住宅地產 (EQR) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Equity Residential First Quarter Earnings conference call, on the 28th of April, 2011. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. After the presentation, there will be an --

(Operator Instructions)

I will now hand the conference over to Marty McKenna. Please go ahead sir.

Thank you Deshall. Good morning and thank you for joining us to discuss Equity Residential first quarter 2011 results. Our featured speakers today are David Neithercut, our President and CEO, and Mark Parrell, our Chief Financial Officer. Fred Tuomi, our EVP of Property Management and David Santee, our EVP of Property Operations are also here with us for the Q&A.

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

Thank you Mark. Good morning everyone. Thanks for taking time to join us for our call today. As you've heard us say for quite some time now, it's a great time to be in the apartment business. And as we look at the four key drivers of our top line, we're happy to say that turnover continues to decline and that helps build occupancy as well as our exposure.

Occupancy and improvements are leading to pricing power. So our base rents and our renewal rents are increasing as we continue to push rents with confidence. It's really important to note though, that the first quarter of the year does not produce a terribly large number of absolute lease transactions. Our primary leasing season is still ahead of us.

We've kept our operating guidance unchanged for the time being. We'll provide an update on our second quarter call in late July when we're further into our primary leasing season. And that being said, as we look at the four months of actual performance we have under our belt, as we look at our exposure today of 7.6%.

And as we look at the renewal activity, we're seeing 30 and 60 days out. We have every reason, every reason to believe that our same store revenue and net operating income growth for the full year should be in the top half of our current guidance range. And Fred Tuomi and David Santee, they are here to answer I'm sure the many questions you have on fundamentals across our core markets.

On the transaction side, it's no surprise that the acquisition market remains extremely competitive. There's a massive amount of capital looking to be deployed in multifamily real estate today. And we think the cap rates in our markets across the country are in the 4% to 5% range, and that investors are underwriting un-leveraged internal rates of return with 7 to 8 handles.

As a result, we think the valuations in our primary markets have recovered significantly. And looking at our own assets here, but depending on the market, we think values are now in a range of maybe back to even, to down 10% or so and that's from the peak we saw in 2007, 2008. And I'll tell you that these values have recovered from decline to as much as 30% and more.

As noted in last night's press release, during the quarter we acquired two multifamily assets for $139 million in the first quarter. We bought 225 units in Ft. Lauderdale, Florida. This is an asset that is across the street from an existing asset that we own there.

We paid $200,000 a door, which is about $180 a foot, and a cap rate in the low 5%. But we're pretty confident we will be in the 6% soon. We have (inaudible) to assets that have been under managed and we're going to gain some efficiencies by operating the asset with our neighboring property.

We also bought about 296 units in the Longwood Medical Center of Boston's Back Bay We paid $317,000 a unit, which is about $346 a foot. We paid a high 5% cap rate for that deal.

That property is surrounded by numerous colleges, hospitals, and other medical facilities, and it's very difficult, if not nearly impossible to build new in that marketplace. I will tell you, although we didn't value this, we do think there's a redevelopment possibility on the existing parking deck on that particular property.

As noted in the report last night we also bought a commercial property in downtown Seattle. This property is adjacent to our Harbor Steps property. 97,000 square feet of office and retail space, and we'll operate it as such as we wait for the demolition of the elevated highway which is immediately to the west of the property, and the only barrier that separates this asset from the Puget Sound.

The property is currently vacant, and we're going to finish the rehab started by the seller. We expect to stabilize yield in the high single digits, which will be achieved in a couple of years as we inventory this asset for development -- for redevelopment opportunities somewhere down the road.

During the quarter, we also continued to sell non-core assets and reduce our overall exposure to what we consider our non-core markets. We sold 12 assets in the quarter for $262 million, realizing a weighted average IRR of 10.75% which we're pretty pleased about. 5 of those properties were in Maryland at an average age of more than 30 years. And 4 of which were more than 50 miles from the district.

We sold 2 assets in Atlanta, 2 assets in San Francisco's East Bay, 1 in Phoenix, and 1 in St. Pete. I'll tell you that the bid for the assets that we'd like to sell remains very strong. We're seeing cap rates on our forward 12 numbers in the 5.75% to 7.25% range.

And its important to note that we think that makes the buyer's cap rate probably 50 basis points or so below that. And we think these represent good values when looked at on a per foot, or per unit basis. And we're willing to continue to sell into that bid because we think these values are very interest rate sensitive.

Now, as noted also in last night's release, the strong demand for assets has caused us to accelerate our disposition activity for the year. In fact, we sold $530 million of assets in April alone.

This past Tuesday, we closed on a 7 property, 1626 unit portfolio sale with single buy. Of the $286 million trade, all these deals were in the metro DC area. 6 of them in Virginia. 1 in Maryland. 6 of the 7 assets were built in the '80's. We sold that at about a 5.7% cap rate to us, which we think was about a 5.2% or so to the buyer.

This month we've also sold 3 deals in Portland, Oregon, 2 in Phoenix, and 1 each in Palm Beach, Florida, Lawrence, Massachusetts, and Manchester, New Hampshire. So we're announcing our exit from the Manchester, New Hampshire market. These last 6 deals sold at a weighted average cap rate in the very low 6%.

Year to date through today, we've sold $792 million of deals. And we have another $200 million under contract. So it's quite clear we have the potential to sell well beyond our original guidance assumptions. But of course, it has to be balanced against the opportunity to redeploy that capital and acquisitions. Which as I said, is a pretty competitive process today.

We only acquired $139 million of apartment deals in the first quarter. We've acquired 1 deal this month for $100 million in downtown LA, and we pictured that on the front page of last night's earnings release. We have 3 more properties under contract for $255 million. 1 in DC Proper, 1 in Arlington, Virginia, and 1 in LA

So, as we sit here today, we should be a net seller of around $500 million by midyear. And as we've noted, this has accelerated the level of disposition activity. This is going to increment -- be incrementally more dilutive to our financial results for the year than the original assumptions.

