住宅地產 (EQR) 2010 Q4 法說會逐字稿

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

Thank you, Marcus. Good morning, and thank you for joining us to discuss Equity Residential's fourth quarter 2010 results and outlook for 2011. Our featured speakers today are David Neithercut, our President and CEO; Fred Tuomi, our EVP of Property Management; David Santee, our EVP of Property Operations; and Mark Parrell, our Chief Financial Officer.

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now, I'll turn it over to David Neithercut.

Thank you, Marty, and good morning, everyone. Thanks for joining us today. We've got a lot of ground to cover today, and to cover that ground you're going to hear, as Marty said, from Fred and David Santee and Mark, as well as myself.

But I want to start today by giving a really big shout-out to all those folks that made it in yesterday. As you all know, we had quite an adventure here in Chicago. It takes a lot of helping hands to get our press release out and to get prepared for today's call, and there was even a little bit of conversation yesterday morning about whether or not we would have to postpone all of this. But sure enough, around 9.00 or 10.00 o'clock, everybody was here, all hands were on deck, and we are really grateful for all those that made it in. And they had some amazing stories about what it took for them to actually get in. But they all made it, and we are all extremely grateful for their dedication and for their commitment.

I also want of knowledge the great job done across the country by the entire equity team in 2010. We had market-leading same-store revenue growth in nearly all of our markets last year. Or expense control was outstanding for yet another year. We acquired some terrific assets, including some land parcels, in our core markets at prices that were very quickly shown to be terrific bargains. And we are well-positioned today, externally well-positioned today, for much success going forward. We have a great portfolio of assets, a great operating platform, a great team of people across the country, and a strong and flexible balance sheet.

Furthermore, as you've all heard us say numerous times over the last year or so, renter demand for well-located, well-built assets in our core markets is very, very strong. This is thanks in large part to a huge demographic of our population with an extremely high propensity to rent; but also due to the fact that there is very little new supply being added or started in our core markets. We benefit from the continued decline in the single-family home ownership rate across the country -- not necessarily because former owners are moving back into our apartments, but because our existing residents have wisely reassessed the benefits of single-family home ownership and are staying renters longer.

Finally, and thankfully, the economy is now showing improvement in creating modest job growth. All these factors combined provide a very positive outlook for the multifamily space for 2011 and beyond. With that said, we want to give you some color on our same-store guidance for 2011. First, Fred will take everyone through the thought process behind our 4% to 5% revenue growth projection for the year, and then David Santee will break down our 1% to 2% year-over-year expense -- increase in expenses. So, Fred?

All right. Thank you, David. I would now like to provide more details on our revenue guidance for 2011. And once again, I will discuss our revenue in terms of the four key drivers -- these are resident turnover; our physical occupancy; base rent pricing, which are the net effective rates achieved on new leases; and then finally, our renewal pricing.

First, with turnover, in 2010 turnover declined further, by 480 basis points. And we ended the year at 56.7%. In 2011, we expect turnover to remain near these great levels. However, we do know, as rental rates continue to recover, and we expect some level of increased turnover from those now unwilling to pay these higher rates. So our turnover assumption for 2011 is 58%, which is still a great number, but does reflect a marginal increase of 130 basis points over 2010.

Turning to occupancy, as you know, by the middle of last year, our occupancy recovered to normal, sustainable levels in virtually all of our markets. Our occupancy assumption for 2011 is to stay right at 95%, and this does reflect a 20-basis-point improvement over the achieved level of 2010.

So, given relatively stable turnover and stable solid occupancy, really, it all basically comes down to rate -- the rate for base rents on new leases and the rates for our renewal leases. On the base rent pricing, we are happy to see that base rents recovered all throughout 2010, as we reported last year. Rates peaked in Q3, right around September, and then softened, as expected, in Q4. Coming into the new year, we begin January of 2011 with our base rents 6% above those levels of January of 2010.

So, going forward for 2011, we expect base rents to follow a normal seasonal pattern -- and that is continued growth through Q1 and Q2; maybe a slight pause in June and July; we'll reach an intra-year peak around early September in Q3; and then, again, seasonal softening in Q4. So on average, we expect our base rents to run approximately 5% above the 2010 levels. And finally, renewals. As we have reported throughout this entire recession, our renewal pricing strategy has been a significant stabilizing factor to our revenue stream. Renewals that were flat to down 1% was a great result through the downturn, considering at the time base rents were following -- falling 10% or more.

So today, in our rent roll, we still have about 20% of our residents that are currently paying lease rates that are still about 5% above our current base rents. This is especially true in the West Coast markets, as they have lagged in the recovery. So now, deep into the recovery phase, these older leases will act to temper somewhat our revenue percentage gains, by one of two cases. Either they renew with us again, with minimal increase; or they may move out, and the vacating being replaced by a new lease at today's still slightly lower rent.

So, our average renewal increases continue to run at 5% through the fourth quarter of 2010, and this trend is continuing into the new year. Our January renewals just finished up 5.1%. February renewals are almost done, and we've achieved 5.3%. And so far for March, we've booked 1,264 renewals at an [achieved] level of an increase of 5.6%. So, for renewals, we expect this level to hold through 2011, meaning an average renewal increase of 4% to 5%, as we reach tougher rate comparisons later in the year.

So, to recap the explanation of our guidance, we expect -- a slight increase in annual turnover, to 58%; occupancy, a solid 95%; base rent pricing growth, on average, over the year of 5%; renewal increases, 4% to 5%. And therefore, the revenue growth for the full year 2011 will be between 4% and 5%. That's the deal on revenue. And now, my partner David Santee will talk about expenses.

Thank you, Fred. As David previously mentioned, our 2011 same-store operating expense guidance is up 1% to 2%. Today I will focus my comments on the three key drivers of our expense structure, which are real estate taxes, utilities, and payroll. Collectively, these account for 66% of our total operating expenses.

As we've discussed on previous calls, increases in real estate taxes are not a question of if, but when. The two key drivers of real estate tax are valuation and rate. For 2011, we approximate rate increases of 3% to 4%, as states rush to fill significant budget gaps. However, these rates are based on significantly lower valuations achieved through the appeal process over the last two years, and many that are still in process today.

Applying our historic success rate and our appeal process, we are confident that we will mitigate this rate increase through lower valuations and refunds, that will produce a net result of minus one to plus one for full year 2011. For utilities, it's pretty much the same story as last year. Municipalities continue to pass through aggressive rate increases -- and by aggressive, I mean high single-digits in water and sewer, as a means to fill their budget gaps and keep pace with an aging infrastructure. On the other hand, the perceived abundance of natural gas and low rates allowed us to lock 50% of our 2011 anticipated consumption at a significant savings to 2010. We've also completed rate locks for electricity, in those markets that are deregulated, at a significant savings as well. All in, we expect growth in our utility accounts to be 3% to 3.5%.

On to payroll. Payroll for 2011 is expected to grow slightly less than 1%, even though we realized merit increases for our property staff of 2.8%. Over 2010, we completed our property transformation initiative, which allowed us to lower our overall property payroll cost, in addition to transferring on-site property bookkeeping to a centralized shared services group. Much of the property level payroll for these shared services has been moved to property management expense, which accounts for a large portion of the estimated 5% year-over-year growth in this line item. We are already realizing some of the expected financial benefits of this arrangement in our other income line, and expect further offsets in payroll expense as we reach 100% stabilization.

All of our other account groupings, other than repairs and maintenance, are expected to show year-over-year declines, as we continue to leverage every ounce of technology that's out there. Whether it's our paperless initiatives, electronic delivery and storage of all lease documents, or additional shared service opportunities, our visibility, curiosity, and execution continue to produce reliable and predictable expense growth.

