住宅地產 (EQR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Equity Residential second quarter 2012 earnings conference call and webcast. 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, July 26, 2012. I would now like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.

Thanks, George. Good morning, and thank you for joining us to discuss Equity Residential's second quarter 2012 results. Our featured speakers today are David Neithercut, our President and CEO, Fred Tuomi, our EVP of Property Management, and Mark Parrell, our Chief Financial Officer. David Santee, our EVP of Property Operations is also here with us for the Q&A.

Let me remind you that certain matter 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. We're very pleased to report what has not been a terribly well-kept secret, and that is that the operating fundamentals in the multi-family space continue to be very strong. And based on the activity we're seeing today across our portfolio, we see no reason why strong fundamentals shouldn't continue for quite awhile. As reported in our earnings release and supplemental last night, we delivered second quarter results which came in very much in line with our expectations, and which produced results for the first half of the year of 5.5% same-store revenue growth and 7.5% same-store NOI growth. Numbers that are right on top of the midpoint of the full year guidance that we gave in February for both of these metrics.

So all and all, the year is shaping up pretty much as we had forecasted, and Fred is going to take a minute now to share a bit about what we're seeing as we begin to wrap up our primary leasing season.

All right. Thank you. As David mentioned, we are very pleased with the first half of the year, and we're confident that the full-year 2012 revenue growth will be very close to the midpoint of our original guidance, which was 5.5%. So far, the peek leasing season has shown very strong demand, allowing us to build occupancy and grow rents across all of our markets. The fundamentals of our business are solid, and the outlook for the future remains very positive.

And I'll now give you a quick update on each of the drivers of our revenue. First is turnover. As we continue to grow base rents through the cycle, an increase in turnover is expected, and especially from those moving out due to rent increases. However, we're still able to offset this turnover by refilling vacant units with qualified residents at higher base rents. The markets with the greatest increase in turnover still include San Francisco and Boston, where we have had very strong rent growth and not surprisingly, the greatest level of move outs due to rent increases.

Denver is another market where we have seen a significant increase in turnover lately. Denver is interesting, in that it recovered earlier than most markets, and has seen over two -- or really, two and a half consecutive years of very strong rent growth, and its single family market is very healthy. So Denver may actually be an indication of other markets in the very near future. So in Denver, we're now seeing more price resistance on renewals and coupled with an increase in home buying. But the good news is, we're refilling the move outs very quickly at current base rents, and today Denver is 96.2% occupied, the highest occupancy in several years, and 6.1% left to lease, the lowest level of left to lease in several years, while still growing base rents at a nice 10%. So clearly, this is an example where there is ample demand in Denver to refill vacancies due to rent increases and home purchasing at the current high base rents.

For the entire same-store portfolio, move outs due to rent increases grew 50 basis points in the second quarter, to 14.7% of move outs. And notably, sequentially, it actually declined from first quarter by 10 basis points. Move outs due to home buying again picked up slightly, to 12.9% for the quarter, which is still well below past normal levels. So the full year 2012, we now expect same-store turnover to finish about 200 basis points over 2011, which would be around 59.5%.

Next is occupancy. At the end of Q2, our year-to-date average occupancy is 95.1%, and this compared to 95.2% for the same period year-to-date in 2011. We've had very strong occupancy gains across all markets over the past 90 days, which spans the end of the quarter, reaching to 96% occupancy as of today, with a very healthy 7% left to lease. For the full year 2012, we still expect occupancy to be 95.2%.

Next that takes us to base rents. Due to higher turnover and vacancy experienced in the first quarter, we held base rents basically steady through April and began pushing rates again in May, as the leasing season demand kicked in and occupancy grew. So as of this week, this week, base rents are up 7.5% since January first of this year and then up 4.2% year-over-year compared to the same week in 2011. And by the way, that happened to have been the peak pricing week that we experienced in 2011. As expected, the year-over-year growth in base rents has moderated since Q1, due to tougher comp periods. We still expect base rents to average 5.5% over 2011 levels over the entire year.

Our strongest base rate growth continues to come from the Northwest. And again, as of this week, San Francisco is up 16% year-to-date, meaning from January, and 11% versus the same week last year, year-over-year. Denver is up 12% year-to-date and 10% year-over-year. And Seattle is up 10% year-to-date, 5% year-over-year, with the CDB and East Side sub markets significantly higher than that. The Southwest continues to lag; however, Los Angeles and Orange County are finally improving both in occupancy and rent growth.

Regarding new residents willingness and ability to pay these higher rent levels, we experienced very strong leasing velocity as base rents began to accelerate late May and into June, indicating a willing acceptance of these new pricing levels, many of which are now above peak levels of mid-2008. The average rent as a percent of income remains steady, at 17.2%, and this still remains a very healthy level. So all income and credit quality indicators are keeping pace with the rents of our portfolio.

Finally, renewals. Renewals remain strong and in line with current base levels -- base rent levels. Recent achieved renewals have been April, 6.9%; May, 7.0%; June, 6.4%; July, 5.8%. Because we price most renewals at market levels, renewal increases will track closely to the year-over-year base rent growth. This means renewal increase percentages will also moderate as we enter tougher comp periods, but still average around 5.5% for the full year. So overall, the fundamentals remain solid and right in line with our original expectations of a narrow range around the midpoint of our guidance, or 5.5% total revenue growth for the full year 2012. David?

