住宅地產 (EQR) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the Equity Residential 3Q 2014 earnings call. Today's conference is being recorded. At this time, I would like to turn the call over to Marty McKenna. Please go ahead.

Thank you, Pam. Good morning and thank you for joining us to discuss Equity Residential's third-quarter results. Our featured speakers today are David Neithercut, our President and CEO; and David Santee, our Chief Operating Officer. Mark Parrell, our Chief Financial Officer, is also with us for the Q and A.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent facts.

And now I'll turn it over to David Neithercut.

Thank you, Marty.

Good morning, everyone; thank you for joining us for our call. As we've said for quite some time, that we are very confident the impact on multifamily fundamentals by the millennial generation and their desire to live in high density urban environments with the flexibility and optionality provided by rental housing would produce an extended runway of growth for our portfolio. That is certainly what we are seeing today and expect to see for the foreseeable future.

Thanks to a great leasing season and the hard work of our teams across the country, we expect to deliver same-store revenue growth for the full year of 4.1%, which is above our original expectations at the high end of our most recent guidance. This comes from continued exceptional growth from the usual suspects, markets that are enjoying strong job growth and are highly attractive to young millennials such as San Francisco, Seattle, and Denver along with very solid performance from other markets including Southern California.

This strong revenue growth will help produce full year 2014 normalized funds from operations of $3.12 to $3.14 per share. These results are above both our original and most recent guidance and represent a year-over-year increase in normalized FFO of nearly 10%, an increase that is among the largest we've experienced in the last 15 years. It's because of the incredible portfolio we've assembled over the last few years.

Concentrated in high density, urban markets with close proximity to public transportation, dining, culture, education, nightlife, and the like. The demand for high-quality rental housing in these markets remains very strong. Occupancies are at all-time highs for this time of year. Renewal increases are at the highest they've been all year. And our current left-to-lease remains below normal levels. In short, fundamentals remain very good.

With continued strong demand for quality rental housing like that provided by Equity Residential, and we're delighted with where we are currently positioned with our performance this year and we all eagerly await the year ahead. So with that said, I'll now let David Santee, our Chief Operating Officer, discuss in more detail what we're seeing across our markets today and how that is shaping our thoughts about 2015.

Thank you, David.

Good morning, everyone. We are extremely pleased to produce another very strong quarter and I would like to take a moment to recognize everyone on the [EQR] team for all of their extra efforts during our peak leasing season and continued excellence in the execution of our operational strategies.

Our reported third-quarter revenue growth of 4.1% and commitment to delivering results at the top end of our revised revenue guidance represents continued strength in fundamentals and acceleration in many of our key drivers of revenue growth. First is the change in physical turnover. Although we reported a slight increase, it is directly attributable to an increase in the number of intraproperty transfers, meaning residents moving between apartments in the same community.

Netting out transfers for the quarter, resident turnover was flat, and down150 basis points year-to-date. We also believe it's important to understand the motivations and economic impact behind these transfers which represent over 10% of moveouts in any given year. Through September, 64% of all of these intraproperty transfers moved to a larger and/or more expensive apartment, paying an average increase in rent of $339.

All transfers, both up and down, produced an average favorable rent change of $66 per month. The continued decline in turnover helped by a 90 basis point quarter-over-quarter reduction in moveouts to buy homes gave us confidence to maintain our aggressive pricing strategy despite record deliveries and lease-ups across many of our markets.

Net effective base rents have increased 6.7% year-to-date and for the third quarter, averaged 4.5%, greater than Q3 of 13. Renewal rates achieved accelerated for the fourth time in four quarters, moving from 5.2% in Q4 of 2013 to a very strong 6% in Q3. We would expect to see similar results through the year-end, though transactions will be few.

Increased demand as a result of an improving job market allowed us to maintain our aggressive stance with pricing. But also realized substantial occupancy gains during the peak leasing season. Increasing from 95.7% in 2013 to 96.1% this quarter. Year-to-date occupancy stands at 95.7%, a 30 basis point improvement. And as we sit here today, occupancy is 96.2% versus 95.4% same week last year, with a 120 basis point improvement in left-to-lease down to 5.9%.

Looking out over the fourth quarter, we, of course, anticipate the typical seasonal slowdown. However, our net effective base rents remain elevated over same week last year creating year-over-year net effective rent growth in excess of 5%, the highest year-to-date. Should this trend continue, and we don't experience the full effects of the normal seasonal decline in both rents and occupancy, it is possible that we could slightly exceed our revised full-year revenue growth of 4.1%.

Now I'm going around the horn with the brief market highlights. Seattle continues to outperform with 100 basis points better occupancy. Renewals achieved for September and October are above 9% and net effective base rents are up 5.7% versus same week last year. Our delivery estimates for 2014 and 2015 are 7,800 and 7,300 units respectively. Growing relocations of various company and regional headquarters, Oracle as an example, offer encouraging signs of continued diversified demand in the urban core. Amazon alone has over 4,800 open positions in its downtown locations.

