住宅地產 (EQR) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Equity Residential third quarter 2013 earnings conference call and webcast.

(Operator Instructions)

This conference is being recorded today, Thursday, October 31, 2013. I would now like to turn the conference over to our host, Mr. Marty McKenna. Please go ahead, sir.

Thanks, Lily. Good morning, and thank you for joining us for to discuss Equity Residential's third quarter 2013 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 law. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn it over to David Neithercut.

Thank you, Marty. Good morning, everyone, and thanks for joining us for today. Last night, we reported operating results for the third quarter and first nine months of the year which were very much in line with our expectations. We also provided guidance for the entire year for same store revenue growth that was right on our original numbers of 4.5%. Our same store expenses will come in at 3.3%, the high end of our original expectations, is our worst fears about real estate tax increases came true, and same store NOI of 5.1%, a bit below our original midpoint due to these higher expenses.

As expected, San Francisco, Denver, and Seattle continue to lead the way with very impressive quarterly and year-to-date performance. And as we discussed on our last call in late July, new supply in Washington DC is beginning to impact our numbers.

2013 has been a tremendous year for Equity Residential and we are very pleased with the exceptional portfolio we created and with our operating results thus far this year. We remain focused on core coastal markets and expect that with the benefit of favorable demographics and the high cost of single-family housing in our markets to produce very good revenue and FFO for years to come.

In last night's release, we also provided guidance for same store revenue growth for next year of 3% to 4%. And note that our same store set of 2014 will include the nearly 18,500 units that we acquired in the Archstone transaction. Not surprisingly, our revenue growth estimates for next year are impacted significantly by having nearly 19% of our 2014 same store revenue coming from the Washington DC market, which we expect to produce slightly negative revenue growth next year.

More importantly, however, we expect many of our other markets to continue to deliver strong, above trend, revenue growth in 2014. To take you through what we're seeing across our markets today and how we are thinking about next year, I'll turn the call over to our Chief Operating Officer, David Santee.

Thank you, David. Before I jump into preliminary 2014 expectations, I'd like to briefly discuss our Q3 operating results that when combined with our year-to-date performance, puts us exactly where we thought we would be when we gave full-year guidance last October. As reported last night, our Q3 revenue rose 4.1%, was a result of continued strong fundamentals across all of our markets. Occupancy of 95.7% for the quarter was down 20 basis points year over year. However, this is more about our higher than we would have preferred occupancy last year in entering this year's peak leasing season in a position of greater strength. Year to date, our occupancy is 10 basis points above planned and increased 10 basis points sequentially which creates a solid foundation going into Q4.

Renewals in Q3 remain strong, averaging 5.4% and continue to be driven by the Northwest markets with San Francisco, Seattle, and Denver all realizing achieved renewal rates that were above Q2 results at 9%, 7.5%, and 7.4%, respectively. Forward-looking renewals for October and November achieved to date, results remained above 5% for the entire same store portfolio. Apartment turnover was down 30 basis points for the quarter and 20 basis points year to date, as fewer resident moved out due to price and/or renewal increases. Moveouts due to homebuying for the quarter increased 90 basis points year over year, consistent with prior quarters representing an incremental change of only 87 moveouts across the entire portfolio.

As discussed last quarter, both inter- and intra-property transfers remain 11% higher year to date, representing a much higher resident retention than the apartment turnover statistics might represent. Base rent increases quarter over quarter were 2.1% and were greatly influenced by a decline in Washington DC rents of 3.2%. However, based on how we see the market today, we would not expect Washington DC revenue to turn negative on a quarter-over-quarter basis until mid-year, as renewals were a positive 2.6% for October and are expected to be positive for quite some time. Base rent pricing leaders continue to be San Francisco, Seattle, and Denver, and we would expect those three markets to be our top three revenue growth markets again in 2014.

Expenses continue to be a very short story, and it's all about real estate taxes. The aggressive actions of states and municipalities are unprecedented. Both rate and value increases are occurring simultaneously as real estate taxes always lag value creation. Historically, value increases would be offset by lower tax rates, but this is not the case for 2013. We now expect to end the year near the high end of our expense guidance. However, it's important to note that excluding real estate taxes, our year-to-date expense growth would amount to only 1.3%, a testament to our continued focus and leverage of the Archstone assets which continue to perform in line with expectations.

For comparison, the Archstone portfolio revenue growth is 4.5% year to date and sequentially 1.3%, essentially in the same zip code as the EQR portfolio. As you drill down to the market and sub-market results, specific property anomalies account for the slight differences versus our same store portfolio. We remain extremely pleased with the results of our integration, and I can confidently say that we have put that behind us some time ago and have been operating as one company for quite a while.

Now I'll provide a little color on our preliminary 2014 revenue guidance. First, as we announced in our release, we will include the same stores and communities for full year 2014, creating a same store portfolio of approximately 101,820 apartments. Looking at the new market mix going forward, we arrived at a guidance range of 3% to 4%, categorizing our markets into three buckets of revenue growth.

The first bucket continues to be filled with Northwest markets that should produce combined 2014 revenue growth in excess of 5%. Driven by strong embedded growth and thus far minimal to no market disruption due to new supply. Seattle continues to remain resilient after receiving and absorbing over 10,000 new units in the past 12 months, with solid revenue growth and current year-to-date occupancy running 10 basis points above 2012.

The second bucket includes markets where revenue growth would average 3.5%, which include all other markets excluding DC. These markets represent solid levels of embedded growth and continuing strong fundamentals with slightly elevated levels of new deliveries. Our core markets most impacted by new deliveries would be downtown Boston, Los Angeles, and South Florida, with downtown Boston receiving the brunt of head-to-head new competition. LA and Orange County continue their slower-than-expected path to recovery but still have plenty of runway for outsized revenue growth in the future.

