住宅地產 (EQR) 2012 Q4 法說會逐字稿

Welcome to the Equity Residential fourth 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, February 6, 2013. I would now like to turn the conference over to Marty McKenna. Please go ahead.

Thanks Alicia. Good morning and thank you for joining us to discuss Equity Residential's fourth quarter 2012 results and our outlook for 2013. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our EVP of Property Operations; and Mark Parrell, our Chief Financial Officer.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of Federal Securities Law. These forward-looking statements as 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. I'll turn the call over to David Neithercut.

Thank you, Marty. Good morning, everyone. Thanks for joining us today. As we reported in our earnings release last night, for the full year 2012, Equity Residential delivered same-store revenue growth of 5.5%, and NOI growth for the year of 7.6 %. These results are slightly above our expectations at the beginning of the year and are among the best numbers in our 20 year history. We are very pleased that, for the very first time ever, we've had two consecutive years of 5% same-store revenue growth or better. So we are very pleased with our operating performance last year and we wanted to acknowledge the contributions of the Equity team across the country and here in Chicago that delivered such strong performance for us.

I'm pleased to say that as we sit here today, we continue to see favorable fundamentals across our markets. And expect to achieve yet another year of operating performance above historical trend in 2013 and that will continue to string us some of the best year-over-year results in our history. Clearly though, with same-store revenue guidance of 4% to 5% and NOI guidance of 4.5% to 6%, we are not expecting our same-store results to be quite as strong this year as they were last year. But things are still very good across our markets.

Occupancy is currently 95.1%, which is very strong for this point in the season. We put 5.1% more money in the bank this January compared to January 2012 from our current same-store set of nearly 108,000 units. More than 4,000 January leases were -- lease renewals were completed, up 6%. Nearly 3, 500 February renewals have been completed, up 5.4%, and a limited number of March renewals have already been done, up 5.1%. So thus far, the year is setting up pretty much as we expected.

To give you more perspective on our operating outlook for 2013, I'll turn the call over to David Santee, who, as most of you know, has been responsible for building and running our centralized operations platform which has been so important to our past and will be to our future success. With Fred Tuomi's pending retirement, David has taken on the added responsibility of overseeing our day-to-day on-site property management business. I know that Fred agrees with me that he is leaving the business in very, very capable hands. David?

Thank you, David. As noted in last night's press release, same-store guidance for 2013 is based on an expected year-end unit count of 80,120 apartments versus the 107,870 we have today. The vast majority of the 27,750 units, which by the way was the size of the Company when we first went public, slated for disposition or expected to close prior to or shortly after quarter end, which gives us the confidence to provide you the impact to year-end results today.

The net change as a result of these dispositions is favorable to improved revenue growth, neutral to total expense growth, and significantly lowers our forecasted resident turnover. What this all means is that we expect same-store revenue growth to improve modestly as a result of the change in our same-store pool. But our number will still be within the range so we are leaving our 2013 same-store projected revenue growth unchanged from our earlier Q3 guidance of 4% to 5%.

Fundamental factors of supply, while increasing, appear to be manageable while demand continues to be steady as the economy continues to pick up steam, fueling increased job growth and household formation. As we have discussed previously, we expect short-term disruptions to pricing power in specific neighborhoods in Washington DC, North San Jose, and Seattle. However, the combined dynamics of favorable long-term demographics and the continued aversion and economic challenges to homeownership will ensure steady demand for rental housing for the near term.

Seattle proved to be a testament to this model by absorbing almost 8,000 units in 2012 while increasing occupancy 120 basis points. Move-outs to buy homes -- purchase homes for our Seattle portfolio only increased by 65 for all of 2012. For all of our core markets, this is further supported by recent improvements in job creation, especially within our younger college-educated urban cohort, where unemployment dropped from 4.1% last year to 3.7% in January. Our resident base remains very healthy with rent as a percent of income remaining steady in the 17% range and the percentage of FICO scores above 720 continuing to grow.

For 2013 revenue guidance, I'll now address the four key drivers in more detail. Those are resident turnover, physical occupancy, base rent pricing -- meaning our net effective rates on new leases, and renewal pricing. For 2013, we expect adjusted same-store turnover to be approximately 160 basis points lower to 56.2% from 58.2%. This reduction is a direct result of exiting higher turnover Sunbelt markets like Atlanta and Phoenix. We would expect turnover in our core markets to remain virtually unchanged or slightly lower as move-outs, due to renewal increases, continue to decline as renters reposition themselves at their appropriate price point.

In other words, residents who have experienced back-to-back, double-digit renewal increases have since moved on and been replaced by higher quality resident who, on average, will receive a mid to high single-digit rent increase going forward. Our occupancy assumption of 95.3% is not impacted by dispositions and is identical to full year 2012 actual. Although we are trending ahead of target by 20 basis points, for both January and February. As David mentioned, renewal pricing continues to be strong and we would expect renewal rents achieved to exceed 5% on average throughout the year.

Finally, base rents, as we sit here today, base rents for all 107,000 same-store units are 3% higher versus same week last year as we begin to gradually move them up from their normal seasonal lows. For the full year, we would expect base rents to average 4% to 4.5% growth with lower growth in the first and fourth quarter and higher growth during peak leasing season. This is no different than years past.

So to recap, resident turnover will decline to 56.2% as a result of higher turnover market exits; occupancy of 95.3% identical to 2012 actual; renewal increases in excess of 5% for the entire year; and base rents to average 4% to 4.5% for the full year. For expenses, guidance on adjusted same-store unit count of 80,120 units is 2.5% to 3.5%, which is no change for our full 107,000 units same-store unit count, and this is in line with our discussion on our last call in Q3.

As we discussed previously, real estate taxes, payroll, and utilities, make up 68% of total operating expense. There is no change to this percentage as a result of the expected dispositions. However, the percentage of real estate taxes to total expense does move from 30% to 33%, offsetting a 30 basis point decline in growth from 6.5% down to 6.3% to really achieve a net zero impact for full year same-store expense growth. Utilities will have marginal growth of 2.5% as we continue to invest in green initiatives like LED lighting retrofits, and upgrading and optimization of central systems. Payroll should, again, be well under control at sub 2% while all other core operating accounts are flat to down, as we continue to find innovative ways to leverage our platform, optimize costs, and realize immediate benefit to our same-store portfolio as a result of adding the Archstone assets.

