住宅地產 (EQR) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Equity Residential third-quarter 2012 earnings conference call and webcast.

During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions. (Operator Instructions) Today's conference is being recorded October 25, 2012.

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

Thank you, Lisa. Good morning and thank you for joining us to discuss Equity Residential's third-quarter 2012 results. Our featured speakers today are David Neithercut, our President and CEO; Fred Tuomi, our EVP of Property Management; and David Santee, our EVP of Property Operations. Mark Parrell, our CFO, is also here with us for the Q&A.

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.

Now I will turn it over to David Neithercut.

Thank you, Marty. Good morning, everyone. Thanks for joining us today for our third-quarter call on which we are very pleased to report that we continue to see favorable fundamentals across our markets. This continued strong demand for rental housing produced same-store revenue growth of 5.8% for the quarter ending September 30.

As we sit here today with almost 10 months in the bank and a good handle on expirations or renewals for the balance of the year, we are confident that same-store revenues for the full year 2012 will come in at 5.6%. This is just slightly ahead of our expectations at the beginning of the year. And this a very strong level coming off 5% growth in 2011.

This will represent the first time in our history that we will have had two consecutive years of 5% same-store revenue growth or better. I would like to thank the hard-working teams across the Equity nation for doing all that you do each and every day to deliver these terrific results.

Looking into next year, we currently expect that same-store revenue will grow 4% to 5% in 2013, which will continue a string of some of the best operating performance in the Company's history. As we sit here today half of that growth is already embedded in our existing rent roll, so that if we maintained our current occupancy and every existing lease renewed at the same rent as we are collecting today, we would see same-store revenue growth in the low 2s next year. And that is even if we didn't have any rent growth at all next year, which of course we certainly will.

To give you some perspective on that I'm going to turn the call over to Fred Tuomi, our friend, our colleague, who will be retiring next year after nearly 20 years leading our Property Management team. Fred is going to address not just what we are seeing today, but what we are seeing for the balance of the year and how we expect to start the new year. Fred?

Great. Thank you. As David mentioned, the fundamentals of our business still remain very solid. We enjoyed a strong leasing season and remain confident for our full year 2012 revenue growth will finish at 5.6%. By the end of the fourth quarter we will be well positioned for yet another year of very strong revenue growth for 2013.

I will now provide an update on the key drivers of our revenue in terms of how we will finish this year, and then more importantly, how that will carry over into 2013.

The first, turnover. We had a trend of higher turnover that we saw in the first half of this year and that has reversed course. We now saw that the third-quarter turnover we had levels below those of the third quarter a year ago in 2011.

We expect this trend to continue into the fourth quarter resulting in a full-year 2012 turnover now of 58.2%. Turnover for the year 2013 should be in the range of 58% to 58.5%.

Now the markets with the greatest increase in turnover compared to 2011 still include San Francisco and Denver, where we had very strong growth in base rents and, not surprisingly, high levels of move outs due to those rate increases. But for the entire same-store portfolio move outs due to rate increases have moderated. Moderated to 11.9%, which is down 210 basis points from the third quarter of 2011 and down sequentially by almost 300 basis points.

So this moderation indicates further acceptance of our pricing by our newer residents and reflects the seasonal moderation of our rents.

Move outs due to home buying, still nothing to report here. This measure stayed basically flat sequentially from Q2. It is at 13%, which is up 110 basis points over the same quarter last year but still well below normal levels. So our customers renting in high-quality urban core buildings are showing very little desire to purchase a home.

Moving on to occupancy. We maintained strong occupancy through the leasing season, and we are now well positioned as we enter the final two months of the year. Occupancy is 95.6% as of this morning, which was 60 basis points higher than the same point last year.

Our exposure is very healthy and we have 7.1% left to lease today. The normal softening through the fourth quarter has already begun and we expect occupancy to trend down and close the year at about 95%, a starting point for 2013, which will be 30 or 40 basis points higher than the starting point we had coming into this year 2012.

That leads to base rents. The strength of our demands in leasing season allowed us to keep pushing base rents through late August. We actually peaked for the year, the intra-year, on August 20. So this intra-year rent peak came 30 days later than it did in 2011, which is an indication of the strong leasing velocity we enjoyed through the summer of 2012.

Naturally, since then rents have moderated according to our normal seasonal patterns. The strongest base rent growth continues to come from the Pacific Northwest. Again, as of this week, San Francisco base rents are up 10% year over year, Denver is up 7% year over year, and the base rents in Seattle are up 6% year over year. However, with central business district and the East Side submarkets significantly higher, and of course Tacoma significantly lower and actually slightly negative.

