住宅地產 (EQR) 2014 Q4 法說會逐字稿

Good day and welcome to the Equity Residential fourth quarter 2014 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to today's speakers. Please go ahead.

Thanks, Noah. Good morning and thank you for joining us to discuss Equity Residential's fourth quarter 2014 results and outlook for 2015. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer.

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

Thanks, Marty. Good morning, everybody. As reported in last night's earnings release, 2014 was another very good year for Equity Residential. Full-year normalized FFO grew to $3.17 per share, an 11.2% increase over 2013 and among the highest year-over-year increases in our history.

Clearly, we continue to enjoy very strong apartment demand across our core markets. Much of this demand is generated from the creation of new households.

Now, like many, we think that last week's report on fourth quarter household formations overstates what actually happened in the quarter. It was more likely an indication of the strong household growth that has been taking place throughout the entire year, which has driven demand for good quality rental housing like that owned by EQR in our core markets across the country.

We also benefit from the continued decline in single family home ownership rates across the country that was also reported last week. It remains to be seen if return to the long-term historical average of 64% becomes a bottom or not, but across our portfolio we continue to see fewer residents leave us to buy a home, either due to their lack of desire to own one or financial inability to do so. All in all, multi-family fundamentals remain very strong and we continue to see no end in sight for above trend operating performance.

Like last year, when we saw same store revenue grow 4.3%, which exceeded not only our original expectations, but even our most recent ones, due in large part to a very strong fourth quarter that delivered exceptional revenue growth of 4.9%. You may recall David Santee saying on our most recent call that if the sight we were seeing early in the fourth quarter continued, that we could beat our revenue estimate for the quarter and the results speak for themselves.

I want to acknowledge the great work of our teams across the country that delivered such terrific results last quarter and last year. We're pleased to report that the very strong performance these teams delivered in the fourth quarter of last year has carried over into the first quarter of 2015, which has given us confidence that the low end of the same store revenue growth guidance range we gave you in late October is no longer in the cards.

With that said, I'll let David Santee give you a little bit more color on what we're seeing across the markets today.

Thank you, David and good morning, everyone. Today I'll review our fourth quarter operating results, provide some additional color on our revised 2015 revenue guidance, detail out our 2015 expense outlook and then end in my remarks with brief updates across our core markets.

On our Q3 call, I said that if elevated demand and subsequent occupancy continued through November and December that we would exceed or we could exceed the 4.1% full-year revenue growth target and that's exactly what happened.

Occupancy increased quarter-over-quarter by 60 basis points. However, many of our higher average rent markets like LA, Seattle, New York, Orange County, San Diego realized 80 basis points of increase, while San Francisco led the way delivering over 140 basis points of increased occupancy versus the same period last year.

December, typically the lowest point of the year, was a solid 100 basis points higher than the previous year. Even Washington DC delivered 30 basis points of improved occupancy.

Now, while demand certainly picked up during mid year as a result of improving job growth, many of our internal initiatives provided an even stronger foundation and positional strength in Q4. Typically our softest quarter of the year, we reported turnover for the quarter increased by 1.6% or 194 units. However, the real story lies in resident retention, netting out a 23% increase to same property transfers during Q4, resident turnover decreased 50 basis points with more than 60% of these transfers electing for larger or more expensive units.

For full-year resident turnover, adjusted for same and intra-property transfers, declined 160 basis points from 48.9% to 47.3%. With the scale and variety of living options we offer across all of our core markets, it's clear that we are developing a strong following with our existing residents and delivering on our internal brand commitment.

We also made tremendous progress in our day-to-day management of lease expirations. Our pricing teams worked diligently to integrate and better organize the Archstone portfolio explorations while fine tuning legacy assets to account for close proximity of these competing assets. Today the combined portfolio's positioned for optimal seasonal performance and we are seeing that play out in Q1 across all key drivers of revenue growth.

Strong demand coupled with the successful execution of our internal initiatives created a Q4 environment that allowed us to perform just as strong in Q4 as we did in Q2 and Q3 with both new lease, base rent and achieved renewal rent growth holding strong in the upper 5% range. More importantly, these strong drivers of revenue have carried through to Q1.

Today we continue to see occupancy that is 100 basis points higher than same week last year and exposure that is 100 basis points lower, allowing for both renewal and new lease rates to accelerate versus a slow and steady climb from a much lower seasonal starting point. Renewals achieved in Q4 were 5.7%, although 20 basis points lower than Q3, based on our normal seasonal expectations, they did average 25 basis points higher than Q1 and Q2 of 2014.

January renewals bounced back to 5.9% achieved and February and March should easily exceed 6%. Given this trend, which is a material departure from our historical seasonal norms, we would expect Q1 revenue growth to almost mirror if not exceed Q4, driven primarily by the 100 basis points of improved occupancy that we enjoy today and higher new lease rents. As we move closer to the peak leasing season, we would anticipate the favorable occupancy spreads to compress, as we are mindful that 2015 deliveries remain elevated across many of our markets with occupancy always peaking during this period.

For all the above reasons, we are comfortable with tightening our full-year revenue guidance, increasing the bottom end of our previous range to 3.75%. Expenses for the quarter were extremely favorable at 2.2%, allowing us to achieve full-year results that were 40 basis points below our stated expectation of 2.2% on the Q3 call.

During our Q4 call last year, we said that we would mitigate the impact of real estate tax growth of 5.25% and a 7.5% expected utility expense growth by leveraging the integration of the Archstone portfolio through the re-engineering of our leasing and advertising costs, on-site payroll and a more efficient management company. And we did just that.

For full year 2015, which accounts for 97,911 units, L&A costs declined 10.5%, on-site payroll was down 20 basis points and property management costs declined by 5.2% year over year. In the fourth quarter we received a modest benefit from declining energy prices as well as a year-end favorable accrual to employee overhead.

For 2015, expense guidance is 2.5% to 3.5%. Real estate taxes, payroll and utilities now account for almost 72% of total operating expense.

With the complete reversal in energy, we would expect full-year utility costs to be negative. That will help offset another 5 plus handle for real estate taxes, which account for 36% of total expense. With an improving labor market and property staffing fully optimized, we anticipate total payroll costs to grow 2% to 3% for the full year, with all other line items in the 2.5% to 3.5% range.

