Equity Residential (EQR) Q3 2011 Earnings Report, Transcript and Summary

Frederick C. Tuomi - Former President of Property Management Mark J. Parrell - Chief Financial Officer and Executive Vice President Marty McKenna - Spokeman Unknown Executive - David S. Santee - Executive Vice President of Operations David J. Neithercut - Chief Executive Officer, President, Trustee, Member of Executive Committee and Member of Pricing Committee

Mark Biffert - Goldman Sachs Eric Wolfe - Citigroup Inc, Research Division Andrew McCulloch - Green Street Advisors, Inc., Research Division Jana Galan - BofA Merrill Lynch, Research Division Jonathan Habermann - Goldman Sachs Group Inc., Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Richard C. Anderson - BMO Capital Markets U.S. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division David Bragg - Zelman & Associates, Research Division Seth Laughlin - ISI Group Inc., Research Division Michael Bilerman - Citigroup Inc, Research Division Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division Swaroop Yalla - Morgan Stanley, Research Division Haendel Emmanuel St. Juste - Keefe, Bruyette, & Woods, Inc., Research Division Steve Sakwa - ISI Group Inc., Research Division Robert Stevenson - Macquarie Research

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, October 27, 2011. I would now like to turn the call over to Mr. Marty McKenna, Vice President, Investor Relations. Go ahead, sir.

Thanks, Jo. Good morning and thank you for joining us to discuss Equity Residential's Third Quarter 2011 Results. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our EVP of Property Operations; and Mark Parrell, our Chief Financial Officer. Fred Tuomi, our EVP of Property Management is also here with us 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 the call over to David.

Thank you, Marty. Good morning, everyone. Thank you for joining us for our call today. We're obviously very pleased with the company's operating performance in the third quarter and we want to thank the thousands of our colleagues across the country that continue to deliver these strong results for us. Only 2 other times in our company's history have we delivered 9% growth in quarterly NOI, and theses result could not have been achieved without the dedication and the commitment by our on-site personnel and their support teams. And here's a very important thing that we want to share with you today, and that is across the country, these teams continue to deliver. Despite concerns about the economy, with expectations of slowing job growth and worries about the growing possibility of a double-dip recession, we are continuing to post very strong operating results. This month, this week, and even today. Because despite all the worry and all the headlines, our dashboards indicate there's no let-up in the strength of underlying apartment fundamentals. And David Santee is going to tell you just exactly what it is we're seeing out there today.

Okay, thank you, David. Good morning, everyone. Since we last spoke, the economic headwinds have been creating considerable uncertainty. However, one thing is certain, the fundamentals of our business remain strong come, our dashboards flash green, and our target demographic appears to be healthy and resilient. In the third quarter, our 17,000-plus new residents had an average household income of $86,000 and a median age of 29. Individual credit scores continue to improve and we had record numbers of automatic credit approvals across the portfolio. Now typically, this is the time of year where I would expect to be telling you about the softening of demand along with downward pressure on rents due to the seasonal nature of our business. But it's quite the contrary. Our daily unique visitors to equityapartments.com, our number one source for move-ins and a key proxy for relative demand, continue to outpace previous year's activity by more than 20%. This means that we average over 15,000 unique visitors through our website each and every day. To keep pace with turnover, we only -- we need only to convert 5% of these 15,000 daily visitors to new residents. On a quarter-over-quarter basis, e-leads or guest cards increased 7%, applicants increased 6% and move-ins were up 4%. With this continued strength in demand and favorable overall fundamentals, our 4 key drivers of revenue continue to deliver results at/or above expectations. As we have discussed previously, these drivers are our turnover, occupancy, base rent and renewal pricing. So let's start with turnover. Turnover for the third quarter was 17.7% compared to 17.9% for Q3 2010. This positions us well for achieving our revised 2011 annualized turnover of 57.2%. Quality homes, loyal customers and our friend, the housing market, continue to fuel a strong base of residents whose average stay has increased from 1.4 years to 1.8 years quarter-over-quarter. Now occupancy. Throughout this year, we have continued to enjoy a 40-plus basis point improvement in occupancy. With occupancy at 95.2% today, and a left to lease of 7.5%, it's a story of what we don't see in the traditional seasonal slowdown. Last year at this time, occupancy was 94.6%, and we had a slightly higher left to lease. But this year, solid demand, a lack of new supply, and a rethink on the benefits of homeownership should continue to support higher, stabilized occupancy and base rents. So let's go to base rents. Since January 1, base rents have improved 9.1%. And for definitional purposes, base rents are LRO-produced rents prior to assigning any amenity values. Our quarter-over-quarter base rents increased 5.8%, exceeding our internal expectations of 5%. Base rents in Q4 should be, on average, 8% higher than a year ago, as a result of normal seasonal Q4 rate softening experienced last year, which we are not experiencing today. This break in seasonal patterns, coupled with improved pricing power in our Southern California markets, gives us continued confidence and opportunity with our renewal rates. So as a result of continued low turnover, strong occupancy and base rents that are all trending very favorably against historical norms, we have the confidence to quote and achieve market-leading rents on each and every renewal. As a result, renewal rents achieved in Q3 were up 6.4%, and forward-quoted rents are 7.4% for November, 8% for December, and January coming in at 8.3%. And again, quoted rents are initial rates offered to all expiring leases but history tells us that we will achieve 80 to 100 basis points less than quoting. So with all that said, no one can predict the future. However, my dashboard is telling me that our future is bright. That in the near term, job growth is less important than previous downturns and we have the wind at our back. How hard and fast that wind blows remains to be seen.

