住宅地產 (EQR) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Equity Residential Q2 2014 conference call. Today's conference is being recorded. And I will now turn the conference over to Mr. Marty McKenna. Please go ahead sir.

Thank you. Good morning and thank you for joining us to discuss Equity Residential's second-quarter 2014 results. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements if they become untrue because of subsequent events. Now I'll turn the call over David Neithercut.

Thank you Marty, good morning everybody, thanks for joining us today. On our last call I told you that each of our teams across the country had our properties very well-positioned for the upcoming leasing season, and that they were raring to go to maximize revenue during this very important time of the year. So here we are at the end of July, a couple of months into the leasing season in the bank, with August squarely in our sites, I am once again pleased to say that our teams have delivered as promised.

As we announced last night, same-store revenues increased 4% for the first half of the year and 4.1% in the second quarter. As a result we've increased our full-year same-store revenue guidance to a midpoint of 4%, which is at the high end of our original guidance provided in early February. We've also increased our normalized FFO guidance for the full-year to a midpoint of $3.10 a share, nearly 9% higher than last year, and an annual increase that is among the largest we've experienced in the last 15 years.

This is all because the fundamentals remain very, very solid, with continued strong demand for quality rental housing like that provided by Equity Residential. We are also pleased that the continued strength in fundamentals is being experienced across nearly every one of our core markets. Reaching the high end of our original same-store revenue guidance range is not due to any particular market or markets performing significantly better than what we had expected, but rather nearly every market performing above our baseline expectations and more towards our best-case expectations.

Across nearly every market, our occupancy is closer to best case, our retention is closer to best case, market rents and renewal rents are both better than we'd expected, even in those markets where there was some concern about new supply. So we're very pleased about our performance so far this year and how things are shaping up for the entire year. And with that, I'll let David Santee, our Chief Operating Officer, discuss in more detail what we are currently seeing in each of our core markets, and how we performed during this all (inaudible) leasing season. And he'll be followed by Mark Parrell, our Chief Financial Officer, who will address our updated guidance and capital rating activities.

Thank you David. Good morning everyone. Well it continues to be a great time to be in the apartment business as evidenced by our strong revenue performance in the quarter and first half of the year across our entire portfolio. In general, new deliveries that are coming to the markets are being leased up faster than expected while maintaining order and price discipline, with concessions as stabilized assets almost nonexistent. Continued improvements in job growth, consumer sentiment, and added lift to both revenue and expenses from the inclusion of the Archstone portfolio to our same-store set, are helping us drive results at the top end of our revenue guidance for the year.

Today I'll provide color on our four key revenue drivers, briefly discuss our expense drivers, and then up date you on each of our core markets. To date all four of our key performance indicators are stronger than expected. Net effective base rents have consistently exceeded our original expectations by almost 50 basis points, and are currently 4.7% above same week last year. Renewal increases originally expected to moderate slightly below 5% have consistently exceeded 5% and accelerated from 5.4% in Q1 to 5.5% in Q2. With a 5.9% achieved on the books for July and August currently at 5.5%, which we know that will improve throughout the month, we should exceed our full year renewal growth expectations by 60 to 75 basis points.

Turnover for the quarter declined again from 14.4% in 2013 to 14.2%. If you recall in the previous quarters we discussed our lease expiration management, and moving more leases from Q4 and Q1 to Q2, so we seeing a decline in both percentage and absolute terms in Q2, is even more meaningful as residents are less inclined to move from quality buildings and neighborhoods that shape their lifestyle.

With July's [tasks] on the books and notice to vacates given through August and September, it appears that turnover will continue to decline, driven largely by fewer moveouts to buy homes. In fact, moveouts to buy homes declined or were flat quarter over quarter across all of our major markets, with San Francisco being the only exception, which had three more moveouts to buy homes.

Occupancy improved 20 basis points for the quarter to 95.8%, which puts us right on top of our full-year guidance of 95.5%. Expenses for the quarter were up 1.4%, allowing us to make up some ground after the brutal utility expense for Q1. Excluding real estate taxes, all other expenses declined 1.05%, driven by our expected savings from the inclusion of the Archstone portfolio and a more efficient property management operation. As a result of staffing and process optimization across the Archstone portfolio, on-site payroll costs for those assets were down 3.2% for the quarter and 10.2% year to date.

In the maintenance category, again just for the Archstone communities, turn costs were down 32% for the quarter and 40% year to date, as a result of implementing our turnover philosophy which emphasizes the use of in-house labor versus contract services. Additionally, the close proximity of both Archstone and legacy assets have allowed us to optimize our internet spend, and reduce L&A costs across the combined portfolio by almost 20% for the quarter and 17.5% year to date. As we discussed previously, the favorable contribution to same-store expense reduction for the Archstone assets will diminish as we move further into the year and begin to realize stabilized comp periods.

Real estate taxes, which account for 35% of total expense remain unchanged at a 6.2% full-year growth rate. We are confident that this number is a worst-case scenario, allowing us to tighten the total expense growth range between 2.25% and 2.75%.

