住宅地產 (EQR) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Equity Residential 1Q 2015 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Marty McKenna. Please go ahead, sir.

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

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

Thank you, Marty, and good morning, everybody. Thanks for joining us today. As reported in last night's earnings release, our teams across the country did just a great job during the first quarter. Achieving 5% growth in same-store revenue, which we've driven primarily by a continuation of the strong occupancy that we saw in the fourth quarter of last year.

We also did a terrific job controlling expenses, and delivered first-quarter NOI growth of 7% and Normalized FFO growth for the quarter of 11.3%. There's absolutely no doubt that we continue to enjoy very strong apartment demand across the our core markets. And David Santee will go into much more detail in just a moment.

But this strength is being experienced in nearly every market in which we operate. Driven by all that which we've talked about over the last several years, including a modestly improving economy that's helped produce a million new jobs in the last four months, and 3.3 million in the last year. The creation of new households by the millennial generation, which is generating significant demand for rental housing, which is not being met by new supply today. And the desire of so many to live in 24/7 cities across the country that have very high costs to single-family home ownership.

All in all, multi-family fundamentals remain very favorable. The first quarter of 2015 produced very strong operating performance, and we're pleased that our results year to date, and how we are positioned going into the primary leasing season, have enabled us to raise our same-store revenue guidance for the year to 4.3% to 4.7%. With that said, I'll let David Santee discuss in more detail what we're seeing across the country today.

Okay, thank you, David, and good morning, everyone. Today I'll be reviewing our results for the quarter, discuss our current position with respect to base rents and renewal increases, and then update you on our markets and our three buckets of revenue growth. All of these give us the confidence today to tighten and raise our full-year 2015 revenue guidance. While our expectations for Q1 performance were high, actual results were even slightly better. However, we are mindful that peak leasing season and peak deliveries across all of our markets are still ahead of us.

Q1 performance was a result of the continuation of the strong operating metrics that we delivered in Q4, with the key driver being elevated occupancies compared to Q1 of 2014. Our same-store portfolio realized an 80-basis point pick up in occupancy. However, more notably, our core markets delivered a 100-basis point pick up, ranging from a low of 50 basis point in Boston to 180 basis points in San Francisco. We continue to believe that these improved results are driven by strong demand from an improving economy, a shift in generational lifestyle preferences as more and more renters are choosing the urban lifestyle, and continued declines in home ownership.

As a result of the strength that we saw in Q4 and the expectation that the trend would continue, we have the confidence to extend renewal offers that achieve 6.3% growth for the quarter -- the highest since Q1 of 2012. Additionally, the percentage of residents that chose to renew with us this quarter was the highest since Q1 of 2008, at 56.1%.

Turnover continued to decline quarter over quarter, falling from 11.3% to 11.2%, with the percentage of move-outs to buy homes dipping to 11.9%, the lowest percentage we have seen since Q1 of 2012. In terms of real numbers, move-outs to buy homes fell from 1,330 to 1,269 quarter over quarter, representing about 1.3% of our total same-store unit count. Net resident turnover, which factors out same-community transfers, fell 30 basis points quarter over quarter, from 10% to 9.7%, as residents' desire to remain in their building and neighborhood caused them to move either up or down in rent -- with 60% choosing to move up.

Net effective new-lease rents, the foundation for determining renewal increases, averaged 5.1% year over year for the quarter, versus 3.1% in Q1 of 2014. And have continued to remain at these levels through today.

As we enter the second quarter, the significant occupancy gains that we enjoyed in Q4 and Q1 have begun to moderate, as expected. Although today we still enjoy an exposure rate that is 10 basis points lower than same-week last year, and occupancy at 96.4%, which is 50 basis points higher than same-week last year. Renewal increases achieved for April and May to-date are 7.2% and 7%, respectively. And based on our results thus far for June and July offers, we expect to achieve similar results for these months.

While Q1 produced outstanding revenue growth, those results were slightly better than our expectations that drive full-year guidance. With peak leasing season just ramping up -- and reminding ourselves again that 2015 will see peak deliveries -- we are extremely pleased with our quarter-to-date results and expected outcomes through May and June.

Expenses for the quarter were generally in line. However, the route we took was quite different than our original road map. The Northeast storms resulted in significant snow removal costs, and also impacted our ability to perform many services in-house, as our staff dealt with the in-flurry effects of the storm or were simply not able to make it to work.

In the plus column, all of these unexpected events were more than offset by the sharp declines in energy costs. Real estate taxes representing over 36% of total expense are being revised downward from 5.35% to 5.1% for the full year as a result of lower-than-projected values in Northern Virginia and lower overall taxes in Denver, and King County in Washington State.