All right. Thank you, David. So obviously, we feel pretty good about current fundamentals in the multifamily space and despite concerns about the macroeconomic climate, we remain optimistic about fundamentals for the foreseeable future and that's for all the reasons we've talked about over the last several quarters. We feel good about apartment fundamentals with so little new supply being added to most of our markets. And at a time when we'll create about 1 million new households a year in the country and occupancy levels, as David said, and across many other portfolios are already above 95%. We feel good about apartment fundamentals because demographics are squarely in our favor, with 85 million eco-boomers coming into the work place and most likely, in the rental housing. We feel good about apartment fundamentals as a single-family homeownership rate continues to fall as more households think about housing as consumption rather than as investment, and value the flexibility and optionality provided by rental housing. So supply and demand fundamentals should remain very strong for quite some time to come. Yet despite all this, many think that without job growth, we can't possibly be in as good a place as David suggested we are, because when you back in time, there was a high correlation between job growth and revenue growth. And while all of us here would agree that job growth is great for the apartment space, we believe that in the current environment, even without it, we will continue to deliver very strong revenue growth. Because today, we don't need the job growth necessary to absorb all of the new units being delivered because there are very few new units actually being delivered today. And we don't need a lot of job growth to backfill the incremental vacancy caused by residents moving out to buy single-family homes, because they're not moving out to buy single-family homes at anywhere near the historical run rate. So unlike not long ago, when we needed job growth to backfill all those move outs in order to get back to 95% occupancy, which would then enable us to increase our rents, in the current environment, we should be able to maintain 95% occupancy without it. And with 95% occupancy, the current attitude about single-family homes and 1 million new households being formed annually, rents will continue to go up. So turning now to the transaction market. I will tell you that remains very competitive. That remains and continues to be plenty of capital chasing very little supply. Cap rates in our core markets across the country remain in the low 4s today, as investors continue to underwrite strong revenue growth for the next several years. As we look across the marketplace today, we think values are now back to and maybe even above previous peak levels in our core markets, yet may still be down as much as 15% in others. So as we announced in our earnings release last night, during the quarter, we acquired 2 stabilized assets for $113 million at a weighted average cap rate of 4.7%. These were 118-unit deal in downtown L.A., and 247 units in Fort Lauderdale, Florida. We also acquired a 95-unit property in Daly City. It's on the peninsula, just south of San Francisco. This asset was completed in 2011, and was totally vacant when acquired. This was the third acquisition we've made of a vacant property built as a for sale condominium product. Like our other deals, we anticipate a quick lease-up and for a yield in year 2, in the mid to high 5s. So through September, we've acquired about $700 million of deals and our revised guidance for acquisition activity for the entire year is $1.25 billion. So we must have a fair amount in the pipeline and indeed we do. We're currently under contract for $500 million of assets, all of which should close this year. These deals are in Boston, in New York, in the D.C. Metro area, in Southern California, and on the Peninsula in San Francisco. And these opportunities represent cap rates in the low 4% to mid-6% range, and we think they'll all make great additions to our portfolios in these core markets and also represent great trades for the properties that we are selling. During the quarter, we also continued to sell non-core assets and reduce our overall exposure to our nonCore markets. We sold 7 assets for $210 million at a weighted average cap rate of 7.2%. And we realized the weighted average unleveraged IRR of 8.2%. Now this is well below the 11% unleveraged IRR we've achieved on the $1.4 billion of dispositions we've done in the entire first 9 months of the year. And in this past quarter, this lower result is due to having not done terribly well on some deals in Tampa, Florida, where we sold our last 4 assets and have now completely exited that market. Now other sales included the deal in Portland, Oregon, which leaves us now with 2 assets there, both of which are currently being marketed for sale. Our current expectation for full year dispositions is now $1.4 billion, which suggests that we only have about $17 million of sale in the quarter. That trade has already happened with the recent sale of an asset in Phoenix, so while we continue to market assets in numerous markets across the country, no additional dispositions are expected to close in the remainder of the year. On the development side of our business, we have 3 items to discuss this quarter. And the first is that we began construction on a site in San Jose, California for 444 units, at $154 million total cost, just under $350,000 a door. We expect the low to mid-6% yield on current market rents on that transaction. But we also sold or admitted an institutional partner for an 80% interest in that deal and we did that because inclusive of the 546 unit second phase, the total development costs there will be $370 million, and we thought it prudent to reduce our exposure somewhat, and we have retained the right the build the second phase on our own. The second thing to mention is our acquisition during the quarter of 2 land parcels. Now the first in Irvine, California, represents 190 units for a total development cost of $50 million, or about $263,000 a door. We hope to begin construction on that opportunity in 2013, and expect a yield on current rents of 5.6%. The second landside acquired during the third quarter was not actually an acquisition at all, but rather a 99-year ground lease on the upper west side of Manhattan, on the west side of Amsterdam between 67th and 68th Streets, where we will build a 224-unit property beginning in just about a year from now. I had a cost of about $506,000 a door, and a stabilized yield, we hope to achieve or expect to receive based on current market rent of about 6%. And lastly, we've begun initial leasing on our soon-to-be completed property at 10th Avenue and 23rd Street in New York City's Chelsea neighborhood. Many of you have seen this property located directly on the high line and it will be completed by the end of this quarter. When originally underwritten, we expected the due leases on that property with rents averaging sort of mid to low 5s and deliver a stabilized yield in the 7s and I'm happy to tell you that we've already signed a handful of leases in the mid-6s, and we fully expect to stabilize that asset with a yield on cost in the 8s. So through the third quarter, we've started 1,225 units with a total development cost of $325 million. We're currently working diligently on 3 projects totaling another $300 million, which will also start this year. 287 units in Seattle, 360 units in Alexandria, Virginia, and 252 units in Pasadena, California. That means we'll start about $600 million this year, which was our guidance in July. The development team is also continuing to work on secured development rights, representing nearly $1 billion in total development costs in New York, in Southern California, in South Florida and Seattle. And we also continue to pursue new opportunities across each of our core markets, some of which are under LOI. For others, we've submitted proposals that we hope will turn into LOIs, and yields on estimated costs for those things we're working on that we don't yet have tied up are in the mid-5s to mid-6s range. So I'll now ask Mark to take you to some financial highlights for the quarter.

