住宅地產 (EQR) 2013 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Equity Residential Q2 2013 earnings conference call and webcast on Wednesday, July 31, 2013. For the presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

I'll now hand the conference over to Marty McKenna. Please go ahead, sir.

Thank you.

Good morning and thank you for joining us to discuss Equity Residential's second-quarter results. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; 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 the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

And now I'll turn the call over to David Neithercut.

Thank you, Marty. Good morning, everyone. Thank you for joining us for our call today.

Last night we were very pleased to report our operating results for the second quarter and first half of the year, which showed continued strong apartment fundamentals across our markets. As expected, San Francisco, Denver and Seattle continue to lead the way. And also as expected, we're beginning to experience weakness in the Washington DC market. Last night we also reported that we currently expect our full-year same-store operating performance to be right on the guidance we provided in February, with a slightly negative impact on expenses due to real estate taxes, which David Santee will address in just a moment.

With respect to revenues and controllable expenses, we are very much on our numbers. And that comes despite having integrated 21,000 new apartment units into our new-store portfolio, while also overseeing the operations of 24,000 units that we disposed of during the first half of the year. And please don't underestimate the effort it takes to run a disposition effort. It really requires a great deal of time and attention through the entire sales process. So, our teams across the country have done a fabulous job so far this year delivering the goods on all fronts -- same-store performance, new asset integration, and asset sales. And I send my most sincere thanks and congratulations to our investments and property management team for a job very well done.

David Santee now will give you a bit more detail about fundamentals, and what we're seeing across some of our markets today.

Thank you, David. Good morning, everyone.

Today I will be discussing the key drivers of our operating results for the quarter, as well as providing brief highlights for each of our core markets. And then close with an update on the Archstone integration and operating performance.

As reported last night, our 4.9% revenue growth for the quarter was dead on our projections that drive our full-year guidance. Occupancy for the quarter improved to 95.3% as a result of healthy demand across all markets and reduced resident turnover. A part of the turnover for the quarter declined 20 basis points. And as we discussed last quarter, we continue to see benefit from our concentration of assets by realizing an 11% increase year to date in our same or intra-property transfers.

Home-buying across the portfolio increased 90 basis points quarter over quarter, from 12.1% of moveouts to 13%. This 90 bps increase equates to 102 incremental moveouts to buy homes versus same-quarter 2012. With most of the increases coming from Washington, DC, Seattle, and Boston. All other markets were either flat or showed market declines, most notably San Francisco which fell 180 and 160 basis points in Q1 and Q2, respectively. Now, operating from a position of strong occupancy and low exposure allowed us to enter the peak leasing season with base rents in our projected range of 3% to 4%. And achieve renewal increases of 5.6% for April, 5.6% in May, and 5.5% in June. With July recently closing out at 5.4%. Looking forward, quoted increases for August to September averaged 6.5%. And we would expect to achieve our normal 150 basis point spread, resulting in net increases in excess of 5%.

While it's only a matter of time, our expense growth of 3.6% has brought our streak of 24 quarters of 3% expense growth or less to an end. At 32% of total expense, it's no surprise to anyone that real estate taxes are the key driver. And as a result, we have revised our full-year tax growth to 7.1%, driven mostly by a 38% value increase in Colorado. Our 7.6% real estate tax growth for the quarter represents a catch-up accrual to end the year at 7.1%.

Additionally, as we discussed on our Q1 call, natural gas has been trading in a very tight range. But it's still 20% to 30% higher than the lows of 2012. That, coupled with a 50% increase in heating oil costs, will produce full-year expense growth at the high end of our range. As we have discussed previously, real estate tax, payroll and utilities account for 69% of total operating expense. It's important to know that year-to-date, excluding real estate taxes, expense growth amounted to only 1.7%.

Taking a quick trip across our core markets, I will start with Seattle, which continues to outperform our expectations. Absorbing over 4,000 units in Q2, the delivery of new units, especially Belltown and downtown, appears to be well dispersed and orderly with strong occupancy and base rent growth in the mid single digits. Bellevue and Redmond and other markets north continue to lead the market with base rents currently in double-digit territory.

