住宅地產 (EQR) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, October 27, 2011.

I would now like to turn the call over to Mr. Marty McKenna, Vice President, Investor Relations. Go ahead, sir.

Thanks, Jo. Good morning, and thank you for joining us to discuss Equity Residential's third-quarter 2011 results. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our EVP of Property Operations; and Mark Parrell, our Chief Financial Officer. Fred Tuomi, our EVP of Property Management, is 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 will turn the call over to David.

Thank you, Marty. Good morning, everyone. Thank you for joining us for our call today. We are obviously very pleased with the Company's operating performance in the third quarter, and we want to thank the thousands of our colleagues across the country that continue to deliver these strong results for us.

Only two other times in our Company's history have we delivered 9% growth in quarterly NOI (technical difficulty), and these results couldn't have been achieved without the dedication and the commitment by our on-site personnel and their support teams.

There is a very important thing that we want to share with you today. And that is across the country, these teams continue to deliver. Despite concerns about the economy, with expectations of slowing job growth and worries about the growing possibility of a double-dip recession, we are continuing to post very strong operating results, this month, this week and even today. Because despite all the worry and all the headlines, our dashboards indicate that there is no let-up in the strength of underlying apartment fundamentals, and David Santee is going to tell you just exactly what it is we are seeing out there today.

Thank you, David. Good morning, everyone. Since we last spoke, the economic headwinds have been creating considerable uncertainty. However, one thing is certain. The fundamentals of our business remain strong, our dashboards flash green and our target demographic appears to be healthy and resilient.

In the third quarter, our 17,000-plus new residents had an average household income of $86,000 and a median age of 29. Individual credit scores continued to improve, and we had record numbers of automatic credit approvals across the portfolio.

Now typically, this is the time of year where I would expect to be telling you about the softening of demand, along with downward pressure on rents due to the seasonal nature of our business. But it is quite the contrary. Our daily unique visitors to equityapartments.com, our number one source for move-ins and a key proxy for relative demand, continued to outpace previous-year activity by more than 20%. This means that we average over 15,000 unique visitors to our website each and every day.

To keep pace with turnover, we need only to convert 5% of these 15,000 daily visitors to new residents.

On a quarter-over-quarter basis, e-leads or guest cards increased 7%, applicants increased 6% and move-ins were up 4%. With this continued strength in demand and favorable overall fundamentals, our four key drivers of revenue continue to deliver results at or above expectations.

As we have discussed previously, these drivers are turnover, occupancy, base rent and renewal pricing. So let's start with turnover.

Turnover for the third quarter was 17.7% compared to 17.9% for Q3 2010. This positions us well for achieving our revised 2011 annualized turnover of 57.2%. Quality homes, loyal customers and our friend, the housing market, continue to fuel a strong base of residents whose average stay has increased from 1.4 years to 1.8 years quarter-over-quarter.

Now occupancy. Throughout this year, we have continued to enjoy a 40-plus-basis-point improvement in occupancy. With occupancy at 95.2% today and a left to lease of 7.5%, it is a story of what we don't see in the traditional seasonal slowdown. Last year at this time, occupancy was 94.6%, and we had a slightly higher left to lease. But this year, solid demand, a lack of new supply and a rethink on the benefits of home ownership should continue to support higher stabilized occupancy and base rents.

So let's go to base rents. Since January 1, base rents based rents have improved 9.1%. And for definitional purposes, base rents are LRO-produced rents prior to assigning any amenity values.

Quarter-over-quarter, base rents increased 5.8%, exceeding our internal expectations of 5%. Base rents in Q4 should be, on average, 8% higher than a year ago as a result of normal seasonal Q4 rate softening experienced last year, which we are not experiencing today. This break in seasonal patterns, coupled with improved pricing power in our Southern California markets, gives us continued confidence and opportunity with our renewal rates.

So as a result of continued low turnover, strong occupancy and base rents that are all trending very favorably against historical norms, we have the confidence to quote and achieve market-leading rents on each and every renewal. As a result, renewal rents achieved in Q3 were up 6.4%. And forward-quoted rents are 7.4% for November, 8% for December, and January coming in at 8.3%. Again, quoted rents are initial rates offered to all expiring leases. But history tells us that we will achieve 80 to 100 basis points less than quoted.

So with all that said, no one can predict the future. However, my dashboard is telling me that our future is bright, that in the near term, job growth is less important than previous downturns, and we have the wind at our back. How hard and fast that wind blows remains to be seen.

All right. Thank you, David. So obviously, we feel pretty good about current fundamentals in the multifamily space. And despite concerns about the macroeconomic climate, we remain optimistic about fundamentals for the foreseeable future. And that's for all the reasons we've talked about over the last several quarters.

We feel good about apartment fundamentals, with so little new supply being added to most of our markets, and at a time when we will create about a million new households a year in the country and occupancy levels, as David said, across many other portfolios are already above 95%.

We feel good about apartment fundamentals because demographics are squarely in our favor, with 85 million echo boomers coming into the workplace, and most likely into rental housing.

We feel good about apartment fundamentals as the single-family home ownership rate continues to fall, as more households think about housing as consumption rather than as investment, and value the flexibility and optionality provided by rental housing.

So supply and demand fundamentals should remain very strong for quite some time to come. Yet despite all this, many think that without job growth we can't possibly be in as good a place as David has suggested we are. Because when you look back in time, there was a high correlation between job growth and revenue growth. And while all of us here would agree that job growth is great for the apartment space, we believe that in the current environment, even without it, we will continue to deliver very strong revenue growth.

Because today, we don't need the job growth necessary to absorb all of the new units being delivered, because there are very few new units actually being delivered today. And we don't need a lot of job growth to backfill the incremental vacancy caused by residents moving out to buy single-family homes, because they are not moving out to buy single-family homes at anywhere near the historical run rate.

So unlike not long ago, when we needed job growth to backfill all those move-outs in order to get back to 95% occupancy, which would then enable us to increase our rents, in the current environment, we should be able to maintain 95% occupancy without it. And with 95% occupancy, the current attitude about single-family homes and a million new households being formed annually, rents will continue to go up.

So turning now to the transaction market, I will tell you that it remains very competitive. There remains -- continues to be plenty of capital chasing very little supply. Cap rates in our core markets across the country remain in the low 4s today, as investors continue to underwrite strong revenue growth for the next several years. And as we look across the marketplace today, we think values are now back to and maybe even above previous peak levels in our core markets, yet may still be down as much as 15% in others.

So as we announced in our earnings released last night, during the quarter, we acquired two stabilized assets for $113 million at a weighted-average cap rate of 4.7%. These were a 118-unit deal in downtown LA and 247 units in Fort Lauderdale, Florida.

We also acquired a 95-unit property in Daly City. It is on the peninsula just south of San Francisco. This asset was completed in 2011 and was totally vacant when acquired. This was the third acquisition we've made of a vacant property built as a for-sale condominium product. Like our other deals, we anticipate a quick lease-up and for a yield in year two in the mid to high 5s.

So through September, we've acquired about $700 million of deals, and our revised guidance for acquisitioning activity for the entire year is $1.25 billion. So we must have a fair amount in the pipeline, and indeed we do.