Thanks, Fred. So as noted by Fred, the strong performers we're delivering is really the result of continued demand across our core markets today. And despite continued concerns about job growth, I can tell you that we're not seeing any reduction in demand for these apartment units. We're certainly seeing, as Fred noted, more people moving out today because they're unable to afford higher rents; but at the same time, seeing no slow down in new prospects able to pay market rents and willing to take immediate occupancy. That said, longer term, we're certainly mindful that rents could be rising faster than incomes, particularly giving the level of high unemployment in the domestic economy today. But we remind you that unemployment rate of the college educated is only 4%. And as Fred noted, our average rent to household income ratio is currently only 17%. So we think we have plenty of runway yet on this particular metric.

We're also mindful about the risks of new supply to longer term performance. And while starts will certainly be up this year and next, the numbers seem to be bigger when looked at on a percentage basis than they really are when looked at on an absolute basis. We've done a lot of work looking at new supply, not on the top line national numbers, of course, but by focusing on our specific sub markets within our core markets across our country, and by looking at it on an absolute basis. And what we've done is -- by start with our teams across the field in these markets and other's forecast for actual deliveries over the next three years, focusing on projects that are actually under construction today. And compare that to new supply to the expected marginal rental demand in those markets. And we get there by looking at projected household growth in these markets, and applying against that a conservative multi-family capture rate of about 20%. And that helps us come with up with an estimate for incremental future demand. And in general, when we compare future deliveries to that expected incremental demand, we see markets able to absorb this new supply with no long-term disruption to the marketplace. Now, that's not to say that if we operate an asset near a new delivery that we won't feel the impact of that new supply, but we think absorption will be quick and overall our markets will remain healthy, allowing for continued strong growth in rental rates.

Turning now to our transaction activities in the first half of the year, we've acquired five existing assets for $670 million. And much of that activity occurred in the second quarter, with two very large acquisitions for $511 million. The largest of these two acquisitions was the Beatrice, which was pictured on the front of last night's earnings release. This represents 301 units on 6th Avenue in Manhattan's Chelsea neighborhood. The project was built in 2010, and what we acquired was the top 30 floors of a 54-floor high-rise. We acquired that in a condo structure, and the other condo user, representing floors 1 through 23, is a very popular Kimpton hotel named The Aventi. We acquired our 301 units for $280 million, which represents a purchase price of $930,000 a unit and $1,340 per square foot. That asset was acquired at a 4.76% cap rate. Rents in the building currently average about $7.25 per square foot, and this is really truly an exceptional asset with great location and unparalleled views.

This quarter we also acquired 510 units in Chevy Chase, Maryland in an asset built in 1996. This was acquired for $231 million, or $450,000 a door, at a cap rate of 5.2%. During the quarter, we sold 9 assets for $130 million, totalling 1,662 units. We sold two assets in Phoenix, two in Atlanta, one in Orlando, and we also sold a portfolio of four properties in various suburban Boston markets which were encumbered by highly structured debt from Massachusetts Housing Finance Authority.

We've kept our transactional guidance for the year at $1.25 billion of acquisitions and $1.25 billion of dispositions. Now, despite a competitive marketplace, we're about halfway towards that acquisition goal. Clearly, though, with respect to dispositions, we have some ground to cover. But we've sold $385 million of product year-to-date, we have another 320 million of product under contract, and several hundred million more in various stages of marketing. We'll have no issue meeting our disposition guidance if we can find suitable reinvestment opportunities, because the demand for the assets we would sell to fund reinvestment into core assets remains very, very strong. That's the good news. The bad news is that this demand for these non-core assets is a function of how competitive it is to acquire the core assets today that we would like to buy, because it remains a great deal of capital chasing very few core deals in our markets today, which is creating a very competitive acquisition environment.

On the development side of our business, we continue to look for new opportunities. We've only acquired two land parcels this year, both in the first quarter, that were each fully described on our April call. So while we did not acquire any new land sites last quarter, we are moving towards closing on three sites this quarter, one in Southern California and two in Seattle, and we have several additional sites that could close yet this year. For the full year, we've reduced our expected starts to about $525 million. This is down about $225 million from expectations at the beginning of the year, because we've had two potential starts that will not likely go forward this year, because we've created much of the expected value in getting these sites fully entitled and we might simply monetize that value without taking any additional risk. Current underwriting of our development deals, those both underway and proposed, suggest yields on cost in the high 5s and low 6s on current rents, and the mid-7s on stabilized rents. I'll turn the call over to Mark.

Thanks, David. Good morning, everyone, and thank you for joining us on today's call. This morning I'm going to cover two topics. I'm going to give you some detail on our same-store operating expenses, and I'm going to explain the changes to our full-year normalized FFO guidance.

So first, on the operating expense side. Year-to-date same-store operating expenses are up about 1.9%, which is right about in the middle of our 1.5% to 2.5% guidance range that we put out in February. We still expect expenses to grow at about a 2% rate, so we have not changed our same-store expense range. And this is just a terrific number on its own. But it's especially impressive on top of the modest 0.6%, or 60 basis point, increase in same-store expenses we had in 2011. However, we have had some additional pressure on the real estate tax side since we set guidance in February, which has been offset by utility and property management cost savings. And I do want to give you a little color on those three important line items.