Thanks, David. Good morning, everyone, and thank you for joining us on today's call. And today, I will discuss our Normalized FFO guidance and our dividend, and then close with the discussion of our balance sheet in the debt markets. On the guidance side, I'm going to focus on our Normalized FFO guidance for the fourth quarter. We expect Normalized FFO per share of between $0.63 and $0.67 in the fourth quarter, and between $2.41 and $2.45 for the full year. This is right on track with what we told you back in July. In the revised guidance we issued last night, we slightly lowered our expected disposition activity. We now expect to sell $1.4 billion of assets instead of $1.5 billion. We also slightly increased our acquisition activity to $1.25 billion. It had been $1.15 billion, coming so late in a year, this will improve our 2011 Normalized FFO only marginally, but it will benefit our 2012 numbers. So armed with our 2011 Normalized FFO guidance, we can accurately predict our full year 2011 dividend. As you may recall, last December, we announced the new dividend policy for our company. Under our new policy, we intend to pay a total annual dividend equal to about 65% of our Normalized FFO, applying the policy to our 2011 Normalized FFO number of between $2.41 per share and $2.45 per share, our total dividend for 2011 should be between $1.57 per share and $1.59 per share. The company has already paid out dividends of $33.75 per share for each of the first 3 quarters of the year, and that totals up to a dividend paid-to-date of $1.0125 per share. Therefore, the company expects, and this is all subject to the board's approval, to pay a dividend in January 2012, of approximately $0.56 per share to $0.58 per share that will bring the total payment for 2011, to between $1.57 and $1.59 per share number I've mentioned a moment ago. This is approximately an 8% increase over last year's full year dividend of $1.47. On the balance sheet side, certainly, lots of scary stuff out there in the capital markets. A lot of anxiety about Europe, though that may be improving with this morning's news, and slowing growth expectations for much of the rest of the world. While no company, including ours, is totally immune from this turbulence, we thought it was important to stress that our strong and flexible balance sheet means we are well-positioned to weather possible disruptions in the capital markets. The most important thing we have done recently to strengthen our finances is to put in place, last July, a new unsecured revolving line of credit. It matures in July 2014, it does have a 1-year extension at the company's option, it has $1.25 billion of capacity and a strong diversified base of lenders and we did manage to slightly improve our financial covenants. We are we are absolutely delighted to have put this in place just before all the capital markets volatility hit. I also want to say a word about our credit metrics and the debt level that we think is best for running our business. Our debt ratios at the end of the quarter, and you can see those disclosed on Page 17 of the release, are better than 4 years ago before the credit market collapsed. The main reason for this improvement is that our EBITDA is growing rapidly because of its strong operating performance, including great performance from new acquisitions and development and all this of course, improves our credit metrics. Additionally, in August, we used proceeds from our property dispositions to redeem the $482.5 million that was outstanding on our 3.85% Exchangeable Senior Notes, so that was our convertible issuance. The improvement in our balance sheet ratios from this redemption, however, will be temporary, because we would expect to borrow this money back by the end of this year to fund investment activity. We believe that we will have a net debt-to-EBITDA ratio at December 31, 2011, of about 7.1x, and 2011 full year fixed charge coverage of 2.6x. We expect to be about $425 million drawn on our revolving line of credit on December 31, 2011. I stated on previous calls that we plan to raise debt at some point in the next few months. Unsecured EQR 10-year debt pricing is considerably in flux today, given the good news out of Europe, spreads a few days ago would have been around 2.5%, implying an all-in rate of about 4.75%. The spreads seem to be coming in substantially, though the treasury has sold off a bit as well. But overall, our unsecured debt cost seem to be improving. On the GSE side, we think EQR could get a 10-year interest-only deal done for a rate of about 4.25%. We will consider carefully, which debt market is most advantageous for EQR to access, considering rate flexibility and ratings considerations. Because of the timing and size of the issuance is not certain, we have not included any incremental debt cost in our guidance. Now I will turn the call back over to our operator, Jo, for any questions.

