Equity Residential (EQR) Q1 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Equity Residential First Quarter Earnings Conference Call on the 28th of April, 2011. [Operator Instructions] I will now hand the conference over to Mr. Marty McKenna. Please go ahead, sir.

Thank you, Nishal. Good morning, thank you for joining us to discuss Equity Residential's first quarter 2011 results. Our featured speakers today are David Neithercutt, our President and CEO; and Mark Parrell, our Chief Financial Officer. Fred Tuomi, our EVP of Property Management; and David Santee, our EVP of Property Operations are also with us here for the Q&A. 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 it over to David.

Thank you, Marty. Good morning, everyone. Thanks for taking time to join us for our call today. As you heard us say for quite some time now, it's a great time to be in the apartment business. And as we look at the 4 key drivers of our top line, we're happy to say that turnover continues to decline and that helps build occupancy exposure. Occupancy and fulfillments are leading the pricing power so our base rents and our renewal rents are increasing as we continue to push rents with confidence. It's really important to note, though, that the first quarter of the year does not produce a terribly large number of absolute least transactions, so that our primary leasing season is still ahead of us. We've kept our operating guidance unchanged for the time being, and we'll provide an update in our second quarter call in late July when we're further into our final leasing season. That being said, though, as we look at the 4 months of actual performance we have under our belt, as we look at our exposure today of 7.6%. And as we look at the renewal activity we're seeing 30 or 60 days out, we've got every reason to believe that our same store revenue and net operating income growth for the full year should be in the top half of our current guidance range. And Fred Tuomi, David Santee, they're here to answer I'm sure the many questions you've got on fundamentals across our core markets. On the transaction side, it's no surprise that the acquisition market remains extremely competitive. There is a massive amount of capital looking to be deployed in multifamily real estate today. And we think that cap rates in our markets across the country are in the 4% to 5% range and that investors underwriting unleveraged internal rates of return with 7 to 8 handles. As a result, we think the valuations in our primary markets have recovered significantly. And looking at our own assets here, depending on the market we think values are now in a range of maybe back to even to down 10% or so, and that's from the peak that we saw in 2007, 2008. And I'll tell you that these values recover from declines of as much as 30% and more. As noted on the last night's press release, during the quarter, we acquired 2 multifamily assets for $139 million in the first quarter. We bought 225 units in Fort Lauderdale, Florida. This is an asset that's across the street from an existing asset that we own there. We paid $200,000 a door. That's about $180 a foot at a cap rate in the low 5s, but we're pretty confident that we'll be in the fixture soon. We have line into assets that are undermanaged, and we're going to gain some efficiency by operating the asset with our neighboring property. We also bought 296 units in the Longwood Medical Center [Area], Boston's Back Bay. A $317,000 a unit which is about $346 a foot. We paid a high 5 cap rate for that deal. That property's surrounded by numerous colleges, hospitals and other medical facilities and it's very difficult, if not nearly impossible to build new in that market place. And I will tell you, although we didn't value this, we do think that there's a redevelopment possibility on the existing apartments that's on that particular property. As noted in the report last night, we also bought a commercial property in downtown Seattle. This property is adjacent to our Harbor Steps property, 97,000 square feet of office and retail space and we will operate it as such as we wait for the demolition of the elevated highway, which is immediately to the west of the property and the only barrier that separates this asset from the Puget Sound. Property's currently vacant, and we're going to finish the rehab started by the seller and we expect a stabilized yield in the high single digits, which will be achieved in a couple of years as we inventory this asset for development or redevelopment opportunity somewhere down the road. During the quarter, we also continued to sell non-core assets to reduce our overall exposure to what we consider our non-core markets. We sold 12 assets in the quarter for $262 million, realizing a weighted average IRR of 10.75%, which we're pretty pleased about. 5 of those properties were in Maryland with an average age of more than 30 years, and 4 of which I'll tell you was more than 50 miles from the district. We sold 2 assets in Atlanta, 2 assets in San Francisco's East Bay, 1 in Phoenix and 1 in St. Pete [St. Petersburg, Florida]. I'll tell you that it's a bid for the assets that we would like to sell remains very strong. We're seeing cap rates on our forward 12 numbers in the 5 to 75 to 7 1/4 range. And it's important to note that we think that makes the buyers actually cap rate probably 50 basis points or so below that. And we think these represent good values when looked at on a per foot or per unit basis, and we're willing to continue to sell into that bid because we think these values are very interest-rate sensitive. Now as noted also in last night's release, the strong demand for assets has caused us to accelerate our distribution activity for the year. In fact, we sold $530 million of assets in April alone. This past Tuesday, we closed on a 7-property, 1,626 unit portfolio sale with a single buyer. As the $286 million trade, all these deals were in the Metro D.C. area, 6 of them in Virginia, 1 in Maryland. 6 of the 7 assets were built in the '80s and we sold that at about 5.7% cap rate to us, which we think was about a 5.2% or so to the buyer. This month, we've also sold 3 deals in Portland, Oregon, 2 in Phoenix and 1 each in Palm Beach, Florida, Lawrence, Massachusetts and Manchester, New Hampshire so we're announcing our exit in the Manchester, New Hampshire rent market. These last 6 deals sold at a weighted average cap rate in the very low 6s. So year-to-date today, we sold $792 million of deals and we have another $200 million under contract. So it's quite clear we've got the potential to sell well beyond our original guidance assumptions. But of course, it has to be balanced against the opportunity to redeploy that capital into acquisitions, which as I already said is a pretty competitive process today. We only acquired $139 million of apartment deals in the first quarter. We've acquired 1 deal this month for $100 million in downtown L.A. and we pictured that on the frontpage of last night's earnings release and we have 3 more properties under contract for $255 million: 1 in D.C. proper, 1 in Arlington, Virginia and 1 in L.A. So as we sit here today, we should be a net seller of around $500 million by midyear. And as we've noted, this has accelerated the level of disposition activity. This is going to be incrementally more dilutive to our financial results for the year than our original assumptions. Nevertheless though, I'd tell you we're very pleased at the opportunities we're seeing to sell these non-core assets and exit these non-core markets. And of course, we'll have a much better idea how this all going to shape up and unfold for the full year by our second quarter earnings release, and we'll update our transaction and FFO guidance at that time. On the development side during the quarter, we commenced construction on 1 new development deal, and that's with at the Gateway to Chinatown [Chinatown Gateway] in downtown L.A. It's a 280-unit transaction and at the end of that about $332,000 a door. Now the yield on our cost for this deal, at our basis, will be below market because our land basis was above market by about $14 million or so. This is land that we acquired in the mid-2000s. And because we always intended to build on it, we couldn't write it down. So our GAAP yield on this deal will be in the low 5s, with the land value at market, the GAAP yield would be in low-to-mid 6s. During the quarter, we also completed our 250-unit deal in Redmond, Washington, This deal is leased up extraordinary well. The team has done a great job on leasing velocity there, and it will stabilize significantly sooner than we had expected. We're also planning to start this quarter our development deal, our joint venture development deal in Miami. And we continue to look for starts for the year, coming in at around $400 million to $500 million level. I'll tell you, Mark Tennison's team continually look for new development opportunities. They're currently working sites in all of our core markets: Boston, New York, D.C. area, South Florida, Southern Cal, San Francisco Bay Area and Seattle. And I tell you, all of these deals are being aggressively pursued by most of the parties. Our preliminary underwriting suggests yields on these deals and probably other development deals in these markets would currently be in the mid 5s to the mid 6 range. I'll turn the call over to Mark.