Moving on to the markets, we'll start with Washington DC metro, which has seen record absorption in spite of anemic job growth during 2014. Despite another 13,000 units to be delivered this year and the tail end of 2014 deliveries in various stages of lease-up, the metro area remains very stable with solid occupancy and good pricing discipline.

The district itself continues to see outsized population growth and 25% of our district move-ins were from folks moving closer in from Virginia and Maryland. With the budget deficit improving and many government retirees being replaced with younger workers with a higher propensity to rent, our positive year-over-year revenue growth that we see today and I'm not prepared to call a bottom, but it sure feels like we could be there. Assuming no change in direction, we're cautiously optimistic that DC could end the year flat to positive.

Seattle will be measured by degrees of great, by sub-market for 2015. The CDD Belltown sub-market will see a 30% decline in deliveries from 3,200 to 2,000. Capitol Hill and Redmond will experience similar levels of delivery, although these deliveries are small in unit count and easier to digest.

South Lake Union, the geographical center of Seattle and home for Amazon, has been master planned to meet the transportation, recreation and sustainable living needs for up to 50,000 jobs in this neighborhood alone. We would expect this sub-market to do extremely well next year and in future years.

Bellevue, on the other hand, will see elevated deliveries with large unit counts that can weigh on performance for longer periods. To those operators in Snohomish, Everett and all other markets north, 2015 should yield above average results. With 2015 deliveries equal to 2014 and based on the location of those deliveries, we would expect Seattle to produce another year of out-sized results.

San Francisco continues its epic pace with significant acceleration in Q4. In one of the most underhoused cities in the country, deliveries are miniscule and simply don't seem to be relevant. The January occupancy, up 250 basis points versus 2014 at 97.2% today and net effective base rents up 13% versus last January, it's easy to envision another year of 8% to 10% revenue growth for full-year 2015.

Los Angeles, Orange County and San Diego continue to show signs of strength with Orange County expecting to produce the better revenue growth of the three on pure deliveries and quality job growth. Now if Orange County can deliver a 6% plus revenue growth, then I would expect LA and San Diego to trail by 50 basis points based on elevated deliveries alone.

Broad-based job growth across all markets and resolution of the port of Los Angeles labor dispute are all positives, in addition to the expanding Silicon Beach movement in west LA down to Playa Del Rey. If there is a market that will benefit from lower gasoline costs, it will certainly be SoCal and we would expect to see the spreads tighten between ask and achieve renewal rents over the course of the year.

Jumping over to Boston, a glut of high-end deliveries in the urban core and the financial district is beginning to weigh on this sub-market and subsequently, our portfolio. With a 35% increase in delivered units for 2015, net effective base rents remain flat. However, occupancy is stable and demand remains solid. With such large concentrations of high-end product within a very small radius, we would expect pricing pressure throughout much of 2015.

New York City, specifically Manhattan, remains stable with only slight concentrations of new deliveries on the upper west side. Jersey City and Brooklyn will both deliver large, institutional type product, which will weigh on pricing power over the next year. However, with population in the metro achieving the new high of 8.4 million people, a pickup in business and professional service jobs and the continued growth in jobs away from financial services, New York should produce four-handle revenue growth supported by an expected 155,000 new jobs in 2015.

And as we discussed last call, south Florida cranes continue to grow like weeds with over 12,000 condos in various stages of development. Concentrations of apartment deliveries remain in the Miami Brickell sub-markets, with most deliveries in Broward and Palm Beach being east of I-95, that will demand a much higher price point versus the EQR portfolio. With the Cuban fall and growing South American business influence, we expect south Florida to have an exceptionally strong year.

Revisiting our three buckets of revenue growth, we still see San Francisco, Seattle, Denver and Orange County in our plus 5% revenue growth bucket. New York, LA, San Diego and south Florida remain in the 3% to 5% revenue bucket. However, Boston will do well to achieve 3%, but today looks more like a high 2%.

Washington DC, at 18% of NOI, remains in its own bucket and as I said earlier, we are cautiously optimistic that we could potentially end the year in flat to positive territory. I too would like to thank everyone across EQR land for delivering on our commitment to both our residents and shareholders and look forward to another fantastic year at EQR. David?

Thanks, David. On the transaction side, as expected, we did nearly 63% of our full-year dispossession activity in the fourth quarter with the sale of seven properties containing nearly 2,200 units for $332 million. Five of these assets were in Orlando, which left us with only three properties there at the end of the year that should all be sold in the first half of 2015. We also disposed of a small property in southern California and a recently completed and stabilized unconsolidated Archstone asset in Phoenix owned in a joint venture with a local developer.

We acquired two stabilized assets in the fourth quarter, both in Seattle, at a blended cap rate of 4.8% and our partner's 95% interest in a soon to be completed project currently in lease-up in Emeryville, California had a stabilized yield of 4.8%.

Now as noted in last night's release, for the full year, acquisitions totaled $557 million. That includes all the stabilized assets, properties in lease-up and the one owned in the joint venture. Dispositions totaled nearly $530 million, which includes the one held in a joint venture. It was all done at a cap rate spread of about 113 basis points.

Now as indicated on page 27 of the supplemental materials of last night's press release, our guidance for 2015 assumes a similar level of activity at a 100 basis point spread. We continue to have assets that we'd like to sell, but we're in no rush to do so. So if we can source good acquisition opportunities relative to the assets we'd like to sell, we'll go ahead and make that trade.

At the present time there is product available for sale in our core markets that we would be pleased to own, but the wall of capital anxious to acquire those assets remains significant, pushing cap rates down and pricing up the levels that will likely leave us on the sidelines. But like last year, I'm sure we'll find some investment opportunities either sourced directly or with risks that we can uniquely underwrite and manage that will enable us to sell some assets and redeploy that capital to our core markets that will provide us better long-term, risk-adjusted returns.

On the development side, we're excited to have commenced construction on two assets in the fourth quarter. One is in Seattle's South Lake Union sub-market where we are building 483 units for $159 million at an expected yield at today's rents in the upper 5%s and one fronting Showplace Square in San Francisco's Soma district where we're building 241 units for $164 million and expected yield at today's rents in the mid 5%s.