With that said, I'd also like to recognize everyone for the tremendous effort put forth over the past several months and especially those who are involved in the huge disposition effort. We are all energized by the tremendous amount of activity and even more invigorated and excited about what lies ahead.

All right. Thank you, David. Normally at this time, I would describe our investment activity and try to give a little color as to what we've acquired and what we've sold during the quarter. Clearly, with the Archstone announcement and all that has been going around here the last six months, there has been very little normal activity taking place here. Now in just a moment, Mark Parrell will go through the specifics about the capital market activities necessary for us to move towards -- forward towards a late February closing of the Archstone purchase along with our partners at AvalonBay.

But in addition to the capital market execution, there remained another critical part of our funding plan that I want to talk about and that was, frankly, very significant but manageable execution risk for us. That is the disposition of approximately $4 billion of non-core assets, representing 40% of our $10 billion share of the purchase of Archstone. But this was among the most important strategic benefits of the entire transaction for us. To not only acquire portfolio of high-quality assets in our targeted high [barrier] markets, but to do so with proceeds from the sale of assets in our remaining non-core markets and the sale of often older, more suburban or otherwise, non-strategic assets in our core markets.

Thereby, complete the last piece of the transformation of our portfolio, which will soon be comprised nearly entirely of the best assets in high barrier markets with housing costs far in excess of the national average, which we believe will provide superior long-term total returns. So for the last years we've worked to acquire all or some of Archstone, we had identified the assets that we would target for sale, should we be successful in our pursuit. We did all the work necessary to understand the value we might realize from their sale and we readied those assets for an immediate sales process.

Throughout the fall, as a possibility that we might be successful in our pursuit of Archstone increased, we slowed our acquisition pace and prepared for the launch of an accelerated level of dispositions. At the time of our late November announcement of our partnership with AvalonBay to acquire Archstone. As we discussed during our secondary equity offering, the funding strategy called for the sale of $4 billion of assets, the net activity was projected to take place ratably over the year, averaging about $1 billion per quarter.

Now since we will be borrowing at historically low floating rates to finance this disposition plan, the longer it took to sell the assets, the more positive arbitrage we'd enjoy in 2013, and during which time this portion of the Archstone purchase will be very earnings accretive. But the longer we took to sell assets, the more overall market and execution risk we faced While we are ready to bring assets to the market upon announcement, I'm happy to say that the reception to our offerings has been very strong. We now expect to close nearly $3 billion of dispositions in the first quarter, another $1 billion of dispositions in the second quarter, and $500 million in the second half of the year, significantly mitigating the execution risk of our purchase of Archstone.

I'm very pleased to say that all of this disposition activity has been done at our expected pricing, so this accelerated activity and risk mitigation did not come at a discount to any value whatsoever. However, as noted in last night's press release, it is a fact that this accelerated disposition activity reduced our expectations for 2013 normalized FFO by $0.13 per share from what we thought at the time of announcement of the Archstone transaction. But it's equally important to note that the timing of these sales will have no impact on 2014 performance.

On the development side of our business, we continue to be very pleased with the results of the new properties brought online are soon to be completed. The rate of unit absorption remains very strong and the net effective rents are in excess of our original pro forma in the most every case. Leading the pack is our 1023 Project in Manhattan, which is now 97% occupied at rents that are 13% above our original performance.

During the fourth quarter, we continued to look for new opportunities to add high-quality assets in great locations in our core markets through development when we acquired four adjacent parcels in Los Angeles located around the Howard Hughes Campus on the west side of the 405 Freeway. These sites are entitled for 970 total units and at the present time, we plan on building 545 units on two of the parcels at a cost of approximately $194 million at yields on current rents in the mid 5%s and an expected stabilized yield in the high 6%s. At the present time, we'll either inventory the other two parcels for future development or consider selling them.

We did start one development project in the fourth quarter last year, that is our co-development project with Toll Brothers of 400 Park Avenue South in Manhattan. When completed, we will own and operate 269 apartment units on floors 2 through 22, and Toll Brothers will offer for sale, as condominiums, 99 units on floors 23 through 40. Our share of the development costs are approximately $252 million. The project is expected to be ready for occupancy in late 2014, and our expected yields on cost at current rents is in the high 5%s with stabilized yield in the high 6%s.

We currently own 14 land sites and control 2 others, representing a pipeline of about 4,800 units with a development cost of nearly $1.8 billion, in great locations in New York, Washington DC, San Francisco, Seattle, and Southern California. In addition to the six projects currently under development by Archstone, we will also take ownership of four land sites and gain control of two others that we would expect to acquire. Five of these six sites are in the San Francisco Bay Area and the other in Washington DC, and of a total development cost of $1.1 billion.

We have the potential to begin construction this year on as many as seven of the EQR land sites, several of which were ready to start last year but we put them on ice while we dealt with the execution of the Archstone acquisition. With that now well in hand through our dispositions, our starts this year on EQR owned or controlled sites could total more than $500 million in New York, Seattle, San Francisco and Southern California. Several of the Archstone land sites may also be ready to start in 2013, but like our own pipeline, we will address all potential development starts on a case-by-case basis, with an eye on appropriate sources of funding.

So we remain very excited about our development pipeline and that which we will acquire from Archstone and think we will be able to add great assets to our portfolio in key locations, continuing to create value for our shareholders through our development business. So now I'll ask Mark to take you through our capital markets activities and our 2013 guidance, after which we will be happy to open the call to Q&A.

Thank you, David. I want to take a few minutes this morning and review our recent capital markets activity and then give some color on our normalized FFO guidance and how our disposition and funding strategy is impacting our normalized FFO numbers. I will also discuss how we expect our balance sheet, our credit metrics and liquidity to look post-Archstone and give you some thoughts about accessing the debt markets. I will end with a couple of accounting housekeeping items.