San Francisco -- the only question here is how high can it go? With few deliveries relative to demand, San Francisco is positioned yet again to lead the way. Renewals achieved for September and October were once again above 10%. Occupancy today is 97.1%, which is 130 basis points better than the same time last year and left-to-lease is 170 basis points better at 4.7%.

Net effective base rents are 12.5% above same week last year and there are no indications that this will slow down in the next couple of quarters. Now, like the other West Coast markets, LA Orange County and San Diego are all experiencing 80 to 90 basis points improvement in occupancies and lower left-to-lease. All three are experiencing broad-based job growth and improving fundamentals. LA will see elevated deliveries in 2015 at 8,800 units. However, the downtown area is quickly establishing itself as the place to be.

Pressuring the West LA, Santa Monica and Marina submarkets which are also in a [repositioned] play as the Silicon Beach, playing host to new tech startups and satellite locations for the Googles of the world, providing more affordable living options relative to its northern California headquarters.

Orange County remains solid with 2,900 new deliveries slated for 2015. While job growth is broad-based, the majority of deliveries will be concentrated in Irvine where job growth is five times the growth of Orange County as a whole.

Jumping East, going to Boston, it will continue to be pressured in the financial district and Cambridge as new lease-ups come online. Concessions in the 2- to 3-month range are commonplace but the net effective cost of a 12-month lease remains higher than stabilized well-established product. Occupancies remain healthy with 7,000 units absorbed year-to-date. With 5,100 deliveries slated for 2015, seasonal demand is very pronounced in Boston and we would expect moderation in occupancy and rental rate growth through Q1 of next year.

Now in New York we're continuing to deliver solid and steady growth in Manhattan. And for definitional purposes, Manhattan also includes Brooklyn and Williamsburg. We delivered a 4.2% for the quarter. With elevated deliveries in both Brooklyn and the Jersey waterfront, we would expect some moderation in Brooklyn but significant pricing pressures in Jersey. With continued strong population growth, well-diversified job creation -- think Silicon [Halley] -- Manhattan should be a solid steady performer for years to come.

Now it's no secret that South Florida is at it again with almost 11,000 deliveries for 2014 and another 12,000 in 2015. With over 50% of the deliveries in the Miami-Brickell submarket and the balance east of 95, from Fort Lauderdale north, the EQR portfolio should be well-insulated both geographically and by price point.

Saving the best for last, Washington, DC, thus far continues to hold up pretty well. Renewals achieved remain above 3% for the quarter and through September. Over 14,000 units have been absorbed year-to-date and our portfolio continues to perform slightly better than our original 2014 expectations. With another 12,600 units coming online in 2015, we remain cautiously optimistic that next year's results will be similar to slightly worse than 2014.

More than half of 2015 deliveries are located outside the Beltway, concentrated in the I-270 corridor and south on US-1 between Pentagon City and South Alexandria. The RBC corridor, Arlington and DC proper, all have significantly fewer deliveries going forward and to date have been some of our better performing submarkets.

Expenses for the quarter increased 60 basis points year-over-year and are up 1.7% year-to-date. Third-quarter expenses were favorably impacted by an adjustment for full-year real estate taxes as a result of two significant appeals that were won in Florida. We just didn't expect to resolve those appeals this year but those came through late in the quarter.

Continued reductions in property management costs as a result of efficiencies drive from the Archstone integration and restructuring as well as natural gas and electric costs continue to moderate with utilities declining 1.3%. For full-year 2014 we would expect expense growth to be 2.2%. With year-to-date expenses of 1.7%, Q4 expenses expected to grow 3.6% will be driven by slightly higher utility costs, real estate tax of 5.7%, and higher payroll costs as a result of stabilized operations from the Archstone integration.

Now as we think about 2015 and our preliminary guidance of 3.5% to 4.5% topline growth, we'll be making adjustments to our three buckets of market revenue growth. Washington, DC, will continue in a bucket of its own, with a revenue decline of approximately 1% again for 2015. While DC has absorbed more than 14,000 units thus far, we're still at the midpoint of delivering a combined 30,000 units for this year and next.

Our middle bucket of 3% to 5% revenue growth will consist of Boston and New York. New York should produce full-year results similar to 2014 while Boston will be closer to 3%. Our plus 5% revenue growth markets continue to be led by San Francisco, Denver, and Seattle. Los Angeles should be a solid plus 5% performer with Orange County, San Diego and South Florida crossing the 5% threshold early in the year.

For expenses, 2015 are built from the ground up. But as we think about them today, real estate taxes will have a [five] handle and make up 34% of total expense. We should see moderate growth in payroll as a result of diminishing returns from the Archstone integration. However, utilities should produce meaningful year-over-year reductions in cost as a result of lower natural gas and electricity costs. All combined, real estate taxes, payroll and utilities, make up almost 71% of total expense. With that in mind, we would expect 2015 expense to be modestly higher compared to 2014 with more color to come on our Q4 call.