Thank you, David. I'm going to talk just a minute about 2010 and 2011 transaction activity. On our third quarter call, we gave guidance that suggested that the fourth quarter of 2010 would produce acquisition activity that would get us to about $1.5 billion for the full year, and we are right on top of that number. At that time, we also gave guidance on disposition activity for the fourth quarter that would get us to $750 million for the full year; and we fell a bit short of that goal, with some closings on dispositions being pushed into the first quarter of 2011.

What was most interesting about the activity for the year of 2010 was that only 6% of the dollar volume of our acquisitions occurred in the fourth quarter, and 75% of our dispositions by dollar volume did occur in the fourth quarter. And that's because we began 2010 thinking that property values were cheap, and that led to a lot of acquisition activity early in the year, both for existing assets and land sites. That same view on valuation, when combined with an improving capital market situation, such that there was no longer any urgency to turn our older assets into cash, nearly shut our disposition business down in the first half of the year. But as more capital came roaring back into the space, and asset pricing recovery -- recovered, our activity flipped.

Our acquisition activity slowed considerably in the second half of 2010, and our disposition business ramped up. And it ramped up as investors drove pricing in our non-strategic assets to levels that encouraged us to monetize our investments in those assets. And we noted on our calls throughout 2010 that we expect our acquisition activity to be very lumpy -- which, in fact, it was. And we see no reason why 2011 won't be similar. We've included in our guidance and assumption of $1 billion of acquisitions for the year, and we would expect to get there.

But I'll tell you that with a short list of product we are working on today, this activity won't be evenly conducted during the year. There continues today to be a very strong bid for well located, A-quality assets in our core markets, and cap rates for these assets are in the 4% to 5% range today. So, like the second half of 2010, we will continue to seek out direct acquisition opportunities and deals with a little bit more risk -- risk that we believe we can underwrite and manage, that will provide us with a better risk-adjusted return.

We'll also continue to sell our non-strategic assets and exit non-core markets in 2011, and we've provided guidance for the year at $1.25 billion of dispositions. We continue to see, we think, are pretty good bits for these assets, in the 5.5% to 6.5% cap-rate range, and we think these represent good prices on a per-unit, per-square-foot basis. And I will tell you, we think there is downside risk to these prices, primarily from rising interest rates. So we think it's a good time to sell these assets we don't consider need a long-term [holes]. We also think that selling is a good hedge for any possible changes in liquidity provided in the multifamily space from the GSEs, going forward.

On the development side of our business, we ended the year having finished construction on three assets, totaling 1,450 units, with a construction cost of $707 million. We started construction on three new projects in 2010, the third of which was started in the fourth quarter, and that's in Arlington, Virginia. This is a partial we acquired in the first quarter of 2010, and it's adjacent to an existing property we already own in Arlington. It's a $64 million development cost for 188 units, and we expect a 7.6% yield at current rents on that transaction.

For the year, we acquired six land parcels -- the Arlington, Virginia site I just noted, and previously disclosed sites in Berkeley, California; Alexandria, Virginia; and in southeast Florida. We also purchased two land parcels in metro Seattle in the fourth quarter -- one in Ballard, for 287 units, about a $90 million development cost. We expect a 6.5% yield on today's rents in that transaction. And a deal in Mill Creek, in the Seattle area, which is a 95-unit, third phase to an existing property we own. About $16 million development cost, and we project a 6.9% yield on today's rents for that transaction.

In addition, we have some land sites that have been on our balance sheet for several years, on which construction could start soon. So, we're anticipating that starts for 2011 could total $400 million to $500 million. One start in 2011 will be the southeast Florida deal. And that site was contributed late last year to a joint venture with a large institutional partner, and will be off-balance sheet as a result. This partner will provide 60% of cost -- of construction cost as debt, and will provide 80% of the balance as equity. We will provide 20% of that balance, or 8% of total project cost as equity, and provide construction oversight, et cetera.

We are also considering the possibility of another start in a joint venture structure. And as noted in our earnings release, our change in intention on that particular deal is what caused the impairment on that particular site. It's a very large two-faced project on the West Coast; and we think it makes sense to share the capital commitment with a third party, and we'll explore that option this year.

We expect the balance of our 2011 starts to be 100% for our own account. And I'll tell you that Mark Tennison and his team continue to look for new sites, with the goal of finding opportunities to build new product for us in our core markets and assets that we'll be happily -- happily own and operate for a long, long time. As a major acquirer of assets, though, we will properly weigh the risks and rewards of construction new streams of income against buying existing streams of income, and we'll deploy capital in the most appropriate, risk-adjusted manner. Mark?

Thanks, David. Good morning, everyone. This morning I'm going to focus on four areas -- normalized FFO, which is our new measuring stick for our Company's performance; our 2011 guidance, including a brief word on our planned capital expenditures; I'm going to talk a little bit about our impairment charge, why we took it now, and give you a little detail behind it; and also speak to our 2011 refinancing plans and our balance sheet.

On the normalized FFO side, we're introducing that metric to you this quarter; going forward, it will be the primary way we report our Company's financial performance. And you might ask, why did we do this?Well, we wanted a metric that more accurately reflected the actual operating performance of our Company. And we think operating -- we think normalized FFO does that two ways. It eliminates items that by their nature are non-comparable between periods. And for that, as an example, I think of the impairments or the $3.5 million we received on a couple of litigation matters during the course of 2010. It also eliminates items that tend to obscure the operating performance of the Company. And in that case, I think of the $4 million in insurance proceeds we received in 2010, related to Prospect Towers.

For an example of the benefit of normalized FFO, I'd suggest you look at the fourth quarter 2009 versus the fourth quarter 2010 FFO and normalized FFO reconciliation. And those are on the first two pages of our press release. We think the normalized FFO reconciliation presents a much clearer picture of what happened at EQR in this fourth quarter, and what the trends are in our business. Another big benefit of using normalized FFO is that it will allow investors to more accurately estimate the total dividend amount under our new policy. Because the Company provides regular, quarterly financial guidance, investors should have transparency as to the expected annual dividend, and therefore, the amount of that final fourth dividend payment.

In fact, in the press release, we have indicated that based on our guidance -- and this is always subject to our Board's discretion, we expect a total 2011 dividend of between $1.56 and $1.62 per share. Applying our new dividend policy to our guidance, this means that the Company intends to pay its usual $0.3375 per share dividend for each of the first three quarters of 2011. So that means we will pay $0.3375 in April, July, and October 2011. For the fourth quarter, the Company intends to pay a dividend in January 2012 that will bring the total payment for 2011 to between $1.56 and $1.62 per share, which is that 65% of normalized FFO number. Now, we are still providing you with all the information you need to look at us on either an EPS basis, or -- and I will call it a classic FFO basis. And to do that, you need to look at pages 25 and 26 of the release.

Now, on to our guidance. We have provided a normalized FFO guidance range for the year, of between $2.40 and $2.50 per share. The biggest drivers, of course, as usual, are same-store, and revenues and expenses have already been covered capably by Fred and David Santee. This same-store activity this year will generate $0.24 in incremental normalized FFO for the year. Non-same-store, we've talked a lot about non-same-store on prior calls, it's been a big contributor to our recent results, it will be a big contributor in 2011.