Fourth quarter starts brought the full year to $1.15 billion, the highest level of starts in our history, that will soon deliver us great product in southern California, San Francisco and Seattle at weighted average initial yields at current rents from the mid 4%s to nearly 6%. We also completed $491 million of developments projects in 2014 and we currently expect these new assets to deliver low 6% returns on current rents in markets where core product today trades in the 4%s such as downtown LA, Seattle and Pasadena.

In 2015 we expect to complete $846 million of properties currently under development and $1.2 billion in 2016. Our current forecasts are that these deliveries will generate initial yields in the mid 5%s to mid 6%s at current rents, which includes new product in southern California, San Francisco, San Jose and Seattle and two terrific new developments in New York City, which we will be very proud to show many of you during the June NAREIT meetings.

We're not acquiring land for new development today at the rate we are commencing construction on existing sites held in inventory. By definition then, future starts should decrease from the record level we saw last year. Over the next two years we currently expect to start approximately $1 billion of new construction projects, all on land currently held in inventory and at the present time expect to start $400 million of those projects this year and the balance in 2016, all of which is self-funded requiring no incremental equity capital to complete.

So now we'll turn the call over to Mark Parrell who will take you through some important financial measures.

Thank you, David. Good morning. I want to take a few minutes this morning to talk about our guidance for 2015 as well as our new commercial paper program and our 2015 sources and uses.

For the year we have provided normalized FFO guidance range of $3.35 to $3.45 per share. At the midpoint, this equates to a 7.25% growth and normalized FFO in 2015 and this is on top of the 11.2% growth we experienced in 2014. And that creates a compound average growth rate of normalized FFO of 9.25% per year. We also expect to grow our dividend substantially in 2015, raising it from its current level of $2 per share up to $2.21 per share, which is a healthy 10.5% increase.

So now I'll go through some quick highlights on our 2015 guidance. As David Santee said, we expect continued growth in same store operations and that should add $0.21 per share or $81 million to our bottom line. We see a $19 million or $0.05 per share contribution from our non-same-store assets and that does include our lease-ups.

In addition we see an $11 million or $0.03 per share expected improvement from lower interest expense and that number is net of capitalized interest. The interest expense improvement comes from lower expected rates and higher expected capitalized interest and that's offset a bit by a slightly higher weighted average debt balance for the year. All those good benefits are offset by about a $0.04 per share reduction in normalized FFO and that's due to transaction activity timing.

To be clear, this is due to the timing of both 2014 and 2015 transactions. 2014 was benefited by the fact that acquisitions occurred mostly in the beginning of the year, while as David Neithercut noted, these positions were mostly back end loaded. In contrast, 2015 is burdened by our expectation that we will complete the majority of our dispositions in the first half of the year, while acquisitions will be evenly spaced throughout 2015.

I'm now going to move on to G&A. We have bifurcated our treatment of this line item. Our 2015 normalized FFO guidance anticipates our recurring G&A to be $51 million to $53 million and that's slightly higher at the midpoint than the $51 million in G&A that we reported in 2014.

In addition, our GAAP G&A will include approximately $9.7 million in charges we are incurring in 2015 in connection with the adoption of our new executive compensation program. We will also incur a GAAP charge of $1.3 million that will run through our property management line in connection with this program.

This new performance-based plan, and it's pretty similar to those in many other REITs, covers the period 2015 to 2017. The old plan, which used a time-based vesting methodology, terminated for executives at the end of 2014.

The accounting rules require that both the time-based grant for service in 2014 and the performance-based grant for service from 2015 to 2017 both be expensed in 2015. This overlapping and duplicative GAAP charge of $11 million is not included in our normalized FFO guidance for G&A or property management. One timing note on G&A: we again have many G&A costs that are front end loaded and we therefore expect about 60% of our G&A spend to happen during the first six months of the year.

Now I want to take a moment to talk a bit about our new commercial paper program. This week we entered into a $500 million commercial paper program, which will allow us to borrow daily, weekly or monthly at extremely low floating rates of interest. This will allow us to continue to reduce our already very low cost of capital.

I want to take a moment, though, to put the CP program into the context of our larger balance sheet management strategy. As we have discussed before, the company generally expects floating rate debt to constitute 15% to 20% of total debt. A portion of this floating rate exposure comes from borrowings under our unsecured revolving line of credit.

We expect to use the new CP program to replace a portion of the amount that we would otherwise have outstanding under our revolving line of credit. When fully implemented, we expect the CP program to save us approximately 0.5% or 50 basis points as compared to our line pricing.

We have amended our line of credit to ensure that it will be available in the event the commercial paper market is disrupted and we need to repay our CP borrowings on short notice. We are very pleased to be one of the few real estate companies who, through good balance sheet management, have earned market and rating agency support to do a CP program.

Now I want to end with a little color on the sources and uses for 2015. We are very well positioned heading into the year. We expect to repay approximately $600 million of debt in 2015. This consists of the $400 million that's listed on our maturity schedule that's coming due in 2015 as well as about $200 million of high-cost mortgage debt that's due in 2016 that we will be repaying in 2015. There are no prepayment penalties associated with that.

We will also spend about $700 million this year on development activities. So in the aggregate, we see about $1.3 billion of cash uses in 2015.

Our guidance assumes we fund these uses with $950 million of debt, consisting of a $500 million debt deal in the first half of 2015 and a $450 million debt deal in the second half of the year. The remaining $350 million will mostly come from operating cash flow.

Just a few other debt related guidance assumptions for you. We have about $450 million in hedges that lock in an implied 10-year treasury rate of approximately 2.5% for the issuance expected in the first half of the year.

We expect to have about $59 million in capitalized interest in 2015. We expect to maintain an average balance on our revolving line of credit or under our new commercial paper program of about $400 million this year and we anticipate ending the year with outstanding revolver borrowings and or commercial paper outstandings of about $400 million and that's modestly higher than where we began 2015. That will still leave us with $2 billion of capacity on a revolver that does not mature until 2018.

Now I'll turn the call back over to David Neithercut.

Thanks Mark. Before we open the call to questions, I just want to mention how pleased we all are here at Equity that Steve Sterrett was appointed to our board last week. You all know what a smart, experienced, capable pro Steve is. You also know that, just as importantly, he's really a good guy.

He's going to be a terrific add to what is already a very experienced and thoughtful group of people. The entire board and the entire management team really look forward to working with Steve in the years ahead. With that, Noah, we'll be happy to open the call to questions.