Nevertheless, we're very pleased with the opportunity we're seeing to sell these non-core assets, and exit these non-core markets. Of course, we'll have a much better idea how this is all going to shape up and unfold for the full year by our second quarter earnings release, and we'll update our transactions and FFO guidance at that time.

On the development side, during the quarter we commenced construction on one new development deal. And that's at the Gateway to Chinatown in downtown LA It's a 280 unit transaction, and I'll be into that for about $332,000 a door. Now the yield on our cost for this deal, at our basis, will be below market.

Because our land basis is about market by about $14 million, or so. This is land that we acquired in the mid-2000's, and because we always intended to build on it, we couldn't write it down. Our GAAP yield on this deal will be in the low 5%. With the land valued at market, the GAAP yield would be in the low to mid-6%.

During the quarter we also completed our 250 unit deal in we've got in Washington. This deal is leased up extraordinarily well. The team has done a great job on leasing velocity there. And it will stabilize significantly sooner than we had expected.

We also expect to start this quarter a development deal -- a venture development deal in Miami. And we continue to look for starts for the year coming in around the $400 million to $500 million level. I'll tell you, Mark Tennison's team will continue to look for new development opportunities. They're currently working on sites in all of our core markets, Boston, New York, DC area, south Florida, southern Cal, San Francisco Bay area and Seattle.

And all of these deals are being aggressively pursued by multiple parties. Preliminary underwriting suggests yields on these deals and probably other development deals in these markets, would be in the mid-5% to the mid-6% range. I'll turn the call over to Mark.

Good morning, everyone. Thank you for joining us on today's call. I'm going to focus primarily on three things. Our first quarter results, our guidance for the second quarter and the remainder of 2011, and I'll close with an update on the revolving credit markets and on our balance sheet.

We reported normalized FFO of $0.56 for the quarter, and this was slightly above our target. On the revenue side, as David said, all the indicators from our operating platform are flashing green. I want to give you some color on the four main revenue drivers and I'm just going to go through them quickly.

The first driver we always talk about is turnover. On our February 2011 call Fred Tuomi said that we were assuming, our 2011 resident turnover would increase slightly as we pushed rent. We are certainly pushing rents, but we are retaining more of our residents, even at higher renewal rent levels.

The second driver we talked about is occupancy. We expected average occupancy for the entire year to be around 95% which is a 20 basis point increase over 2010. Occupancy in the first quarter was slightly higher than we expected for that period, and we anticipate occupancy for the entire year to exceed our expectations.

Third thing we like to talk about is base rents. Base rents are currently up 5.7% over this time last year. This too is slightly better than what we had expected.

And our final driver we talk about is renewal rents. And for April, renewal rents are up a healthy 6.1% over this time last year. And again, that is better than we had expected.

If you kind of put this all into the blender, you can see why, at this early point in the year, we are optimistic about achieving our 2011 same store revenue growth. We would expect that to be in the upper half of our 4% up to 5% up revenue guidance range.

On the expense side through the first quarter, our big 3 expense categories, real estate taxes, on-site payroll and utilities were all on plan. As we look to the balance of the year, it appears likely that our annual expense number will be toward the bottom half of the plus 1% to plus 2% guidance range for expenses.

Why is that? Well, on the real estate tax side we budgeted that flat and we may end up being down. We continue to have very good success on appeals, even better than we had expected. And if this pattern persists, we may see some unexpected benefit in that category.

Property management costs are another area of opportunity. We do expect these to grow but probably by not as much as we had expected. Because some of the efficiency initiatives that David Santee mentioned on prior calls are moving faster than we had thought back in February when we gave you guidance.

Speaking of guidance, we have provided a normalized FFO guidance range for the second quarter of $0.57 to $0.61 per share. The difference between the Company's first quarter 2011 normalized FFO of $0.56 per share, and the midpoint of the second quarter guidance range of $0.59 is primarily due to these three factors. So again, reconciling those (inaudible) increase.

A positive impact of $0.04 per share will come from higher total property NOI in the second quarter of 2011. And of that $0.04, $0.01 will come from incremental lease-up NOI, $0.03 will come from increased NOI from the same store property set. As expenses decline due to seasonal factors, and as we start to have more opportunities to raise rents during our peak leasing season.

We further expect in the second quarter to have a positive impact of about $0.02, mostly due to less interest expense. Pardon me, we will have a lower average debt balance in the second quarter 2011 than we did in the first quarter 2011. We also expect a negative impact of about $0.03 per share due to dilution predominately coming from our 2011 transaction activity. Some of this dilution was included in prior guidance.

However, as David noted, the timing of our disposition activity has moved forward quite a bit, which will increase our dilution in the second quarter and for the full year. And as a point of reference, this is the exact opposite of what occurred in 2010 when we had accelerated acquisition activity in the first four months of 2010, with disposition activity back loaded towards the end of 2010.

We expect our 2011 normalized FFO per share to accelerate each quarter as the year goes on, driven by sequential increases in NOI from property operations, both from the same store and lease-up properties, as base rent and renewal rent increases flow through our portfolio. This will be off set in part by the dilution from our transaction activity, including the acceleration of disposition activity that I just mentioned.

On the balance sheet side, we are in good shape. And our strong credit metrics continue to improve as our operating business thrives. EQR's liquidity position is excellent. Cash on hand today, including 1031 escrow balances stands at about $770 million. And our revolving line of credit is undrawn and has about $1.35 billion in capacity. Cash balances at year end should be about $300 million.

And now just a quick note on the revolving credit market. Our existing revolving line of credit matures in February 2012, and you can expect us to refinance our revolver over the next few quarters. So, as you might imagine, we have been keen observers of the revolver refinance market. I am happy to report that this market has improved greatly over the last few months. Banks are eager to deploy capital with conservatively leveraged companies like Equity Residential, making the market as deep as for high quality credit as it was in 2007.

On the other hand, while the investment grade revolver market is clearly strong, borrowing spreads and up-front fees remain above 2007 levels. But the current momentum is for these to continue to compress. As a point of comparison, our existing revolving line of credit carries an all end spread of 50 basis points, or 0.5% above LIBOR. New revolving credit facilities for real estate companies comparably rated to Equity Residential are being done today at all end spreads of about 1.5% above LIBOR.