Moving on to our markets we continue to maintain our three buckets of revenue performance, with the top bucket consisting of Seattle, San Francisco, and Denver, producing revenue growth in excess of 5%. The middle bucket of 3% to 5% revenue growth includes all other markets, excluding DC which is in a bucket by itself with a projected revenue decline of 1% for the full year.

So starting in the northwest, Seattle continues its outside performance with robust job growth and a per capita income 23% higher than the national average. Boeing, Amazon, and Microsoft continue to provide a solid economic foundation. Our two lease-ups are above pro forma rent and well ahead on occupancy. 320 Pine, a 134 unit presale acquisition went from 0% occupancy in February to 99% occupancy in June.

Our central business district, Bellevue, and Redmond submarkets lead the way with plus 7% revenue growth year to date. There are marginal differences when looking at other in-town submarkets versus the suburbs as all submarkets are producing average year-to-date revenue growth of 6.5%.

While the recent Microsoft layoffs were troubling at first, the direct impact of the announced local reductions should have little impact in the Redmond submarket. With new deliveries in Redmond already leased, and only 350 being delivered in 2015. Redmond should do just fine barring any further negative news.

Denver continues the outperformance despite delivering almost 10,000 units. With a high concentration of new deliveries downtown, growth in our CBD submarket is a meager 4.3%, while our well-diversified suburban submarkets range from 7% to plus-9% year to date.

San Francisco continues to be the lead market for the fourth consecutive year. Net effective new lease rents and renewals achieved continue to be in the 9% to 11% range, and we see no signs of a slowdown. Even with elevated deliveries, the level of supply is simply not sufficient to meet demand from the continued tech boom. The peninsula submarket continues to produce the highest revenue growth followed by our downtown portfolio, however, the East Bay appears to be accelerating as renters look for more affordable housing.

Los Angeles continues to perform well and as expected, despite new deliveries being concentrated in the downtown and mid-Wilshire corridor submarkets, these two areas are accelerating and producing the largest revenue growth of our eight LA submarkets, with 5.5% and 5.4% year to date respectively. Our weakest growth is coming from Santa Clarita and West LA, primarily in and around the Marina del Rey area. With such a diverse and improving economy, we would expect LA to continue its positive momentum with above-trend growth for an extended period of time.

Orange county continues to produce accelerating growth as a result of few deliveries and well diversified job [mix]. Moveouts to buy homes have declined in Orange County more than any other market, about 400 basis points. And it appears that both future supply and expected job growth are perfectly in sync over the next several years. San Diego with 3,000 deliveries is realizing price pressure downtown, our lowest revenue growth submarket. The I-5 and the I-15 corridor submarkets continue to do well as minimal supply and decent job growth provide a stable operating environment.

Moving over to the East Coast, Boston, like Denver, is feeling the effects of a concentration of new deliveries in the urban core, although neighborhood and price points can produce dramatically different results. With 6,000 units being delivered across the Boston [MSA], and more than half of those in the financial district, there are pricing pressures at our assets that compete head to head with new product. We also have assets in that same submarket that are somewhat insulated from new deliveries that allow our in-town submarkets to lead all other Boston submarkets with year-to-date growth of 4.6%.

All other suburban markets showed no signs of outside growth in the nearterm as future development begins to move back to the suburbs. Additionally, our significant parking garage operation can impact reported revenue growth depending upon the post-season success of the professional sports teams. Our reported number of 2.8% revenue growth includes those garage performance numbers. Stripping this out, residential results only were 3.2% for the quarter and 3.4% year to date, and 2.4% sequentially.

Stepping down to New York, the pause button is off and the music is playing once again. After seeing rents flat for most of 2013, net effective base rents have bounced between 3% and 5% growth for much of the year. Occupancy has improved 20 basis points year to date, demand has picked up noticeably, and we appear to be on solid footing once again.

Downtown Brooklyn leads our portfolio in submarket revenue growth year to date at 6.5%. The upper west side at 2% is lagging all other submarkets. However, most all New York City submarkets appear to have accelerating revenue growth as rental rate growth shows favorable momentum.

South Florida, well the cranes are back and record prices are being paid for land. Miami Dade leads the charge across a three county metro area as wealthy South Americans continue to expand the job base by expanding their businesses in Miami. All seven of our three county submarkets are performing similarly as new supply is manageable in the improving economy.

Washington DC continues to perform as expected. With lackluster job growth and outside supply, positive revenue growth for the metro area continues to be elusive, although net effective base rents across our eight submarkets can be up [2%] one week and down 2% the next. Occupancy and current exposure are all favorable as demand for quality apartments in great locations remains steady and our current residents are staying put, as moveouts for the first half of the year are down more than 400 basis points, while we continue to achieve renewal increases above 3%.

For DC metro submarkets, the Maryland suburbs lead the way. Year to date, PG County and the I-270 corridor continue to enjoy positive revenue growth, while South Arlington and Alexandria bring up the rear at minus 2.2% and 1.56% respectively. Our district portfolio is negative 58 basis points year to date, but August billings are positive 11 basis points versus last August.