In the minus column, the save in real estate taxes will be eaten up by higher payroll costs, which is 22.5% of total [expenses] as a result of overtime, due to the Northeast storms and fewer vacant positions across our portfolio. With energy costs remaining sharply lower and a slight reduction in property insurance costs, we remain confident that we are on track to hit the midpoint of our expense guidance range of 2.5% to 3.5%.

Moving on to the markets, I'll lead off with the Washington DC Metro area. Despite anemic job growth and record deliveries during 2013, the DC Metro area was able to absorb more than 14,000 units. As many of the government retirees live in homes in the suburbs, their younger replacements are choosing to live in the city, with the amenities and transportation they need right outside their front door.

New lease rents remain under pressure, and on average, are flat across the portfolio. However, renewal rates achieved have increased from the low threes during 2014 to the low fours in Q1. Renewals on the books for April and May indicate this trend will continue throughout the year. Improvements in job growth are beginning to materialize, and the previous multi-year declines in the professional service sectors have gone, and are expected to be positive going forward.

At 17% of total NOI, any improvement in Washington Metro will certainly have a favorable impact on our full-year results. With a 13,000 units being delivered in 2015, and by our account, another 9700 in 2016, the Metro area continues to be fairly stable. With occupancy up 100 basis points today versus same-week last year, DC performance thus far is dead-on our projected revenue growth assumptions.

Seattle continues to meet expectations, with concentrated deliveries in the east and north. Amazon's recent financial results bode well, and their 4,000-plus open positions in downtown, which pay an average of $90,000 per year, increased by 200 jobs versus same-time last year. Expedia recently announced that it would be relocating its headquarters from the suburbs to the city, where the high-quality talents choose to live, work and play. Corporate relocations from the burbs to the urban core are playing out in every major city across the US, and we would expect this trend to continue.

San Francisco was the winning beneficiary of the improved occupancy that we saw in Q4 and Q1, with a 180 basis points increase over Q1 of 2014. With minimal deliveries relative to outsized demand, we see no reason why San Francisco should not lead the way again in 2015. And we look forward to stellar results as we begin lease-up on our new product in Emeryville and downtown.

Denver thus far continues to maintain its ranking as the second best market across our portfolio. With peak deliveries of over 9,000 units this year, we would expect softness in the urban core to continue -- this softness being defined as only 5.5% revenue growth. With the majority of our portfolio located in the suburbs, we wouldn't expect to see any material deterioration of revenue growth for the full year. Additionally, reports of actual or projected job losses as a result of the energy crash are few and far between.

Los Angeles' performance has shown tremendous strength in recent weeks. With net effective new-lease rent growth approaching 7% today, and renewal rents achieved averaging 7.5% thus far for Q2 versus 6.5% in Q1, we'll be moving Los Angeles to our plus-5% revenue growth bucket for full-year 2015. With most of the port drama behind us and very strong demand in the valley and far north, a broad-based economic recovery is clearly materializing. With only 8,500 new deliveries expected in 2015, there should be minimal impact to this improved trajectory.

Today representing almost 11% of our NOI, LA is delivering occupancy of 96.6%, which is 100 basis points higher than same-week last year, an exposure that is 100 basis points lower than last year. It appears that LA is now on track for an extended run that will provide outsized growth for an extended period to the EQR portfolio.

Orange County, San Diego and the Inland Empire are all performing as expected. Some softness in downtown San Diego from new delivery will constrain new-lease rents. However, renewal increases achieved across the three markets range from the mid-6s to the mid-7s.

Jumping over to Boston, new-lease growth is going to continue to be under pressure, as 70% of the 5,000 new deliveries are concentrated in the urban core and Cambridge, with late 2014 deliveries spilling over into 2015. However, despite the perceived impact from the winter storms, Boston absorbed over 4,600 units in the first quarter, as demand and rental activity saw no impact.

As newly delivered office and lab space come online, we would expect to see increased demand in the urban core, as the financial services and biotech industries continue their expansion. Our Boston portfolio is slightly better-positioned than same-week last year, with lower exposure, and 30 basis points better occupancy. With new lease pricing under pressure from the concentrated deliveries, the key driver of revenue growth for 2015 will be in the form of renewals, where we achieved plus-5% through June.

New York is steady as she goes. For Q1, the Jersey waterfront beat out Manhattan, but only as a result of the poor results they experienced in Q1 of 2014. Going forward, we would expect Manhattan to continue to lead the Metro area in revenue growth, with modest weakness on the Upper West Side, due to new and large unit count deliveries. Improved job growth in the higher-paying sectors of business and professional services will certainly bolster demand for all of the high-end product that has been recently delivered.