I expect that our new covenant package will be substantially similar to our existing covenant package, and that the new revolver will carry a four or five year term. An estimate of the impact of the revolver renewal on Normalized FFO is included in our guidance. I look forward to reporting the full details on our new revolver once it is complete. And now I'll turn the call back over to David.

Thank you Mark. Deshall, we'll be happy to open the call to questions now.

Thank you, sir. (Operator Instructions) The first question comes from Jana Galan. Please go ahead with your question.

Hi, good morning. Thank you for providing the April renewal rates. I was curious if maybe you could give us more color on the markets.

Any particular market?

Maybe more Southern California compared to New York and D.C.

Okay. This is Fred Tuomi and I'd be happy to give you some color on that. Were you referring to renewal performance specifically?

Yes.

Okay, yes. As Mark mentioned, our renewals for April are up 6.1%. And that's actually achieved completed renewals. And going forward into the next month, we look like that will continue to improve. We're quoting in the 7%s and achieving maybe in the low 6%s.

Looking at the April renewals, those that are complete, the most powerful renewals were done in San Francisco at 8.4% -- 8.4% up in San Francisco. Denver was 7.9%. D.C. , Virginia was 7.1%. And Seattle was also 7.1%. So we're getting some power in those great markets. As expected, Southern California is bringing up the rear on renewals, and we did achieve a 3.3% in L.A., 3.6% in Orange County, which is starting to gain some momentum, and San Diego was at

Great, thank you. And then, I was just curious about the disposition activity, and it seemed that some of the more recent ones were kind of in the D.C., Virginia area. And kind of the thinking behind why you thought that was better to dispose of rather than keep.

Well, we just had a very attractive opportunity to sell some of our older, more outlying garden-style assets. And I also noted that we had acquired a couple properties in D.C. And so we just thought it was an appropriate way to balance our exposure there. And net of all of us, we'll be down about $200 million of exposure following the completions of both of these buys and sales.

Great, thank you.

You're very welcome.

The next question comes from Swaroop Yalla. Please go ahead with your question.

Hi, good morning.

Good morning.

I was just wondering, the acquisitions which you mentioned for this quarter, did I miss -- I think it was reported in the press about another building that you guys bought in L.A. Is that something which was part of this? Or am I jumping the gun here?

I'm not sure part of what. We did acquire for $100 million, a property in downtown L.A., which had previously been an office building which had been converted into apartments. A phenomenal location in downtown L.A. It's 322 units. And we think we bought that at close to a [5% cap].

Great. And then just touching back on Southern California question. I was just wondering what is the sort of macro drivers for the lagging performance? Is it the lack of jobs? Or the quality of jobs? Or is it the supply in that market which is still taking time to clear?

This is Fred Tuomi again. Southern California, I'll take it by major market. First Los Angeles. Yes, L.A. is a big market. It's a big diverse economy, and it was hit hard with the recession. All the sectors were hit pretty hard, some worse than others.

And the job growth, although it is coming back, it's coming back slower, a little bit later than other markets. So, we still love L.A., it's going to be great. But it's just now starting to get some momentum on the job creation. So, it's going to need some job growth across all sectors.

Most recently, I'm more concerned about the state and local city government. Sectors such as the port showing good high-single, low-double digit growth. Entertainment is up. The technology has been stable. Defense, we've had some good news, bad news. So, it's kind of a mixed bag, but gaining momentum and should grow about 50,000 jobs this year is the forecast, which is 1.3%.

Unemployment is still lingering high at 12.2%. Still needs a little more time to percolate on the jobs. I believe they're coming.

L.A. also is -- was a victim of supply. The last couple years, we're 5,000 plus in the new units delivered into L.A. Even though it's a big market, they're highly concentrated in market rates in the key sub markets like Warner Center in San Fernando Valley, and NoHo area of Hollywood, and then some in downtown.

The downtown market has absorbed quite well. But those other two markets are struggling with the absorption. This year they're delivering another 2,000 units. 2011 we'll see 2,200 units still coming in to L.A., those kind of spill over of those projects. And next year we'll probably see about another 2,000. So, a little bit of a supply measure. Market sort of weak, and that's holding L.A. back.

Now, L.A. like I said is a big market and lots of sub markets. Some markets we're in are performing quite well, much better than the top line number you see. But those areas like in Warner Center, we have a lot of concessions, some really tough lease-up pressure, as well as in the NoHo area.

Orange County is a smaller market, easier to get your arms around. We're happy to see job growth coming back to Orange County earlier than L.A. So, it's had a nice little run here in job growth, about 2.2% or 30,000 jobs. Occupancy has recovered, we're 96% occupied in Orange County right now. Renewal increases are starting to pick up at 3.6%, and our rents are up 4.7% over last year and up already 4% this year to-date.

So Orange County you would see a strength in trend, led by jobs, and the nice thing about Orange County, only 200 new units being delivered this year. That's unheard of. Typically you run 2,000 to 3,500 per year in Orange County. We only have 200, and a couple hundred coming next year.

San Diego has been, a small market, sort of a disappointment. It's been kind of volatile, it's based on the military. We've had military rotations in and out, mostly out. And that's been kind of a dampening effect on San Diego's progress. It's doing okay, but not great. Renewals are up 4%, rents are up in the 3% range, and occupancy is up right around 95%.

And again on San Diego, North County is doing much better. Mission Valley is still competitive and has some military impact. And then South County, definitely the military impact has been hurting the South County, San Diego.

Great. That's helpful. Thank you so much.

The next question comes from Eric Wolfe of Citigroup. Please go ahead with your question.

(inaudible - technical difficulty) on the line with me. Maybe just a follow-up on the asset sales. I know you mentioned in your remarks that there's a lot of capital going after apartments. I guess why accelerate the pace of sales if asset values are going up, NOI is going up, and you don't really have a use for the proceeds in terms of acquisitions, at least in the short term.

Well, we think these assets are subject to -- the valuations are subject to interest rate risk. And we just think as we look at these prices on a per pound basis, and what we think buyers' expectations are in those valuations for revenue growth and rent growth, we think these are fair prices. I think that one can wait too long and not have the ability to sell. And so we think when the opportunity is there, we ought to take advantage of it.