And then the final bucket representing almost 19% of total income, is the Washington DC Metro in which our revenue growth model assumes a full year 2014 revenue decline of 1%. If we were to exclude DC from our 2014 revenue projections, our most likely outcome would produce full year 2014 revenue growth in excess of 4%.

While we have not finalized our 2014 expense expectations for the new same store portfolio, we will experience another year of outsized real estate tax increases. However, we expect significant reductions to property management costs and minimal growth across all other categories that will result in a range that could be similar to 2013.

To sum it up, the continuation of solid fundamentals will drive revenue growth well above historical trend across many of our markets. Core controllable operating expenses should remain in check, resident turnover continues to trickle down, rent growth for lease renewals achieved remain above 5%, same store base rent growth of 3.5% versus same week last year, and today's occupancy of 95.8% creates a solid foundation of performance as we close out the year and turn our eyes to 2014.

Great. Thank you, David. On the transaction side as noted in the press release last night, we've sold $4.36 billion of assets through the first nine months of the year and expect to sell one or two additional assets in the fourth quarter which will bring us to $4.4 billion in disposition for the full year, and that compares to our most recent guidance of $4.1 billion. The increase in guidance is a result of having sold one of our largest single properties this past quarter and that was in the Mission Valley sub-market of San Diego where we sold 1,410 units in 62 buildings over 75 acres. This asset traded for $360 million and a confidentiality agreement prevents me from saying what the cap rate was on this deal but I can tell you it was well below the average cap rate of what we've sold everything else year to date.

While this was not a must sell for us in any regard because we frankly we like Southern California. A garden asset of this size and age is not terribly liquid and we thought it prudent to monetize our investment while there was a strong demand for Southern California assets and a continued low-interest rate environment. So we started a process that produced a bid that we thought made sense for us and are pleased that that bid delivered an unleveraged IRR of nearly 12% over a 16-year holding period. Other assets sales continued our market exits from Tacoma, Phoenix, and Atlanta.

We had a very busy quarter on the development side of our business with three starts totaling $366 million bringing our year-to-date starts to nearly $500 million. We also began pre-leasing four projects and during the quarter we sold two land sites. In addition to the $500 million of starts through the first nine months of the year, we have four deals totaling nearly $800 million that could start very soon. What doesn't start in the fourth quarter of this year will likely start in the first quarter of next year. Two of these sites are in San Francisco and two sites in Southern California.

The disclosure of our development business in last night's earnings release shows about $1.6 billion of active development currently underway and $262 million completed in resell. I remind you that of this $1.9 billion, 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 those following lease up and stabilization.

In addition to that which we've already started in those projects which we will start very soon, we have 12 additional land sites and those are owned or controlled representing a pipeline of nearly 3,500 units in terrific urban core locations in our core markets with development costs of approximately $1.5 billion. As a result, our development starts will be elevated relative to historical run rates and could average close to $1 billion both this year and next. I'm happy to say 100% of which will be totally self-funded with free cash flow, disposition proceeds, or use of our $2.5 billion credit facility. Going forward, my expectation is that by 2015, our starts will be more in the range of $500 million to $750 million a year.

And with that, I'll now 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 normalized FFO and some of our other guidance for the full year and give you some color on our recent capital markets activities. For the year, we have provided a revised normalized FFO guidance range of $2.83 per share to $2.85 per share. This is slightly higher than the guidance we gave you in July and is pretty much right on target with the guidance we gave back in February.

The improvement since our July guidance is due to a loan payoff that occurred on October 1 as well as the new loan closing and additional partial loan payoff we expect to have this quarter, both of which are described in the press release. While these activities triggered substantial prepayment penalties in the fourth quarter, they also lowered fourth-quarter interest expense and other financing costs.

Moving to another guidance matter, we increased our annual G&A guidance to $63 million which is up about $16 million from 2012. The increase is driven primarily by Archstone-related and other one-time items. These costs are specific to 2013 and will not be part of our normal run rate level of G&A. We anticipate 2014 G&A to be substantially lower than 2013, likely in the low $50 million range. We are careful stewards of our shareholders' money and expect in 2014 to reestablish our customary low level of G&A.

We've had a -- certainly had a busy few months in the capital markets side. As you saw in the release, we are in the process of repaying approximately $1.8 billion in GSE debt, all in a single quarter, and refinancing $800 million of this debt with a life insurance company.

Let me take a moment to give you a few highlights. About a month after we received the additional disposition proceeds, we repaid a $963.5 million secured loan that we had assumed as part of the Archstone transaction. This loan was set to mature in November of 2014 and carried a cash interest rate of 5.88% and a GAAP interest rate of 3.45%, and the GAAP rate is lower because it's impacted by the amortization of the Archstone debt premium.

While selling additional assets is still dilutive compared to the 3.45% GAAP rate I just mentioned, we certainly were able to lessen normalized FFO dilution by lowering interest expense, and we were able to address a near-term debt maturity. In other words, as a cash management matter, it was a better deal to incur the prepayment penalty and deploy this cash than to hold it and earn nothing until we could prepay this debt at par in 2014.

We also took out to bid a pool of 13 former Archstone properties which are tax protected assets and on which we are required to maintain secured debt. Currently, these 13 assets and several other assets are encumbered by a $1.27 billion GSE loan that matures in 2017 and carries a cash interest rate of 6.26% and a GAAP interest rate of 3.58%, and again the GAAP rate is lower because of the amortization of the Archstone debt premium. The interest by life insurance companies and the GSEs in refinancing these prime urban assets were very strong. The business we obtained from the life insurance companies was substantially superior to pricing available at that time for the GSEs while CMBS lenders were not competitive at all in our process.