Thanks, David. Good morning, everyone. Thank you for joining us on today's call. This morning, I'm going to focus primarily on 3 things: Our first quarter results, our guidance for the second quarter and the remainder of 2011; and I'll close with an update on the revolving credit markets and on our balance sheet. We reported normalized FFO of $0.56 per share for the quarter, and this was slightly above our target. On the revenue side, as David said, all the indicators from our operating platform are flashing green. I want to give you some color on our 4 main revenue drivers, and I'm just going to go through them quickly. The first driver we always talk about is turnover. On our February 2011 call, Fred Tuomi said that we were assuming that our 2011 resident turnover would increase slightly as we push rent. We are certainly pushing rents, but we are retaining more of our residents even at higher renewal rent levels. The second driver we talked about is occupancy. We expected an average occupancy for the entire year to be around 95%, which is a 20 basis point increase over 2010. Occupancy in the first quarter was slightly higher than we expected for that period, and we anticipate occupancy for the entire year to exceed our expectations. Third thing we like to talk about is base rents. Base rents are currently up 5.7% over this time last year. This, too, was slightly better than what we had expected. And our final driver we talk about is renewal rents. And for April, renewal rents are up a healthy 6.1% over this time last year. And again, that is better than we had expected. If you kind of put this all onto the blender, you can see why at this early point in the year, we are optimistic about achieving our 2011 same-store revenue growth and we would expect that to be in the upper half of our 4% up to 5% up revenue guidance range. On the expense side through the first quarter, our big 3 expense categories, real estate taxes, on-site payroll and utilities were all on plan. As we look to the balance of the year, it appears likely that our annual expense number will be towards the bottom half of our plus 1% to plus 2% guidance range for expenses. And why is that? Well, on the real estate tax side, we budgeted that flat and we may end up being down. We continue to have very good success on appeals, even better than we had expected. And if this pattern persists, we may see some unexpected benefit in that category. Property management costs is another area of opportunity, we do expect these to grow, but probably by not as much as we had expected because some of the efficiency initiatives that David Santee mentioned on prior calls are moving faster than we had thought back in February when we gave you guidance. Speaking of guidance, we have provided a normalized FFO guidance range for the second quarter, a $0.57 to $0.61 per share. The difference between the company's first quarter 2011 normalized FFO of $0.56 per share and the midpoint of the second quarter guidance range of $0.59 per share is primarily due to these 3 factors. So again, reconciling those at $0.03 increase. A positive impact of $0.04 per share will come from higher total property NOI in the second quarter of 2011. And of that $0.04, $0.01 will come from incremental lease up NOI, $0.03 will come from increased NOI from the same-store property set, as expenses decline due to see seasonal factors and as we start to have more opportunities to raise rents during our peak leasing season. We further expect in the second quarter to have a positive impact of about $0.02 per share, mostly due to less interest expense. We will have a lower average debt balance in the second quarter of 2011 than we did in the first quarter of 2011. We also expect a negative impact of about $0.03 per share due to dilution predominantly coming from our 2011 transaction activity. Some of this dilution was included in our prior guidance. However, as David noted, the timing of our disposition activity has moved forward quite a bit, which will increase our dilution in the second quarter and for the full year. And as a point of reference, this is the exact opposite of what occurred in 2010, where we had accelerated acquisition or activity in the first 4 months of 2010 with disposition activity backloaded towards the end of 2010. We expect our 2011 and normalized FFO per share to accelerate each quarter, as the year goes on, driven by sequential increases in NOI from property operation, both from the same-store and lease up properties as base rent and renewal rent increases flow through our portfolio. This will be offset in part by the dilution from our transaction activity, including the acceleration of disposition activity that I just mentioned. On the balance sheet side, we're in good shape. And our strong credit metrics continue to improve as our operating business thrives. EQR's liquidity position is excellent. Cash on hand today, including 1031 escrow balances stands at about $770 million, and our revolving line of credit is undrawn and has about $1.35 billion in capacity. Cash balances at year end should be about $300 million. And now just a quick note on the revolving credit market. Our existing revolving line of credit matures in February 2012, and you can expect us to refinance our revolver over the next few quarters. So as you might imagine, we have been keen observers of the revolver refinance market. I am happy to report that this market has improved greatly over the last few months. Banks are eager to deploy capital with conservatively leveraged companies like Equity Residential, making the market as deep for high-quality credit as it was in 2007. On the other hand, while the investment grade revolver market is clearly strong, borrowing spreads and upfront fees remain above 2007 levels, but the current momentum is for these to continue to compress. As a point of comparison, our existing revolving line of credit carries an all-in spread of 50 basis points or 0.5% above LIBOR. New revolving credit facilities for real estate companies comparably rated to Equity Residential are being done today at all-in spreads of about 1.5% above LIBOR. I expect that our new covenant package would be substantially similar to our existing covenant package and that the new revolver will carry a 4- or 5-year term. An estimate of the impact of the revolver renewal on normalized FFO is included in our guidance. I look forward to reporting the full details on our new revolving ones it is complete. And now I'll turn the call back over to David.