In addition, it will help now that the job losses in the financial sectors appear to have found a bottom. With the outside deliveries in Brooklyn and Jersey City coming online, we're already seeing new-lease price pressure, and would expect that to play out for the next 12 to 18 months.

Last but not least, South Florida. With over 12,000 units being delivered this year across the three-county metro area, we expect the most severe pricing pressure in the downtown Miami submarket, where 50% of these new apartments will be located. The balance of new deliveries are mostly east of I-95, from Fort Lauderdale all the way to West Palm Beach, which insulates the bulk of our portfolio from direct competition.

With only two EQR assets near downtown Miami and the balance of the portfolio further west of I-95, we should be well-positioned to deliver another year of plus-5% revenue growth. Job growth remains strong and diverse across the entire region, with the potential implications of Cuba's new open-for-business policy providing more questions than answers.

Summarizing our buckets of revenue growth, we now see the DC bucket as half-full versus half-empty, and have challenged our team to meet or exceed 100% revenue growth for the full year. With 13,000 new units still to come and meaningful job growth in the early stages, Washington DC will be a slow and steady climb from the bottom.

Our 3% to 5% revenue buckets now contain San Diego, New York, and a cautiously optimistic Boston, which will be challenged to achieve a 3% or better. Our plus-5% bucket has the usual suspects, with San Francisco and Denver leading the way yet again. LA now breaking out with 6%-plus revenue growth, followed by Seattle with a solid low-6%, and then South Florida and Orange County in the low-5%s.

As we have demonstrated, it's still a great time to be in the apartment business. An improving economy and the generational shift in lifestyle choices will continue to produce outsized demand in the urban core. A decline in deliveries in 2016 across most of our core markets will most certainly extend the runway we have to grow revenue, and produce results that are above historical trend for the foreseeable future. David?

Great. Thank you, David. As evidenced by the recent activity in our sector, there remains a very strong bid for multi-family assets, from many different segments of the investment community. As a result, the first quarter saw no acquisition activity on our part, as pricing remains aggressive.

We did sell three assets in the first quarter. Two in Redmond, Washington and one in Agoura Hills, California for a total of $145.4 million, at a 5.27% cap rate that we sold, under the expectation that the buyer acquired about a 5% yield on those deals. These assets were each multiple-building, garden-style assets averaging 31 years of age, and represented opportunities for us to sell into a strong investor demand for value-add product.

Thus far in the second quarter, we've had some transaction activity occur that we think is an interesting example of the market trading that you'll see us try and undertake going forward. Two weeks ago, we acquired a recently completed 202-unit property in Boston for $131 million at a low-4% cap rate.

Around that same time, we also sold a 41-year-old 193,000 square-foot medical office building in Boston for $123.5 million, or $639 per square foot, at a mid-4% cap rate. This property is located next to Mass General, and was acquired as part of our [Charles] (technical difficulty) parking investment 16 years ago. With the current demand for healthcare assets, we saw great opportunity to dispose of this building and trade into a multi-family asset with far more upside in both earnings and NAV growth going forward.

On the development side, we commenced construction on one new project in the first quarter, representing the last of the four downtown San Francisco sites that we acquired as part of the Archstone transaction. We're building 449 units at a cost of $290 million, and expected yield on cost at today's rents in the mid-5%s. We continue to assume that we'll start about $459 million of new developments this year. And we have a couple of smaller deals that we'll have to get underway yet this year to reach that goal.

But more importantly, similar to the acquisition market, there's a lot of capital chasing development opportunities, and land pricing has increased significantly. As a result, and noted on our last call, we're not acquiring land for new development at the same rate as we're commencing construction on existing sites held in inventory. So in addition to reductions and starts this year, we would also expect starts in future years to be down from the level seen over the last several years. And with that, Ann, we'll be happy to open the call to questions.

(Operator Instructions)

Nick Joseph, Citi.

You mentioned the Boston acquisition. I'm wondering if you can talk a little bit more about that, what was attractive about that deal, and if your underwriting criteria have changed at all?

Well, I'm not sure it changed at all. We think that deal today, Nick, is probably our best-located asset in the city. And we underwrote that deal at a high-7% IRR. I think our expectation over the last several years has been high-7% to low-8%s, and we think that this will deliver within that range.

And then just more broadly on the transaction environment today, you mentioned the strong bid and aggressive pricing. Is this an opportunity to actually trade out of some of your non-core markets, if you can find core deals to redeploy the capital?