So, we are mindful that many markets will continue to have elevated deliveries. We believe that improved job growth is upon us and delays in marriage, are creating additional demand. People of all walks of life are seeking a lifestyle in the city and renting by choice. Owning a home is no longer a required variable in the calculus of achieving the American dream and homeownership rates continue to decline.

Certainly this must be a formula for outsized demand for quality apartments that should produce above trend revenue growth for some time to come. David?

All right, thanks, Dave.

Clearly, we remain excited about the strength and fundamentals that we continue to experience across our markets. As David noted, we were driven by an improving economy, steadily improving job growth and a recovering unemployment rate. We remain confident that due to a very favorable demographic picture, and as he noted, changing lifestyles, such as a [millennial] who's staying single longer and they really are embracing the flexibility provided by high density rental housing within close proximity to their friends and their favorite activities.

We've got a lot of runway yet left ahead of us for continued strong revenue and NOI growth which will result in favorable growth in normalized FFO and our dividend payments to total shareholder return for years to come. With the heavy lifting of our portfolio transformation behind us, our transaction activity today is more fine-tuning in nature as we complete a few remaining market exits and we redeploy that capital into longer-term core market investments. We sold three non-core assets in the third quarter.

Two 25-year-old garden assets in Florida and a 44-year-old asset 100 miles west of Boston, Massachusetts. We realized an 11.8% unleveraged IRR inclusive of management cost on those deals. During the quarter we bought one property, 308 units in North Hollywood, California, that had been built in 2013.

Our guidance for the year remains to buy $500 million of assets and sell $500 million, at a spread of 100 basis points and that spread being the difference between the yield we are selling and that which we are buying. This suggests we have $125 million of acquisitions yet to do this year and $300 million more in dispositions all of which must be done significantly tighter than the 140 basis points spread realized year-to-date.

We're currently working on a couple of acquisitions that could get us to our $500 million target; we hope to close by year end at high four yields. And on the disposition front in addition to the nearly $200 million sold through the first nine months of the year, thus far in the fourth quarter we've sold a couple of deals in Orlando for $150 million at 6% yield and we have a half a dozen other disposition candidates in various stages of the process.

And several of these deals represent less desirable assets, but in our core markets that will trade at yields in the low to middle [fives], which are significantly lower than those realized in our exit markets and will bring our weighted average disposition yield to somewhere near the high fives by the end of the year.

And lastly, I'll reiterate that the disposition yields we provide are the forward 12-month yields that we are selling. The true cap rate however, really that being the yield that the buyer acquired is significantly lower than our disposition yield when adjustments are made for increases in real estate taxes and insurance.

Now we're excited to have commenced construction in the third quarter on a 40-story tower in downtown Seattle on Pine Street, just two blocks from Pike Place Market. This asset is expected to cost $200 million, net of some additional air rights that we expect to sell at a later date. The tower will be delivered in 2017 and produce a yield on cost in the high [fours] on today's market rents and is expected to stabilize in the upper fives.

This transaction brings 2014 starts-to-date to $829 million which includes two high-rise towers, one in downtown San Francisco and that which we just started in Seattle. It's also possible that two additional projects could begin yet this year totaling $300 million which are also in San Francisco and Seattle but if they don't get underway yet this year, they most certainly will early in 2015.

We've completed roughly $500 million of development projects this year and we currently expect these new assets to deliver low- to [mid-six] returns on current rents in markets where core product trades solidly in the fours, such as downtown LA, Seattle, and Pasadena. We also have another $830 million of projects underway that will be completed in 2015 and our current forecast are that next year's deliveries will yield in the low [sixes]. This includes two new towers in New York City and new product in San Francisco, San Jose and Seattle.

During the third quarter, we acquired one land site for the 2016 start of a 33-story tower in the financial district of downtown LA containing 428 units for a total development cost of $200 million. Mid 5% yields at current rents and we'd expect that deal to stabilize in the mid-sixes.

So before I open the call to questions, I'd like to give a little shoutout to the entire team at Equity for having recently been recognized by GRESB as the residential large cap sector leader in sustainability.

Sustainability is an important initiative here. One that is not only the right thing to do, but one that is having a strong bottom-line return for the Company and we're very proud of the work that Lou Shotsky and many others around country have been doing to produce such positive results and favorable recognition. So, Pam, we'll be happy to have you open the call up for questions now.

Think you very much.

(Operator Instructions)

Nick Joseph, Citigroup

Thanks. David, you talked about the strong multifamily fundamentals and clearly we're seeing them in the results in the Outlook. What's the largest risk to the strong multifamily Outlook going forward?

Well, look I think that the demographic picture is very strong. We're certainly seeing the job growth in the markets in which we operate. I tell you to think that we think about as risks to us are their safety and security of our center cities. But I think that's not an immediate concern but that's something that we've talked a lot about. I'll tell you that I think one of the limiting factors on the growth of these and the long-term power of these center cities is public education.