Thank you, Mark. Michelle, we would be happy to open the call for questions now.

[Operator Instructions] The first question comes from Yana Galang [ph].

I was curious maybe if you could give us some more color on the market?

Any particular market?

Maybe more Southern California compared to New York and D.C.?

This is Fred Tuomi. I'd be happy to give you some color on that. Were you referring to renewal performance specifically?

Yes.

Mark mentioned our renewals for April are up 6.1% and that's actually achieved completed renewals. And going forward into the next month, it looks like growth will continue to improve, recording in the 7, achieving maybe in the low 6s. Looking at the April renewals, those are complete. The most powerful renewals are done in San Francisco at 8.4. 8.4 up in San Francisco. Denver was 7.9, D.C., Virginia was 7.1 and Seattle is also 7.1. So we're getting some power in those great markets. As expected, Southern California is going to bring up the rear. Renewals and we did achieve at 3.3 in L.A., 3.6 in Orange County, which is starting to gain some momentum and in San Diego was a 4.2.

And then I was just curious about the disposition activity, and it seems that some of the more recent ones were kind of in the D.C., Virginia area, and kind of the thinking behind why you thought that was better to dispose of rather than keep.

Well, we just had a very attractive opportunity to sell some of our older, more outlying, garden-style assets. And I also noted that we had acquired a couple of properties in D.C. And so we just thought it was appropriate way to balance our exposure there. And net of all of this, I'd tell you we'll be down about $200 million of exposure, following the completions of both these buys and sells.

The next question comes from Swaroop Yalla.

I was just wondering the acquisitions which you mentioned for this quarter, did I miss -- I think it was reported in the press about another building that you guys bought in L.A. Is that something which was part of this? Or I mean, or am I jumping the gun here?

I'm not sure part of what. We did acquire for $100 million a property in downtown L.A. which has been -- previously been an office building which has been converted into apartments; I mean, a phenomenal location in downtown L.A. It's 322 units, and we think we bought that at close to a 5 cap.

And then just touching back on Southern California question. I was just wondering what is the sort of macro drivers for the lagging performance? Is it the lack of jobs or the quality of jobs? Or is it the supply in that market which is still taking time to clear?

This is Fred Tuomi again. Southern California, I'll take it by major market. First, Los Angeles. L.A. is a big market. It's a big, diverse economy. It was hit hard in the recession; all the sectors were hit pretty hard, some worse than others. And the job growth, although it's coming back, it's coming back slower, a little bit later than other markets. So we still love L.A. It's going to be great. But just now, it's starting to get some momentum on the job creation. It's going to need some job growth across all sectors. Most recently -- I'm more concerned about the state, local, city governments. But sectors such as The Port [ph], showing some good high single, low double digit growth. Entertainment is up. The technology's been stable. Defense has some good news, bad news. So it's sort of a mixed bag, but gaining momentum and should grow about 50,000 jobs this year; to forecast, which is a 1.3%. Unemployment's still lingering kind of high. It's at 12.2. So still needs a little more time to percolate on the job, but I believe they're coming. L.A. also was a victim of supply. In the last couple of years of 5,000-plus new units delivered into L.A. Even though it's a big market, they're highly concentrated in market rates in the key submarkets like Warner Center in San Fernando Valley, and those areas of Hollywood and southern downtown. The downtown market has absorbed quite well, but there's other 2 markets that have been struggling with the absorption. This year, they're delivering another 2,000 units. 2011 will see 2,200 units still coming into L.A. There's kind of a spillover at those projects. And next year, we'll probably see another 2,000. So a little bit of a supply pressure in the market that's sort of weak. That's holding L.A. back. Now L.A. is, as I said, it's a big market, lots of submarkets. Some markets we're in are performing quite well, much better than the top line number you see. But those areas like [indiscernible] Warner Center, we've got tests, a lot of concessions, some really tough lease up pressure as well as in the NoHo area. Orange County is a smaller market, easier to kind of get your arms around. We're happy to see job growth coming back to Orange County earlier than L.A. So it's kind of nice to learn here that jobs are up about 2.2% or 30,000 jobs. Occupancy has recovered. We're 96% occupied in Orange County right now, and renewal increases are starting to pick up at 3 6 and our rents are up and 4.7 over last year and up already 4% this year to date. So Orange County we see a strengthening trend led by jobs. And then nice thing about Orange County, only 200 new units being delivered this year. That's unheard of. Typically, we run 2,000 to 3,500 per year in Orange County. We only had 200 and only a couple of hundred coming next year. San Diego has been -- even though it's a small market, sort of a disappointment. It's been kind of also based on the military. We've had military rotations in and out; mostly out. And that's been kind of a dampening effect on San Diego's progress. It's doing okay, but not great. Renewals are up 4%. Rents are up in the 3 range and occupancy is roughly around 95. And again in San Diego, North County's doing much better, Mission Valley is still competitive and has no material impact impact. And in the South County, definitely the military impact doesn't hurt any less in South County, San Diego.

The next question comes from Eric Wolfe from Citigroup.

Maybe just a follow up on the asset sales. I know you mentioned in your remarks that there's a lot of capital going after apartments. But I guess why accelerate the pace of sales if asset values are going up, NOI is going up and you don't really have a use for the proceeds, in terms of acquisitions, at least in the short term?

Well, we think that these assets are subject to -- the valuations are subject to the interest rate risk, and we just think as we look at these prices on a per pound basis and what we think buyers' expectations are in those valuations for revenue growth and rent growth. We think that these are fair prices. I think that one can wait too long and not have the ability to sell. And so we think when the opportunity is there, we have to take advantage of it.

