住宅地產 (EQR) 2013 Q4 法說會逐字稿

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

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, February 5, 2014. I will now turn the conference over to Mr. Marty McKenna. Please go ahead.

Thank you, Sarah. Good morning, and thank you for joining us to discuss Equity Residential's fourth-quarter 2013 results and outlook for 2014. 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 will turn it over to David Neithercut.

Thank you, Mark, and good morning, everyone. As shown in the results we released last night, both the fourth quarter and full year 2013 ended up pretty much right on our original expectations.

Same store revenue growth for the full year came in at 4.5%. That was comprised of very strong revenue growth in the first quarter of 5.1%, which weakened, as we expected, during the year and ended with still strong, but moderating, revenue growth of 4% in the fourth quarter.

Not surprisingly, San Francisco, Denver, and Seattle continued to lead the way, with Washington, DC bringing up the rear. Also, as we noted last summer, real estate tax increases would come in well above our original expectations, pushing same store expense growth to the high end of our original guidance. And all that resulted in year-over-year growth in net operating income of 5.0%.

But we're extremely pleased with the property performance delivered by our teams across the country, because 2013 was no ordinary year at Equity Residential. Our teams produced these results, while at the same time seamlessly integrating $9 billion of new assets and handling nearly $4.5 billion of dispositions, all at the same time. So to everyone across the equity platform, we send our thanks and congratulations for what was an absolutely incredible year.

In last night's release, we also confirmed our 2014 guidance for same store revenue growth of 3% to 4%. And note again that our same store stat for the full year will include the nearly 18,500 units that we acquired in the Archstone transaction.

Not surprisingly, our revenue growth estimates for next year are impacting significantly by having 18% of our revenue coming from the Washington, DC market, which we expect to produce slightly negative revenue growth this year. More importantly, however, we expect many of our markets to continue to deliver strong, above-trend revenue growth in 2014.

Lastly, I want to note that our 2014 guidance also calls for an increase in our normalized FFO of 8%, at the midpoint of our range. This was very significant, because after many years of elevated levels of transaction activity, as we worked to reposition our portfolio into assets located in high density urban markets along the coasts, a process that we believe was hugely NAV accretive, but one that significantly diluted our normalized FFO growth each year.

Beginning 2014, the earnings dilution from this activity will significantly reduce. And like the first 15 years of our life as a public company, we expect to once again post recurring, normalized FFO and dividend growth in excess of our same store NOI growth, reflecting the benefits of both modest levels of leverage, and the benefits of our size, scale, and our operating platform.

Now, I am happy to turn the call over to David Santee, our Chief Operating Officer, who will take you through what we are seeing across our markets today, and how we're thinking about revenue and expense growth in 2014.

Thank you, David. Good morning, everyone. Today, I would like to provide color on our revenue and expense guidance for 2014, give a brief overview across our core markets, and let you know where we sit today.

During Q4, turnover continued to decline, and net of intra-property transfers, our full-year 2013 turnover decreased 145 basis points to 50%, from 51.45%. Our added focus on minimizing Q4 lease expirations continues to pay off, as our January move-outs showed a decline of 5% year-over-year.

Move-outs to buy homes generally continues to be back paid news, as 2013 move-outs for this reason were 13%, an increase of only 70 basis points for 202 more move-outs across 80,000-plus units. Similar to 2013, we start the year from a solid foundation of pricing, occupancy, and exposure across most of our markets. Today, occupancy sits at 95% with a 7% exposure, identical to same week last year, with a net effective new lease pricing up 3.5% versus same week last year.

Renewal quotes issues for January and February combined are identical to January and February last year, albeit a different portfolio. And we would expect to achieve renewal increases in excess of 5.5% for this period. These early indicators, coupled with improved job growth and consumer confidence, lead us to believe that 2014 will be a solid year for Equity Residential. However, we are mindful of the potential impact from outside supply across most of our markets.

Our 2014 revenue guidance of 3% to 4% is muted by one constant theme. All roads to revenue growth for EQR lead to Washington, DC. At 18% of total revenue, and our assumption of 1% decline for full-year 2014, DC will shave approximately 80 to 100 basis points off of revenue growth for the entire same store portfolio. With expense guidance of 2% to 3%, it's deja vu all over again.

Real estate taxes representing 34% of total expense are estimated to grow at 5.25%, which is improved from earlier estimates as a result of California limiting the tax factor to 1% for 2014, a very rare event. The 2014 tax factor is the second lowest in 40 years, and as a result, it is also only the seventh time in 40 years.