I think that's something that will send a lot of people to the suburbs but I think that the demand for housing in these cities is there today. The jobs are being located there. Companies are relocating back to the city, we're seeing it here in Chicago on a regular basis, and we're obviously very optimistic about the long-term upside of this reurbanization of the country today.

Thanks. In terms of the balance sheet, you have $450 million on the line right now and $300 million of higher coupon debt coming due in April. What are your thoughts on addressing those? And could we see you be opportunistic in the near term given where rates are, or is that more of a 2015?

Hi Nick, it's Mark Parell. I think it's more of a 2015 thing. We have done some hedging in anticipation of that maturity, as well as some secured debt maturities we have later in 2015. Right now our expectation is that we would deal with that in 2015 given that we have the protection on the hedges. But yes, we'll watch the market and if something really changes dramatically I guess we could do something. But right now that's not our expectation.

Thanks.

David Bragg, Green Street Advisors

Thank you, good morning. Last quarter you suggested that there was a lot of product on the transaction market and it seems to suggest there was a possibility that you would exceed your acquisition guidance for the year. David, could you talk a little bit more about what you've seen over the last few months and the opportunities that may have not materialized?

Well we've certainly seen more product this year and there's certainly been more activity, transaction activity this year than a year ago. I tell you there have been some things that have traded that we've watch very closely and decided not to bid on or bid to stay in the process, but knowing that we would not get it just given how aggressive pricing can be for the kind of product we'd be happy to add to our portfolio.

There have been deals that have been shopped in portfolios that have been withdrawn because sellers expectation of a portfolio bid weren't met and will now perhaps be broken up and be sold individually and we may or may not transact on some of those individually. And frankly I tell you there's some portfolios that have been buyers or sellers expectations have been met and they have just been pulled from the market.

There certainly has been an increase, we have bird-dogged all of it, but nothing that we've felt has been particularly opportunistic as you note. There are things we have bought that have been in lease up. We're pursuing a transaction today that is still under construction. So it might be some opportunities for us to play here and there. But I guess I'll tell you Dave, that there is nothing out there that we need to buy, there's nothing out there that is hugely strategically important for us.

And if we can find the right trade opportunity, the right things to buy at the time we believe are getting good values on what we want to sell we'll transact. But if we can't find that we won't.

Okay thanks for that. And we noticed a pretty big increase in CapEx in the quarter on a year-to-date basis. You were up pretty meaningfully year-over-year. Could you talk about that and what the expectations are for 2015?

Sure. It's Mark Parrell. I think for 2014 we'll be pretty close to the $1,700 number. Dave, we increased our rehab spend guidance a little bit. We are doing rehabs at a faster pace and the rehab team is working really hard and doing some good work for us. And building improvements probably a little lower. But that's just timing, that's just projects moving between the years.

I would think next year would be similar, the $1,700 number, which again we think about also as a percentage of rent. So this new portfolio has obviously much higher rents, much higher per unit values. And so we think the CapEx spend really matches up with that pretty well. And in terms of the changes from last year, last year's numbers didn't include the Archstone spend to the same store set. So the numbers you're comparing are a bit apples and oranges.

Right. So you're spending significantly more on the Archstone assets then legacy assets?

We're spending significantly more, I would say on assets in general because we have these higher cost assets in higher cost markets. The Archstone projects or deals are getting a little more attention but for example, rehabs were to two-thirds EQR at legacy properties and one-third Archstone legacy properties. And that's about the right split between the portfolio NOI.

Okay great. Last question on that, what's the contribution that you've seen in 2014 to NOI growth from this activity and what do you expect in 2015?

Again, we do leave our rehabs in same-store, because of the percentage of the value of the assets are pretty small. We do know others take rehabs in and out and that's just not something we do; we leave them in. But it's still pretty modest as you look at the whole portfolio, so something on the order this year of 15 basis points, would be the contribution year-to-date. (Multiple speakers)

That would be our expectation going forward, 10 to 20 basis points, Dave.

I guess the only other thing I'd add there is we're averaging $10,000 to $12,000 per unit spend and others ideas of rehab can be $50,000, $60,000, $70,000 per unit, so it's a little different activity that we're conducting than what understand some of our peers might (multiple speakers).

And just to finish that thought, the Breakwater -- the Marina del Rey deal at Breakwater, which is on working on our development page that was a $100,000 plus unit rehab. It was an empty property we emptied out. That isn't in same-store, never was. These other rehabs are often done when occupied and for us it's appropriate to keep those rehabs in same-store and take these big major rehabs out.

Got it. Thank you.

Jana Galan, Bank of America Merrill Lynch

Thank you, good morning.

Hi Jana.

For David Santee, if you could please provide an update of rent as a percent of income and maybe highlight some of the markets like San Francisco that saw 12.5% year-over-year growth?

I think we have discussed this before in that we measure income one-time when folks move in. And because we use the same qualifiers, that percent of income really never changes. When we look at San Francisco today, the median rent percent of median income is 24%. Southern California it's 23%. Seattle is only 19%. The numbers really don't change as people with higher incomes continue to backfill the people that move out because they can't afford the rent.

