住宅地產 (EQR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Equity Residential's fourth-quarter 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, February 2, 2012.

I would now like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.

Thanks, Camille. Good morning, and thank you for joining us to discuss Equity Residential's fourth-quarter 2011 results and our outlook for 2012. Our featured speakers today are David Neithercut, our President and CEO; Fred Tuomi, our EVP of Property Management; David Santee, our EVP of Property Operations; and Mark Parrell, our Chief Financial Officer.

Before I turn it over to our team for their comments, I want to point out an error contained in the release we issued yesterday. On page 12 of the release, the data for our same-store year-over-year turnover is incorrect, as we inadvertently calculated the numbers using 9/30 year-to-date data. The full-year 2011 number should be 57.8% instead of 44.4%; and the full-year 2010 number should be 56.9% instead of 44.1%. Fred Tuomi will provide some color on our expectations for 2012 turnover in his remarks.

We apologize for this error and will issue an updated release after our call. And we thank Dave Bragg from Zelman Associates for catching this error and bringing it to our attention.

Lastly, let me remind you that 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 the call over to David Neithercut.

Thank you, Marty. Good morning, everyone. Thanks for joining us today. We're extremely pleased with the Company's operating performance in the fourth quarter, which wrapped up a very good year for Equity Residential. And on behalf of everyone here, we want to thank the thousands of our colleagues across the country that continue to deliver these very strong result for us.

Our same-store net operating income for the full year of 7.7% was nearly spot on the high end of the guidance range we gave you exactly one year ago. And this performance was the result of continued strength in fundamentals, driven by a huge demographic of our population that is not just simply in their prime rental years, but one that's currently shunning the commitment and financial risk of single-family home ownership, and is instead embracing the optionality and flexibility, the lifestyle, really, provided by rental housing.

At the same time, new supply has been severely limited in some markets and almost nonexistent in others. This leads to tight markets with high retention, low vacancy, and rising rental rates. So we're very confident that 2012 will be another very good year.

Fred Tuomi is going to take a moment now and take you through the baseline assumptions for our key revenue drivers this year.

Thank you, David. As noted in our press release last night, our guidance for 2012 revenue growth is between 5% and 6%. We continue to see strength in virtually all of our markets -- actually in all of our markets, and the fundamental factors of supply and demand remain in our favor. The combined forces of demographics, household formations, and the continued aversion to home ownership will ensure strong demand for rental housing. This is further supported by gradual improvements in job creation, especially within our younger, college-educated, urban cohort, where unemployment now stands at 4.1% versus 8.5% overall.

Our resident base is very healthy due to its high level of employment, good income growth, and a demonstrated ability and desire to pay higher rents for quality rental housing. On average as a percent of income, our rent is currently 17.2%. This is a very good number and actually down slightly from last quarter. This is versus the 33% threshold we typically use to qualify new applicants. The household income of new residents acquired in 2011 was 4.4% greater than those residents moving in with us during 2010.

So, this year, some of the strongest revenue growth will come from Boston, New York, and San Francisco. In these key markets, we see continued stability in the financial sector, and continued growth from technology, new media, business services, and the health sciences. The more challenging markets will include San Diego and, to no surprise, the DC Metro area.

So regarding our 2012 revenue guidance, I'll again discuss the four key (technical difficulty) drivers in more detail. And those are resident turnover; our physical occupancy; base rent pricing, meaning net effective rates on new leases; and then our renewal pricing.

The first turnover -- you know, one of the benefits we've seen from this renter nation phenomenon is structurally lower resident turnover. This has been evident since, really, late 2008 and 2009. In 2011, as rents were recovering, turnover actually increased slightly, but well inside of our expectations that we gave to you last year. So our turnover assumption for this year's same-store set is 58%, which is up slightly from the prior year.

Occupancy -- our occupancy assumption is 95.2%, which is no change from 2011. So, with relatively stable turnover, solid occupancy, the revenue forecast really comes again down to rate -- meaning base rents for new leases and then the achieved renewal rates. So, base rent pricing -- coming into 2012 where we sit right now today, our base rents are up 7% over the same time last year. We feel very good about this, and the forward trend for the next several weeks looks very encouraging.

Throughout this year, base rents will follow the typical seasonal pattern. This mean that we'll have continued growth through Q1 and Q2; we'll strike an intra-year peak in Q3, and then the typical seasonal softening into Q4. But on average over the year 2012, we expect these base rents to run approximately 5.5% above the 2011 levels. This implies a narrowing as we approach the peak Q3 comp period of last year.

And then finally, renewal pricing. We achieved renewal increases above 6% through the fourth quarter, and this trend is continuing as we turn the corner into this year. January renewals are now done at 6.7%; February is at 6.2% so far; and we booked 1,800 March renewals at an average increase of 6.1%. So for the full year 2012, we expect average renewal increases of between 5% and 6%. This also implies a narrowing as we again approach the peak Q3 comp period of 2011.

So to recap our explanation of our guidance, we expect turnover up slightly to 58% on the 2012 same-store set; occupancy very steady at 95.2%; average base rent pricing growth of 5.5%; and average renewal increases of between 5% and 6%. Therefore, the revenue growth for the full-year 2012 should come in between 5% and 6%. David?

All right. Thanks, Fred. So as Fred said, the midpoint of our 2012 same-store guidance then is 5.5%. That's actually 50 basis points higher than our actual results for 2011. I'll have to say that 2011 had a much easier comp set than 2012 will. So clearly, we see continued strength in fundamentals across our markets.

Now in addition to delivering great top-line growth over the last several years, we worked very hard to make our operations more efficient, and that followed an extensive review of our operating model several years ago. This has led to compounded annual growth in same-store expenses just over 1 percentage point in each of the last five years. Our guidance for 2012 same-store expense growth is 1.5% to 2.5%.

David Santee is now going to break that down and give you some color as to how we're getting to this range.

Okay. Thank you, David. For more color on our 2012 guidance for same-store property expense, I'll start with the three key drivers that account for 68% of total operating expense. These are real estate taxes, utilities, and payroll.

The headline for 2012 expense guidance can best be explained by this -- what the gas man giveth, the tax man taketh away. As expected, real estate taxes are on the rise and account for 29% of all expenses. On a GAAP basis for 2012 -- and GAAP is gross taxes net of all appeals and refunds -- we would expect to see a year-over-year increase of 4% to 5%. One-third, or approximately 160 basis points of this GAAP increase of 4% to 5% is a result of our scheduled 421a tax abatement burn-off on five New York City assets. Given our ongoing portfolio transformation, Florida remains the only significant state with the potential to surprise and adversely impact overall expectations.

Utilities and energy, which account for 16% of operating expense, continue to move in opposite directions. Water, sewer, and trash utilities continue to grow well above inflationary levels, as municipalities scramble for revenue to deal with aging and antiquated infrastructure, as well as finding alternative measures to dispose of waste. It's also important to note that we recover over 83% of this expense on an annual basis through our Resident Utility Billing System, or what we call RUBS.

Offsetting this growth was our decision to ride the natural gas market to new three-year lows, versus our execution of our annual rate lock in the deregulated Northeast markets. By our measure, lower natural gas rates should also lead to lower electricity costs, as generation plants move away from coal as a result of more stringent emission requirements and a glut of natural gas. Additionally, our internal initiatives around waste management will also mitigate rate growth in this area in the near-term, resulting in a year-over-year growth rate for all utilities of 1.5% to 2.5%.

Our on-site payroll, which represents almost 23% of total operating expense, we expect a year-over-year growth rate in the 1% range. Our laser focus on leveraging technology and automation continue to provide benefits that mitigate our annual merit increases, and allow us to find optimal staffing levels across all asset types.

All other account groups making up the remaining 32% of operating expense contribute an additional 20 to 40 basis points of growth, with property insurance up 6% to 7%, and leasing and advertising costs down 7% to 9%. Maintenance, property management, and other operating expenses combined are expected to be flat. With that said, we're extremely pleased with our ability to deliver another year of exceptional performance in managing our costs, while continuing to increase our customer loyalty, employee engagement, and other internal quality metrics.

David?