We are currently under contract for $500 million of assets, all of which should close this year. These deals are in Boston, in New York, in the DC Metro area, in Southern California and on the peninsula in San Francisco. These opportunities represent cap rates in the low 4 to mid-6 range, and we think they will all make great additions to our portfolios in these core markets, and also represent great trades for the properties we are selling.

During the quarter, we also continued to sell non-core assets and reduce our overall exposure to our non-core markets. We sold seven assets for $210 million at a weighted average cap rate of 7.2%. And we realized a weighted-average unleveraged IRR of 8.2%. Now this is well below the 11% unleveraged IRR we've achieved on the $1.4 billion of dispositions we've done in the entire first nine months of the year. And in this past quarter, this lower result is due to having not done terribly well on some deals in Tampa, Florida, where we sold our last four assets and have now completely exited that market.

Other sales included a deal in Portland, Oregon, which leaves us now with two assets there, both of which are currently being marketed for sale.

Our current expectation for full-year dispositions is now $1.4 billion, which suggests that we only have about $17 million to sell in the fourth quarter. That trade has already happened with the recent sale of an asset in Phoenix. So while we continue to market assets in numerous markets across the country, (technical difficulty) no additional dispositions are expected to close the remainder of the year.

On the development side of our business, we have three items to discuss this quarter, and the first is that we began construction on a site in San Jose, California for 444 units and $154 million total cost, just under $350,000 a door. We expect a low to mid 6% yield on current market rents on that transaction.

And we also sold or admitted an institutional partner for an 80% interest in that deal. And we did that because inclusive of the 546-unit second phase, the total development costs there will be $370 million, and we thought it prudent to reduce our exposure somewhat, and we have retained the right to build the second phase on our own.

The second thing to mention is our acquisition during the quarter of two land parcels. The first in Irvine, California represents 190 units for a total development cost of $50 million, or about $263,000 a door. We hope to begin construction on that opportunity in 2013, and expect a yield on current rents of 5.6%.

The second land site acquired during the third quarter was not actually an acquisition at all, but rather a 99-year ground lease on the Upper West Side of Manhattan, on the west side of Amsterdam between 67th and 68th Streets, where we will build a 224-unit property beginning in just about a year from now at a cost of about $506,000 a door. And as stabilized yield, we hope to achieve -- or expect to receive based on current market rents of about 6%.

And lastly, we've begun initial leasing on our soon-to-be completed property at 10th Ave and 23rd Street in New York City's Chelsea neighborhood. Many of you have seen this property located directly on the High Line, and it will be completed by the end of this quarter. When originally underwritten, we expected the new leases on that property with rents averaging sort of mid to low 5s and deliver a stabilized yield in the 7s. And I'm happy to tell you we've already signed a handful of leases in the mid-6s and we fully expect to stabilize that asset with a yield on cost in the 8s.

Through the third quarter, we've started 1225 units with a total development cost of $325 million. We are currently working diligently on three projects totaling another $300 million, which should also start this year -- 287 units in Seattle, 360 units in Alexandria, Virginia, and 252 units in Pasadena, California.

That means we will start about $600 million this year, which was our guidance in July. The development team is also continuing to work on secured development rights representing nearly $1 billion in total development costs in New York, in Southern California, in South Florida and Seattle. And we also continue to pursue new opportunities across each of our core markets, some of which are under LOI; for others, we've submitted proposals that we hope will turn into LOIs. And yields on estimated costs for those things we're working on that we don't yet have tied up are in the mid 5s to mid 6s range.

So I will now ask Mark to take you through some financial highlights for the quarter.

Thanks, David. Good morning everyone, and thank you for joining us on today's call. Today I will discuss our normalized FFO guidance and our dividend, and then close with a discussion of our balance sheet and the debt markets.

On the guidance side, I'm going to focus on our normalized FFO guidance for the fourth quarter. We expect normalized FFO per share of between $0.63 and $0.67 in the fourth quarter, and between $2.41 and $2.45 for the full year. This is right on track with what we told you back in July.

In the revised guidance we issued last night, we slightly lowered our expected disposition activity. We now expect to sell $1.4 billion of assets instead of $1.5 billion. We also slightly increased our acquisition activity to $1.25 billion. It had been $1.15 billion. Coming so late in the year, this will improve our 2011 normalized FFO only marginally, but it will benefit our 2012 numbers.

So, armed with our 2011 normalized FFO guidance, we can accurately predict our full-year 2011 dividend. As you may recall, last December we announced a new dividend policy for our Company. Under our new policy, we intend to pay a total annual dividend equal to about 65% of our normalized FFO. Applying the policy to our 2011 normalized FFO number of between $2.41 per share and $2.45 per share, our total dividend for 2011 should be between $1.57 per share and $1.59 per share.

The Company has already paid out dividends of $0.3375 per share for each of the first three quarters of the year, and that totals up to a dividend paid to date of $1.0125 per share. Therefore, the Company expects -- and this is all subject to the Board's approval -- to pay a dividend in January 2012 of approximately $0.56 per share to $0.58 per share. That will bring the total payment for 2011 to between that $1.57 and $1.59 per share number I mentioned a moment ago. This is approximately an 8% increase over last year's full-year dividend of $1.47.

On the balance sheet side, certainly lots of scary stuff out there in the capital markets. A lot of anxiety about Europe, though that may be improving with this morning's news, and slowing growth expectations for much of the rest of the world.

While no company, including ours, is totally immune from this turbulence, we thought it was important to stress that our strong and flexible balance sheet means we are well-positioned to weather possible disruptions in the capital markets.

The most important thing we have done recently to strengthen our finances is to put in place last July a new unsecured revolving line of credit. It matures in July 2014. It does have a one-year extension at the Company's option. It has $1.25 billion of capacity, and a strong, diversified base of lenders. And we did manage to slightly improve our financial covenants. We are absolutely delighted to have put this in place just before all the capital markets volatility hit.

I also want to say a word about our credit metrics and the debt level that we think is best for running our business. Our debt ratios at the end of the quarter -- and you can see those disclosed on page 17 of the release -- are better than four years ago before the credit market collapse. The main reason for this improvement is that our EBITDA is growing rapidly because of strong operating performance, including great performance from new acquisitions and development, and all this of course improves our credit metrics.

Additionally, in August, we used proceeds from our property dispositions to redeem the $482.5 million that was outstanding on our 3.85% exchangeable senior notes. So that was our convertible issuance. The improvement in our balance sheet ratios from this redemption, however, will be temporary, because we would expect to borrow this money back by the end of this year to fund investment activity.

We believe that we will have a net debt to EBITDA ratio at December 31, 2011 of about 7.1 times, and 2011 full-year fixed charge coverage of 2.6 times. We expect to be about $425 million drawn on our revolving line of credit on December 31, 2011.

I stated on previous calls that we plan to raise debt at some point in the next few months. Unsecured EQR 10-year debt pricing is considerably in flux today, given the good news out of Europe. Spreads a few days ago would have been around 2.5%, implying an all-in rate of about 4.75%. Spreads seem to be coming in substantially, though the Treasury has sold off a bit as well. But overall, our unsecured debt costs seem to be improving.