(Operator Instructions)

And we'll take our first question from Nick Yulico with UBS.

Hello, everyone. As I look at your same-store guidance, the high end of 2015 same-store NOI guidance is for growth of 5.5%. That would roughly equal 2014. Can you talk a little bit about some of the biggest factors that get you there? It seems like demand trends are picking up, yet maybe occupancy comps are getting tougher. You cited through the year and you still have some worries about supply in relation to that?

This is David Santee.

I think you have to kind of put all that in a blender and evaluate your risks on a market by market basis. Certainly, as I said in the prepared remarks, DC delivered quite a number of units last year. Many of those properties are still in the low teens or well below 50% leased up; and you have another big crunch coming this year. So I talked about this last year, that all roads lead to DC for us. Looking at it another way, if you pulled DC out of our numbers, you would have seen a 120 basis point improvement on both Q4 revenue and full-year revenue. So I think we're very confident about our expectations across all the other markets; but DC being 20%, or almost 20%, of our NOI can materially move the meter either way.

Okay. And as well, we were hearing that in New York City you may have been quietly testing a sale of an asset to test the condo conversion market. Can you talk a little bit about whether you have been doing that? And your latest thoughts on your Manhattan portfolio in relation to possibly selling some assets at very low cap rates based on the strength in the market?

All I can say there, Nick, is that in the guidance we've given you a $500 million of dispositions that does not include any sales of any assets in Manhattan.

Okay. Anything as to whether you can confirm whether you were actually testing the market quietly to see how --

I'd tell you that we believe everything we own is for sale all the time.

Okay. Thanks.

You bet.

We'll take our next question from Nick Joseph with Citigroup.

Thanks. David, you mentioned the wall of capital chasing deals today. Do you expect any impact from a stronger US dollar on foreign demand for US multi-family assets? And could that have any impact on cap rates going forward?

Well, I think that there is certainly demand from foreign capital, but there's also a lot of demand from domestic capital. I think we'll continue to look at good quality multi-family assets as a good investment opportunity. And there are, frankly, so few assets available for sale, I'm not sure that, that would negatively impact evaluations. That's certainly an interesting thought, but I'm not sure that it's one that would negatively impact the demand for assets here.

Thanks. And then, in terms of development, you talked about not backfilling the pipeline as fast as the expected starts. But given the strong multi-family fundamentals and the runway for future growth, how does development fit into EQR's long-term strategy?

Well, it plays an important part in that long-term strategy, but it's not the only part of our strategy. We continue to be very active and try and look for development opportunities, and we'll continue to do so, but prices have gotten very expensive, construction costs are up, and we're just not seeing the opportunities to reload back inventory at the same rate that we're putting it into service. We've got, could be opportunities to buy assets in markets; could be opportunities to buy land in markets; and we'll continue to pursue both and execute on what we think are the best risk-adjusted returns.

Great. Thanks for the color.

You bet.

And we'll take our next question from Dave Bragg with Green Street Advisors.

Thank you, good morning.

David, can you elaborate on the competitive acquisition market that might leave you on the sidelines? The question is: as acquisitions have gotten more competitive, to what extent has your cost of capital, namely disposition pricing, not kept up the pace?

You've not seen us print any of the big acquisitions that have taken place across the country. Again, it's limited, but there certainly have been some; and we've tended to find little opportunities here and there that might be properties that are in lease-up, or properties maybe even under development, or just ones that have got different, unique risks that we might be able to manage, in addition to having this opportunity to buy out our joint venture partner on this deal in Emeryville.

As I said earlier, we don't have product that we need to sell, so we're not anxiously looking for almost anything in order to get out of stuff that we don't want to own. We're just trying to be opportunistic and make trades that make sense. The sheer volume of transaction activity that you've seen us experience, even away from the Archstone transaction, over the past half a dozen years, has come down considerably as we've sort of achieved our objective of transforming the portfolio. And we're now going to take little bit more opportunistic approach to the investment side.

Okay. So you would target a 100 basis-point cap rate spread between acquisitions and dispositions. I'd love to hear your thoughts on why that's the right spread; and is it currently a bit wider than that today when you look across the board at the stuff that you could sell and the opportunities that you are underwriting on the acquisition front?

Well, that's obviously based on what we know we'd sell if we could find the right opportunities, and what we think we'll have to pay for those opportunities. You know, if we were to have acquired some of the stuff that we looked at and underwrote that we didn't buy, that spread probably would have been wider because a lot of stuff is traded in the 3%s. But we believe we can manage that business today at a 100 or so basis-point spread and we did that last year at 113 basis points. So the guidance is just, we think we'll do 500 on the buys and on the sales; who knows how it will actually end up. That's just the assumptions that are made in the guidance that Mark gave.

Okay. The last question is that the investment activity lately, especially on the development front, has been largely focused on the West Coast. And can you talk about in general terms as to the changes that you've seen in terms of your underwriting of long-term growth rates on the West Coast versus East Coast? Or total return potential that seems to be steering you incrementally towards the West Coast over the last couple of years away from the East Coast?

We found more land opportunities -- well, one thing is that we acquired a bunch of assets in the Archstone trade, so that was one reason why you've seen more on the West Coast. In addition, we found a great piece of property on the 405 in LA. We continue to find some opportunities in Seattle -- and believe me, the guys on the East Coast have been working awfully hard to try and find opportunities there.

Been very challenging in New York, if not impossible. We've got a couple land sites in Washington that we'll consider to start building on. We've got a couple of sites in Boston that we may build on soon. It's probably taking a longer time in Boston, for instance, to really get the things that we've got our eyes on actually to the point where we can start construction.

Most of the reason why we've been more West Coast-focused is the fact that we've got, I think, four land sites in San Francisco with Archstone.

Okay. Thank you.

You bet.

We'll take our next question from Jana Galan with Bank of America Merrill Lynch.

Thank you. Good morning.

Good morning.

Question for David Santee: I was wondering if you could touch on affordability for in your markets. If you could share either the move-outs due to rent increases in the fourth quarter, or where your residents are with rent as a percent of income by market?