Terrific. Thanks a lot, David. Well, turning now to transaction activity, you'll recall that we suggested at the beginning of last year that we expected our acquisition activity to be very lumpy, and indeed, it was. -- having closed more than 50% of the entire year's acquisitions in the fourth quarter alone.

In the quarter, we acquired 11 assets representing 3,669 units for $681 million. Four of these were in Southern California; three in Northern California; two in Boston; and one each in Brooklyn, New York and Bethesda, Maryland. Last year, we also continued to sell non-core assets and reduce our overall exposure to non-core markets.

We sold 47 assets during the year for just under $1.5 billion at a weighted average cap rate of 6.5%, and realized a weighted average unleveraged IRR, inclusive of management costs of 11.1%. And again, very lumpy activity, with nearly 80% of this or $1.2 billion being done in the first half of the year, when we aggressively hit good bids for our non-core assets, after which time we had to take a breather to let our acquisition activity catch up.

We begin 2012 looking at the transaction market as very similar to last year. And that means an awful lot of capital chasing relatively little supply in our core markets, as well as continued demand for assets in non-core markets, with a cap rate spread between the two that remains as wide as we've seen for quite some time.

Now, brokers are telling us that they're being asked by owners to value more core assets, which lead these brokers to believe that more product might be coming to market; but I'll tell you, we haven't seen it yet. Cap rates on core product in our markets across the country today remain in the 4's, as investors continue to underwrite strong revenue growth for the next several years as well as enjoy a low interest rate environment.

With the acquisition market intensely competitive in 2011, last year was a big year for our development business. We started construction on six projects last year, totaling $656 million in completed costs. Now of that, $423 million is really our share, because two of those deals that we started were done with joint ventures with an institutional partner.

We expect our 2011 development starts to deliver weighted average yields in the low 6's at today's rents, and we started three of these in the fourth quarter. The Madison in Alexandria, Virginia -- $115 million total cost; we have an expectation of a yield in the mid-6's on current rents for the Madison. We started a deal in Ballard, Washington, our Market Street Landing property, with a $90 million total cost and a low 6% expected yield on current rents. And we also started construction on the second phase of a property in Pasadena, California for $125 million total costs at a high 4% or low 5% expected current yield on that property.

During 2011, we also acquired six land parcels and entered into a one long-term ground lease, all for future development totaling $725 million of new product. Four of these properties or these parcels were acquired in the fourth quarter. A property in San Francisco's Mission Bay area for 273 units, $154 million total cost at a high 5% yield expected on current rents. We also acquired a land parcel in Anaheim, California for 220 units, $52 million total cost and a low 6% yield expected on current rents; and also a parcel in West Seattle, Washington, 206 units and $62 million of total costs, where we expect a 6% yield on current rents.

Lastly, we also acquired a site in Manhattan, the southwest corner of Park Avenue South and East 28th Street. That property was acquired with Toll Brothers, with whom we will develop -- co-develop a 40-story building on the site. Of the $134 million paid for that land parcel, $76 million was contributed by Equity and $58 million was contributed by Toll Brothers.

When completed, EQR will own 6,500 square feet of ground floor retail and 265 rental apartments on floor 2 through 22, and Toll will own and sell as condos 99 units on floors 23 through 40. Now Equity Residential's total cost, or what we will own at the end of the day, is $238 million. That's $897,000 a door and a little more than $1,000 per square foot.

We've underwritten an expected yield on current rents in the mid-5's, and I'll tell you current rents or what we underwrote were rents in the mid-$6 rent per square foot, and we're very pleased to report that our recently completed 1023 asset on the Highline in Chelsea is a lease-up today and achieving numbers in excess of that. And as described in the footnotes in last night's press release, until the core and shell are complete, we will own the land and building in a joint venture with Toll. And as a result, we will have to consolidate all the costs for that project while it's consolidated.

At the time the core and shell are complete, our interests will be converted into condominium interests. They'll own their floors; we'll own our floors, each subject to a master condominium regime, and we will no longer consolidate Toll's interest in the building.

So, in 2012, we currently expect to be in a position to start eight projects representing 2014 units totaling $750 million in total development costs. These land sites are all currently on our balance sheet or will be by the end of February. We have two in New York City; two in South Florida; two in Seattle; and one each in Southern California and DC. Current underwriting suggests a yield on cost in the low 6's on current rents in these assets, and we're very excited to soon add them to our portfolio.

I'll turn the call now over to Mark.

Thanks, David. This morning, I'm really going to focus on two areas -- first, our recent financing activity in our balance sheet -- and as you can see from the release, we're very busy in that area this quarter -- as well as our 2012 guidance.

So we've been busy both refinancing our 2011 and early 2012 debt maturities, and also lining up financing for our potential acquisition of an interest in Archstone. So the first thing we really needed to do was address our 2011 and early 2012 debt maturities.

Up until December of 2011, we had raised almost no money in the debt markets to finance 2011 debt maturities of about $1.1 billion, so we had some work to do. And there were really two reasons for that -- our large cash balance for most of 2011, as David said, we were big net disposers early in 2011; and the existence of our interest rate hedges.

So through the third quarter of '11, we were such a large net seller that this substantial excess cash we had we invested temporarily in repaying our debts. As I said in my third-quarter earnings call remarks, it was always our intention to re-borrow these funds, once acquisition activity caught up with dispositions. As I also said on the third-quarter call, we expected the catch-up in investment activity to occur in the fourth quarter, and that indeed is what occurred. We also had about $750 million in interest rate hedges, which locked in a borrowing rate for us.

So, on to the specifics. We did a $1 billion unsecured note offering in early December 2011. These notes mature September 15, 2021. They have a coupon rate of 4.625% and an all-in effective rate of about 6.2%. That includes the effect of fees and interest rate hedges. And, really, most of that difference between the 4.625% and the 6.2% is the amortization of the $150 million in swap termination costs that the Company incurred.

So we were very pleased with how the fixed income offering went. We had a terrific response from our investors. We had over $3 billion in solid demand. That allowed us to substantially tighten the spread and increase the size of the offering. The remaining proceeds from this offering, which sit now on our balance sheet in cash, will be used to repay the $250 million in unsecured debt that matures in March of 2012. This pre-funding will lower 2012 Normalized FFO by about $0.01.

Now just to comment on the ATM. As many of you know, we use the ATM primarily to fund our normal investment activity, including our increased development activity. So we did access the ATM program in the fourth quarter. We issued about 828,000 common shares at an average price of $57.31 per share for a total consideration of approximately $47.4 million. We did access the ATM again in January 2012. We issued about 201,000 common shares at an average price of $57.87 per share for total consideration of $11.6 million. There is no other ATM activity contemplated in our 2012 guidance.

And now just a bit of background on how we thought about financing the Archstone acquisition. In December, when we made our offer, we created a situation where we needed to have substantial and certain liquidity available if we were successful, but we did not want to burden our balance sheet with cash if we were not successful. In other words, we wanted certain but contingent capital.

To accomplish this, we began by entering into a $1 billion bridge loan, and that was done simultaneously with announcing the Archstone acquisition in early December. The bridge gets expensive the longer it stays outstanding, so we very quickly replaced the bridge with a $500 million expansion of our existing unsecured line of credit, and a new $500 million delayed draw term loan, both of which are cost-effective, contingent, and could be available to us, Archstone or not.

So just a few points on the expanded revolver and the delayed draw term loan. The revolver expansion took our overall revolver size to $1.75 billion. It did not change our July 2014 maturity date or any of the other important terms in that facility. The cost in 2012 on the revolver expansion will be about $1.9 million and that will reduce Normalized FFO.

Now a comment on the delayed draw term loan, which is a very interesting and useful financial tool. It operates much like a bridge loan, except it's cheaper, more flexible, and has a longer term. At any time up to July 4, 2012, the Company can draw on the delayed draw term loan for any reason. The spread on it is 1.25% over LIBOR and that's based on the Company's current credit rating. Our guidance assumes that we'll draw on this loan in July of this year -- in July of 2012, to repay at par the existing $500 million term loan that matures in October 2012. This is the only material debt activity that the Company is budgeting in 2012. Fees from the delayed draw term loan will be about $1.9 million in 2012 and will reduce Normalized FFO.