I think you said that there's an underwriting in the 7% to 8% IR range. How were they getting that? I mean, is NOI growth flat over the next couple of years and then cap rates stay sort of where they are or is that...

No, I said my comment was what I thought buyers were underwriting sort of more core product. And so actually I think people are underwriting these assets that we've been selling more at higher IRRs than that. I think that Alan George's team would tell you that he's seeing more buyers out there thinking about more value-add opportunities. And so I think we're selling assets into that mindset with the hope that by putting however much money into these older properties we're selling, we'll be able to get incrementally higher rents. And as long as the people want to pay us for that opportunity, we think it's the right thing to do.

I guess for the assets, in particular, that you sold, the $800 million. What would be your expectations NOI growth over the next couple of years and net interest rates move up. Where do you think cap rates could go for those assets?

Well, we think NOI growth for those deals will still be okay. I don't think we'll expect the same NOI growth that we'll see in the properties which we have been investing, but I don't see any reason why the deals we're selling won't see a decent NOI growth. And I think the valuations show, acquires expectations of that growth. I'd just tell you that I think that the buyers that are acquiring these assets are leveraged buyers, and so interest rates make those valuations very sensitive, then we just we don't have an expectation. Sooner than later, at some point in time, interest rates will go up and those valuations could be at risk. There'll be top line growth as well. So I don't know how much values might change, whether that top line will be able to keep up the pace. But in any event, we've targeted assets or markets that we don't believe that are in the long-term picture for EQR. And as a result of that, we are now, just as we have over the past 5 years, systematically going and offering those properties into the marketplace, and we think they're pretty good values today.

The next question comes from David Toti of FBR Capital Investments. David Toti - FBR Capital Markets & Co.: I want to touch on something that seems to be a little bit of a theme in this space. And that's the -- you're pushing rents, yet your turnover's falling and your occupancies are rising. And I assume traffic has been increasing as well. Is the message there that there's a lag and that you just haven't pushed rents hard enough yet, that we should expect going forward to start to see some of that reverse? The indication to me is that maybe you left a little bit of rent on the table by not driving it hard enough.

This as David Santee. Like David said earlier in his comments, this really isn't the time of year when you look at the cyclical nature of demand. It's just a hard time of year to push rent. And I think when you look at our renewal rents -- and to be honest. I mean, we still haven't seen robust job growth in most of these markets. So I would say that demand is pretty on par with what we saw last year through the same time period. So I think it's all relative, and it's relative depending on from what market you're talking about. I mean, some of these -- also keep in mind, if you think about what we've experienced in the last 2 to 3 years, it was more of a V-shape than a long drawn out decline. So we still had, as of last quarter, we had about 20% of our residents that were still above our current market rents. In the last 3 months, we closed that gap to where only 13% of our residents are at an average of 1% above market rents. So again depending upon how you measure it, I would say that we've been very aggressive with pushing rents.

Yeah, I think that's right. If you go back to the renewal rates, that credit quoted in some of those markets around the country for 30, 60 days out, they're was a very strong high single-digit renewals.

And then the other side of the coin is, is that so you have people that are living here that are still paying above market rents. Those folks are still getting maybe a 1% or 2%, but people that moved in in the lowest part of the down cycle, I mean, a lot of these folks are getting 15%, 20%, 25% rent increases.

David, this is Fred. I can give you a little bit more color on that issue, a per market also. Base rent increases, the net effect of new lease rates, are up year-over-year in San Francisco, 10.9% as of right now. Boston up 9.2%; D.C., Virginia up 8.9%. Pretty robust, but the average is brought down again by Southern California where Inland Empire is pretty much flat. L.A.'s up 1%, San Diego up 2.5% and Orange County a little better. David Toti - FBR Capital Markets & Co.: So it sounds to me like you're being pretty aggressive on rents, but yet the trend of retention is sort of maybe working in your favor. That's sort of what it sounds like. Despite double-digit rent increases in a lot of markets, you're still seeing turns drop and occupancy rise.

Yes, and that was contrary to what our initial thought on how this year would play out. You would expect as you put the pedal on the rent, the more people move out. That's not happening. And I think that's kind of a systematic view of our business right now is people aren't buying homes. Homebuying continues to drop. They're enjoying the lifestyle., They can rent a better lifestyle than they can afford to buy. They're in great cities with great jobs. And consider the alternatives. They're not going to sink every penny that they can beg, borrow and steal into a home. They're not going to move out into the 'burbs. They're going to stay in urban core, enjoy a great life and continuing to want to buy up on that lifestyle. So we're seeing great retention at good pricing.

I think the last data point is when you look at our reason for move out. Historically, it's always been, the number 1 reason for move out is job change, then second to that was always home buying and rent increase too expensive was usually about number 4, number 5 on the list. Today, and for the past really 2 to 3 quarters, rent increase or too expensive has been our number 2 reason for move out and equates to about 14% of our move outs. So I think that's a testament to our aggressiveness and kind of pushing those rents to the limit.

Let me just add one other. I'll just repeat that. On the overall market dynamics, this thing about no supply in 2011 and 2012 is a real game changer. Before, you'd always have a good number of supply coming in to these markets. It gave people choices, gave them options and gave them incentives to move. We don't have new supply now. None of our key markets have a supply issue this year, and they're not going to have it next year. And that just takes an option right off the table. So people are staying put. David Toti - FBR Capital Markets & Co.: In aggregate, how would you compare traffic today to let's say the same time last year? And do you see any change in the closing rate relative to the traffic flow?

Yes, there's a couple of different dynamics that we're seeing. Number one, as far as our traffic to equityapartments.com in the past couple of months, we've seen daily increases of 15% to 25% unique visitors. Now the dynamic changes when you start publishing rents online. And historically, our foot traffic for the most part has remained the same. So the people that call or submit a guest card online, those people that finally make it to the property for the most part quarter-over-quarter relative to last year is about the same. But historically, we've always seen a 75/25 breakout. So 75% of the people actually rented and moved in, and then the other 25% canceled or were disqualified or declined. What we've seen in the last 2 quarters is a shift in 80%. 80% of those people are now moving in and only 20% of those people are canceling or being declined.