Utilities, accounting for 15% of total expense, are expected to increase in excess of 7.5% as a result of outside percentage increases in natural gas commodity prices, outside consumption of both gas and electric due to historically low temperatures, and an ever-increasing cost in both water and sewer as many municipalities grapple with antiquated systems and limited revenue for modernization.

Mitigating these sizable increases are our efforts to leverage the geographic locations of our new, same store portfolio. Through reengineering our leasing and advertising costs, on site payroll and management company structure, delivering on the expected synergies, as we discussed prior to and during the integration of the Archstone assets. Our top level assumptions that drive our revenue model and guidance for 2014 assume average rent growth of 3.25%, achieve renewal rates of 4.75%, occupancy of 95.4% and turnover at 51.5%.

Aside from DC, we would expect a repeat of 2013, and maintain our same three buckets of revenue growth markets for 2014, which are San Francisco, Denver, and Seattle buckets, which will produce combined revenue growth in excess of 5.5%. The second bucket contains L.A., Orange County, San Diego, Boston, New York, and Florida, which will produce revenue growth from 3.5% to 5%. And then the last bucket, of course, is Washington, DC, delivering a 1% decline.

Now, starting with Seattle, I will give brief market highlights, some revenue expectations, and expected deliveries that combined to drive our thought process for rolled-up revenue guidance. 2014 will see record deliveries in Seattle, with 8600 units expected, amounting to a 46% increase over 2013.

As a very manageable percentage of existing stock, and knowing that Amazon will continue its large capital investment, Boeing has put the union contract dispute successfully behind them, and Microsoft has chosen to make the safe decision with its new CEO, we are optimistic that Seattle will be able to absorb this new inventory with mild disruption, and remain in the top bucket of revenue growth similar to 2013.

No surprise that San Francisco continues to lead the pack as the cost to own far outpaces the cost of renting. With much of the first wave of north San Jose product leased up, with virtually no impact to existing assets, the next wave is upon us. We would expect that any softness in the South Bay would be mitigated by increasing rents in Oakland and the East Bay, as the shortage of affordable housing pushes existing and prospective renters to lower cost sub-markets.

Net effective base rents for this week are up 10.8% over same week last year, and renewal offers for February exceeded 12.5%. While they will see record deliveries of 5,500 new apartments in 2014, the rate of deliveries for 2015 will decline 40%. We see nothing on the horizon that will impact the strong fundamentals that exist in San Francisco today.

Now, Los Angeles fundamentals appear to be in a continuing improvement pattern, with the anticipation of a breakout year for the L.A. economy and a new, pro-business city government. The rebranding of downtown as a world class city, coupled with meaningful additions to infrastructure and transportation, calls us to be very optimistic, in L.A.'s ability to absorb the 11,000 new deliveries expected in 2014. Also, given the centralized nature and small percentage of existing stock, and a 37% falloff in 2015 deliveries, we again see no major hurdles to improving fundamentals and revenue growth.

Orange County and San Diego will continue to see above average growth. With 5,000 new units expected to deliver in 2014 for Orange County, we see little direct impact to the EQR portfolio, primarily due to the coastal nature of these new developments.

San Diego will also see 5,000 new deliveries this year, but is also one of the few beneficiaries of the budget sequestration. With the military's reorientation to the Pacific Rim and sizable allocations of increased spending, we see economic stability in the near term. However, some potential price pressure in the high end of the market in downtown sub-markets.

Boston is currently delivering 5,500 units, with the majority of those units in the urban core, going head to head with many of our assets. We expect rents to moderate without serious disruption, given the net effective rents these new buildings must command. To date, new deliveries were absorbed fairly quickly, especially during the fourth quarter. Given continued strong job growth and a 62% decrease in 2015 deliveries, we would expect any market disruption to be short lived.

New York, in our assessment, is simply taking a pause. With mild elevated deliveries in both 2013 and 2014 at the high end of the market, and increased move-outs to buy homes which were up almost 20%, New York has seen steady demand and moderating new lease net effective rent growth, as the job machine has produced more jobs on the low side of average income. Our outlook remains positive, with renewals achieved still exceeding 4% for Q1.

Washington, DC, despite having 19,000 new deliveries in process as we speak, we remain very positive as a long-term owner. Near-term pricing pressure will net new average lease rents of negative 3% to 4% or greater, while achieved renewals that are already on the books for January, February and March, exceed 2%, netting a 1% revenue decline for full-year 2014.

Detailed traffic statistics on our existing communities and new lease-ups in DC tell us that the private sector continues to hire. Many prospective renters are coming from other states. And while the government is smaller today, they continue to fill positions and move forward. Without a material catalyst in place for significant increase in new job growth, we would expect DC revenue growth to decline even further in 2015.