So we have had an extremely busy few months getting ourselves positioned to fund the Archstone deal. So just a quick review of that activity. Immediately after the deal announcement, we began our public equity offering, in which we sold 21.9 million common shares at a gross price of $54.75 per share for net proceeds of approximately $1.16 billion, which is about $53.11 net per share. We are very appreciative of the support of our investors in this extremely successful offering.

In January, we entered into a new $2.5 billion unsecured revolving credit agreement with the group of about 25 financial institutions. This new facility matures in April 2018 and has an interest rate of LIBOR plus the spread, which at our current credit rating, is 1.05% -- the spread is, and has an annual facility fee of 0.15%, or 15 basis points. This facility replaced the Company's existing $1.75 billion facility, which was scheduled to mature in July 2014. The bank syndicate is broadly diversified and all our existing banks renewed and increased their commitment to Equity Residential and we added several prominent financial institutions to the syndicate as well.

At the same time, we entered into a new unsecured $750 million delayed draw term loan facility with the identical bank syndicate. The maturity date of the facility is January 11, 2015, and is subject to a one-year extension option exercisable by the Company. The term loan has an interest rate of LIBOR plus 1.2% at our current credit rating. The facility is currently undrawn and is available in one draw made on or before July 11, 2013, and can be used to fund the Archstone acquisition or for any other corporate purpose.

With the completion of these financing activities and along with the cash on hand that we have, the Company has sufficient capital to fund its portion of the Archstone acquisition cash price while also fund transaction costs and require debt paydowns at closing. So we are comfortably able to terminate our $2.5 billion bridge loan facility commitment. So with the capital market's activity understood, I want to move on and speak a little bit about guidance. Year in and year out, the performance of our same-store pool of properties is the biggest driver of our normalized FFO. But in 2013, there certainly are a couple of other important pieces to the puzzle that can move our 2013 normalized FFO numbers materially.

First, as David noted, the timing of dispositions to fund the Archstone transaction and use to which we put those disposition proceeds will have a major impact on 2013 normalized FFO. Second, new store activity in the form of net operating income from the Archstone acquisition will constitute more than 20% of our total operating income in 2013, and will be a major factor in normalized FFO, but of course, it will not show up in our same-store annual stat numbers.

So now just a quick reminder on our funding strategy for the Archstone acquisition. Our plan for funding our $10 billion of the transaction does not change. We already sourced $3 billion of equity from the public markets and from Lehman. We expect to obtain $4 billion from dispositions of non-core assets, which as David Neithercut just said, is a process that we have well in hand. We plan to use our new expanded revolver and our new term loan to fund this portion of the deal, these dispositions, until these disposition transactions close. The final piece is we will assume slightly more than $3 billion of Archstone fixed rate and tax-exempt secured debt for a total up to $10 billion.

While our funding strategy for Archstone has not changed since the announcement of the deal, our expectation of the time it will take to complete our disposition plans has. By taking advantage of the strong market bid for our non-core assets, we have greatly reduced funding risk that does cause an increase [non] of dilution. To be able to do the dilution calculation, you need to understand how we plan to use the $3 billion of disposition proceeds out of the $4 billion, I mentioned before, that we expect to receive after the Archstone closing.

We anticipate taking $1.5 billion of the $3 billion in disposition proceeds and using them to pay down our revolving line of credit. At the end of 2013, we expect that the revolver will have a balance of slightly less than $200 million. We have included in the guidance the use of $1 billion of these disposition proceeds to pay down $800 million in principal of Archstone secured debt that would otherwise mature in 2017 but we are assuming, along with the related $200 million prepayment penalty. This payoff reduces our 2017 debt maturities to a more manageable level. Otherwise, our 2017 debt maturities, inclusive of the Archstone debt we're assuming, would have increased to a number slightly over $3 billion. The prepayment penalty and the related write-off of the unamortized mark-to-market premium are detailed for you on page 28 of the supplement.

The remaining $500 million we'll use for various corporate purposes including retiring the $400 million in unsecured debt that the Company has maturing in April 2014 -- or 2013, pardon me. We are planning on leaving the entire balance of the term loan outstanding from closing until the end of 2013. Because of the accelerated pace of dispositions and because of the new term loan, we no longer anticipate assuming any short-term floating rate secured Archstone debt. As David said, it was very important to us that we derisk the Archstone deal as quickly as possible. The steps we took with regard to the financing of the deal were done with that goal in mind. The actions we have taken on the capital market side and the expected dispositions leave us very pleased with our balance sheet, with our debt maturity schedule and with what our liquidity will look like at the end of 2013.

Measured at year end 2013, we would expect to cover our fixed charges at about 2.5 times to have a debt to undepreciated book value of assets ratio of about 40% and have a debt to EBITDA ratio of about 7 times. Without the Archstone transaction, we would've expected that our debt to EBITDA ratio in 2013 would have been in the mid 6s and our fixed charge coverage ratio would have been around 2.8 times. We expect liquidity at year end, and that will be mostly in the form of undrawn capacity on our $2.5 billion revolving line of credit, to be substantial at about $2.2 billion. We see development spending in 2013 of about $500 million, which has been factored into the liquidity planning and all the credit metrics that I just discussed.

Overall, we think it's wise to match the long duration of our expected ownership period of the Archstone assets with a set of liabilities that have a similarly long duration. Over time, we will look to extend or term out the $950 million in Archstone debt maturing in 2015 -- or 2014 and the $1 billion in Archstone debt maturing in 2017 that we are assuming. We will be opportunistic in looking at the unsecured market and may also take advantage of the favorable extension terms offered us by the existing lender on some of the 2017 debt and we will also consider the preferred market as well.

Finally, just a couple of quick details to cover on the accounting side. Just as our normalized 2012 FFO did not include the $150 million of Archstone termination fees, our normalized 2013 FFO will not include approximately $189 million of primarily Archstone-related transaction costs or any prepayment penalties that we may end up incurring. On page 28 of the release, we have added a new disclosure schedule that list 2013 non-comparable items. The dollar amounts on page 28 tied to the per share numbers at the top right corner of page 29. We think this disclosure will help investors bridge the larger than usual gap this year between our normalized FFO guidance and our funds from operations as defined by NAREIT. Now I'll turn the call over to Alicia for the question-and-answer period.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

David Toti, Cantor Fitzgerald.