San Francisco shows no signs of letting up, with year-to-date base rent growth up 14.9%. To date, we have seen absolutely zero impact in North San Jose from new deliveries. In the past 45 days, we have leased 77 of the first 107 units that have come online at our new Domain development at rents above our performance. Additionally our new Archstone Santa Clara community, located in Ground Zero of North San Jose, is 98.4% occupied, with a 3.6% exposure. And outperforming our pro forma revenue through July. Los Angeles and Orange County continue to strengthen, with base rents up year to date 4.5% and 4.6%, respectively. Although less robust than our initial expectations, the Beach Cities, Tri-Cities and Mid-Wilshire remain very healthy. And have moved to double-digit rental rate growth in the last 60 days. Orange County has performed consistently throughout the year, as limited new supply and an improving job picture should produce steady out-sized revenue growth in the near term.

Moving on to San Diego, I guess it's no surprise that the ship has finally come in. And with the reorientation of military focus to the Pacific Rim, and minimal new supply, we would expect a more stable operating environment with steady, improving rent growth. Beginning in the year with flat-based rents, current year-over-year base rent growth has been slightly better than 3%.

Moving on to the East Coast, Boston continues to remain solid, with continued job growth in the healthcare and education sectors. We would expect, and are seeing, a move to a more normal rent growth environment, currently 3.5% to 4% year over year, as Boston is further along in the cycle, coupled with a slug of new deliveries in downtown later this year. Manhattan continues to see strong demand from an increasingly diversified renter pool. As buildings began to reopen after Hurricane Sandy, we saw some minimal price pressure early in the year. But the typical summer demand is now upon us.

Brooklyn has come on strong with double-digit base rent growth. While we've seen more prolonged softness in Jersey City as a result of modest concessions being introduced into the market. And the weekend PATH closings made Jersey City a less attractive option. Historically, we have seen renters trade down to Jersey as prices move up in Manhattan. But not this year. Year-to-date base rent growth for the metro area, including outer suburbs and Jersey waterfront, is 4.5%.

Washington, DC continues to show signs of stress as new deliveries come online, and the impact of sequestration and furloughs put a damper on the metro area economy. However, at 95.6% occupancy today, and over 9,000 Class A units being absorbed in the past 12 months, there continues to be healthy demand for apartments, even in the face of declining government payrolls and procurement. As the supply peaks in 2014, with 19,000 expected new deliveries, we would expect our results to be weaker than they are today, as we continue to realize positive rent growth from renewals, with base rent growth under pressure.

Last but not least, South Florida, with only 6,800 new units expected across the three-county area for 2014, we would expect these units to be absorbed quickly, just as they are today, due to above average population growth and the continued positioning as a center for international trade. Moving out of the typical summer decline, we would expect base rent growth to pick back up in the 4% to 5% range year over year.

To recap, we are exactly where we thought we would be from a revenue perspective when we gave guidance back in February. The near-term fundamentals of almost all markets is expected to be extremely favorable, despite the supply concerns. And, as we continue to see an improving job market, strong household formation, and home-buying that to date appears to be in check, we are confident that our portfolio will continue to produce results above historical norms.

As for the Archstone portfolio, I remained extremely pleased with our progress thus far. The technical aspects are complete and are well behind us. Our retention of the quality associates that came onboard is extremely high. And we continue to lead the operations of both portfolios together to maximize the value to our shareholders, our residents, and all of our Equity residential associates. Our revenue is right on track versus pro forma. And our expenses continue to outperform our expectations as we leverage the hand-in-glove geographies of our new communities.

I would like to thank everyone across EQR land for all the extra effort over the last several months, as we wrap up our peak leasing seasons knowing that we have delivered exactly what we said we would do.

Thank you, David.

On the transaction side, we remained very busy during the second quarter. And, as noted in last night's press release, in the quarter we sold 19 assets, 5 land parcels, and a commercial building in Seattle, for a total of $820 million. In the first half of the year, we've sold $3.7 billion of operating assets. And, as noted on page 9 of the release, have exited Jacksonville, Florida, and have limited assets remaining in Tacoma, Atlanta, and Phoenix. Three of the remaining six assets in Phoenix are under contract and should close yet this summer, with the last three sales likely being 2014 disposition events. Since the end of the quarter, we have sold one of our last two assets in Tacoma. And we expect to sell the remaining one yet this year or in early 2014. And, finally, in Atlanta, of the four assets we still owned on June 30, two are under contract and are scheduled to close next week. And the others should be sold by the end of the year or early next year.