We expect non-same-store to add $40 million, or $0.13, to our 2011 results. That will be split between development lease-ups and the lease-ups of the two luxury properties -- that's 425 Mass Avenue deal in Washington, D.C., and Vantage Pointe in San Diego, that we both bought fully built, but are all or mostly unoccupied. Our very successful acquisition and lease-up of 425 Mass Avenue alone will add $0.03 of normalized FFO to our numbers. Vantage Pointe will contribute another $0.02 of normalized FFO. Other big contributors are our large development deals -- Brooklyner, our brand-new, 51-story sleek high-rise in Brooklyn; Third Square, our new development in Cambridge, Massachusetts; Westgate, our new 480-unit deal in the heart of Pasadena, California; and 70 Greene, our new Jersey City high-rise.

Now, we're going to talk a little bit about transaction activity and the impact of transaction activity on guidance. First, our 2011 transaction activity. We expect that to be about a $0.05 dilutive impact to our 2011 numbers. Our transaction guidance is weighted towards dispositions occurring in the second quarter and later in the year. There will be some sale activity in the first quarter of 2011, but less as we reload the pipeline after a big fourth-quarter 2010 sales effort. Acquisitions are pretty -- are assumed to be pretty evenly spaced in our guidance.

On the 2010 transaction side, their dilutive impact will also be about $0.05. Our 2010 acquisitions were early, and our 2010 dispositions were late in the year. That had the impact of minimizing our 2010 dilution from these activities, but will leave 2010 -- or 2011, pardon me, with a full run rate of dilution. On the interest expense side, interest expense will reduce normalized FFO by about $0.03 in 2011. We have assumed slightly higher floating rates of interest 2011 than 2010, and have assumed the paydown of some of our debt with existing ATM proceeds. Please recall that prepayment penalties do not factor into the calculation of normalized FFO.

I want to talk a little bit about the share count dilution and give you some color on that. You should expect our average share count to be about 10 million shares higher in 2011 than 2010. Our guidance assumes no additional use of the ATM program beyond what we have disclosed in the press release, as issued to date. ATM proceeds still on our balance sheet will be used for future investment activity, debt repayment, and other corporate purposes. We have estimated about a $0.04 drag from these additional shares; but depending how and when we use the funds, that division estimate may change.

And a final little reminder, all numbers I just discussed were on a normalized FFO basis. Our guidance on page 25 of the release is also on a normalized FFO basis only. On page 26, we give you the numbers you need to reconcile normalized FFO to regular classic FFO. Quick note on capital expenditures. Guidance for capital expenditures is $850 per same-store unit without rehabs, and $1,200 including rehabs.

This is all laid out for you on page 22 of the release. We have added disclosure that we rehabbed about 4,300 units in 2010, and that we expect to rehab 5,500 units in 2011. In 2011, we expect to spend about $7,500 per unit rehabbed, which is up slightly from the $7,300 per unit rehabbed we spent in 2010. Total spend on capital expenditures, exclusive of rehabs, will be up modestly, about 2%, as increases in building improvement costs are being offset by lower replacement cost spending.

Now, a little discussion on the impairment charge. We did take a $45.4 million charge to earnings this quarter. It affected FFO, as well. It does not affect normalized FFO. The two properties involved in our charge were priced and purchased by the Company in the 2005 to 2007 time frame, when land values tended to be higher. So why did we take the charge now?

Well, previously, we had intended to hold, and had the ability to hold, these two pieces of land, and to develop them or sell them over the long-term for a price that we believed would be -- and this is all on a nominal dollars basis, sufficient to recover their respective book values. Our intentions as to these two pieces of land changed recently. One will likely be sold outright in the near term, and the other will likely be sold to a joint venture, where we will not be the majority partner. The rules require that we mark these pieces of land to market now, if we expect their sell prices to be lower than their book bases.

So then, looking at the rest of our land book, we have only two material pieces of land that have not been marked to market. Both are in good long-term locations in California, that we intend to develop and we have the ability to hold. We think that in the long run, the cash flow from each of these pieces of land will exceed their respective carrying values on our books, once projects are built on them. And therefore, we will not be marking them down.

That said, the land for these deals was priced in the 2004 to 2007 time frame, and like nearly any land acquired in that time period, they are not worth their book value today. If we were to mark these pieces of land to market right now, we would take about a $34 million charge. So that's our maximum exposure, we had to mark these assets to market right now, but this is not a charge we are expecting to take.

A couple quick notes on the balance sheet, and I'll turn it back over to David Neithercut. Included in our guidance is an anticipated mid-year debt issuance of about $400 million, at about a 5.5% rate. Please remember, we've hedged a good portion of our interest rate exposure, so we have some protection if rates increase materially. A smaller secured issuance, which was required for tax reasons, is also planned. Overall, the rates on these new debt issuances are expected to be about a push, on run rate basis, compared to the fixed-rate debt that's been replaced.

Cash on hand, including 1031 escrow balances, stands at $365 million today, and the revolving line of credit has about $1.35 billion in capacity. So, in sum, we have plenty of short-term liquidity. Cash balances at year-end should be about $420 million. David Neithercut mentioned that we could start up between $400 million and $500 million in development deals in 2011. We expect to spend about $160 million on construction in 2011, including projects already in progress and projects slated to start, as we begin to ramp this business up.

We will be conservative in financing our development business, using mostly proceeds from dispositions or ATM proceeds to fund that business. In 2011, we expect to have free cash flow of about $100 million after all capital expenditures, including rehab spending and payment of our expected higher dividend. This free cash flow may also be used to finance investment activity.Now, I'll turn it back over to David Neithercut.

Thank you, Mark. Before we open the call to questions, I want to touch on two final points. The first is our equity-raising activity under the ATM that Mark mentioned. Since its inception, we've issued approximately 12.7 million shares under this program, raising about $570 million. And that represents an increase of about 4% to our total shares outstanding. And I want to remind everyone that when we put this program in place, we said that it would be used to address investment opportunities.

The first issuance was done in early 2010, around the purchase of [a macro] assets. The most recent issuance activity was done recognizing that we had been a significant net buyer of assets during 2010, and that we have a development pipeline, as Mark mentioned, of $400 million to $500 million of starts in 2011. Continued usage of the facility will likely be the result of investment opportunities that we cannot identify today, and that can't be funded with disposition proceeds.

Because we are very happy today with our position, with our current credit statistics, with our coverage ratios, et cetera, and Moody's has made an announcement about those credit statistics today, and we have all currently identified needs for capital already covered by previous activity. That said, to be sure, we have capacity, if necessary, down the road. Our Board has recently authorized an increase to this facility.

And lastly, as Mark mentioned, in early December we announced a new dividend policy. And I will tell you this is the result of us stepping back and questioning the conventional thinking about dividend policy. And this was done at a time when we thought we were at the beginning of a period of very strong earnings growth, and therefore, very strong dividend growth going ahead -- going forward.

We felt that a policy that was more directly tied to operations was simply a better way to run the railroad. And this is a policy that will quickly and proportionately produce a dividend increase when operations improve, and on the other hand, will quickly and proportionally reduce the dividend when operations go down. It is very simple, it's very transparent, and very predictable. And in our minds, anyway, the right dividend policy for Equity Residential, and one that should produce a strong dividend increase for 2011. And with that, Marcus, we'll be happy to open the call for questions.

Thank you, sir. (Operator Instructions)We will pause for a moment to compile the Q&A roster. The first question comes from the line of Jeff Spector with Bank of America.

Great, thank you. David, I guess, just following up on your comments on the dividend policy, what has been investor reaction to it?

I'll tell you, honestly, we haven't heard boo about it. I've had several direct conversations with investors who understood why we did it and thought it made sense, but there's been very little reaction to the policy changes.