[Operator Instructions] Our first question comes from the line of Ross Nussbaum with UBS.

David, I'm trying to make sense out of what were very bullish comments about the market and particular with some of the trends you're seeing on renewals over the next couple of months, with the guidance that was provided for the full year of 5% on the revenue growth line. Because if you back into what that implies for the fourth quarter, it would imply that the year-over-year revenue growth rate may be equivalent to what we just saw on the third quarter, so sort of a flattening out of that revenue growth rate, but that doesn't seem to jive with the very positive commentary I just heard on the call. Can you reconcile those 2 for me?

Sure, David, it's Santee.

Sure. So it's really about understanding the cyclical nature of our business. And if you think about -- think of our business in terms of lease expirations and it's just an arch, from January to December, it's an arch. So what happens in Q4 is that you just have fewer transactions. Yes, we're going to issue 8% renewals or 7.5% renewals, but those expirations are probably 40% less than what you see in Q2 and Q3. Additionally, because you have more renewals and less move-ins, the transactional fees, if you think of our income stream as there's rental rate and then other income, those transactional fees actually go negative sequentially from Q3 to Q4. So that sequential negativity on transactional fees offsets your rate growth to where if you look back at our sequential results for the past 10 years, they have been either negative or flat, 7 out of the past 10 years. So it's just a normal occurrence based on the structure of our revenue stream.

So if I can just add to that, so it sounds like there might be this pause going on because of some of the seasonality issues, but as we get into the first half of next year, we should all be assuming that your year-over-year revenue growth rate would be higher than the 5.5% that you're booking now?

Well, we've got to be very careful about giving any guidance for 2012. But as David said in his kind of prepared comments, fourth quarter is going to -- will be strong just because relative to what is the downturn that could happen in 4Q 2010, that wasn't happening now. But yes, we feel very good about what the next few years hold for us.

And our next question comes from the line of Rob Stevenson with Macquarie.

Just on Ross' question. Can you talk about what the trend was on new leases and renewal spreads month-by-month during the third quarter, and whether or not those have crossed and permanently crossed?

Go ahead.

Yes, this is -- would you repeat the question? Renewal increases and newly spreads?

Yes, month by month during the third quarter, whether or not you've gotten to the point where you permanently crossed in terms of new leases being stronger than renewals, or whether or not renewals are still stronger -- still in stronger growth than the new leases, et cetera?