On the GSE side, we think EQR could get a 10-year interest-only deal done for a rate of about 4.25%. We will consider carefully which debt market is most advantageous for EQR to access, considering rate, flexibility and ratings considerations. Because the timing and size of the issuance is not certain, we have not included any incremental debt costs in our guidance.

Now I will turn the call back over to our operator, Jo, for any questions.

(Operator Instructions) Ross Nussbaum, UBS.

Good morning, everyone. David, I'm trying to make sense out of what were very bullish comments about the market, and particularly with some of trends you are seeing on renewals over the next couple of months, with the guidance that was provided for the full year of 5% on the revenue growth line. Because if you back into what that implies for the fourth quarter, it would imply that the year-over-year revenue growth rate may be equivalent to what we just saw in the third quarter, so sort of a flattening out of that revenue growth rate. But that doesn't seem to jive with the very positive commentary I just heard on the call. Can you reconcile those two for me?

Sure. David Santee (multiple speakers).

Sure. So it is really about understanding the cyclical nature of our business. And if you think about -- think of our business in terms of lease expirations, and it's just an arch; from January to December, it is an arch.

So what happens in Q4 is that you just have fewer transactions (technical difficulty). Yes, we are going (technical difficulty) to 8% renewals or 7.5% renewals, but those expirations are probably 40% less than what you see in Q2 and Q3.

Additionally, because you have more renewals and less move-ins, the transactional fees -- if you think of our income stream as there is rental rate and then other income, those transactional fees actually go negative sequentially from Q3 to Q4. So that sequential negativity on transactional fees offsets your rate growth to where if you look back at our sequential results for the past 10 years, they have been either negative or flat seven out of the past 10 years. So it is just a normal occurrence, based on the structure of our revenue stream.

So if I just add to that, so it sounds like there might be this pause going on because of some of the seasonality issues. But as we get into the first half of next year, we should all be assuming that your year-over-year revenue growth rate would be higher than the 5.5% that you're booking now.

Well, we are going to be very careful about giving any guidance for 2012. But as David said in his kind of prepared comments, the fourth quarter will be strong just because relative to the downturn that had happened in 4Q 2010 that wasn't happening now. But yes, we feel very good about what the next few years hold for us.

Rob Stevenson, Macquarie.

Just to follow up on Ross's question, can you talk about what the trend was on new leases and renewal spreads month by month during the third quarter, and whether or not those have crossed and permanently crossed?

Yes -- would you repeat the question, please? Renewal increases and new leases spreads?

Yes, month by month during the third quarter, and whether or not you've gotten to the point where you've permanently crossed in terms of new leases being stronger than renewals, or whether or not renewals are still showing stronger growth than the new leases, et cetera.

Well, the renewals have been fairly consistent through each month at about between 6.2, 6.5, right around there. We ended, I think, quarter average of 6.4, and there really wasn't very much variation between those months.

On the new lease gain, which I assume by that you mean -- if a specific apartment 2A moves out, what was the old guy paying versus the new one coming in, after some period of vacancy.

Right.

And that statistic moves around a lot. There is a lot of noise in that. It could depend on the unit mix, when that person moved in, what they were paying previously -- did they move in in 2005, 2008, or did they move in last year or six months ago? So there is a lot of movement in those numbers.

We have seen -- because of the volume of transactions in the summer months, that number was like a 5, and it trended down to in the 4s. So we are pretty consistent between 4 and 4.25, maybe 4.3, throughout the third quarter on that statistic. So renewals still continue to be higher than the new lease rate.

But let me make this point on that idea. When we renew a lease, we are renewing people to the market rent. So if the market rent is $1800, they are going to pay $1800 on their renewal lease.

When someone moves out, the new person coming in, regardless of what the old person was paying, is still going to pay that same rent, $1800. So we are achieving the same rent, whether getting there by renewal or getting there by the turn of a vacant unity. This replacement rent statistic, the new lease gain, some people call it, can be very misleading depending on just the legacy leases that are turning that particular month. But rest assured we are achieving the market rate either way.

I was just going to say, that assumes, however, that the rate we think will be market in 60 days from now is in fact that rent. It is possible to rent in -- the spot right in 60 days from now could be higher than what we think the 60 day out rent is today. Hopefully, we are being very aggressive on that 60 days out, but it's possible the market could actually be higher.

And then can you guys talk a little bit about what you are seeing on the expense side, not the seasonal expenses, but the sort of recurring, consistent expenses, whether it is taxes, personnel costs, utilities, et cetera, today versus at the beginning of the year? Is there any upward bias to that or are you still seeing it sort of the meandering around?

I think we are on track relative to our guidance. We put into place some pretty significant programs at the beginning of 2010 that we are still seeing the benefits in the payroll line.

Utilities, you know, it continues to be the same story. Water, sewer rates continued to go up, and that growth is offset by reduced costs in natural gas.

And then when it comes to real estate taxes, I think we've raised our number just a tad to 1.31 for year-end, which is slightly higher than we expected at the beginning of the year. But we are in a period now where we know all of the variables. We have all the valuations, we have all the tax rates, and a lot of the appeals have gone through the pipeline. So we see expenses right where we expected them to be.

Okay. So if you think about beginning of the year versus today, you are seeing an upward slope, but nothing that is a very strong slope?

If I had to say anything was upward, it would only be real estate taxes.

Okay, all right. Thank you.

Jay Habermann, Goldman Sachs.

Good morning. David, you gave some color on the acquisitions. And I'm just wondering, what is the going-in return, I guess, for the acquisitions you expect to close by year end? I know you gave a range of cap rates, but are you seeing opportunities to buy some B assets that you think you can upgrade to As, or are these essentially mostly A assets?

I guess there is a lot of the former, Jay, that we are working on some transactions that represent some sort of value-add opportunity. We are also looking at some assets that we think are pretty good as is.

So again, what we end up buying -- if we get these things closed or not, you know, it remains to be seen. But again, I guess I just have to sort of tell you what the overall spread is. And then we've given guidance as to what we think the delta will be on acquisitions for the full year versus dispositions for the full year, and you will just have to go on that.

Okay. And I guess as I think about 2012 -- and I know there has certainly been some effort at getting some guidance there -- but as you think about maybe buying versus building, would you expect to develop more next year versus buy?

Again, it remains to be seen, obviously. I will tell you I would not be surprised if we didn't see more development opportunities next year than what we've seen in the last year. I just think that -- getting a sense that as challenging maybe as development financing might have been for some, it might be incrementally a little more challenging.

So I've talked with our development guys about the possibility of actually seeing more development opportunity. Now, what that will be relative to acquisition opportunity, I don't know. But I'd tell you, in the core sites that we would like to build on, we think there was a reasonable amount of competition this past year and we may not have as much competition next year.

Okay. And can you help us think as well about the outlook for New York City, as well as DC? I know in the case of DC, clearly, it is rents that have held up well throughout the cycle. But help us think about the most recent quarter in New York and the outlook for rent growth there.

Okay, this is Fred Tuomi. New York is still hanging strong. I mean, the demand has been very strong through the summer and continues up through this week. And it's particularly encouraging to see that demand is very strong at the high end, the big apartments, the penthouse, the view premium units are all full, and we've got a good, strong demand there.