For the full year, we currently expect to sell about $4.1 billion of assets. This is primarily comprised of assets in exit markets, with some non-core assets within our targeted markets. As you know, an important driver of the Archstone transaction was the ability it provided us to accelerate the sale of so many of these non-core assets. And we are very pleased that the market has been extremely receptive to our offerings. And we were able to achieve our disposition goals at values and yields that were right on top of our original expectations when we were finalizing the Archstone deal late last year.

We were able to get it done much more quickly than we had planned, thanks to the work that had been done by our teams in advance of the announcement. And we thereby significantly reduced the execution risk of the Archstone acquisition. And that execution risk was real, as demonstrated by the increase in the 10-year treasury, the spread widening, and all-in increase in borrowing rates that we have seen take place over the last several months or so. And this is precisely the risk that we wanted to manage. And, as Mark Parrell will discuss in greater detail in just a moment, this accelerated level of dispositions came at the cost of more FFO dilution for the year than originally expected. But it was a great trade and we're delighted we made it, and we're glad we made it when we did.

The disclosure of our development business in last night's earnings release shows about $1.4 billion of active development currently underway, and $156 million completed and released. Of the $1.4 billion under construction, five assets totaling about $300 million, which came to us as part of the Archstone transaction, are not considered core investments. And we would expect to sell these following lease-up and stabilization. During the quarter, we've sold the five land sites that we mentioned on our most recent earnings call, four that were acquired as part of the Archstone transaction. Three of these were in Phoenix and one was in Maryland. And we also sold a legacy land site in EQR's inventory in South Florida to a condo developer, and we more than doubled our investment in that property. We continue to hold four Archstone land sites that we expect to sell in the near term -- one in Maryland, two in South Florida, and one in Southern California. As I noted on our April call, the remaining five Archstone assets will be held for future development -- one site in DC and four in the city of San Francisco.

In the second quarter we also bought one new land site in the heart of Seattle's Ballard neighborhood where we will build 303 units for approximately $83 million at a mid 5% yield on current rents. With this recent acquisition in the Archstone land sites we intend to keep, we now own a total of 18 land sites and control 2 others, representing a pipeline of nearly 6,000 units, with a development cost of approximately $2.5 billion.

We did not begin construction on any new projects in the second quarter. So our year-to-date starts remained at the $130 million level which we started in the first quarter. However, we have the potential to begin construction yet this year on as much as another $800 million of development, which could bring our starts for the year to nearly $1 billion. And will add great assets to our portfolio in key locations of the urban core of our target markets, and create significant value here for our shareholders.

Now I'll turn the call over to Mark Parrell.

Thank you, David.

I want to take a few minutes this morning to describe the changes we made to our normalized FFO and revenue guidance for the full year. And give you some color on our recent capital markets activities. For the year, we had provided a revised normalized FFO guidance range of $2.80 per share to $2.85 per share. At the mid point, this is a reduction of about $0.03 per share from our original guidance back in February. This change is primarily due to the Company's success in selling non-core assets to fund the Archstone acquisition faster than we had anticipated. As David Neithercut just said, we think selling these non-core assets quickly at great prices before the recent run-up in rates absolutely the right decision.

We have tightened our same-store revenue range for the full year around our original midpoint. And now expect annual same-store revenue to be up 4.4% to 4.6% versus our original guidance range back in February of up 4% to 5%. Our philosophy on our same-store guidance is to give you as early as possible what we believe will be our most likely outcome, and then to hit that guidance. Our systems and personnel have a proven track record as accurate forecasters. And we believe that the investment community benefits from this clarity and accuracy.

Other guidance changes were relatively minor. We increased our G&A guidance midpoint because of higher compensation costs than we had originally budgeted. I do expect G&A to go down in 2014 as Archstone-related items come out of our numbers. Interest expense will likely be somewhat better than we had thought because we paid off higher-cost debt earlier than we had expected due to our accelerated disposition pace.

Now I just have a few quick things to cover on the capital markets side. First, I want to give you some color on our finance strategy relative to the $1.5 billion in debt that we have maturing in 2014. We manage interest expense like any other operating cost by trying to drive down our long-term costs without taking undue risk. We generally hedge about 50% of the next year's maturity because we do recognize our inability to predict rates. As rates have declined over the last few years, hedging rates forward was a money-losing proposition. But because we only hedged about 50% of our refinancing needs, we did get a significant benefit from declining rates. It is, of course, a different story when you are hedging into a rising rate environment.