Southern California base rents continue to improve. Los Angeles was up 3.5% year over year as of this week. Orange County is up 4%. However, San Diego is still lagging with base rents up 2% year over year.

Regarding our new residents' ability to pay higher rent levels, the average rent as a percentage of income remains very healthy at 17.6%, and all other income and credit quality indicators are keeping pace with rents in our portfolio.

So as we finish 2012 base rents will be about 4% above December of 2011. This gives us an excellent starting point for further base rent growth through the cycle of 2013. Therefore, we believe base rents next year will grow between 4% and 5%.

And finally, renewals. Renewals remain strong and continue to support our revenue growth through the fourth quarter. Recent achieved renewals have been August we booked 5.3%, September 5.7%, and October renewals finished up 6.1%.

We are quoting November and December well above 7% and expect to achieve increases booked renewals for these two months at or above 6%. So for 2013 we expect to sustain renewal increases in the range of 4.5% to 5.5%.

So in summary, we are very confident the balance of 2012 will position us for another solid year of revenue growth in 2013. As David mentioned, we have embedded growth for 2013 north of 2%. Again, what this means is that if we were to freeze all rents and occupancy as of the first day of 2013 and applied no further increases in base rents and absolutely no increases on any renewals, we would mathematically achieve more than 2% growth in revenue.

Of course that is not going to happen. So based on our current expectations of continued growth in base rent and renewal increases, coupled with steady occupancy for next year and an in-place seasonal lease expiration schedule, we foresee the resulting revenue growth for 2013 of 4% to 5%.

Now David Santee will assess our expenses. David?

Thank you, Fred. As we have discussed previously, payroll, utilities, and real estate taxes account for 68% of our total expense with real estate taxes being our largest expense line item at 30%.

As expected, our core property level expenses, meaning everything but property management costs and real estate taxes, should essentially end the year flat as we continue to leverage technology and find creative ways to reinvent our operations. Innovation and then executing on that change has become a hallmark of our organization and I would be remiss if I did not acknowledge the efforts of all of our employees, both here at Two North and across the country, for allowing us to realize our 22nd consecutive quarter of expense growth below 3%.

Over the last three years it's no secret that apartment fundamentals have improved dramatically. This continued improvement coupled with the ongoing economic challenges of states and municipalities has not escaped notice of the taxman either. I would like to take just a minute to walk you through our 2012 real estate taxes and also provide some insight as to what the next year may look like as we have re-forecasted our 2012 tax growth from 5.5% to the upper quartile of a 6% handle.

Because most actual tax bills are not determined until Q3, estimating full-year real estate taxes is both art and science. Relying on historical outcomes is key to estimating future taxes; however, present economic circumstances are in no way reflective of historical actions by states and municipalities. Consequently, the actions by three states far exceeded even our most aggressive forecast.

The state of Washington far exceeded rate forecast resulting in a 6.1% increase. Both Florida and Virginia issued back-to-back annual valuation increases with 2012 being more aggressive than last year. Historically, when valuations are aggressive tax rates are softened. This scenario did not play out for this year, which resulted in an 8.8% increase for Florida and a 15.1% increase in Virginia.

As for the Q3 expense of 9.3%, had we known in January what we know today we would have reported a consistent quarterly expense in the high 6% range. To achieve our year-end forecast the 9.3% reported in Q3 is the accounting adjustment needed to achieve a fully loaded year-to-date and revised full-year expense target.

Now as we think about the 2013 environment, we see a very similar scenario playing out for both core operating expenses and real estate taxes; minimal core growth and another 6%-plus handle for real estate taxes. Now again a key driver, about 150 basis points, for both 2012 and 2013 real estate tax growth is directly attributable to our 421a tax abatement burn off for our New York City portfolio. The balance is based on our projection of value and rate increases by market. And for now, our assumptions are more influenced by 2012 and 2013 realities versus historical norms. David?

Thanks, David. Let me turn now to transactions which, as we have said for quite some time now, is really a reinvestment process for us as we continue to sell assets in our non-core markets and redeploy that capital into our core markets that we think will provide a superior long-term, risk-adjusted total return for us.

So in the third quarter we acquired four assets for $236 million, each great additions to our portfolio. One in Manhattan and three in California, two in the north and one in Southern California.

We acquired a 98-unit property on 37th Street in Manhattan between 9th and 10th Avenues. This project probably was completed this year and originally intended to be condo product, as such it has a very high quality with terrific finishes. And unlike most of the other condo deals we have acquired, this one was actually fully leased. It was acquired for $84 million, $771,000 a door, at a 4.9% cap rate.