As we look back to our original guidance we believe that many of the markets could absorb the new deliveries without major disruption. So far they have. We also thought that if we could see improved job growth that we could produce better revenue results, and we have. And finally, we knew we had significant opportunity to optimize the Archstone portfolio and deliver exceptional results, and we did. This all together gives us the confidence in raising our guidance for the full year. Mark?

Thank you David. I want to take a few minutes this morning to review our revised guidance for the year and to give the group some background on our recent debt raise and its impact on our balance sheet.

We have provided revised guidance for our same store metrics as well as our normalized FFO per share for the year; we now expect to produce normalized FFO of $3.08 to $3.12 per share, and that's up $0.02 or about 1% at the midpoint from our prior range. This growth in normalized FFO as David Santee just described is being fueled by our expectation of better than expected growth in our net operating income and that's both in the same store set and the lease-up set, offset by about $0.02 per share of additional interest expense as a result of our recent debt deal. Our previous guidance included a smaller debt deal later in the year than the one we ended up doing.

On the transaction activity side we did not change our guidance assumptions on volume or cap rate spread, and there was no net impact on our revised normalized FFO guidance on transactions. David Santee reviewed the factors driving our same-store expectations, and I'm pleased to say that we have increased our targeted range on our same-store revenues to 3.9% to 4.1%, and that's up from 3% to 4% from our February guidance.

And we have narrowed our expectations on expense growth to a range of 2.25% to 2.75%. Now all our results in an expected net operating income range of 4.5% to 5%, and this continues the strong growth we've produced over the last several years and that we continue to expect to deliver. And as a reminder the Archstone assets we acquired last year have been in our same-store numbers this year since the beginning of the year, both in our sequential, quarterly, and year-to-date same store set.

In June on the debt side we decided to take advantage of the incredibly attractive rates that were available to us, and we went ahead issued $1.2 billion of unsecured debt. And we issued two pieces of debt, we issued our first true 30-year debt piece, and a 5-year issuance. We issued $450 million of unsecured 5-year bonds at an interest rate of 2.4%, and we issued $750 million of 30-year unsecured bonds at an interest rate of 4.54%.

We used the proceeds from this offering to repay our $750 million term loan facility, which was scheduled to mature in January 2015, and to repay the amounts outstanding on our line of credit. These issuances were very well received by our fixed-income investors, particularly the 30-year issuance. In fact, the 30-year bond was issued at the lowest interest rate and the lowest spread above treasuries of any 30-year bond ever issued by a REIT, while the 5-year bond issue was priced at near-record low levels. The five-year bonds were swapped to floating, and we will therefore actually be paying an all-in rate of LIBOR plus about 75 basis points. And right now, all-in that would be around 1% on the $450 million in five-year bonds that we issued.

About 11% of our debt now carries the floating rate. As we draw on our revolver during the balance of the year to repay our September bond maturity and to fund development, floating rate debt will increase until it is about 16% of total debt, and that's right in our 15% to 20% target zone for floating rate debt as compared to total debt. At the end of the year I expect our revolver to have a $550 million balance.

There were several advantages in our minds to issuing this debt down. The term loan facility was about 50 basis point more costly than swap rates on the five-year notes [forward], so we do have some immediate cost savings. But more importantly our long-term cost of capital is reduced with such a cheap piece of long-term debt, also these issuances extended the weighted average maturity of our debt to 7.9 years, which is the longest in the apartment space, and one of the longest among all large REITs. When rates do begin to rise this will be a big advantage to us.

Finally, by completing all our 2014 debt refinancing activities and a large portion of our 2015 refinancing activities now, we are in an even better liquidity and funding position over the next couple of years. Now I'll turn the call back over to David Neithercut.

Thanks Mark. Clearly we remain very excited about the strength and fundamentals that we continue to experience across our markets, and we remain confident that due to a very favorable demographic picture and continued improvement in the overall economy that we have a lot of runway yet ahead of us for continued favorable revenue and NOI growth which will result in strong growth in normalized FFO and dividend payments, and total shareholder return for years to come.

I just want to make a couple of comments about transaction development activity. We did buy a couple of properties in the second quarter as noted in the release. In Seattle we closed on a deal that we put under contract in 2011 before construction commenced, and that was the 134 units that David Santee mentioned, which we acquired for $36 million. Recently completed and 67% occupied at closing, it's now fully leased and occupied, should stabilize at a return in the mid 6%s, and that deal would trade at a cap rate today in the low 4%s.

We also acquired 208 units in Glendale, California, about a block from GGP's highly productive Glendale Galleria property; we acquired that property for $70.5 million, it was built in 2013 and was 81% occupied at closing. Today that deal is 91% leased and 87% occupied; it should stabilize with at a yield of 5%.

The one property we sold in the quarter was in Orlando, Florida. 336 units we sold for $41 million. And in our press release we reflect that the yield that we sold of being one of 6.7%, and we refer to that as a cap rate, the true cap rate however, that being the yield that the buyer acquired would be closer to 6% when adjustments are made for real estate taxes and insurance.