I just want to express the Company's appreciation for the overwhelming support we receive from our bank group in the revolver syndication process and the delayed draw term loan syndication process. Both transactions were well over-subscribed. So, with these financing activities, we've created ample liquidity -- not only for our normal investment activity and upcoming debt maturities, but also for our pursuit of an interest in Archstone.

A few more notes on the balance sheet and then I'll move on to guidance. In 2012, we expect to have free cash flow from operations of about $150 million. This is after capital expenditures, including rehab spending, and after payment of our expected higher dividend.

David Neithercut mentioned that we could start up to $750 million in development deals in 2012. We expect to spend about $250 million on construction in 2012, including projects already in progress and projects slated to start. That $250 million amount does not include any yet-to-be-identified land acquisitions. We'll continue to be conservative in financing our development business. We'll use proceeds mostly from dispositions, free cash flow from operations, and the ATM.

This increase in development activity will result in an increase in capitalized interest, which I'll go over with you in a moment when we go through guidance. As of today, cash on hand, including 1031 escrow balances, stands at about $375 million. Our revolving line of credit has about $1.72 billion in capacity, and the $500 million delayed draw term loan is undrawn. At the end of 2012, we expect to be on our line to the tune of about $200 million.

Now let's go through guidance here. Normalized FFO guidance range for 2012 is $2.68 to $2.78. The $2.73 midpoint would be a 12% increase over our 2011 results. As usual, the biggest driver is our same-store operations; Fred Tuomi and David Santee have already capably described that. But that same-store line will generate about $0.28, we think, in incremental Normalized FFO.

Our non-same-store properties will add about $0.04 more of FFO to our Normalized FFO to our 2012 numbers. Our interest expense is going to increase Normalized FFO by about $0.01, but there's a bit going on here and I just want to go through that.

We will benefit from $0.04 per share of higher capitalized interest, due to this increased development activity that both I and David Neithercut have referred to. And we'll also have $0.04 of benefit from lower secured debt balances. Almost all the debt that was repaid in 2011 was secured debt.

That's going to be offset by about a $0.06 per share of increased interest expense due to higher weighted average amounts of unsecured debt. So again, this pre-funding activity, this $1 billion issuance, is going to create a higher unsecured debt balance for us. It also includes the swap termination costs I referred to. We're going to have a $0.01 negative from these facility fees from the revolver and the expanded revolver, and the new delayed draw term loan. So, again, about $0.08 to the good and about $0.07 to the bad nets out to about $0.01 to the good on interest expense for 2012.

The last big driver is share count dilution. We expect our average share counts to be about 5 million shares higher in 2012 than 2011. This will cause us about a $0.03 drag on Normalized FFO. This is mostly a result of employee stock option exercises in 2011, hitting the share count for a full year in 2012, as well as expected 2012 employee stock option activity. We also expect to issue 1 million operating partnership units, which count as shares, of course, in our share count; in connection with the planned 2012 acquisition. And all of that is in our guidance right now.

A relatively small amount, about $0.01 negative of the $0.03 negative, is the result of issuance that has already occurred on our ATM. As I said previously, no further ATM activity is contemplated in our guidance.

Just a reminder, all the numbers I've just gone through are on a Normalized FFO basis. Our guidance on page 27 on the press release is also on a Normalized FFO basis only. And on page 28, we give you all the information you need to reconcile Normalized FFO to either FFO as defined by NAREIT or to EPS.

And finally, let me just reiterate that our earnings per share guidance, FFO guidance, and Normalized FFO guidance, assume no impact, positive or negative, from Archstone. Further, because our Normalized FFO definition is designed to eliminate non-comparable items, things like pursuit costs and breakup fees would not be included in our Normalized FFO guidance or results in any event.

Now I'll finish up with capital expenditures. So guidance for total capital expenditures in 2012 is $850 per same store unit without rehabs, and about $1225 including rehabs. In 2011, we spent about $850 per same-store unit without rehabs, and we spent about $1,200 when we included rehabs. So a slight increase this year. Details on all our capital expenditures are on page 24.

We rehabbed about 5,400 units in 2011 and we expect to rehab about 4,700 units in 2012. In 2012, we expect to spend about $8,300 per unit rehab and that's up about $1,300 from the $7,000 we spent per unit in 2011. We're going to be doing more rehabs this year in higher costs markets like New York, and we'll be replacing carpet with more costly hard surface flooring, which we believe, in the future, will lower our replacement costs.

Now I'll turn the call back over to David Neithercut.

All right. Thanks, Mark. So before we open the call to questions, let me just say a few more words about Archstone. There's really not much I can say, and certainly, not much more I can say than what many of you already know and what we mentioned in the press release last night.

But let me say that the Lehman estate has had the right to match our first offer. They had an ace, and ace of trump, if you will, and they played it. They did match our offer and they acquired the first half of the bank's interests that we put in play late last year.

We are currently now inside a 30-day window during which time the banks are obligated to contract with us to sell the second half of their interest in Archstone, provided we offer to do so at a price that's no less than $1.325 billion -- that's the same amount that we offered on their first half. Now I will tell you we've not yet made any such offer, although I expect that we certainly would, but we're not obligated to do so. Any offer that we do make will again be subject to Lehman's right to match it. And if they do, we'll receive a breakup fee that's a function of the size of our bid. And that breakup fee could be as little as $0, or as much as $80 million.

I'll tell you, we continue to think that much of the Archstone portfolio would fit hand-in-glove with ours, as Mark said; we certainly have the capacity to pay for it. Stay tuned, more to come.

So with that, Operator, we'll be happy to open the call to Q&A.

(Operator Instructions). Andrew McCulloch, Greene Street Advisors.

Can you guys talk a little bit about the trajectory of asset values in the quarter and if you saw any big divergence between markets and/or product quality? I'm kind of just looking at the momentum of asset values.

Of what we've acquired or just what we're looking at?

Just what you're seeing in the market overall.

Well, look, generally, let me tell you that we think that asset values today could be above peak levels in Boston and Denver and LA and San Diego. We think they're kind of back to peak levels in Orange County and DC. And they're still below in Seattle, New York City, and South Florida, as well as the commodity markets -- Northern Florida, Atlanta, and in Phoenix.

I'll tell you, recently, I don't think we've seen a great deal of change, Andy, in those values, but I'll tell you that there hasn't been much transaction activity. So that the data set is reasonably small. Our team, led by Allen George thinks that we're probably within the range of values across those markets, and we'll likely stay within the current range of values for some time.

Thanks. And then on supplies, we know supply is not a big concern nationally this year, but can you talk about any specific markets or submarkets that maybe you're worried about actually near-term?

Yes, Andy, this is Fred Tuomi. I can talk about that. Really, looking at this year, there's really no markets that I'm concerned about this year and same for 2011. We had a very good environment of low supply there. But what is of concern is the building pipeline on a couple of markets, and most notably of the DC market.

And there's a lot of talk about DC, which way is it going to go on the demand side as well as supply. So DC has demonstrated it can absorb a lot of units. It absorbed a lot while the government was growing. So if the government becomes a factor in terms of either stopping the growth or receiving, then this coming supply pipeline is going to be an issue there.

So in DC, we see about maybe between 6000, 7000, maybe 7500 units coming in 2012 depending on what actually gets delivered. And then right behind that the next year you could see maybe another 7000 to 8000 units. So DC is the number one supply issue.

Beyond that, there's really no real markets of concern -- New York, no; Seattle, a couple-thousand units but kind of distributed equally; San Jose, a couple-thousand units but I think we have plenty of demand to absorb that; and LA, maybe the San Fernando Valley again, but again, small numbers. So really it may boil down to DC is going to be the issue.

Great. And just one more question on capital recycling. David, you had mentioned, you had talked a little bit about cap rates in your prepared remarks and core versus non-core markets, and that that spread is as wide as you've ever seen. Given that you're planning over $1 billion in capital recycling in '12, does that mean you think that spread's still not light enough?

No, I guess I'd tell you, Andy, what we've given you in our guidance, not so much of what we think our budget is for sales or budget is for acquisitions, but more to tell you that embedded in our guidance is that assumption. Not unlike the beginning of last year, we'll go into this year and we'll try and transact, if it makes sense to do so, and we won't if it doesn't. So it's very difficult for us today to tell you exactly what we'll do on the buy side and the sell side.