That's essentially what we've been doing over the last half-a-dozen years. So yes. The challenge there is not finding interest in those assets we'd like to sell -- as evidenced by the $4.5 billion of assets we sold to help fund the Archstone acquisition. But it is finding the opportunity to redeploy those assets -- that capital.

I can tell you that, of what we own today that we'd like to sell, we're in no hurry to sell any of it. We're happy to continue to own it. We will exit Orlando in the next month or so. But other than that, what we have on our list that we'd sell, we'll own in the meantime. And when we find the right opportunities to reallocate that capital, we will. But we're in no rush to do so.

Thanks. And then just finally, on those dispositions, will they be from non-core markets, or will they be non-core assets in your core markets?

I would say it will be all of the above. We're getting to a point today where we can sell non-core assets in our core markets while we continue to sell out of non-core. So you'll see us do both.

Thanks.

You're very welcome.

Derek Bower, Evercore ISI.

Just had a question on the guidance and the outlook. I certainly appreciate the guidance range for the full year, but it still implies deceleration to the back-half of the year, especially at the top end. So can you just elaborate a little bit more on the risk factors that get you to the mid-point, even the top-end of the guidance, that still has the deceleration you had? Turnover, I think, is down lowest since 2008; renewals are as high as since 2012. Can you just elaborate a little bit more again on what brings that deceleration throughout the remainder of the year, just given how strong the household formation numbers have been?

Hi, Derek, it's Mark Parrell. I think David Santee will probably supplement this a little bit. We've mentioned before, we really got a substantial occupancy benefit in the fourth quarter, and again repeated that in first quarter. And occupancy, as David Santee just mentioned, remains very high. And so we have positives in all regards on the operation side.

But as you compare our occupancy in the second quarter that we expect in 2015 to occupancy that we had in 2014, and you keep doing that throughout the year, they get closer, those two numbers, and there is just less occupancy benefit. So I don't think it's really as much anything about slowing down or decelerating, or household formations being worse, or anything like that. It's just the mechanics of the numbers when you have this occupancy improvement that was so substantial. And that was in the slower part of our year, in the end of the fourth quarter and the beginning of the first.

The only thing I would add is, the fourth quarter and the first quarter, the numbers are great, both on new lease rents, both on renewals, but your transactions in those quarters are so few. That's why I remind everyone that we do have peak deliveries. We're just now entering the peak leasing season, where more than 50% of our leases will turn, and that's where we'll make most of the money. We don't see any, really, deceleration. Like Mark said, it's just the mechanics of the numbers.

Okay, got it. And then just touching on margins, there was a bit of a deceleration sequentially from the fourth quarter. I don't know if that's typical from a seasonality basis, but you got a 100-basis point margin improvement last year in 2014 over 2013. What do you think is the projected run rate for 2015 again?

As a margin?

Yes, NOI margin.

We put out 66% and 67% -- I think those are good numbers. I want to point out, our margin is fully loaded, so our property management cost is everything that it takes to run that operation -- IT, all-property-related legal, and the all-property-related accounting. So when you're comparing apples to apples, so you have the right comparator.

Okay, got you. That's it for me, thanks.

You bet.

Nick Yulico, UBS.

David, you mentioned the transaction market being -- I forget what words you used exactly, but I think it was implying that pricing is pretty good. And we saw one apartment REIT get taken out at a cap rate that was probably 100 basis points higher than you. And you've got a much different portfolio. How do you think about -- recognizing you don't need the capital -- but how do you weigh doing a JV of a bunch of your best, lowest cap rate assets, just to demonstrate to the market that this is where market pricing is, and this is where our stock is?

Well, we'd consider such an event if we did have a use of the capital. And I'd suggest to you that every day away from us there are trades being printed that demonstrate the value of these assets. I don't think we need to do something to make that clear to the marketplace; it's happening every single day all around us. Again, it's something we'd consider if we had a use of the capital. We don't at the present time. Development is fully funded. But it's not something that we would not consider. We'd certainly be open-minded to it if it made sense.

Okay. And then going back to this occupancy issue, you talk about looks like the comps get a little tougher throughout the year. Yet you also said that, I think, in the second quarter so far, you're over 96% occupied, and you're showing a good year-over-year growth in occupancy. So how do we think about this idea of recognizing that the whole industry is at peak in occupancy, and people are worried about year-over-year occupancy growth? And yet maybe we're going to push through that as an industry, just because the demand trends are so strong, and what was considered peak occupancy won't be peak occupancy?

Well, I think you're referring to 97% as the new 95%. I think we're optimistic that that could play out. We didn't do anything differently relative to our pricing philosophies or processes in Q4 and Q1. But yet, demand really is the key driver. If you take the position that some of these core markets are really under-housed going back 10 years, and we have an improving economy, I completely agree that there's no reason why 97% couldn't be the new standard for the years to come in some of these core markets.

