there's a lot more to it. You've got this demographic factor of this echo-boom generation, however many kids graduate from college, you've got immigration, you've got all things. I would not suggest that it was purely unbundling. But we would expect that there will be some of that. We do see some of that in our own portfolio as we see our own residence unbundle. That's certainly part of it. But as to what markets share unbundling represents I couldn't begin to tell you that.

And the 1.2 million households that you referenced, what do you think you need to get to, to sustain the great things going on in the space right now in terms of household formation?

I don't know the exact answer to that question. But I'll tell you that historically in an apartment recovery, you've relied on household growth and job growth to reestablish occupancy that had been lost during the downturn. But we never really lost much occupancy during the downturn And so we're going into this recovery well occupied and that's why you are seeing strong retention rents and strong increases in our asking rents. I just think that if we get another 800,000 or 900,000 households the next year, I suppose which is possible seeing how that's what happened last year and this year even without our job growth, I think we'll be in a point where we continue to see really strong fundamentals. If you add job growth on to that and get household growth back to that 1.2 million level with no new supply being added it only gets better.

Last question on acquisitions, part of the problem that happened in the 2005, 2006 timeframe people were buying assets at very low cap rates on the belief that there will be growth in that math obviously it did not work out. Ultimately, somebody was left holding the bag. The same thing is happening now. Can you tell me why we shouldn't be worried to some degree that the low cap rate that is you're buying at are presuming some substantial increase in rent? And if that doesn't materialize then are we setting ourselves up for a similar outcome.

I guess just thinking about where we've been buying and where rents were and where rents are today and looking at what's going on in the whole single-family home side. Look, I mean we worry about everything everyday here. I can't tell you we don't worry about anything. but I just look at what prices we are paying per door and per unit and the yields we're getting relative to, frankly, the yields which we're selling our assets, we are happy with the trade.

Okay, thanks.

You're very welcome.

And your next question comes from the line of Alexander Goldfarb of Sandler O'Neill.

Good morning. Just want to go back to the developments for a minute. Just want to get your thoughts on a few things here. One is if high-rise is on the list or if you consider high-rise that's something better to buy rather than develop. And then as you do the next round, should we expect most of this will be done in-house? Or are you going to be contracting with third parties to do the development and then you take over the deal at completion?

I would expect -- I will not say that we will not do joint ventures. But we have our own extremely experienced, extremely capable in-house development team and we'll be looking to that group to provide most of the opportunity. And most of what we're doing is mid-rise product. We do not have any high-rise product in the works today. So again, that'll be mostly mid-rise and garden and [wrap] product. But we'll be doing it mostly ourselves and my guess is mostly be smaller total cost projects than what you've seen us start back in three or four years ago.

And so on the high-rise, would you -- based on lessons learned, would you consider that's product better that's acquired rather than developed.

At certain points in the cycle, I suppose. In other points of the cycle perhaps not.

Okay. And then on the debt side, looking to your maturities next year and obviously, now given where we are in year, better sense of what rates might be? You've got the convert -- the term loan gets pushed I guess into 2012, you only have it looks like very little unsecured. So I'm guessing the rest is mortgage. What should we be thinking about for you guys, refinancing your stuff for next year and obviously some of that will be paid off with disposition proceeds?

Right. This is a great conversation you and I have every call. I think we are positioned well for 2011 maturities. They're mostly in May and August. There's a big unsecured maturity. Our convertible debt comes due in August. Really, there's a put and a call and effectively comes due in August 2011. So I do think of that as a maturity and it's reflected as such. So I wanted to mention that. I think we have a bias towards the unsecured market. I think the unsecured that maybe a 4.3% or 4.4% ten-year unsecured rate. It's a terrific place to finance this Company. The secured debt rate is probably a little bit lower but not much.

So I guess as you think about replacement rates, I think we -- it's a good chance that we hope to get underneath that rate. We give a total fixed rate right now of 5.43% for 2011, And the bogey that we have out there for me and for our treasurer is to get to below that number. So that interest expense is accretive. We are able to do that on the July issuance at the 5.09% issuance. I feel very optimistic about that. We've got some hedges in place as well if rates move up. So I feel good about how we're positioned going into 2011.