Right. And I think you said they're underwriting in the 7% to 8% IR range. How are they getting to that? Is NOI growth flat over the next couple of years and cap rates stay where they are, or -- .

My comment was what I thought buyers were underwriting sort of more core product.

More core product. Okay.

Right. And so, I think people are underwriting these assets that we've been selling more -- at higher IRR's than that. I think that Alan George's team would tell you that he's seeing more buyers out there thinking about more value-add opportunities.

And so I think we're selling assets into that mindset and with the hope that by putting, however much money into these to these older properties we're selling, we'll be able to get incrementally higher rents. And as long as people want to pay us for that opportunity, we think it's the right thing to do.

Right, and I guess for the assets in particular that you sold, the $800 million, what would be your expectation for NOI growth over the next couple of years. And as interest rates move up, where do you think cap rates could go for those assets?

Well, we think NOI growth for those deals will still be okay. I don't think we'll expect the same NOI growth that we'll see in the properties in which we have been investing. I don't see any reason why the deals we're selling won't see decent NOI growth, and I think the valuations show acquires expectations of that growth.

The buyers that are acquiring these assets are leveraged buyers. And so interest rates make those valuations very sensitive. And we have an expectation sooner than later. And at some point in time, interest rates will go up and those valuations could be at risk.

We'll say this, there'll be top line growth as well. I don't know how much values might change, whether or not top lines will be able to keep up the pace. But in any event, we've targeted assets or markets that we don't believe that are in the long-term picture for EQR, and as a result of that, we are now, just as we have been over the past five years, systematically going in and offering those properties into the marketplace, and we think they're pretty good values today.

That's helpful. Thank you.

You bet.

The next question comes from David Toti of FBR Capital Investment. Please go ahead with your question.

Good morning, guys.

Good morning.

I want to touch on something that seems to be a little bit of a theme in this space. And that's the -- you're pushing rents, yet your turnover is falling and your occupancies are rising. And I assume traffic has been increasing as well. Is the message there that there's a lag and that you just haven't pushed rents hard enough yet. That we should expect going forward to start to see some of that reverse. The indication to me is that maybe you left a little bit of rent on the table by not driving it hard enough.

This is David Santee. Like David said earlier in his comments, this really isn't the time of year, when you look at the cyclical nature of demand, it's just a hard time of year to push rents. Yet, I think when you look at our renewal rents, and to be honest, we still haven't seen robust job growth in most of these markets. So, I would say that demand is pretty -- it's pretty on par with what we saw last year through this same time period.

So I think it's all relative. And it's relative depending upon what market you're talking about. Some of these -- also keep in mind, if you think about what we've experienced in the last two to three years, it was more of a V shape than a long drawn-out decline.

So we still had, as of last quarter, we had about 20% of our residents that were still above our current market rents. In the last three months, we've closed that gap to where only 13% of our residents are at an average of 1% above market rent. So again, depending on how you measure it, I would say we've been very aggressive with pushing rents.

Yes, I think that's right. And if you go back to the renewal rates that Fred had quoted in some of those markets around the country, for 30 to 60 days out, those are very strong, high single-digit renewals.

And the other side of the coin is that, so you have people that are living here that are still paying above-market rents. Those folks are still getting maybe a 1% or 2%. But people that moved in the lowest part of the down cycle, a lot of these folks are getting 15%, 20%, 25% rent increases.

This is Fred. I can give you a little more color on that issue of per market also. Base rent increases, that's the net effect of new lease rates, are up year over year. In San Francisco, 10.9% as of right now. Boston, up 9.2%. D.C., Virginia up 8.9%. Pretty robust. The average is brought down by, again by Southern California where inland empire, they're pretty much flat. L.A. is up 1%. San Diego up 2.5%, and Orange County a little better.

So it sounds like you're being pretty aggressive on rents, and yet the trend of retention is sort of maybe working in your favor. That's sort of what it sounds like. Despite double-digit rent increases in a lot of markets, you're still seeing turn drop and occupancy rise.

Yes. And that was contrary to our initial thought on how this year would play out. You would expect as you put the pedal on the rents, that more people would move out. But that's not happening. And I think that's kind of a systematic view of our business right now. People aren't buying homes. Home buying continues to drop. They're enjoying the lifestyle.

They can rent a better lifestyle than they can afford to buy. They're in great cities with great jobs. And they consider the alternative. They're not going to sink every penny that they can beg, borrow, and steal into a home.

They're not going to move out to the burbs. They're going to stay in the urban core and enjoy a great life. And they're continuing to want to buy up on that lifestyle. We're seeing great retention at good pricing. So, we're loving life.

I think the last data point is when you look at our reason for move-outs. Historically, it's always been the number one reason for move-out is job change. And then second to that was always home buying. And rent increase too expensive was usually about number four or number five on the list. Today, and for the past really two to three quarters, rent increase or too expensive has been our number two reason for move-out. And it equates to about 14% of our move-outs. I think that's a testament to our aggressiveness and pushing those rents to the limit.

Let me add one other element to the piece here. The overall market dynamics, this thing about no supply in 2011 and 2012 is a real game changer. Before, you'd always have a good number of supply coming into these markets, and gave people choices, gave them options, and gave them incentives to move. We don't have new supply now. There's none -- none of our key markets have a supply issue this year, and we're not going to have it next year. And that just takes the option off the table, so people are staying put.

Let me say, that no one will ever suggest to the two of you again (laughter) we take that very personally.

That more than answered my question. I do have one -- .

Aren't you glad you asked?

One last detail.

Are you sure?

Yes. In aggregate, how would you compare traffic today, to the same time last year. And do you see any change in the closing rate relative to the traffic flow?

Yes. There's a couple different dynamics that we're seeing. Number one, as far as our traffic to www.equityapartments.com, in the past couple months we've seen daily increases of 15% to 25% unique visitors. Now, the dynamic changes when you start publishing rents online. Historically, our foot traffic for the most part has remained the same. The people that call or submit a guest card online, those people that finally make it to the property, for the most part, quarter over quarter relative to last year, it's about the same.