Thanks.

You're welcome.

John Kim, BMO Capital Markets.

I realize it's just a data point with some seasonality, but how concerned are you of the weak GDP number that came out this morning? And particular, if GDP moderates to, let's say, 2% growth this year, how much will that impact your ability to raise rents at two times that rate?

Well, we haven't had time, of course, to analyze the GDP number that just came out a couple of hours ago. But some of that relatively low number was based on lower exports and US dollar strengthen, and things that just really don't have a direct impact on us. I'm not suggesting none of our residents are employed in export-oriented industries, but it's just, I think, one number for one quarter, and it's been a pretty uneven recovery. We feel like supply and demand speak for themselves at this point, in our business.

Okay. And on the asset sales during the period, was it an important distinction that they were sold in the suburban markets? Are you continuing to focus your portfolio in the core cities?

I guess they are representative of the assets that we've been selling over the past half-a-dozen years, being older, garden-surfaced park-kind of properties. And in response to one of the earlier questions, you'll begin to see more of that in our core markets going forward. So the older, garden-type product in our core markets, you'll see us trade out of, going forward, provided we can find good reinvestment opportunity.

Got it. And then also on your development pipeline, the stabilized yields you disclosed this period on completed and stabilized developments, with 5.9% -- which I think is one of the highest numbers you've produced in the last few quarters. But I was wondering if you could disclose the yield of the developments that were stabilized this quarter, but completed in prior quarters?

Stabilized this quarter? Approaching 6%. The deals that we completed in 2014 -- which I'd assume would then be those that would stabilize this year -- we think will stabilize in the upper 5%s, close to 6%.

Got it, thank you.

You're very welcome.

Alex Goldfarb, Sandler O'Neill.

Just a few questions here. I'm going to guess that they're both for -- that Mark Parrell will take them. The first is, the Fannie, Freddie issue with their production caps. If the FHA doesn't increase those caps, are you concerned about an impact as far as in the multi-family market? Or is this something that private lenders are already stepping up, and even if both Fannie and Freddie are capped at the $60 billion in total, it's not going to impact it enough? Private lenders will step in there that it won't disrupt pricing or transactions in multi-family?

Alex, thanks for the question. We've been monitoring that situation for a while. And just so everyone has the facts straight, Fannie and Freddie were given by the regulator a $30 billion per year production limit, and they're getting relatively close to those limits. Currently the regulator is considering this matter, and may have some sort of decision in the near-term.

What I'd say about EQR's capital needs -- and you were asking more about dispositions, which I'll get to in a minute. But we are lucky and in this enviable position of having access to the unsecured market and the preferred market and the like-company market, which right now is very competitive and very strong. And all those markets now, except the preferred market, are cheaper than Fannie and Freddie for us.

On the disposition side, we have not seen any impact -- and in fact, just sold an asset a few days ago in Orlando. And though there's been a lot of discussion about this matter in the investment sales community, there wasn't any impact on our pricing; we weren't re-traded on it. So we'll have to see what the regulator decides. I'm of the opinion that the market can adjust to some of this, if given time. But we'll just have to wait and see.

Let me add just one thing here, Alex, if I may. I'd be far more concerned about this if we still owned the $5 billion of product that we've sold over the last couple of years, than what we own today. As I noted in one of my responses to one of the previous questions, we're fine owning what we have today. And I think that source of debt capital is far more important to what we have already sold than what we would sell going forward.

Okay. And then the second question is, on your CP program, there are recent articles in the newspaper about moving some of the money markets to floating NAVs rather than fixed. Does that affect the buyers of your CP paper? Would those buyers now buy short-term governments? Or the buyers of your CP paper are not the same as the people who have the prime funds, et cetera?

I think the latter. We're A2/P2 rated, so corporates own us. Maybe a life insurance company or two owns us while they put money aside waiting for long-term bond issuances to come out in the market, generally. It isn't the high-quality -- they're not really allowed to own A2/P2 paper. So I don't think that's going to make a great deal of difference to us.

Okay, thank you.

You bet, Alex.

Dave Bragg, Green Street Advisors.

On the topic of elevated occupancy, we seem to be attributing that a lot to strong demand. But can you talk about what you've done to reduce frictional vacancy? That could get everyone a lot more comfortable with this idea of sustainable higher occupancy levels.

Well, your biggest cost in vacancy is -- on turnover, is vacancy. Turn costs are relatively minimal. Actually, just in the last, let's just say, three weeks -- we have sales meetings across all of our markets twice a year. And I attended four of them in the past two weeks. Really, the easiest way to reduce frictional vacancy is through retention. And I think a lot of people in San Francisco understand what's going on. Residents in San Francisco expect large increases.