And then Mark, the convert, I think of differently rather than straight unsecured, but is the balance -- if we just add up the numbers, is the balance all mortgage? There is about 500 or so of convert. There's the term loan which is another 500. Well, that's 12 I should say. There's 95 of straight unsecured. Is the balance of everything else regular mortgage debt?

Correct.

And is that tax exempt or all just straight Fannie, Freddie type stuff.

Correct. The latter. There's both pools and one-offs in there that need to be refinanced.

Okay. Then just a final question is the other expense guidance of 2011 to 2012, does that include Prospect Towers or Prospect Towers is separate from that?

Prospect Towers cost don't run through that line item. Prospect Towers cost Run through if you go to the P&L, they're going to run through property, tax and insurance line item. So it says real estate taxes and insurance. So, the $3.5 million that's on the non-comp schedule for Prospect Towers, they run through that line item. The $835,000 of less revenue that we talk about for Prospect Towers for the quarter, Alex, that runs through rental income. So, rental income is $835,000 lower this quarter because of Prospect Towers and real estate taxes and insurance are $3.5 million higher this quarter because of Prospect Towers.

So, the other expense, the other whatever is $3 million or so whatever the number is in the fourth quarter that's separate and apart, that's the point.

Correct. Yes, sir.

Okay. Thanks a lot.

Thank you.

You're welcome, Alex.

and your next question comes from the line of Jay Habermann of Goldman Sachs.

Good morning everyone. Just a couple of questions. On expense growth, I know you guys have been pretty good there for some time. As you look out to next year, and I'll take a stab at this, you mentioned real estate taxes down. I assume that favorable benefit will carry into next year. In payroll, you've seen some increases here due to the bonuses, but I am just curious as you think about expense growth next year. Are you expecting to maintain that 1.5% range or are there some factors we should think about that would push you one direction or the other?

This is David Santee. All the municipalities have been hesitant to raise rates and very quick to lower valuations. And they're being supported by the stimulus funds. We really haven't heard what's going to happen next year. If some of these states do what they need to do, we could probably expect some increase in rates next year. But that will remain to be seen until next year. On the payroll, I feel very good about being able to maintain consistent, predictable, expense management for quite some time.

Okay. David, you mentioned starts next year, just switching to development of $340 million, is that a level you would think could move up over time? Is that level what you think to maintain as you look out to say 2011 and 2012 at $340 million per annum?

Again, it's hard to say. I'd just tell you that of the assets that we've acquired this year that could start in 2011. Those starts would total $340 million. If we've started anything of our legacy land inventory, obviously that number would go up. We did have at one time about a $500 million a year start run rate in development, and I suppose we could see that again, but it's just going to depend on if we see the appropriate opportunities relative to what we can actually buy in those markets.

Lastly on the dividend, I know you are running about 75% payout on FAD, any thoughts on an increase as you look out to next year?

We've got a Board meeting coming up in December. There will certainly be some discussion there about the appropriate dividend policy going forward. That's about all I could tell you at this time.

Thanks everyone.

And your next question comes from the line of Michael Salinsky of RBC Capital Markets.

Good morning, guys. First just a bookkeeping question. Prospect Tower is still $12 million for the year?

Give or take. And I think the take means it might be slightly lower. Give or take, and I think the take means it might be slightly lower, but right now we are just still working through that. But it's going. I would have to say, People in the field are doing a great job. People in Chicago are doing a great job, our residents and the City of Hackensack have been very supportive, so, Mike, that number might be a little bit lower, but it's a good enough estimate for now.

Question for the David. Loss to lease on the portfolio currently?

We really don't measure that. I mean LRO gives you 16 weeks of pricing all of which are different, so I would have to pick up a week to measure that. So we don't really look at loss to lease any longer.

Okay. Fair enough. You've made a number of investments here in DC in the third quarter as well as year-to-date. As the market has moved past peak rents, and you are also starting to see some development. I'm just curious how you feel about DC going forward relative to the potential supply concerns and whether that's still a market that makes sense to buy as opposed to build at this point?