After this exhaustive process, we committed to do an $800 million secured loan with a large life insurance company. The loan will have a turn of 10 years. It will be interest only and will carry a fixed interest rate of 4.21%. The proceeds from this loan will be used to pay off $825 million of the $1.27 billion of secured loan. The approximately $440 million balance will remain outstanding and continue to mature in November of 2017 and continue to carry a cash interest rate of 6.26% and a GAAP rate of 3.58%.

The prepayment of these two loans will result in a cash prepayment penalty of approximately $150 million and in earnings, an FFO charge of $43 million. The charge will not impact normalized FFO. While this is certainly a substantial sum of money, we see the net economic cost to us as much less.

Lehman is effectively paying a substantial portion of the prepayment penalty here in the form of the reduced purchase price we paid in the Archstone transaction for assuming this above market debt. Also we were able to benefit of the bargain extension option that we had previously discussed with you which was granted to us as part of the Archstone loan assumption process. After netting these contributions from third parties, prepaying this loan and incurring the penalty now equates to a break even refinance rate in 2017 of less than 4%.

Besides the economic value for the Company of this financing activity, the Company also received some important other risk and debt management benefits. We lowered our outside debt maturities in 2017 from $2.2 billion to $1.35 billion and significantly extended the weighted average maturity of our debt to almost 7 years.

Also, when the prior GSE loan matured in 2017, these assets would need to be refinanced with secured debt or very substantial tax protection cost to the Company would have been triggered. So dealing with it now and putting this risk behind us seemed prudent. We also established a valuable new channel for sourcing secured debt. And best of all, we locked in a great rate on the last piece of the Archstone transaction capital structure.

Now, I'll turn the call back to over to Lily to compile questions for the question-and-answer period.

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

(Operator Instructions)

Our first question comes from the line of Nick Joseph with Citigroup. Please go ahead, sir.

In terms of same-store revenue growth next year at 3% to 4%, while the deceleration from this year, the absolute growth rate remains historically strong. Without giving guidance but looking over the next few years, how long do you expect growth to remain above historical averages?

Well, it's tough to sort of say but we believe strongly that with the markets that we are now operating in, these urban core markets, and as we look at the demographic picture, across the single-family housing in these markets which is a significant multiple more than average across the country. Look at what's happening to where we think jobs are going to be going forward. We think that we're in a position of having a nice extended run of very strong performance.

Okay, and then you continue to sell assets in the market. How's the transaction market and cap rates changed with the increase in rates?

Really not much at all. We think that we continue to see, you know, maybe slow increases in values of kind of core, core plus products, and have not seen as much if any diminution in value of a lesser quality product. This is a very, very -- it remains a very strong demand for both classes.

All right. Thanks. Given where your stock is trading relative to net asset value, what are your thoughts around share repurchases relative to other capital allocation decisions?

I guess I can tell you that having acquired $1 billion or so of stock back, it's something that is certainly part of our calculus and will remain part of that.

Great. Thanks.

Our next question comes from the line of Dave Bragg with Green Street Advisors. Please go ahead.

You break out that same store revenue growth outlook into the two buckets for us, your legacy portfolio, that same store portfolio versus the Archstone assets?

We didn't break those out for 2014. (multiple speakers) I mean, based upon performance, there really shouldn't be any material difference. I will say that when you look at the first part of next year, and you look back at the impact to the operations on the Archstone portfolio just as a result of the announcement, I think that in the near term at least for Q1, we would expect the Archstone properties to do a little better and play catch up from last year but by the end of the year, there really isn't a material difference.

So the Archstone portfolio is overweight DC but there's a catch-up opportunity there that will cause it to perform pretty closely to the legacy portfolio?

Our comments, Dave, are sort of market by market, sub-market by sub-market, so certainly because of the overweight of DC, that portfolio would under perform but relative to the Archstone assets in DC versus EQR or in Seattle or any other market, we would expect those to perform relatively comparably but for the little bit of pickup we may have in the first quarter in the Archstone portfolio.

Okay. Thank you. So you've undergone this transaction, the significant amount of dispositions that you've executed on yet the stock trades at as wide as a discount as it has in a long time. Can you talk about what steps you are considering taking to close that discount, maybe elaborate on your last answer, if possible, or any misperceptions you think might be out there that are driving this?

Well, I guess there's nothing more to say about my prior answer, Dave. I think we've demonstrated ourselves as a company willing to acquire stock. We have in the past and again, it would certainly be part of our capital. With respect to just pricing, I can tell you that our team every day sees the kinds of properties that we own and will happily own for a long time. Trading today in markets, certainly in the 4%s, and in some markets maybe even in the 3%s. And so EQR trading today kind of in the mid 5%s. I think it's -- I think it's quite an opportunity relative to where things are trading on a one off basis out there. Our focus today is just going to be execute, execute, execute. We are happy with the assets we've got, we think there remains I think an extended period of very solid performance and the stock price will take care of itself.

Okay. Thank you. My last question is given the size of the Company today now that you've had time to digest the Archstone assets, how can we think about Equity Residential's opportunities to move the needle via external growth going forward?

Well, I'll tell you that we remain a company that has I think the capacity to be very opportunistic and the intent of being very opportunistic. We will continue to sell assets where we believe we ought to and reallocate that capital into assets in our core markets. We will continue to have a development business, as I said earlier, we'll be a $500 million, $750 million of starts per year business and we'll again remain very opportunistic. I think we demonstrated that in 2009 and 2010. I will be prepared to do that again. We certainly have got rehabs going across our portfolio that we think incrementally will help repositioning assets across the portfolio, but again for the time being, I think it's execute, execute, execute. We've got $2 billion of starts this year and next year, and also I think that we've got our hands full and you can expect us to have our nose to the grindstone on those particular subjects.

Thank you.

Our next question comes from the line of David Toti with Cantor Fitzgerald. Please go ahead.

Just quickly, what are your expectations for the depth of the reversal in DC? Do see it as being sort of a start decline, more of a gradual sort of prolonged soft patch. If you had to sort of like think about that market in the next 24 months, what does it look like from a revenue perspective?