The next question comes from Bill Acheson of Ladenburg Thalmann Investments.

On the commercial property next to Harbor Steps, in terms of a comment, not a question, I'm kind of hoping it was that a three-story entertainment venue. It doesn't sound like that's the case.

No.

On expenses, I continue to marvel at the expense control that you guys are doing. I mean, the only market that seem to stick out was New York City. I assume -- I'm assuming that was property taxes. But looking forward, I mean, how heavily have you weighed in the increase in energy?

Well, when you look at our utility mix, utilities makes up about 60% and energy makes up about 40%. I would tell you that we see more growth in the water sewer. Water sewer is up about 9%. But then gas, natural gas, we did a rate lock through this year, so natural gas is offsetting that sewer and water rates. I tend to think that we're already talking about our natural gas strategy for next year. And frankly, we see no reason today to considering a lock for next year and just may ride the market, unless there is some significant speculative change, relative to future pricing. I don't know if that answers your question.

No, no, no, I understand. I mean the other thing is to the extent that your properties are transit-centric, the increase in energy should be a net benefit I would imagine? In talking about Phoenix here, you guys have boots on the ground there. In terms of a market commentary there, it doesn't look like -- I mean looking at the increase in rents that you're able to get there, doesn't look like all the single-family homes that are on the market there that are up for rent here, doesn't look like it's having any effect on your ability to raise rents?

Phoenix, has been a pleasant surprise. We're expecting a lot worse due to the mass of single-family overhead. But what's happening in Phoenix is , even though the prices on homes continue to plummet, foreclosures continue to mount through today, people just aren't buying those homes really at any price. And a lot of those distressed, single-family homes are outside of the core markets, they are far North, far West Phoenix, our portfolio there is much concentrated than all the good neighborhoods where you want to be. Home buying, due to home buying in Phoenix continues to drop this quarter over last quarter, first quarter last year is down another 4%. It's only 16.7% which is very, very low for Phoenix. So you're right, Phoenix is kind of define initial logic, is doing fantastic we're seeing good rent growth, renewals are up 6%, occupancy, even at this stage of the year is 95.9 as we start going into the warmer season there. And all systems are going and we're really pleased with it.

The next question comes from Jay Habermann of Goldman Sachs.

David, you mentioned obviously the accelerating dispositions and it looks like you're getting close to $1 billion based on what you sort of have in the works. What's your thoughts? If you do exceed, by how much would you anticipate doing so?

Very hard to say, Jay. If I had a better sense of that, we might have kind of changed our guidance already. But we're working on acquisition opportunities, and I think that will have a -- will play a big part on what we do on the dispo side. We continue to think that there will be more acquisition opportunities later in the year. We don't know if the color we get out there from our guys that are working this every day for us in the field, our conversations with our brokers, they know that brokers are having more and more conversations with owners, giving them their opinions and value, and they're telling us that more products coming. So it's really hard for me today to kind of give you a best guess how this is going to end up at the end of the year and in the past years, our disposition and acquisition activity is kind of been balanced throughout the year. And as I've said over the past several cause, it's just going to be lumpy. And because it does such, it's just very hard to call.

And just switching gears a little bit, I know acquisitions are projected to be about double starts for the year, but as you think about the next couple of years, and perhaps, building your development pipeline, I mean are you guys changing your philosophies sort of the buy versus build? Are you more willing to buy today to get the rent growth more immediately or are you thinking about longer term and developing.

Well, I guess it's both. It's never kind of an either or proposition for us, Jay. We operate in markets and I tell you, markets we've been buyers of existing streams of income, At the same time, we've been buyers of land site. So it all just depends on what the opportunities are, and if we think we're getting the appropriate risk adjusted return for taking the development risk. But we think development continues to be a terrific opportunity for us, way for us to create value. But I also think that acquiring assets is the way to create value as evidenced by what we did in late '09 and the early part of 2010. So I think we'll play both and I think you'll see us be buying existing streams of income and building new streams of income in most of our core markets around the country.

And then lastly on New York City, are you seeing any sort of price sensitivity on the part of tenants? i mean are tenants willing to move perhaps for cheaper rents outside of the city or are you not seeing that yet?

No. New York is just been a sweet spot again. January and early February was a little soft, that's seasonal to be expected, and then, it just really tightened up. There's very little new supply coming into New York this year or next year, the broker fees are pretty much all gone, come late March and in April, very strong demand. Before we're relying on job growth coming from business services and legal and entertainment, and now the financial sector, and all you guys are hiding like crazy. And they're all renting apartments versus buying homes out in the 'burbs. So we're seeing very strong demand and increasing demand in New York, limited supplies so rents are moving up quite nicely in New York.

The next question comes from Alex Goldfarb of Sandler O'Neill.

David, in your opening comments, I just want to make sure I got this right. I think you said that your math would suggest that some of the stuff that you're selling is 5 3/4 to 7 1/4, but you think that the buyers cap rate maybe 50 basis points lower. I would've expected the inverse. So I want to make sure if I heard that right, and if I did, if you could just sort of walk through that?

Well, I think that after adjusting for real estate taxes, it will likely be changed at the transfer. I'd tell you they don't get the same insurance benefits that we get. They certainly don't get the same leasing and advertising benefits that David Santee and his team deliver. So our expectations that it's going to be more difficult for them to see the same sort of benefit on the expense side that we see.

My second question is, and this is sort of -- more of a -- sort of macro thing. Certainly, anyone who went to the NYU event, noticed a large contingent outside, we've all been getting e-mails. AvalonBay certainly had some stuff going on at their development site in Long Island. Do you think that the current environment is just a lot more charged than it historically has been or is this the cycle of things? And right now, we're just sort of at a peak. But if you go back in years, there's been this sort of protest that have come and gone?