But historically, we've always seen a 75/25 breakout. 75% of the people actually rented and moved in. And the other 25% canceled or were disqualified or declined. What we've seen in the last two quarters is a shift in 80%. 80% of those people are moving in, and only 20% of those people are canceling or being declined.

That's very, very helpful. Thank you for the detail today.

The next question comes from Bill Acheson of Ladenburg Thalmann Investments. Please go ahead with your question.

Yes, thank you. Hello, guys, how are you doing?

Good morning, Bill.

On the commercial property next to Harbor Steps, in terms of a comment, not a question, I'd been hoping it was that three-story entertainment venue (laughter). It doesn't sound like that's the case.

No.

On expenses, I continue to marvel at the expense control that you guys are doing. The only market that seemed to stick out was New York City. I'm assuming that was property taxes. Looking forward, how heavily have you weighed in the increase in energy?

Well, when you look at our utility mix, utilities make up about 60%, and energy makes up about 40%. I would tell you that we see more growth in the water sewer. Water sewer is up about 9%. But then gas, natural gas, we did a rate lock through this year. So natural gas is offsetting that sewer and water rates. I tend to think that we're already talking about our natural gas strategy for next year. And frankly, we see no reason today to considering a lock for next year and just may ride the market unless there's some significant speculative change relative to future pricing.

I don't know if that answers your question?

No, I understand. The other thing is to the extent that your properties are transit-centric, the increase in energy should be a net benefit, I would imagine. Talking about Phoenix here. You have boots on the ground there. In terms of a market commentary there, it doesn't look like, looking at the increase in rents that you're able to get there, it doesn't look like all the single family homes that are on the market there that are up for rent there, it doesn't look like it's having any effect on your ability to raise rents.

Were you going to ask a question?

You just want the color on Phoenix, right?

Why don't you go ahead.

Phoenix has been a pleasant surprise. We were expecting a lot worse due to the mass of single family overhang. But what's happening in Phoenix is, even though the prices on homes continue to plummet and foreclosures continue to mount through today, people just are not buying those homes really at any price. And a lot of those distressed single family homes are outside of the core markets. They're far north, far west Phoenix. And our portfolio there is much concentrated in all the good neighborhoods where you want to be.

Move-out's due to home buying in Phoenix continues to drop, in this quarter over last quarter and first quarter of last year is down another 4%. It's only 16.7%, which is very, very low for Phoenix. So you're right. Phoenix is kind of defying initial logic. It's doing fantastic. We're seeing good rent growth. Renewals are up 6%. Occupancy, even at this stage of the year, is 95.9% as we start going into the warmer season there. And all systems are go in Phoenix. We're really pleased with it.

Thank you, guys. Good luck out there.

Thanks, Bill.

The next question comes from Jay Habermann of Goldman Sachs. Please go ahead with your question.

David, you mentioned obviously, the accelerating dispositions, and looks like you're getting close to a billion based on what you have in the works. What's your thoughts? If you do exceed, by how much would you anticipate doing so?

Very hard to say, Jay. If I had a better sense of that, we might have changed our guidance already. We're working on acquisition opportunities. I think that will play a big part on what we do on the dispo side. We continue to think there will be more acquisition opportunities later in the year.

The color we get out there from our guys that are working this every day for us in the field, the conversations with brokers, they know that brokers are having more and more conversations with owners, giving them their opinions of value. And they're telling us that more product is coming.

It's really hard for me today to give you a best guest how it's going to end up at the end of the year. And in the past years, our disposition and acquisition activity has kind of been balanced throughout the year. As I've said over the past several calls, it's going to be lumpy. And because it is such, it's just very hard to call.

Okay. And switching gears a little bit. I know acquisitions are projected to be about double starts for the year. As you think about the next couple of years, and perhaps building your development pipeline, are you changing your philosophy, the buy versus build. Are you more willing to buy today to get the rent growth more immediately, or are you thinking about longer term in developing?

I guess it's both. It's never been an either/or proposition for us, Jay. We operate in markets, and I tell you, markets we've been buyers of existing streams of income, at the same time we've been buyers of land sites.

So it all just depends on what the opportunities are, and if we think we're getting the appropriate risk adjusted return for taking the development risk. But we think development continues to be a terrific opportunity for us, a way for us to create value. But I also think that acquiring assets is the way to create value, evidenced by what we did in late '09 and the early part of 2010. I think we'll play both, and I think you'll see us be buying existing streams of income and building new streams of income in most of our core markets around the country.

Okay, that's helpful. And then lastly on New York City, are you seeing any price sensitivity on the part of tenants. Are tenants willing to move perhaps for cheaper rents outside of the city, or are you not seeing that yet.

No, New York is just in a sweet spot again. January and early February was a little soft. That's seasonal, to be expected. And then it just really tightened up.

There's very little new supply coming into New York this year, next year. The broker fees are pretty much all gone come late March and in April. Very strong demand.

Before we were relying on job growth coming from business services and legal and entertainment. And now the financial sector, all you guys are hiring like crazy and they are all renting apartments versus buying homes out in the burbs. So, we're seeing very strong demand and increasing demand in New York. Limited supply, so rents are moving up quite nicely in New York.

Great. Thanks, guys.

You bet.

The next question is Alex Goldfarb of Sandler O'Neill.

Good morning.

Good morning, Alex.

David, in your opening comments, I just want to make sure I got this right, I think you said your math would suggest that some of the stuff you're selling is 5.75% to 7.25%. But you think that the buyers' cap rate may be 50 basis points lower. I would have expected the inverse. So, I want to make sure if I heard that right, and if I did, If you could walk through that.

Well, I think that after adjusting for real estate taxes, it will likely be changed, I have a transfer. I tell you, they don't get the same insurance benefits that we get. They certainly don't get the same leasing and advertising benefits that David Santee and his team deliver. Our expectation is that it's going to be more difficult for them to see the same sort of benefits on the expense side that we see.