First, on the real estate tax side, we have said for some time that we expect property taxes to rise more sharply, as assessors recognize the recent improvements in apartment values. And that time has certainly come. We originally anticipated our property taxes to be up about 4.5% this year. We have seen rates and values come in higher than expected in some markets. And as a result, we now expect our property tax expense to be up about 5.5% for the full year.

We have, however, benefited on the utility side to offset some of that property tax increase. We now see lower utility costs, and we see them as flat or slightly negative year-over-year, and that compares to the up 1.5% to up 2.5% thought we had on utilities back in February. This year we decided not to hedge our natural gas costs, and that certainly ended up being a good decision. As a result, our energy costs, especially these natural gas cost, should be modestly lower than we thought back in February. But we do continue to feel some upward pressure on water and sewer costs. Another favorable expense variance is the important property management expense line item. And there we continued to benefit from our efforts to centralize bookkeeping and our other property accounting functions.

So if you put all of this in the blender, same-store expenses are well under control and about where we thought they would be back in February. And also, just a quick note on the changing makeup of our same-store expenses. Property taxes are becoming a bigger slice of our expense pie. In 2009, property taxes were 27% of our operating costs. They're now 30% of our operating costs. And because the growth rate of taxes will be higher than that of our other expense line items, the share that real estate taxes take of our operating expenses will continue to grow.

I want to chat for a moment about our normalized FFO guidance. Our normalized FFO guidance range for the year is now $2.73 per share to $2.78 per share, meaning we've moved our midpoint up by about $0.03 per share. I'll quickly highlight the three major variances from what we thought back in February when we gave you our original guidance. First off, we see property NOI, or net operating income, as about $0.01 higher than we thought in February. It's mostly due to lease ups and other non-same-store activities. We see interest expense as $0.01 lower than we thought back in February, and that's mostly due to our application of the $150 million in Archstone-related termination fees to our revolver balance. We currently expect outstandings on the revolver to be $700 million at December 31, 2012, if we do not transact in the debt or equity markets. As always, we will be opportunistic in accessing the capital markets, with an eye towards minimizing our long-term cost of capital.

Finally, reconciling on the business Series N preferred redemption, on July 20, we called for redemption of the $150 million that is outstanding of our 6.48% Series N preferred shares. Our guidance assumes the funding of this preferred redemption using the line of credit. This will increase 2012 normalized FFO by about $0.01 per share. We will take a $5.1 million non-cash charge in the third quarter for the write-off of the original issuance costs. This charge will run through EPS and FFO. It will not run through normalized FFO.

And while we're on the topic of accounting, I want to provide a quick housekeeping note on the Archstone fees. We have previously disclosed that we received $150 million in termination fees in connection with our pursuit of Archstone. All or part of the fees must be returned if we acquire all or substantially all of Archstone within a 30-day period. That 30-day period applies to the $70 million we received from Lehman Brothers; or a 120-day period, and that applies to the $80 million fee we received from Barclays and Bank of America. And all of those time periods are measured from the June 6, 2012 date that Lehman acquired the Bank of America and Barclays interests in Archstone.

Because this condition was not satisfied by the end of the second quarter, meaning that we're not yet at the June, July 6 date that we would have fully earned the Lehman $70 million fee, the entire $150 million in termination fees were recorded as deferred revenue in our second quarter financial statements, and placed in the other liability section of our balance sheet. And that's why you see the large increase in other liabilities. The time period for that first $70 million fee portion from Lehman Brothers has passed, and those funds will be recognized in our third quarter financials in interest and other income, and we will relieve our other liabilities balance by $70 million. We will recognize the remaining $80 million fee from Barclays and Bank of America in the fourth quarter, assuming no transaction occurs; neither of these fees will be included in normalized FFO.

I will now turn the call back over to George, the operator, for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from the line of Eric Wolfe with Citi. Please go ahead.

Thanks. I just wanted to make sure I understood the point you were making on Denver and how that can be the model going forward. I think you were basically saying that even though you expect turnover due to home purchases and financial reasons and everything to keep moving up, that you're confident you can replace those tenants with rate increases. Is that the point you were making?

Yes. This is Fred.

That's exactly the point we're making. Looking at the metrics across our portfolio, Denver just kind of popped up. On one hand, it was worrisome, in that it's high turnover, it was growing, and it was due to rent increases, and it was due to home purchasing. But then on the revenue side, it's one of the top performers there as well. So we had great, great growth, but then also very strong leasing velocity through this leasing season, high occupancy, low left to lease and it continues to grow. So it looks like even though that market is recovered, the single family is healthy and people are buying homes, there is plenty of demand for our product from our profile, and they're ready, willing and able to lease apartments at the current rents that continue to grow, and refill those vacancies.

That's understood. I guess also as part of that, we should probably expect to see turnover keep rising in your markets. Is that an expectation that we should have, or is that just sort of you're saying we might see this in isolated cases and certain markets like Denver?

I think, clearly this year you're going to see turnover increase over last year. In the last couple years, it's been kind of low. It will normalize probably, I would say, probably after next year. But yes, turnover will continue to grow from increased rents and from home buying. And Denver just happened to be an example where we're seeing both at the same time. Other markets with big increases in turnover,like San Francisco and Boston, we're not seeing home purchasing. They're too expensive or they're hard to get. And other markets where home buying is picking up, the rents are low and we're not having the increase pressure.