We acquired 241 units in downtown San Mateo, about 16 miles south of downtown San Francisco. This property was built in two phases, an older property; first phase in 1964 and the other in 1972. It was acquired for $93 million, or $386,000 a door. This is a value-added deal in which we intend to invest another $35,000 a door, which will result in a sub-4% yield in the first year but will produce a 5% return in short order and will soon deliver 6%-plus returns.

We also acquired a small property on Bluxome Street in downtown San Francisco that was built in 2007. And I say small, both because it is only 102 units but also because the average unit size is 233 square feet. It is perfect for our target demographic.

The property have average rents of $1,750 per unit per month, which is hundreds of dollars below rents on larger studios in the area. The property was acquired for $23.9 million, $234,000 a door, and a cap rate of 5%.

We have added to our terrific portfolio in downtown Los Angeles by acquiring a property that was originally built in 1925 and was gut renovated and converted into apartments in 2006. This property contains 99 units. It was acquired for $35.5 million, which is $328,000 a door, and a cap rate of 4.2%.

On the disposition side, the first nine months of the year we have sold $617 million in non-core assets, $281 million of which were sold last quarter. So in the quarter just ending we sold 2,153 units. This is comprised of three assets in Orlando and one each in Phoenix, Atlanta, and Maryland, and our last two assets developed by joint venture partners, one in New Jersey and one here in Chicago, which represents our complete exit from our headquarters city.

We have reduced our transactional guidance for the year on each side of the trade by $150 million, so we are now down to $1.1 billion of acquisitions and $1.1 billion of dispositions for the year. Having sold only 56% of that disposition goal through 9/30, we will have a lot to do in the fourth quarter.

But so far this quarter we have sold or have under contract $160 million of products. We have another $140 million under letter of intent and another several hundred million more at various stages of marketing. So we do think as we sit here today we will be able to accomplish that.

On the development side we continue to be very pleased with the results of our new developments recently brought online. The rate of unit absorption remains very strong and net effective rents are in excess of our original pro forma in every case.

We continue to look for new opportunities to add high-quality assets in great locations in our core markets through development and acquired three new parcels in the third quarter to do just that. These three sites will produce 794 total units at a total development cost of $270 million with a weighted average yield on cost at current market rents in the mid-5% range. And these are in markets where high-quality assets trade today in the low 4%s, being Seattle and coastal Southern California.

We started one project in the third quarter, that is the third and smallest phase in our Westgate project in Pasadena containing 88 units for $54 million. And we have five additional projects that are slated to start yet this year -- two in Manhattan, two in Seattle, and one in Washington, DC.

There is certainly no guarantee that we will get each of these started this year. If we don't, they will likely get underway in the first quarter of next year. But assuming that we do, however, starts for this year will total 1,051 units, $543 million, and deliver a 6% yield on current market rents which we think will provide a stabilized yield of 7%.

We currently own sites for an additional 3,500 units with a development cost of nearly $1.4 billion in great locations in Boston, San Francisco, Seattle, and Southern California, and continue to pursue opportunities for several billion dollars more of development.

With that, Alicia, we will be happy to open the call to questions.

(Operator Instructions) Eric Wolfe, Citi.

Thanks for all the detail on 2013. I am a little surprised to see you provide so much detail so early on, so just curious what prompted you to put out the revenue guidance earlier than you normally would.

Look, we got a pretty clear sense out there that there is a lot of questions about 2013 and we felt that there was a lot of uncertainty and a lot of questions. We just felt that we had a clear enough sense about where we were headed that it was appropriate to let the investment community know.

Okay. Then just trying to dig into that 4% to 5% revenue growth projection a little bit more. You said that you are going to get 2% or just over 2% from the earn-in from last year, and then you are going to get 4% to 5% on base rents, 4.5% to 5.5% on renewals -- I think that is what you said at least. Shouldn't that bring you closer to 5% revenue growth, or are you expecting a little bit of a dip in occupancy next year?

It is Fred. We are assuming constant occupancy and maybe a slight uptick in turnover, but you can't just do that math that simply. You have to take into consideration the seasonality of the lease expirations. They don't all expire January 1 or we can move everybody January 1, nor do they all expire conveniently, exactly in the middle of the year. So you have to roll that through the actual expirations that we anticipate throughout the year, both those that are according to lease expirations and those that may terminate early. So it is not quite that direct.

Right. And then I guess just from a seasonality perspective, you would expect things to sort of trend the same way that you are seeing this year, or is there any sort of change?