Consistent with the thought process I just discussed, we have been active in addressing the $1.5 billion in 2014 maturity. We have entered into $350 million of forward-starting swaps, locking in a 10-year treasury rate of 2.42% in anticipation of debt issuance activities in 2014. These swaps have a positive value of about $18 million today. Also, in April 2013 we issued $500 million of unsecured debt at a coupon rate of 3%, and an all-in rate of 4%. We did not budget for this issuance in our initial February guidance. As a result, once we complete our planned $4.1 in disposition, which should be around September 1, we will have a bit more than $500 million in excess cash. Our new guidance assumes that these funds remain as cash for the entirety of 2013. We could, of course, use these funds to address our 2014 maturity or to acquire assets.

Switching topics, as we discussed on prior calls, we are also working to address the elevated level of maturities we have in 2017, resulting from the Archstone acquisition. We have about $2.2 billion, or 19% of our debt maturing in that year. We took steps as part of the Archstone loan assumption process to get some flexibility to address our 2017 maturities. And are working with the lender to extend up to $1.3 billion of this debt by taking advantage of a bargain extension option granted to us at the time of the assumption by the lender. We are also exploring other borrowing options, and look forward to reporting back to you on the outcome during the October earnings call.

Finally, as you saw in last night's release, our Board has authorized an increase in shares for both our ATM issuance program and our share repurchase program. These are housekeeping matters that we are attending to now because our universal shelf -- and the universal shelf is a document under which we issue public debt and public equity -- expires shortly, which, in turn, causes our ATM to lapse. We are simply replenishing the availability in both programs to give us approximately $750 million capacity for either share issuance or share buyback, which we think is an appropriate amount for a company our size. As we said in the release, we have no immediate plans to use either program. We haven't used our ATM program, in fact, since the third quarter of 2012. And haven't used the share repurchase program in a number of years.

We consider ourselves careful stewards of your capital. And have a track record that reflects our belief that we would only issue shares where the use of the fund when matched with the price of the shares, creates long-term value for our shareholders. Share repurchases can also add to the long-term value of our business in situations where there is a large disconnect between our share price and the private market value of our business, and when other multi-family investment options are inferior NAV decisions. At all times we will be mindful of maintaining the strength of our balance sheet.

And now I will turn the call back over to David Neithercut.

Thank you, Mark.

Like many public real estate companies who trace their beginnings back to the modern REIT era of the early 1990s, EQR went public in 1993. And will celebrate its 20th anniversary as a public company on August 12. We are extremely proud of our 20-year history, having delivered a compounded average annual return since our IPO of nearly 14%. Which compares quite favorably to 9% for the S&P 500 and 11% for the REIT index during the same time period.

While we are extremely proud of the past returns we've provided to our shareholders, what we are particularly proud of is the company we have built during this time. One that has done extremely well for its shareholders in the past. And one that is positioned today to continue to deliver industry-leading performance for our shareholders far into the future. A company that did not simply weather the great recession without issuance of dilutive equity, but that was also the earliest and most aggressive investor in late 2009 and early 2010 when others were not yet aware that a recovery was underway. A company with an operating platform and team of professionals that have unmatched visibility into its business. And has, yet again, hit its operating guidance with laser-like precision. While simultaneously and seamlessly integrating the 21,000 units we acquired in the Archstone transaction. And while selling 24,000 non-core units that helped pay for it. And a company that, over the last 10 years, has transformed itself from an owner-operator of garden apartment properties in low-barrier commodity markets across the country, to an owner-operator of assets in high density urban areas, with high walk scores in select markets, with high housing costs, and barriers to new entry.

As we celebrate our last 20 years and look forwards towards the next 20, we think we are extraordinarily well-positioned. Because there's no denying the growth of the Gateway City Center, there's no denying the continued demand in these cities for well-located, good-quality rental housing like that provided by EQR. There's no denying the powerful demographic impact on housing in these markets by the echo-boom generation who are marrying later, having children later, and who will opt for the flexibility provided by rental housing much later in their lives than prior generations. Because there's also no denying that there are more than 2 million additional 20- to 30-somethings living at home with mom and dad than the historical average. And that these so-called missing households will ultimately enter the housing market, and will do so by primarily occupying rental housing. And there's no denying that, despite current levels of new supply, our core markets will continue to have a shortage of rental housing to meet this strong and growing demand. So, as we look forward to our next 20 years, we are extremely excited about how we are positioned with our assets, with our platform, and the team that will move us forward.