Okay. That's helpful. My second question is, and this is more of a sort of macro thing. Certainly, anyone who went to the NYU event noticed a large contingent outside. We've all been getting e-mails. Avalon Bay certainly had some stuff go on at their development site in Long Island. Do you think that the current environment is just a lot more charged than it historically has been, or is this the cycle of things? And right now we're at a peak, but if you go back in years, there's been these sort of protests that have come and gone.

Well, for those of you who don't understand what Alex is referring to, there were some construction union people protesting at a meeting that Sam and I participated in New York not long ago. And they're protesting the fact that we used non-union labor for our deal under construction in Manhattan at 10th and 23rd.

And it's hard for me to respond to that, Alex, because I don't really have a frame of reference. We've moved on. It's not been a problem for us. They've tried to do things that annoy our residents at various buildings around New York. Our residents don't really care.

And I guess we gave these union shops an opportunity to bid, and gave them sort of bogeys they need to hit. They were unwilling or unable to hit those. So, we decided to go with an experienced contractor that used non-union labor, and we're extremely pleased with the job they're doing.

You mentioned Avalon Bay. My guess is that at 1 o'clock today you'll get a better idea from Bryce who might have a bigger frame of reference for you about their experience dealing with these unions.

Okay, thank you.

The next question comes from Andrew McCulloch of Green Street Advisors. Please go ahead with your question.

Good morning, guys. On acquisitions, and sorry if I missed this, has the market changed with respect to potential portfolio acquisitions? Or most of the deals that you're still targeting are one off?

Mostly one off. We've seen very few larger portfolio transactions. I can't remember us looking at anything more than maybe two deals. We're working now on a pair of deals, smaller deals that are run as one. Other than that, it's been a one-off acquisition process for us. Other than the three deals we bought in New York in early 2010.

Just on the market for broken condo assets. Is that market pretty well picked over, or do you still see opportunities out there to acquire assets that aren't half pregnant with presales.

What we did early on was buy completely vacant deals. Then we did look at some deals that had a very small percentage of units being sold to third parties. And I'm not sure that we're seeing anything today on the busted condo front.

We are looking at some deals that had been busted condos, which have now been leased as apartments. In fact, Alan was telling me about one just the other day, so the current owners switched from condo to rental, and now it's a stabilized apartment building and they're thinking about selling it. We've not seen much of that.

There is some talk out there about improvements in the condo market and maybe even people starting to [gin] up construction for condominiums again. I think if you probably had the wherewithal to hold on this long, my guess is it probably behooves you to continue down that path.

Thanks for the color. Just one question on development. Can you update us where the stabilized yields are trending for your various in-process development projects. I think you already touched on Chinatown, but for the other deals?

Low 5%s, our expectations were probably in the 6%s, but they're probably low 5%s just given the timing and construction costs at the time, and land prices at the time. We're probably trending low 5%s.

Great. Thanks a lot.

You bet.

The next question comes from Tony Paolone of JPMorgan. Please go ahead with your question.

Good morning.

Hi, Tony.

It's actually Ralph Davies on the line with Tony.

Okay.

In terms of the component of your portfolio that you would classify as interest-rate sensitive. Recognizing that deployment kind of limits sales, I was wondering, could you talk about how much of your asset base would fit the interest-rate sensitive bucket outside of the $1.25 billion?

Well, I guess I'd say 100% of our portfolio is interest-rate sensitive. I don't mean to suggest that our core longer-term assets aren't, we just don't think they are as sensitive to interest rates. We don't think the buyers with whom we compete to acquire our core products are basing their bid based upon what kind of leverage they can get from a Lifeco or from the agencies. I think they're comparing that more to what BBB Bond yields are, etcetera, etcetera.

I think what we're seeing is the properties that we're trying to sell, those are a much more heavily leveraged buyer whose valuations are directly tied to their mortgage financing. And our team, we have a terrific team of people who handle our secured financing. And they can tell you exactly what's going to happen to the GSEs or Lifeco advanced amounts and advanced rates based upon very small changes in interest rates.

And we immediately see this. We have deals under letter of intent, and buyers come back to us and say -- markets moved 25 bps, spreads widened, what have you. And those values change. So I would say 100% of our assets are interest-rate sensitive. And we think there's more volatility due to interest rate changes on the assets that we've been selling.

Okay. So would you say that in terms of the component of your portfolio that is I guess more volatile, would you say it's not much outside of that $1.25 billion.

I guess if the question is, and forgive me if I'm going ahead, but if the question is how much more of our assets are we planning on selling? We think that could be perhaps a couple billion dollars more. And so that's part of the longer-term plan.

So going back to one of the earlier questions, why are we selling now? We look over the next five years at the assets we know we don't want to own over the next five years. And we have some we want to sell. We need to take advantage of pricing today, because in a perfect world there'll be more behind it.

Okay. Thanks. And then just quickly for Mark, could you remind us what's in the non-comparable line item to get to normalized FFO. I think it was about $2.1 million, and will that run at that rate for the rest of the year?

I can direct you to page 22 of the release. There's a lot of good detail on that. When you go through and you want to just reconcile normalized, or actually white paper or classic FFO in the normalized, we give you the reconciling items.

Some of that reconciliation was due to forfeited deposits this quarter, which was about $500,000 that we had. So that's listed on the schedule. We also had an insurance recovery on Prospect Towers of $1.6 million. Most of that adjustment was due to those, as well as the normal things you see us adjust for, which is the convert bond premium, as well as property acquisition costs. That's laid out on page 22. And hopefully, that answers your question.

It does, thank you.

The next question comes from Ross Nussbaum of UBS. Please go ahead with your question.

Good morning. Two questions, first, how much higher above the low 6%s growth that you're seeing on renewal rents do you think is reasonably achievable over the next year, given headwinds from oil on the consumer, given that you have a diversified portfolio that's not just New York or Washington or San Francisco. Can you meaningfully get that number up from the low 6%s? Or are we going to start hitting a wall up there?

I think a lot of it just depends on the continued fundamentals in our industry. Low supply, even if job growth trickles in. I think we'll continue to push and try to maximize that number. It really depends on what the market rates end up doing. And all indications are simple rules of supply and demand. If demand continues to increase on a fixed supply, we would expect market rates continuing to increase above average run rates of 3% and maybe in the 4% or 5% and therefore we'd expect to see renewals continue to run at 5% and 6%.