Okay, and then, second question. If I could just focus on acquisitions. Can you provide a little bit more detail? You said -- changing the risk profile and also the return, if you could talk a little bit more what your -- what you are thinking on acquisitions?

Well, I guess I'm not sure we are changing our overall risk profile. But I will tell you that in the first part of 2010, we moved very quickly and took advantage of opportunities to buy some terrific assets that were stabilized assets. As capital began to -- more capital began to chase those sort of assets, we began to look elsewhere. And that led to, among others, the acquisitions of our 425 Mass deal in D.C., which was totally vacant at the time of acquisition. And also, our deal at Vantage Pointe in San Diego, which at the time was about 20% occupied.

We also, later in the year, bought some deals that we knew we were going to do some significant rehab work to reposition those assets. So I think those are the kinds of things that we will be looking at. I'm not suggesting that we will never buy or won't buy a stabilized asset, but there's an awful lot of capital chasing those. We think that we can manage risks, underwrite risk and manage those risks better than the average bear. And as a result, we are looking for things that we can either do directly, or that might have a little bit more risk on them, so we can get our yields up, as long as they are appropriately risk-adjusted.

Okay, thanks. And then, last question. You quickly mentioned the GSEs preparing for possible change -- which, of course, is prudent. I mean, just curious, have you heard anything recently about potential change there -- anything we might hear at the end of February?

Yes, Jeff. It's Mark Parrell. What we've heard is probably what you've heard -- that the President is going to put out a statement the next few weeks on GSE reform. I believe it was required by the Dodd-Frank Act, that he actually do that in January, and he's going to do that in February. You know, I'm not sure that it's going to really result in any substantial reform efforts in this Congress. I think this is something that we think is more likely to have an impact in 2013, after the next presidential election, where there's a little bit more consensus on what to do with the GSEs. And particularly what to do with them on the single-family side.

Also, with the country so dependent on the single-family housing side on the GSEs, I think real reform is going to be delayed a bit, until the housing market stabilizes. So in the near-term, we don't see big risk to the GSEs in the multi-side. But, in the longer term, we certainly think there will be changes there, and I think it is prudent of us to sell some of those assets that are more susceptible to that leveraged risk now, and not wait to see what happens.

Great. Thanks, Mark.

Thank you.

You're very welcome.

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

Hi, good morning.

Good morning.

I was just -- touching back on the expense growth comment, I was wondering, what do you -- how do you factor in the weather-related expenses, we've been having record winter storms across the country. How do those factor into your guidance?

This is David Santee. If you look back at last year, we had significant storms -- I think to the tune of $3 million in additional operating expense. I mean, typically, when we do our budgets, we take a three- to five-year average in some instances, primarily for snow removal and what have you. I think with -- I would tell you that probably with the storms that we had in December, we have -- we have made an assumption that the likelihood of increased storm activity, what happened this year, and I think we've embedded that in our guidance.

Okay, great. Also, I just wanted to touch upon the pricing for the debt. You might have mentioned this already, but I just wanted to get some indications on pricing you are seeing for the secured and unsecured debt.

Sure. On the unsecured side, right now, I'm spotting a ten-year about 3.5%. So, on the unsecured side, we think we could do a deal maybe somewhere around 4.8%. Terrific rate, I would say. Very interesting recent set of developments is that the secured market is wide to that number. Fannie and Freddie probably are more like 200 over the ten-year.

So, that would lead you to believe that we could do a deal maybe around 5.5%. It's pretty unusual for Fannie and Freddie to be wide of the unsecured market, but that's what's going on now. So again, I think we're maybe 480 on the unsecured side, on a ten-year basis, and probably something like 550, 540 on a ten-year site on the secured.

Great. And, lastly, I just wanted to talk about an industry conference last month, you talked about bifurcation of rent growth between the AA minuses and the B-type assets. I was wondering if you have seen that in your portfolio, and if you track that kind of metric?

Yes, this is Fred Tuomi. We've looked at that over time. It's -- I wouldn't say it's not a significant departure. We've had more on a market basis, and what we are seeing right now is more of a departure on the market. Northeast market, New York, Boston, D.C. continue to be very strong, and the West Coast market, particularly Southern California, continues to be weak. Within those markets, looking at between As and Bs, not a material difference; although our preference is to have more of the urban core, high-quality, high-density assets, and those continue to do extremely well.

Great. Thank you so much.

You're welcome.

Your next question comes from the line of Eric Wolfe with Citigroup.

Thanks, Michael [Zuss] on the line. Just following up on a prior question. Are the assets you are planning to sell this year -- are those sales contingent on you finding acquisition opportunities to put the capital into? Or are they simply assets where you are trying to take advantage of attractive pricing you are seeing?

Well, there's a certain number amount of assets that we can sell every year without having to cover those with acquisitions, just on a tax basis, to -- that will not impact the dividend policy. And Mark said that's about $300 million. So, we have $300 million of dispositions we can do without worrying about additional acquisitions. And that's why we've got a spread of $250 million in our guidance. We are confident that we will be able to find acquisition opportunities, but we will continue to sell, at least up to that $300 million level, if we cannot.

Got you. And just to follow-up, also, on (inaudible)'s question, do you see any pressure on transaction pricing, just given the rising interest rates you mentioned? Just wondering whether you think it makes sense to continue buying at -- call it like a 4% and 5% cap rate, when borrowing is at -- sort of more like 5.5%?

Well, we believe that property values -- put aside cap rates specifically, but property values of lesser-quality assets and sort of non-core markets, as Mark noted, are more predicated on interest rates, on Fannie financing and mortgage rates and the amount of leverage that buyers can get. There's less impact on value, I think, of the types of property we've been buying, because the institutional investor with whom we compete is not debasing their bid off of what mortgage rate they can get.

And so, that is what's encouraging us or giving us, I think, the thought process that we ought to continue to sell. And as I also mentioned, we are not all that keen on buying 4%, 4.5% cap rate deals, that are stabilized. We have bought 4%, 4.5% cap-rate deals that we believe we can reposition, and I'll tell you we expect high 5%, 6% returns on those within 24 or so months, because of the $7,500 or $10,000 [a door] that we may put into them. So, we are trying to manage that -- the low yields by taking a little bit more risk things, and acquire assets that we believe will quickly -- again, as I said, be 5% and 6% deals. And managing that against the disposition business, which I said was about a 6.5% disposition cap.

And just an additional note on the financing side. When you look at the 5.5% that I suggested Fannie and Freddie would do a deal at, the life companies have become very competitive, and in many cases, are inside that number, particularly for lower-leverage deals in better markets. It doesn't have to be just a New York or a San Francisco or D.C. But in a better market and a newer asset, they can be inside -- and we've seen instances where they are inside of the Fannie, Freddie pricing. And I think the life companies are going to continue to be providers, at least on the margin, of a fair amount of capital on the debt side to our business.

Got you. Thank you.

You're welcome.

Your next question comes from Jay Habermann with Goldman Sachs.

Good morning, everyone.

Hi, Jay.

Hi. Just a question on market rents. And, I guess, today you are sitting here with -- on average rents about -- asking rents about 5% above 2010 levels. So, as you look to the end of this year, where do you see rents trending in terms of that pace of increase?

This is Fred Tuomi. Actually, today we are sitting at 6% above last year's. And next year, as I mentioned earlier, we expect, on average, to run about 5% above last year's level. And because of the seasonality of the business, pricing is also seasonal -- has a seasonal effect as well. So, we will have steady growth, and then growth will pick up a little bit faster as we head into May and June. June and July might be a little bit of a flat, and then September will have another tick-up, and then we will tick down in fourth quarter. So, intra-year, meaning what are the rents going to do from January today, through the year? Like I said, on average it will be up 5%, but won't be up 8% year-to-date when we hit the peak in September, and then fall off again in Q4. And again, blended average up 5%.