Our expectation, frankly, is that that delta will narrow, that there just continues to be an awful lot of capital. We think that capital will be forced into the non-core markets or lesser-quality assets, and we'll see a little bit more competitive pricing on that. And that will bring that cap rate down somewhat.

But again, I don't -- and I'm not quite sure I said we thought that delta was the widest we've ever seen it; we just said it's been the widest we've seen for some time. I would tell you I think maybe 125 or so basis points is somewhat of a normal level over an extended time period. We've seen that narrow to as little as 60. It was 130 or so in 2011. But I just do want to make the point that that was wide -- on the wider end, but we do expect that it could narrow during the year, as capital gets forced into lesser core assets and non-core markets.

Great. Thank you very much.

Dave Bragg, Zelman and Associates.

A related question -- if we go back a year and think about your disposition activity at the beginning of '11, it seemed to be front-end loaded due in part to your view of a risk to higher interest rates over the course of the year. And now the outlook is agreeably quite different, could you talk about how that plays into your strategy on the transaction front?

Sure, so we did start 2011, Dave -- and by the way, thank you for your catch on our earnings release last night -- we did start 2011 with a desire to hedge somewhat in what we thought could be risks of value of non-core product, just as a result of Fannie and Freddie and uncertainty in issues like that.

I think we're at a point today where we've done an awful lot of that heavy lifting. I don't think, while we continue to have questions about Fannie and Freddie, we don't think that it's anything imminent. They did big volume last year. And I'll tell you, after being in South Florida earlier in January, they continue to talk about doing big volumes again this year.

So -- but I'll also tell you that last year, we were seeing what we thought were very reasonable prices per door, prices per square foot on that product. And we went ahead and hit that bid. I think that we'll continue to sell those assets -- or those non-core assets, non-core markets today, provided we find opportunities to reinvest that capital.

And as Mark noted, one such opportunity is the development pipeline that will be up in 2011 and will be up again in 2012 and likely 2013. But I don't think that you'll see the rush to transact that we started in 2011, just as a -- that we did as a hedge to what could happen to valuations of those lesser quality product.

Okay. And then shifting over to expenses on real estate taxes, specifically, could you talk a little bit more about the outlook in some of your major markets? You touched on New York, and I think we could understand where you might lie on California. But can you walk through some of the other major markets, in terms of your outlook and the risk to that outlook, given the different timelines in each?

Dave, this is David Santee. When you look at the distribution of our increase, 34% of our increase is coming from the 421a burn-off. And then I mentioned the volatility of Florida. When you look at these other states, California especially, beyond that, there's just not a lot of risk. But California, we're subject to the 2% cap, the Prop 13. So, and even in New Jersey and some other locations, the ability to predict or at least understand what the ceiling is on real estate taxes from year to year is just much more transparent.

So, in the case of Florida, we won't know what actual rates are probably until October/November. So we're having to make some assumptions there, just as we make assumptions every single year on our ability to drive lower valuations or win appeals.

And then I would just add an additional piece of color. When you look back, going back all the way to 2001, the highest increase in real estate taxes that we've had occurred in 2007, 2008. 2007 was 5.6% and 2008 was 5.0%. So I think, given that our industry really experienced a V-shaped recovery, perhaps this year is just a recapture and we could see a little more stability after 2012.

Okay. Thank you. And one last question on expenses. Could you just put in perspective for us what you're doing on the payroll line, perhaps talk about -- I don't know if you could relate it back to the number of people onsite per 100 units or another metric such as that. And then compare that to what those, on a same-store basis, might be seeing in terms of wage growth. Just help us understand how this continues to be a flat line item.

Dave, that's like asking me to give you the formula to Coca-Cola. (laughter) No, really, it really is -- we continue to focus on specialization. Our industry, the folks at the site -- they're running little cities, so they have to be well-versed in many different activities. And basically, when you're doing a lot of things, you don't do anything great; you just do a lot of things okay.

So what we've really tried to focus on is carving out specialized groups, whether it's procurement; obviously, the pricing; we're in the final stages of centralizing our CBG group into Phoenix, which is really, that is the key driver of some of our payroll growth, where we really just peeled 400-some assistant managers out of the equation with an average salary of -- base salary of $35,000. And we backfilled not all of those bodies, but we did backfill some of those that had count with additional salespeople or customer service people with a base salary in the $25,000 range.

So we're still seeing some favorable impacts of that. And then for this year, we're even seeing efficiencies in that CBG Group. We started with 50 people in that group. 2012 will operate at about 36 folks. So our ability to automate -- instead of doing all the calculations, the cash register does it for you, we just continue to see benefits from this approach.

All right. Thank you.

Eric Wolfe, Citi.

You mentioned that New York was one of your top markets this year but just thinking about what's happened on the compensation side across the major banks and financial institutions. I'm wondering if you've started to see any sort of weakness in New York City markets or if there's any hesitancy you're seeing among the tenant base there?

Yes, this is Fred again. I'm happy to say, no. I stay very close in touch with the New York market. I love talking to our people there. And still, even though there's more talk about cutbacks or the lack of growth in the financial sector, again, in our properties, our resident base, we are not seeing any job loss from people leaving the market.

It's very solid and we're actually seeing growth in the area from some new sectors that I think I mentioned last quarter. And that's the tech sector and the new media sector and some entertainment sector. It's become very vogue for companies like Google and all of these other tech companies to be hanging out around Chelsea neighborhood in New York City and having a presence there. So we're seeing very strong demand at the high end in our penthouse units, our larger units, our combined units. And all of the submarkets are well occupied, they're full.

We're seeing very little deviant behavior from our private competitors there, meaning concessions and the broker fees. There's still some of that in the downtown market, but very few compared to last couple of years. So I think New York is very solid and we're bullish on it. The current trend is still very favorable.

And David mentioned 1023, our building there on the high line of Chelsea. And we are very confident in that one. I think we hit the timing just right with that one. And it's a great building in a fantastic location. And we took a little bit of a risk on the lease-up, in that we decided to do it with no upfront concessions, no discounts whatsoever. We just took the confidence route.

And we actually released our highest ticket units for the lease-up -- for the pre-lease up. We held the studios, the lower-priced tickets back. And fortunately, that worked quite well. So we have pre-leased over 20% of those units before we opened. We opened right on time. So we're leased like 25% now and actually occupied about 15%.

The weird thing about that one is that the bigger the unit, the higher the rent per square foot. Our three bedroom unit there that we leased was $8.90 a foot. Okay. But on average, we're now at a little over $7 a foot. And as you remember, our underwriting on that one was about $5.60. So we're thrilled with the demand there. And again, that's fueled by this cohort of the young people, highly employed, making good wages, and from great sectors to want to live right where the action is.

Right. That's very hopeful. I guess we're probably all more biased on our end in terms of what we're seeing. But just try to get a sense of what the exposure is to the financial institutions. I mean, do you track what percentage of your residents work at, I guess, those institutions? And is it a large number, like 10% to 20%? Or is it pretty relevant, kind of like in the low-single digits?

Well, anyone in business in New York is going to be depended upon, to a certain extent, either directly at or indirectly to your industry, the financial services sector. We look at that and we're not concerned about any heavy concentration. In Jersey City, at 70 Green building, we do have a lot of Goldman employees. But as recently as last week, they're continuing to bring people in.

So yes, we have that exposure. If there was a mass layoff in that sector, but I think it's well distributed amongst the firms and in the neighborhoods. And again, the neat thing is on the margin, the marginal growth of our demand there seems to be led by this tech, new media, entertainment, lawyers, business services, in addition to the finance.

Got you. And then last question for the Toll Brothers deal that you're doing, I think you said rents were in the mid-$6 a foot range or that's where you intend them to be. Just curious whether it's going to be more expensive to rent there or just to pay a mortgage on the condos that Toll is selling?

Well, I did say that we underwrote, Eric, $6.50 or so rents per square foot. And who knows where the condos will be sold. It will be quite some time. It won't be until 2014, 2015 when those condos will be sold. So it's -- but my expectation is that it will continue to be cheaper to rent.

Okay. All right. Thank you.

Ross Nussbaum, UBS.