And even though there is a lot of talk about, gee, what's going to happen to the banking sector and the financial sector in terms of jobs, as of today, we have not seen any tangible evidence of our residents losing jobs and having to downsize or move out of the city.

Another interesting trend developed in New York is that the non-banking sectors are growing. We're seeing a lot of people coming in, getting apartments; from the entertainment, from the legal, technology, leisure, healthcare, they are all growing. New media, people -- it seems like almost everyone wants to occupy New York these days, including these other sectors. So very strong demand in New York, good rent growth. We are well above peak there now. Rents are up 12% year to date through this week, 6% from last year, 7% renewals. So it is all looking very good in New York.

And really, no supply issues. And with no supply issues locally in each little neighborhood, we are not seeing any concessions or OP deals, except a few small owners doing that.

Then DC is still going strong. There is a lot of talk about -- you see, gee, what's going to happen with the Super Committee, what's going to happen with government job losses, what's going to happen with supply (technical difficulty)? And all of that may become (technical difficulty) here in the late '12 or '13 or '14. But in the moment, DC, Virginia, still going very strong. All the indicators are looking good. Demand is there. Occupancy is 95.5%. Rents are up 8.6% year-to-date; 7%, a little bit more than 7% this time last year. Renewals are 7%. No one's buying homes. Traffic is still strong. And a very good renter demographic there, high incomes, people with very good jobs.

So it is still going strong, but now that's not to say that the next couple years, it could be tough there. If the government really does absolute cuts, and we see some leading indicators of that in the jobs numbers; they are softening. But if they do absolute cuts instead of just relative cuts, meaning they are slowing the growth rate, if that happens then it could be some downward pressure on DC, I think late '12 and into '13 and '14.

The supply fixture in DC is also something to be concerned about. We had a little bit of a pause this year, only 3000 units. They were all absorbed very quickly. And next year we're going to see about 8000 units coming in, and this time a lot more in the District. The last kind of cycle, we didn't see that many high-end luxury apartments built in the District because all the sites went to condos.

This time around we're going to see some apartments delivered into the District in 2012, and then again in 2013 and beyond. So we can expect about 8000 units into the whole Metro area next year, about half of those in Virginia, one-quarter of those in the District and one-quarter in the Maryland suburbs, and then about 9000 units the next 2013, 2014.

So if the job continues to be strong, as we've said before, these will be absorbed very easily. If not, that could create some problems in a couple -- 18 months to 24 months out. But as we sit today, we are still very, very confident in the DC/Virginia market.

Okay, that's helpful. And just a final question. Any thoughts on the ATM at this point? I guess you talked about the line balance by year-end, but any thoughts on using some equity as you anticipate acquisitions?

No, I guess the financing Mark talked about is essentially just to refinance other debt that was taken down. The converts that we called away, which we were able to deal with just on cash on hand. So there has been no discussion about that at the present time.

Thank you.

Saroop Purewal, Morgan Stanley.

Hi, David. There were a couple of proposals from the federal government on housing. It is a hot topic. They introduced HARP 2.0 for making it easy for refinancing. And also the proposal on turning some of the distressed single-family homes into rentals.

So just wondering what your thoughts are on that, and if you are seeing any impact -- I mean, how are you positioning yourselves for these changes?

Well, let me say, we are seeing no impact and, frankly, don't expect to see a lot of impact. I think it is possible in some markets, like Las Vegas and Orlando and the Inland Empire maybe, you might see some impact from that. But just in the markets we are in, there is just not a big overhang of those single-family homes.

And just from a larger kind of perspective, if those programs can help stabilize single-family home prices, then I think that will be helpful for the economy. But we are not looking at that as a big threat to what we do and not trying to position ourselves as a result.

Great. In terms of your views on just having these programs at about scale, do you see -- how do you see the economics working out? If you are seeing anything -- I mean, what are your views on the business model itself?

I'm not quite sure I understand. On the business model of an investor buying single family homes to rent?

Yes.

You know, again, we've not thought a lot about it because we don't look at it in the majority of our markets as any sort of threat.

I will tell you, just as an owner and operator of rental housing -- and I will tell you, as someone who owned and operated the [Letchford] portfolio, for instance, which is low-density, there is an awful lot of landscaping, asphalt roofs and siding with each one of those individual units. And I encourage people not to underestimate the cost of maintaining that investment, nor of the cost of actually attracting and keeping any sort of reasonable level of occupancy.

I'm not suggesting that people can't do well with that, but I would encourage you not to underestimate the cost of doing so.

Great. Just to follow up on the question on New York and DC, when I look at year-on-year revenue numbers, it looked like in the third quarter there was a slight dip in New York and DC. How should I be reading this? Can you break it down by occupancy and rents for these markets, or is that just a little bit more noise relating to seasonality?

It is probably mostly seasonality. In New York, right now today, we are sitting in Manhattan, 96.9% occupancy. Very strong for this time of year; in fact that's 60 basis points higher than the same week a year ago. So in Manhattan, a very strong 5% left to lease. Rents are up 12% year-to-date, 6% year-over-year, and renewals, like I said, are 7%.

The other part that we consider New York is the Gold Coast of Jersey, that we have right there in Jersey City. And there, we are 95.8% occupied, which is 70 basis points higher than the same period last year. So you can see demand has grown and has been sustained. Rents are up 16% from January. They are up 10% from the same week a year earlier, and renewals are just under 7%. So again, the Jersey City piece is going great.

And we have a couple of super buildings right there near the Goldman headquarters, and Goldman is still a steady source of great business for us. So still looking good there.

So I think the most recent indicators are that we are going to have a very strong finish to the year in the New York market.

And in DC, I think I gave you those stats. We are up 6.3% for the quarter in terms of revenue, and that is continuing or getting a little bit better as we move into the fourth quarter. And again, rents are up strong, (inaudible) are up strong. Turnover was flat in terms of the same quarter last year, and homebuying was flat. So really see nothing to be concerned about in the DC market. Today, it is more about the future.

Got it. Thank you so much.

Jana Galan, Bank of America.

Good morning. David provided commentary that Southern California is continuing to improve. I was wondering if you can give some detail on the various submarkets and what you were seeing for rents and occupancy in September and so far in October.

Southern California is finally coming to the dance. We are seeing some good momentum building and it seems to be sustained, whereas before we had a couple false starts. That really happened in August of this year. So starting with Los Angeles, really about -- the first week in August, we saw significant momentum picking up from Los Angeles, in terms of demand, prices, renewals, occupancy and everything. So LA is looking good. We are seeing renewals of just under 4%. Rents are up 5% year-over-year. We are sitting at 96% occupancy. And a very low forward exposure of left to lease of only 6%.

Pretty much the same thing in Orange County. August, we saw a nice pickup. It is being sustained. Occupancy is 96%. Left to lease, you know, the forward exposure is only 5.7%. Rents are up 9% year-to-date and 9% year-over-year.

So Orange County, smaller market, I think you're going to have a quicker rebound as things solidify. So it's looking good in Orange County as well.

San Diego is kind of the laggard. It is improving, but I wouldn't say it's building rapid momentum. Our portfolio has more exposure to the South County market and Mission Valley, which has been kind of hampered by some of the military rotations. So San Diego is just okay, just not as robust. But we are happy to say LA and Orange County are really building some sustainable momentum.