No, we are definitely back to a normal market intra-year seasonality curve. Maybe the years of the recession and the first year of recovery, it was a little bit different, but really not materially. But this year it clearly was -- we ramp up Q1, really push things during the leasing season, separate from the comps, really get aggressive on the rents, and then we start moderating as demand moderates. So you really have to follow the demand cycle, and the demand cycle certainly is seasonal in this business.

Okay. Then just last question on supply. We have obviously seen the starts number continue to climb, I think 260 last month. When you look at that number, is there a certain level that starts concerning you? I know it is very regional for you, so maybe if you think about it just for your markets, like what is the level that starts concerning you looking forward?

We don't really react to an overall number. Just for our core markets, I did look at that and 2012 we have 37,000 units coming in, which is the lowest we have ever seen other than 2011. Then for 2013 we see 54,000 units coming into our markets. Just for comparison, back in 2009 we had 67,000 and in 2008 we had 57,000, so still below those years but that is really not that important.

What is more important is that on a market basis and a submarket basis, and really down to the street basis, where are those new deals coming out? How are they pricing? How are they incenting their absorption lease-up schedule through concessions? And what is the impact on our specific properties? You really have to build it from property level up.

You also have to look at the demand side also, Eric. We look at expected households formations and job growth in those markets and look at what a historical average institutional-grade apartment capture rate of that growth is. And, frankly, in many of these markets we don't think that new supply will meet that incremental new demand.

Okay, thank you.

David Bragg, Zelman & Associates.

Good morning. Another question on the 2013 outlook that you provided. Could you talk about the markets that will be positive contributors to revenue growth in terms of better revenue growth in 2013 then 2012 and the markets that you expect to see the largest deceleration from 2012 into 2013?

David, this is Fred again. We are not going to give market-by-market guidance. We normally don't give it even later in the process, so we are certainly not going to give it now.

But you can just kind of look at the trends. The trends are very strong in the strong markets and those trends will continue because we have that embedded growth that is going to carry us forward. The market is a little bit weaker, less so.

I would say generally, in terms of deceleration, the only one I would worry about would be Washington, DC. We have talked a lot about DC. It's still holding up quite well right now. In fact, it is looking great but we all know there is two big things coming at us. The big supply coming at us in DC, highly focused on the District and close in, and then the big question mark of the fiscal cliff or the sequestration, which if it happens could be very disruptive to the market.

So I would expect DC really to be the only market concerned about a deceleration; not negative but certainly a deceleration of growth. The others I think you just look at -- the current trends will continue.

Okay, thank you. Just on the lower turnover, what does this tell you seeing this trend which I don't think you necessarily expected? Does it mean that the renters that came in during 2009 and 2010 at discounted rents they effectively traded up? That they have departed and now you are working through a resident base with higher income and a better ability to take on these increases?

Thank you, I couldn't have said it better myself. Yes, that is exactly it.

The turnover of being 58.2% that is really on top of our original expectations for this year, but we did revise that expectation up after we saw the turnover increasing in the early part of the year. I think that exactly kind of reversed itself due to -- as newer residents coming in they are used to paying those levels. They don't have the historical perspective of, gee, I was paying much lower rent back in 2008, 2009, and 2010, and so it is not as much of a shock. Then, of course, the incomes have been moving up nicely as well.

So I think people are set and they're not buying homes. They are staying put with this urban core, great assets, great walk score, where they want to live. They are not buying homes because if they were to buy a home today they would have to go way out in the burbs and fight the interstate. So we are seeing very good stability in our resident base and our retention.

Thanks. Just one question for Mark. Mark, can you talk about the plans to address the line balance?

Yes, so line balance is about $850 million. It will get paid down about $250 million just because we are going to have a lot more in dispositions in the fourth quarter to meet our guidance numbers than we have had to date. So the real amount at issue here is really something like $600 million.

Most of that is the term loan that we just recently paid off, which was floating rate debt. So we do want a portion of the revolver to stay outstanding and to have a floating rate debt component.

And, finally, we still do have our hedges in place. We have about $200 million in swaps to fixed that protect us, so it isn't a matter of if, it is a matter of when we access the unsecured market. But it won't need to be a particularly large deal and it doesn't need to be particularly soon, because I do want to have some floating rate exposure. With the line we can maintain exposure around 13%.

If we termed it all out, we would end up having floating rate exposure of 5% or 6% and I just don't think that is quite the number we are looking for. Certainly very attractive market to term debt out right now.

Got it, thank you.

David Toti, Cantor Fitzgerald.