A couple of questions. I believe on the last conference call you had talked about renewal rates increasing, I'm going to say it was, I think it was 7.4% in November; 8% in December; 8.3% in January. And I know those weren't your full resident base that it was rolling at that time. But those actual renewal numbers came in, for instance, in the month of January, I think it was 160 bps lower. Were you surprised at that differential between where you saw things back in the last conference call and where you are today on the renewals?

Yes, this is Fred again. I think what you're referring to was our quoted rates versus the achieved rates. And there's always a spread between those. We price our renewals forward-looking. We see the trend, where prices are going to be, not where they are today.

So we'll price pretty aggressively and then we'll actually quote above that. So it gives us plenty of room on the quote, the forward quotes. And if rents escalate faster than we expected, then we kind of hit right on the mark. If they don't, then maybe we have a little bit of a margin where we can negotiate down. And we always give in the system just a little sliver of negotiating room for our folks to get the deal done, to a point where we don't have excessive turnover.

So there's always going to be a gap, a spread between what we quote and then what we actually achieve at the end of the day on any given month. So those numbers of 7.5% and 8% were forward quote numbers that we talked about last quarter. And what we achieved were in the mid-6's. So that delta is going to be anywhere from 150 -- sometimes, some months maybe 200 basis points, depending on the trajectory of the rents. So that's continue what we see right now.

So like I said, we achieved 6.7% in January. We actually quoted in January 8.7% -- so it was a 200 basis point spread there. In February, we're quoting an 8.1%, and I mentioned we're, so far -- it's not done yet and that will probably come up -- but so far, we've achieved about a 6.2%. So again, you're going to be anywhere from 150 to 200 basis point spread between quote and achieved.

That's where I was going. So for February and March, those are -- those at 6.2% and 6.1% number you gave, those are actuals, those are not the quotes?

Yes. Those are actual booked, signed leases in the hopper right now against quotes in the high 7's, low 8's. And those are early returns, so to speak. And by the time we actually close out the month, I think those numbers will move up a little bit.

Got it. Okay. Understood. Thanks. David, you had referenced earlier in the call that you thought cap rates in your core markets were in the 4's, I think was your statement. And when I look back over the last year on the $1-billion-plus you've acquired, I think it was around a 5.2% or so. How should we be thinking about reconciling the difference between those numbers? Have you just been that good of an acquirer? Or is a little apples and oranges in those statements?

Well, I guess, you go back to prior calls, we talked a lot about -- we're big acquirers of that core product in '09 and the first half of 2010. And then that market got very competitive, and we started to look for good acquisition opportunities that might not be the core stuff that a lot of this new money would be chasing.

And so we started buying some older assets, some assets that needed repositioning. We bought a very interesting asset in East Palo Alto, California, had a 6.5% cap rate and $71,000 per door. So we started doing some direct deals. So when I give you this cap rate number, I'm telling you, Ross, that that's what we're suggesting are the rates for recently-built core product. And we bought some older product, again, some stuff that needed repositioning, as well as done some things direct that we think have maybe given us a little more yield than what the market might have provided.

That's perfect, understood. Last question, when all is said and done on Archstone, if I take the assumption for a minute that Lehman exercises their final ROFO, ballpark, where are your total costs on the transaction if I add up legal and advisory and financing? Do you have sort of a rough guesstimate as to where those all come in?

Ross, it's Mark Parrell. We gave some idea of just the historical costs back in our reconciliation page, that's page 26. So we've incurred right now about, call it, $4.5 million worth of costs, as it relates mostly to the financing activity but also to pursuit costs. I would think if the transaction ended up the way you described, we'd certainly have several-hundred-thousand-dollars more of legal and other fees to get ourselves under contract, go through the process with the banks, and then be ROFO'ed away.

So I see that as almost certain that the costs would be kind of all-in $5 million to $5.5 million. The transaction goes another way, of course, then it could be a considerably larger amount of transaction costs.

But most of the costs, really, are sunk. It was the cost to get up to speed. Our deal under this option with the banks is to enter into a contract that's substantially the same contract we've already negotiated.

So Mark's point here is -- there's not a lot of additional incremental legal expenses to incur. And he's outlined the financing charges that we incurred last year, as well as those that we'll have this year as a result of the expanded credit facility, as well as the delayed term loan. So there should not be a lot of incremental costs related to Archstone to go through what would be the step two.

Appreciate it. Thank you.

Seth Laughlin, ISI Group.

Thanks for taking the call. I just had a quick question that was mentioned earlier, that interest rate expectations have moved decidedly lower. I was wondering if you could just kind of give us an update on how that's impacting underwriting, in terms of levered and IRR -- or unlevered IRRs, both for you guys and also what you're seeing in the market.

I think (multiple speakers) what we're trying to get to is whether those have come down, what's the view that debt costs are going to be much lower than had previously thought for longer periods of time?

Well, I guess I've said several times on this call that I don't think that we compete for the core product that we would like to buy, with people that are that sensitive to interest rates -- the actual borrowing rates. I think they're probably more sensitive to just what their alternative reinvestment opportunities are for those dollars.

We are more concerned about what happens to interest rates on perspective deals we're trying to sell. And that's why we think we've continued to see an increase in valuation over the year of what we consider to be our non-core product. But clearly, I think that with interest rates being down, and given the lack of alternative investment opportunities, that's brought a lot of capital into the multi-family space to chase the few core assets that are available at any given time.

Just to give you a little color on what might affect disposition values, which certainly the GSE debt numbers do affect that, we see 10-year GSE money as between 3.6% and 4% right now; so very inexpensive. But the reason I don't think it's going to necessarily help that much more on asset values in some of those disposition markets for us, is that the GSEs have rate floors. So the fact that your interest rate is 3.75%, they're underwriting at a 5%, 5.5% rate. So your proceeds aren't going up, so your leveraged IRR isn't going up that much. So I don't think you're getting that as a seller in your price.

So again, I think just some of the adjustments the GSEs have made lately to their underwriting means that I don't think asset values will go that much higher, even if rates decline somewhat, because of these interest rate floors that they use for underwriting.

Understood. And then I guess just quickly, what are you guys targeting? I know it's maybe non-core, but in terms of levered and unlevered IRRs today?

Well, I'll tell you, I mean, everything we've acquired this past year has generally been plus 8% long-term IRR. And that's why we sort of had to back off chasing a lot of the core products. (multiple speakers) And I'm saying, that's an unleveraged number.

Understood. And then maybe just one quick follow-up for Fred. Do you have any color in terms of how you expect DC to play out inside versus outside the Beltway in 2012? Any meaningful differential in performance?

Well, it depends on which way it goes. If you think about DC, we had a very strong run there, both inside and then near-term the Beltway there, while the government was growing. And even through 2009 and '10, we were delivering 7000 units, I mean, the absorption was just phenomenal -- actually, record-setting absorption in there. So we kind of motored right through that. But we can't really expect that to be sustained forever, because the government is not going to continue to grow at that rate, at least I hope it doesn't.

So really, the watchword on DC right now is we have to wait a few more months and see which way this goes. Because government jobs have slowed, they've actually declined. There is a hiring freeze and loss through attrition, all the GSA functions. The military is kind of in limbo right now.

And on the private sector we're still seeing growth from tech, education, and health and business services, but these contractors related to the government have kind of -- they're dealing with a great amount of uncertainty right now so they've kind of like stopped. They're not hiring ahead, anticipating the next big procurement contract, whatever it is, so they're just kind of stuck there.

So we're dealing with uncertainty on the demand side. And then on the supply, it's coming. And it could be 6000, 7000 units this year. It could be more next year and then after that, it remains to be seen from many of these deals will actually get delivered.

So I think it's going to impact over -- I think starting in the second half of this year, late 2012, it's going to impact in the district more. Because you're going to see more of these developments, all high-end, competing for the same renter cohort, whether it's U Street, I Street, the triangle area, all of Northwest DC is going to have these great buildings coming online and there's going to be a little supply issue there. Perhaps at the same time when we're going to have more slowing in the government sector.

So that could be problematic for the second half of the year. We just have to wait. So I think by second quarter, certainly third quarter, we're going to know how it's going to play out.

The close-in areas, Arlington, Alexandria, aren't going to have quite as much new supply. The RBC quarter will have a couple, but mostly small buildings. So I'm not as worried about those. It's really the district.