Okay. The renewals have been fairly consistent through each month at about between 6.2%, 6.5% rate, around there. We ended, I think, quarter average was 6.4%, and there really wasn't much variation between those months. On the new lease gain, which I assume by that you mean, specific apartment to when it moves out, what was the old guy paying versus the new one coming in after some period of vacancy?

Right.

And that statistic is -- moves around a lot. There's a lot of noise on that. It could depend on the unit mix when that person moved in, what they were paying previously, if they decide to move in 2005, 2008, or did they move in last year or 6 months ago. So there's a lot of movement in those numbers. We have seen -- because of the volume of transactions in the summer months, that number was like a 5%, and it trended down to in the 4s. So we're pretty consistent between 4%, and 4.25%, and maybe 4.3% throughout the third quarter on that statistic. So renewals are still continuing to be higher than the new lease rate. But let me make this point on that idea, when we renew a lease, we're renewing people to the market rent. And so if the market rent is $1,800, they're going to pay $1,800 on the renewal lease. When someone moves out, the new person coming in, regardless of whether the old person was paying, they're still going to pay that same rent, $1,800. So we're achieving the same rent whether getting there by renewal, or getting there by the turn of a vacant unit. This replacement rent statistic and the new lease gains, some people call it, can be very misleading depending on just the legacy leases that are turning that particular month. But rest assured, we're getting -- achieving the market rate either way.

Just to say, that assumes, however, that the rate we think we'll be marketing 60 days from now is in fact, that rent.

Right. Which could be higher.

It's possible, the rent in 60 -- the spot rent in 60 days from now, could the higher than what we are -- what we think the 60-day out rent is today. Now hopefully, we're being very aggressive on that 60 days out, but it is possible the market could actually be higher.

Okay. And then can you guys talk a little bit about what you're seeing on the expense side, not the seasonal expenses but the sort of recurring consistent expenses, whether it's taxes, personnel costs, utilities, et cetera, today versus at the beginning of the year? Is there any upward bias to that or are you still being at sort of meandering around?

Well, I think we're on track relative to our guidance. We put into place, some pretty significant programs at the beginning of 2010, that we're still seeing the benefits in the payroll line. Utilities, it continues to be the same story. Water, sewer, rates continue to go up and that growth is offset by reduced costs in natural gas. And then when it comes to real estate taxes, I think we've raised our number just a tad to 1.31% for yearend, which is slightly higher than we expected at the beginning of the year. But we're in a period now, where we know all of the variables. We know we have all the valuations, we have all the tax rates and a lot of the appeals have gone through the pipeline. So we see expenses right where we expected them to be.

Okay. So if you think about it beginning of the year versus today, you're seeing an upward -- a downward slope, but nothing that's a very strong slope?

If I had to say anything was upward, it would only be real estate taxes.

And our next question comes from the line of Jay Habermann with Goldman Sachs.

David, you gave some color on the acquisitions. And I'm just wondering, what is the going-in return I guess, for the acquisitions you expect to close by yearend? I know you gave a range of cap rates , but are you seeing opportunities to buy some B assets that you think you can upgrade to As or it is essentially mostly A assets?

I guess there is a lot of the former, Jay, that we are working on some transactions that represent some sort of value-add opportunity. We're also looking at some assets that we think are pretty good as is. So again, what we end up buying, if we these things closed or not, it remains to be seen. But again, I guess, I just have to sort of tell you what the overall spread is. And then, we've given guidance as to what we think the delta will be on acquisitions for the full year versus dispositions for the full year and we'll just have to go on that.

Okay. And I guess, as I think about 2012, and I know there's certainly been some effort at giving some guidance there, but as you think about maybe buying versus building, would you expect to develop more next year versus buy?

Again, it remains to be seen obviously. I will tell you that I would not be surprised if we didn't see more development opportunities next year than what we've seen in the last year. I just think that the -- getting a sense that as challenging it may be as development financing might have been, for some, it might be incrementally a little more challenging. So I've talked with our development guys about the possibility of actually seeing more development opportunity. Now what that will be relative to acquisition opportunity, I don't know. But I'd tell you, in the core sites that we'd like to build on, we think that there was a reasonable amount of competition this past year and we may not have as much competition next year.

Okay. And can you help us think as well about the outlook for New York City, as well as D.C.? I know in the case of D.C., clearly, its rents that have held up well throughout this cycle, but help us think about the most recent quarter in New York and the outlook for rent growth there?