We get numerous emails from residents regarding renewal increases. And what we've done is, we've really made in effort to arm -- give our people the tools to better-negotiate -- and not necessarily negotiate, but to educate, our residents. So our renewal discussions with residents are more about showing them what our competitors are charging, bringing up rents online so that they can see this isn't something that just EQR is doing -- this is a macro event that is impacting pretty much everyone.

I think we have very good success with that. And that's why I think you see, even though renewals continue to accelerate, turnover continues to decline. And certainly, just well-located buildings, with access to amenities right outside the door, and great service by our on-site staff, all together produce great retention.

Thanks for that. Also, can you point to a change in the number of days that an apartment is down between when a renter departs and the new renter comes in? Have you been able to achieve any efficiencies on that front in the last, call it, five or eight years?

That's probably -- there's a seasonable impact to that. Average days vacant, November through January, are probably in the high 20s. As you start getting into high-traffic season, it comes down to the low 20s, if not 20 on average.

But there's a lot of noise in those numbers. What we do is, we really hold -- we measure the hold time. Every day we're measuring how many days our staff are holding apartments for people that are moving into vacant units. If someone wants to rent a vacant unit, they have to take occupancy, financial responsibility, within five to seven days. We try to do that on our notice-to-vacate units as well. And some of those vacancy days are influenced to some degree by the level of rehabs that we're doing, because it extends out those dates by two or three weeks.

I just want to reinforce that distinction between the time of economic responsibility and the time of occupancy. Like, someone will come and say -- I need an apartment in 60 days. We'll say -- fine, but you've got to start paying for it today. And that's one -- let me say, there's an awful lot of people out there -- I think more mom-and-pop operations -- that will not be quite as strict about when one has to take on the financial obligation, relative to one actually -- compared to when one actually takes occupancy.

And David, just to add a final note, David Santee mentioned on the last call how we had moved a lot of our lease expirees around, so that we had fewer of them in the periods of time where David Santee said we have longer hold periods. We have moved a significant amount of our lease expirations out of that slower period of demand, so that should give you higher occupancy over time as well.

Okay, thank you for all of that. Next question relates to the Boston acquisition. Can you walk us through what looks to be a mid-four cap purchase to a high-seven IRR?

Well, it's called rental growth. It's called being in a great asset in a great location. That may, as David Santee is discussing today, be one that is maybe challenged because of new deliveries. But we think over an extended time period, will do very well for us.

Okay. Just rental growth, no cap rate compression?

No. In fact, not cap rate compression on the exit at all.

Okay. Last question goes back to this broad, apparently very robust appetite for multi-family assets. Given the interest of some new entrants and other asset aggregators, this is always a tough thing to quantify but, David, do you observe any degree of a portfolio premium today?

A portfolio premium or platform value -- I don't know. I think it's quite obvious that the private equity firms have raised an awful lot of capital. Many of them are underweighted, under invested in multi-family.

Multi-family is an extremely leverageable asset, and I think that, that's made people very interested in the space, and they'd be willing to be very aggressive in pricing. Whether or not that's creating portfolio premium, I can't tell you -- or platform value, I'm not sure. But there's no question that there's an awful lot of large capital sources out there that have been looking at this space.

Thank you.

You're welcome, Dave.

Ian Weissman, Credit Suisse.

If you could flesh out a little bit your color on DC, UDR mentioned yesterday that the recovery in DC was really happening more in the urban core. I was hoping you could address some of that comment and decipher between the CBD and the suburban markets.

Let me -- it's jumping around. For Q1, the numbers play out. You see the strongest growth in the I-270 corridor, suburban Northern Virginia, and then south of Arlington. However, this year, you're going to see most of the deliveries in the I-270 corridor, North Bethesda. Q1, the only market that was really negative for us was Alexandria. Again, South Alexandria, Alexandria, is where a lot of the deliveries in 2015 will occur. What was good this past year will probably be under pressure this year, if that helps.

That's helpful, thank you. And just one final housekeeping issue. It looks like it was $6.9 million or so in income from the lawsuit settlement that hit the JV in 1Q, that issued back out to get to Normalized FFO. It looks like you're backing out $0.02 more in 2Q. Is that also from a lawsuit settlement, or is there something else going on?

Correct. That's another expected $10 million or $11 million. And we'll see. Timing should shift, amounts could shift.

Related to another issue?

Same matter. Paid out over time.

Okay, thank you.

You're welcome.

Rich Anderson, Mizuho Securities.