Well, I think we've discussed this before, that currently we really only measure residents' income at time of application. So by that nature, they're going to be able to afford the rent and therefore, as we've seen over the years, really, the rent as a percent of income really doesn't change. People making more money are replacing people that can't afford it. I will tell you we did see, in the area of move-outs due to rent being too expensive -- that has fallen off significantly. I want to say probably 600 basis points for the year; but a lot of that was really centered in San Francisco. That was a key driver. But even San Francisco has stabilized a lot more.

Historically, we've seen rent as a percent of income, it would be about 20%; and that's the way it's been, not only in the existing portfolio, but in the portfolio that we owned in the 1990s. It's a fairly consistent percentage on average.

Thank you. And then, just curious -- you've had very impressively high occupancy rates. Curious if you think this is the result of undersupply of housing coming out of the recession? Or improvement from revenue management?

I would say that we've never been one to buy occupancy. And I think if you look back over the years, relative to some of our competitors, that we tend to probably run a little lower occupancy in Q4 because we try to optimize that balance between rate and occupancy. This year we didn't pull any levers any differently than we have in previous years, so this improved occupancy was really a true function of increased demand. And one could argue that in some of these markets -- look, we said, over the past couple of years if you start sprinkling in more jobs, which went from 150,000 a month all the way up to the high 200,000s, that we could see outsized growth. We've had discussions recently that, look, if things continue the way they are, then 97% could be the new 95% occupied in quality, institutional-type communities.

So it's really a combination of lots of things, Jana. It's under supply of new products. It's people staying single longer. It's people interested in living in the high-density urban environments. I mean there's all sorts of things that come to play that we've been talking about for the past four or five years that are really now all getting to a point, building to a head, that is giving us great occupancy, great revenue growth and a good outlook going forward.

Thank you.

You're welcome.

We'll take our next question from Ian Weissman with Credit Suisse.

This is Chris for Ian.

Getting back to acquisitions and dispositions and the spreads there, I get that the 100 basis points is what you have forecasted for this year. But could we expect that number to come down in the future as the quality of assets that you're selling improves? That's one; and then, two: do you have an estimate in terms of the spread on an AFFO yield basis? I imagine those are quite a bit tighter as the older assets are more CapEx intensive?

I think that, that's very possible; and also that the CapEx as a percentage of revenue will be higher in the dispositions, in the assets that we're selling. That's a very good point with respect to that cap rate spread and something that we are noticing.

Having now essentially exited all of the more commodity-like markets, much of what we'll be selling going forward are assets in our core markets that don't fit our needs going forward. We've got assets in suburban Seattle, for instance; we've got assets in New England; some assets in California that we will be able to sell at cap rates that will be much tighter to those which we will be buying. That's a very good point you raised.

Okay. Great; and then I wanted to revisit the 4Q beat. You talked about the reason for it on the revenue side, and then getting back to the expense side, you talked about the initiatives you put in place. What surprised you after the 3Q call that led to you beating it by 40 basis points?

Yes, it's Mark Parrell.

Part of that certainly was some adjustments to reserves that we always do at the end of the year; and two of them in particular going in one direction, and that was an adjustment to our medical reserves. All year we spend, Chris, trying to estimate what our medical expenses will be for our employee benefit plans. And at the end of the year we true that up. And there was a couple million dollar benefit from that, that we were not anticipating. So that would have come through earlier in the year if we had approximated it correctly, because it is a savings. We had overestimated the expense run rate for the year for our medical expense number.

And then we had fewer casualties than we thought for the year and that also pushed some money through the system. That doesn't affect same-store. That does affect FFO; but the medical reserve does affect the same-store and FFO.

Got you. Thank you very much, guys.

You're welcome.

We'll take our next question from Alexander Goldfarb with Sandler O'Neill.

Morning.

First question is, David, going back to the initial comments on the rent gap. In the first half you guys said it's wide, and that's why you expect the first half, especially first quarter, to be better than historic; but in the back half you spoke about it compressing, and also the impact of supply. If the first half continues, is there upside to the back half? Or the back half assumes sort of the same strong growth that you've seen in the first half or so far year to date, and therefore, there's really not upside if it continues at the current trajectory?

Let me see. Okay.

Certainly, today we're running 100 basis points in occupancy above same time last year. When you get into February, end of February, that's going to compress down to 80. When you get down to March, that's going to go down to 60 or 40, which goes back to the question, is 97% the new 95%? If that's the case, and depending upon what happens with the new deliveries, you could see some gapping in the peak leasing period. I mean, I think we were running 96% and change last summer, so to get a big pickup from 96.5% is a little more difficult than getting a big pickup from 95%.

So then we have -- I think we should be able to achieve in Q4 of 2015 pretty much the same occupancy that we achieved in 2014. So a lot of the pickup is going to be in the first half of this year solely due to improved occupancy.

Okay. That's helpful.

And then, on the development, I thought you mentioned that there's one batch that's delivering in the mid-4%s to 6%, and then 6% plus on the existing pipeline. Just want to clarify that.

Well, we've got a deal in San Francisco that we think will be a mid-4% delivery at current rent, so that was a range of assets there, Alex.

Okay. That's helpful and then finally, for Mark Parrell, a two-parter.

One is: on the CP program, is the cost advantage just because the participants in that are subject to less regulatory issues that maybe line of credit lenders aren't as aggressive? And the next part is, as you look at your -- well, you already spoke about 2015 -- but as you look at your 2016 and 2017 maturities that are above market, some of your other large brethren have spoken about possibly addressing those in advance. So curious your take.

Okay. Well, on the CP program, a lot of those buyers are various money funds, also corporates; and that market is a very efficient market and it is a lower cost market than the bank market. I'm sure the regulatory charges play into it. I also think that, because REITs were not CP participants until very recently, there wasn't a lot of interplay between those; and the banks, frankly, got to price the credits maybe a little wider, especially high quality guys like us, than they probably should have been able to. And I think with the CP program, we're going to close that gap.

In terms of 2016 and 2017, we have a fair amount maturing. We'll be really thoughtful about that. We were already going to pull forward $200 million that is par pre-payable. We can do that either by pre-funding, or we can do that by hedging. And I think with the input of our Board, we'll think real hard about that. Because as you know, on occasion we have pre-funded these maturities and locked in these lower rates. And right now being able to do a 30-year potentially inside of 4% is very interesting, I have to say. So we'll be very thoughtful about that.

Okay. Thank you.