And last, but not least, is south Florida. With its strong South American influence, the condo market in Miami is back and having a favorable influence on the economy. Modest levels of new deliveries will occur across the three-county MSA, with little, if any, disruption for the broader market.

So in summary, we continue to see strong fundamentals across all of our markets. 2014 will see record levels of deliveries in the urban core; however, 2015 deliveries across our core markets will decline by 40%. We see nothing on the horizon that will negatively impact the continued improvement in the macroeconomics that drive our business and would expect solid performance through 2014 and beyond.

Thank you, David. For the first time in many years, there is really very little to report on the transaction side for the quarter just ended, because for the second consecutive quarter we did not acquire any new assets.

We did, however, sell a couple of assets in the fourth quarter, one in Atlanta and one in Tacoma, bringing the total sold for the entire year to just shy of $4.5 billion. I am very proud to say that this enormous level of disposition activity was accomplished right on our expectations with respect to price and cap rate, as we planned and budgeted for the Archstone acquisition. And is yet another example of the incredible work by our teams across the country in successfully managing the execution risk of that extremely important transaction.

The development team continues to be extremely busy with an elevated level of activity, thanks to our legacy land inventory and the Archstone land sites that we acquired early in 2013. During the fourth quarter of 2013, we started two new projects totaling $382 million total cost, bringing our starts for the entire year to nearly $900 million.

The disclosure of our development business in last night's release shows about $1.7 billion of active development currently under way and nearly $500 million completed and in lease-up. I remind you that of this $2.2 billion total, five assets totaling $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 did sell one land site, the Miami, Florida, which was acquired as part of the Archstone transaction. And we sold that for $22 million, and essentially that was the basis that had been attributed to that. And we continue to hold two Archstone land sites that we expect to sell in the near term.

So today, we hold 12 land sites in inventory that we expect to develop, representing a pipeline of just over 3,500 units in terrific, urban core locations in our core markets, with a development cost of approximately $1.5 billion, and 60% of which is in the San Francisco Bay area. We currently expect to start about half of this product this year and the other half in 2015, which will require an additional $1.1 billion or so of capital, since the land has already been taken down for all of these deals. This incremental capital can be totally self sourced with free cash flow, disposition proceeds, or use of our $2.5 billion credit facility, while still maintaining conservative credit metrics.

So we should average about $750 million of starts in each of the next two years, and by 2016, I would expect that our starts will average less than that level and be in the range of $500 million to $750 million a year. Now, I am happy to turn the call over to Mark Parrell.

Thank you, David. I want to take a few minutes this morning to give some detail on our guidance for 2014, and our capital and rehab plans. And I also want to discuss our projected capital outlay activities for the year.

For the year, we have provided a normalized FFO guidance range of $3.03 to $3.13 per share. The 8% growth we expect in normalized FFO is being fueled by our expectation of continued solid operations, as well as the normalization of G&A and interest expense at much lower levels, which we think approximate our expected future run rate.

As David Neithercut noted, another substantial contributing factor to our expected FFO growth in 2014 is the absence of transaction dilution from our investment activities. We are forecasting acquisitions and dispositions of just $500 million each, and a narrower cap rate spread than in the past, reflective of the fact that the heavy lifting of our portfolio transformation is complete.

Moving on to G&A, we have given annual G&A guidance of $50 million to $52 million, down from $62 million in 2013. We believe that a number in the low $50 millions in G&A is a good approximation of a normal annual run rate for our Company. The increased level in 2013 was driven primarily by Archstone-related and other one-time items.

Also, we would like you to note that we have many G&A costs that are front-end loaded in the first couple of quarters, including compensation matters and certain reserves. And we expect 60% or so of our G&A spend to happen in the first six months of 2014.

And then as a reminder, our 2014 same store pool includes all of the Archstone-stabilized assets that we own and operate as if we owned them for all of 2013. Because some 2013 and 2014 numbers, like property taxes, are impacted by the acquisition, some of the expense comparisons early in the year may require further explanation. We will keep you advised of those items, but we do not expect them to be material.

On to the dividend, as we previously announced, we have made a couple of adjustments to our dividend policy. With respect to timing, we now expect to make four equal dividend payments, starting with our April quarterly dividend.

Also, we expect to continue our policy of paying a dividend equal to 65% of our normalized FFO guidance. But we will fix the total dividend amount at the midpoint of our initial guidance range, and do not expect to change our dividend during the year, even if our normalized FFO ends up being somewhat higher or somewhat lower than our initial normalized FFO guidance for the year.