I'll let David say a few comments in just a moment. Clearly, there's an awful lot of units coming online. Certainly, there's remains an extraordinary amount of dysfunction in DC. Yet if you look at third parties' expectations of household formation in that market over the next few years, we believe that these units will absorb. It won't be pretty maybe getting there, but we think that there will be a lot of a incremental demand going forward.

I guess I would add that when you look at the distribution of all these units across the metro area, certainly a lot of those are downtown. When you start looking at deliveries in the 2015, they spread out more to the burbs which would not be a great as impact to our portfolio. When you add in the Archstone portfolio to next year, many of those communities that we acquired up Connecticut Avenue are virtually insulated from development. So I think it will just come down to the timing of the deliveries in conjunction with what's going on with politics in DC.

Another benchmark we just started or leased up, Belle Pre in Alexandria. We are leasing new units at our pro forma net effective rents and our pace of leases is very robust. The pace of lease up is exceeding expectation. In fact, that can be said for many of our new developments. When you look back over the last 24 months, we have base rents have been relatively flat and then if you go back to 2007, 2008 in the downturn, renewals kept us floating and renewals will offset some of that negative rent increase and I don't think at the end of the day it will be as bad as people think.

Okay. That's helpful. And then my other question, David, is you've obviously been net sellers for some time. You've talked about that pretty specifically and maybe expect to be for a bit. At what point does that reverse? Is it the -- sort of the potential for an uplift in cap rates? Is it the completion of the disposition strategy? Is it something external that would cause either a reverse and sort of think that there were more opportunities in the market for buying? How you think about that going into what could be a higher cap rate environment?

Well, again, we have -- all of our acquisitions, David, have been self-funded. So it's really when we see opportunities if there's arbitrage what we can sell versus what we can buy. In fact, I will tell you we are working on a deal right now in Southern California that we think we can sort of acquire at a cap rate very similar to the cap rate at which we can sell, something that we think is out in the valley. So that's the kind of trading I think that we will do. As I said in my one of my previous answers, we will remain very opportunistic and if there are opportunities to buy and frankly there may be in Washington DC, for instance. I don't think we would hesitate to take advantage of those opportunities.

Okay. Thanks for the detail today.

Our next question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please go ahead.

Did you notice any impact on the DC portfolio from the government shutdown in October?

Really, absolutely not. We had made arrangements to work with government employees. Should it continue and waive late fees and what have you, but really we saw nothing that we could -- nothing that was tangible.

That market has been sort of operating under uncertainty of the sequestration and everything else going on, so if I can anything more then I think the weight that that market had been carrying for quite some time.

Okay. And then, David, if you can comment on the performance of As versus B assets in your portfolio in the third quarter? Particularly in the markets that saw the increases in supply?

I don't know that we've seen any material differences. I think, again, it comes down to location, location, location. One of our best-performing assets in downtown DC, 1500 Mass is a 50-year-old building. I can't point to anything that would lead us to think that there's that much difference in the asset class.

And does that kind of hold also for your view for the 2014 guidance?

Yes.

Thank you.

Our next question comes from the line of Rob Stevenson with Macquarie. Please go ahead.

Thanks. David, what's -- with 20% of the portfolio exposure in DC now, is that bordering the upper line -- upper boundary of your tolerance for any market concentration or how do you think about that?

I would say that on a average long-term basis, that probably is at that upper limit, yes Rob.

Okay, and when you're thinking about the going through the development pipe -- the development starts over the next couple years, where's the bulk of those starts going to wind up being? And are there any sort of ultra big sized deals like the Park Avenue asset?

We've got four sites in San Francisco, five sites in San Francisco so that would be a pretty good market share. We've also got a couple of sites in DC that are on ice at the present time. We have got a very nice site, the Howard Hughes site down in Southern California, and I think that's generally what you'll see and we certainly have some things in Seattle, downtown Seattle and some South Lake Union sites in Seattle.

Okay. Are any of these, like I said, ultra very large assets at the end of the day? Especially San Francisco?

They are in the plus. Several are in the plus $200 million range, yes.

Okay.

If that's what you mean.

Yes, I mean just trying to figure out what's -- when you're talking about $1 billion dollars, is that 4 starts or is that 10 type of -- ?

Our focus has been really urban core locations, not suburban, but urban core locations and those are by definition going to be a little more expensive assets and so you'll see us doing fewer starts but they are likely to be more expensive, yes.

Okay. And then just lastly, was there any particular rationale for the 2014 same store revenue guidance now versus January in line with earnings like normal?

A very good question. And one that we talked about ourselves. And I guess it came down to the fact that we believed that we had of pretty good handle on it, a good view that our people across the country, our systems, our processing, the experience that we've got gave us a good enough look at it that when we had that, we felt it was appropriate to share and then to sit on a for 90 days was not the right thing to do.

Okay. Thanks, guys.

Our next question comes from the line of Ryan Bennett with Zelman & Associates. Please go ahead.

Good morning. Just along the lines of development, real quick. In terms of your start that you expect over the next year, what's the current yield on developments based on current rents versus where cap rates are in those markets?

Well, in our sort of pipeline, in that million -- $1.5 billion or so of pipeline that current rents we think were low 5%s to mid 6%s. These are markets all day long that are in the 4%s and some of these assets could trade in the high 3%s, on a stabilized basis, we think.

Got it. Appreciate the color there. I appreciate all the color on DC. Just one other market that stood out. I know you've been positive on New York in the past, and then it seems like it got grouped into the middle bucket for next year. Just curious if you've seen any pressure on your ability to push rents there recently or anything sub-market specific in the New York region that may cause the incremental slowdown.