Thank you, Alex.

We'll take our next question from Andrew Rosivach with Goldman Sachs.

Good morning and thanks for taking my call.

I'm trying to get this to a couple of AFFO numbers and it's got a couple of pieces. The first is, you guys give better disclosure than anybody on CapEx; and you've got your CapEx for same-store unit in 2014 went up to $1,800 versus $1,200 the prior year. And that increment, just call it $60 million, is about 4% of your same-store NOI. Is there a redevelopment component to that?

Sure; it's Mark Parrell.

What I'd direct you to is, there's a little bit of guidance we give on page 23, and we talk about rehabs, is what we call them. So these are not the $40,000 or $100,000 units, tear-it-down-to-the-studs type of things. These are kitchen and bath reworks that we do. But they do have often a revenue-enhancing component, and/or at least in part, they're optional. Some are asset preservation, but some are optional.

We do give you some separate guidance on that. For example, for this year there's three real pieces, the routine piece or replacements that's $350 a unit. It's been about that number for a long time; and that's carpets and appliance replacements. Then we've got these rehabs I just spoke of; and a few years ago that was $250 to $300 a unit and we expect in 2015 that will be $600 a unit. And we've signaled on prior calls that we're going to do a lot more rehab. We have a lot of opportunity with the kind of assets we now own.

Yes, yes.

Yes. So that's part of that increase -- a couple hundred bucks of it. And then we do have a third component. We call it building improvements. And that's all the external stuff: air conditioners on top of high-rises, complex facade work, all of that. And what happened there is, the last couple of years have been a bit of a catch-up, so 2014 and we think 2015.

If you look at 2013, that number was pretty low, much lower than usual, and that was really us being maybe a little bit busy integrating Archstone and not doing all the capital projects we had originally budgeted. But I do think we now own more expensive assets, and so I would think this $1,800-plus number will moderate a bit in out years. I'm not sure it's ever going to get back to $1,400 a unit, which is what it was when we owned, again, a much cheaper portfolio in these commodity markets.

I guess the way to translate this is, you've got that $869 for 2014. I can see in the footnotes you give a sense of where it's going to be for 2015. So $350 would be kind of the recurring number, and the above and beyond would be considered a rehab?

Well, in fairness, the $600 per unit for rehab -- some of that we have to do. Some of those are just asset preservation. But I would say a clear majority of those are things we're doing with an IRR in mind or a return in mind, and for us we center that at a mid-teens return; and we generally have gotten that. The $350 -- routine, absolutely have to do. Of that $600 per unit, that could easily go down $200 a unit or more if we wanted it to, but we think right now this is a good use of shareholder capital.

Do you have a sense, to get apples to apples with a couple of your peers because everybody's kind of all over on this, what the burnout has been on your same-store related to that activity?

Well, it varies. We said before, in general, it will increase revenue by between 10 and 20 basis points. Remember, we have $2.6 billion of same-store, of total revenue; so it's a big number, Andrew. This year, for example, in 2014, on that 4.3% reported number, it had no impact. And the reason for that is, a lot of these rehabs were done in Washington DC, and a lot of these rehabs are in their early stages where they're creating vacancy and not creating income. And because of that, you just have no impact on the year.

But it will vary year over year, and some years it will be 20 basis points and some years zero. I reiterate, we're doing this as an asset preservation matter, and we're doing this as an investment matter. We're not really trying to change, and in fact, we aren't really changing, our same-store numbers.

Okay. And then, obviously, the increase is (inaudible), but I also want to do the other piece of it, that you guys have been touching on, is -- you've been paying off the old Archstone debt and as a result, that kind of non-cash benefit is getting smaller. Maybe you could remind me how much it was helping earnings in 2013 versus 2014 versus 2015.

Yes, my Chief Accounting Officer is smiling at me because we spent a lot of time talking about this in just in the last day or so. I'd refer you to page 15, and this is going to be a little technical, but I'll be very brief, and if we need to talk more about it we can. There's various premiums and discounts that are discussed at the bottom of that page, at the very bottom of 15; but the net of result of all this is that our -- put aside cap interest for a moment -- but our reported interest expense for the year is within $2 million of what the actual cash number is. All of these premiums discounts plus all the amortization of financing costs have very little net impact on what we report. Because some goes one way and some goes the other.

So the answer on Archstone and the rest of it is, the Archstone debt is certainly disappearing. We only have one real large pool in 2017 left, but in its net impact on the Company, it's effectively is nothing -- the interest expense into normalized FFO or regular FFO for that matter.

And you wouldn't happen to know what that $2 million was in 2014 or 2013? Because as I recall, it shrunk from a much larger number?

It was, and I don't have that point of reference here with me. It was a much larger number, particularly in 2013. We did some very large payoffs in 2013, and that number came down very quickly. So there was certain benefit in 2013, but it didn't last long. I'll say that much.

Great. Thanks for the time, guys.

Thank you.

You're welcome.

And we'll take our next question from Dan Oppenheim with Zelman & Associates.

Thanks very much.

I was wondering if you can talk a little bit more in terms of the thoughts on renewal rates, in that you've done a great job of lifting occupancy and talking about 97% as being the new 95%. Sounds like you're a bit more focused on pushing rates here, given the comments about February and March renewal increases. Are you basically implicitly accepting that the move-outs could go up -- move-outs due to rental increases could go up sightly more as we get to the spring and summer? Or is that not a worry at all given the thought that at the time of move-in that the affordability is strong enough that they can handle it here.

Well, when you look at the reason to move out being too expensive, the whole portfolio is about 10%. Additionally, we have also as part some of our internal initiatives and rearranging the lease expiration schedule on the Archstone portfolio, we have moved more leases into the peak months than we previously have. But we don't see any slowdown in demand. December, as a data point, we saw our e-leaves increase in December by 14%. So for the quarter it was up 9%, so we continue to see demand.

There's been some articles recently; the kids are starting to move out of the basement. I think if all of that continues, along with even retirees wanting to relocate back into the city, there's this huge magnet in the urban core that is drawing everyone there that I think will serve us well and allow us to continue to ask for higher rents.

Great, thank you.

We'll take our next question from Rich Anderson with Mizuho Securities.

Thanks.