I have one question for you, David, it's more of a strategic one around, obviously, commentary that your sales have accelerated beyond our expectations which is a great sign. The question then is, why not be a bigger seller in this market? Why not take the portfolio and distill it even further and intensify that quality and that growth profile from your current projections?

So $4 billion is not enough for you, David? (laughter) Selling these -- our disposition program this year will put us in a position where we will have exited Tacoma, Jacksonville, Atlanta, and Phoenix. We will still have some exposure in some markets such as Orlando and the Inland Empire and what we call our non-Boston/New England portfolio. So we will still have some product to sell and as we get further in the year, we will see what the market brings.

But we acknowledge we have a little bit more to do. We think we can do that over a more extended time period and perhaps be more strategic with that. But, I think $4 billion is an awful lot of dispositions and again, most of them will be done the first part of the year and we'll just see what happens in the second half of the year.

I won't argue that is not a big number. Are there markets that you would say would be potentially flagged as the second level of exit? Can you disclose something like that?

The second level of what?

Of exit. Are there markets that you would say -- okay, if we get down to the number, we're --

No, I think we're getting to the point where most of the dispositions will be non-core assets in our core markets. So, more older, suburban things that, frankly, won't be able to rotate out of in the new assets at a much tighter spread then when you're selling non-core markets and allocating in the core markets.

Okay and then I just have a follow-up question relative to the dynamics in some of your markets where the affordability and [margins] are somewhat extreme, like in Atlanta and the Southern California. Can you just comment relative to those two markets on turn rates and move-out rates? In some cases, you're seeing some rent strikes and those dynamics don't really make sense to me on the surface.

Dave, this is David Santee. You've cracked up on me a little bit at the end. As far as Atlanta goes, Atlanta is doing very well. I think that's more about -- we've sold down that portfolio. Historically, we were an outside perimeter organization. Early in the 2000s, we acquired assets in Midtown/Buckhead area, and that is really the last of our remaining assets there. So, I think Atlanta is probably no different than any other market. You're seeing an urban attraction, people looking for great walk scores, and so those properties are doing well. Atlanta is -- they are doing a [$1.6 billion] year to date so far.

Southern California is a very vast area. I would say that the rent to income really has not changed there. It has been 20%, it's always been 20%. We continue to have assets up in Santa Clarita. We have a lot of new store assets that are more urban, near more urban centers, LA, West LA, what have you. So, again, I think one of the more important things to remember is that LA, Orange County, San Diego, those rents are still not at peak levels that we saw in 2008. So I think we still have a lot of runway left in Southern California.

Alex Goldfarb, Sandler O'Neill.

I'm sure your families are happy to have you guys home on the weekend now.

Who says we're home on the weekend? (laughter)

Well, it's too cold to play golf out unless you're jetting down south every weekend. Just some quick questions here. First, big picture and then just some guidance stuff. Archstone, obviously, spent a lot of money establishing a brand. You guys have gone the opposite route and not gone the branded strategy. Now that you're going to have all these Archstone communities that have Archstone plastered everywhere, are you going to keep that brand for awhile and see maybe if it is worth keeping? Or your view is, you know what, let's just bring it. Let's just rename all those properties to a generic?

Well, I'll answer that question in two parts. I'll let David talk about our perspective by branding, but I'll just start out by telling you that our arrangement with AvalonBay is the name will be off all of the Archstone buildings by the end of 2014, for the Archstone brand itself will not continue. I will let David talk a little bit about the way we've thought about branding.

Yes, so, I have been to most of the Archstone communities. I would tell you that, in their structure, I think they had probably 14 different marketing regions, so to speak, and each property is branded to varying degrees. I would say the more high-end communities are more hotel-like. There is not a lot of Archstone logos everywhere, but then again, some buildings have pretty significant Archstone logos and what have you, that we are currently having our marketing folks go property by property, assess what we need to do. Then we will make decisions over the course of next year and then most likely execute into 2013 or 2014.

Okay. Okay, that is helpful. Then second, just a few quick guidance things. Does the guidance for the year, does that reflect the accounting treatment for the Archstone acquisition?

As best -- Alex, it is Mark Parrell. As best as we can determine it, and I make that answer for this reason. Because the accounting rules require us to book the acquisition at fair value, and because fair value includes our stock price, the $2 billion or so of stock that we gave to Lehman will be repriced on the closing day and issued to them on that day. So that will have a big impact on how all the assets and all the rest of the things look and on certain fair value adjustments we make to things like retail leases, I'll tell you at the margin it doesn't matter much and we gave it our best guess. But there could be a little bit of noise there as well.

Okay, but as far as the debt coming over and what have you, and all that. Basically, the numbers are pretty good; there may be some tweaks, it sounds like. Then just finally on that front, what is the impact to Archstone on a same-store perspective? If you have your guidance of the 4.5% to 6%, Archstone you expect to do better than that, worse than that, on par?

This is David Santee. Basically when we are head to head, block to block, say Manhattan, say DC, we would expect those properties to perform very similar, identical, to our own properties. Again, we've had a long-term relationship with Archstone. We know what their previous performance has been. It hasn't been too dissimilar from our own. So, on the revenue side, we would expect to see similar performance compared to similar geographically-located assets.

On the expense side, Alex, and some of these other things, it is just not comparable, because the companies have different capitalization policies and things like that. They're just really -- and plus, when the acquisition occurs, real estate taxes will be repriced and things will occur so a same-store expense comparison won't really make any sense.

Okay, okay, but okay, that -- but the revenue comments are helpful. Thank you.

Dave Bragg, Zelman & Associates.

On G&A, is $14 million a quarter and appropriate run rate going forward or is this outlook for 2013 inflated temporarily as you work through this integration of Archstone?

No, that's not -- it's Mark Parrell, that's not a correct -- the guidance number that we put out there of $55 million to $58 million. It is going to be front-end loaded because of some accounting conventions that we use, mostly related to compensation-related grants. So, you can spread it evenly but I'll tell you that the number will start up higher and lend up, so call it, in the first quarter, maybe $16 million and by the end of the fourth quarter, it will end up something like $10 million. So it will go down quarter by quarter over time and we think end up right in the middle of that range.