It's Fred Tuomi. In terms of the performance of the market, I'm still very optimistic and very bullish on the DC markets. Rents are up double digit year-to-date, 10% year-over-year. We're getting 5.5% and 6% renewal increases. Occupancies are solid, rent to lease is manageable. It's just all good things. I don't see anything really going to change that. In terms of the supply demand, it's had a lot of supply brought in over the last three years running, right through the downturn. We've had 7,000 units back in 2008, 7,600 in 2009, 4,800 units delivered this year at the worst possible time, but yet we've had some of the best fundamentals.

And the reason is that DC, as a general market, had record apartment absorption over the last two years, which is really mind blowing, but when you look at it, it was just fortunate timing with the fantastic job creation from the whole Federal government and all the other aspects I talked about earlier. Right now in 2011 there will be some continued development. Only 1,400 units being delivered in the entire DC, Virginia, Maryland market. So that's a significant reduction. I don't see a slowdown in demand, but it's likely to come at some point. It will moderate, but with only 1,400 units coming in, you'll feel very good about 2011 and early into 2012. We, as well as other people are talking about development in DC.

When you talk to anybody about development, DC is one of the things they talk about. So I do expect some more units to be delivered there in maybe late 2011, 2012, 2013, but will it be back up to 7,000 to 8,000 units? I don't think so. That would take a lot of return at the merchant builders and lot of lending to support that I think it's going to be well capitalized, more disciplined, folks going to be adding units. So, there will be some supply coming back, but I don't think it's going to be disruptive.

Fair enough. And finally as you start to look at development, you've acquired a number of parcels during the quarter. What level of development should we be looking for from EQR going forward, what's the level that you feel comfortable running at? Obviously, you've run down the portfolio here over there in the past couple of years just through completions and lease up. Just wondering what we should expect the long-term development strategy is there?

Well, as I just answered, we can start $340 million in 2011 if we just only start those deals that we've acquired this year that we believe will be in a position to start construction next year. We have in the past had historical run rate of as much as $500 million or so of starts. So, I guess we have the capacity, both with capital and internal capacity of our development team to do $500 million a year. It's just going to be a function of will there be sufficient opportunities, priced accordingly relative to acquisition opportunities. So, it's very hard to tell you, to say Mike, what that will be going forward.

Maybe, to put in different way, what's the preference right now as to buy versus build? Are you moving more towards development at this point or do you still feel that acquisitions make the most sense?

Again, it's a market-by-market, opportunity-by-opportunity decision that we make. Frankly, we have been buying in every single market that we've been buying existing assets in every single market in which we've been buying development sites. So, there have been limited opportunities in these markets and so we've been buying and buying existing deals and buying land sites. So, it's not always an either or proposition as long as you're getting the appropriate risk adjusted premium for taking on all the risks of the development. So, right now in every core market in which we operate, we're considering both.

Thanks, guys.

And your next question comes from the line of Dustin Pizzo of UBS.

Good afternoon, guys. Hey, Dustin. Not to beat the dead horse around the rental rate growth, but just following up on I think was Rich's earlier question related to the rents. Are you at all concerned your ability to continue to push the rent at the same momentum if we don't' see income growth just given that ratio is already back to long-term average? Or do you simply think that people are going to willing to pay more rents or more on rent going forward or I guess just quite frankly, have to pay more on rent going forward given the supply demand dynamics?

I think it's more of the latter. I think they have to. I think we remain very confident just looking at supply demand and all the things we've talked about that rents are going up. It's just a question of how much rents are going up. Clearly, we'd like job growth because we think with that there will be more household formation, rents will go up more. But we think that just at 95% occupancy with all the things we've talked about, we focus a lot on the unfortunate 9% of the population that are unemployed and we got 91% of the population that is employed and those people are hunkering down they are in our units, they're indicating to us that they have no intention of leaving certainly not at the rates that they had in the past. So, we see no reason why we can't continue to get very good rental increases from that subset.