Got you. That's helpful. And the last question is, you also made the point that your rent to income ratio is only 17%, so you're pretty confident you can keep raising rents. But I guess if you're only at 17%, why would turnover trend up? I mean, I would think that if people are only paying 17% of the income out in the form of rent that they would be more inclined to stay where they are and renew their lease. I don't know if there's a different dynamic going on there, but that would just be what I thought would happen.

Well, the situation on that, the 17% is the marginal residents. Those are the residents who have moved in. The actual residents who have been there for a few years, we don't have a way of keeping up with their income after they move in. So I think a lot of the turnover you're seeing now because of rents being too expensive, one of them is just really the reaction to two or three years in a row of big rent increases. And then the other is during the downturn, when rents were down 10%, 15%, 20%, a lot of people were able to afford a nicer apartment at the same rent. So as the rent recovers back to a normal basis, they either choose to or not be able to pay that rent, and they'll just go to a less costly housing alternative.

So the 17% is the incremental renter, not the average renter?

Yes. It's not the entire installed base, correct. Because somebody's living there five years, we have their income as of five years ago. We don't have recertification of income each year.

Right. Okay. Thank you.

Thank you. And our next question comes from the line of David Toti with Cantor Fitzgerald. Please go ahead.

Come in, David.

Can you hear me?

We have you now, David.

Great. Sorry about that. You guys have been pretty fair about markets that you find attractive for various reasons and markets that you're exiting, like Chicago. Strategically, what are your thoughts on markets like Vegas and Phoenix, in particular? Counter-intuitive markets that offer higher cap rates and potentially higher rents (Inaudible)

No. We have not been in Chicago for quite some time and we've not been in Vegas for quite some time. But I think that you should continue to expect our investment activity to track very closely to what you've seen us do over the past half a dozen years. We think that focus has served us well. And notwithstanding the fact that you maybe get better going in cap rates in some of those markets today, we think those are more trading markets and it's difficult for us to kind of play that game. We think our total return will be better achieved in the markets that we've been focused on. Thank you. You guys mentioned the OPU in the period. Is that just an aberration, or is that something you think that we could see more of in the coming quarters? I guess it's an aberration, because we haven't done it in quite some time. And frankly, I'd been surprised about that. But this was just a situation with a family selling an asset that they had owned for many, many years. For tax planning purposes taking OP units made sense for them.

But I have expected for some time, and I've been wrong, frankly, in this expectation, that OP units would be a security that we use in more acquisitions. But so far, I've been surprised that we haven't. But I would have an expectation, particularly in a rising tax rate rate environment, that we could see more OP unit issuances; and frankly, I've been surprised that we've seen so little thus far.

Yes, I would think in the context of potentially a political change, that that would have some affect.

David, just quickly, my last question, how is the management expense performing in the last couple of quarters? We haven't spoke about it much since the market has been so strong. But how is the performance today versus, let's say, if we go back to 2007. I'm wondering what are the primary differences?

David, this is David Santee.

And the first obvious answer is it works the same, day in and day out, whether it's an up market or a down market. I think it's more about what levers we decide to pull, how much we decide to intervene from a strategic position. We have executive level reviews, myself, Fred, a couple other folks, every other week. And that's where we kind of determine what levers we want to pull to achieve specific goals in specific markets. So I would say that historically we have intervened more in being aggressive with the rate increases that LRO has put out. And I would say that at this stage of the game, we're probably letting LRO run more independently and letting it address the various markets.

Okay. That's very helpful. Thanks for the details.

You're very welcome.

Thank you. And our next question comes from Rob Stevenson with Macquarie. Please go ahead.

Good morning, guys. Given the previous comments on turnover moving up, et cetera, could you get into the lower foot traffic environment going forward. Does that sort of force you to reign back on the rental rate increases?

Well, I guess what I would tell you is that foot traffic has remained fairly constant. It was up 5% in Q1. Again it was up 5 % in Q2 over last year. The difference is really the outcome of that traffic, whereas in Q2 we saw a result of 7% more applicants, and then those 7% more applicants turned into 9% more move ins. So that's how the numbers worked for Q2.

I guess in terms of the sort of overall operating strategy, normally apartment companies, once you start getting into the fall, start trying to hit the fall with a higher level of occupancy and start reigning rental rate increases anyway. Does this cause you to have to start that process a little sooner than you otherwise would have?

Well, I would say that there's just a natural seasonality in our business. A large percentage of our leases don't make it to term. People get transferred, what have you. And when that happens in Q4, so to speak, you're throwing unexpected supply into the market. And your less sophisticated operators, people that don't have LRO, smaller operators, they're just going to kind of turn to the concession or drop rate because perhaps their ownership structure just requires a higher occupancy, which really just puts a whole pressure on the market. And so I would say that every year since we've been operating LRO, we've seen that seasonality and that seasonal softness. And so it's really just a matter of to what degree that impacts our business in Q4. Obviously, we want to be in a position, especially in the northern markets, Boston, New York, where people just don't choose to move. People that are moving in those markets in Q4, Q1, those are people that have to move, for some reason or another.

I guess the only thing I would add to that, Rob, is the fact that notwithstanding this increase in turnover, our net exposure, our left to lease, is still very reasonable at this point in the season.