Thanks. And you mentioned moveouts for homeownership were down about 90 bps. Could you provide stats on other reasons for move out?

Year in and year out the number one reason is really job change. Either people need to relocate or transfer or what have you. That always runs in the 23% to 24% of moveouts. Rent increases to expenses, those have been really when you look back at the last 7 or 8 quarters, it's been 12% to 13%. Obviously, some markets are more dramatic than others. There for awhile, San Francisco was 30% to 33% of moveouts. And then bought home is typically the third. As far as the overall makeup of moveouts, it's still pretty consistent with job change number one, increase too expensive number two, and then bought home is number three.

Great thank you

You're very welcome

Rich Anderson, [Zuo] Securities

Thanks, good morning. We're thinking about your outlook for same-store revenue it's 50 basis points higher this year than it was last year. And I'm curious what kind of were you thinking then versus now? Is it a rehab impact, as Mark described? Or, is there something more optimistic that you feel about for 2015 versus starting point last year?

I would first say that we build this from the ground up. We start with embedded rent. So we start with the projected value of the rent roll in Q4. We look at turnover and know that in a lot of these markets we have below 50% turnover so you can pretty much count on the renewal increases to come through for you. And then it's just a matter of what you think rents are going to grow next year in the market.

I would say that we definitely have a higher degree of confidence in the Southern California markets to produce greater growth than we've seen in the past. I think we're probably a little more optimistic on DC than we were last year. That's not to say that DC is going to make some big turnaround, but certainly it performed better than we thought this year, we're just taking the same assumption next year. When you put all of that into the blender, that's how we get our range.

Okay. You mentioned David, the new supply happening in Florida -- southern Florida. On the topic of fine tuning from a transaction and portfolio pruning perspective, will Florida now register as the market where you start to get in front of what could be some supply pressure in the next couple of years?

The focus will continue to be on the exit markets we've been working on. And we've got I think desires to sell more older, non-core assets in terms of our core markets. But no market is immune to, or off-limits from selling at, as that we think we can trade those dollars in to a better performing other assets. But the focus will be on Inland Empire, continuing in Orlando, some far out Western Massachusetts assets, maybe some suburban stuff in DC, Inland Empire. I think the priorities will likely be there.

Okay. And then my last question is, do you have the statistics on the percentage of your tenants that are married?

What we know is that nearly half of our units are occupied by single individuals. We know what units are occupied by two adults. We don't always know what marital status is.

Okay, thank you.

David Toti, Cantor Fitzgerald

Good morning.

Good morning

Just quickly, David I want to go back to the emphasis on the urban renter in the urban product that the company has been focusing on for some time. We hear from some peers that actually they're concerned about urban locations given generally higher levels of supply delivery, and there seems to be a focus from some of your peers to be on more suburban assets. Could you just comment on do you believe that that's true? That the risk of supply is higher? And is there any way that you cut the portfolio performance relative to urban versus suburban? Have you looked that on a go forward basis?

We're certainly aware of what elevated deliveries have been maybe in DC and in Boston up in these urban markets. That doesn't change our long-term view that these are the best long-term performers and will provide us with a higher long-term total rate of return. This increased density brings more people. It brings more activity, supports more restaurants and more bars. It is very much a [lotus] of the lifestyle that we believe that our demographic would prefer.

I think that these young people want to be downtown. The don't want to be in the suburbs. And I'm not suggesting that you can't build and lease units in the suburbs, but we think that the impact, the long-term impact will be greater being downtown notwithstanding, some, what we believe our short-term elevated levels of deliveries in some of these markets. We think that the peak is here or nearly 2015 and it will come down from there. The absorption that we've seen for instance in DC, I think continues to give us confidence that this is where people want to be and it will pay off for us over the long term.

Does it suggest than that perhaps the suburban renter if you're going to really aggregate that individual, is older? Perhaps married, maybe a little bit less elastic in terms of rent and price tolerance?

I think one could make assumptions like that. We've not done any real hard diligence on that. I guess my sense, this is my personal sense is that people are renting in the suburbs want to be in the suburbs and will likely be homeowners in the suburbs. And people that are renting downtown want to be downtown and it'll be a long time before they are homeowners in the suburbs.

Okay. I'm just trying to explore that, the theory a little bit. Just one last question on the development pipeline. For the recent projects are you seeing -- are you basically underwriting significantly lower yield expectations on these assets, or has the yield generally remained pretty steady and maybe some -- if you could just quantify that to some extent that would be helpful?

As we're underwriting new deals?

Yes.

Yes, well certainly yields have come down. So the product that we built in 2010 or 2011 that's now stabilized are stabilizing in the high sevens and the eights. That product in lease up today, which would have been started a couple of years ago, are probably in the mid sixes. Things that are being completed soon will be high fives, low sixes. Clearly, as construction prices have increased, as land prices have increased, yields have certainly come down.