Thank you. And then just a quick follow-up on the expenses. Payroll, leasing and advertising, they were down quite a bit. And I was wondering if this is a function of moving certain parts of the process online or to the website, and maybe how much is left in savings there.

The payroll, a lot of that really has to do with our central business group initiative that we implemented really about -- well, third quarter last year. So all of that savings continues to flow through.

If you look at our property management expense, you will see that is elevated. So a lot of that payroll savings is sitting in the property management costs.

Probably the most significant is really the leasing and advertising costs, down 20 -- almost 22% year to date. And that really -- I mean that goes back to kind of the demand conversation that we had earlier. I mean, we've kind of eliminated the use of brokers in New York and Boston. We've reduced our paid search by 20%. We're using fewer and fewer ILSs. And all of that translates into a 20 some percent reduction on leasing and advertising, but we continue to drive more traffic.

Andrew McCulloch, Green Street Advisors.

Good morning. Just on (technical difficulty), your stock's up -- I don't know -- 15% for the month. And I'm not sure asset values have really done a whole lot over that time frame. Are you giving your acquisition folks more of a green light today, given you are trading at a sizable premium to NAV again?

I guess, Andy, we are responding to every acquisition opportunity that we think makes sense for us. And look at those primarily in the current environment as trading opportunities. So we've still got assets we would like to sell, and if we can find assets into which we can redeploy that capital, we won't hesitate to do so. So for the present time, it is really funding acquisitions with dispositions capital.

Okay, and just on acquisitions, I guess, there has been a lot of news articles about a Palo Alto portfolio that you guys are pursuing. Sounds like that might be in your guidance. Can you comment on that portfolio, or at least give us some indication on when you will be able to comment on it?

Well, I guess it is not a secret that we are looking at a portfolio in East Palo Alto, California of 1800 units. On the peninsula, great location on the peninsula, that we think could represent a terrific opportunity for us to make an investment in a large portfolio. And we are continuing to work on it, and we do have an expectation that we could close on that this year, but nothing is certain at the present time.

Okay. And then just on land values and construction costs, can you give any general comments about recent trends there?

I guess construction costs, we still think are down call it 15% or so from peak. And maybe they are rising modestly, and maybe only modestly because labor costs remain generally under control.

And land prices, I guess, have been competitive because we are looking at entitled opportunities in core markets, and there is sufficient number of people that are interested in acquiring those. So land prices on those types of deals have come back and come back pretty quickly.

But again, we are looking at investment -- or development opportunities relative to what acquisition opportunities are in those individual markets. And in some, we will do one; in other markets, we will do the other; in some markets, we will happily do both, if we think we are getting properly compensated for the incremental risk that we take through the development process.

Great. Thanks a lot.

Eric Wolfe, Citi.

Thanks. Just wanted to follow up on Ross' question, as well. Could you tell us how much you expect just your rental revenue growth to accelerate from the third to fourth quarters? So excluding the other income that you mentioned would be down on a quarter-over-quarter basis, how much would revenue growth be in the fourth quarter versus the third?

So if you are talking about a sequential rental revenue number, it is probably up something like 20 basis points. Putting aside the impact of other income going down because of the transactional activity reduction that David Santee spoke of a moment ago.

Okay. So I guess the fact that occupancy is up sort of 40 basis points year-over-year, and -- I don't know -- the rental rate growth that you mentioned, 7%, 8% during the quarter, seemed -- obviously, it is higher than the 5.5% on same-store revenue. I guess I would have thought there would be a little bit more acceleration there. But I don't know, is there something we are missing, other than just the number of expirations that you have?

Really, I think it is all about the expirations and the number of move-ins. If you look at just our September to October move-ins, those were down 2000. And so what you have to do is really look at the level of fees that you're talking about in such a short period of time.

So in many of our markets -- Florida, we receive $90 for an application fee. In a lot of our markets, we receive $300, $400, $500 nonrefundable move-in fees. All of that flows into our other income. So it is just a matter of the ability to impact that revenue with such few transactions.

And I will say this as well. In our business, think of it in the world of yield management. There is two formulas that we use as for demand. And one is that arc that I spoke about, where if you take the northern part of the United States, I mean, the business cycle is more pronounced relative to that arc. So in Boston, in November and December, you have very, very, very few move-ins, versus the more birdlike pattern which is in the southern part of the United States, where you have pretty much consistent demand all through the year.

So it is really just math, based on the available transactions to impact revenue.

That is very helpful. And just on David's commentary on cap rates, it sounds like they stayed pretty flat even through this period of renewed economic concerns. But you would think at some point that cap rates have to rise just based on slowing growth or rising interest rates. So just wondering when you think that might occur, if that's sort of an early next year time phenomenon or that's going to happen later on when more supply hits.

It is obviously tough for me to say, Eric. I guess I can tell you that in the marketplace today, there are probably fewer bidders on assets, because some have had to retrench or retreat for various reasons. But there is still sufficient number of people looking at these transactions that pricing has remained fairly consistent.

Okay.

Whether there is an inflection point on that or not, I don't know. But I will just tell you, I think at least for the present time -- and I'm not quite sure if it changes down the road -- for the types of properties that we've been buying, I think there is a shortage of sticks and bricks of the kind of quality that we've been buying relative to the amount of capital. And our investment activity over the past year has been one to sell the assets that we believe -- whose values are most at risk of rising interest rates. And those are the assets to markets we've been selling. And we've been saying for quite some time that we think that those that we've been buying are less sensitive to interest rate risk. Certainly sensitive, but less so.

David, it's Michael Bilerman speaking. You had made a comment in the beginning that you believe housing is more viewed as a consumption today than as an investment. And so I'm curious as you think about your business and as you evaluate the strategic sort of goals, do you think there is an opportunity to create a subset within the portfolio where you are doing longer-duration leases, almost like a quasi-ownership, where the tenant, because they do want to have a little bit more security over their rent payments for the next three to five years, they want to have security about where they live, they don't want to have to deal with annual renewals or moving, that you could take a subset of the portfolio, especially in your higher-end assets, even some of these condo-turned-rental buildings, and create that? Is that opportunity also, to create a little bit more of an income stream -- a stable income stream over time?

I guess if you think that we are in a rising rent environment, you would like to have shorter-dated leases than longer dated leases. So I think that in most markets we are in, the convention is a year. And outside of New York, we are obligated to offer longer leases. My guess is we will continue to operate kind of with the convention, with a view that rates will continue to rise.

Right, but I guess over long cycles of time, if the consumer is changing from one of investment to consumption, there is certainly part of those individuals that do want a little bit more security and timing that you could create more demand and income stream that is less variable.

Well, except you would have to charge a rate that accounted for the fact that it was a two-year number. And I will tell you, that would be a pretty big rate and they'd have to compare that to a one-year number. And I guess I just -- and also I will tell you, in some instances, it is almost an option for the tenant, because most of them, one year out, if they want out, they are going to come and complain and pay the legislated -- the mandated small fee to actually get out. So I'm not quite sure there is a lot of upside to us in that kind of thought process.