Okay. And then, David, given your comments on the difficulty in the acquisition market and the ability to still sell a significant amount of assets, how willing are you to see the spread in terms of gross dollar value in dispositions and acquisitions, given the fact that you may see some development sites and you're not spending as much on development these days? Is there a tolerance to do $1.65 billion of dispositions, but not do anymore acquisitions and just take the dilution in the near term on that?

No, Rob. I mean, I guess what we look at and we talk about in our weekly investment committee meetings is the trades that we're making between selling certain assets and having the opportunity to reinvest that capital in other assets. So there is no magic in our minds as to what that going in delta might be, but rather what's the long-term total return and how do we feel about selling certain assets and rotating that capital into other assets.

I tell you, as we look at the assets we're selling today and look at what the prices per door are today and what those yields are, we don't believe we're in a position where we're terribly concerned about those values going forward. So selling those assets today at a high five and low six and putting the money in the bank and taking that dilution doesn't make that much sense, because on an absolute dollar basis, absolute price per pound basis, we think those values are solid and we can always sell the asset next year, if it takes until then to find an appropriate reinvestment opportunity.

Okay. Thank you. I appreciate it.

You're welcome.

Thank you. And our next question comes from the line of Dave Bragg with Zelman & Associates. Please go ahead.

Hello. Good morning. Can you talk about the trends on new move- ins during the course of the quarter and in July?

What exactly do you mean by new move ins? Are you talking about the rates?

Yes. So your percentage gains on new move-ins over the prior lease on the same unit, so we can compare those to renewal gains.

Okay. Like the new lease replacement rent? Basically, the way we look at that is the most important thing to look at is what are your base rents doing? What are you getting on new people coming in? Like I mentioned, we're still going to average 5.5% for the year. We were at 6.5% for Q1, and about 4% Q2, and we're at 4.2% today, which matches up with the peak of last year. And because we price pretty much at the market, that's really what we look for. So we're at 5.5% for the year; 6.5%, first half, 4 % right now, and that might go up a little bit through the end of third quarter. So that's really what you're going to see it grow to.

That actual statistic moves around a lot. We've talked about that before. There's a lot of noise in that actual measurement. So really, we like to look at just what are the base rents doing and you're going to see, right now we're at the 4% range.

Okay. So that 4% is specific to July?

That 4.2% right now this week. It was 4% for the quarter ending Q2. We're at 4.2% today. So basically in theory, if someone moved in exactly last year and paid market rent, and they moved out and somebody moves in that same apartment, identical apartment, the same point now a year later, you're going to see a gain of 4.2%. But knowing that number comes with different units, different unit types, different lease terms, different amenities on the units. There is lots of other noises in that statistic.

Right. Understood.

Just trying to think about your same-store re revenue growth guidance range for the year. It's very precise. So I want to make sure that we understand some of the components of that. You touched on many of them. But I was surprised that you expect occupancy to dip back down to only average. 95.2% over the course of the year. Is that accurate? Do you expect a big drop-off in the fourth quarter?

Well, we expect some drop off in the fourth quarter. As David just mentioned, there's definite seasonality to this business. Right now in the moment, in this leasing season, things are a little bit hotter than we expected. But it's not over yet. So like I said, we're 96% right now. 7% forward exposure. Very healthy numbers. So could that number be higher? Yes, it could be. But we're not going to let it get too high, because our bias in our company is biased towards rate versus occupancy. So we're not going to -- you're not going to see us kind of post these big giant occupancy numbers over a long period of time. Will it be significantly more? No, because we're going to crank up rates to manage it.

And then on leases expiring in September, October, what are the renewal increases that you're asking for?

Okay. For, let's see, August, we asked 6.8% and got a 5.2%. September, we asked a 7%; and we'll probably achieve north of 5%. And October -- it's really kind of early to talk about October. But we're going to probably quote in the high 6s and probably get in the low 5s, I would say.

Great.

It's a little early for that. Just a few have been put out so far.

Okay. Thank you. One final question.

David, you mentioned an interesting analysis or study that -- in your opening comments, and can you just talk about how the results of that compare to your investment decisions? For example, you're selling assets in Orlando and Phoenix, but those happen to have very strong job growth and very little multi-family activity right now. I would have to imagine that they stack up very favorably as compared to your markets as a whole.

Yes. But that's also -- those are very easy markets in which to start new product. And they're also markets that I think are far more risk to a single family home threat. So we've not really done much of that work on those markets that are more commodity-like markets. The focus has been on the higher barrier markets.

Okay. So it's a much longer term perspective that you're taking than maybe a favorable relationship over the next couple of years.

We have a long-term bias for the higher density, higher barrier markets. But the analysis we've done here is just a two- or three- year analysis, really focused on the starts that we know or the developments that we know will actually take place.

All right. Thank you.

You bet.

Thank you. And our next question comes from the line of Jana Galan with Bank of America. Please go ahead.

Hello. Good morning. Thank you for the earlier remarks on how you're thinking about future new supply and absorption. I was wondering if you could comment on the DC market, in particular, and if this brings some releasing with better work than you initially had budgeted or expected.

Yes. Jana, this is Fred Tuomi.

DC, as we reported in the first quarter, continues to surprise us on the up side. I mean, we had lower expectations. We thought things would be moderating consistently and maybe a little bit faster by this point of the year. And the good news is, it's not. We're 96.8% occupied in DC today, 8% left to lease. Rents are up from the beginning of the year over 10%. And they're about 4% year-over-year right now, and renewals at 4.5%. So we're in a very healthy state right now in DC. And we kind of cover all of the good sub markets there.