Okay. Yes, this is Fred Tuomi. New York is still hanging strong. I mean, the demand has been very strong through the summer and continues up through this week. And it's particularly encouraging to see that demand is very strong at the high end. The big apartments, the penthouse, the view premium units are all full and we've got a good strong demand there. And even though there's a lot of talk about what's going to happen to the banking sector and the financial sector in terms of jobs, as of today, we have not seen any tangible evidence of our residents losing jobs and having to downsize or move out of the city. And another interesting trend developed in New York is that the nonbanking sectors are growing. We're seeing a lot of people coming in, getting apartments from the entertainment, from the legal, technology, leisure, healthcare, they're all growing, new media. It seems like almost everyone wants to occupy New York these days, including these other sectors. So a very strong demand in New York, good rent growth. We're well above peak there now, the rents are up 12% year-to-date through this week, 6% from last year, 7% renewals. So it's all looking very good in New York. And really, no supply issues. And with no supply issues locally, in each little neighborhood, we're not seeing any concessions or OP deals, except for a few small owners doing that. Then D.C. is still going strong. I mean, there's a lot of talk about ECG [ph], what's going to happen with the super community, what's going to happen with government job losses, what's going to happen with supply, and all of that may become an issue here in the next -- late '12, or '13 or '14. But in the moment D.C., and Virginia is still going very strong. All the indicators are looking good, demand is there, occupancy is 95.5%, rents are up 8%, 6% year-to-date, 7%, a little bit more than 7% this time last year, renewals are 7%. Nobody is buying homes, traffic is still strong and a very good rent demographic there. High incomes, people with very good jobs, so it's still going strong. But now, it's not to say that in the next couple of years, it could be tough there. If the government really does absolute cuts and we see some leading indicators of that in the jobs numbers, they are softening. But if they do absolute cuts instead of relative cuts, meaning, they're slowing the growth rate. If that happens, then it could be some downward pressure on D.C., I think late '12 and into '13 and '14. The supply picture in D.C. is also something to be concerned about. We have a little bit of a pause this year, only 3,000 units, they were all sold very quickly. And next year, we're going to see about 8,000 units coming in. And this time, a lot more in the district. In the last kind of cycle, we didn't see that many high-end luxury apartments built in the district, because all of the sites went to condos. This time around, we're going to see some apartments delivered into the district in 2012, and then again, in 2013 and beyond. So we could expect about 8,000 units into the whole Metro area next year. About half of those in Virginia, a quarter of those in the district and a quarter in the Maryland suburbs, and that about 9,000 units the next 2013, 2014. If the job continues to be strong, as we've said before, this will be absorbed very easily. If not, that could create some problems in a couple, maybe 18 months to 24 months out. But as we sit today, we're still very, very confident in the D.C., Virginia market.

Okay. That's helpful. And just a final question. Any thoughts on the ATM at this point? I guess, you talked about the line balance by yearend, but any thoughts on using some equity as you anticipate acquisitions?

No. I guess the financing Mark talked about is essentially, just to refinance other debt that was taken down, the converts that we called away which we were able to deal with just on cash on hand. So there've been no discussion about that at the present time.

And our next question comes from the line of Swaroop Yalla with Morgan Stanley.

David, there were a couple of proposals from the federal government on housing. I mean, it's a hot topic. They introduced HARP 2.0, for making it easy for refinancing and also, the proposal on turning some of the distressed single-family homes into rentals. So just wondering what your thoughts are on that and if you are seeing any impact, I mean, how are you positioning yourself for these changes?

Well, let me say that we're seeing no impact and frankly, don't expect to see a lot of impact. I think it's possible in some markets like Las Vegas or Orlando, and the Inland Empire maybe, you might see some impact from that. But just in the markets we're at -- we're in, there's just not a big overhang of those single-family homes. And just from a larger kind of perspective, if those programs can help stabilize single-family home prices and I think, that will be helpful for the economy. But we're not looking at that as a big threat to what we do and not trying to position ourselves as a result.

Great. In terms of your views on just having these programs at about scale, do you see -- how do you see the economics working out? I mean, if you're seeing anything, I mean, what are your views on the business model itself?

I'm not quite sure I understand. On the business model of an investor buying single-family homes to rent?

Yes.

Again, we've not thought a lot about it because we don't look at it in the majority of our markets as any sort of threat. I will tell you, just as an owner and operator of rental housing, and I would tell you, as someone who owned and operated the Lexford portfolio for instance, which is low-density, there's an awful lot of landscaping, asphalt roofs and siding with each one of those individual units and I've encouraged people not to underestimate the cost of maintaining that investment, nor of the cost of actually attracting and keeping any sort of reasonable level of occupancy. I'm not suggesting that people can't do well with that. But I would encourage you not to underestimate the cost of doing so.