So applying all this to 2014, we have given a normalized FFO guidance range of $3.03 to $3.13 per share, with a $3.08 per share midpoint. Multiplying that $3.08 number by our 65% payout ratio leads to a projected annual dividend of $2.00 per share, to be paid in quarterly installments of $0.50 each. As a reminder, all future dividend decisions are subject to the discretion of EQR's Board.

Now switching over to our capital spending, we have provided guidance on page 24 for our capital expenditures, which we estimate will be $1,700 per same store unit. That's a pretty significant increase over the about $1,200 per same store unit that we spent in 2013.

We expect rehabs, which I will go over in more detail in just a moment, to ramp up, and see them constituting $450 per same store unit, while routine in-unit replacements, like flooring and appliances, should be around $325 per unit. And that's really quite consistent with prior years.

The major ramp-up in capital expenditures is in the building improvements category, and that includes things like roofs, mechanical systems, and siding. That's where we expect to spend about $925 per unit in 2014, which is up about 50% from the $615 for same store unit we spent in 2013. There's really two things going on that explain the increase.

First, the 2014 same store pool includes the Archstone assets, which include many assets with much higher rents, but also with higher building improvement costs. And second, you may recall that our initial 2013 capital expenditures guidance was $300 higher than the $615 per unit that we actually spent in 2013. Some large building improvement projects that we had hoped to complete in 2013 when we gave you guidance earlier in the year ending up falling into 2014, and are impacting our 2014 numbers.

On rehabs, we will continue to aggressively harvest value from our properties by doing those rehabs that meet our investment parameters. In 2013, we completed rehabs, and these are mostly kitchen and bath rehabs, on about 3,800 units of which 2,560 were in same store. The other 1,200 units rehabbed in 2013 were primarily Archstone assets.

This effort will accelerate in 2014, and we expect to spend about $45 million, or about $8,500 per rehab unit, to rehab kitchens and baths and do other related work on about 5,300 units, all of which will be in same store. This program is very scalable, and we will continue to show good investment discipline in terminating asset rehabs that fail to hit our return targets. And those targets are generally an annual return on cost in the mid-teens.

And finally, switching over to the capital market side, we are extremely well positioned headed into 2014. Our debt maturities in 2014 are modest, and are about $550 million, and are mostly back-end loaded. We have $400 million in hedges that lock in an approximate 10-year treasury rate of 2.5%, so we've mitigated most of the rate risk in our refinancings.

Our guidance assumes a mid-year, $500 million debt deal. We will also spend $600 million this year on the development activity that David Neithercut described. We will fund these development activities with net cash flow of about $250 million. And we will reborrow in 2014 some of the debt capacity created from the disposition activity we had in late 2013 that exceeded our $4 billion Archstone funding target.

We expect to have about $53 million in capitalized interest in 2014. We also expect to maintain an average balance on our revolving line of credit of about $500 million this year, and to end the year with about a $600 million balance. This will still leave us with $1.9 billion of capacity on a revolver that does not mature until 2018. And will help us maintain our target of having the Company's floating rate debt exposure be between 15% and 20% of total debt. We like the very short end of the curve and think some modest exposure to it is appropriate.

I will now turn the call back to the operator for questions. Sarah?

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

(Operator Instructions)

Dave Bragg, Green Street Advisors.

Hi, good morning.

Good morning, Dave.

My question is on your expected trajectory of revenue growth throughout 2014. With respect to stabilization and the year-over-year growth later in this year, or given your comments on DC, should we expect to see continued deceleration throughout the year?

Well, if you look at our quarter -- or sequential numbers, it is really about the Northwest continuing to offset DC, and then some help from L.A. and Orange County. So, it really comes down to what happens in DC, like I said, all roads lead to DC. I am encouraged, I mean when we look at our rents today, our net effective rents were only down 2%. And there's been some strengthening in the last month or so, but you still have 19,000 units to come and another 10,000 next year.

Right. Thank you. And a follow-up to Mark's commentary on CapEx. What was the impact of revenue enhancing CapEx on NOI growth in 2013, and what are your expectations for the impact in 2014?

Hi, Dave. It is Mark.

Historically, it has been between 10 and 30 basis points beneficial, the same store growth. It was about 20 basis points beneficial to 2013, and we would expect about the same in 2014.

But the other point I just want to make to that is we really aren't doing it to juice any of the same store numbers. We're really doing it because we think it's a good investment and we get a good IRR on it. And if we're not, we stop. And it is really as simple as that.

Got it. Thank you.