How much of the 4% revenue growth expected for 2015 is in the bag? And how much would you say is still quote, unquote speculative? In the bag from --

I don't know how to answer that. (multiple speakers) Well, oh, the embedded is, it's 2%, 2% and change. It's kind of always been that way, the last three or four, five years. That's just taking the rent roll and annualizing it as of January.

Right.

So you usually get about probably 40% to 50% of your rent growth turns into revenue growth only because most of your expirations, renewals occur mid-year. So if you're giving, 8%, 6%, 7% renewal increases, you're going to pick up 40% of that, on average.

Got you. Okay. And a technical question for Mark Parrell, if you could: what is the benefit to NAREIT FFO in the first quarter from pursued costs?

You're referring to the numbers on page 28?

Yes, I am.

Yes. So the benefit there actually on the net -- so NAREIT FFO defined will be higher, we believe, than our normalized FFO. And it will be higher because we anticipate, but are not certain, of having a litigation recovery, a payment to us in settlement of a lawsuit somewhere in the $10 million to $20 million range. We've put that in the guidance. That goes in that same line, so you're seeing it there as a big positive.

So something on the order of $0.04 or $0.05 to the positive. Then we'll have $0.005 to $0.01 of these pursuit costs that we always add back to the NAREIT FFO number. That's what's going on there, Rich. That number will, throughout the year, decline; and more of these pursuit costs will erode that litigation settlement. That's why the guidance for the whole year for NAREIT FFO and our normalized FFO is almost the same number. It's just the penny difference.

Okay. Understood. Thanks.

And then last question from me: you're not calling a bottom yet in DC, you may soon. But on the counter to that, my question is, what's your view on technology as an industry? It's easy to see the strength right now, but to the extent that you're calling a bottom in DC or may someday, is it possible we'll soon be calling a top or plateauing of markets like Seattle, San Francisco, even Boston and Denver, because the technology industry is starting to look overdone at this point? Just comment what you're looking at and what you're looking for in those markets from a technology perspective.

Well, I would say we spend a lot of time here just R&Ding and researching future opportunities for technology. So I think for the most part we're just in the beginning stages of technology and the opportunities that will exist going forward. Certainly, places like San Francisco, you're geographically limited; but I don't see any reason to think that Seattle will slow down.

When you look at comparative rent levels to other major cities, there's plenty of room to run; and there's still this, again, the magnet. Many companies in Seattle that have headquarters or regional headquarters in the suburbs are relocating to the city because that's where the younger employees demand to work. So I'm not sure that it's just technology. I think it's a broad-based urban revival.

The $40 billion valuation Uber, some VC folks are starting to call a top in technology and worried about it getting overdone. But you're just not seeing any of that -- not worried about it at all at this point. Is that a fair statement?

Well, look, we'll be the first to admit that San Francisco's had its busts, and we're not suggesting that it won't again. But we will also tell you that every time it busts, it's come back stronger than it had previously. You look at the demographic picture, you look at -- David noted this, the reorganization that's happening, you look at this millennial generation, where they want to live, work and play -- we continue to be very optimistic about long-term opportunities in these core urban centers. That doesn't mean that they won't stumble or bust from time to time. But we think over the long term, we're in the right assets in the right markets.

You got it. Thank you.

You bet, Rich.

We'll take our next question from Tom Lesnick with Capital One Securities.

Thank you. Actually, my questions have been answered.

And we'll take our next question from Vincent Chow with Deutsche Bank.

Yes, hey, everyone.

I apologize if I missed this, but in terms of the same-store performance for the quarter being ahead of expectations, I know you talked about the positive early trends that you saw that you discussed in third quarter continued and that drove the upside. But by market, I was wondering if there was any particular markets -- they all seemed to do well, but any one market really stand out as much better than you had expected as of the third quarter?

Well, I think when you look at the contribution to the overall growth, it was certainly San Francisco with -- what did I say? 140 basis points improvement in occupancy. So that was -- typically, we've seen, we've had this discussion over the past couple of years in that San Francisco's so under-housed, why do we have this seasonal impact? I think we've done a better job of managing expirations in addition to outsized demand in Q4. So I would say, San Francisco definitely surprised, relative to their contribution to the occupancy. And we would expect them to continue to surprise us.

Okay. So I'm not sure if that's a surprise, but I guess -- (laughter)

A couple of modeling questions, to clean up here. It doesn't sound like equity is part of the plan here this year, but just curious -- you ended with 377 million shares. I think it's going to 380 million for the guidance. And is that just equity awards, or is there something else going on there?

Right. It's Parrell.

That's just the effective employee stock option exercises that we're predicting throughout the year.

Okay. Great.

And then, I think I heard 60% of the G&A spend is supposed to be in the first half of 2015. Was that GAAP G&A? Does that include the --

Either way you cut it, it will be in the first two quarters of the year will be 60%. So whether you take our $52 million number or the GAAP $63 million, it will be the same kind of dispersion.

Okay. Thank you.

You bet.

We'll take our next question from George Hoglund with Jefferies.

Sorry if I missed this, but the $0.05 per share of lower NOI from higher OpEx in 1Q 2015 -- can you elaborate what's driving that? I assume part of it's the medical expense true up from 4Q that goes away?

Yes, so we've got a few things. We've got a $5 million increase in utilities. We've certainly noticed here in Chicago it's gotten a lot colder since December. We've got a $4 million increase in payroll; and that -- again, these are all very common for us. In that payroll increase you've got raises coming through the system. You're resetting all your accruals and about a $4 million or $5 million increase in real estate taxes because we're, again, resetting our accrual levels for 2015 as they relate to 2014. So all of that all together is the source of that negative $0.05.

And did the recent snowstorm in the northeast, will that impact any OpEx in 1Q?

You know, on a same-store basis, probably not. The impact in New York and DC was obviously very minimal. We typically just take a three-year average in our budgeted numbers. So Boston was the only one that really had a major impact, but I don't think there will be any material impact on Q1 numbers.

And then the last one -- looking at acquisitions for the year, based on what you guys are seeing in the markets or what's becoming available, any sense in terms of geography where there might be more acquisitions done? And then, also, you anticipate these being just stabilized assets? Or might there be some recently developed assets with some lease-up?