Now, we're still concerned because of two things. One is just the job picture there. In the moment, the jobs are great. I mean, we still have job growth last year and this year. Unemployment is at 5.3%. That tells you something about the Federal Government. They're going to take care of themselves. So it's looking very good. Demand is high. Labor market is still growing, although there is still a lot of uncertainty and anxiety about what is coming next. But that shoe has not started to fall yet.

With respect to supply, we can't really worry about it. We know it. So there is significant supply coming in DC. Everybody knows that. 8,000 units this year, 10,000 in 2013. And then the pipeline shows -- if everything gets delivered which it won't, you can have about another 10,000 coming in 2014. And most of that is clustered in the good areas. Mount Vernon Triangle, NOMA, Belmont, Silver Spring, RBC Corridor, Carlisle, et cetera. Very competitive with our portfolio.

So today, what we're seeing which is encouraging on the leading edge of the supply wave that's coming at us, right there in the District, we have several high profile lease ups, but they're doing extremely well. Those lease ops in the Mount Vernon NOMA markets are doing 40 units a month each of absorption. That's very strong. So DC has always proven to be able to absorb a lot of units quickly. So if we don't see a big reduction in government employment, a big reduction in Defense employment, I think we could motor right through this next couple of years with very little disruption through strong absorption. But time will tell. So far, so good, I would say.

Thank you. Very helpful.

Thank you. And our next question comes from the line of Rich Anderson, BMO Capital Markets. Please go ahead.

Thanks. Good morning, everybody.

I want to ask a little bit about the 14.7% of move out because of rents being too high. It occurs to me that this is a really big number. And then, so isn't that kind of like the beginning of not the end, but at least some kind of deceleration in rent growth? That has to happen first. I mean, that's the kind of way we're looking at it. And then, you tack on 13% of home buying as being the turnover. So should we -- is it fair to say you're taking your foot off the gas a little bit, David, by not starting those two developments because of these two factors?

That's not what's driven this development decision whatsoever, Rich. But I guess I just kind of go back to Fred's comments about Denver. Yes, we have seen an increase in people moving out because of pricing. And it's higher than it's been. In a historical context, it's not a crazy number, though. And we've noted we're seeing some people move out, an increase in people who buy single-family homes. And as a percentage, that might be high, but it's still low, again in a historical context. And then using Denver as that example, notwithstanding increases in both of those areas, we see Denver at the highest occupancy that we've seen in the last several years and the lowest left to lease in the last several years. So I guess what we're sort of suggesting to you is we think that the incremental demand is there and these markets can absorb this activity.

Right. But how long can that shell game last? You are backfilling successfully, but how long would this typically go on that there is this demand to stop up and all these people moving out because the rent is too high?

Rich, this is Fred. Our number one reason for move out is people's job situation changes. Job change, job transfer.

Okay.

And that continues to be number one.

And how big is that?

That's in the 20% range.

Okay.

Okay. And then you have the top three have always been job change or job transfer, home purchasing, rent increase. Then it drops off significantly from that, for a myriad of other reasons. So depending on where you are in the cycle, we're going to be jockeying for position of what is going to be number two and number three, because number one is always going to be job change and job transfer. It used to be home purchasing was up in the 20% range. Now it's down in the 12%, 13% range. So naturally, it's going to be -- the rent increase is going to be, float up to number two. So it's really a mix of what people give us as a reason of moving.

And don't forget, we had a lot of people move into apartments that got really good rates during the downturn, and now they're going to reach a point where they're going to think, you know what, I think I'll do something different. So I think it's a healthy sign of the market that people are moving out because of rent increases. If it ever slows down and our absorption slows and we see velocity slow, then we'll back off and you'll see that number kind of shift back.

The other thing that we look is, the fact that people are moving out consistently or because of job opportunities, that's a good sign of our resident base, that they're employed, they're active and they have job opportunities.

Just a little color, all of these are not due to rent increases. Some of this is a result of life changes with people. If you remember, we talked about we only measure people's income when they move in. So we -- when we see this activity spike in a market, most of you know, we go right down to the transaction level and we can see that, yes, someone did get an increase, but it was a 2% increase. But their life circumstances just changed, and perhaps they got a new job in the last two years that doesn't pay as much. So this isn't all about rent increases. It's probably 50/50 about changes in their life circumstances.

Okay. And then just one last question for David or anybody. Renting single family, that's kind of becoming in vogue with a lot of participants looking to get involved in that opportunity. How do you see that as a threat or opportunity for EQR, or is it kind of a non-issue at this point?

Embedded in that question perhaps is two separate questions. One is what kind of threat do we see these single-family homes being acquired by investors and being offered for rental? What kind of threat do we see that to our business? And we don't see it as a terribly big threat. We think that those units are occupied by people who have already elected to make that sort of lifestyle change. And most likely, those homes are now being rented by people who had been dispossessed, perhaps, of the home that they had previously owned.

And then with respect to any involvement or participation we might have or interest we might have in being that owner, we work very hard to really narrow our focus and operate very efficiently by sort of gaining size and scale in smaller footprints. And I think that it's going to be a challenge for these investors to operate these properties the way that they had hoped. And I would not expect us to have any interest in being involved in a purchase and ownership of single-family homes for rental.