Okay, great. That makes sense. Thanks. Then on a related note, Mark, the property management costs as a percentage of revenue, I think over time, you've been successfully pushing this down to now below 4%. Once you have the dispositions executed on an Archstone integrated, where does that ultimately settle out?

Yes, I think that goes and this is -- again, there's some variability here, but that probably goes from about 3.75% to 3% and some of that has to do with just revenues going up so much. But property management costs in total are very well in check, as David Santee has said. They will go up in total this year, so property management costs in their totality, not the same-store but in totality, will go up somewhat this year. But as a percentage of revenue, because revenue is growing so well, it will go down an approximate, call it, 3.5%.

Okay. The last question is on development. Last quarter on that call, you suggested near-term start potential of about $450 million and then an additional potential $700 million of starts in 2013. Now you're talking about $500 million of potential starts in 2013. So, is this pullback on development solely due to the focus on Archstone or are you finding development to be less compelling right now?

No, it was certainly the former, Dave. We have slowed down, as I said in my prepared remarks. We had development deals on our inventory that could've started in 2012, which we postponed, unwilling to make that capital commitment -- that capital obligation with all of the execution risks we were looking at as part of the Archstone transaction. So, we just postponed that but we continue to think that development makes a lot of sense for us. As I said in the past, I don't think you'll see us ramp development up as a percentage of our balance sheet as some of our peers, but I think you can count on us as a $500 million to $700 million or so annual starts on an average basis.

Eric Wolfe, Citibank.

You talked about the great demand, I think is how you put it in your press release last night for the assets and how this has allowed you to sell assets a little bit earlier than you thought. Just looking beyond the Goldman/Greystar deal, can you talk a little bit about the buyer pool you're seeing for your assets and how this might compare to what you were seeing last year?

Well, on a one-off basis, or a small portfolio basis, I don't think it's changed at all. It's a lot of local and regional people, many of whom have got access to institutional money to do smaller transactions. The one thing that did change, as a result of selling so much property, was we had a lot of big buyers come to us, people that might not be interested in a $50 million one-off deal, but be interested in deals of size. So that did open up the buyer pool somewhat for us and that did lead us to doing the Greystar transaction. But most of the deals are being done on a onesie-twosie basis for the same kind of local and regional fellas that might have been buying these assets back in 2012.

Got you. These bigger buyers that you referred to, these are institutional buyers that are always active or are they new buyers that are looking to put new money to work? Is there a way to qualify those types of buyers?

Well, these are more financial buyers that are looking for almost any real estate in size, or they need to play in size, which has made it difficult for them to play in the multi-space and obviously, with us selling as much as we did, they came knocking on our door. We were reluctant, frankly, to do a big deal, because we did not want to get ourselves in a position where we had a lot of eggs in one basket.

But we had enough going away from Greystar that we were comfortable to do this transaction with them. They were willing to do it in a structure that gave us confidence that they would be there at closing and they have $150 million of that risk. So, but again, there's -- they are either financial buyers who needed transactions of size and this was an opportunity for them to get into a multi because many of them are short multi today.

Right, right, understood. Just in terms of the pricing, you said that the pricing was in line with your original expectations. It sounds like from commentary from you and your peers, cap rates really haven't moved up all that much which is a little surprising since growth has slowed. So I'm wondering why you think that's been the case that cap rates have stayed somewhat stable even as growth has accelerated a little bit. Obviously, it's still very, very strong but it has slowed, as you mentioned, in your remarks.

Well, look, these are still huge spreads to underlying treasuries and on a spread to financing costs, it is the best arbitrage, even at these rates, that people have seen in their careers. So you can finance it in the mid- to low 3%s today. So even at these rates, these continue to be very good leverage returns. Frankly, there is a shortage of product and there is a competitive bid for product.

Got you. But the financing on the private side, have you seen that change at all? Has it gotten more aggressive in terms of leverage or has this just been -- is it just literally just the dearth of supply out there of quality assets that's making people chase a little bit?

Well, I'm not sure I can comment -- it's Parrell on all the buyer motivations, but on the debt side, Fannie just announced it had a record year at $33 billion or so of -- and I understand that Freddie has done something that's pretty close to that number. So I think the secured markets, just the GSE market is just very, very good. When you can borrow for 10 years in the low to mid-3%s, maybe not having any amortization for a couple of years, the cash-on-cash return when you're buying product from us at a 6% just makes a ton of sense. I think it is compelling, in a world starved of yield.

So I would say to me, none of this is really all that surprising. Fannie's rates haven't changed their advanced rates. They've tightened a few things but not materially. So Fannie and Freddie continue to be very good sources of capital for our buyers and almost all our buyers are utilizing GSE debt at this point.

Rob Stevenson, Macquarie.

Mark, in your same-store expense growth of 2.5% to 3.5%, can you talk about what the underlying major buckets there are? It seems low given less than 25% or so of your assets are in California and limited from a property tax standpoint by Prop 13, just what you guys are doing to control expenses around the other buckets.

Sure, well, I think David Santee is going to give some specific color, but I can talk about a couple of the line items. He's talked a lot about real estate taxes and that is certainly the negative; that is the item that is going up the most. In general, thematically, everything else is well under control and then you've got insurance, which is a small line item for us, about 3% of our expenses.

That is going to go up again, and our budget this year is 12% to 13% increase in that line item, driven by probably a 15% or so increase in our property insurance premiums which renew every year in March. So I will let David Santee give you some commentary, but we don't -- again, we didn't see a difference in expense results between, I'll call it, current same-store of 107,000 units and new same-store of 80,000 units, the year-end same-store of 80,000. So David, do you want to --?

Well, as far as real estate taxes go, on the original same-store set of 100,000 units, we were anticipating 6.5% growth and really, almost 50% of that comes from California as well as our 421a abatement or burn-offs in New York City. Everything else is very small percentages, so that's the key driver on real estate taxes. Then when you look at the three groups, when you take real estate taxes, payroll, and utilities, which is 70% -- or 68%, that group is growing at 4.2%. Then everything else, so as an example, selling all of our garden communities in Phoenix and Jacksonville and Atlanta, there is pick-up in grounds expense, but it's just -- they're small numbers. So I think we are very comfortable with our expense range and really, just like 2012, real estate taxes is the key driver.