I just have just a quick question. I'm not sure you can answer it, but I just want to talk about some of the acquisitions and dispositions and kind of the math. If we look at the assets that you are buying in aggregate in the quarter, what would you estimate the three-year growth rate to be on those rents roughly?

I can't tell you what the three-year average weighted growth rate is going to be on these, but I will tell you that we -- and these assets will be -- we are buying in the 4%s. We will quickly be in the 5%s and moving towards 6%. But, again, on a dollar-weighted average basis I would have that off the top of my head.

Understandable. Then on the stuff that you are selling in the 6% cap, how would you characterize the growth on those rents maybe in a comparable period, whatever that might be?

We don't really look at it in that short of increment, David. We really look at it over a longer period of time. And while some of those markets may have very strong growth in the next year or so, new supply will quickly put an end to that.

We just think over an extended time period, which is really our investment horizon, that we will have a better overall total rate of return by making these trades. We are also looking at just where we are trading assets, not simply on a cap rate basis but on an absolute basis, and where those dollars are relative to replacement costs in those markets. And we think that the absolute price per pound makes sense for us.

Okay. My last question, and I apologize if you covered this; I jumped on a bit late. Are you seeing any -- in your transaction sort of pipeline, acquisition pipeline, are you seeing any upward movement in cap rates in some of the secondary/tertiary markets that might come across your desk?

Well, on the acquisition side we are only in the primary markets. What we are acquiring I would probably say maybe a little bit on the DC side, but generally I think on average cap rates have held fairly close, have been fairly stable through much of this year. And because of improvements on the bottom line you have seen modest increases in value during the year.

Okay. Actually that wasn't my last question, I wanted to squeeze in one more. Are you seeing any change in the, let's say, on the buyer's side for the assets that you are selling relative to how those parties are underwriting assets going forward? If there is no movement on the cap rate, are you seeing any additional conservatism on the part of the buyer relative to their outlook?

No, I tell you I think a lot of this is sort of lender driven; I'm turning now to the assets that we are selling. I think that a lot of what people can pay is a function of Fannie and Freddie, but they are out there, they are lending.

They are going to have big books this year. They are as busy as can be. That is providing capital to actually allow us to continue to sell these assets and allow us to get disposition prices that are in the high 5%s to mid-6%s.

Excellent, thanks. See you guys in California.

Rob Stevenson, Macquarie.

Good morning, guys. Maybe one for David or Mark. If I heard correctly, you guys were talking about 6% real estate tax growth in 2013. Did I get that right?

That is correct.

Okay. And then sort of flattish to up slightly for the other 70% of your expense load?

That is how we are seeing it today.

Okay. So that is going to basically put expense growth somewhere in the 2% to 3% for next year?

That is how the math works.

I wanted to make sure that I had all of that right, okay.

I guess a couple of quick other ones. The land parcels that you guys bought this quarter, is there still a lot of work that needs to be done there as why the construction is not starting there for another 18-plus months? Or is it something that you guys are looking at where you don't want to deliver supply into those markets and according to with the bulk of what is happening there?

Most of what we have acquired, Rob, is zoned and entitled, and we just need plan review. It just takes a little while to get that stuff done, but there is not a lot of risk in getting consents and approvals. You are just getting plans done and getting plans reviewed and approved.

Okay. And then I guess lastly, what is the size of the redevelopment opportunity in your sort of ongoing core portfolio today that is over and above what is just sort of general maintenance CapEx, which would actually be revenue producing in terms of whether or not it is kitchens and baths or more wholesale stuff on well-located stuff that maybe just has a little bit of age on it?

I think you should expect to see us rehab something along the lines -- and we talk about that a little bit on page 22 -- something along the lines of 4,000 to 5,000 units a year in a portfolio, give or take 100,000. So I mean a lot of our locations are just terrific locations and you just need to keep the product up to date.

So I am not sure that there is a cumulative number I can give you, which is I think what your question was. But I think a run rate of us doing rehabs that are fairly material on 4% or 5% of the portfolio is probably what we would end up doing.

And is at just what you think you can do, or I mean is there the opportunity for you guys if the acquisition market starts to become less attractive that you could deploy capital there faster than you otherwise would have? Or is it just mutually exclusive that that is what basically your opportunity set is?

I appreciate the question, but just on order of magnitude we spend $40 million on rehabs and though the returns are very solid, I mean that is one asset we would acquire. So I am not sure that toggling rehabs, even doubling them, to a company our size is going to make a great deal of difference.

Okay. All right, thanks, guys.

Jana Galan, Bank of America.