As Mark said, our guidance for the year remains to buy $500 million of assets and to sell $500 million at a cap rate spread of 100 basis points. That said, I'll tell you we are seeing a lot more product in the market, a lot of which we'd be very happy to own by trading them into them with proceeds from non-core assets, but bidding remains very competitive and pricing remains very aggressive.

So if we are able to find more investment opportunities that make sense for us relative to the assets we desire to sell, and that's an important caveat, then our transaction activity this year could exceed current guidance. Interestingly, if that were to happen though, the cap rate spread might actually decrease or narrow because the incremental assets we might sell will be less desirable assets in our core markets, and these will trade at lower cap rates than the assets we've been selling in our exit markets.

Real quickly on development. While we may not have completed or started any projects this past quarter, there was and remains a great deal of activity taking place. We currently expect to complete another $254 million of development deals yet this year, which will bring total completions to $621 million or so for the full year. Starts this year currently look like they'll coming in around $1 billion, that's slightly higher than our original expectation, which simply means that some early 2015 starts could now occur in late 2014. And that would suggest additional starts yet this year totaling about $500 million.

Through the second quarter we acquired one land site, also in the Capitol Hill neighborhood due east of downtown Seattle for 140 units, which we'll develop for a total cost of about $45 million. That deal would yield about a 5% at current rents today, and we'd expect to stabilize somewhere in the low- to mid-6%s. With this newly acquired land parcel to our inventory and assuming we do get to $1 billion of starts this year, that would then mean we would have about five development projects that we'd start next year, or 1,200 units at a total construction cost of nearly $600 million. And similarly, those deals would lease at current rents in the mid-5%s, and stabilized yields in the low- to mid-6%s. With that said, operator we'd be happy to open the call for questions.

(Operator Instructions)

We'll hear first from Nick Joseph with Citigroup.

What made you change your mind on that?

Hey Nick, it's Mark Parrell, did you ask why we decided to issue 30-year debt? You got cut off there.

Yes, David, you talked in the past about maybe reluctance to actually issue 30-year debt, so I'm wondering what changed.

Yes, it's Mark Parrell, we have been thinking about it a while Nick. And it's been attractive for a while, but particularly so in the last few months. And we always thought it's a great way to match these long-hold assets we have, that we built and we bought lately with the long-term, low-cost of capital. And our anxiety always centered on the covenants, these meaningful covenants that exist in REIT bonds, and just binding ourselves for 30 years, who knows what will change in that period of time.

But as you look at a rate as low as we were able to get at 4.5%, and you look at the average rate the treasury has been, so imagine 10 years from now we want to repay these bonds. We did a little research and even in a low interest climate we've been in lately, the last 20 years, about two thirds of the time, the 20-year treasury has been at our higher than 4.5%, meaning we'd have no prepayment penalty. So in our minds, just boiling it all down we're getting a great piece of debt, and there was a pretty fair probability that in the future the Company would have the opportunity to take it out for a small or no prepayment penalty if we ever needed to do that. So again, we think it's a great piece of capital to have in the structure long-term.

Thanks. And can you talk about what you're seeing in DC in terms of the transaction market and if there's any opportunities to acquire there.

Well we've seen a little bit of transaction activity; there have been a couple of deals that have traded before any lease-up occurred to avoid the TOPA transaction issues. But I'll tell you that I'm not quite sure I'd define any of that as an opportunity, we think those were still very aggressively priced. So not unlike David had said just in terms of core operations, things are going reasonably well in DC given the supply. We just are not seeing a great deal of transaction activity at prices that we would consider to be opportunistic.

Great, thanks.

You bet.

Nick Yulico with UBS has the next question.

Oh thanks. Just turning to your guidance and your outlook on the markets, if you look, it sounds like DC got a little bit worse in the second quarter, New York City got a lot better, west coast was still very good, and Boston got a little bit weaker. How are you expecting those markets to play out in the second half of the year? Is it going to be something similar, and what's the big sort of variance? Where could the big variance to your guidance be, is it Boston getting weaker, DC getting weaker, or New York City getting even better?

This is David Santee. We've already issued renewals out through August and September. And really when you just look at the flow of the numbers, once you lock down September it's really hard to move the full-year numbers, and really the only way to move the full-year numbers significantly would be having a significant drop in occupancy. So that's why we are confident in our range and in our very tight range.

And then your occupancy comps, I'm assuming you feel pretty good about it in the second half of the year?

Yes, we already have notices through September. Those are normal to lower than last year, which would imply we maintained the same level of occupancy. And then really there are so few transactions in the fourth quarter relative to the full year, it's just very hard to move the full-year number.

And then turn to the development pipeline, can you remind us where you are expecting the stabilized yields for the pipeline in place today? And whether you now think that those yields could be higher than you thought they were say last year?

Well I guess everything that we delivered last year was probably performing better than expectations, just because all the comments David had said about how well we're doing in our markets.