Understood. Appreciate it.

Jay Habermann, Goldman Sachs.

So back to Ross's question, I guess, on cap rates and returns, I mean, how much are you guys willing to lower your initial yields for the right product?

Hard to say. I mean I -- it's difficult to say. But again, it's also a function of what we're getting for the assets that we're selling. Because we're really thinking a lot about it, Jay, as just the trade. So what can we get for that next incremental disposition in pick-your-market, and what our reinvestment opportunities? So we're really -- I mean, that's really just -- it's a trading process for us and it remains to be seen on any individual asset. I mean, I just can't tell you anything specifically.

Okay. Well, I asked the question because you guys still feel pretty good about growth this year, same as you were last year. And you've obviously seen spreads compress a bit in the last couple of months. But we're just trying to gauge your appetite there.

And I guess just a second question, you had mentioned as well rent as a percentage of income had actually dropped in the fourth quarter. I know rents were up 7% year-over-year. Are you seeing incomes grow that much greater? And I guess speak to the credit quality of the tenants that you're seeing coming in the door today.

Yes, this is Fred again. On all fronts, we just feel very good about our resident base. Like I mentioned, in terms of their employment level, the types of jobs they have, where they're located, where they want to live, and then their ability and desire to pay the rents, including the increases for the people there.

Our average income right now is $8288 a month. That's just under $100,000 a year, which is remarkable. And if you look at the marginal people that moved into us versus the people that moved in last year on the same-store set, I mentioned that the household incomes are up 4.5%. Now, rents are up like 6%, but the -- and the average rent as a percent of income over the entire portfolio stayed pretty flat, it actually improved just a little bit to 17.2%.

Southern California markets again are the one where you're going to see the higher -- they're going to be in the low 20's, but they always have been higher in California. And then New York remains the lowest; where we have the highest rent, we also have, even more so, the higher incomes.

So again, the credit quality is good. I think we continue to get people with higher FICO scores, that's the trend and that continues this quarter. We're seeing more automatic approvals, which means slam dunk applications are approved right there on the spot because of their FICO scores, their income, et cetera. And we don't see any kind of a slowdown or hiccup or any pause at all to be concerned about, on the creditability and the viability of the balance sheets and the income statements of our resident base.

And I know you mentioned tenants are shunning the single-family market at this point and home ownership is declining. I guess, with some improvement in consumer confidence, are you expecting that turnover to pick up? I guess what's the catalyst to sort of turn things in a different direction at some point?

Well, eventually, it's going to happen. There's pent-up demand for home buying. We're not going to say it's never going to happen, although I wouldn't be surprised if it's going to be a long time before that paradigm shift reverses. And it probably -- may never, generation get back to the way it was. But we watch that closely and Q4, we just finished at 13.3% move-outs for home buying, which is exactly equal to what it was a year ago. So no real shift.

Within the markets, no surprise. Phoenix is the only one that really moved up. They moved up over 200 basis points and to a kind of a -- you know, a little bit of a higher number, 21%. In the heyday, Phoenix probably would have been 35%, 40% move-out for home buying. But still, it's kind of remarkable that Phoenix is now the first market to get back up with a two-handle, so it's 21%.

Other markets that moved up were Orange County, Inland Empire. Inland Empire is maybe the second to Phoenix, they're at 17%. They did move up 100 basis points.

So in those cheap, cheap single-family commodity markets, I think those are going to be the first ones you might see people eventually get tempted because the pricing is just so low, well under $100,000. But then in the core markets, New York actually went down. It almost got cut in half. Only 4%, 4.5% of our people moved out to buying homes in New York, which was down significantly, as well as Denver and DC.

So again, on that front, it's steady as she goes. We don't see any leading indicator of the homebuying picking up in a meaningful market. And in Phoenix and Inland Empire would be the only -- small exceptions, but again, not a big, big move.

Yes, I guess I'd also add that even at the lowest down payments required to get into a single-family home, you're still talking about thousands of dollars that I don't think a lot of people might have. And I think while it's appropriate to think about single-family homes and the number of our folks that could -- that might have a desire to own a single-family home, I think that in a better economic environment, I also think you need to keep one eye on the millions of 20-some-odd-year-old people that are still living with mom and dad, where households yet to be formed.

Because I think we believe strongly that if and when the confidence of the consumer and the strength of the economy will allow people to leave our apartments and go buy single-family homes, we remain confident that there will be ample backfilling of potential households that are still living with mom and dad.

Great. Thanks, guys.

Alex Goldfarb, Sandler O'Neill.

Just a question on Archstone and I'm not asking for you guys to divulge your strategy, but in just thinking about it, you haven't exercised the option yet. The banks clearly want to sell; Lehman has the ROFO right, regardless of who tries to buy the bank's thing. There's also the ride-along, the tagalong right that they have.

So in this scenario that's existing, you guys have the potential to get upwards of an $80 million break fee if you exercise the option, the bidding goes through, and they ROFO. Is there a scenario, a reasonable scenario, where you wouldn't -- you'd let the option lapse?

Well, I guess I'm not sure how I could answer that question without divulging any sort of strategy. (laughter) (multiple speakers) But I guess I'd (multiple speakers) --

All I am saying is you're a reasonable (multiple speakers) --

-- I'm trying to tell you that I think that there is an $80 million payment sitting there on the table and I'm not quite sure how we'd go forward without taking it, Alex.

Okay. Yes, that's my thought. I was just sort of intrigued that you guys hadn't exercise the option. So that's why I asked.

Just switching to construction, it's a two-parter. One, you guys are ramping up the development program pretty strongly. Just curious if you're doing all this in-house or if you're sourcing some outside developers to help? And then along those lines, just given that construction lending remains really tight and a number the merchant guys can't get financing for all their pipelines, are you seeing more people -- more developers coming to you guys to either do pre-sales or to ask you to come in on their deals?

Well, the answer to your first question, Alex, is we're doing this all on our own. The only ventures that we've done are the ones in which we have brought an institutional partner in to -- as capital source do the transaction with us. And then, as I said, the co-development deal with Toll in Manhattan. But we're not doing ventures where we're providing the capital and third-party developers are providing those services. We're doing it all on our own.

I tell you, we have for some time tried to do take-out deals for developers that own land that are having trouble getting capital, either debt capital or equity capital, whereby our contractual takeout upon completion might enable them to go get the necessary construction financing. And done a lot of talking, but have not been terribly successful. We continue to work on a handful of those deals, but I can't tell you that any of them are imminent at this time.

Okay. Is there a particular reason that they don't -- is it that the developers want too much or prior experience gives you some caution about entering those sorts of deals?

Well, it's a lot of it is because we do vet the developers pretty carefully before we consider them to begin with. A lot of it is just the availability of capital from the banks. And the banks are interested in lending. They'd like to do more development lending. Many of them will say that to you, but -- and they have relaxed spreads and they have increased proceeds.

I think getting a 65% to 70% loan to cost construction loan is not all that difficult. But what is difficult about that process is you need to have a real balance sheet behind it. The bank wants some principal recourse and the bank wants to see that you have network. The bank wants to see that you have true liquidity and cash. And those are the things that we see holding up developers from being able to do that.

Okay. Thank you.

Rob Stevenson, Macquarie Capital.

David, can you talk about what you see is the magnitude of the redevelopment or repositioning opportunity in your portfolio, given the earlier comments on buying older assets today?

Well, I guess, there were two comments. One is what Mark had talked about, Rob, with respect to our existing portfolio of assets currently owned. And we continue to think that there are opportunities to put $7000, $10,000, $12,000 a door into those units and get a good double-digit return on those transactions. And we've got a lot of history of actually providing that.

If your question is about acquisition opportunities to do likewise, I'll tell you, even those are becoming more challenging. It wasn't long ago when institutional money was no longer pursuing value-add, but we're seeing a lot of demand for value-added transactions as well.

But we've bought some older assets. Several on the peninsula, and we're doing pretty significant repositioning on three or four deals on the peninsula right now. So we'll certainly do that, but even those deals are becoming competitive to find.

Well, I guess my question in essence is, Mark said basically that you guys would do 4700 units at $8300 per, so that's a little under $40 million in '12. And given the historical returns that you guys and a lot of the peers have been able to drive off of that type of program, I'm surprised it's not greater, given the lack of strong returns in either the acquisition or the development market today.