And with that, now we'll be happy to open the call to questions.

(Operator Instructions)

Michael Bilerman from Citi.

It's actually Nick Joseph here. How has the transaction market and cap rates changed with the increasing rates?

It's a very interesting question, one that we are watching quite closely. I will tell you that on core assets in core markets, not at all. There continues to be a very short supply and very long demand. We have seen very little change on cap rates there. We think value on those kinds of assets may modestly continue to increase. On the not core, not A product, what we talk about as a more leveraged product, we have seen some modest change. A lot of this increase in borrowing rates have occurred maybe over the last 60 or 90 days. And a lot of deals that are getting done today would have been priced a while ago. But I think we are certainly beginning to see some pushback from investors, some retrades, and certainly are beginning to see some small impact on value as a result.

I would say that I think that you would expect to see a bigger change in value if rates continue to go up. We did not see any change early in this increase, but more recently have begun to see some modest pushback.

Thanks. And then, what's the difference in expected yields between the development assets delivering over the next few quarters versus the developments that you're potentially starting later this year?

I will tell you, the things that we will be delivering this year, next year, these will be stabilizing, and some of them in the 7%s and 8%s, and easily 6%s. And what has been starting now, or what will start this year on current rents we think will be in mid 5%s to low 6%s.

All right, great. Thanks.

Dave Bragg from Green Street Advisors.

Good morning. As a follow-up on Nick's first question, I think that you were concerned about two issues as you evaluated your asset sales -- not just the potential upward movement in interest rates but changes from Fannie and Freddie. I think you covered the first part, but can you talk about what you have observed from Fannie and Freddie over recent months? And what the impact might be over time on cap rates?

Dave it's Mark Parrell. Just a comment on that. Tactically, Fannie and Freddie continue to work just as diligently. They continue to give back to us. There's no dysfunction occurring, that we can see at all, on the operational side. What they have done, though, and probably in reaction to the regulator, is to really hold spreads constant. So, what you see at the time, we think that at the time we announced the Archstone transaction, the all-in rate for a maximum leverage 1.25 times coverage loan, in the kind of markets we're selling out of, like Phoenix, probably carried as a 10-year matter, that loan would have carried a rate of 3.5%. And would have had a spread of 1.7% or so.

We think that spread is probably up 50 basis points. And that all-in rate is probably around 5%. So, what I would tell you is, Fannie and Freddie operating day-to-day just fine. But I would say that there has been an impact we have seen in terms of the regulators' input into spreads, or some other type of input into spreads, has really caused Fannie's and Freddie's rates to increase pretty substantially. What you see also are some of these buyers are taking advantage of seven-year deals and trying to moderate some of that rate increase by just going down the duration curve. We're seeing a little bit of that, as well.

That's helpful. Thank you.

Rich Anderson from BMO Capital Markets.

Good morning, everybody. Appreciating your comment about your philosophy on same-store guidance, but you also alluded to the prospects of improving job market, and also the household formation issue of people still living with mom and dad. How much of improving jobs and improving household formation environment is included in your guidance? Or have you left some on the table, not inclined to get out over your skis on the potential improvement in those two categories of demand?

Really, the year is kind of baked. David and his team have got pretty good visibility into August, obviously, September. And then the number of transactions begins to really dwindle. It almost doesn't matter what happens between now and the end of the year because so much of the year has already been determined.

We are certainly at a point now, unlike the last several years. We have talked in the past how, because people weren't moving out to buy single-family homes, and there was no new supply, and our occupancy was strong, job growth just wasn't as important to us in moving rents. Now with new supply coming, job growth is becoming more important, like it has been for all of the history of the apartment space. So, clearly, with the elevated levels of new supply in DC, there's demand there but we'd certainly like the more job supply, more jobs, in order to help us have a little bit more wind at our back on the rental increase side. But as it relates to this year, and any estimates or projections we're making for this year, that is really a moot point.

Okay, thank you for that color. To David Santee, you mentioned revenue is pretty much exactly where you expected related to your February guidance. I assume that nets to something that didn't come out as expected, at the market level. Could you describe which market or markets have done better materially than you expected coming into the year, and which have done worse?