And as I say the things we're starting today we think are low fives to six. So you're certainly getting better returns on that which you started coming out of the recession if you had land priced at what you could buy at the recession, if you were carrying legacy land you wouldn't be able to realize those same returns but certainly you're getting lower returns today than you were putting projects in service four years ago.

Okay, thanks for the detail today.

You're welcome

Nick Yulico, UBS

Thanks. A couple of questions going back to the preliminary talk about expenses next year. I think you said they would be modestly higher than 2014? I wasn't sure if that related to the modestly higher than the 2.2% growth level this year?

Yes. Modestly elevated compared to the 2.2%.

Okay. And then turning to the New York City portfolio, could you remind us, I think some of your assets there have 421 abatements which will eventually be rolling off at some point. Could you remind us how many of those assets have those and when those abatements might roll off? And how you're thinking about that process in relation to maybe looking at those assets as being good candidates for condo conversion sales, not doing-it-yourself?

I don't know off the top of my head how many are subject to 420-1A but there are a fair number of them. They are all in -- many of them in the process of burning off because they do burn off over an extended time period and the impact on real estate taxes next year because of 420-1A burn off is what, David?

160 basis points.

So a significant percent of share of our increase in real estate taxes next year as a result of the burn off of the 420-1A. And then, your second question, with respect to interest in condominium conversions of our properties, we're open-minded about selling things in New York City if people will pay us premiums for them.

Okay, but you're not at the point now where you've identified several of these assets that you're going to be facing higher real estate taxes and you're thinking about bringing those to market to sell?

There is no such activity underway at the present time.

Okay.

We have quite a number of 420-1A assets. Just sitting here looking at the percent of tax it could be 30% to 40% of our assets in New York. But we have -- because there's step-ups every five years or what have you over 15 or 20 years, we are experiencing step ups pretty much every year, to varying degrees.

Okay, thanks.

You're welcome.

Alex Goldfarb, Sandler O'Neill

Hey, good morning out there.

Good morning.

Two questions. One, what is your take for why we're seeing apartment fundamentals accelerate? I mean, if you look at the economy it generally seems to be following the same trend. It's not like the economy has suddenly shot off the roof and job growth is through the roof et cetera. And the supply picture hasn't dramatically just dropped. Why do think we're getting an acceleration of apartment fundamentals when one would think that you'd get a maturation of the cycle?

I think it's just been a slow and steady improvement. I think that we've seen this over the past 3 or 4 years, it's just been a slow and steady improvement. The starting to create jobs, the unemployment rate is coming down slowly but surely. We've have some economic activity happening. And the demographic picture is not impacted really by what's happening in the economy.

There's still 4 million young people a year turning 21 years of age in this country and forming households and we're seeing a lot of them move to the cities. So, I think it's just been a slow and steady process. And frankly don't forget that we've underbuilt housing in this country over the past half a dozen years. We certainly didn't deliver a lot of product in 2009 and 2010. And so I think we're still behind, frankly, I think, what a normal level of new supply might be. I think those things all add up to just continued slow and steady fundamentals in the business that continue to look really good for us.

So last year we sort of had a pause in the second half of the year. You wouldn't -- would you attribute more towards renter adjustments to the new levels and now that everyone's accepted the new rents it's just moving on? Or, should -- or you think that maybe next year we see some pushback to some of the increases we've seen this year?

I guess I don't really have an opinion about that Alex, I'm sorry. Again David just mentioned, we have the highest occupancy we've ever had this time of year. Our left to lease is low, so basic fundamentals are good. I will tell you we get pushback all the time from people about rental increases. Many of them go out and shop the market and come back and accept the renewal offer.

Others can't. As David noted, the second biggest reason people move out is they can't afford it. But we've got people who are happy to move back in, who move in with a higher income than the person that left. So I just think it's a slow and steady event. I think that the interest in owning single family homes is not there of our tenant profile, again, nearly half our units occupied by single individuals. For those who might like owning single family homes, down payments are a stretch and getting financing is difficult.

So I think all of those things add up to just continued slow and steady improvement in fundamentals and just a very positive outlook for us.

Okay. Second question is, given how the 10-year has come down and the demand for, especially CBD real estate, just seems to continue to increase, are you seeing more demand from institutions to own infill CBD apartments, or are the cap rates still tough for pension funds to digest?

I'd say that cap rates relative to the 10-year treasury might be as positive and wide as they've been in quite some time. We're still seeing interest in institutions owning these kind of assets. And a deal just traded in Seattle a half a block away from the deal that we're now building on Pine Street, that traded three and half and they're happy to have it. And they think they will might acknowledge that it might be a 5% IRR but up at 10-year treasury level today, they think that's a very acceptable spread.

I guess what I'd say is there may be fewer of those institutional chase in those deals today but there's still enough of them to get done at very strong pricing.

And Alex, at URI last week, there was a lot of discussion about foreign buyers. And their interest in multifamily in these markets. That they find these core markets highly desirable. They like the return. They like it as a safety play and that folks across the country are seeing some added interest from foreign buyers that really weren't that common as buyers of multifamily in the past.