And then maybe I understood -- or misunderstood, but in your opening comments you talked about getting stabilized 7% plus yield in three years at Vantage Pointe on current rents. So, just to be clear is that not assume any increase in rents over the next three years?

Those yields there and the yields on the development deals are based upon rents that are currently in the marketplace. Any subsequent rental increases in the market will only improve those returns.

Okay, thank you.

And your next question comes from the line of Andrew McCulloch of Green Street Advisors.

Good morning. Just a couple of questions and maybe one follow-up to Dustin's question. David, you said people will have to pay a larger percent of their income to rent, one, I just double back up a set without a [whack].

I suppose at some point that could happen. But again I think we are just seeing incremental demand in this system even without a lot of job growth that probably should offset that or certainly could offset that. I'm not suggesting that we don't worry about this stuff, I think we do. We all wonder how long we can continue to push rents and [wait] the rate that we have. But we continue to push as long as our [dashboards] tell us that we can, and again when you are 95% occupied at, on November 1 that's a pretty good place to roll into the next year's leasing season. I can't tell you if rents are going up 2%, 4% or 6%, but we are very confident that they are going up and if we just get job growth it'll just go up more.

Okay thanks. And then on development, can you comment on what construction cost has done may be peak to trough and then whether you are seeing any pressure and if you can may be stick to some of your various components that would be great?

I'm not equipped to go through a lot of the components. But I would tell you that we think construction cost may be were down 20% or so, 20% to 25% we still think they are down 15% to 20% from peak. So, that we think at least relative to our construction costs have been it's still an attractive level, but just in terms of the different components I can't go into that level of detail for you

Great. One last question. It seems like the end of last year the buyer pool on acquisitions fell dramatically once deal got over say $50 million or $75 million which doesn't seem to be the case anymore. Where do you think that breakpoint is today where that the buyer pool starts to materially thin out?

That's a good question. I'm not sure where that break point is frankly, there's a lot of institutional demand for property. And I think what you had seen before, Andy, a year or so ago, late last year where price points that were low and easily financeable by Freddie and Fannie and required an equity component that was rather manageable. Now that the institutional capital is off the sidelines I think all bets are off. There's just a significant amount of institutional money out there looking for assets, and names that we've not seen in a long time, foreign investors that had not been active. So I'm not quite sure I know where that break is today.

Okay, thanks, David.

You're very welcome.

And your next question comes from Haendel St. Juste of KBW.

Good afternoon. A couple of quick ones here. David, I guess I like your thoughts on trying to understand or quantify the value of assets still in the portfolio you consider non-core and in which markets, I guess essentially I'm looking at is how much more of these non-core assets we have left. Are you getting -- How close are you to your target portfolio?

Before I answer that specific question, let me just tell you that in any given year, we will always have assets that we believe we want to sell. So there's no there's no magic goal and then we'll never ever have to sell anything again. So, any in given year there will always be product to sell. But I think we've got $1.5 billion or so of products that we've identified today that we think are non-strategic, non-core assets that we'd like to sell over some time in the next year or so.

Can you give us some of the markets?

We're selling assets today in Portland, Oregon, in New England, in northern Florida. We've got assets in Phoenix. So around the country, we're looking to sell assets.

Okay. And just a quick one. You guys gave us a sense of the renewal rents, you're getting the mid-5%, I'm curious on what you're asking in these conversations?

Typically, we're quoting about 80 to 100 basis points higher than what we achieved. That's a pretty good run rate. Looking out, we're quoting 7% and achieving 6% out here in November, as David has mentioned, but typically 80 to 100 basis points.

And that hasn't changes much over the last couple weeks, months?

No.

Thank you, guys.

There is some negotiation range.

There's a negotiation range within our renewal process and it is negotiated so you're not going to just hold firm at a quote. So we quote and then we achieve at slightly less.

Understood. Okay. Thank you.

You're welcome Haendel.

(Operator Instructions) There are no further questions at this time. Do you have any closing remarks?

Terrific. Thank you everyone for your attention and interest today. We look forward to seeing many of you in New York at NAREIT meetings in a couple of weeks. Have a great day. Have a great day.

This concludes today's conference. You may now disconnect.