David Toti, Cantor Fitzgerald.

Good morning, guys.

Good morning.

My first question is, going back to DC, it seems most of the market is pretty fearful of what is happening relative to revenue growth. Is this actually an opportunity in your mind, or could it create opportunities going forward for acquisitions in that market, given relative weakness and probably some upward pressure on cap rates?

Well, I tell you, we haven't seen any upward pressure on cap rates just yet. I will also say that the sample size has been pretty small to draw any conclusions about what we think has happened in the value there. And I guess I would always consider us to want to be opportunistic.

You know at 18% of NOI already. I think it would have to be extremely compelling for us to want to add to that. But we have been active in all of our markets, and we will sort of see what the opportunities are, and make the appropriate decision at the time.

Okay, that's helpful. And my second question then just has to do with condo conversions and condo mapping and the portfolio, given your CBD concentration. Do you think there are some opportunities there (technical difficulty) those assets into a relatively strong housing market?

I think that there is an awful lot of potential condo conversion potential in our portfolio. I don't think you will see us do what we had done for the last time through. But I think that there -- you look at what is happening in New York City, and what has happened to the increase in value of assets on a per-unit, per-square-foot basis in New York, on the condo side versus the residential side or the rental side, and the separation has been significant.

So there certainly is, I think, some potential there. I'm not quite sure if it makes sense for us to try and sell into that. I don't think you will see us do conversions ourself.

But you could -- you know, you could see us explore from time to time the ability to maybe monetize something into a condo bid. And we did repurpose some of our people during the downturn and had to get condo entitlements in California and Florida and other places just to have that optionality, really for a buyer from us.

Right. If you think about it from a yield perspective, if you can sell to a -- if you don't want to do it yourself, but sell to a converter yourself for a 3% cap or a 4% cap and then redeploy into developments, even at a 5% and 6%, I think that would be an attractive turn.

That would certainly be accretive, yes, it would. We will be open minded about that.

Okay, thanks for the details, Dave.

You bet.

Nick Joseph, Citigroup.

Thanks. Full year guidance at $3.08 at the midpoint assumes a substantial ramp throughout the year from the first quarter guidance of $0.70. What is driving that ramp and how do you expect it to trend throughout the year?

Hello, Nick. It is Mark Parrell.

Part of that is that comment I made about G&A, where we have a lot of front-loaded G&A. So just as you go through the quarters, and this is very similar to 2013, if you look, the difference between the first and second quarter in 2013 was about $0.07 a share. And that is really without getting too precise about what is going to happen this year.

You just also have a very large ramp-up in NOI in the portfolio between the second and the first quarter. So interest expense, pretty constant; G&A tapering off; and NOI going up throughout the year as expenses taper off from the high energy costs of the first quarter going into the second. So really, it is not all that unusual for us to follow this pattern.

Thanks. And then you touched on it a little, but could you give some more detail on what is driving that G&A savings this year relative to last year?

Well, sure. It is a couple of different things, and the biggest is that there were compensation costs relating to Archstone that were running through our numbers in 2013 that won't exist. There also was a rebalancing of the Company that occurred in terms of staffing, and so there were employee termination costs that went through there, as well.

So all of that will not, we believe, repeat itself in 2014, and thus, we are going back to a more normalized G&A rate, which is really close to the number we had in 2012. So really, 2013 ends up being a bit of an aberration.

Great. Thanks.

Nick Yulico, UBS.

Thanks, good morning. On the same store revenue guidance, when you went to the market expectations, DC was similar to what you talked about in third quarter. But it sounded like the West Coast and the New York/Florida guidance was a bit better. Is that right? Are you feeling a little bit better about those markets today versus the last guidance?

I guess I would say we are unchanged on New York, but more positive on L.A.

Okay. So everything else is roughly the same?

Yes.

Okay. And then on the same store expense guidance, is there anything besides property taxes being a little bit easier this year that is driving the easier same store expenses this year versus 2013?

Well, I think, because we're adding the Archstone portfolio in the same store, you do have quite a big pick-up in Q1, as we -- as soon as we plug them in, we discontinued a lot of the things that they did over the months. We resized the portfolio. So payroll is helping, but also the management company costs. We did some restructuring, no different than the G&A conversation that Mark just had that is really offsetting a lot of these costs.

Okay. And then just lastly, I was hoping to get some numbers on the rehab units that last year and this year, I think a fair amount of those were in DC, or going to be in DC, some of the Archstone assets. Could you quantify a bit how much of the -- what percentage of your DC portfolio is undertaking rehab last year and this year?