Okay. And just a question on the debt maturities. As you look at the roughly $1.1 billion -- and this assumes you push out the term loan to 2012, is your anticipation that you will use the ATM to pay down some of that debt? I know you talked about the $500 million financing, but that leaves roughly $600 million of additional maturities.

Yes. Our guidance assumes that we are going to use about half the cash we have sitting -- so call it $200 million, $250 million, to be applied to make our debt issuance, the mid-year debt issuance I referred to, smaller.

Okay. And then, just lastly, on the start side, can you talk about the markets and the returns you are expecting? And then, in addition, how much land you would look to buy this year?

Well, I don't have any plans or any, specifically, budgets or guidance for land acquisitions. I would expect us to -- to certainly acquire land. But I think what we've been expecting to do on the build side -- as I said, the assets that we bought, or sites we bought earlier in the year, we think are 7%, 7.5% yields. And that which we bought later in the year, Jay, have been more like 6.5% yield.

Okay. Thank you.

You bet.

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

Just following up from Jay, on the mark to market, the loss to lease, it sounded -- I just want to make sure I have everything straight. It sounds like you're anticipating rent in 2011, the in-place, being up 6% over '10, and that in '12, they would be up like 5% over '11. So it sounds like sort of a constant, essentially constant trending loss to lease. Is that the right way to think about it? Did I hear correctly?

Yes, this is Fred Tuomi. We didn't really talk about 2012. I can't wait to start talking about 2012, I think it's going to be great, but we haven't really talked about it yet. We're up -- this January, today, January, our base rents are up 6% over the same period last January. So, our base rents on new leases are up 6%. And we think they are going to trend, on average, 5% above last year's level as they move through the year, through 2011. So, loss to lease, as we've talked before, we really don't focus on that number as a statistic, because it changes every day, based on what our prices comes out of LRO. We do have -- Eastern markets have some embedded loss to lease, but we still have some Western markets that have some embedded gain to lease.

As I inferred on our renewal discussion, we have about 20% of our in-place leases, right now today, that are still at rents above the current market asking rent, by about 5% on average. So, as those continue to roll off, either by moving out or renewing at a flat or a smaller increase, they'll be, at that instant, marginally dilutive. But then, at least we'll get them behind us. So, I think by the time we finish this year, we'll have most of that behind us. And again, it's mostly in LA, Orange County, San Diego, San Francisco, and Seattle, that West Coast market. Once we get through that, then we are set up for just good solid, even better growth in the future, because we won't have that as a drag.

Okay. Then, that helps -- that helps clarify. Next question is just Illinois-specific. A lot of news about the raise -- the rise in taxes out there, corporate taxes. So, two-part question -- one, what's the bottom-line effect to your FFO? And then two, is -- Bloomberg -- on the Bloomberg News this morning, you have an article about Governor Christie trying to lure businesses. How much of an impact -- like, is this enough to make you guys decide to move out of state? Or is this one of these things that -- sort of like operating in California or New York, you just sort of suck it up and you absorb it and you move forward?

With better than two feet of snow on the ground and a temperature of negative two, I think we'd move just about anywhere at this point. That, I don't think, is in the offing. The way it really works as a REIT as a pass-through entity, is really its employment taxes. Because, obviously, we have a substantial number of employees in Illinois. Those really aren't changing much. It's the income tax.

So the Company, really, there is really no impact to us from what happened in Illinois, the tax increase. That's more an impact on all of us as individuals. I will say that the Company is owed a few hundred thousand dollars by the State of Illinois, so I guess there may be a positive impact, and we can finally get paid our refund. But that's really minimal for us, and I really -- no -- no real impact, Alex.

Okay, and just, final question. Are you noticing any shift in number of college grads coming into your apartments, or has the mix been pretty constant, college grads versus those, let's say, 25 and over?

Alex, this is Fred again. I don't have a statistic for you, but I can just tell you, anecdotally, we are seeing a lot of new fresh faces with job prospects and a rent check in hand. And we are seeing that -- I've heard that recently in New York and in Virginia and in downtown Seattle, and we're seeing a lot of that in our recep at Vantage Pointe in San Diego. Very good renter cohort demographics, very exciting to see. They are young, they're college graduates, they have good jobs, and they want to live in great buildings in urban settings.

Thank you.

You're welcome, Alex.

Your next question comes from the line of Dustin Pizzo with UBS.

Good morning, guys. Fred, on the corp portfolios, as you look at renewals, what percent of the residents today are just checking the box on those rate increases, and what percent are pushing back? It is still around that 60/40 mix?

Yes, yes, it is. We expect maybe we can move that up this year, because David Santee has just kind of put together a -- an online renewal capability, to where it can do it paperless very easily. So, we expect maybe more will, instead of checking the box, it'll be clicking the button. So that should move up. But right now, today, it's still about that 60%, and then the others are going to come in and want to negotiate. But the balance of power on these renewal negotiations began to shift last year, middle of the year, late last year. And so, we are kind of enjoying that. So, it's not as big a concern as it was maybe 12 to 18 months ago.

Okay. And then, as you look across the portfolio, are you seeing any significant differences in your ability to push on renewals and markets for the renter, back at or above the prior peaks or higher as a percentage of the tenants' income, as opposed to some of the more depressed markets, like Florida, Phoenix, Orlando?

Yes, it is kind of a tale of two cities there. On average, I mentioned our renewal increases are very solid, north of 5%, hitting 5.1%, 5.3%. But the market mix is a little more telling. For example, recently, for February, Seattle was up 7%, very strong renewal increases there, especially in [CPD]. Phoenix is coming along now at 6.8%; Denver, 6.3%; D.C., 6%; New York, 5%. All very good numbers, but kind of bringing up the rear, still, in Southern California. Orange County is showing signs of improvement, but they only did a 2.9%; San Diego got soft to a 2.4%; and then LA, just like last quarter, was a 3.5%.

Okay, that's helpful, thank you.

You're welcome, Dustin.

Your next question is from the line of Bill [Arkson] with Benchmark.

Good morning, guys. For longer-term modeling, I guess, more than anything else, how reasonable is it to expect rent to income -- household income levels, what have you, get back to the peak pricing that we saw at the end of '07, beginning of '08. I'm just kind of looking at the psychology of the matter, and any regional flavor that you guys have would be appreciated, to that end.

Yes, this is Fred Tuomi again. We had looked at that, we've got some questions on that, throughout the year. And, basically I'll just sum it up, saying we are not concerned about that -- that issue right now. We are still 6% below peak rents, if you want to use that term, from the middle of '08. They've paid these rent levels before. They are going to pay them again. And it will grow from there.

The numbers really haven't changed dramatically, they look very reasonable, under control, whether you look at rent as a percent of income, or a multiplier, or how many people are getting to the danger zone of paying more than 35% of rent. And every way we look at it, it comes up where California's really the only possible concern. It has always been that case. People in California pay more for housing of any type, so it doesn't surprise me that they are kind of on the high end of all these ranges. But I think if you looked at that five years ago, you would have had the same thing. And you look at it five years from now, it will be no different.

So, I'm not really too concerned about this issue of our -- if you were pushing rents to the point where they won't be able to pay, because again, people are going to -- jobs our improving, incomes are going to improve behind that, and again, they're for great buildings, great locations, people want to live there. We don't need that many households to fill our buildings.