When I just do a quick look at my NAV and I put a 4.25%-type cap rate on you, I get to something close to $90 for you. Is EQR too big to sell?

I wouldn't think so. I think Sam has demonstrated with the sale of EOP that we wouldn't be too big to sell.

Okay. I mean, we talk about portfolio premium and all the rest, it just occurred to me, maybe we should be talking full gamut anyway. The other question is much smaller-term, or smaller-level. On the Boston acquisition, would you have made that deal in the absence of the [MOB] sale? Or is it all about a trade?

I guess I'm not sure I can answer the question, Rich, because we didn't think about it in that manner. We like this asset. We've looked at this asset for a while. Within the first part of a large portfolio sale, it is one that we had identified that we'd like to own if we could break it out of the portfolio. When it became available, we moved on it. And my guess is, we probably would have bought it.

We think positively long-term about this location, about the quality of this asset, about what's happening in Boston. And my guess is that we probably would have bought it without the sale of the office building. But being able to trade with the office building, I think, probably just helped. I think it is something that we would have strongly considered, even if we didn't have the office building as a source of capital.

Okay. And then last question -- quick one for Mark. I noticed that this duplicity charge declined this quarter versus last. Is there some sort of accounting adjustment there?

Yes, it's just a change in estimates. This was the charge we got for the exec com program, would be $11 million, and now in the $9 million range. And just as we've gotten fuller information, we just refined the estimate.

Okay, good enough, thank you.

You're welcome, Rich.

Rob Stevenson, Janney.

How active these days are you guys on the redevelopment front? And are you taking on wholesale redevelopment? Or are you basically just selling those assets and redeploying capital?

Sure. It's Mark Parrell. We are doing -- and we give you a fair amount of disclosure on that on page 21 -- a kitchen and bath renovation process, which we call Rehab. And we'll spend about $50 million doing that. Some of that is asset preservation; some of that is certainly optional and accretive.

We are doing a couple of large redevelopments, one specifically, out in Los Angeles. We took that asset out of same-store. So I think, as you see, that we own more and more of these assets that are very hard to replace, I think you will see us spending money on these larger-scale renovations and remove those from same-store, like other folks do. And on these kitchen and bath refreshes, I think those will stay in same-store and be something we spend $30 million to $60 million on a year, and just help us to stay current in the market.

I would say in general, Rob, assets that we consider to be medium long-term holds will continue to do these rehabs, as Mark suggested. On assets that we think would be shorter-term holds that might benefit from such a capital expenditure, we might often sell that asset, not unlike the three that we sold in the first quarter, for a value-add player. We think that we might realize more value selling that upside to a third party, rather than trying to do it ourselves and then sell it after the fact.

Okay. In terms of the $144 million of land for development on the page 19, how many projects does that include, and how many of those are shovel-ready today?

Well, I can't say exactly how many that includes. And any that would be shovel-ready today may very well be starting. We do have a couple of sites in DC that have been ready for a while that we've put on ice. But anything outside of that, they're not shovel-ready yet, and when they are ready, we'll start construction on them.

Okay. And then lastly, given the commentary around the reduction in real estate tax expectations for this year, do you guys think that you're finally over the hump, in terms of the really big increases? Or is this just a specific instance where you got a good benefit out of a couple of markets?

I think if you go back and listen to some of our previous discussions, the 421-a abatement or burn-off in New York City, will add 160 to maybe 180 basis points to our real estate tax number for the next four to five years. I think this year, we caught a couple breaks. There's still some bright spots that could materialize throughout the year, but I think high-4s, low-5s are probably in the cards for the next several years, just as a result of New York.

Thanks, Rob.

Dan Oppenheim, Zelman and Associates.

Was wondering if you can just talk a little bit about DC? I think with the comment of -- in terms of having a site that's ready, that you've been waiting on, it seems that there are many others as well in that position. Do you have a concern that when we do see some recovery in the market, that there is enough supply that comes, that it ends up being a very muted recovery there?

Well, that's part of the process, Dan, that we believe that it might make sense. I'm not sure that if there are an awful lot of other sites that are ready to go, I'm not sure the owners of those sites will have the capital and the financing on giving that marketplace the go-forward. And there may be an opportunity for the more highly, better-capitalized companies to actually get ahead of that. But it is certainly something that we'll consider when we decide to go forward or not.

Got it, okay. And then in terms of 315 on a, in terms of the acquisition there, buying a one-year-old asset there, Coos, a lot of demand for value-add projects. Do you think it's a better market in terms of the acquisitions for those where you can buy something that's recent development, but without the lease-up risk to it that way?