How much is real estate taxes as a percent of the operating expenses? (multiple speakers) 3%, what is taxes?

In the current same-store set, the full 107,000, it is 30%. In the year-end same-store of 80,000 units, it moves up to 33%.

Okay. All right, great. Then David, what has been the conversations that you guys have had with Lehman about the holding period for their shares? Has the Board discussed putting in place a stock repurchase plan or some other mechanism to make sure that if they decide to exit in a relatively quick fashion, there's not a material disruption to your stock price?

Well, I would respond by saying first things first, Rob. We've got an awful lot of work to do to get to the closing table and actually acquire Archstone and issue that stock. I will tell you that the registration rights agreements were among the most heavily negotiated parts of the entire transaction. I can tell you that shortly after closing, we will take the time to sit with them and make sure that we have an open dialogue with them about doing what we can do to help them meet their goals and have it not be a disruptive process.

The only thing I just ask you to bear in mind is that they are not in any hurry. They've got quite a long -- or quite a bit of runway in which to complete the liquidation of the Lehman estate. If -- and I feel if Archstone truly was an option for them, they would've been looking at an awful long time to monetize their interest. So these are very smart people. I think they are very patient people.

They are charged to maximize the return to the creditors. I don't think that they will have done all they have done here to do anything hasty. I think it will be a very thoughtful process, one that I know we will be engaged in with them, and try to help them do that in the least disruptive manner as possible.

Ross Nussbaum with UBS.

David, just to follow-up on that point with respect to the registration rates, is there any ability to sell the shares in the open market versus a block trade or an overnight offering?

There is an ability to both dribble the shares out in what amounts to a reverse ATM transaction. There is also the ability to do block trades that Lehman can do. They can use executives to go on road shows. They have a fair amount of flexibility. And understand, that flexibility inures to our benefit. We'd like them to get out of the stock in an orderly fashion and as David said, we intend to facilitate that exit to the best of our ability.

Okay. On the FFO front, can you clarify specifically what is in the guidance with respect to the mark-to-market on the Archstone debt? Is there -- we're coming up with a number that's $0.11 a share, give or take?

So let me just direct you to page 27. So this is the Archstone interest expense and just total interest expense. So, we give you detailed, both, again, on page 27 of interest expense inclusive, of course, in both cases of Archstone, but it also has the capitalized -- or excuse me the mark-to-market in it. So you can see two different numbers at the top. It's got a $477 million and $409 million(sic-see press release "$498.8 million") range, and then in the footnote of $518 million to $541 million range. So the effect of the mark is, give or take, $41 million, $42 million.

You asked about what the interest expense was for Archstone. It's about $0.11, call it, $0.12-ish for the mark. I'm sorry, the mark is about $0.11 or $0.12-ish. The total amount of Archstone interest expense for the year, let me see if I can find it for you here -- balance effect. Yes, that's about $0.19 a share is our calculation.

Remember, we have in our guidance the probability of repaying some of that Archstone secured debt in the second quarter. Remember that comment I made about repaying $800 million? So that's a second quarter event, give or take, for us. So I have $0.19 of Archstone interest using the mark-to-market in our guidance right now.

Got it. Okay, that is helpful. Finally, David, on Avalon's call, they used the term, transition, a transitional year in some of their markets to describe 2013, with better times potentially ahead in '14 and '15. At the risk of asking you to comment on what a competitor said, I'm just curious what you thought of that comment? Because your numbers wouldn't suggest necessarily that this is any transition year.

Well, I'm not -- in preparation for our own, I have not spent a lot of time reviewing or reading anything what our peers or competitors have said. I would suggest to you that, depending on who you speak to, there's an expectation of better job growth and better household formation down the road. Based upon what we see as new supply in 2013, 2014, 2015, I think the fundamental, if those household formation expectations and if those job growth expectations hold true, you'd see better supply and demand fundamentals in future years.

Now, who knows what those numbers will be. I can tell you that estimates for 2011 were rolled back and for 2012 were rolled back, so one never knows. But based upon what we see as supply in '14 and '15 and what other people say about job growth in household formations, you do see, if you use those numbers, a better supply and demand picture.

Andrew Rosivach, Goldman Sachs.

Hello, this is Matt Rand on the line with Andrew. Two questions for you. First, AvalonBay gave a sense that there was a $0.15 of dilution in their 2013 guidance as a result of the common stock offering held before the Archstone deal closed. Can you say what the comparable number would be for you guys?

Yes, I would say that number would be, give or take, $0.05. The fact that we have -- we're carrying around $1.1 billion, $1.2 billion of cash and the related shares for January and February, not really using the money till the end of the year, not giving the Archstone NOI til the end of February, has that general impact on us.

Okay. (multiple speakers)

Remember, our offering was smaller than theirs by 50%.

Got you, got you. Okay, thanks. Then the second piece is you gave the guidance of how much doing all of these asset sales is going to dilute calendar '13. What is the run rate once it's all in place? So what would be, say, your fourth quarter level of dilution from these sales?

Well, by the time you get to the fourth quarter, you've got pretty well all the dilution you can have, right? Because there is only, in our current guidance, all but say, $200 million to $250 million of the sales that we are projecting will have occurred. So when you get to the fourth quarter, there isn't between the third and fourth quarter, if that is your question, much in the way of incremental dilution. In fact, looking at the numbers specifically, it really -- there isn't much between those two quarters because again, you've not sold a great deal of incremental product between those quarters.

Got you, got you. So said a little bit differently, what would be a run rate, almost like a '14 dilution number, relative to the calendar '13 that is in your guidance?

'14 dilution number, so the question is the remaining dilution in '14 that is not recognized in '13?

Exactly, yes.

Okay, I'm not sure I have an exact number, but we'd say maybe, give or take, on the order of $70 million.

Tom Truxillo, Bank of America Merrill Lynch.