Okay, it's a difficult analysis to do, I've done the work. But since you guys have been so active on the disposition front, it sort of throws off the ratios. Now, with regard to the disposition program, a lot of the best assets and the best markets have already been picked over, the trophy assets have been bought or bid up. Is it -- what I'm hearing is that investors are turning to the less trophy-like assets, and -- are you seeing a benefit to the pricing in your disposition program as result?

Absolutely. It didn't take long, Bill, for the capital chasing the better-quality product to kind of go downstream a little bit. We've taken this opportunity, to your point, to sell some properties that, I guess, we'd call extreme suburban Boston. In fact, someone said to me one time, well, that deal is not in Boston. And I told him, it is if you're selling it. The same thing with some Washington D.C. assets. I'm not sure local people in Washington, D.C. would think that these are D.C. assets, but when you are selling them, we do.

So, absolutely. We are seeing very good pricing for well way-suburban assets, as well as that capital is finding its way into our non-core markets, and is giving us what we think are pretty good business. I noted on those assets we want to sell in our exit markets.

Okay, well put. Thank you.

You bet.

Your next question comes from the line of David Todd with FR -- I'm sorry, FBR Capital Markets.

Hey guys, just a quick question. David, can you just clarify a little bit -- I want to be sure I understand the comment you made relative to risk, rising rates, and some of the assets that you're thinking about disposing of. Are you seeing the risk more on the ability to secure those with debt, or is the risk more related to pricing, in your mind?

Well, I guess they're -- they kind of go hand-in-hand. As Mark noted in his comments, the assets that we've been selling have been bought by buyers that are generally higher-leveraged borrowers. And I'll tell you that Fannie and Freddie have an enormous market share financing those assets.

And as interest rates have come up over the last six or so months, we have seen an impact -- a negative impact on valuations on those assets. So as we sit here today, with an improving economy and the expectation at some point in time rising interest rates, as well as who knows what with respect to Freddie and Fannie and the liquidity that they might be providing in that space, we look at the prices per door and prices per unit of the assets that we are contemplating selling. And we're telling ourselves that it makes sense to go ahead and sell some of those today. And continue to do so going forward.

Do you have a LIBOR assumption that you can share?

Sure.

Just in terms of what you're modeling?

Yes. So, just floating rates of interest for us, about $0.01 negative for the year. So, we had about 30 basis points for LIBOR for 2010, is what it ended up being. And I think we raised that up, give or take, to about 90. So that difference between the two is what, at the end of the day, ran through our guidance.

Okay. And then, assuming that --

And that's the curve. We really take the LIBOR curve, by the way, and just use that. We don't really try to guess ourselves what rates are going to be.

All right. And then, so David, going back to previous question. Do you see that impact, that pricing impact, sort of bleeding over to the higher-quality assets? Or do you see that segment as being somewhat resilient, with these kind of LIBOR assumptions cooked in?

Well, I'm not suggesting that those assets are -- valuations are based upon LIBOR assumptions. I just think the better-quality assets are not as -- the valuations are not as directly tied to say, Fannie and Freddie advance rates and Freddie and Fannie absolute interest rates. I think those are more subject -- valuations of the better-quality assets that we've been buying -- and it represents the lion's share of our portfolio today, you've got chief investment officers of institutions looking at BBB bond yields and other investment options. So, I think that certainly, valuations of multi-(inaudible) assets, of even the better quality, will be impacted as -- if interest rates go up. But not as much as the more leveraged-type assets that represent the kind of properties that we've been trying to sell.

Okay, that's helpful. Thank you.

You bet.

Thank you, sir. Your next question comes from the line of Rob Stevenson with Macquarie.

Good morning, Rob. Come in, Rob.

Rob, you're line is open.

Why don't you go to the next one then, Marcus?

Okay, sir. Your next question comes from Rich Anderson with BMO Capital Markets.

Marcus? Are you having any problem on your end?

I'm queuing up the next question now, sir. Can you hear me fine, sir?

Here at Equity we hear you fine.

So, let me check their line, sir.

Thank you.

You're welcome. Yes, sir, I'm in the process of opening their lines now, sir. Okay?

Thank you very much, Marcus.

Thank you, sir.

Marcus, what are we doing?

I'm opening the line now, sir.

So, what does that mean?

Your line is open at this time, Rich. We have a question from Rich Anderson from BMO Capital Markets

Can you hear me?

Yes. We have you, Rich. Great. Thank you, Marcus.

But, I feel bad because Rob was in front of me, but, you know, he'll get over it.

That's alright. We'll come back to Rob.

Just quickly, if I could spend just a second on the 2010 results, how do you get from a $2.07 of conventional FFO to $2.27 of normalized FFO?

Well, you have the impairment charge.

Yes.

Which is $0.15.

Yes.

So -- and then you add to that about $0.05 of run rate, so that's the convertible debt discount, which every year is, give or take, $10 million. You have pursuit costs, which we had this year, to about five. You have some settlements related to the Prospect Towers insurance matter, so that's the reconciliation. We also give you that information, if you need it, towards the back of the release.

Okay, but wouldn't the $2.20 previous midpoint of FFO have included all of that?

The $2.20 previous midpoint did include -- well, it didn't include the Prospect Towers insurance recoveries, necessarily. We weren't aware of those, for example. We weren't aware of the impairment charge when we gave that guidance, either.

Okay. All right, I just was trying to reconcile.

No, I understand.

I don't want to spend too much time on 2010. On your comments on equity, if I could just get this straight, you don't expect -- your sources and uses, what you are seeing now in terms of acquisitions and dispositions, you would see no use of the ATM. And any equity would come in the form of a conventional equity offering of about 10 million or 11 million shares. Is that right?

Well, the ATM -- we can always do a large conventional discrete offering, if we care to, under our universal shelf. The ATM 10 million shares are the [dribble-out] process. So those two distinct things? Just to clarify our guidance, to be just kind of clear about it, the 10 million shares we added to the share count, the average share count for 2011 versus '10, have an effect of making our FFO, whether you count it normalized or classic, $0.06 lower for the year. Depending how we use that money, that dilution will go away or dissipate, to some extent.

I plan to use some of it for that debt offering -- reducing our debt offering. So, Rich, if we use it for development, then we'll have cap interest; if we use it for investment, we will have -- call it a 4.5% to 5.5% yield. So that dilution number is likely to change. There's $0.04 of dilution there, and I really assume that was invested in 40-basis-point cash for the year, which I admit is a cautious assumption. But it's the one that triangulated correctly with the rest of our guidance.

Okay. But so, in the -- the equity, the 10 million additional shares weighted average could come in any form of equity raising, including [an ATM]?

No, let's just be clear. There's -- under the [Aegis] -- and, I'm sorry, there's two different 10 million share numbers here. Our weighted average share count for 2011 is expected to be, and assumed to be, in our guidance, 10 million more shares than our weighted average share count was in 2010.

I saw that.

Separately, the ATM -- we re-upped the ATM, so we have 10 million shares worth of capability to issue. We've assumed that we are not going to issue at all under that ATM, further, for the rest of this year in our guidance.

And then, the last question is on -- just a question and comment on this normalized FFO. I guess, once upon a time, there was one definition of FFO, and now there's maybe 30 or 40. And I understand your thought process in going through it. But when I look at the impact of normalized versus conventional FFO for 2011, it's a difference of $0.05. And I'm wondering, why go through all the brain damage, if that's all the difference is? Now you're going to probably screw up consensus, to some degree, that may not make as much sense.