Great. And just to follow up on the correction on New York and D.C., when I look at year-on-year revenue numbers, it looked like in the third quarter, there was a slight dip in New York and D.C. I mean, how should I be reading this? I mean, can you break it down by occupancy and rents by -- for these markets? Or is that just a little bit more noise relating to seasonality?

Yes, it's probably mostly seasonality. In New York, right now, today, we're sitting in Manhattan, 96.9% occupancy, very strong for this time of year, if fact, that's 60 basis points higher than the same week a year ago. So in Manhattan, a very strong 5% left to lease, and the rents are up 12% year-to-date, 6% year-over-year, in renewals, like I said are 7%. The other part that we considered, New York is the Gold Coast of Jersey, that we have right there in Jersey City, and they we're at 95.8% occupied, which is 70 basis points higher than the same period last year. So you can see demand has grown and has been sustained. Rents are up 16% from the January. They're up 10% from the same week a year earlier and renewals are just under 7%. So again, the Jersey City piece is going great, and we have a couple super buildings right there near the Goldman headquarters and Goldman is still a steady source of great business for us. So still looking good there. So I think the most recent indicators are that we're going to have a very strong finish to the year in the New York market. In the D.C., I think, I gave you those stats, we're up 6.3% for the quarter in terms of revenue and that's continuing or getting a little bit better as we move into the fourth quarter. And again, rents are up strong, renewals are up strong, turnover was flat in terms of same quarter last year, and home buying was flat. So really, I see nothing to be concerned about in the D.C. market today. It's more about the future.

And your next question comes from the line of Jana Galan with Bank of America.

David provided the commentary that Southern California is continuing to improve. I was wondering if you can give some detail on the various submarkets and what you were seeing for rents and occupancy in September and so far, in October?

Okay, yes, it's Fred Tuomi again. Southern California is finally coming to the dance. We're seeing some good momentum building and it seems to be sustained whereas before, we had a couple of false starts. And that really happened in August of this year. So starting with Los Angeles, really about -- the first week in August, we saw a significant momentum picking up from Los Angeles in terms of demand, prices, renewals, occupancy and everything. So L.A. is looking good. We're seeing renewals of just under 4%, rents are up 5% year-over-year, we're sitting at 96% occupancy and at a very low forward exposure left to lease of only 6%. Pretty much the same thing in Orange County. August, we saw a nice pick up. It's being sustained. Occupancy is 96%, left to lease, the forward exposure is only 5.7%. Rents are up 9% year-to-date and 9% year-over-year. So Orange County, smaller market, I think you're going to have a quicker rebound as things solidify. So it's looking good in Orange County as well. San Diego is kind of a laggard. It's improving but I wouldn't say it's building rapid momentum. Our portfolio has more exposure to the South County market and Mission Valley, which has been kind of hampered by some of the military rotations. So San Diego is okay, it's just not as robust, but we're happy to say L.A. and Orange County are really building some sustainable

And then just a quick follow-up on the expenses, payroll, leasing and advertising, they were down quite a bit, and I was wondering if this is a function of moving certain parts of the process online or to the website and maybe how much is left in savings there?

Well, the payroll -- a lot of that really has to do with our central business group initiative that we implemented really about, well, third quarter last year. So all of that savings continues to flow through. If you look at our property management expense, you'll see that's elevated. So a lot of that payroll savings is sitting in the property management cost. Probably the most significant is really the leasing and advertising costs, down 20% -- almost 22% year-to-date. And that really -- I mean, that goes back to kind of the demand conversation that we had earlier. I mean, we've kind of eliminated the use of brokers in New York and Boston. We've reduced our paid search by 20%. We're using fewer and fewer ILSs and all of that translates into 20 some percent reduction on leasing and advertising, but we continue to drive more traffic.

And our next question comes from the line of Andrew McCulloch with Green Street Advisors.

David, just on external growth, your stock's up 15% for the month and I'm not sure assets value have really done a whole lot over that timeframe. Are you giving your acquisition folks more of a green light today given you're trading at a sizable prems NAV again?

I guess, Andy, we're responding to every acquisition opportunity that we think that makes sense for us. And look at those primarily in the current environment as trading opportunities. So we still got assets we'd like to sell and if we can find assets into which we can redeploy that capital, we won't hesitate to do so. So for the present time, it's really funding acquisitions with dispositions capital.

Okay, and then just on acquisitions I guess. There's been a lot news articles about the Palo Alto portfolio that you guys are pursuing. It sounds like that might be in your guidance. Can you comment on that portfolio or at least give us some indication on when you'll be able to comment on it?