Mark, I appreciate all the color on the outsources and uses of capital. You mentioned leaving the $750 million delay draw term loan out until the end of 2013. But that seems like a pretty cheap cost of capital even in today's environment. Why not just plan to leave that out until '15 or '16 with the one-year extension? Then secondly, you mentioned the $950 million of Archstone maturities in '14 or '15, I missed which one it was, and $1 billion in '17 and that you'd look to refinance that. Can you talk about prepayments that are associated with that and maybe what those rates are and see if it would make sense to do so?

Sure, you are breaking up just a bit but the first question on the term loan, I did not mean to imply that we will definitely pay it off at the end of 2013. In fact, that isn't the plan currently. It is cheap money; we don't have that much floating rate debt on the balance sheet in general. So as opposed to doing some long-dated swap, it seemed to us that using this delayed draw term loan and having a little bit on a revolver that's this big was a thoughtful way to balance our fixed afloat mix. On the Archstone '14s, I recall that interest rate and I don't have that right in front of me being, give or take, 6%.

When we affect it by the mark-to-market on the debt premium, it will be more in the 3%s, so there is that accounting difference. The 2014 Archstone debt becomes due in November 2014, pre-payable at par in May of '14. Probably not a lot of reason to run out and deal with that by prepaying it. The prepayment penalty is very substantial. Again, I can't give you an exact number offhand, but I'm guessing you can do that calculation pretty readily.

2017, that debt is the same structure of pre-payable at par in May of '17, maturing finally in November of '17. That debt is, I think, a little over 6%, maybe 6.5% as a coupon rate. We have the right to extend some of that debt with the lender and that is one thing we are considering doing. We can term it out in the unsecured market. I think the unsecured market, and you'd know at least as well as I, is very open to companies like EQR in the low 3% range for 10-year money. We would think about doing preferreds as well and we would consider taking advantage of the extension option with the secured lender. So all of those are on the table to deal with the '17s. I'm not particularly worried about the '14s; we'll just deal with those as they come, but it would probably be a good idea to add some duration to the '17s but we are in no rush to do so.

Okay, and you talked about you're leaving some floating rate out there. How do you feel about your secured debt mix right now, given what you're assuming from Archstone? Does that have any -- is that an impact on what you decide to do with this 1.9?

Yes, great question, absolutely. The implication is that the unencumbered pool is smaller because of Archstone, that is absolutely true. That is mostly true because every Archstone asset we are acquiring has secured debt on it. All the assets we're selling have no secured debt on it. So there is a little bit of a pinch point in 2013.

That said, I still expect total unencumbered NOI to be 55% of -- 55% of our total NOI will be unencumbered in 2013 at the end, and that number will just improve. All things being equal, we probably would like to do a little more unsecured debt and have that number go up, but we are going to just -- we have enough debt to deal with here where I think we could access the unsecured market. We could turn some out in the secured market and it still would leave us with some great numbers. Our debt yield on the unsecured side is 17% so unencumbered NOI divided by -- so it's a cap rate, right, divided by total unsecured debt. That's got to be one of the best numbers out there. This unencumbered NOI is approaching $900 million in its totality; it is a very, very strong company on the credit side.

Jana Galan, Bank of America Merrill Lynch.

So you've been a very active capital recycler and once Archstone in your dispositions close, you'll have the target portfolio that you have been working toward. I was curious if this will change your focus to do more redevelopment? Maybe if you could talk about what the potential is for enhancement CapEx in your portfolio and in the Archstone portfolio?

Just to give you some additional disclosure on CapEx, so first of all, just a comment on the Archstone CapEx. Our view and we are not, of course, yet in the properties as the owner, is that these properties were pretty well maintained. We're not seeing a great deal of deferred capital in the Archstone system. We are seeing potentially and we're still diligencing this some opportunities on the [rehab] side. There will be more detail about that later in the year and I'm not in a position to give you much there. But certainly, there was probably less capital to spend on rehab then maybe there is at EQR and we're going to take a hard look at that.

We've revised our CapEx guidance on page 24, and you can see that. We now expect to spend about $1,500 per same-store unit; these are the EQR 80,000 units base versus $1,200 which is about what we spent, or $1,225 in 2012, so our remaining 80,000 units have a lot more rent per month. So our average rents per month are going to go from $1,700 now with 100,000 units to about $1,900 with 80,000 units. You're going to see an increase in CapEx, consistent with additional building improvement-type costs that you have in high-rises, which is a lot of what we'll own when you get down to that 80,000 units. So your question on Archstone, just to sum it up, is we feel very good about where we stand on the capital side with Archstone. We see some opportunity there but again, we need to get into the properties and really run them for a little while to be more definitive on that.

Just in terms on a capital recycler, we'll always be a capital recycler. We will always be trying to sell slower growth properties and reinvest that capital in higher growth assets. We may not be doing it at the same run rate that you've seen us go run at over the last six to eight years as we've changed the complexion of our portfolio. But you also won't see that be done at the cap rate spread that we've experienced over those half-a-dozen or eight years or so. We'll be selling assets in core markets to buy assets in core markets, which means the dilutive impact of that cap -- the initial dilutive of that capital recycling will be significantly less than what it's been over the past few years. So we'll always be making -- be looking at our assets, and reviewing our portfolio, ridding ourselves of slower growth assets and trying to reallocate that capital into deals that we think will provide us a better long-term return.

Andrew McCulloch, Green Street Advisors.

Most of my questions have been asked, but just one follow-up for Mark. As you guys continue to sell assets and refortify your balance sheet, do you see a single-A credit rating as a possibility come '14?

Again, it is the first things first. Right now, to do that, I think we would need to complete the disposition program as we planned. We need to be very -- get up the whole integration done and over. What I would say mostly is, what is the advantage of that? I'm not sure that we would get much of a savings in terms of debt costs to make a promise to our fixed income investors and the rating agencies and tie up our equity investors with a much lower leverage ratio than we have already.

So I just don't know that I think the risk reward there is all that beneficial. But I think over time, naturally, this portfolio gravitates to that rating. It is just whether, as a management team, that's the right thing to do is a trade-off because it does come with obligations as it relates to leverage that I'm just not sure we want to undertake.