I'm sorry, as a percentage of the total portfolio?

A percentage of your DC portfolio.

I'm not sure we have a percentage of the DC portfolio. As much as we can tell you, about 20% of our dollars of that sort of $45 million-odd will be spent in DC. Between DC, L.A., and San Francisco, that is about 70%.

So the amount of contribution of the rehab properties has a lot to do with what market you're doing the rehabs in. To move the average up from our midpoint, you have to do those rehabs in markets that have growth that is higher than the average. But we're not doing them, again, primarily to just move same store numbers. We're doing them because they're good investments.

In DC, I can't quantify, but I can tell you there is a lot of runway. And we expect to be doing 5,000 units a year across the whole (technical difficulty) -- Probably on a property count, it is about 10% to 15%. So five to seven rate properties.

And that's what is going to be done this year, or what is going to be the combined 2013/2014?

Well, I mean we've got, you just keep reloading. You have seven or eight you did, and you're going to do another seven or eight. And it's just going to keep going through the system.

This past year, we did -- it looks, in DC, there were four fairly large ones going on and several other smaller ones. And next year, I guess, another seven or eight. And a few of these that will be 2013s will continue into 2014, as well.

Okay, got you. Appreciate that. Thanks.

Alex Goldfarb, Sandler O'Neil.

Good morning. Thank you.

Just want to continue on with the expense question. Again, you guys have been very good at managing expenses and almost for us, it becomes -- we get sort of lulled into this sense of no matter what expense pressure you guys have, you seem to find offsetting savings to that net, it is 2% to 3% a year.

As we think -- obviously we're not -- you guys are not providing 2015 guidance. But is it reasonable to think that ongoing as a platform, with all of the expense pressures that you guys have outlined, that 2% to 3% is sort of manageable over the next several years? Or should we think that maybe this year has some aberrational savings, at which point years forward would see some higher expense growth?

I will let David go in just a minute. But I think that what you are seeing is the benefits of the size and scale being brought to bear. A lot of companies out there are looking to get scale. I mean we've got -- and while there is not much you can do about real estate taxes, which is the lion's share -- it is 30%-some odd.

There are certainly ways that David and his team can continue to use our scale. And now with the concentrations that we've got in individual markets, I certainly have an expectation. And I can't, but David will tell you whether these things are 3% or so or not, but I certainly see no reason why we shouldn't do better than others, just because in any given year, because of the benefits of that scale that we have.

So, not that I'm giving 2015 guidance, but I guess what I would say is, go back to the big three. Real estate taxes, payroll, and utilities make up about almost 70% of our total expense.

This year, when you look at the makeup of the real estate tax, almost half of the 5.25% increase is in New York. And about half of the half is the 421-A. So that is known, it is planned.

When you look at utilities, look, it is going to be a big year for utilities, only because of the consumption, the rates on natural gas/electric. But then when you look at payroll, I think we've been pretty disciplined in how we look at payroll. We constantly try to reinvent how we run our portfolio. So I think there is no reason why next year shouldn't be any worse than this year.

Okay. And then the next question is for Mark.

You commented on, that you still have a hedge outstanding. Obviously, I'm sure bankers parade to your office every week, if not more often than that, pitching new ideas, especially in this interest rate environment. Is your view to continue to do more hedging, given the prospect for higher rates? Or your experience in the past is such that calling interest rates is difficult and therefore, it is not worth bearing the cost when the hedge goes the wrong way?

We don't really try to call interest rates. We try to manage risk. Interest rates changing is the same as utility consumption costs changing. It is just another material expense of running the Company.

So what we do, Alex, is we look at how much outstanding debt we have, what the rollover rate would need to be for us to accretively refinance it, and then what the curve requires us to pay for this insurance, going forward. And we have been very consistent over the last 10 years or 15 years of hedging about half of that risk, under the theory that we don't know where rates are going. We are not taking a view. We are just buying some sort of insurance against rates getting away from us.

So when rates end up lower, as they did the prior three years or so on us, we still got a good part of the benefit. And where, like this year, rates ended up getting away from everyone a little bit, we had insurance in place and we will get some benefit. So for us, it is just a risk mitigator over time, and there is really isn't anything about guessing that we try to do in that process.

From Sam's perspective, it doesn't matter that you had to pay a higher rate over the past few years because you locked in the hedging? The view is that if you look over the life of you guys hedging, that net EQRs come out ahead? I guess that is the view?

I'm not in the position to speak for Sam Zell. I will say that we're happy how everything turned out, in general. And I would say that over a long period of time, I think our weighted average cost of capital was lower than really anyone else we compete against, and that is a very important strategic advantage to us.