I mean, you go back to the age of our demographic, 29 years old. A lot of these folks -- I think people are willing to pay more for flexibility than certainty. So unless that dynamic changes, I think we will probably continue on, unless there is some huge shift in thinking on part of the customer.

And we do offer two-year leases in New York, in Manhattan. And some people take it, but most of the people still go for the 12-month lease term. And there is a lot of smart people that are figuring it out.

Great. Thank you.

Seth Laughlin, ISI Group.

Good afternoon. Thanks. Just a question on acquisitions. I guess as you are looking at them today, are you adjusting your underwriting, given that we are kind of progressing through the cycle and at maybe peak growth rates? Are you becoming more conservative either on growth or IRRs?

I guess we are still trying to underwrite to plus 8% IRRs. And (technical difficulty) we [still] have an expectation of the ability to raise rents over the next several years. So on a market by market basis, it is possible the team is maybe rethinking what we may be able to do 12 or 24 months out. But in any event, I will tell you that there is good rental growth in our underwriting assumptions over the next few years.

Understood. And then maybe just a quick follow-up on the tax question. I guess just to help us understand the process, what is the timing of the appraisals and sort of thinking about what timeframe -- if you were to receive increases, either in rate or appraised value -- when could that start to hit the expenses, assuming that did occur?

Well, let me say this. When we look back over 10 years of year-end real estate tax numbers, the high-water mark was in 2007 and 2008 at a 5% growth. Most of the time, the 10-year average is about 2.5% to 3%.

So typically what happens is that -- every state is different. New York, we have 421A step-ups. Florida -- and then you have to look where we have vulnerability relative to rate. New Jersey just passed a cap, where values can't increase more than 5% versus the 10%.

And so it is -- you know, I'm not sure how to answer your question. But all of this -- as far as budgeting goes, we are in constant contact with our third-party sources in the field. We pretty much know what to expect throughout the year. And generally speaking, by the time we receive those valuations -- and in some cases we don't find the actual tax rates until October or September -- then we need to make those adjustments.

Let me just add, there is some other items that should be thought about, just so there isn't undue anxiety about the 2.6% quarter-over-quarter third-quarter real estate tax number. The prior period was down over 4%. Also, there was an adjustment; we had to make an accrual adjustment of about $0.5 million that is in that number, that otherwise, that number would have been smaller.

And a good part of the remainder -- and you can see this in our New York expense numbers -- is due to the burn-off of some abatements in New York City.

So these numbers on a quarterly basis are lumpy. It is better to look at the 1.3% year-to-date number. And that is very much in the wheelhouse, and I think absent this $0.5 million or so kind of accrual adjustment we made, would have been right on that 1% number.

So I don't think know that we see anything really different in real estate taxes, beyond accounting adjustments and the like.

Understood. That's helpful. That's all for me.

David Bragg, Zelman and Associates.

Thanks. Good morning. Just a couple questions on renewals. What percentage of current residents are pushing back nowadays, if you split it between those simply accepting the renewal increase versus coming in to negotiate?

We are still seeing most people are renewing at the quote, about 60% or so. That number really hasn't changed.

And the only market I've seen kind of anecdotal and a little bit of measured evidence of people getting a little bit of price resistance is San Francisco -- to be expected. We've had very strong growth there through this year. But again, it is not impacting our results or the performance or the overall demand there.

So really, in terms of the acceptance of the quote and there may be more negotiations, but we don't see it in the actual numbers.

That helps. And you walked us through the expected acceleration for renewal increases for the portfolio as a whole into January. But can you help us understand directionally the trends in the key markets? What markets are seeing the greatest acceleration of renewal increases into 4Q from 3Q, and in what markets are they flattish or maybe lower?

The strong markets in terms of renewals, San Francisco leads the pack, and we are currently achieving in the month of October north of 11%. Denver at 8%, Boston at 8%, DC/Virginia at 7%, and New York at 7%. So those are the strongest markets. And that is continuing.

Actually, the quoted percentages, as David mentioned, for November, December, January, are actually going to be above those numbers. And we have to wait until we actually see what we've closed.

On the other side of the spectrum, those that are pretty weak on the renewals -- Inland Empire, as you would expect, is 3.6. LA is below 4 and San Diego is kind of right at 4.

But I just want to make sure -- go through, again, if you would, David, just what we are seeing in these renewal rents relative to last year, because of what happened last year. It's more about the comp period than it is the current year (multiple speakers).

Yes, you know, probably the best example that I can give you is Orange County, where you look at -- last year, we had the seasonal falloff in rents. But this year, we see the exact opposite.

So when I look at my LRO rents for two weeks out, I see rent growth of 11.2% in Orange County. So Orange County, even though we've already issued those renewals, five weeks ago, rent growth in Orange County was only 4%. So you have this softening from last year, but you have this significant growth this year, which is creating this wide gap.

So it is not unlikely that come January, February, March, we could be issuing -- if this sticks, we could be issuing 11%, 12% renewal increases in Orange County.

Okay, and just to look at this from one other way, I want to confirm that there are no markets in which you are sending out renewal increases today for 4Q into January that are lower than what you achieved in 3Q of this year.

That's correct. Remember, we price renewals on the forward expected prices.

Okay. That helps. Then on development, David, you mentioned a lower level of competition potentially for development deals next year. Hopefully, you could expand on that a little bit. What have you seen in recent months to cause you to believe that?

And then more specific to your Company, I think that you've traditionally said that $500 million, $600 million of starts is around the maximum that you would do in any given year. But given those comments, is it becoming more likely that you could exceed that level at some point in the near future?

I guess what I had said about the $500 million to $600 million, Dave, was I thought that was kind of a normal run rate. That doesn't mean that is a limit or a ceiling.

I guess -- and my only comment is, you know, we talk to a lot of banks, a lot of capital sources. I think we talked to one capital source the other day who said they were pulling back, they were having a wait-and-see attitude. And I just think that the marginal sort of local developer who might have thought they were going to get something done might be a little more challenged than what they had thought.

I think the banks potentially could be a little bit more cautious, equity sources perhaps could be -- they need a little bit more guarantee or a little bit more skin in the game. And that is all. It was just a comment based upon conversations we've had with -- Mark and I had with various equity and debt providers, who are leading us to believe that they were going to be a little more cautious going forward as they assessed all this uncertainty.

Okay. Last question real quick, Mark. You mentioned 4.25% for 10-year money from the GSEs. Could you just compare where the life companies are to that? Thanks.

Well, they are running towards the end of their allocations for the year. So again, if we were going to do a life company deal in size, I think it might be better to just be the first deal out of the chute in January than it would be to try and get some money now, just because I think a lot of guys have exhausted their allocation. I think we would be right in that GSE range with the kind of pools we do.

Another note is we would have to choose assets that were very shiny in our core markets. The life company bid is certainly there for the kind of assets EQR owns. But if we were to try to put assets in that were in the few tertiary markets we own assets in still, like Orlando, I think we would get some pushback on that. And I think if we put in -- and we have few of these -- but in core market assets that were maybe in slightly less desirable submarkets, I think we would get pushback from the life companies, too. So I think it can match the GSEs. I just think they are a little pickier on their collateral.

Thank you.

Alex Goldfarb, Sandler O'Neill.