Well for those of you who don't understand what Alex was referring to, there were some construction union people protesting at a meeting that Sam and I participated in New York not too long ago. And they're protesting the fact that we use nonunion labor for our deal under construction in Manhattan at 23rd. It's hard for me to respond to that Alex, because I don't really have a frame of reference. It's just we've moved on, it's not been a problem for us. They tried to do things that annoy our residents at various buildings around New York and I tell you, our residents don't really care. And I guess we gave this union shops and opportunity to bid and gave them sort of bogeys they need to hit, they were unwilling or unable to hit those, and so we decided to go with an experienced contractor that used nonunion labor, and we're extremely pleased with the job that they're doing. So I don't know -- I think you mentioned AvalonBay, my guess is 1:00 today, you're going to maybe get a better idea from Bryce who might have a bigger frame of reference for you about their experience dealing with these unions.

The next question comes from Andrew McCulloch of Green Street Advisors.

On acquisitions, and sorry if I missed it, has the market changed with respect to potential portfolio acquisitions? Or most of the deals that you're still targeting are one off?

Mostly one-off, Andy. We've seen very few larger portfolio transactions. I mean, I can't remember us looking at anything more than maybe 2 deals, but we're working now on a pair of deals, smaller deals that are sort of run as 1. But other than that, it's really been a 1 off acquisition process for us. Of course, other than the 3 deals we bought in New York in early 2010.

And then just on the market for broken condo assets, is that market pretty well picked over, or do you still see opportunities out there to acquire assets that aren't half pregnant with presales?

What we did early on was to buy completely vacant deals, then we did look at some deals that had a very small percentage of units being sold through third parties. And I'm not sure that we're seeing anything today on the busted condo front. I will tell you that we are looking at some deals that have been busted condos, which have now been leased as apartments. So in fact Alan was telling me about one just the other day. So the current owners switched from condo to rental, and now, it's a stabilized apartment building and they're thinking about perhaps selling it. But we've not seen much of that. But I'll tell you, there is some talk out there about improvements in the condo market and maybe even people starting to gin up construction for condominiums again. So I think if you probably had to wherewithal the hold on this long. My guess is it probably behooves you to continue down that path.

And just one question on development, can you update us where the stabilized yields are trending for your various in process development projects. I think you already touched on Chinatown, but for the other deals?

I'd tell you low 5s, our expectations were probably in the 6s, but they're probably low 5s, just given the timing and construction costs at the time and land prices at the time, but probably trending, probably low 5s.

The next question comes from Tony Paolone of JPMorgan. Ralph Davies - JP Morgan Chase & Co: It's actually Ralph Davies on the line for Tony. Was calling in terms of component of your portfolio that you would classify as interest-rate sensitive. Recognizing the deployment kind of limits sales. I was wondering, could talk about how much of your asset base would fit the interest-rate sensitive, I guess bucket outside of the $1.25 billion?

Well I guess I'd say, 100% of our portfolio is interest rate sensitive. I'm not -- don't mean to suggest that our sort of core longer-term assets aren't, we just don't think that they are as sensitive interest rates. We don't think that even the buyers with whom we complete to acquire our core product, are basing their bid based upon what kind of leverage they can get from the Lifeco from the agency, so they could compare it more to what BBB bond yields are. Et cetera, et cetera. I think what we're seeing is the properties that we're trying to sell, those are a much more heavily-leveraged buyer, whose valuations are directly tied to the mortgage financing. And our team, we've got a terrific team of people who handle our secured financing, and they can tell you exactly what's going to happen to the GSEs or Lifeco advance amounts and advance rates based upon very small changes in interest rate. And we immediately see this. We've got deals under letter of intent and buyers come back to us and say markets move 25 bps spread wide, and what have you. And those values change. So I would say 100% of our assets are interest-rate sensitive. And we just think that there's more volatility due to interest rate changes on the assets that we've been selling. Ralph Davies - JP Morgan Chase & Co: So would you say that, in terms of the component of your portfolio that I guess more volatile, would you say it's not much outside of that $1.25 billion or?

Well, look, I guess if the question is, and forgive me if I'm going ahead here, but the question is how much more of that assets are we still planning on selling. We think that could be perhaps a couple of billion dollars more. And so that's part of the longer-term plan. So going back to 1 of the earlier questions, why are we selling now, we'll look over the next 5 years at the asset we know we don't want to own over the next 5 years, and we've got some we want to sell. So we need to take advantage of pricing today because in a perfect world, there will be more behind it. Ralph Davies - JP Morgan Chase & Co: Got it thanks. And then just quickly for Mark. Could you remind us what's in that non-comparable line item to get to normalized FFO? I think it was about $2.1 million. And will that kind of run at that rate for the rest of the year?

I can direct you just to Page 22 of the release. There's a lot of good detail on that so when you go through and you want to just reconcile on normalized or actually white paper or classic FFO in a normalize, we give you the reconciling items. So some of that reconciliation was due to forfeited deposits this quarter which was about $500,000 that we had. So that's listed on the schedule. We also had an insurance recovery on Prospect Towers of $1.6 million. So most of that adjustment was due to those, as well as the normal things you see us adjust, for which is to convert bond premium, as well as property acquisition cost. So that sort of lay down on 22, and hopefully that answers your question. Ralph Davies - JP Morgan Chase & Co: It does. Thank you.

The next question comes from Ross Nussbaum of UBS.

First, how much higher above the 6 -- low 6s growth that you're seeing on renewal rents, do you think it's reasonably achievable over the next year, given headwinds from oil on the consumer, given that you've got a diversified portfolio that's not just New York or Washington or San Francisco? Can you meaningfully get that number up from the low 6s? Or is that, are we going to start hitting a wall up there?

Well I think a lot of it just depends on the continued fundamentals in our industry, low supply, even if job growth trickles in. I think we'll continue to push and try to maximize that number. It's really just, really depends on what the market rates end up doing. And all indications are simple rules of supply and demand, if the demand continues to increase on a fixed supply, we would expect market rates continuing to increase above average run rates of 3, and maybe in the 4 or 5, and therefore, we'd expect to see renewals, then you could run it 5 or 6.