But again, no one can guess as to the exact moment is a good day to do a debt deal. And I think it is a bit of a fool's errand to try to do that, so we don't even attempt it.

Okay. Thank you.

Alex, I think the way that we manage interest rate risk the most is by laddering the maturities out over a 10-year time period, so that in any one given year, we don't have a great deal of debt maturing. And I think Mark and his team did an unbelievable job of managing that risk away as part of the Archstone transaction.

And as we said, as we see debt issuances coming up in the future, we begin to take some of that risk off the table within nine months or so, or a year, of knowing that we will likely have to do some kind of issuance. But I think probably one of the most important ways we do it is just by making sure that we don't have any -- an awful lot of debt maturing in any one year.

Okay, thank you.

You're welcome

Michael Salinsky, RBC Capital Markets.

Good afternoon, guys. First question just relates to Archstone. Obviously, a lot of synergies recognized in 2013. As you look at 2014 across the portfolio, it sounds like redevelopment is an opportunity, but where else do you see cost savings opportunities or integration opportunities relative to your existing portfolio?

This is David Santee. I guess what I would say is that all of the low-hanging fruit was harvested, pretty much the day we plugged the Archstone portfolio into our platform. So now it is more sharp shooting.

And we have already done a review of payroll, and leveraging the fact that some of these properties are down the block, across the street, what have you. And there will be many, many opportunities of small opportunities. But combined, they will be material over the long run. But I think you're seeing the full impact in the Q1 expense numbers.

Okay. And then second question, David, as you look today, where your cost of capital is, look at the stocks trading, where do you see the best investment options today? Is it -- at this part of the cycle, does it still make sense to be doing core acquisitions, or does it make more sense to be doing value-add acquisitions? And as you look forward, how do you weigh in development on that?

Well, I guess that is a constant discussion here, Mike. On one hand, we will always be trading out of some assets and into other assets. And we have given you guidance of the $500 million of buys and sells. That is just the budget that the guidance is based upon.

We can find good acquisition opportunities at the appropriate spread to move capital from one asset or one market into another. That is something that we will always do.

And then I think it really comes down to, as we think about free cash flow, and that amount of capital that we can raise, without having to 1031. We've got limited amounts of capital we can raise in any given year without having it impact our taxable income. What do we do with that money?

And we look at a development. I tell you, we have been open minded to consider stock buybacks, and we will be thinking about what to do with that every step of the way. We had a Board meeting here in December, as I mentioned to everyone on our last call, and we talked about uses of that capital, and what the opportunities might be, and where the stock price was, and where we thought NAV was. And that is all a part of the calculus.

So we've got $1.5 billion of potential development that we could start. None of it is committed to be started. And we will ask ourselves that question every time there comes an opportunity to start to go vertical on any of that, if that's the right thing to do or if there is not some other alternative use for that capital.

And then just finally, you put net disclosure there on the Lehman stock sales. Were you approached by Lehman in the fourth quarter, or year to date, about the sale of the stock or repurchase opportunities?

Hey, Mike. It is Mark.

Like with many of our large shareholders, there is constant communication. We did not facilitate any of those transactions. Lehman did those on their own.

Thank you much.

You're welcome.

Jeffrey Pehl, Goldman Sachs.

Hi, good morning.

Good morning.

I was just curious if you could give us an update on your development pipeline? What is the current yield you're expecting on that?

Well, of the projects that are under construction today, we've got a high -- so of about a $1.7 billion under way today. We have, on the current yields, we underwrote those at high 5%s, and we think that those deals could stabilize in the mid-6%s.

Okay. Thank you.

And that is, on average, across that entire portfolio of business.

Okay. Great. Thanks.

Vincent Chao, Deutsche Bank.

Yes. Hi, guys. Just sticking with the development yield side of things.

As you think about the $750 million of starts this year and next, is it your expectation that rental growth can keep pace with any sort of upward pressure on construction, particularly on the construction payroll costs? Or where do you think we should expect yields to come in a little bit?

I think that right now, what we are seeing for -- we think construction costs for 2014, I think we will be okay. I will tell you that 2013 probably saw across some of the markets a little bit more increase in construction costs and rental growth. But I think -- but as we sit here, and we think about 2014, I think we will be okay.

Okay. So yields can be maintained. All right.

And then just a cleanup question. We talk a lot about utilities and G&A impacting the early part of the year, but just in relation to the minus $0.05 noted in the press release on OpEx and minus $0.02 of other, is that entirely related to utility costs and G&A? Or is there anything else that is causing some downward pressure quarter on quarter?