This is David. I mean certainly there are stronger pockets in New York. But I think generally speaking, we don't see any market-wide slowdowns, certainly, as you move further away from Manhattan. Revenue growth is not is robust. Jersey City is less robust than Manhattan. Moving down, Fairfield, Connecticut. The activity is still in the urban core and one of the things that we really haven't seen this go-round is the move into Jersey City. Historically, when rents have elevated in Manhattan, we see pretty strong demand in Jersey City. But we are not seeing this this go-round.

Got it. And then just I believe you mentioned moveouts due to rent increases was down in the quarter. Was there a particular markets trend in terms of where maybe had been down further or increased in particular markets? Any trends there?

On a quarter over quarter basis, as an example, Denver sticks out in my mind. That was down compared to Q3 last year, down 600 basis points. I'm just kind of scanning the markets -- that's probably the most notable, I would say.

Okay, great.

Everything else is maybe 100, 200 basis points.

Great. Thank you.

Our next question comes from the line of David Harris with Imperial Capital. Please go ahead.

Let me have another crack at the share buyback question. If I remember correctly, you are amongst the most active of share buyback companies and your Chairman very vocal about good capital discipline. I applaud you and him for that action. If I think back then, was your decision to buy back principally driven by discount to net asset value and how are you thinking that that might be any different in today's environment?

Well, I guess, it was. I mean, we just looked at what we thought the fundamental underlying value was of our assets and looked at what that was relative to our stock price and thought that the stock market was trading those assets that have a significant discount. And again, I've mentioned several times already today, we own assets today that there is extraordinary demand for by institutional investors that are paying cap rates in the low 4%s and perhaps even high 3%s, yet our stock today is trading at an implied cap rate that is representative of a lot of the assets we've sold in commodity markets over the past 9 months. So again, we pay a great deal of attention to that, we pay a great deal of attention to that as we buy assets and as we start new development transactions. So we'll just -- not sure much more I can say on that matter except that we do pay close attention to it and as you noted, we were amongst the most aggressive back when an opportunity presented itself some time ago.

Right. Okay. You re-upped your buyback and your share issuance programs after the Archstone deal closed. I think it was around second quarter. Has the Board reviewed capital allocation, in particular, with regard to share buybacks recently?

I guess the Board reviews most everything when we gather on a quarterly basis.

When was the last quarterly meeting?

I think September.

September.

Okay. And then another question here on Archstone. Now you've got your arms a little bit more around the portfolio. Is there any thought to revisiting corporate leasing and condo activity, again, as we look forward?

I guess I'll let David address the corporate leasing side. On the condo side, there has not been, but I do believe that we will see good condo demand for the kinds of properties we own in the not-too-distant future. What action we take as a result of that remains to be seen. I would not expect us to play the manner in which we did back in the early to middle 2000s around what we did in Florida and Arizona. But I do believe we are certainly seeing interest of condominium people looking for land sites. We are seeing more potential demand there, so I think that that is something that we will see, as I said, in the very near future. Now with respect to corporate leasing, David?

With respect to corporate leasing, spending my first 10 years in this industry at Oakwood Apartments, taking corporate leases feels good when they come in but there's a long tail when they move out. One of our goals over the past 12 months is to continue to add more strategy around when and where and how many corporate apartments we take. It certainly does not fit into our branding expectations of creating long term loyal customers. And so I think, we have been trying to wean ourselves off that drug, so to speak. And we will continue to evaluate on a transaction-by-transaction basis.

What does corporate leases represent as a percentage of the portfolio today?

In our portfolio today? Gosh, again you have to kind of define what you mean by corporate leases. There are many -- in New York, we have lots of missions and types of apartments like that, that have been with us for 10 years or so. So it's very -- it's not as easy just to say we have this many corporate units, but we are definitely trying to get out of the short-term block of business type corporate function, especially in the world -- the era of Airbnb. Airbnb is creating some very unique challenges for owners in -- especially in New York City and Seattle, and that's something that we have to keep in front of us.

Okay, if we use broad terms of definition, are we talking 2% or 3%?

I would say probably closer to 4%.

Closer to 4%. Okay. Thank you very much, guys.

Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Thanks. Good morning. Mark, did you say, I don't remember. I don't know if you said it explicitly, but did you say that you get -- you break even for the $150 million of prepayment costs in 2017 with lower -- assuming the lower interest rates?

Rich, so what we did is we took a look at what rate in 2017 we would need to refinance the debt at.

The remaining debt.

Yes. I kind of regret the $800 million being refinanced now at 4.2%. And that rate is a little less than 4%. So if prevailing rates were 4.25% and higher, we would -- this decision we just made would be a good one financially for us. And if it was -- if rates were 3%, then it wouldn't be. But we did think that, that was a good way to kind of hedge out. That's a big exposure for us in 2017. We had a lot of debt due in that year. We also had all these other things we were trying to balance out. So that was the analysis.

Okay, and then do you think that this is kind of the last of the kind of reset activities you might have related to capital markets transactions for Archstone or will there be more to come?

No. I think we're done. I mean, the important message to kind of get across here is we needed to get our hands on $9 billion of capital to fund Archstone, and we did $4 billion plus of that through the dispositions that were right on the numbers we thought, right on NAB. We raised $3 billion through the equity market, $1 billion directly and $2 billion through Lehman, and we think that blended price was good. And we needed to make the debt stack make sense. So that other $3 billion or so that we assumed had a duration, Rich, of like 2 years. And so we had a bunch of debt on assets we [hooked] on 10 or 20 years that had a duration of 2 years. And by doing what we did this quarter, we have fixed that and we can move forward and I think the capital structure is balanced.

Okay. Turning to the 3% to 4% revenue growth. Can I just -- can you characterize that for me? Is that kind of what you would get next year from like a loss to lease perspective if nothing changed in the markets? If so, kind of like a static view? But if market rents increased, that number would go up? Or is that a view of what how markets might behave incrementally next year as well?