What we're working on today, starting today and expect to start really is the story of 5%s and 6%s, it's the story of deals yielding at current rents somewhere in the 5%s, and we think stabilized two years or so out or three years out in the 6%s.

And is that consistent with the existing pipeline or the existing pipeline yields a little bit higher?

Well the existing pipeline you mean those things under construction today?

Yes, that's right, and what has been recently delivered.

What has been recently completed would be in excess of that.

And then what's --

So everything that start in 2011 is really gangbusters, everything started in 2012 would be a little less than et cetera, et cetera. So now down to a point where anything started today would yield in the 5%s at current rents and again, we'd expect yields in the 6%.

Okay, got you. And one last question David, is you mentioned acquisitions maybe being more attractive today, there is a significant spread where you'd be buying at a lower initial yield than where you're selling. How do you balance that if you are also trying to create earnings growth? I mean it sounds like that would be a dilutive process. Thanks.

No company knows more about that than Equity Residential after all the activity we've taken place and we've conducted over the half a dozen or so years. But that's certainly part of the balancing process.

And we would balance that as I noted in my opening comment by selling assets in core markets that would be less desirable assets, and we would sell those at lower cap rates than exit markets. And again, I don't mean to suggest that we thought acquisitions were more attractive; what I suggested was that we expected to see more opportunity, but we are seeing that it remains very, very competitively softcore and pricing is very aggressive.

So we're going to see more product and we'll see if we're able to make sense of the pricing of that product relative to the proceeds and yields we'll be able to sell and rate capital at, to your point because we do want to manage that dilution. Our sort of plight to the market has been that the dilution we experienced as part of this transformation that we've taken place over the past six years or so will slow considerably and we aim to deliver on it.

Thanks.

You bet.

Moving on to David Bragg with Green Street Advisors.

Thank you, good morning. The cost savings that you outlined as having achieved on Archstone portfolio are pretty impressive, especially considering that Archstone was considered to be a good operator. Can you talk about how those compare to the general cost savings opportunities you see in the broader transaction market? Were you able to save more or last on that integration than what you generally expect as you underwrite deals?

I would say typically we -- it's hard to look back and say what we actually saved because we don't really have new acquisitions' previous results so to speak, we just underwrite it. But I would say typically what we see or the three areas of opportunity are always leasing and advertising, payroll, and turn costs. I can't say that most acquisitions produce that degree of savings.

Okay, that's helpful. Thank you. And then on the transaction market David, can you talk about why you think that you are seeing more opportunities than you expected this year? What is the nature of the sellers?

I think pricing has been very strong, and I think sellers of assets that think that they will likely want to monetize their interest sometime in the near future, they're thinking this might be a good time.

A lot of that feedback comes from the brokerage network that do let us know that they've been requested by sellers to give their opinions of value, and normally when more of those inquiries are made that then does produce more deals coming to the marketplace.

So I will say however though there've been several instances in which properties have been pulled back from market, because perhaps the seller's overly inflated expectations failed to be met. But the brokerage is telling us more is coming, we are certainly seeing more and I think it's more of a desire shorter-term holders thinking today would be a great opportunity to monetize their equity investment.

Okay. And what's the landscape for portfolio purchase opportunities?

There have been a few out there. Some concentrations in some markets and then some larger portfolios with despaired assets across lots of markets, some of which would be considered non-core from our perspective. But I would not say there has been an abundant amount of larger portfolios, there have been just a small handful.

Okay. And now last question is as you talked about starting some of the non-core assets or less desirable assets within your core markets, can you just walk us through that process in which you analyze your own portfolio and discuss the attributes of some of the assets that you might be selling from these markets? Are they older, are they more suburban? Any insight like that?

Yes and yes. They remain older assets and more sort of suburban surface park garden kind of product. Suburban DC is an example, Inland Empire, some stuff in various submarkets of southern California, maybe even of Seattle. So there are assets that ultimately we know that because of their age and location might not be long-term holds for us, and if there are opportunities to sell those at attractive yields relative to what we can buy them, we'd be more than happy to make those trades. But there's no pressing need to do so today.

Okay, thank you.

You bet.

Jana Galan with Bank of America Merrill Lynch.

Good morning. For David Santee, can you comment on what new lease rent growth was in July?

New lease rent, I have it for the quarter which was 5.5%.

Thank you. And then any comments on A versus Bs within your portfolio?

Well when I look at our results and I tried to allude to that in my prepared remarks, I guess I would just say it depends. It depends on where you are in the market, what type of supply you have, what type of new product is coming online.

We have some of our best-performing urban assets in Boston, are B communities. Some of our best-performing assets in Seattle are B communities. So it's really a mix of location which I think is becoming more and more critical. I think people are looking for a place that is going to shape their lifestyle, neighborhood is ultra important. And I think if you are in those neighborhoods both As and Bs will perform equally.

Thank you. And then maybe just a quick question on the transaction market. Just maybe David, your view on whether you are seeing -- I know you said there are only a small amount of portfolios, but whether those are looking like they would get premiums, or could they actually be at a little bit of a discount because there's only a limited number of buyers that could take down a very large portfolio?