Thank you. Good morning out there. Just quickly, David, on the last call, you spoke a little more cautiously about acquiring and wanted to step up your disposition activity. Certainly, it seems like you're re-ramping up the acquisition activity. Given the macro headlines almost seem worse today than they did with the second-quarter call, what has given you more confidence to be a bit more aggressive on the acquisition front?

Alex, I don't think we've been more aggressive; we've just seen a little bit more product. And I think that on the call, the second-quarter call, I think I might have said that we might expect to see more product as we progress later into the year.

I also believe I said that I said it in 2010 and it didn't happen, but we had an expectation that we would see more product towards the end of the year and that has in fact happened. So it's not being more aggressive. We are just seeing more product.

Okay, and you think that is driven just more by the recovery of NOIs that sellers are more willing to let go because values have come up? Or what do you think -- or is it more potential people thinking about tax issues that if tax law changes -- what do you think is driving it?

Every single seller has their own reasons, Alex. They may have refinanced risk that they've decided that they don't wish to take. They may have a desire to take some taxes now before maybe changes. They may just feel like I can't get any better than this. Who knows? I think every seller has their own reasons.

Okay. Last question is in New York, just the $506,000 a door that you mentioned for the Upper West Side, that is the all-in correct? That is not the your implied land costs, correct?

That is without land cost.

Okay. So if you factor in the ground lease, what is the implied per-door for the land?

That's a good [question]. Depending on how you do that -- and I guess if you just do an NPV calculation over a 99-year ground lease, that cost per door could get into the mid-8s, mid-$800,000 per door; call it $860,000 a door, depending on how one did that valuation.

You mean $860,000 all in, so it would be like another $350,000 a door?

Yes. And I use as a comparison, just to kind of put that in perspective, that a property three blocks north of there, at 72nd at Amsterdam and Broadway, called The Circle, traded for something like $1350 a door.

Okay, so if you think about it --

I'm sorry, per foot.

Okay, so to your earlier comment about values rebounding, based on -- there's the Park Avenue site that you guys are reported in with Toll Brothers that I think is like $400 a foot. I think -- that sounds like it is a fee deal. But it sounds like in New York, the land costs have now surpassed prior peaks. That seems to be a fair assessment?

If not past, pretty close. Again, but we are talking about entitled, ready to go product.

Okay, so all of this --

So let me put some things in perspective, because I got some numbers kind of garbled up here a little bit. So $870,000 a door is maybe a little more than $1000 a foot. And that compares to the $1350 or so a foot up at The Circle. So yes, I would tell you on entitled, zoned, fully ready to go product in New York, I would say the prices would be back close to peak.

Okay, thank you.

Michael Salinsky, RBC.

Jo, we're losing you a little bit.

I'm sorry. Can you hear me now?

Not as well as we had previously. So we'll have the questioner go ahead and ask their question. We will see if we can hear him or her okay.

Hey, guys. It's Mike Salinsky here. Can you hear me?

Yes, that's fine, Jo. We got Mike okay. Good morning, Mike.

First question, just want to go back to expenses. I know you guys have been pretty proactive in locking in costs, proactively managing real estate expenses. I'm not asking for guidance for '12, but if you think about expenses overall, should we expect more normalized levels? And is there anything kind of on the expense horizon that you're getting a little bit concerned about right now? I know you don't have a lot of pressure on payroll with new supply down. But I'm just curious as you look out over the next several quarters what you expect to see on the expense front.

Well, I think we have a few treats, not tricks. But I think you're going to see the benefits of our central business group kind of flow through the system, and probably see payroll growth return to more normal levels, probably in the 2%, 2 plus percent range.

We've always discussed about real estate taxes that eventually we will see some pressure there. Utilities, you know, I think it will continue to be the same story. We will continue to see gains from lower natural gas that offset water and sewer. And take those three categories and that is almost 70% of our expense formula.

So I think we have some things in the works that will still allow us to mitigate some of those -- some of that growth. And it's just a matter of how quickly we can get that done.

Okay, that's helpful. Second of all, you had an LRO royalty termination in the quarter. What was that related to?

Originally, when we partnered with Archstone, we had a 50% ownership interest in the intellectual property rights. So basically, for the last five years, we have turned that product, both Archstone and us, turned that product over to a company called Rainmaker. And in the original deal, if Rainmaker achieved certain revenue levels, they had the right to purchase the intellectual property. And so therefore, everyone exercised their rights, and now Archstone has full control -- I'm sorry -- Rainmaker now has full control and ownership of the LRO product.

And then final question, just in terms of dispositions. I think, Dave, you had mentioned in the past about $1.5 billion left to sell. And I was just wondering, as you are going through the portfolio, is that still a good number today, as we think about disposition activity over the next 12 months? Is that something you expect to accelerate, given where we are at at the cycle or pull back on, given where we are at at the cycle?

Well, I will tell you, I think that today, Mike, we have very little that we need to sell. We've got assets we ultimately would like to sell as we rotate into core markets and perhaps different product in the same market which we might want to sell some assets.

So I think you should expect $1 billion or $1.5 billion for disposition run rate for us for the next several years. A lot of that, though, will be a function of will we find could invest what opportunities into which we can recycle that capital. But the product that we need to sell has generally been sold, and now we think it is just more opportunistic traits.

Great. That's all for me, guys. Thanks.

Rich Anderson, BMO Capital Markets.

Thanks, and sorry to keep this going, but I also have one question. Big picture, you mentioned the elimination of home ownership as an investment. And I'm wondering why that matters. Actually, that's not part of your competitive set, that people aren't going to occupy a home. In fact, if anything, the elimination of them keeps the overall housing market more affordable to the extent that it ever does turn. So why is it that is a good thing, if they are not really leaving, per se, by definition?

I'm not sure. Is that a trick question?

No. (laughter)

I mean, the fact that people are having second thoughts about leaving our apartments to go buy a single-family home.

No, that's not what I'm talking about. I'm talking about you have an investor who is not going to occupy a home, is just investing in it to rent it out or whatever. Why does that matter if that appetite is gone -- for you?

No, I'm suggesting that that appetite is gone from our residents. And that single-family home that investor wants to buy, that exists as housing inventory, whether what is owned by that person, by original owner, by a bank. I mean, I'm not quite sure we care who owns it. It is a housing unit.

My comment was about our residents no longer thinking that they need to buy these things because they were going to double every five years. But rather thinking about it as consumption, thinking about the wisdom of putting every penny of their liquid net worth into a home, borrowing money from their in-laws. And we think that is just getting people to stay longer in our apartments.

And it was from that perspective, not from the perspective of an investor buying a single-family home and making it available for (multiple speakers).

If one of your renters bought a home as an investment, they may stay in your unit. I guess I don't understand fully the connection between that angle of home buying and your business. That is the part I just don't get fully.

Well, I guess I don't fully get your question. We can talk later this afternoon.

Okay (multiple speakers). Fair enough. I'll talk to you off-line.

Okay, thanks.

Tayo Okusanya, Jefferies & Company.

Good afternoon. I just have one quick question. I'm just trying to understand comments that were made about cap rates with acquisitions now kind of like in 4.5% type cap rates. And given your expectations of 8% IRRs, wondering what you really have to underwrite by way of NOI growth and also exit cap rates to feel comfortable with that idea of being able to hit that 8% IRR when the ingoing cap rate is just at 4.5%.