Well, I guess that's kind of been a pretty normal run rate for us. I think we've probably done $30 million to $40 million of spend in each of the past three-plus or so years. We'll just continue to churn through that.

We haven't talked about ramping it up. We've just been talking about consistently spending around that amount of money each year, and I'd expect to do so for the next handful of years as well.

Okay. And then turning to development, assuming that you could find the land, I mean, what's the upper end of your comfort range in terms of the size of the development pipeline going forward?

You know, another -- a good question, but one that's difficult to answer. We have -- we will have a higher level of activity over the next -- last year, this year maybe 2013. A lot of that's because we saw opportunity to acquire land in '09 and 2010, and we're executing that.

I'm not sure that I'd expect that elevated level to continue. But, I mean, it just remains to be seen what the opportunities are relative to the acquisition opportunities. But I think, we've just kind of historically had a $500 million or $600 million run rate, and now we'll be maybe plus $700 million for a couple years. And we'll see what the opportunities are come 2013, 2014 and kind of take it from there.

I think that if you've seen the assets that we've built, I encourage you to go see 1023. I think we've got a fantastic team that's delivering absolutely tremendous product. And if we felt that it was appropriate to build that up, I wouldn't hesitate to do it.

Okay. So it sounds like, I mean, assuming that you don't get Archstone, there's probably not a high likelihood that you're going to take some of that $1 billion-plus and either materially expand the development pipeline from here or materially ramp up, or get more aggressive on your traditional acquisition program.

No, I think that that -- the availability -- look, the availability of that capital has always been available to us. I mean, it wasn't like all of a sudden it's new-found capital; we just asked for it. But no, just because it's available to us and we can draw on it, doesn't mean we're going to change our investment activity or philosophy in a world that does not include Archstone.

Okay. Thanks, guys.

Rich Anderson, BMO Capital Markets.

So what would you prefer, as much as 1600% return on $500 million investment and if you get an $80 million breakup fee? Or to own 26.5% of Archstone for, like, several years? What would be the better outcome for you?

Look, I guess I'll only tell you that we've not been in this for a breakup fee. We've been in this because we felt that those were good quality assets, that one way or another, were at a time in its life cycle that those needed to come to market one way or another. And it was an opportunity for us. So, I mean, it's not an easy answer to -- or question to answer, but I can tell you, we didn't do this trying to play for a breakup fee.

Okay. I mean, I wasn't suggesting that, but -- okay. Just on the issue, the question was raised about interest rates and timing of acquisitions and dispositions, just from a pure modeling perspective, would it be fair to straight-line acquisitions and dispositions? Unlike last year, where it was more lumpy in the beginning and the end of the year?

Yes. Hey, Rich, it's Mark Parrell. Yes, our guidance does assume that acquisitions and dispositions are evenly spaced throughout the year.

Okay.

And again, that doesn't necessarily mean we think that's how it's going to happen; we're just telling you that that is what is embedded in the guidance that we've given you.

Okay. On the topic of development, a lot of talk here about expanding the development pipeline. I guess what gets you comfortable three years from now or whatever, when you ultimately deliver product that the market is going to be suitable to bring product to market? I'm thinking specifically about the Toll Brothers deal. But just generally speaking, how do you have that kind of vision three years from now?

Look, I mean, therein lies the risk of development, but also therein lies the risk of underwriting even an existing stabilized asset, right? I mean, we underwrite -- we buy assets today, and we underwrite what we think rents are today and where rents are going. So it's just a question of, are you willing to own an asset at this basis for the next ex-number of years throughout this marketplace?

And while I'll tell you that I think that lesser capitalized companies have to really be more concerned about that, but I think that we're in a place where we deliver a great product and a great location in a market that we know long-term is going to be fantastic. Whether or not it comes out of the blocks a little under expectation is not a big worry for us.

We're trying to identify, for acquisition and development, assets that we think we're going to own happily for 15 or 20 years. And what happens in the six-month period that it gets leased up, when it's delivered, is not terribly important. Because we believe, long-term, we're building the right product in the right markets and we'll be properly rewarded. If we had a smaller balance sheet or we were a merchant builder, and all of our upside was dependent upon what happened within one six-month window three years out from now, that would be a different story.

Right. Okay. That makes sense. So like if you're -- if you say a 15 to 20-year time horizon on any kind of investment you make be a large portfolio or a development, I mean, is there a time frame from the completion of that project or the closing of the transaction, where you would not want to see fundamentals start to slow?

I mean, in other words, take any portfolio -- (multiple speakers) do you need at least three or four years of pretty good stuff happening before it starts to slow down? Or does that not matter?

Well, look, I mean, we've got land today that we're going to start building on in 2012 that we acquired before the bust, that because of the carry and we're at a point where we probably have a carrying value for that land that is below real market value today. And that's I mention the one deal in Pasadena, California will be a high 4%, low 5% yield. Well, that's because legacy sort of pricing.

We could have started that earlier. We can kind of start it later. But again, we felt when we bought the property years ago, and frankly now that we're going to start building on it, we're quite comfortable that this will be a very successful project at the end of the day. It may under-perform relative to our basis, but long-term, we think we'll do okay. But you just can't be as precise as I think you're suggesting one would like to be.

Right and fair. Well said. And then the last question is on the dividend. I'm not so sure I'm comfortable or I like that the fairly, I guess, clever dividend policy of kind of paying out the leftovers at the end of the year. It kind of demonstrates to me a little bit of a lack of commitment in terms of the full year.

And I'm just curious, what would you say to somebody that thought that way? That you're -- from the starting point, you're kind of -- you never have a situation where you're going to have to cut the dividend, because you're not committing to a full number at the very beginning of the year. How would you respond to that?

I guess I think you just said. I mean, we think an appropriate dividend policy is not to establish some number, that if things go sideways, you have to fight to defend because you're so concerned about ever having to cut it. We think that, like any partnership, whatever will split the rewards at the end of the year.

We do acknowledge that, at points in time, we'll need to address how much of that we intend to pay in the first three quarters of the year. We didn't want to set a situation in which we were constantly changing that. But at some point in time, I'm sure we'll address what is the appropriate payment for the first three quarters? What's the appropriate percentage that ought to be paid out in the first three versus the last one?

But when we establish this level, we went back over the past 10 years of operations of the Company and tried to find something that we knew we would have been able to cover throughout some of the most challenging times. So whether it's clever or not, I mean, we're not trying to be clever; we just think it's, frankly, a more appropriate way to run the railroad.

I think I'm going to rename you David Nevercut.

(laughter) Well, that would be wonderful. Thank you.

Thank you.

Michael Salinsky, RBC Capital Markets.

The legacy hedging there, was that all taken care of with the offering in the fourth quarter? And also, I believe you said a $250 million spend for 2012 without land purchases. Can you give us the number that you're kind of baking in, in terms of your sources and uses for 2012?

So the hedges that were terminated, the $750 million of hedges had about $150 million of costs that we talked about in the script. There are still a couple -- I think it's actually about $300 million worth of hedges that remain. They have a negative value of around $35 million today. Those numbers sit in our deferred until we do our debt offerings in 2013. So that's the current mark on that portfolio of debt.

In terms of the quote on how much land, we don't have any land purchases baked in except for one. There is one land purchase that we -- are either under contract or LOI, or close enough. We decided internally that we did include it in the number I quoted. But there are no other land purchases that are in our guidance.

Okay. That's helpful. Second of all, I believe you completed a couple of acquisitions since the beginning of the first quarter there. How much of the $1.25 billion has been identified? And also, can you give us a sense of how much of the $1.25 billion of dispositions you guys are actually -- you guys are actively marketing at this point?

There's been very little activity on either side of the ledger up until now. I guess the guys will tell you that things don't get started until -- if things slowed dramatically at the end of the year and don't start until after the National Housing Council meetings, but I'll tell you, we had a lot of contacts and a lot of people there. And we'll be getting to see more activity there.

But there's a very, very small pipeline of transactions. But there is one large acquisition we're working on, and Mark noted that he had budgeted for 1 million OP units being delivered as part of that one acquisition. But that's really what the limit of what the supply looks like today.