And I'll also add there, we look at that another way as just the financial condition of our customers. On those coming in, we see still very good strong credit scores and income ratios. And overall in our entire portfolio, all of our leases across our entire Company, we look at the rent versus income ratio. And right now we're sitting at a median rent as a percent of income of 22.9%. That's a very healthy number. We have a lot of room to grow on that. We automatically approve 30% to 35%. We're sitting at 22.9% with an average of 17.7%. Those numbers have been fairly consistent.

And you look across the market. Some of our high priced markets are actually low on that. And California is typically higher, which has always been the case. We feel like we're nowhere near the danger zone where people can't afford the continued higher rents for their lifestyle. We don't really see any near-term constraint.

And David, I can't help but think that some of the commentary I'm hearing on the disposition side makes me think back to 2006, 2007, in that it feels like you're suggesting that a segment of the market may be mis-pricing risk here. And I think back to what Sam and Richard did at Equity Office in selling the company, and what Equity Residential did in terms of selling out a couple of billion of assets back in '06 and '07. Is this starting to feel peak-ish to you? I think you're saying it's feeling peak-ish to you valuation-wise, on the segment of assets that you're selling. Should we be drawing these parallels back to '06 and '07?

I don't think so, frankly. I think that much of what happened in '06 and '07 was very much debt capital driven. Today I think what you're seeing is very fundamental driven. And I think that's just a much different picture.

I think that the buyers of the assets that we're selling are getting good leverage at good rates, at good debt rates, and they're going to put some money into these units, and they think they're going to get good returns on incremental capital. And my guess is they'll get very decent cash-on-cash returns, on a more leveraged basis than we would operate them, and they'll get very acceptable IRR's given where the10-year treasury is today and where alternative yields are on alternative investments.

I understand your question. I never want to say it's different because you have to be careful about that. I think much of what's happening today is driven by fundamentals, and much of what happened back then was driven by just a mass amount of debt capital available in the marketplace.

Thanks.

You bet.

The next question is from David Harris of Gleacher & Company. Please go ahead with your question.

Good morning, guys. How are you?

Hi, David.

I have a question on ATM. You did [$150 million] early in the first quarter, and prior quarter you did over [$250 million]. Should we think of you as being opportunistic price takers around your ATM usage? Or are you fine-tuning your activities on issuance through to the ATM with your activities on use of proceeds?

Yes, it's really a sources and uses question, David, by what's happening on the sales side of our business, and we're generating a lot of cash. So we don't really have much use for any ATM proceeds when we're sitting on the amount of cash we have, and the cash we expect to get from our disposition process over the next 30 and 60 days.

With the [$250 million] that you did in the fourth quarter, is that sort of signaling a limit to how much you'd feel comfortable doing in any quarter period in time? Or is that -- there are no constraints. Use of the proceeds and the stock -- the bid for the stock is there. You just keep issuing.

It's Mark Parrell, David. We have a limit every day. There's rules about how much you can issue using ATM. If we needed to, we could raise more than that if the market was stable and appropriate. It's really just not needing the money. We don't run up to a magic number and need it. We spoke on the last call about raising money under the ATM to fund these development deals that we discussed. The six land parcels bought during 2010. And that's really what the ATM activity was about. It wasn't about a limitation on how much we can do in a particular quarter, either practically or legally.

Okay, and so dove-tailing that with your earlier comments about sales accelerating in the near to medium term. I'm assuming ATM issuance is probably going to be pretty limited in that time frame?

I think one could take that away from our comments, yes.

Okay. And then general question on the portfolio. If I think between Memorial Day and Labor Day, which I think the book-ends of the classic summer leasing season, how much of the portfolio is sort of rolling in that period in time? Is two-thirds a reasonable number?

Between Memorial Day and Labor Day? It's probably more 40%.

Okay. All right. Is that because you smoothed it out? Or did I have an over-inflated view of the number from the past?

What we consider our primary leasing season. He's bracketed it by Memorial Day and Labor Day. Would you bracket it differently.

No, I mean when I sit here and look at the distribution of expirations, let's just say it's relatively flat from November through March. And then April is kind of the shoulder month. And then May through, really May through August are the peak months. And then September and October become the other side of the shoulder months.

So just going back to your reservations about changing the guidance formally today, if we think about you reporting in July on second quarter, you're pretty much halfway through that peak period?

Yes, but with 30- and 60-day visibility in terms of renewals.

Okay. So by that time you'll have a much better handle and visibility as to your confidence level over operating performance.

And as every day goes by, we will do that. But we would expect, come the end of July, obviously, with seven months under our belt, and 30- and 60-day visibility, and David said with the percentage of transactions yet ahead of us. We'd have a pretty good sense what the full year will produce. And I think we have over the past two or three years changed guidance at that time, and have been pretty accurate.

Okay, great. Thank you.

You bet.

The next question comes from Tayo Okusanya of Jefferies and Company. Please go ahead with your question.

Good afternoon, gentlemen. Just going back to Ross's question a little bit. Things are going extremely well now in all your key markets. But the economic backdrop still doesn't feel that great. Do you ever kind of worry that at some point you do start to see more price sensitivity from tenants? Or do you get worried that the strong fundamentals start to slow 12 to 18 months down the road?

Well, as we said before, we don't operate our business based out of kind of a macro unknown assumption set. We base our business based on what we see on the ground on our business every day with our intelligence, from what our locals tell us. And with our incredible operating platform, can actually visually show us in terms of what's happening today, what's happened in the recent past, and more importantly, the near term predictive capability that we have. And based on that, we don't see any headwinds or constraints. Can it happen? Yes, maybe. But we'll know it probably within 45, 60, 90 days, and we can react accordingly.

But we're not going to take a preemptive reaction, and try to temper things anticipating resistance. Our pricing philosophy is based on the willing seller and the willing buyer. And right now, the willing buyers are there, and we are going to continue to pressure test the rate level until we have resistance. We're not going to take a soft approach, trying to avoid resistance. We'll know it when we actually see it.