Rich, this is David. So we don't use left to lease. Basically, we look at the value of our rent roll in December and pretty much multiply that times 12 and divide it by 2013 and that gives us our embedded growth. We're going to assume that occupancy remains, for the most part, steady. And so that embedded number is 1.9%. So if the value of our rent roll remains constant all through next year, all other variables are constant, then we do a 1.9%. As -- beyond that, it's really a market by market, looking at our rent trend reports, kind of estimating what we would expect in rent growth based upon what we've seen this year and what we expect from deliveries and just general strength within the market and then we take a percentage of that number to get a market-by-market number. And then it's just a matter of weighting that -- weighting all those numbers and throwing them into our model.

Okay. So if you said that 1.9% number earlier, I apologize. But do you have a conservative factor baked into that range or is that really you expect to hit 3.5% next year as you see it today?

Well, I guess the only way that I could answer that is that if you look back over the past two, three, four years, we have kind of been dead on in our guidance, in the mid-range of our guidance.

Okay. And then just looking at a recurring trend, and this might -- I don't know if this is just a reclassification issue but I've noticed property management costs it seems breaking at the same store has been on the decline this year versus last year. What's the reason for that? It's down 9.8% this year.

I'm sorry. You're talking about prop management costs closure or prop management costs split between same store? I want to make sure I understand your question.

I'm looking at page 15 of the supplemental and historically property management costs this year have been down by anywhere from 4% to 10% relative to last year. Basically the oversight costs, district management, and all that kind of stuff. I'm just wondering what happened.

Yes, these are the centralization and scaling initiatives that David Santee has led here at EQR and it has gone very well for us, and we hope to continue to harvest some of those benefits. I mean, we're just much more concentrated now, and all the back-office functions that lead into property management has been kind of evaluated and resized to support that more concentrated portfolio. So that's what we're seeing.

I guess my question is how do you expect that to trend going into future years?

That's going to be harder to trend at the same rate because as we exit markets and are able to exit the infrastructure of those markets, that's where a lot of that is also rolling off. We've managed to bring the Archstone assets on, $9 billion of Archstone assets, sell $4.4 billion of assets, and we'll have fewer people running that larger portfolio. So no way will we be able to sort of see the same improvement or same year over year change as we've seen initially. I have every expectation that David and his team will continue to squeeze as much out of it as they possibly can and you certainly would not expect to see this same kind of run rate.

You think there's more synergy type of opportunity left, I assume there is, going into 2014 with the Archstone investment?

Well, yes. I mean we -- our focus for the next couple years most likely be on the service side. So there remains opportunities in consolidating operations at the property level. And in addition, we did make some more senior-level changes in the property management organization in the past month that will, you know, contribute to below average growth in proper management cost for next year as well.

Okay. Great. Thanks.

Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Two questions. Let me first pick up from Rich on the Archstone. In touring with us, I mean, your field folks over the past several months, a number of them noted that there was some immediate pickup in Archstone where they were just able to do things much better and be ahead of expectations, and yet the commentary that you guys provided was sort of that Archstone was in line with expectations. So is this sort of just a difference between sort of at the local sort of very local level versus what you guys see from the Chicago level? Or is it that initially, there was a bunch of pickup low-hanging fruit but then as the portfolio became integrated over the course of the year, that most of that low-hanging fruit sort of went away and now it's basically in line with what you're expecting?

So this is David. I guess, let me answer that question in two directions. First, a lot of the savings that we realized were accomplished as soon as we plugged those properties into our portfolio, and just our operating process. On the other hand, we did bring over all of the Archstone employees, meaning we offered everyone a job, we gave time -- we gave people time to integrate, we made more selective personnel decisions and that took from March until the end of July to accomplish that. But again, that was underwritten as well. So we always have higher expectations on our budgets. And I think you know for the most part, I don't think there's a big difference in what our people on-site are saying and what we are believing as well.

Okay, and then the second question just goes back through to David Harris' questions on the share buybacks. If we look at the share buyback and basically rewarding shareholders from a different perspective, let's just sort of assume that the REITs are what they are. I mean, you guys are not alone in trading below NAV. I mean, you can go to other sectors and everyone's got a similar issue. The buybacks, in theory should help, but in practicality, whether they move the stock or not, there may not be a direct link versus if you guys just increase the dividend even if the stocks remain as is, at least shareholders are getting more money today, more cash flow.

So you guys have an AFFO yield of about 3.5%, you could, I mean -- sorry, dividend yield of 3.5%. You could have -- you have a AFFO yield of close to a 5%. Why not just increase the dividend and say and reward shareholders for sticking around and holding the stock versus the stock buyback, not that you guys are necessarily doing it right now, but a stock buyback where you're hoping the market reacts but the market may not react and current shareholders may not be necessarily any better off because they're still getting the same dividend and maybe the market, just for whatever reason, doesn't want to recognize the discount to NAV that is demonstrated by selling assets, buying back stock?

Well, that was a mouth full. I guess there is an awful lot of theory about -- dividend theory about whether or not you're creating value by giving your -- distributing more to your shareholders or not. We'll just put that aside. We believe that the right way to run the railroad is the dividend policy that we've got right now, which is to distribute 65% of our normalized FFO and to retain some capital for -- fund our development, for incremental investment, for a rainy day, what have you. We think that's the right way to do that dividend. We are -- we will be making a presentation to our Board at our next meeting about changing the manner in which we pay that dividend. Again, this is all subject to the Board approval.

But thinking about paying that dividend more pro rata across the year as opposed to smaller payments in the first three quarters and then a true-up in the fourth quarter. But I guess I'll just say, as I said again, we certainly appreciate and recognize the discount of what we're trading today. I think we've taken the appropriate actions in the past and demonstrated that we think that way, and we won't hesitate to do that going forward. We think that's the right thing to do.