Okay.

This is Fred. I would add that just from a feedback from our site people, it is not even on our radar. You never hear about it. And the markets where you think you would, like Orlando, Atlanta, Phoenix, Inland Empire, San Fernando Valley area, perhaps, if it comes up in conversation at all, it would only be three bedrooms, that segment which is a very small piece of our unit mix.

I think that's really good to know. Thank you very much.

You bet.

Thank you. And our next question comes from the line of Andrew Schaffer with Sandler O'Neill. Please go ahead.

Thank you. I have two questions. First, in regards to the Beatrice acquisition, I was wondering how much the going cap rate is affected by the (Inaudible) tax abatement?

The 4.7%, 6% or so percent cap rate is impacted by that. I would tell you, and our guidance would suggest to you, that if that property did not have that tax abatement it would easily sell with a three handle.

Okay. Thank you. And then secondly, going forward, are you looking to do additional deals with the homebuilders or hotels and do you see value in that structure, or is it just another way for you guys to mitigate your risk?

Well, we didn't build this deal with this hotel operator. It was built with a third party, and built with the two different uses themselves. And we were willing to acquire the apartments with the hotel below, because we do have experience operating a mixed use structure like that. The only deal that we have done -- I guess we've done two. One in Jersey City, in which we did a joint development venture with the K. Hovnanian Company. And then most recently, we'll start construction soon on a property on Park Avenue South in New York with Toll.

I think in very expensive product, mixed use product, if we believe we can make a smart investment and lay some of that off to someone like we did with Toll, or work in venture with Toll, I think that we'll be happy to do that. But you would see that in markets in which the cost for land is so expensive that hedging that risk and sharing that risk is smart to do. I would think that there's some conversations, perhaps, about doing something similar in Boston today. So I think in those very high density, very costly markets you could see us do that kind of thing. But I would say it's not a focus. But again, if there is opportunities to build the right product in the right market and it makes sense to do so with a third party, we would certainly consider it.

Okay. Great. That was very helpful.

You're welcome.

Thank you. And our next question comes from the line of Andy McCulloch with Green Street Advisors. Please go ahead.

The question --

Sorry, Andy.

Yes. Can you hear me?

Yes. We have you now.

Okay. On the two acquisitions, what are the unlevered IRRs?

We have an unlevered IRR expectation on the Beatrice in the high 7s. I tell you I would expect to achieve better than that, just because at $1,340 per square foot for the units on such high levels of those floors with the views they've got, retail condo product sells well in excess of that today. On a pure rental value, we looked at in the high 7s, but I think we should exceed that. On the property we bought in Chevy chase where it made low 9s, that is a property that we will do some significant investment into for some rehabs, and we'll get some benefit from that. But so high 7s on the Beatrice and low 9s on the deal in Chevy Chase.

And then just generally on unlevered returns that you're targeting for your core deals in the markets that you're going after, have those moved around all that much?

No. We've continued to, on most product be in that high 7 range, really as a floor. Frankly, it's been mostly 8s and above. And the Beatrice, I think, given the fact it's a brand new product, that was a high floor product, that that was something that maybe got us a touch under 8 on an IRR basis. But generally everything else has been plus 8%.

Do we still have you, Andy?

Yes. Can you hear me?

Yes. We have you now.

On Archstone, are there any blocks of assets that are being marketed?

Yes. We've heard about assets for sale that Archstone has out there and perhaps that there may be more coming.

Thank you.

You're very welcome.

Thank you. And our next question comes from the line of Philip Martin with Morningstar. Please go ahead.

Good morning, and thank you for taking my question.

You bet.

I'm interested in the change in the nature of the underlying credit and what the household makeup in your community is the last several years, certainly given what's going on and gone on in single family housing and et cetera. I'm interested as to what this may mean for future CapEx needs. Are your tenants and households demanding something a bit different than they have historically because of the change in the household makeup within your community?

You want to talk about credit?

Well, I guess I would first start by saying that half of our apartments are really occupied by one person.

Okay.

So it's not -- it's not like a lot of families are flocking to our communities. I mean, our supply of three bedrooms are very minimal across the portfolio. And as we continue to shift to our core markets, the percentage of studios and smaller one bedrooms really don't accommodate families.

On the credit side, again, much of this could have to do with our portfolio shift. But we continue to see the percentage of people with credit scores above 720 increase each and every quarter. And then those folks below 500, that number is decreasing. So it's definitely a sign -- it coincides with what we're seeing, in that we have good, qualified residents coming to backfill those that are moving out. They have higher incomes. They have higher credit scores. And that's the goal that we're trying to accomplish.

So from a higher income profile, I'm assuming maybe an older tenant, obviously paying higher rents, that may be competing more closely with single-family home ownership in the future. Would you expect to see your CapEx demands potentially go up if you're dealing with a tenant that's wanting more amenities in the unit or at the property community level?

We gave a little -- your question has both long-term and near-term aspects to it. But the near term aspects to it, we left our CapEx guidance alone, on page 22, and we expect to spend $1,225 a unit in all, and we spent about $1,200 last year in that same area. And certainly, these are higher touch properties we're purchasing and our residents have a very high expectation of us, consistent with their higher rent. I also point out that a lot of these high rises operate very differently than garden-style apartments, in terms of the kind of capital we spend money on. And the rent ticket is just so much higher, that CapEx as a percentage isn't necessarily going up.