And we understand that trees don't grow to the sky. But right now with the occupancy levels we have with the demographic picture we see, with the statistics that Fred shared with you about income as opposed to rent as a percentage of income. We see a lot of runway yet.

Makes sense. Thank you.

You're very welcome.

The next question comes from Rob Stevenson with Macquarie. Please go ahead with your question.

Hi, everyone. It's actually Nick Yulico on for Rob. Just two quick questions. One, where do you think you could price unsecured debt today?

Yes, it's Mark Parrell. We could do a 10-year unsecured debt offering at probably around 4.6%, which is about 1.3% above the current 10-year. Which, by historical standards, is excellent.

Okay. Great. And just one other thing. I just want to make sure I'm understanding this. I mean you have a fair amount of debt maturing this year and next year. So is the plan then to actually deleverage a bit through these asset sales, and are the asset sales actually being used as a way to sort of -- as a hedge against the rising cost of debt? Is that how to think of this?

I want to split the balance sheet up. We do have refinance risk on the debt side, as to rate. And we do hedge that separately. The activity on the asset side of the balance sheet to sell these interest rate sensitive assets, we coordinate those but we're not selling assets to pay down debt at this point. That's not our goal.

Okay, thanks.

You bet.

The next question comes from Haendel St Juste of KBW. Please go ahead with your question.

Good afternoon, guys. I'd like to go back to D.C. for a minute. I'm just trying to get a sense of how many assets there you have left to cull? And how do you think about that market today versus others on a 12-, 24-month look forward?

I'll answer the first question, and have Fred answer the second. I don't know off the top of my head, Haendel. But I will tell you that we do have an intention of continuing to sort of tighten the circle of our investments there. And be more downtown and more in the Arlington, Alexandria area. We continue to have some older assets, more of the outer kind of ring. And our intention would be to address those. I don't know off of the top of my head exactly how much that represents today though.

This is Fred. D.C. market, especially in district and northern Virginia continue to get better and better. We had a great first quarter, and it's really building momentum from there as we enter into the second quarter. This year is going to be fantastic. We have pretty low supply, 2,900 units spread throughout the district and Virginia, and some in suburban Maryland. Going out in the next, 2012 and 2013, it's going to be a little more challenging. 2012 we'll see 7,000 units delivered into the market. A lot of it in D.C., a lot of it in northern Virginia, and a little bit out in the key cities of Maryland.

But the job growth so far is still very, very strong. We have 66,000 jobs, 2.2%. The engine of government, of defense, of technology, of business services, of legal, and all of the population services and retail, tourism, everything is up and strong and getting better in those markets.

So, if the job growth is there, which I think it will be for 2012, I think 2012 even though we have 7,000 units coming in, we'll be able to absorb those in fine fashion. Remember, looking back the last two years during the recession, we delivered 7,000-plus units back in 2010, and 7,700 in 2009. And we absorbed those during the recession in great fashion.

So I'm not worried about 2012. I think it will still be a good year. 2013, getting a little bit out there. If the government slows hiring or slows spending, so procurements would decline, so the job growth would soften a little bit. In the face of jammed up pipeline of supply, we have 10,500 units going to hit us in 2013 based on current pipeline that we've identified. So, 2013, you could see some softening there because of supply and demand maybe going the other way. The next couple of years will continue to be strong in that market.

Thank you for that. A couple more. Do you guys know today off hand how many of the assets in your portfolio could be characterized as student housing? And how should we think about these assets within the context of your longer-term portfolio strategy?

I'll let Fred and David answer how many they think are student. We don't own any assets that would be considered student by the classification of a common room with four or five bedrooms off of it with each bed being leased separately. We do have properties in which we have different percentages of students in occupancy. But it's conventional apartment product.

Berkeley.

Yes, Berkeley. We have properties in Orlando near UCF.

University of Miami. Cambridge.

Yes, the Red Road property is right across the street from the University of Miami. But these are conventional apartments that would have a high percentage perhaps of student occupancy.

Certainly. And I understand that. And then the other piece about the longer-term fit in your portfolio? Is there a sense that with pretty attractive pricing on that side of the business that they could be for sale here?

I guess we've thought about it not so much by the tenancy, but just generally what do we think growth expectations might be in various assets. I will tell you, I toured some properties and we have students, and I'm just wondering whether or not they should be in the long-term strategy for us.

So my guess is that over time we may address those. But there's no immediate need to get up after those day. Occupancies are strong. Rents are going up there, perhaps even more quickly than in our other products. But we'll certainly be looking at those as we think about the strategy longer term.

And one final one. I guess it's a very widely held view that you have a top quality franchise in many respects, particularly in operations, for instance. But given that, is your development capability where you'd like it to be? And should acquiring a developer be part of your near-term plan here, especially given the fierce competition on the acquisition side?

Look, our ability to develop has nothing to do with the fact that we don't have a top-notch development team, or we're under-staffed. We have a terrific bunch of guys who have delivered phenomenal product for us, and we expect to continue to deliver phenomenal product for us. It's more a question of what percentage of our investment activity should development represent? I would have no desire to buy some development company, and try and ramp that up to some extremely high number. I think a $500 million or so, per annum pipeline for us is just fine. And if we ever wanted to take it up, I assure you we could do it with the existing resources that we have.

I encourage you to go and look at what we've built in Boston, and what we've built in New York, and what we're building in Chelsea. What the team has done in Seattle and in south Florida. We can do what we want to do, and it's easily scalable if we want to increase the business.

Certainly. And I was not suggesting that you do not have a top quality platform there, just that perhaps it should be larger here today.

If we wanted it to be larger, we could scale it without any difficulty.

Okay. Thanks for the comments, guys.

You bet, thank you.

There appear to be no further questions. Please continue with any other points you wish to raise, sir.

Terrific, thank you very much. We appreciate your time today, everyone, and we look forward to seeing you in June. Fred, David Santee, and Mark Parrell will all be there, and we'll look forward to seeing you. Thank you so much for your time.

This concludes the Equity Residential First-Quarter Earnings conference call. Thank you for participating. You may now disconnect.