Good morning. I think you have a small handful of assets that cater to students. Given the increase in student housing communities marketed for sale, I was curious if you are looking at those or would want to expand in that business?

I am sorry, to increase our exposure or decrease our exposure? Increase. No, I think that we have certainly got -- have assets and even assets that we have acquired in urban locations that do have some students, but the percentage is certainly smaller.

We do have properties, for instance in Orlando, which would be part of assets that we would likely sell in the near future. We also do have some development sites in Berkeley, California, which we intend to build which would certainly be attractive to students. It is not a big part of our strategy; it would really be just on the margin.

Great. Then, Fred, thank you so much for your comments on the supply in DC. I was just curious if you could talk a little bit about what you are seeing in Seattle.

Yes. Seattle is doing great right now, especially downtown and the East Side. Sonoma is just a little bit softer and then Tacoma -- we do have a fairly large portfolio in Tacoma and it is still underwater.

But Seattle has a great run. Tech employment is very high. Amazon is hiring a lot of people. Microsoft has a lot of different projects going on and hiring a lot of people. Google is moving in big-time into Seattle. The biotech is great.

So it is really a great story in Seattle all the way around, but the supply is an issue. We have got 3,000 units this year, 5,000 units next year, and that supply is pretty much concentrated in the downtown area and the fringe of downtown, places like Ballard and then some over even in West Seattle.

But the absorption is strong and there is a lot of people in the renter demographic that are coming into the city. A lot of people from other areas are moving into downtown and doing a reverse commute, so we think the absorption is going to be there to meet that supply. If it doesn't, we may have a little bit of an issue in those concentrated areas, primarily the CBD, but it is going to be short lived.

So the supply for 2013 and 2014, I would say it is a moderate issue but not a big issue because the demand should be there to meet it.

Thank you. Then I am just curious if the 2013 revenue growth number is there a certain job growth expectation in that?

No, we don't go from macro to micro. We consider the macro environment but we build these things from the ground up on what is in place and the trends and asset by asset. So we don't really take a headline number and then peg our operations based on that.

Okay, thank you very much.

Alex Goldfarb, Sandler O'Neill.

It is actually Andrew Schaffer here. First I would like to ask you about -- I think I heard you had $200 million of unassigned hedges and I was wondering what kind of effect that would have on the all-in rate of a 10-year or a 30-year unsecured issuance.

So the 10-year hedges, about $200 million, are $44 million to the negative right now. So basically you take the $44 million divide it by 10 and then whatever the amount of the notional is. I'm not sure I'm going to do that math in my head right now, but it is probably on a $400 million deal something like 1%.

Does that change the way you think about issuing 10-year versus 30-year paper? Because I know in the past you have said you kind of preferred or shied away from the 30 year?

The hedges don't really have anything to do with our thought process on 30-year debt. The hedges are there to just allow us to access the market at an opportune time.

Our concerns about 30-year debt have a lot more to do with just having covenants that are real and substantive continue on for such a long period of time. To handcuff our successor's successor's successor with those kind of important and substantive covenants on leverage is just something we need to be careful about, and to this point we haven't had any appetite to do.

All right, perfect. Thank you, that is it for me.

Mike Salinsky, RBC Capital Markets.

Good morning. You talked a little bit -- you gave quite a bit of detail on operations for 2013 and you also talked about development starts in the fourth quarter. Can you give us a sense just as you are putting the plans together what you are thinking on the development side? What you could start for 2013 as well?

Again, a lot of it is just timing and what can actually be started in the year, what might have to be pushed into the next year. But as we look at our agenda today we have got $700 million of product that could start in 2013, Mike.

Okay. And that is in addition to the $540 million you talked about in the fourth quarter?

That is correct.

Okay. Second question, you had 170 basis point spread during the quarter. I know you have talked about looking at price per pound as well, but at what point does that spread become too wide?

Again, it is more value. We are on record as having said that we are going to exit certain of these markets and try and redeploy that capital. When we find assets to buy that we think make sense for a long-term investment standpoint and can match that up against sales that we think make sense -- and it is not just simply cap rate.

We certainly do pay attention to that delta, but it is also just where can we sell assets on a price per pound versus what we think replacement costs are in those markets. And we try and decide if that makes sense.

So I wouldn't focus so much on the 170. A lot of that is just the complexion of what happened to be sold in one quarter versus what happened to be acquired in one market or rather in one quarter.

Historically we have seen that delta to be about 125 basis points. It will be a little wider now because we have seen more aggressive pricing where we want to invest and cap rates, I think, being held up a little bit in the markets that we want to sell. But really we do look at the absolute values in those markets and still do think that those represent decent prices for exit at.