I would say that all of the Pacific Northwest markets continued to exceed our projections. We are well ahead of, if you want to say budget, in Seattle, Denver, and San Francisco. I would say, relative to our internal expectations, we had expected more from LA. And I think that, like I said, the Tri-City, the Beach City, all of those are doing fantastic with 8%-plus revenue growth. It's more of our fringe properties -- Santa Clarita, Agoura Hills, way north in the Valley. That's where you see a lot more home buying and a different price point. That's averaging down our overall market growth. But, other than that, everything's pretty much tracking as we expected.

Okay. And then last question for me, maybe to David Neithercut. The single-family rental businesses is getting a lot of airtime lately, including in today's Wall Street Journal. Curious where you stand on that business as it becomes more and more of a mainstream thought process. Where does EQR stand? Not that you would get into it, but where do you consider it as a form of competition for the conventional multi-family product?

I'll tell you that as a form of competition for Equity Residential, we don't see it at all. If you look at the portfolios that these folks own, it's Las Vegas, it's Phoenix, it's Tampa, it's suburban Chicago, it's Atlanta. We just don't overlap. With respect to it competing with multi-family, single-family homes have always been a very large share of overall rental housing. But then the question comes, is it a business, is it a trade. I'm in the trade camp not the business camp. It will be very interesting to see what happens.

What do you think, by being in the trade camp, what you do think the main risks to the story are? Is it just efficiencies of management? Is it capital expenditures? What are the things that cause you concern from an operating standpoint?

Really, the latter. I think that they will be more challenging to manage than people think. I think it's likely that they will underestimate tenant credit quality, underestimate the turn cost and releasing expenses and CapEx and maintenance, and all of the above. Not that it can't be done. But the notion that it can be done as efficiently and at the same margins as multi-family, I think is comical. When we owned Lexford portfolio years ago, which averaged 88 single-story units, and, believe me, the margins on the Lexford portfolio was nothing like the margins that we enjoy in our high-density urban assets. I think that these claims that they can operate the same margins as multi-family is just a joke.

Okay, thanks very much. I appreciate it.

Jana Galan Bank of America.

Thank you. Good morning. Following up on the decision to increase the ATM and the buyback program to levels more appropriate for the size of your business, are you potentially thinking about other parts of the business, whether it's the financial side or on operations, that also need to increase given the larger scale you have?

I am not quite sure I understand the question. Just in terms of the platform of our business, we run a very tight ship. And you've seen our G&A costs as a percentage of revenue dollar, or our management cost as a percentage of revenue dollar are the lowest among our peers. So I'm not quite sure I understand the nature of your question.

Sorry, it's a little big picture. But just thinking on, for example, the development pipeline, are you looking at that as increasing it to a percent of enterprise value? Or maybe for Mark, any changes to balance sheet targets?

With respect to development, we don't have a target for that. What we have told our development team is that we will try and make sure that we can fund all the good development that they can find. Because of the additions of the Archstone land sites to our portfolio, we will have higher than normal run rates if development starts this year and next. Although, at the present time I don't expect that to be a new ongoing run rate. I wouldn't be surprised if we didn't go back to what had been our historical run rate of $600 million or $700 million development starts in any one year. Our intention is to be, I think, a little more discriminating and selective on what we build and where we build it, rather than thinking about volume.

Thank you. And then any changes on any balance sheet targets?

No. We don't see the need to change those. We think the market concentrations we have are appropriate. The Company's very diversified on the operations side. We think running the company with about a 7.0 net debt to EBITDA number, which is what it was before Archstone and what we're back to already, is the right thing to do. And fixed charge coverage of 2.5 times, or better when you take out cap interest. So, we think the Company is where it should be, and we don't expect to change that.

Thank you.

Andrew Shaifer from Sandler O'Neill.

Thank you. I was wondering for this year and last if you can give a gross or a percentage of assets of how many of your properties had property tax reassessments.

I guess I would say, for this year -- just looking at the numbers right now. This year -- this will be the growth percent by market over 2012 -- Arizona was a plus 2%, California was up 5.7%, Colorado blended 12%.

Sorry. Actually, just total amount of properties. Not actually a per market, just the actual gross amount of your asset base that you had property tax reassessments this year and last.

We don't (multiple speakers).

Okay, that's fine. And, secondly, in regards to your cap rate spreads widening by 10 basis points, I believe, from what you said earlier you said the dispositions are requiring higher yields rather than the acquisition cap rates extending a little bit.