Okay. No, I mean, I just said because you guys can fund developments through dispositions, and as you indicated, the development pipeline will be coming down. So there's -- it would seem like the Company, the free cash flow generation, is definitely manageable and if there's less need of it, hence, thinking that maybe it could just go back to more to shareholders. But yes, we look forward to the next Board meeting, I guess. Thanks.

Next question comes from of Ross Nussbaum with UBS. Please go ahead.

Thanks. It's Nick Yulico on the line. Turning back to the revenue guidance for next year, I was hoping you could provide some of the major factors that get you to the bottom, middle, or top end of that range. I mean, is the big sensitivity where job growth settles out?

This is David. We've never really factored in job growth. We build our expectations from the ground up -- what's going on in the neighborhood of our communities. Certainly, if we had an environment of more robust job creation, we would feel much better about that especially for 2014 considering that will be the peak of new supply.

Okay, because I mean the reason I ask is because there's a feeling that there's pent-up household formation that could happen in this country but we are not creating enough jobs to get that household formation. So it sounds like what you're saying is when you are looking at your guidance for next year, you're basing it on what's going on in your markets now, where job growth at the national level has been anemic even if is strong in the west. I guess I'm wondering is that correct in that you are sort of -- if job growth goes back above 200,000 a month on a national level, does that mean that that is likely additive to revenue next year?

I guess I would say that when we run the numbers, we look out the next 12 months. We either feel like there could be a catalyst or not. We kind of feel like there's not and that job growth will continue to run in the 150,000 range and anything above and beyond that will be favorable to our business.

And will help get the 3 million additional 20- or 30-year-olds that are living with mom and dad out of the house and get those missing households back into the marketplace. (multiple speakers)

That's not factored into the guidance. That's an added benefit.

We look at the economy as we see it operating today, not robust growth, 150,000 or so jobs a month, maybe 170,000 or so I guess with what they've done year to date and just kind of roll that forward but what we also do, as David said, we really look at this neighborhood by neighborhood, sub-market by sub-market, and give our best guess. If we took 7.2 unemployment down to 6.5 and that's -- that job growth significantly change, yes, that would be certainly helpful on the upside, and it would surely help the Washington, DC. Sure.

Okay. Yes. Thanks, David. Just one other follow-up. I think you said earlier that you categorize the Northwest as the market next year that would be above 5% revenue growth. Specifically which cities are pulling in the Northwest and what is the percentage of NOI from the same store that's in that over 5% bucket next year?

So that would be the combined results of Seattle, San Francisco, and Denver. If you want the same store percentages, I'd probably refer you to page 9 where we're telling you what the portfolio looks like at 9/30/2013, not same store but in its totality because our total unit count, same store versus total units owned are going to be very similar so you can see that San Francisco there is going to be 12% or so of our next year same store NOI, for example.

Thank you very much.

Our next question comes from the line of Andrew Rosivach with Goldman Sachs. Please go ahead, sir.

This is Jeff on the line for Andrew. I'm just going back to DC. About 33% of your portfolio you bought from Archstone was in DC by NOI. You've highlighted that DC will be your weakest is 2014 market. Did the Archstone operating income meet your acquisition underwriting?

Yes I don't think we thought any differently about DC when we underwrote the Archstone portfolio than we thought about our own.

Okay. Thank you.

Our next question comes from line of Michael Salinsky with RBC Capital Markets. Please go ahead.

David, on the current pipeline, the development pipeline today, where do you see yields coming in at and how is that comparing to underwriting as you start leasing on a few of those? And then as we think about starts additionally in the back -- in the fourth quarter and into 2015, where are yields penciling on that relative to recoverable acquisitions are today?

Well, again, of our -- of the products we have under construction -- let me back up. What we have delivered and delivered recently has done very well and will meet or exceed our expectations, and some of those deals are in the 8%s, okay? So those are the things that we would have bought very low land prices back in 2009, 2010. So those have probably exceeded our expectations, and many of those are in the 8%s. What's under construction today, so that which we will deliver very soon, is in the mid-5%s, and some of those are even in the low 8%s.

The pipeline, so those being assets we have not yet started, at current rents, we think those are low-5%s to mid-6%s. And again, if one were to trend rents, and again, that's a not a terrific science, but we think some of those deals would stabilize in the mid-6%s to also mid-8%s. And again, as I noted, we are in the market -- in the core markets today. The kinds of quality of assets that we now own and operate in these core markets will trade in the mid-4%s, low-4%s all day long and some of them probably even in the high 3%s.

Great. That's helpful. Second question. Obviously, as you've been going through the repositioning process, disposition has been elevated. As you think about dispositions for next year just in terms of sources and uses, I mean, what should be a normalized kind of run rate for recycling for EQR kind of going forward? And then just a bookkeeping thing, what was the -- where were the two land parcel sales? Were those legacy Archstone stuff?

I guess with respect to the elevated levels of disposition, I can tell you that we are done. We have for many years been selling $1 billion, $1.5 billion, maybe even $2 billion reallocating that capital into our core markets that have been doing so at cap rate spreads between 90 basis points, 60 basis points, as wide as 125. That business is over. What you'll see us do going forward is what I indicated. We're working on LA right now where we believe for the same cap rate, we can sell an older garden property in the valley and reallocate that into a mid-rise property in a downtown.

So you'll see -- I don't know what the volume will be because it will be more a function of what's available and how we think we're going to fund it. But you'll see the spread between what we buy and what we sell narrow considerably, and it will be more tactical. The larger sort of strategic work is done and it will just be more sort of local and more tactical. The land sites we've sold, one was the legacy site that we've had for quite a while in Chino Hills in Southern California and then we sold a Archstone land site in which we had a 23% interest in the San Diego market.