Obviously, every acquisition opportunity is different. But as I did say that we have pretty strong confidence in rental growth over the next 2, 3, 4 years. And every residual cash flow against which one applies a cap rate has embedded in it a great deal of assumptions, and certainly the exit cap rate that one uses, one has an assumption of that as well.

I guess I can only tell you that as we underwrite our acquisition cash flows, it does produce sort of two facts. One is what the entry price is in absolute numbers price per door and what the exit, what the assumed cash flow is in the assumed cap rate that is used. And we look at those -- as a sanity check, we look at those two points. And in most instances, the compounded average growth rate in the absolute value of those assets has a three handle on it. So between revenue growth and some appreciation is how you get to the 8% IRR, and some of that comes through compounded average growth rate of the underlying assets of about three plus -- with a three handle -- call it mid threes.

So (inaudible) growth for over how many years and what exit cap rate?

Well, again, every asset is different and this is not a formula that you jam every property into. But I would say we've been buying out -- I would say some of the assets we are buying, we got value-add opportunities, where we will put $3000, $5000, $7,000 a door into them and end up getting a low double-digit return on that incremental capital. So that is embedded in there, as well.

So there is an awful lot of things that go into these individual assets. But in general, the expectation of the compounded average growth rate between the absolute value going in and absolute value going out is a mid-3 compounded average growth rate.

Okay. And then just one other quick question. In regards to the dashboard, what would you need to start -- what would you need to start seeing in order for you to kind of feel not as confident about the outlook for the apartment space on a going-forward basis?

Well, I guess I would see increasing exposure and reduced applications, which would start, obviously, putting pressure on our price. Other (technical difficulty) homebuying, move-outs to buy a home is still low. I don't see that changing anytime soon, but certainly it could happen.

But other than that, looking at the dashboard, that is the critical item, is really the exposure and what that does to rents.

Got it. Okay, thank you very much.

[Mark Pfeiffer], Bloomberg Research.

Good afternoon, guys. Just a quick question. You had mentioned that the average household income for your residents was about $86,000. If you take the rent that you are currently charging, it is about -- works to about 22% of their income. How has that number traded say over the last 10 years for your portfolio?

I want to make sure -- you are comparing two different numbers. One is the average income of the 17,000 leases that we did in the third quarter. The other is what the average rent is across the entire portfolio today. So Fred, you --

Yes, in terms of the average rent as a percent of income, right now today, we are sitting at 17.4. The median is 22.7, but the average is 17.4. And when we look at the income -- average monthly household income versus the rent, actually, since the beginning of this year, our incomes have been growing just slightly faster than the rents, which is very encouraging to see.

And this number really has not moved. In January, it was 17.7. July, I think we mentioned that in the last call, it was 17.6. And today, it is 17.4. So it is all kind of clustered right there. So over the last year or so, it has not budged.

Going back 10 years, it is really not a valid comparison because our portfolio has changed so much. We no longer have the bulk of our portfolio in the Sun Belt and markets with lower rents, lower income. So really in our current portfolio, the more relevant is what is happening the last couple years, and it has stayed very healthy. And then on the margin, getting a little bit better.

So what was the peak number that you had, say, back in '06, where you had the higher rents in '07? What was that number at that point and before you started to see pushback on rent or people moving to B quality product?

I don't have that number handy, but I can tell you that we don't see a lot of pushback on the rents. Earlier, I mentioned San Francisco is the only market that we see a little bit of that on an anecdotal basis, and it is showing on our reasons to move out. Again, this is a very small move. Everywhere else, very consistent.

As David mentioned earlier, the balance sheet and the income statement of our residents is very strong and getting better. The credit is good. So we've got that demographic that has great-paying jobs, who want a great lifestyle in an urban setting, and that is what we are enjoying.

Okay. And then just lastly, David, you had talked a little bit about the DC market. I'm just curious, given growing concerns about deficit cuts and all these other items, do you have any other thought process in terms of reducing your exposure in DC and maybe using those to invest in Southern California, where you are seeing an acceleration in rents

I'll tell you, we did sell a large portfolio of assets in sort of suburban DC earlier this year for $250 million (inaudible) in Maryland. So we have done that.

And DC is a market in which we've sold older, more outlying properties and reinvested that capital more into the District and in Northern Virginia. But certainly -- and Fred went through, I think, in pretty good detail the way we are looking at DC, and thinking about jobs as well as thinking about supply, and it certainly is a market we are going to keep a close eye on.

Okay. Thank you.

Haendel St. Juste, KBW.

Two quick ones from me. One, I guess going back to your Palo Alto deal you're looking at for a sec, that potential acquisition, which we understand is more of an affordable nature, would mark a meaningful departure from your recent focus on higher quality assets over the past few years. Is that primarily a function of pricing opportunity or maybe representing more concerted effort to introduce more B quality assets into your portfolio?

I guess we think about that portfolio as workforce housing. And I guess -- I think I've tried to say over the last few calls that we are focused more on markets. And while we did buy and will continue to buy, if we can find a higher quality product at prices we think make sense.

Much of the acquisition activity that we've done since pricing has recovered has been in lesser quality product. So I think that this is looked at as looking at wanting to add assets on the peninsula, and here is a portfolio that we think if it can be done at the right price would represent a good opportunity to do so. So I think we've been more about locations in markets and not simply about quality of asset.

Okay, and one more. Just going back to your answer on a recent question, for clarification. Looking across the spectrum of quality -- the quality spectrum for deals you are bidding on, can you discuss any changes you are seeing in the number of bidders, as well as the type of bidders? And have you seen any narrowing or change in the bid-ask spreads?

I guess I can only tell you is that our acquisition guys report to me that they are seeing fewer competitors, but there are still a sufficient number of competitors to make pricing consistent over the past six or so months.

So while six months ago, there might have been however many [confees] and however many [tours] and offers and people invited to -- in the best in finals, there are probably fewer in each one of those stages, but there is still enough that the ultimate outcome is consistent pricing.

Great. Thanks for your time.

There are no further questions at this time, so I'll turn it back to management for any closing remarks.

Thank you, Jo. Just a couple things. I just want to make sure that we've put the 11% in Orange County in perspective. I know David said this, and I just do want to reiterate that.

That comes from a function of increasing rents today, but more from the fact that rents were decreasing a year ago. So while the percentage of 11% or so potential sounds very high, a lot of it is because of the downturn that we were experiencing a year ago and the comp period that that represents.

So we've talked about rising rents, yes, but the 11% is relative to where rents were a year ago, and they were decreasing.

So with that, let me just say in closing, I want to say a brief word about our dear friend, Bill Acheson, who was killed recently when struck by a car while riding his bicycle. Bill was a longtime REIT guy who covered EQR and other companies for many, many years. We really enjoyed working with Bill. We will miss him in Dallas in a few weeks, but we will look forward to seeing everyone else there. Appreciate your time on the call and we will see you in Dallas. Bye-bye.

Ladies and gentlemen, that does conclude your call for today. Thank you for your participation, and for using ACT Conferencing. You may now disconnect.