As you are underwriting these transactions have you changed your rent growth assumptions at all in the last six months?

Well, I guess -- I have been asked that question a lot, and I will tell you our 2013 sort of rent growth assumptions are probably pretty consistent with what they thought they were going to be back in 2010 and 2011. So as we look forward 12 months today they are probably less than what we looked at 12 months forward 12 months ago. But I don't think we are looking at 2013 today any differently than the way we have looked at 2013 for a while.

Okay. Then the final, where could you issue unsecured paper today? That one is probably for Mark.

Then just curious, for your 2013 outlook what your expectations are for Southern California. It seems like you had a pretty decent ramp up there. Wonder if you expect that to continue into 2013 and if you expect Southern California to be among your better performing markets there.

I am going to address the debt issue; it is Mark. Right now I think we could issue 10-year unsecured paper at something between, say, 3% and 3.1%. On the secured side, just by means of comparison, I think that would be more like 3.3% right now.

And I will push it back to Fred for the SoCal question.

Southern California continues to improve; you can see that in our numbers. I wouldn't say it is like screaming back, but it is good, steady, consistent improvement, whereas 18 months ago we were complaining that it was start/stop, two steps forward/one step back kind of lumpy kind of thing. So it is consistent improvement and moving up.

I would say that both LA and Orange County have some good job growth right now. LA is a little bit more backloaded this year; still remains to be seen. But Orange County has some good, broad-based, steady improvement on the job front. So rents are still below the peak level so we still have a little bit more juice to get back to those levels.

So I think it is to be expected they will continue to be one of our better performers. I wouldn't say maybe the best, but one of the better performers next year.

Now there is two risk areas. The biggest risk is just California. It is still very messed up, as we know, and they have got some serious fiscal issues in the state of California and some legislative things coming up here in this next vote which is really going to be an issue. If California has to really cut expenses then there could be some severe cuts in government jobs and education, etc., so that could take some of the growth fervor out of it.

Then also we have a little bit of supply coming into LA. On the macro basis it is not a big number based on the size of that market, but it is highly concentrated in downtown, Wilshire, and San Fernando Valley again. So maybe a little bit of issue there.

Orange County looks great. San Diego has always been the laggard but it has got a lot of good things going on -- broad-based good job growth. But the military and defense sector overhang there is a little bit of a concern. It is going to keep San Diego I think still in third place.

Appreciate the color. Thank you.

Philip Martin, Morningstar.

Good morning. Question on just the overall Equity Residential portfolio. Nationally or by individual market are you experiencing any meaningful shift in average length of stay by the tenant?

This is David Santee. We look at that every quarter. I would say historic -- well, as we continue to transition our portfolio typically high rise buildings have much lower turnover than garden communities. When you look at it on a market-by-market basis, the average length of stay in, say, a New York, a New England, a Boston, a San Francisco is double that, almost three years, versus the commodity markets like Phoenix, Atlanta, Orlando, which is about 1.6 years.

Okay, okay. When you look at the 17.6% average rent as a percent of income, take us back over the last, call it, five to 10 years and what has been -- kind of pre-crisis what was that number and how has it changed here over the last five years or so?

This is Fred. I can't give you that number going back 10 years, but since we have been focused on it here the last several years it really hasn't changed. It is the 17% range; the median is 21%, 22% and it has been fairly consistent. If there has been any movement, it is just getting more favorable.

Again, related to what David mentioned about our portfolio shift, we are getting better assets, better locations, better residents, better incomes, and much higher rents. So I think it is very steady and stable, and if anything, improving on the margin.

Okay, okay. My last question in terms of the new supply, it sounds like in certainly your core markets the supply, existing and new supply coming on, is not of this institutional quality where yours is. Is that a fair statement?

Again, I know it is property by property as opposed to market by market, but I am just trying to get a sense of -- because we hear new development starts. It may look high, but is it really competitive product when compared to your institutional quality product or your location? I am just trying to get a better sense of the competitive supply.

I understand. We look at it really asset by asset and what is coming into its location that is going to be a competitive threat to our existing assets.

Now some markets you just see a headline number. Like, say, Boston is going to have 3,000 units delivered. Well, if you look at those we are not really too concerned because a lot of it is out in the suburbs and a lot of are small properties and a lot of it are affordable product.

So you are right, a lot of these are smaller, in locations that don't impact institutional assets, and are affordable nature that don't compete with our resident set. But I can tell you, too, that we do have an issue.