Then that is a shift. Okay, thank you.

You're very welcome

Vahid Khorsand, BWS Financial

Hello. Quickly on the fundamentals when the federal government came out last week and was talking about reducing the standards and making it easier for people to get home loans, how do you see that impacting you going forward if that is instituted?

I guess if I owned a lot of property in Atlanta and Phoenix and Dallas, I might be concerned about that but we just don't see that as a risk to us. We again, as I've said several times, see a very large share of our units are occupied by single individuals. A very small share, less than 10% are occupied by two adults with children. And it's also, I want to just impress upon everyone, it's a lifestyle choice, it's not simply an economic decision.

I think our residents want to live in high density environments with proximity to public transportation, et cetera, and all the things one enjoys. I guess I'd ask everybody on the phone how many young analysts are now coming into your office saying they're moving to the suburbs because they can get 97% single family home loan?

They're not, because they want to live downtown, they want to live near their friends, they want to live near where all the activity is. And I also suggest to you that they really do value this flexibility of being in rental housing. Just today this morning I got an email from my nephew in Phoenix talking about how he might be taking a new job here in Chicago. This is a mobile segment of population that at least at this time in their lives are not interested in single family home ownership.

We're also in markets today where the cost of those single family homes as a multiple of incomes is significantly higher than the national average. So I would think that single family home REITs and those who operate in more lower cost markets would be more at risk of what their rentors might do as a result of being able to get very inexpensive 97% loan to value single family mortgages.

Okay. In the last quarter you announced that you hd picked up a property in Glendale, and in this quarter you announced you a property in North Hollywood and then a parcel purchase in LA. And I think it was a month or two months ago, the USC came out with a report that said they expect rents across Los Angeles to go up 8%. Do you see that actually happening? Is that too low an estimate for you? Can you give any thoughts on that?

I guess, we won't give you any specificity about Southern California except to say that in David's earlier remarks he noted that it was a very strong performing market this year. An expected it to be a strong market for us next year. So long-term we like Southern California and are delighted with what we own and with the recent investments that we've made there.

If I could ask you then, do have the impression from investors that there is a little bit of West Coast bias when it comes to your California properties because they have been surpassing rent growth targets and no one seems to be taking that much notice of them?

I'm not sure I understand question. Certainly Seattle, San Francisco have been some of top performing markets and we think, you David suggested that LA and Southern Cal will be in his top bucket, joining those in the top bucket. Certainly the West Coast is expected to have better topline growth next year then the East Coast.

And last question, for the property you purchased, you said there was a 4.7% cap rate. Is that the stabilized cap rate? Or, did you provide us with a stabilized cap rate?

That is -- would be a stabilized cap rate. So there's still a little bit of lease up going on in the transaction, that'd be a stabilized cap rate.

Okay, thank you.

Very welcome.

Tayo Okusanya, Jefferies

Hi, this is George on for Tayo. Most my questions have been answered, but one thing when you talked about that increased turnover, but it's mainly are the increases within the portfolio, people moving to larger more expensive units. Do you have any color on what the driver of that, are these people who are making more money who want a nicer apartment? Or are these people who maybe coupling up and instead of moving out to a home they're just getting a bigger apartment?

We don't have that level of detail. I would suggest that it's probably all of the above. We know that if people get a promotion they want to move up ten floors and have a better view. Some people want to pair up with a roommate and no different than the bonuses don't come in as large that somebody might have to downsize. But nevertheless they still want to remain in the neighborhood. They want to be around the lifestyle that they've accustomed to and I think they're willing to make whatever adjustments they need to accomplish that.

Okay thanks.

You're welcome

Mike Salinsky, RBC Capital Markets

Hello. Good morning.

Hi Mike

David, just going back to the changes in the quarter, you said a 6% renewal increase was that -- what was the new lease on a lease-over-lease basis and how is that blended actual change in the quarter? Just trying to compare that to the second-quarter and the acceleration you saw.

The lease-over-lease was 2.3. Lease renewal was 6% but blended 4%.

Okay, so the blended change of the lease was 4% in the quarter. Okay that's helpful. Then David, second question just going back to David Bragg's question. You talked about acquisition opportunities. Just given the challenging acquisition environment I think you'd said $1.6 billion to $1.8 billion between 2014 and 2015. Are there any thoughts to maybe push forward a little bit more development starts in 2015, or are you still comfortable with that kind of $1.6 billion to $1.8 billion range?

I guess we're comfortable with -- well we've talked about development being -- peaking this year and next year and then going back down. Land sites are very expensive, construction costs are up. In places like New York City, San Francisco, you can't touch property given the strength -- the strong bid from the condo builder.

Our instructions to our development team is we'll find a way to do whatever good development projects we can find. In New York City for instance that might be having to be done on ground leases as opposed to fee simple. Or just finding us other opportunities. And I want to just emphasize the word opportunities. To us that means finding things that we believe we can buy relatively cheap and that's a challenge today.