It's Mark. You're also giving people pay raises and resetting your payroll run rate, resetting all your medical and workman's comp and other accruals. So all of that happens between the quarters, the first and the fourth, along with utilities, which is the biggest single.

Okay. Thank you.

Scott Frost, Bank of America.

Thanks. I wanted to just make sure I understood the debt issuance here, that $0.5 billion you expect to issue, that's to refi the September maturities? And then an incremental $600 million on the revolver, and that's how you get to your average debt balance you expected in the guidance. That's correct, right?

That's correct. And you need to factor in the $250 million of net cash flow that we get through the year from the operating business.

Okay. And should we think of that $600 million as -- from your comments, it seems we should think about that as a permanent part of the capital structure. It's floating rate debt, that's what you want to have in your capital structure. That's correct, right?

Yes, I think for the indefinite future. We like the very short end of the curve, and I think a little exposure to it makes sense.

And again, it is pretty modest. We have maybe 15% to 20% floating rate debt, and this will get us there. And I guess if there is some great opportunity we will think on it, but right now we think it is best to leave it there.

Great. Thank you very much.

You're welcome.

(Operator Instructions)

David Harris, Imperial Capital.

Good morning, guys. I just sneaked in.

Hi, David.

Good morning. Warmed up a little in Chicago. It sounds like you're carrying a cold here, though, David, eh?

I am. I apologize. I've had to step away to blow my nose several times already. (laughter)

Okay. Did you sell that German unit that you had in joint venture with Avalon that was left -- was it a part of the Austin transaction? Bloomberg was carrying the story that you might have been doing that before year end.

That is all in process.

All in process. So not yet done. Is there much left in joint venture from the Archstone transaction that is left, aside from that German unit?

No there isn't a great deal left, David. We may have $80 million, $90 million of JVs total, putting aside the Germany investment, which we do hope goes away soon.

Okay. And then this is a sort of a big picture question. Obviously, you have done tremendous work in repositioning the portfolio; you've got the assets where you want them now.

Any thought, other than perhaps focus on redevelopment, as to strategic growth initiatives that the Company might have? The position -- the portfolio is where you want it to be, the balance sheet is terrific, your dividend policy is completely transparent. Where do we go next?

We've got a $30 billion-some odd portfolio that we continue to work. And back to one of the original questions, there will always be opportunities to sell assets and reallocate that capital in what we think are better investment opportunities.

So I think David and his team, David Santee and his team, will continue to work very hard to deliver the best performance they can from it. And Alan George and his team will continue to manage the portfolio and try and reallocate capital as best possible. And I think Mark Tennison and the development team will continue to find opportunities for us to redeploy our free cash flow.

We are now at a point where we are going to work very, very hard with what we've got, continue to improve it on the margin. But a lot of it is just blocking and tackling the portfolio that we've got today.

Okay. Well, feel better.

Thank you very much.

Rich Anderson, BMO Capital Markets.

Thanks. Good morning.

Good morning.

Just quickly, where are you on the rebranding of the Archstone assets? And is there any kind of material cost embedded in 2014 for that?

Rebranding is just renaming.

Yes, I mean taking down the word Archstone?

Yes, basically, we have -- we are pulling the trigger as we speak. I would tell you that most of the times, we're keeping the core part of the name, whether it is Archstone, Alban Towers, or whatever, and there is not a significant cost in doing this. And we have -- we will be working on it all year, basically.

Okay. That's enough for me.

And then just the bigger picture, Dave, with Archstone now mostly in the rear view mirror, some opportunities for synergies on a go-forward basis. But you still, as Mr. Harris said, it's still a great balance sheet.

Where do you put the probability in the next couple of years where EQR could again be a participant in some type of M&A deal? Is it, forget about it mindset right now, or maybe moderate or low probability? Where do you think you stand on that issue?

I'd answer it on the question by asking you what you think is out there that is terribly strategic for Equity Residential that would make us the better company after the fact?

I don't want to name names. (laughter)

Maybe just think about it. We did not participate in the last event that occurred. We just didn't see it was important or strategic in any way.

So I think that there will be opportunities for us, probably more on the private side, than on the public side. I just don't look at the landscape and think that there is anything that is terribly strategic and important for us that would make us -- Certainly, things could make us larger, but that's certainly not our goal. We want to be better, and I'm not sure there is anything out there that would make us better.

Okay. Perfect.

You're very welcome.

Mr. McKenna, there are no further questions at this time.

Thank you all for your time today. We look forward to seeing many of you in Florida in early March. Thanks so very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.