Okay. That's helpful. And finally, David Santee, if I missed this, did you say where were renewals went out for November and December?

Let's see, for November, what they went out -- renewals went out for November at 7.4% and we achieved -- yes, it's a little early to quote our November achieve but we're already at 5%. I mean, when people get the lower increases, they pretty much sign immediately. So the closer we get to expiration date, the numbers climb. But for December, we sent out a 7.9% and we have achieved a 4.3%. But again, that number will grow substantially.

The typical moderation is about 100, 125 basis points, if I remember it correctly?

Correct.

Okay. Thank you much.

We have a follow-up question from the line of Nick Joseph with Citigroup. Please go ahead.

It's actually Michael Bilerman. David Santee, the 1.9% static number you gave heading into 2014, what would that have been heading into 2013 as a proportion of that 4.5% growth?

It was a 2.3%, if I remember correctly.

So as we think about 2014, effectively in the guidance just probably a little bit lighter in terms of rent growth assumptions in 2014 what you would've expected heading into 2013 in explaining the change.

I guess are you asking me about 2014 or --

Well, I'm just trying to think about if you have -- when you were heading into 2013, you had 2.3% locked in of a 4.5% growth profile. Now as we look towards 2014, you have 1.9% set of a 3.5% growth profile. The slight diminution has to come from your expectation on either turnover, rents, renewals, new leases, and how all that blends together.

Yes. Well, I mean, a lot of it is just -- it's an entirely different portfolio with different weightings and I think I said earlier in the comments that Washington, DC will weigh down the portfolio. So I think you have to kind of really look at it market by market and the contribution of percentage of revenue in each market and then the expected rate of change for next year.

Do you have any sort of details on looking at what your expectation is for renewals in 2014 relative to what it was in 2013 and whether that's playing a part or sort of what your expectation is for base rent increases versus for new leases versus renewals?

Well, we certainly -- I mean, that's how we build our model. So we certainly have expectations and a lot of those are -- I mean, renewals are pretty much a function of what we've accomplished this year and assuming that you will have rent growth next year at specified levels.

I'm going to come back to share buyback just for the fifth time.

Why? Why? (laughter)

Is there any reason why -- well, two parts. One, is there any reason why you haven't done it? You talked in September at a conference saying that the stock was one of the best options that you had, yet you haven't bought any stock since then. So I don't know if it was blackout or anything. Is there any reason why you haven't done it yet?

This Company has done an extraordinary amount of very successful and very value creating work this year. And we've had to deal with a great deal of execution risk in getting the Archstone trade done and really that has been what our focus has been, making sure that we get the dispositions done that we said, at the prices that we had hoped to get, the balance sheet restructuring that market has done, putting us in a position where, frankly, we could consider such a thing. And as I said before, and hopefully we can put this matter to bed, at least for this call, and we will continue to consider going forward. So we needed to get ourselves in a position, Michael, where we could do that.

And I assume just given the fact that you're on GGP's board and you're comfortable, I assume, of going direct to a shareholder and buying a block of stock, that that should factor into the calculus as well or not?

I can't say anything about that, so I guess --

I guess with that said, would you be aggressive in going after Lehman and saying, look we're --

Mike, I don't know what more I can say on this particular matter so why don't we just leave it there.

We'll move on. Okay. Last one just on expenses. As you think -- as you look towards next year, you talked about your worst fears on the real estate taxes coming true, driving that expense growth to 3.3% for the year. How should we think about the dynamics in 2014 between taxes and all the other expenses which you did keep to only have 1.5% increase? How should we think about that trend line into 2014?

I think in my comments I said when you do the calculus on a six handle real estate tax, that being 35% of our total expense makeup, and we are going to assume that we have very minimal growth across all the other account lines with some savings in property management, I guess I would say next year looks very similar to this year.

Okay. Good call on changing the dividend policy, and thanks for your patience.

You bet.

Our next question comes from line of Derek Bower with ISI Group. Please go ahead.

I just had a quick follow-up on guidance. Could you quantify what the boost to 2014 same store revenue growth would be from the rehab spend, particularly on the Archstone portfolio?

It's not enough to move that needle.

Great. Thanks

Our next question comes the line of George Hoglund with Jefferies. Please go ahead

I was just wondering if you could give a little bit more color on the transaction environment in markets that have been seeing new supply in more specifically in Seattle where you've seen some of your competitors buy some of these newly constructed assets.

Well, as David, I think, said in his opening remarks, that Seattle has absorbed a lot of new units. It's been one of our top performers and we expect to continue to be a top performer on the operating side. And there continues to be a lot of demand by institutional investors for sort of core, core plus, and lesser-quality assets in that marketplace. So I guess it's across every market in which we currently operate and we think the markets in which we no longer operate, based upon what we've seen in selling a lot of assets in commodity markets, there just remains very strong demand for good quality, cash flowing assets like multi-family.

All right. Thanks.

There are no further questions at this time. Please continue with your closing remarks.

Thank you very much, Lily. Thank you all today but before we close the call, I want to say a few quick words about our friend and colleague John Collins. Some of you may know but most of you may not know that John's decided to retire after a distinguished 19-year career at Equity Residential. During these last 19 years, John has played a very important role in 80 earnings calls, 40 NAREIT conferences, and hundreds if not thousands of investor meetings across the country.

Today is John's last earnings call with us. Next month will be his last NAREIT conference and so I ask you all to please don't forget to say your farewells to John in San Francisco next month. On behalf of everyone at Equity, I will tell you we will miss John's wit and his wisdom as he transitions to life's next great adventure. We thank him for his many contributions in making Equity Residential such a great and highly respected company. Thank you, John, and thank you all on the call for your time today, your interest in Equity Residential. We will see you in San Francisco.

Ladies and gentlemen, this concludes the Equity Residential third quarter 2013 earnings conference call and webcast. You may now disconnect.