The guys are working very hard both in the transaction group and the development group to try and find things that are of real value creation opportunities, but it's a challenge given the strong bid for land today are primarily from condo guys, as well as the strong bid for stabilized streams of income that we're seeing from institutional buyers and the foreign buyers that Mark had mentioned.

Appreciate the color. Thank you

Nick Joseph, Citigroup

Yes, this is Michael Bilerman. Just two quick questions. David Santee, when you talk about this intra-asset movement which had depressed the turnover stats you showed.

Do have going back on an annual basis, how many of your residents moved either intra-asset and then intra-equity. Because in addition to some of the reasons you site, I assume you as a landlord and how you treat your residents and what you offer in your buildings and how the more urban nature of your portfolio likely means more shift within the portfolio to an equity-owned building? And I did not know if you had the numbers to support that thesis?

Yes. We measure that, we've been measuring it for the last 7 or 8 years. It's on average it's about 500 residents per quarter that move, that stay within the equity family. Sometimes that's just a result of how we structure the ledgers on a building. Trump is the best example where each building is a separate entity, so to speak. Therefore it's not a transfer to move out, move in.

But for the most part we track the number of people that move from what market to what market, and for the most part it's loyal customers that want to stay within the equity family because they've enjoyed their living experience thus far.

And with the increase and mobility of the millennials, are you going after that more as people -- if they do put up a notice that they're vacating that if they're moving to a different location trying to get them to put equity on the map so if they're moving, as Neithercut talked about his nephew moving to Chicago. Recognizing there's not a lot of downtown supply but would you be able to work with that?

Yes. We actually have a 1-800 number specifically designed for that. That we have people in our call centers that are referred to as relocation specialists. We recently, call it back in May, we revised our transfer guidelines, costs, and we just made it more desirable from both an economic and ease of transfer for our residents.

I think one, that's why we've seen elevated transfers over the last quarter, but also we're seeing more and more people stay within the equity family. So we constantly look for ways to improve that experience and retain residents for a longer period.

Great and then just a question for Neithercut. On the day when home ownership rate comes out at 64.4%, which I think is lowest since early 1995, as Sam on record saying he thinks it's going to 55%. Can you just provide some color if that's the mindset why Sam would sell 2 million shares of EQR in August, $130 million?

It's not my place to explain what Sam has done. Except to tell you that those were the first shares of Equity Residential stock that Sam has sold in 23 years. And that they were done for some estate planning purposes. We've been assured that is the end of it. I think that this was the last of call of home homeownership et cetera and more just some personal financial things that needed to be taken care of.

As I think about EQR as an estate vehicle itself, if you believe that we're moving down to a 55% homeownership level and will see continued growth in the underlying cash flows and hence what will be dividend growth, given the way you've tracked your dividend relative to free cash flow, it would just seem incongruous to that sort of comment. That's just why I as trying to understand --

I think that the residual ownership interest that Sam has in Equity Residential speaks volumes about his long-term feelings about the Company.

Agreed. Thank you.

You bet.

Buck Horne, Raymond James and Associates

I know it's been a long call, so I'll be brief. I just had a couple of questions. Spent some time demographically talking about the millennials, but I'm thinking about the other end of the spectrum right now. Are you seeing any increases from baby boomers and maybe the median age of your new renters? Are you seeing any empty nest renters looking for the downtown lifestyle right now?

Yes, when we look at our average age in Manhattan, the average age in Manhattan is 40 years old. We see these numbers pick up little by little. We've done some studies where we look at where people have moved out of some of our suburban communities, where they've relocated to, and you see some minor directional hints that people are moving into the city. And one of the reasons, when you think about it I think about our own folks in Washington DC.

We had our office in the suburbs, out in Tysons corner. We moved our office right downtown DC. If you live in the burbs even though you have public transportation subway, it's just not fully built out yet and it can take you three hours to get from, call it Fairfax, into the city. I think that's a big consideration, as well. As companies continue to move their offices into the city, people don't want to deal with the traffic so they move into the city as well and you have this outsized demand for in-town property.

Thanks. And moving to South Florida, I just wanted to go back to South Florida for a second. Do you have any distinction between the deliveries you're seeing coming next year between how many are for-sale condos versus true rental apartments? And what kind of cap rates are we seeing in south Florida right now, both for in place assets and development deals?

The numbers that I have quoted were for rent apartments. We built these from the ground up and our people in the field validate and what have you, certainly some of these could change but David?

Yes, I think the good quality product in south Florida will trade at four and one-half to five and one-half cap rates today. And as demonstrated by some of the product we've been selling, so the older garden products stuff, is probably close to 6%.

Okay. Thanks.

You're very welcome.

At this time we have no further questions in the phone queue.

Alright, thank you. I appreciate everybody's time today and look forward to seeing many of you in Atlanta next week. Have a great day.

This does conclude today's conference. We thank you for your participation.