I'll also add there, we look at that another way, just the financial condition of our customers. And those coming in, we see still very good strong credit score and income ratios and overall in our entire portfolio, in all of our leases across our entire company, we look at the rent versus income ratio. And right now, we're sitting at a medium rent as a percent of income of 22.9%. That's a very healthy number. I think we've got a lot of room to grow on that. We automatically approve at the range of 30% to 35%. So sitting at 22.9, the average of 17.7. Those numbers have been fairly consistent and if you look across the market, some of our high-priced market are actually low on this, and California is always typically higher, which has always been the case. So we feel like we're nowhere near a danger zone where people can't afford, continued higher rents for their lifestyle. And though we don't really see any kind of near-term constraint.

And then David, I can't help but think that some of the commentary I'm hearing on the disposition side, makes me think back to 2006, 2007, and that, it feels like you're suggesting that a segment of the market may be mispricing risk here. And I think back to what Sam and Richard did at Equity Office in selling the company, and what Equity Residential did in terms of setting out a couple of billion of assets back in '06 and '07. Is this starting to feel peak-ish to you? I mean, I think you're saying, it's feeling peak-ish to you valuation wise on the segment of assets that you're selling. Should we be drawing these parallels back to '06 and '07?

I don't think so, frankly. I think that much of what happened in '06 and '07 was very much debt-capital driven, today, I think what you're seeing is very fundamental driven. And so I think that's just a much different picture. I think that the buyers of the assets that we're selling are getting good leverage and good grades. A good debt-rates and they're going to put some money into these units, and I think we're going to get good returns on incremental capital, and my guess is they'll get very decent, cash-on-cash returns, although on a more leveraged basis than we would operate. And they'll get very acceptable IRRs, given where their tenured treasury is today, and where alternative yields are on alternative investments. So I understand your question, I just think it's -- I never want to say it's different because you got to be careful about that. But I think much of what happens today is driven by fundamentals, and much of what happened back then, was driven by just a mass amount of debt capital available in the marketplace.

The next question is from David Harris of Gleacher & Company. David Harris - Gleacher & Company, Inc.: I've got a question on ATM. You did what -- $150 million early in the first quarter, and prior quarter, you did what, over $250 million? Should we think of you as being opportunistic price takers around your ATM usage? Or are you fine-tuning your activities on issuance through to the ATM with your activities on use of proceeds?

Yes, it's really a sources and uses question, David. Just by what's happening on the sales side of our business, and we're generating a lot of cash. So we don't really have much use for any ATM proceeds when we're sitting on the amount of cash we have and the cash that we expect to get from our disposition process over the next 30 to 60 days. David Harris - Gleacher & Company, Inc.: With the $250 million that you did in the fourth quarter, David, is that sort of signaling a limit to how much you'd feel comfortable doing in any quarter period in time? Or is that a lot of -- if there are no constraints? If you've used -- you've got use of the proceeds and the stock -- the bit for the stock is there, you'd just keep issuing?

It's Mark Parrell, David. I mean, we have a limit everyday. There's rules about how much you can issue using the ATM. But if we needed to, we could raise more than that if the market is stable and appropriate. So really, just not needing money. We don't runoff to a magic number and need it. We spoke on the last call about raising money into the ATM to fund these development deals, and we had discussed the fixed land parcels bought during 2010, and that's really what the ATM activity was about. It wasn't about a limitation of how much we can do in a particular quarter either, practically or legally. David Harris - Gleacher & Company, Inc.: And then so, just dovetailing that with your earlier comments about sales accelerating in the near term, near the medium term. I'm assuming ATM issuance is probably going to be pretty limited in that timeframe?

I think one could take right away from our comments, yes. David Harris - Gleacher & Company, Inc.: And then more general question on the portfolio. If I think between Memorial Day and Labor Day, which is I think the bookends of the classic summer-leasing season, how much of the portfolio was sort of rolling in that period of time? Is 2/3 a reasonable number?

We Memorial Day and Labor Day? It's probably more of 40%. David Harris - Gleacher & Company, Inc.: Okay. Alright and why is that, could you smooth it out? Did I have an overinflated view of the number from the past?

When we consider our primary leasing season, it's bracketed here by Memorial Day and Labor Day. Would you brag it differently at a higher percentage?

No. I mean when I sit here and look at the distribution of expirations, let's just say it's relatively flat from November through March, and then April is kind of the shoulder month. And then May through -- really, May through August are the peak months, and then September and October become the other -- in other side of the shoulder month. David Harris - Gleacher & Company, Inc.: So just going back to your reservations about changing the guidance formally today, if we think about you reporting in July on second quarter, you're kind of pretty much halfway through that peak period?

Yes. With 30 and 60 days visibility in terms of renewals. David Harris - Gleacher & Company, Inc.: So by that time, you'll have a much better handle and visibility as to your confidence level over operating performance?

Well, we have a -- as everyday goes by, we will do that. But we would expect come the end of July, obviously with 7 months under our belts in 30 and 60-day visibility, and as David said, just with a percentage of transactions get ahead of us, and we'd have a pretty good sense as to when we think the full year will produce, and I think that we have over the past 2 or 3 years, changed guidance at that time, and have been pretty accurate.

The next question comes from Tayo Okusanya of Jefferies & Company. Omotayo Okusanya - Jefferies & Company, Inc.: Just going back to Ross' question a little bit. I mean, things are going extremely well now, in all your key market. But the economic backdrop still doesn't feel that great. So do you ever kind of worry that at some point, you do start to see more price sensitivity from tenants? Or do you kind of get worried that the strong fundamental start to slow 12 to 18 months down the road?

Well as we said before, we don't operate our business based out of -- kind of a macro unknown assumption set. We base our business based on what we see on the ground on our business everyday with our intelligence from our locals tell us, and looked at our incredible operating platform can actually visually show us in terms of what's happening today, what's happening in the recent past, and more importantly, the near-term predictive capability that we have. And based on that, we don't see any kind of headwinds or constraints. Can it happen? Yes, maybe. But we'll know it probably within 45 to 60, 90 days, then we can react accordingly. But we're not going to take a preemptive reaction, try to temper things anticipating a slowdown, anticipating resistance. Our pricing philosophy is based on the willing seller and the willing buyer. And right now, the willing buyers are there, and we're going to continue to pressure test at the right level until we have resistance. Were not going to take a soft approach trying to avoid assistance, we'll know it when we actually see it and then actually [indiscernible] We ought to say that trees don't grow to the sky, but right now, with the occupancy levels, we have, with the democratic picture, we see with the statistics that Fred shared with you about the income as opposed to rent as a percentage of income. We see a lot of run rate not yet.