Well it doesn't take an awful lot of buyers; it only takes two. I think it's very possible you could see some premium pricing on those portfolios because of size. Again, there is an awful lot of capital chasing a few deals in the space, and if one has a desire to get capital out into multifamily segment, a large portfolio may be a way to do that and that could result in maybe some modest premium pricing.

Thank you.

You are welcome.

Moving on to Ryan Peterson with Sandler O'Neill.

Hi thank you. You talked about your ability to grow rents this quarter, there seems to be a lull in land owners' ability to push rent at the end of 2013 or the beginning of this year. Do you think that was seasonal or did it just take some time for renters to adapt to the new asking levels?

I would say in general there is at the top level portfolio level there is definitely seasonality in the pricing. We cracked that, we cracked it for the last eight years and basically rents call it rents dripped off 3% to 5% in Q4 and Q1 just because of lack of demand.

Okay, thank you. And then on a separate note, do you think there's going to be a trend of more condo and apartment deals like yours with Toll Brothers, and if not, what are the challenges that would limit more of these deals?

Well I guess we have done a very successful transaction that we've done with Toll Brothers. And I will tell you we have had numerous conversations with others on similar opportunities, but a lot of things have to come together. Pricing for the apartments have to make sense, pricing for the condos have to make sense, the [to-tally] needs to make sense relative to the land pricing, et cetera, et cetera.

And so I would not be surprised to see more of that, not unlike mixed-use projects you've seen, we've got a lovely property in Manhattan that's above a hotel for instance, I think it's a great way to share costs and to mitigate risk. But again it's just one of those things that has to come together. It adds more complexity and more moving parts that just makes it more difficult to accomplish.

Okay thank you.

You bet.

We'll now hear from Ryan Bennett with Zelman and Associates.

Hi, good morning. I appreciate the color by submarkets in your prepared remarks, I'm just curious where you see the peak of new deliveries across your submarkets now, versus where you saw at the beginning of the year?

Well you mean for 2014?

Yes, I guess when you're expecting the highest number of deliveries across your submarket.

So I think the easiest way to look at it is just a calendar year, I mean when we kind of review each of these markets on a quarterly basis, which we did last week, it was clear that we're about 60% of the way through our deliveries at the top level, so which means we have 40% to go.

Got it. And how do you see that playing out into 2015? Does the comp get significantly better across your submarkets based on the value that you have?

Well I guess I would say we made some minor changes to deliveries this year, but they are only going to be pushed into 2015. So when you look at 2014 and 2015 combined, the totals have not really changed. So we would expect declines in deliveries next year, and hopefully with continue improving job growth, a great GDP number today, that the economy will continue to improve, and we will continue down this path of absorbing units with relatively little disruption to our day-to-day business.

Okay, great. And then just to follow, I think in your prepared comments you mentioned Boston's typically seen some increasing development shifting back towards the suburbs. Have you seen that in any other of your major markets?

Yes, so when you -- probably the most obvious is Washington, DC. You start to see development move back out to Weston and outside the beltway beginning next year and beyond. Every other market, not so much.

Thank you.

Then next question comes from Richard Anderson with Mizuho.

Hey, thanks good morning.

Good morning Rich.

Just a couple maybe smaller events that maybe tell a bigger story. The first is to Mark Parrell, swapping to floating, it seems like you're getting a little greedy there. Can you talk about that strategy to go floating from a good rate to begin with?

I'm deeply offended at that comment (laughter). Our thought -- we have strategy on that Rich, I mean what we're trying to is avail ourselves of two different points on that debt cost curve, and long is great, 30 years is terrific. And the other side we like is LIBOR. We think the floating rate being short when LIBOR is 25 basis points and feels like for the near term it will be around that number, that feels pretty good to us.

And I think with the kind of portfolio we have, with the lease growth we expect, if rates do go up as David Santee just alluded to, we have more growth, then I think the revenue line and the interest expense line item will move in sync, and they'll all make good sense. So I guess I would say I don't get particularly greedy about that, I think that was part of the strategy.

We're incrementally down on floating rate debt, we're lower than most of the guys in the apartment space right now, but we'll end up at about 15% or 16% by the end of the year.

Okay. And then to the land purchase in Seattle, despite the nice GDP number today, it seems like there and elsewhere you are kind of operating fundamentally at a hyper level, good solid demand offsetting increases in supply. I am just curious with the city of Seattle in particular you have a lot of supply going on. The rationale to continue developing that market maybe is that -- what is the thought process there? It seems like it's been great but maybe again getting a little greedy.

Well again we've got a very low -- relatively low percentage of our income coming out of that marketplace. This one is just about a $45 million total cost project, so I'm not quite sure how a $35 billion Company can be greedy with a $45 million development deal.