Well, again, we're just speculating but I would say all of the above. We are working on a deal, recently completed deal in Boston, that could get done in the first quarter; but other than that, we'll be looking at everything across every market and making sure that anything that we do buy makes sense relative to the disposition proceeds. And I would not be surprised if we didn't see, just like we did in 2014, opportunities to buy some things that have got a little bit of lease-up risk or development risk, at least from a completion standpoint. It allows us to have a competitive advantage.

And if I can add -- it's Parrell -- another thing that's important when you do your modeling is timing. So our guidance assumes acquisitions occur effectively rateably throughout the year; so about 25% of that $500 million each quarter. Our dispositions, as we said in our remarks, is front-end loaded. We think about $300 million of that should occur in the first quarter and the rest will be spread evenly. All this can change, but that's what our guidance is premised on. That's why you see a little bit more dilution, as I said in my remarks, running through the system.

Thanks, guys.

Take our next question from Haendel St. Juste with Morgan Stanley.

Hey, thanks for taking my question.

Haendel.

David, a slight twist to an earlier question: you guys mentioned not ready to call the bottom in DC in terms of operations. Curious how you're thinking DC from an investment perspective at this point. Is DC on your current menu for potential investment? Are you underwriting any opportunities there? And curious, if you are, how you would be thinking about near-term NOI or IORs for a potential investment?

We're not currently underwriting anything to buy in that marketplace. We have looked at things. We do have a couple of land sites that have been in inventory for a while that we may consider moving forward with. Assets would have maybe a 2017 delivery -- 2017 delivery might be good timing. But we have not -- not underwriting anything. And I'll tell you that we've not seen any real diminution in value at all, of assets in that marketplace. We think values have held up very well. I'm not sure that anyone will see any quote, unquote opportunity in that marketplace.

I appreciate that.

Following up on some earlier comments about your trouble backfilling your development pipeline in concert with the improving outlook for the LA market -- curious on your decision to sell the LA parcel that you sold during the quarter. Can you give us some color, some insight on the thought process there?

Sure, that was part of a four-parcel acquisition that we made in the Howard Hughes complex on the 405 in Sepulveda where there were four parcels. We are building on two of them, 500-plus units and we didn't wish to add more to our inventory in that location and found a builder that paid us a very nice price to buy what we consider to be parcel 3. And at some point in time we'll sell parcel 4, which is a much smaller parcel. And that disposition, we did have a nice gain on that disposition relative to the value that we had attributed to it at purchase.

I appreciate that.

Lastly, you mentioned the declining home ownership rate as a tailwind that you and your peers have benefited from the last couple of years. Curious on the look ahead, and specifically, how you're thinking about the prospects for a single-family recovery today as potentially a risk or a headwind for you. We've seen housing starts estimates out there calling for 20%-plus year-over-year starts growth. Builders are offering a bit more incentives and we're starting to see slow improvement in the mortgage availability, which again, collectively paints a slightly more competitive for-sale dynamic. Curious on your thoughts there. And then also, do you want to broaden that out to include anything else on your risk list as you think about this year and into next year?

We look at the single-family housing national statistics as sort of an interest; and we do, as I noted, we have seen fewer people move out of our apartments in 2014 to buy single-family homes. We operate, we are concentrated today in very expensive single-family home markets. That was part of the plan. And it's very expensive, mortgages are hard to come by. Down payments are significant; and we're buying -- many of our residents, 40% some odd of our units are occupied by a single individual and we don't see that segment as particularly prime homebuyers anyway. A lot of our residents are in the 30-year-old range. We think value and flexibility and optionality is provided by rental housing.

I think there are a an awful lot of things in our markets that differentiate us a little bit than what you might see in markets where the cost of single family housing is much lower, not only in absolute dollars, but as a multiple of income. I think that there are other companies and single-family home renters that I think are at much more risk to what you may be seeing about more focus and easier mortgage availability, et cetera, with respect to the single-family housing set.

Appreciate that.

As a quick follow-up, do you guys have perhaps a recent stat on average tenant income or perhaps rent as a percentage of income?

We've covered that previously; and as David Santee said, we collect that data only at the point of application and point of move-in. So we know that our most recent new occupants, that number's been in the 20% range of rent to income. And that's been very consistent across our history, almost regardless of the portfolio that we are running or the markets in which we were operating in.

Thank you for that.

You're very welcome.

We'll take our next question from Michael Salinsky with RBC Capital Markets.

Hey, guys. Apologize, I'll keep these short.

Given the comments on DC about possibly bottoming in 2015 -- not willing to call the coroner yet -- can you talk about what you need to see in that market to give you confidence that market's bottomed, whether it's job growth or supply? And then also, obviously different mixed sub-markets there. Where do you expect the pockets of real weakness to be in DC in 2015 relative to something that we could see some strength in?

Okay. This is David Santee.

I think first and foremost, we have to see jobs. We have to see a greater degree of certainty and confidence from a lot of the government contractors. That's where it all starts.

As far as the supply, for the most part we have an excellent handle on what's coming online this year, and we track as soon as someone starts moving dirt, so we know what's going to probably surface in 2016. So for 2015, your pockets of deliveries have shifted somewhat. So when you look up the makeup of our revenue growth, for 2014 the District for us was positive, positive revenue growth. For 2014, the I-270 corridor was positive revenue growth for us. This year, your deliveries are going to be in South Alexandria. You're going to have out-sized deliveries up the I-270 corridor, whether Rockville, Bethesda; but at the same time, the RBC corridor is tailing off, so you could start seeing positive rent growth there. So it's just a matter of how strong the good pockets are and how weak the over-supplied markets are, and at what point in time during the year, relative to an improving economy and job growth.

Okay. As my follow-up, given the comments about the tough acquisition environment, tough development environment as well, and the positive comments on redevelopment, and we think about acquisitions in 2015 -- does that make you more lean towards Bs with more of a value-added component or do you still see As as offering the best upside at this point in the cycle?

We're kind of agnostic, Michael. We've bought properties across the quality spectrum and we'll acquire where we think we can find the best risk-adjusted return. We've bought As, we've bought Bs, we've bought Cs and turned them into Bs. We're really quite agnostic about that.

Okay. Thank you much.

You're very welcome.

With no further questions, I'd like to turn the call back over to today's speakers for any additional or closing remarks.

Thank you all for joining us. We look forward to seeing many of you around the circuit in the coming months. Have a great day.

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