The next question comes from Rob Stevenson of Macquarie.

It's actually Nick Yulico calling for Rob. Just 2 quick questions, 1, where do you think you could price on secured debt today?

It's Mark Parrell. We could to a tenure on secured debt offering at probably around 4.6%, which is about 1.3% above the current tenure, which by historical standards, is excellent?

Just one other thing, I just want to make sure I'm understanding this. So -- I mean you have a fair amount of debt maturing this year and next year. So is the plan then to actually deleverage a bit through these asset sales and is the asset sales actually being used as a way to sort of -- as a hedge against the rising cost of debt? Is that how to think of this, or?

I want to -- with the balance sheet up, we do have refinanced REITs on the debt side as to rate, and we do hedge that separately. The activity on the asset side of the balance sheet to sell these interest rate sensitive assets, then certainly, you coordinate those but we are not selling assets to pay down debt at this point. That's not our goal.

The next question comes from Haendel St. Juste of KBW. Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.: I'd like to go back to D.C. for a minute. I'm just trying to get a sense of how many assets there you think you have left to call? And how do you think about that market today versus others on a 12, 24-month look forward?

I guess I'll answer the first question and have Freddy answer the second. I don't know off the top of my head, Haendel, but I will tell you that we do have an intention of continuing to sort of tighten the circle of our investments there and be more downtown and more sort of the Arlington, Alexandria area. We continue to have some older assets more of the outer kind of ring, and our intention would be to address those. I don't know off the top of my head exactly how much that represents today though.

This is Fred. DC market, especially in district and Northern Virginia, it's continuing to get better and better. We had a great first quarter and really building momentum from there as we enter into the second quarter. So obviously this year, it's going to be this fantastic. We have a pretty low supply 2,900 units that will spread throughout the District and Virginia, and some in suburban Maryland. Going out, the next 2012 and 2013, it's going to be a little more challenging, 2012, we're going to see 7,000 units delivered into the market. A lot of that in D.C., a lot of it in Northern Virginia, and a little bit in the key cities of Maryland. But the job growth so far is still very, very strong. We've got 66,000 jobs, 2.2%, so the engine of government, of defense, of technology, of business services, of legal, and all of the population services, and retail service, tourism, everything is up and strong and getting better in those markets. So the job growth is there, which I think it will be for 2012. I think 2012, even though we have 7,000 units coming in, we'll be able to absorb those in fine fashion. Because remember, looking back last 2 years during the recession, we delivered 7,000 units plus back in 2010, and 7,700 in 2009. So I think we absorbed those during the recession in great fashion. So I'm not worried about 2012, I think it will still be a good your. 2013, getting a little bit out there. I think if the government slows hiring or slows spending, so the procurement, would decline so the job growth would soften a little bit. And in the face of jammed up pipeline of supply, we've got 10,500 units going to hit us in 2013 based on current pipeline that we've identified. So 2013 you could see some softening there because of the supply and demand maybe going the other way. But the next couple of years are going to continue to be strong in that market. Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.: A couple more. Do you guys know today offhand how many of the assets in your portfolio could be characterized as student housing? And how should we should think about these assets within the context of your longer-term portfolio strategy?

Well I guess, I'll let Fred and David answer how many do they think are student. We don't own any assets that would be considered student by the classification of, common room with 4 or 5 bedrooms off of which, with each bed being leased separately. We do have properties in which we have different percentages of students in occupancy, but it's conventional apartment product.

Berkeley.

Yes, Berkeley. We've got properties in Orlando near UCF...

University of Miami, Cambridge...

Yes. The railroad property is right across the street in University of Miami. But these are conventional apartments that would have a high percentage perhaps, of student occupancy. Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.: I understand that. And then the other piece about the longer-term fit in your portfolio? Is there a sense that with pretty attractive pricing on that side of the business, that they could be for sale here?

I guess, we thought about it not so much by the tendency by just generally what do we think growth expectations might be in various assets. I will tell you, I toured some properties, and we've got students. And I'm just wondering whether or not they should be in the long-term strategy for us. So my guess is that over time, we may address those, but there's no immediate sort of need to get up there after those today. Occupancies are strong, rents are going up there, perhaps even more quickly than in our other products. But we'll certainly be looking at those as we think about the strategy longer-term. Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.: Again it's very widely held view that you have a top-quality franchise in many respects, particularly in operations for instance. But given that, is your development capability where you'd like it to be and should acquiring a developer be part of your near-term plan here? Especially given the fierce competition on the acquisition side?

Look, I mean our ability to develop has nothing to do with the fact that we don't have a top-notch development team where we're understaffed. We've got a terrific bunch of guys who delivered phenomenal product for us, and we expect to continue to deliver phenomenal product for us. So I think it's just more a question of at what percentage of our investment activity should development represent, I would have no desire to go buy some development company and try and ramp that up to some extremely high number. I think a 500 or so million dollar per annum, sort of pipeline for us is just fine, and if we ever wanted to take it up, I assure you, we could do it with the existing resources we have. And I encourage you to go and look at what we built in Boston, and what we built in New York and what we're building in Chelsea. What their team has done in Seattle and in South Florida. I mean, we can do what we want to do, and it's easily scalable if we want to increase the business. Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.: Certainly, and I was not suggesting you don't have a top-quality platform there just that perhaps, it should be larger here today.

Again, if we wanted to be larger, we could scale it without any difficulty.

There appear to be no further questions. Please continue with any other points you wish to raise, sir.

Terrific. Thank you very much. Well we appreciate your time today everyone and we look forward to seeing you in June. Fred, David Santee, David, Mark Parrell won't be there, and we look forward to seeing you. Thank you so much for your time today.

This concludes the Equity Residential First Quarter Earnings Conference Call. Thank you for participating. You may now disconnect.