I also suggested that in response to one of the other questions that some of what we may sell may be some suburban Seattle stuff. I mean what we're building is downtown close-in in Capitol Hill and South Lake Union and Ballard downtown. So we like those locations, and as David said, we're performing very well in those locations. So again, less than 7% current NOI exposure, I'm not quite sure that doing a $45 million deal is getting us over our skis in Seattle.

Fair enough. And then a bigger picture David, the two deals in the second-quarter acquisitions were kind of a value add, sort of swing to it with buying some vacancy. Do you think that will be more and more a part of the acquisition story for you to get reasonable pricing on deals to take on a little bit of lease-up risk in the front end?

Well the one deal we put under contract in 2011, so it was not a recent decision on that. The one deal we did buy in Glendale was that, and we bought vacant properties maybe half a dozen vacant properties, so I think that anything we do that we believe gives us a competitive advantage to buy a property at a more attractive price is something we'll do.

So we're certainly not afraid of that. And that again was an example of someone looking to monetize their interest in a good market and not willing to wait the extra six months or a year for a deal to get stabilized, and we were more than happy to be there to take advantage of that. Again, we'd buy that deal stabilized 5%, and it traded at a low 4%, maybe even a high 3%. So it's one way a company of our size can take advantage of our balance sheet to maybe get a premium return.

Okay. And then the last question maybe for Santee. $20 million incremental rental revenues second quarter versus first quarter, understanding the seasonality issues and the strong performance during the quarter. But is that a good number, or is there anything lumpy in the second-quarter revenue number top line?

Just pure, good revenue Rich.

Okay. So my NAV is now 80, but you know --

(laughter) why so low? Don't hold back.

Thank you very much.

Thank you Rich.

Vahid Khorsand with WBS Financial has the next question.

First question on the Washington DC market it looks like it's stable but could grow and could improve; is that what it looks like to you?

Well DC, we have 20,000 deliveries this year, we're roughly 60% through that. However, when I look at our billings today we are for the month minus 10 basis points. So we are seeing better occupancy, we are seeing the net effective base rents stabilize. And as I mentioned, some leases they can be up 2%, and next week they could be down 1%, it really just depends on what is available and where and to what degree that impacts the portfolio.

But I guess I would say that I am very pleased with how DC is behaving, and if the next six months are like the last six months then I think we are setting the stage for some reasonable, stable performance.

With that in mind do you think we are approaching a time frame where you might be looking to add assets in the DC market?

Yes, I responded to a similar question earlier suggesting that what we have seen in terms of pricing, what has taken place, there's been not anything we'd define as opportunity. So I do not think that's the market we're going to be pursuing at the current time, but we never say never. If not unlike the lease-up deals we just did, we found something that we could do at a premium, we may very well do that, and we'd pair that with a sale of something in one of the suburban markets so that net exposure would not increase.

Okay. And my final question on the leasing and advertising line, what do you attribute to the drop that seems to be happening every quarter on that? Is that related to the efficiencies through the Archstone deal or is that something else? suburban markets a net exposure would not increase.

Well I guess I would say that it's related to the Archstone inclusion. However, the savings is spread across the entire legacy portfolio. And probably the best example, if you go to New York City where we have two properties right across the street, Archstone used to be in ForRent and Apartments.com and what have you. And we would have our property in all those same three or four ILSs. And basically what we do is we go in and optimize so that the Archstone property goes from four ILSs down to two, and all the property goes from four ILSs down to two, and we cross sell those properties on our website, so you're basically eliminating half of your ILS spend due to the close proximity of the assets.

Okay, thank you.

You are very welcome.

We'll now hear from George [Hugglin] with Jefferies.

Hi guys. I have two questions. First one is on Orange County, since it's had some strong performance this year so far, you have increasing supply coming on in the first half of 2015, how do you view that market being able to absorb that supply?

We have seen extremely good job growth in Orange County. I would say that there is maybe one or two large deals that could have some short-term impact, but we feel very comfortable that that market can absorb the supply that is on the books as of today.

Okay. And then the second question is with the homebuilders moving more so into the multifamily development, how do you view that going forward as sort of impacting things in terms of will it be more so deals like your existing deal with Toll, or do you think it will be more so homebuilders just doing these deals on their own, and do you think this will have a significant pressure on supply or potential pressure on supply going forward?

Well from what we understand from my conversations with the few that are doing it, is it's more of the latter, it's just them thinking it's a good business for them to be in directly. I think thus far it's really been in markets in which they have large single-family home presences and just really have not bumped up the market -- it's a lot of sunbelt product and we just don't think it competes with us. So at the present time we don't see it as competitive threat to us.

Got it, thanks guys.

You're welcome.

Nick Joseph with Citigroup.

Had a couple of quick follow-ups. One was sort of capital structures, if you're thinking has evolved on the 30-year debt, I'm curious how you're thinking is on common equity. And the reason I ask is when you did the Archstone deal, you obviously issued $1 billion at call it I think 64, 75ish if I remember correctly, stocks up north of 20% since then. I guess how do you think about using equity if you can't find the dispositions or you haven't brought things to the market and you find some acquisition opportunities, would you use equity?