I'm not sure I can say anything for certain. Last year, a fairly significant share of what we did acquire, we bought either in some stages of lease-up -- and even considered buying something that was under development. And we will continue to consider those kinds of opportunities, because I think that can help us get an enhanced yield. It's very difficult to say if there's anything going on out there of any sort of opportunity, other than there's just not a lot of supply and a lot of capital chasing it.

Great, thank you.

You're welcome.

George Hoglund, Jefferies.

I just wanted to see on San Francisco, and Northern California in general, if the strong job growth continues, how long do you think we can see these high-single-digit, low-double-digit rental increases?

We've been asking that question for four years now. (laughter) Who's to say? The deliveries are primarily in downtown San Francisco. You're not delivering much of anything in the peninsula. A lot of your growth is being -- you're seeing double-digit growth far out in Dublin, and now Oakland, which was not as a desirable place to be. So I think, what was it, Facebook added double the number of positions, or increased 50%. As long as that continues, I don't see any end to these increases.

Let me just answer that question in a different way, and say that our average rent in San Francisco is still well-below New York City and Boston. So putting aside the rate of growth, the absolute rents are still not the highest in our portfolio.

Okay, and (multiple speakers)

I was just suggesting that there would continue to be headroom there.

Okay, thanks for that color. And then also on DC, just given the recent trends, when do you think we could really see material improvement in DC, given all of the delivery still coming online?

Rents are still, at best, flat to down. I think it's just going to be the velocity of job growth, perhaps a change in Administration, and reallocating more dollars back to defense spending. I think it's going to take something from the government to really jumpstart the economy. But like I said, I think it will be a slow crawl back until there is some meaningful catalyst, which most likely would be the federal government.

Okay, thanks.

You're welcome.

Jana Galan, Bank of America.

Just a quick question on the development pipeline. It looks like 170 Amsterdam was pushed out one quarter. Was that just weather-related?

Yes, I'd just note that you can push a property back one month and have that be one quarter. (laughter) So really, nothing can be -- there's no story there, Jana.

Okay, thanks. And then just on the energy cost savings, has that changed your outlook for the rest of year? Or maybe we could see some benefit as the year plays out?

I would say that, from a natural gas perspective, we're riding the market. We did take advantage of some rates for the winter strip, beginning December, and that continues into March of 2016. So we've locked in some material savings there. I think we'll continue to see saves in both electric -- electric actually is the bigger driver. And as more coal-fired plants in the Northeast convert to natural gas, I think we'll continue to see benefit from that on both natural gas and electric.

Thanks, David.

Thank you, Jana.

Michael Salinsky, RBC Capital Markets.

David, I think you characterized the market by saying, a lot of demand chasing a little bit of supply on the market today. Is that supply that's available? Is that quality supply fitting your wheelhouse, or is it mostly value-add? And then as we're several years into the cycle now, we'll have the early supply that was built be the merchant [boz]. Are you seeing more and more of that come to market there as they're restocking the pipeline?

We keep expecting to. I will tell you, every year our -- Allen, George and his guys come back. They animate C meetings in January, saying that the brokers are telling them they're getting all sorts of requests for opinions of value, et cetera. And then we continue to expect to see a new supply. But I guess maybe with financing rates available to refinance these assets and just the scarcity of them, it's possible people that are not -- they're not willing to sell it at this particular time.

Clearly, we're probably a little bit -- we're more selective in what we're willing to buy today, which may have narrowed the scope of what we'd be willing to consider. But there's just not much out there. We do underwrite a lot. We bid on a lot, knowing that we'll not likely win. So we stay in touch with the market, but frankly, I've never seen our acquisition list as bare as it is today.

Okay, that's helpful. We've seen a lot of actual ground up to that development in New York City right now. Are you seeing any pick-up in terms of conversion activity, be it New York or any other market right now?

I think what we -- the conversion business, I think, has been more talk than action. There's certainly been some, limited. But it's a very risky proposition. It takes an awful lot of capital, and takes an extremely long time to actually execute. And I think people have talked a lot about potential for conversion, but we've seen less than we would expect, given the chatter we've heard about it.

Okay, thank you much.

You're very welcome. Are there any more questions, Ann?

At this time, there are no further questions in the queue. I would like to turn the call back over to David.

Thank you very much. Before you hang up, I want to thank everybody for your time and your interest in Equity Residential today. And to let you know that on Monday afternoon of the NAREIT meetings in New York City in June, we're going to be hosting some tours of our new developments on Park Avenue South and on Amsterdam at 68th Street. And you'll all be receiving notice and invitations of that, so stay tuned for more details. Thank you very much. We look for to seeing you all at NAREIT in June.

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