Rich Anderson, BMO Capital Markets.

Sorry to keep you going here, but, David Neithercut, if you had known -- you've seen deceleration in your same-store performance this year. If you knew that, say, 2015 would be flat or negative in terms of same-store growth, would you still have pulled the trigger on this with a long-term mindset or would that have held you up?

Look, I'll answer your question just by saying, Rich, that we think that, over the long term, trading out of the assets that we are trading out of to buy the Archstone portfolio is a terrific long-term opportunity. Regardless of what we thought 2015 might bring or might not bring, just looking at the -- what we thought we could sell our current portfolio at and what we could buy the Archstone portfolio at, we thought that was a great trade. Again, maybe there will be bumps in the road in later years, but we think that we will look back on this in 2020 and think it was absolutely perfect, spot-on, strategically important thing for us to do.

Okay, fair enough. You mentioned always constantly looking at the portfolio and repos -- not re -- portfolio management-type of activity on an ongoing basis. Do you think that there will be a larger percentage of dispositions out of the Archstone portfolio than the EQR portfolio, or do you think it will be equivalent?

Well, I think at least for the foreseeable future, you will see more EQR assets. The Archstone --

After -- I should say after the $3 billion -- $4 billion or so that you're doing now but once you're steady stream.

Like I say, when we -- we're still going to have exposure in the Inland Empire, we'll have some exposure in Orlando. We'll still have some exposure in, again, what we call our non-Boston/New England portfolio, which for those of you who have been around awhile, it means growth. So I think you'll probably see more sales of EQR assets in the foreseeable future than of Archstone asset.

Okay, interesting. Why do you think, maybe a question for Mark or someone else, why do you think your acquisition costs were $26 million and AvalonBay's were $123 million? Obviously, there's -- they're two different -- they must be two different numbers but maybe you can help me with that?

Well, they are just estimates; we give a little bit of a breakout. I thought when I looked, that I thought they were broadly consistent. Clearly, we're doing the same things here. Most of these costs are termination and severance costs. There's also some transfer taxes that there's been developments on the positive side and that is a very large number in between our two earnings calls, and that also, I think probably influences that estimate. So, I would say that's the answer.

Okay, and as long as I've got you, Mark, you mentioned 7 times debt-to-EBITDA as the year-end target. What will that number be right when you close Archstone? I'm trying to get a sense of how significant of a change that will be.

I'm going to have to do this a little off of memory because I don't have that here, but I think it will be probably on the order of 7.3 to 7.4 times.

Okay, okay. On the issue of normalized FFO definition, you're including the mark-to-market in that number?

We are, so our guidance does benefit from that mark, correct.

Okay, interesting. Then last question to David, not to forget about you, very early on in the conference call, you said the higher-quality residents coming in replacing those that are leaving that got set up with the big rent increases that they've been enduring. Why do you think they're higher-quality residents?

Well, they can afford the higher rents. (laughter)

Why are they -- why is that? Are they more wealthy than the people leaving?

One would assume.

But why?

It is really, probably the -- if you want to take it to the extremes, go to San Francisco and Boston. That's -- those are two highest turnover markets. Boston saw a 900 basis point increase in turnover last year. Reason for move-out due to rents being too expensive for most of last -- well, for all of last year and still through this year, is increased to expenses. So, 30% of move-outs in San Francisco were to expenses. So one can only assume that if someone moves out that can't afford to pay $2,000 and someone moves in and can pay $2,000, that, that's probably a more healthy resident.

I think that, as David said, we've seen our FICO scores continue to improve.

Tayo Okusanya, Jefferies.

Sorry to keep the call going. Just two quick questions. Could you talk a little bit about Archstone integration and what ultimately the plan would be to make sure you get the best of both worlds in regards to what you like at Archstone and what you want to continue to keep at EQR?

So this is David Santee. I will tell you that this has been a very exciting exercise. Again, we've had a long-term relationship with Archstone going back to our partnership with LRO. So I wouldn't say that there is anything surprising. I think we've known our philosophical differences from an operating perspective. I think that, A, they have some great ideas. I think that we see things that we're well ahead of them on from a technology perspective. I think we will -- as I talked to the Board early in December, we're -- our portfolio is improving.

Our portfolio is different than it was 5 years ago, 10 years ago, and certainly, very different than 20 years ago. Our thinking has to continue to evolve. I think that's what we're doing is, we're evolving as our portfolio evolves. There are definitely synergies. There are definitely immediate benefits that will create to our same-store portfolio more from just how we expense items, but more importantly, as an example, giving us high concentration in DC just gives us more bargaining power on a lot of goods and services.

Got it, okay. That is helpful. Then again, post-Archstone with the increased exposure to DC on some of the supply issues going on in the DC market. Can you talk about how you're thinking about that and if there's any possibility of you guys reducing your exposure to DC as part of your future assets there?

Well, I will say that we currently -- of the properties that we have either sold or have under contract, since the announcement of Archstone, about 3,000 units are coming out of Washington, DC. Just in terms of general how we're seeing the DC market with new supply and all, why don't you comment on that, Dave?

Yes, so, relative to Archstone, I think that's a very favorable picture from the DC, downtown DC perspective. We have plotted all of our communities, all the Archstone communities, all the new construction on one of our map applications. The great thing about DC is all of the Archstone assets are pretty much in a straight line, Northwest straight up Mass Avenue and Connecticut Avenue. There is virtually one development that has just broken ground that's remotely close to those properties.

Now, when you go down to -- when you get to NoMa, you can stand on the roof deck of 425 Mass and scan the horizon and see 15 cranes, which is primarily NoMa, it is not all apartments, but certainly most of the apartments and then north up U Street. So for the most part, I think DC really is -- really suffering from the fog of the uncertainty of the fiscal cliff. I think most of the damage that I think the fog has created more damage than actually the outcome of going over the fiscal cliff. Does that answer your question?

That is helpful, that's in good context. Thank you very much.

I'm showing no further questions in the queue at this time. I'd like to turn the conference back to management for any final remarks.

Terrific. Thank you all very much for your time today. We look forward to seeing many of our investors down in Florida in early March. Thank you very much.

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