It's certainly in barrels in our river. I guess we're at a point Michael, where we continue to have some odds and ends of assets that we'd like to use as capital to provide proceeds buy whatever we think we may like to do out there. I don't think there's anything that's terribly important or strategic or fully compelling for us at the current juncture.

So my guess is our expectation would be to buy with what we can with what we can sell; to buy assets at these prices and issue stock at these prices, maybe there's some modest arbitrizing there, but over 375 million shares, I'm not quite sure that there is a whole lot of real purpose there. But we certainly do look at all of the different segments of capital and Mark and his team have done a great job across the debt side. And obviously we're very pleased with where the stock is today, and have that be at a place where it might make sense to actually do that. But again, that's also a function of what we can buy, what's the right proceeds, and we always consider all of those options.

I guess there's no need for what you have on your plate today to even tap the ATM?

That's correct. Our development pipeline as Mark has said over the past several calls, if we improve cash flow with disposition proceeds, we can manage the pipeline with development that we have, so we are not obligated to go into the market to address that.

Okay. And then I assume there's been no change or evolution in terms of how you're thinking about some of the adjuncts to housing, whether it be single-family rentals, student housing, senior housing, there hasn't been any shift in your thinking on any of that, has there?

That's correct, there has been no shift. We looked at single-family years ago and didn't see it as anything but a distraction. And as we think about the markets we are in today, the assets we own and operate, they're attractive to students, they're attractive to seniors, and we don't think we need to move into purpose-fill products to access those two segments.

The last one on conversion to condos, anything that you are working on where you can sort of raise capital, that would be a pretty low effective cap rate. I know you talked about selling some potential core assets -- non-core assets in core markets, but I'm curious as to the conversion play.

Well so far I think that has been a little more talk than action, and I think that certainly we look at our assets and there could be condominium premium embedded in those. But so far that was more talk. We've seen pricing on the price trade that seems to have been bought off at some kind of premium. Again, a lot of that is a function of what are you going to do with the proceeds, because they have to be reinvested. But it's certainly something that we're thoughtful of and keeping an eye on.

Can you do that on any of the upper west side buildings, the Trump Buildings?

You mean structurally?

I mean pricing of what Xcel's building south of that, obviously would mean a very high value as condos for some of those buildings.

Obviously, that's extremely brand-new product being built to a particular spec, and you can't necessarily extrapolate that directly to a product that was built as apartments that could be now 15 years ago.

But clearly we're aware of what's happening in the condominium activity around our properties. I would also tell you that much of what you read about condos in a place like New York City where there's a very high-end luxury large price point stuff, you read little about what's happening at the more middle range, but it's something we're keeping a close eye on.

Okay, thank you.

You're very welcome.

Our next question comes from Michael Salinsky with RBC Capital Markets.

I have a couple quick follow-ups there. David Santee, you've mentioned a 5.5% on new leases, I think that was second quarter. Is that a year to date or do you have a lease-over-lease rate there? And also given the occupancy and the lower moveouts that you're seeing, can you talk about the strategy with new leases in the back half of the year, whether you expect to continue to hold that out a bit more, or you expect that to follow more normal seasonality?

Yes, I'm glad you asked that question because I quoted the renewal rate at 5.5% versus the new lease, so the base rent year over year is dropped 4%. So new leases are 4%, renewals are 5.5%, and then the combined for Q2 is 4.1%.

Okay, that's helpful. And then how does that translate to the back half of the year strategy in terms of new lease rates? Do you expect anything different relative to normal seasonality you've seen the last couple of years?

No, I think what we see year after year is that rates will drip down. I mean we are as we discussed previously to minimize those expirations in Q4 to minimize that drip in both occupancy and rental rate.

In a place like DC we're probably going to be a little more defensive in maintaining that occupancy only because we are not done yet, we still have another year of big deliveries. And the stronger we can maintain occupancy in a market that's delivering units, the more pricing power, or the less susceptible we are to having to give concessions. So that will be our strategy in that market, but typically the seasonal pattern is identical year after year after year. It's just -- but what we see is that we see the same gap, so if rents are up 4% today we would expect that those rents to drift off but still be 4% above last year in Q4.

That's helpful. And then David, just the $500 million you've identified as your acquisition and disposition target, how much of that actually has been identified at this point? You talked about potentially a large pipeline, just curious of the opportunities you're looking at today, how much of that has been identified?

I mean I guess enough of it that we think the $500 million and $500 million can and will be achieved. And I guess my comment is we think that as the year progresses there will be more opportunity and perhaps we'll have an opportunity to identify more. But as we looked at what was kicking around out there that we were working out under contract et cetera, we feel confident that $500 million and $500 million was still doable.

Great, thank you much.

You're welcome.

We have no further questions Mr. McKenna, I'll turn the conference back to you for closing or additional remarks.

Thank you all very much. Enjoy August and the rest of the summer, and I'm sure we'll see a lot of you on in September. Thank you for joining us today.

And again ladies and gentlemen that does conclude our conference for today. We thank you all for your participation.