Okay. Okay. Thank you.

You're very welcome.

Thank you. And our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please go ahead.

Good afternoon. Dave, could you give a little more color on the developments, specifically which ones you guys have looked to cancel, and also an update on what you guys expect to spend total for the year for development, given the outland products that you mentioned.

Well, the deals we had contemplated in starting this year that we do not expect now to start were a couple of land parcels in South Florida. Again, I think we've made considerable profit in the entitlement work that we've done down there. And rather than complete that, we decided we think we might just explore going and monetizing that value today. And when I talked about then starting $525 million of starts this year. But just in terms of land acquisitions this year, we'll be about $42 million.

Okay.

Incremental from this point forward.

Okay. Second of all, just going back to leasing, what's the average lease duration? Have you seen any change in that as you're pushing (Inaudible) pricing? Is it still running at 12 months, or have you seen kind of a pull back on that?

Our typical lease term, probably 87% of our leases are 12-month leases. In New York, we have a larger percentage of 24-month leases, as those are required by law. And then really, all of the rest are just a function of how LRO prices. I mean, there could be some days where a 10-month lease is less than a 12-month lease. But the bulk of our targeted leases are 12 months.

As far as people staying with us, we continue -- even with the turnover, we continue to see our average length of stay increase. So in Q1, our average stay was 1.8 years. That's what it had been the previous two or three quarters, I believe. And then in Q2, we saw that inch up to 1.9 years.

Okay. That's helpful.

Then the final question, in terms of as you're looking at underwriting today, obviously you've captured quite a bit of the pent up rent growth there, just to get back to market. Do you expect rent growth to remain above average? I think in your comments you put in the press release there. But when do you expect to start to see, as growth rates slow for the next couple of years, when do you expect to start to see cap rates rise? Are there any markets today where you're seeing upward pressure on cap rates?

I guess, no. I think in our markets we're either seeing -- generally seeing cap rates in our core markets really sort of stabilize. So we've not seen them continue to go down, nor are we seeing them reverse. And I think what it sort of suggests then is we just think that absolute value continues to increase, that the absolute price per pound continues to increase.

So you're seeing more price per pound than underwriting on cash flow?

Well, no, what I'm saying is if cap rates are staying consistent and bottom lines continue to grow, then valuation continue to go up, even though cap rates don't continue to compress. So even though cap rates have been fairly stable across our markets for the past six months, values have continued to increase because bottom lines have continued to increase.

Okay. So you haven't seen any changes in actual underwriting. The growth rates being underwritten are still the same.

Well, I guess we continue to expect, in the next several years, better than trend bottom line growth. Certainly top line growth. But in every pro for forma, we would expect to try to get back to historical levels, somewhere in the two or three years out. But again, I have an expectation that we could continue to run above trend for a while. But we'll get back to what we think trend would be in a marketplace, at least in our pro formas, maybe by year three.

Okay. Fair enough. Thank you much.

You're welcome, Mike.

Thank you. And our final question comes from the line of Seth Laughlin with ISI. Please go ahead.

Great. Thanks for taking my call. Just a quick question on revenue guidance. When you guys issued in February, I guess we were looking at 200,000-plus jobs per month. Compare that to today, the last three months have been under 100,000. Was that original guidance just conservative on your part, allowing for a possible slow down in the economy, or is it really a matter of your markets just holding up much better than the national average?

Yes. I think I heard that. Just talking about the expectations of job growth has moderated. And I'm sure everybody gets the same or similar economic reports. And overall, the expected job growth for 2012 has been reduced in many markets. But most of all, it's been shifted into 2013. So the two year total is very close to the same.

But you have to look at it market by market and really kind of core area by core area. And some good -- for example, in New York, New York lately has been a job production machine. That was revised dramatically up. Not sideways or down. And, in fact, New York City is back above its peak employment of several years ago and back above peak population, right there in Manhattan. So other markets have been -- San Francisco, very strong on the job front. Boston is very strong on the job front. We had good revisions up.

Now, other markets, like maybe I think it was LA, revised down. Orange County revised down, but it's still positive. So it's a mix. You really have to look at it market by market.

But we are pleased with blessed with a portfolio that is heavily weighted on the economic centers that continue to produce jobs and employ people who are college educated in the urban core who want a rental lifestyle that we deliver. So we (Multiple Speakers) versus the macro overall global or US economy.

Understood. And then in the interest of time, just one quick one that I had. Is there a formulaic relationship between your turnover and expenses, in other words a relationship where 100 basis points of turnover equals X percentage of expense growth?

This is David. You know, turnover -- all of our L&A spend, for the most part, is Internet driven. So I'm to the point where I kind of look at that as a fixed cost. And then our turnover, the actual painting, the cleaning, the shampooing of carpets, what have you, that averages $234 a move out in our portfolio. So even though we do see increased turnover, the impact on expenses ends up being very, very minimal.

Understood. That's helpful. Thanks again.

You're very welcome.

Thank you. And I would now like to turn the conference back to management for any closing remarks.

Thank you very much for your attention today, and we'll look forward to seeing everybody in the fall.

Thank you, ladies and gentlemen. This concludes the Equity Residential Q2 '12 earning call and webcast. You may now disconnect, and thank you for using ACT.