Okay. That's helpful. Third question relates to Archstone. I know you guys are in active discussions with the banks. Have you engaged Lehman in discussions? Or can you comment on that?

I guess I really can't comment on that.

Okay. Fair and not. Thought I'd try. And then final question, just to go back to your opening comments and also understand the underwriting -- as you're looking at this cycle, how long do you think the benefits of lower move-out to homeownership, how long do you think that can continue? And how long do you think that we can continue to see above-average growth in the multi-family space?

You know, it's very difficult to answer that question, but I just don't see any reason why we don't have several more years of above-average performance. As I mentioned earlier, and Fred acknowledged, I'm sure we've got people interested in buying a single-family home in our portfolio, but they either don't have a down payment; they've got too much school debt or other debt and they can't get financing.

But if they do, I'd tell you I think that there's an awful lot of people, that 20-somethings that live with mom and dad are looking to create a household as soon as possible. And I'll tell you, I think that we'll see increased levels of supply this year and next year, and I think -- but it's still well below historical run rates. And I think you're really seeing the result of an awful lot of product being held in inventory through '09, 2010, 2011, that's finally coming out.

And I think that you'll see an elevated level of supply again, well below historical run rates. And I think that that number will then drop off, because people have got to be working now for stuff for 2015. So we're not terribly concerned about the supply side, also because of the financing challenges that Mark said. So I think the multi-family space is in a real sweet spot and will be there for some time.

And are you assuming that sweet spot continues in the 8% IRR you're underwriting? Or are you assuming normalized kind of growth patterns?

Well, I would say a lot of that IRR is a function of what your inbound kind of yield is. But we're still going to try and target that. I'm not suggesting that that number can't come down, but as I'd mentioned earlier, that's going to be a result -- if we're getting better disposition values on what we want to sell, well, that will influence what we'll be willing to pay on assets that we acquire.

That's all for me, guys. Thanks.

Tayo Okusanya, Jefferies & Company.

Just a quick question. This year, there's been this interesting trade between the homebuilders as well -- versus the multi-family REITs based on this whole expectation of refi.gov, and Obama putting out a plan where foreclosed homes can be sold to private investors and issued out as rentals.

Just kind of curious, one, what you think about this trade? And then two, if some of these proposals, what you actually think the impact of some of these proposals could actually be to apartment fundamentals?

Look, I think that on the one hand, anything that can help stabilize a single-family home business or inventory is going to help our economy will be good long-term for everyone.

To the extent that some of these programs allow investors to acquire properties and lease them to people, we believe most of the occupants of those homes will be those who had been previously dispossessed of their own home. We've not seen a lot of people come running back into our apartments who left us during the heyday of '06, '07, '08. We think they're still out there. And if they're no longer in a home they own, they're probably renting a home.

And I'll also tell you, I think a lot of it is limited to a handful of markets that have seen a significant oversupply or significant inventory of unsold homes. So -- and I don't think that's really a problem in the markets in which we have most of our capital committed.

That's helpful. Thank you.

Saroop Purewal, Morgan Stanley.

I was wondering if you can tell us how you expect same-store revenues to trend for the year? Fred mentioned that we could see some narrowing of comps in Q3. Is that when you expect the inflection point to occur for the same-store revenues?

Yes. So, hey, this is Fred again. Yes, when we look at a year forward, it's going to follow the typical seasonal pattern of our business, which means we'll start in January and then we'll have gradual growth through February, March. Then come April, we start seeing demand pick up, and therefore, we see lift in our pricing, both in absolute terms and relative to the year before.

So if you can imagine the 2011 pricing curve, starting off low and then it peaks and then it falls off, that peak does happen sometimes in the August timeframe. So that's what I inferred when I said peaking in Q3 and then the seasonal softening again in Q4.

So when you look at it on a year-over-year basis, it's really that gap between those two curves, and with the distance between those lines. And for this year, the midpoint of our guidance assumes that that gap is going to, on average, be 5.5% over the year. The area between those two lines.

So now this time last year, as we looked forward into 2011, for the midpoint of the guidance last year, which was between 4% and 5%, we said it was base rents would go up 5% under the same kind of average through the year. Now what happened, we actually did better than that. We did 6% on base rents -- actually, a little bit more than 6%, almost 6.5%, and the renewals were 6% instead of 4% or 5%. And that's why we ended up at the top of our range instead of the midpoint.

So could that happen again this year? Absolutely. I think there's more of a chance that we could come out hotter than a chance that we could actually fall short on this. So that's how we look at it.

But again, for guidance, it's kind of that midpoint what's going to happen, and then we'll know really when we update guidance in the middle of the summer kind of what the next leasing season is going to give us. Because last year, as we entered the leasing season, that gap narrowed below 5%. It was actually 4.5%. But then once we hit like July -- actually, no, really the middle of June to July -- we motored right on through and that actually expanded up to a 7% gap. So that's why we came out at the high end in 2011.

That's helpful. The other question I had was on Southern California. I mean, you talked about LA and Orange County showing momentum. If you can talk about the markets there which are showing momentum. And then, more specifically, San Diego, you mentioned as challenging. What markets and what is really driving that? Is it supply pressures? Is it military rotations? If you could just shed some light on that.

Yes, San Diego, it's not a big market for us but it's just been kind of frustrating in that it really hasn't had a powerful recovery yet. We started off okay -- it was actually one of the last ones to really go down back in '09 and '10. But I was expecting it to come back a little bit stronger and it has not.

And the reason is, military rotations. Okay. The big Navy base there, we've got all three of the big aircraft carriers are out, either on maneuvers or up in Bremerton for repairs. And that is a big sucking sound to the economy of San Diego when those things pull out. And all of them are out at the same time right now. And we don't expect any of them to be back until next year, early next year.

So it's going to be kind of a -- just a lower than average -- still positive, still growth, but still lower performer in San Diego for the rest of this year. And we saw that, as they call it, go out, we saw an immediate increase in military lease breaks, almost half of our lease breaks were military. And then we had some corporate nurses. And that's affecting the South County and the Mission Valley markets in particular. And we have a big presence in our portfolio in South County and Mission Valley in particular there, with La Mirage and others.

The central business district, downtown San Diego, continues to be hot. I mean, our advantage point deals is great. We're basically all done with the lease-up there. And then our one same-store property there is doing extremely well. So we kind of have -- suffering from our concentration. The North County with the Pendleton base is doing well, while they're building on that housing on base. But now it's done, so all these soldiers are moving onto base. So it's really the military thing.

The other sectors -- biotech, tech, healthcare, education in San Diego, are favorable but they're not big enough to overcome the military. And then LA and Orange County are just continuing to do good. The momentum we talked about last quarter continues. Orange County is going to have a good year. LA is finally seeing some job growth and I think it's going to have a good year, especially the downtown and Wilshire area.

Thank you so much for the color. Mark, can you just -- last question -- can you talk about the secured and unsecured financing costs you're hearing, based on your discussions with GSEs and light companies and your bankers?

Sure, happy to do that. On the 10-year side, the unsecured market is actually a little bit more expensive right now. I would say EQR would issue debt at about 200 over the 10-year. I see on the secured side, we'd be issuing more like 180 over the 10-year.

So that's not surprising. That's a pretty common relationship for secured to be a little bit cheaper. That relationship, very interestingly, changes when you talk about five-year debt. The GSEs are not typically fond of five-year debt, so they would price a five-year note to us probably at 220 over, which would give you about a 2.9% to 3% note rate. Whereas the unsecured market likes shorter paper, likes five-year duration. And they would price it to us more like 2.6%.

So again, the GSEs, for a lot of reasons, don't like five-year paper. They also give you less in proceeds, all things equal on a five-year versus a 10-year deal. So again, for us, that's how we see it.

The light companies are active; they're in the market. They are selective about what they price. They like the core markets more than they like the non-core markets. The GSEs are beginning to skew some of their activity by submarket. They are still active in every market, but there are some markets they're less active or less interested in.

Great. Thank you so much.

Thank you. And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Great. Thank you all for your time today. And again, as a reminder, there will be an updated release out later this afternoon. Thanks so much.

Ladies and gentlemen, this concludes the Equity Residential fourth-quarter conference call. Thank you for your participation. You may now disconnect.