We gave you a 100 basis point spread in February and we are 110 today. A lot of that probably would just be the mix of assets that ultimately will be sold. But I'd tell you, we were generally right on top of the number, the disposition cap rate we said we'd achieve, and pretty close to the volume. That's just rounding error.

All right, perfect. Thank you very much.

Michael Salinsky from RBC Capital Markets.

Good morning, guys. Probably a question for David Santee. Can you talk a little bit about the performance of the Archstone portfolio in the quarter, how that compared to underwriting? And then, also, can you talk about leases signed in the quarter on a blended basis, probably in the quarter, for the quarter, how that compared versus the second quarter of last year? So, looking at blended rents, how much are they down on a year-over-year basis, if we are just looking at the snapshot that was in the quarter for the quarter?

Okay. I will start with Archstone. For the quarter, all of the markets continue to perform exactly as we expected. We pretty much underwrote most of the Archstone property, just as we have underwritten any other acquisition in their respective market. So the real income, on a year-to-date basis, we are 1% ahead of our revenue underwriting. And that trend continued into the second quarter. Keep in mind, really the second quarter was the first really full quarter of stabilized numbers.

On the expense side, when I look at the numbers, basically every category is below our underwriting. Whether it is leasing and advertising, payroll, maintenance, you name it. Every category is well below our expectations. And expenses are basically 19% below our budget through June. On the blended, our blended, I don't necessarily have last year's blended because the portfolio has changed dramatically. But our blended number for Q2 was, the combined increases was 1.9. But, more importantly, for Q1 of 2013, it was 0.1. Does that answer your question?

That's helpful. That answers the question pretty well. The second question probably more for David. When you think about the capital plan and everything for the back half of the year, in the new numbers, what are you guys assuming in terms of development starts? And also, just in terms of the existing projects, how much escalation have we seen in construction costs?

As I said, we have the potential -- I'm not sure we will get it all done -- but we have the potential to begin as many as $800 million more this year to get to $1 billion. Again, I'm not sure we will get it all started. If we don't start it this year, believe me, a lot of that will start early next year. And then with respect to construction costs, it's different across different markets. They certainly have increased. We are seeing flattening, very little growth in the Boston and the DC metro area. And most other markets, this year we think they are rising 2% to 3%, 4%, except in the Bay Area where we are seeing increases of plus 10%.

Okay. That's helpful. Then, finally, any update you can provide on your thinking on the extension option from some of the Archstone debt that was taken, where it extended the maturities out there? And what the rate, if you took the extension, would be?

Mike, it's Mark Parrell. We're working on that right now and we'll be able to give you a full report in October. Meaning, the good news is that whatever the prepayment penalty is that gets put into that ends up offsetting, to some extent. The prepayment penalty is getting smaller as rates go up. So I think it's a rate that's probably in the 6%s somewhere right now, and probably will stay somewhere in the 6%s. Because again, as rates go up, the prepayment penalty goes down, and vice versa. I'm not sure that even if rates change between now and October I'm going to report to you a much different number than something in the 6%s. It's just a matter of how we work the extension and the bargain option with Fannie Mae. And those are all details we are working on right now.

If you take the extension, does it wipe away the mark-to-market benefit?

Probably not. But we will go through the accounting with you when we go through it in October. Because it can be fairly involved.

Thank you much.

(Operator Instructions)

Jeff Pehl from Goldman Sachs.

Good morning. Just to go back to the shared buyback that you mentioned in your release and on the call this morning, you have an undrawn line of credit and about $152 million of cash. I'm just curious what conditions would have to be met for a repurchase to benefit your cost of capital?

The stock would need to be a lot cheaper than main street real estate value. Again, I just want to make clear that these were just capacity. These were just options that we have provided ourselves to take advantage of, should we want to down the road. We have no intention of executing or using any of them in the near term. And have not used either of these options over the last year or so. So we have brought stock back in the past, and at levels below a lot less than where we are today. And we won't hesitate to do it in the future. But a lot of things have to happen with respect to the differences between main street values and real estate values.

Okay, thanks for the color.

(Operator Instructions)

Thank you. Sir, we appear to have no further questions at this time. Please continue with any further points you wish to raise.

Thank you all for your time and attention today. And look forward to seeing many of you in September, if not before. Thank you.

Thank you. Ladies and gentlemen, that concludes today's Equity Residential 2Q '13 earnings conference call and webcast. Thanks for your participation. You may now disconnect.