DC a lot of these products coming out are right in our wheelhouse. I mean they are institutional grade, high-quality, great located buildings that are being developed. So I'm not going to say we are not going to have competitive threat but you just can't react to a headline number.

Exactly, okay. Okay, thank you.

You're very welcome.

David Harris, Imperial Capital.

Good morning, all. Excuse me (multiple speakers) you have already made reference to these points. But NAREIT, over the summer David you referenced to some elements of conditionality regarding the Archstone payments. Those no longer are relevant to the second payment that you referenced as likely to be included in the fourth quarter?

David, it is Mark Parrell. That expired about October 4, that conditionality, so we will recognize the remaining $80 million in income in the fourth quarter.

Okay, good. Then one final question; on the acquisitions and sales to meet your full-year targets it looks like you have got to be looking to buy about $200 million and sell $500 million. Is that right?

That is the math.

That is the math. Any idea of timing on some of that, David?

Well, being the fourth quarter (multiple speakers) are you looking for November 17?

Well, I will tell you where I am going with that question -- it is always good to introduce levity into these rather dull conference calls I have learned after all these years. Where I'm going with that are any deals this side of the election or is any people expressing any sensitivity, either you as a buyer or potential sellers around the election?

I don't think so at all, David. I think that certainly you can see changes in activity as a result of year-end, but I don't think -- we have got nothing that is contingent on the election that would change a seller's mind or our mind. We are running our business; we are doing what we can do and not concerned about the election.

Okay, good. Thank you.

Josh Paquin, BMO Capital Markets.

Good morning. On the development side your underwriting projects to 5.5% yield on today's rents, just trying to get a feel for if project costs, material costs are going to move commensurately with rent growth or how you are viewing that?

Well, we do trend increases in construction costs from our underwriting to the time that we would expect to be able to start pricing jobs out. And I will tell you that we think construction costs are still maybe down 10% from peak but are rising, and in most of our markets we will be up mid-single digits this year.

And how about labor costs, or is that part of the whole picture (multiple speakers)?

That would be part of that calculus.

Okay, great. I believe Rich is on the line with a question as well.

Thanks. So let's assume for a second that the housing recovery is real and that we don't go to 59% homeownership rate. Tell me what the opportunity is from your perspective, the multifamily perspective, considering that people getting a job building a home, for example, may not be your target tenant?

I am not -- people that are getting a job and building a home?

Yes, I mean everyone is saying this is great because it will create job growth, but are those the type of people that are going to rent an apartment from you? And I'm just curious if there will be downward pressure in that environment from people that aren't as wealthy.

I think that improvements in the single-family space is just good for the economy. And whether or not the guy who is now hanging drywall is our resident or not, I think that is good for the economy and that will be good for everyone.

But as good? I mean a moderation should be expected, correct, even in that improving economy environment?

A moderation of what?

Of growth, rent growth.

Well, we just said we are going from 5%-plus to 4% to 5% so --

That is really not moderation, that is a rounding error kind of.

Okay, you can call it whatever you want. Look, we think that multifamily supply, new incremental multifamily supply will not meet what we think will be incremental new demand. We have obviously targeted on this 80 million strong echo boomer generation and we think their interests in buying a single-family home, while they may want to, they will act on that later.

David Santee told you what the average occupancy is in our units, so we don't think the single-family homes are a huge threat to us. We don't think multifamily supply, maybe outside of DC and San Jose and maybe a little bit in Seattle, short term will be long term threats. We think that the space today is pretty well positioned to perform well above trend for some time to come.

I can't tell you that it's going to -- what level of moderation that sort of means, but we certainly are not suggesting 2013 will show the same percentage growth we have seen the last couple of years. But still we think very strong on a historical basis.

I would think that the majority of the people who are going to be the first to jump and buy a home are probably those renting homes today, not living in apartments. And those that come back on to the payroll from the construction jobs and other homebuilding-related recovery, I don't think they're going to go from unemployed to employed to homeownership.

Okay. And just an unrelated question, in your mind, putting aside your involvement in Archstone, is an IPO from that company good for the space or bad for the space, in your opinion?

I guess I will leave that up to the analysts like you and to the investors. They are hell-bent on going public. We continue to think and have thought, as you know, for a long time that it made sense to maybe do something with us. But it looks like they are going to go public and the market will react to that.

Okay, fair enough. Thank you.

(Operator Instructions) Tayo Okusanya, Jefferies & Co.

I am good. Thank you very much.

I am showing no further questions in the queue at this time. Please continue.

Good, thank you all for joining us. We look forward to seeing you in San Diego in just a few weeks.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.