Is it possible -- is the rationale maybe that that $0.05 spread could grow over the course of the year? It just doesn't -- it doesn't ring clear. I guess a cynic would look at it and say, maybe they had this big impairment in the fourth quarter, and let's get on top of it now. But I just -- if you could kind of give us a thought process a little bit more, because I'm just not seeing the logic.

Sure. Well, let's look at the second page of the press release. I mean, when you look at the second page of the press release and you see what's going on at EQR, what really happened -- isn't what really happened at EQR contained in the normalized FFO rec at the top of the page?An upside on NOI, a downside on debt -- if you look at the debt rec on the prior page, which is classic FFO, it actually looks like I did better on interest expense that quarter. And that's not at all the case. It's just because of the tender charges.

If you look at page 1, you also see that Prospect Towers isn't mentioned at all. It's not mentioned at all, because we've received almost $3 million of insurance proceeds. We take that as a GAAP matter, and as a regular FFO matter, against the cost of Prospect Towers. So, it looks like Prospect Towers didn't hurt us at all in the fourth quarter, where the reality is it hurt us for $0.01, as we had told you before in our prior guidance. I appreciate it adds some complexity to your job, but for us, it's just a much more accurate way for our investors to see what's really going on inside the Company.

But aren't acquisition costs and pursuit costs and debt extinguishment costs -- aren't they kind of recurring, non-recurring items?

No. I don't think of them that way at all. I mean, on the acquisition cost side, until a year or two ago, those are all capitalized. When we think at investment committee about acquiring an asset, we very much take into account the cost of acquiring that asset. If it's in bankruptcy, there's higher costs, and the deal has to have a better yield. So, the idea that I'm going to burden current cash flow, current FFO, current funds, because of an investment decision made in that regard, to me, honestly, makes no sense at all.

Your acquisition costs, then, would be buried in with the acquisition price, then?

No. It used to be. It used to be capitalized for the acquisition.

Why don't you just reverse that and put it in there, then?

I can't make my balance sheet look differently than GAAP requires it to look. GAAP requires me to say that the asset was -- for its purchase value, directly. It does not allow me to include these sorts of acquisition costs anymore.

Okay.

It was only on the pursuit costs on deals that did not close or had been expensed previously, Rich.

Right.

And again, and while I -- again, I -- as Mark noted, we appreciate the fact that you have all of these different definitions. We believe we have an obligation to communicate the best way that we believe possible for us. Now, we'll continue to give what Mark has called this classic, or white paper, FFO. We will continue to have to reconcile to that number, so that number is not going away. We're just trying to come up with what we believe is a more appropriate measurement, reporting metric, that more clearly explains, from period to period, what's going on in the core business.

Okay. Thank you.

Your next question comes from the line of Rob Stevenson.

Did you make it, Rob? Marcus, go find Rob for us.

Yes, sir. I'm finding Rob now, sir.

Hello.

Rob, your line is open.

There you go. Hi, Rob.

Hi. How are you guys doing?

Good. How are you?

All right. I might have to downgrade your conference call company here today.

Us too.

If I look at the development pipeline page, it looks like you have $235 million of land.

Yes.

What's the dollar value of the construction that you could do on that land? So the total, sort of, investment if you built that out entirely? Does that take up the $500 million -- but the $400 million to $500 million that you anticipate starting this year?

No, no.Or is it closer to $1 billion of development? I'd say -- yes, it's closer to $1 billion to $2 billion of development.

Okay. So, if you do $500 million, you'll still have a considerable amount of land left for growth in 2012, in 2013, even if you don't go on a big buying binge of land this year?

Yes. That's correct.

Okay. And then, when I take a look at the redevelopments, as per Mark's comments earlier, it looks like if I back into the numbers, it's going to wind up being somewhere between $40 million and $45 million of investment this year. Is that right?

We think about $41 million, based on our --

Okay.

The problem you're having with the calculation, we have more units -- more weighted average unit count for 2011 than we do for 2010.

Okay. What's the IRR return that you guys are anticipating on that, in order to green-light projects?

Well, we are seeing mid-teens, current returns. We are seeing $100, $125 increases in monthly rental rates, as result of some of this work.

Okay. And, I guess a question -- in terms of capital investment, going to $41 million versus that number being $60 million or $80 million, is it just that the higher dollar value stuff doesn't -- to do another $20 million or $30 million of this stuff, doesn't get you the same sort of IRRs? Is it capacity? Because that's probably the strongest return on, incrementally, dollar invested today, right?

Yes. That was a 3,000-unit run rate two years ago, and a 4,000 plus run rate last year. It will be a 5,000 plus unit run rate this year. So, I think it's just -- it's somewhat of capacity, and we've got a big portfolio of assets that are highly occupied, we have a lot of traffic. So, I'll tell you, where we believe we can renovate, rehab units and get the appropriate return, I assure you, we'll do that.

Okay. And then, one -- just one last one. What's the level of corporate units in EQR today? And have you started seeing that growing again?

This is David Santee. I think, actually, our preference, our internal discussions, is really to move away from the reliance on corporate business. I would tell you that our own internal Company, equity corporate housing, only maintains about 400 units, across all of our communities.

And, it just creates a lot of volatility, especially Q4, Fred talked about the -- the gain to lease, if we want to -- these corporates, they pay 20% to 30% more. They all moved out in the fourth quarter, and then, you are releasing them at current market rates. It puts pressure on our rent roll to some degree. I would just tell you, I don't have an exact number. It's probably in the 2% to 3% range. But our goal is to focus more on loyal, long-term residents.

Okay. Thanks, guys.

You bet, Rob.

Okay. So, your next question comes from the line of Michael Salinsky.

Are you there, Mike?

Just checking. Okay.First of all, a question for David Santee. In your rent growth expectations, you talked about there in good detail. Can you talk about your rent growth expectations for maybe the Northeast and Mid-Atlantic, versus the West Coast, specifically California?

We're going to let Fred do that.

Yes, yes, Mike. Well, the Northeast markets are doing extremely well right now, and they are going to do better this year than the California markets. We usually don't give specific numbers, guidance, by market. But I can tell you, kind of, that trend is continuing. And we are thrilled the Northeast kind of is just motoring right through the recovery. And right now, I think they are positioned well for a good strong start to 2011.

And we continue to be somewhat disappointed in Southern California, they are just not getting the traction. LA is pretty much flat, and we keep waiting for some job growth there. But it's been fits and starts, and it just really hasn't built any kind of momentum yet. So, LA has shown no real signs for a robust recovery. San Diego has kind of been up and down, based on the military rotation. It's certainly better than LA, but again, not just taking off.

The good news in Southern California is Orange County finally is getting some meaningful job growth. We're happy to see that come back, although the -- the kind of the anecdotal [comment] of that is it's strange to see some of the sources of job growth, this recent hiring by mortgage originators. So, here we go again. But, Orange County is getting better -- occupancy is going, and rents are growing a little bit faster there. So, without giving you specific numbers by sub-market, that's how we see it -- continued strength on the East Coast, lagging continuing in Southern California. San Francisco is one exception to the California thing. San Francisco is coming along quite nicely now. We had a good surge in demand. There's some job growth coming back in the tech sector, really all the sub-markets in San Francisco now are growing quite well on all of our measurements. And then, Seattle is certainly coming back.

Helpful. Second question for Mark. You guys have been very proactive in addressing maturities ahead of time. Just curious, so you have the line maturity there in the first quarter of '12. Is the plan to address that here ahead of time, in the second half of 2011?

Yes it is the plan to address it mid-year or thereabouts. What's going on in the revolver market is a real improvement in pricing. I would've said EQR would have priced -- and just for reference, point of reference, our current line is LIBOR plus 50 basis points, fully drawn. I would have said a new deal for us would've been LIBOR plus 200 to LIBOR plus 250, with material upfront. That is all coming down, that market is rallying big-time. So, waiting a little bit, I think, is greatly to our benefit, and I would expect to deal with it more in the middle of the year.

Okay. Then finally, just a question in terms of development, as well as comments and talking about taking more -- a little bit more risk, to generate the returns. What kind of premium do you need -- and I know it's market by market, but what kind of premium do you need on a development versus an acquisition today? Or, premium versus kind of a value-add repositioning or a lease-up type property?

Well, again, as you noted, Mike, it's not a market-to-market basis. But I'll tell you that the development deals we are looking at today -- not the deals that we bought, but those that we are pursuing, are 6.5% or so development yields. And depending, again, on the market, that's 100- to 150-basis-point wide of where deals are trading today. You do have to be careful about using current cap rates, however. You have to take a deal -- an acquisition, and mark all the leases to market before you make that comparison. Because if you're looking at a development transaction, and looking at the yield on current rents, every single one of those units would be at today's market. And they are certainly acquisitions where, if there's a big sort of loss to lease embedded in that, you'd want to mark all those leases to market and then look at what your delta would be.

Thank you very much.

You're very welcome, Mike.

Your next question comes from Andrew McCulloch with Green Street Advisors.

All right. Hi, guys. Good morning. Most of my questions have been answered. Just a couple bigger-picture questions on the political risk front, and in setting potential changes to Fannie and Freddie aside, what do you think the probability is of any changes to either Prop 13 here in California or the federal-level tax-law changes to the ability of homeowners to deduct mortgage interest?

This is David. Again, the issue of Prop 13 seems to pop up every now and then, and it popped up a couple of years ago. And the big lobby group is formed, and it gets shot down. So, I think that risk is always there, but it's definitely not on the front burner for now. And then, I'll let --

Yes, it's Mark Parrell. I don't think we have any specific knowledge to share, or thoughts on what will happen on the mortgage interest tax deduction. I certainly think it does distort, and there's been a lot of commentary about it distorting, all of the different peoples' motivations as they look at housing. But I have no idea whether or not that really would be repealed, or just discussed a little bit more.

Okay, thanks. And just one housekeeping item -- and sorry if I missed this, what was the original cost basis on those two impaired land parcels?

Original cost basis was -- hold on, just -- I'm sorry, I apologize. Just one second. It was about $87 million.

Great. Thanks guys.

Thank you.

Your next question comes from (inaudible).

Good afternoon, guys.

How are you?

Great. Thanks. Hey, a few quick ones here, I know it's been a long call. One, have you noticed a shift in tone from the banks on asset sales lately, given improved asset values and their healthier balance sheets today? And, I guess, how would you characterize your conversations in availability of these type of deals today?

I guess I would say -- it's Mark Parrell -- that we have seen an improved desire, I would say, among banks to clear out their balance sheets of deals that were distressed. If you think about it, there are deals that the bank may have loaned $80 or $90 on, based on a view that the asset was worth $100. The deal went down to $60 or $70 in value. The banks now -- the value is now recovered back up to the bank's loan balance. Not a lot of upside to the bank in it anymore, a desire to do new loans, priced at new rates and do new business, I think, is going to push these banks over time to kind of clear those out. So, we have seen some interest in banks just pushing borrowers to get rid of those loans, to re-equitize. Sometimes that leads to sale transactions, but by no means is it a flood of activity.

Thanks. I guess, number two, could you guys provide some perspective on -- I guess, how much do you estimate that development costs have picked up over the past year?And I guess it would be helpful, too, if you would provide some thoughts on how much you think those costs could rise in the next couple years, and how any such prospective increases would impact your view on development activity. And I -- when I say rising costs, I mean including the cost of land, commodity, and labor, et cetera.

Well, sure. We believe that kind of across our primary markets, construction costs are down 15% to 20% or so. In some of those markets, they're still flat. In others, perhaps, those costs are rising. And we are keeping a very close eye on that. But don't forget the top lines are always rising, pretty aggressively. And so, we are looking -- obviously, look at land values, look at construction costs, and look at what we think is happening to the overall rental market, and we will make the appropriate determination. But, certainly, we think it's a good time to build. We do believe construction costs are going to go up -- how quickly they'll go up, I'm not quite sure I can make that call. There's certainly people who do. But that's not something that we're -- can't tell you what I think is going to happen over the next report years.

But certainly, the bias is upward, and I'm not quite sure -- well, let me say, one of the things our construction guys are telling us that during the downturn, a lot of the people just went out of business. So, as construction begins in some of these markets, there are fewer people to bid on jobs. And that is one thing that is leading to pressure. There are also companies that are not producing as much drywall, et cetera, and some production will have to pick up to help moderate increase in construction cost. They're certainly going up, the bias is certainly up, and we are being very thoughtful about that as we plan our development starts going forward.

Okay. Last question. I want to go back to an earlier question on your portfolio. How much of the portfolio today would you qualify as A versus B, or lower than B? And what do you think that should be over the longer term? I guess, in other words, in your view, is there an optimal balance or an efficient frontier? And if so, what would be the implications for your portfolio here?

I'll tell you, [Handel], we look at markets we want to be in, and then we look at different assets that might be available for sale in that market. And if an A is priced right, we'll buy an A; if a B is priced right, we'll buy a B. We're not -- we don't sit there and think, we want to be this percentage or that percentage.That's just not part of our process. We're trying to buy good quality core assets, and they can be A and they can be B -- and I'll tell you, they can be C, if we believe we can put $10,000 a door into them and move them up the quality scale.

Okay. Thank you for the perspective, appreciate it.

You're very welcome.

Your next question is a follow-up from Eric Wolfe from Citigroup.

Thanks, just one quick one. When you were talking before, about the -- sort of the category of assets that is very subject to interest rates and leverage, I'm just wondering what percentage of your assets base you think falls into that category, versus being more like a high-quality core product with very stable demand?

Well, I guess I will put it another way. I want to make sure that it's clear. I think all of our product will be subject to changes in interest rates. We just think -- I think your point is, if there's a certain percentage of our assets that might be more impacted by that. And I guess I can only answer the question by telling you, we still think that we have a couple of billion of assets that we'd like to sell.And those are the ones that we're focused on today. And those are the ones that we do believe will -- that because we want to sell them over the next ten full years, we want to be thoughtful about what's happening in interest rates and thoughtful about happens -- could be happening to GSE reform.

The fact that interest rates go up and could impact the rest of our portfolio, that's just part of doing business. It's just what we -- the risk we have by being [long]. But those assets that we know that we -- are not likely to be core assets over the next handful of years, those are the ones that we are focused on. And we do believe that those values, again, will be at risk -- that the values we realized on those in the short term, and that's why we want to monetize them.

And so, is the plan over the next couple years to say, get rid of completely, like suburban D.C., suburban Boston, or are you going to keep a place for some of those properties in your portfolio, just because they might have higher growth, and you can't justify the difference based on the cap rate?

That's absolutely right. Again, our desire to sell these assets are if we can find -- get appropriate pricing. And it's not just appropriate cap rate, but the appropriate price per unit and price per door, for those assets. I'll tell you that we have sold substantially all of the assets that we felt an absolute need to sell. The disposition we are doing now, we think of just sort of strategic working the portfolio. And if we don't get the values we want, we won't sell.

That's helpful. Thank you.

You're very welcome.

At this time, sir, you have no further questions.

All right. Well, thank you all very much for your patience today. We appreciate your interest, and I'm sure we will see you around.

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