Well, I guess it's not a secret that we're looking at a portfolio in the East Palo Alto, California, the 1,800 units. On the Peninsula -- great location on the Peninsula, that we think could represent a terrific opportunity for us to make an investment on a -- in a large portfolio. And -- but we're continuing to work on it, and we do have an expectation that we could close on that this year, but nothing is certain at the present time.

Okay, and then just on land value and construction costs. Can you give any general comments about recent trends there?

Well, I guess, construction costs, we still think are down, call it 15 or so percent from peak and maybe they're rising modestly, and maybe only modestly because labor costs remain generally under control and land prices, I guess, have been competitive because we've -- looking at entitled opportunities in core markets, and there's sufficient number of people that are interested in acquiring those. So land prices or those types of deals have come back and come back pretty quickly. But again, we're looking at investment opportunity -- development opportunities relative to what acquisition opportunities are in those individual markets, and some will do one and other markets will do the other and some markets will happily do both, and we think we're getting properly compensated for the incremental risk that we take through the development process.

And our next question comes from the line of Eric Wolfe with Citi.

Just wanted to follow up on Ross's question as well. Could you tell us how much you expect just your rental revenue growth to accelerate from the third to fourth quarters? So excluding the other income that you mentioned would be down on the quarter-over-quarter basis, how much would revenue growth be in the fourth quarter versus the third?

So if you're talking about a sequential rental revenue number, it's probably up something like 20 basis points, putting aside the impact of other income going down because of the transactional activity reduction that David Santee spoke of a moment ago.

Okay. So I guess the fact that occupancy is up sort of 40 basis points year-over-year and the rental rate growth that you mentioned 7%, 8% during the quarter seemed -- obviously it's higher than the 5.5% on same-store revenue. I guess I would have thought there'd be a little bit more acceleration there, but I don't know. Is there is something we're missing other than just the number of expirations you have?

Really, I think it's all about the expirations and the number of move-ins. If you just -- if you look at our, just our September to October move-in, those were down 2,000. And so what you have to do is really look at the level of fees that you're talking about in such a short period of time. So in many of our markets, Florida, we received $90 for an application fee. In a lot of our markets we receive $300, $400, $500 nonrefundable move-in fees, all of that flows into our other income. So it's just a matter of the ability to impact that revenue with such few transactions. And I'll say this as well, in our business, think of it in the world of yield management. There's 2 formulas that we use as for demand and one is that arc the I spoke about. Where if you take the northern part of the United States, I mean, the business cycle is more pronounced relative to that arc. So in Boston, in November and December, you have very, very, very few move-ins versus the more bird-like pattern, which is in the southern part of the United States, where you have pretty much consistent demand all through the year. So it's really just math based on the available transactions to impact revenue.

That's very helpful. And just on David's commentary and cap rates, it sounds like they stayed pretty flat even through this period of renewed economic concerns, but you would think at some point that CapEx passed your eyes [ph] just based on slowing growth or rising interest rates, so just wondering when you think that might occur, if that's sort of an early next year time phenomenon or that's going to happen later on when more supply hits.

It's obviously tough for me to say, Eric. I mean, I guess I can tell you that in the marketplace today, there are probably fewer bidders on assets, because some have had to retrench or retreat for various reasons. But there's still sufficient number of people looking at these transactions that pricing has remained fairly consistent. Whether it's an inflection point or not, I mean, I don't know. But I'll just tell you I think that at least at the present time, but I'm not quite sure if it changes down the road for the types of properties that we've been buying. I think that there's a shortage of sticks and bricks of the kind of quality that we've been buying relative to the amount of capital. And our investment activity over the past year has been, I want to sell the assets that we believe are most -- whose values are most at risk of rising interest rates and those are assets-to-markets we've been selling and we've been saying for quite some time that we think that those that we've buying are of less sensitive interest rate risk. Certainly sensitive, but less so.

David, it's Michael Bilerman speaking. You had made a comment in the beginning that you believe housing is more viewed as consumption today than as an investment, and so I'm curious, as you think about your business and as you evaluate strategic sort of goals, do you think there's an opportunity to create a subset within the portfolio where you're doing longer duration leases -- almost like a quasi-ownership where the tenant, because they do want to have a little bit more security over their rent payments over the next 3 to 5 years, they want to have security about where they live, they don't -- won't have to deal with annual renewals or moving that you could take a subset of the portfolio, especially in your higher end assets, even some of these condo-turned rental buildings and create that. Is that an opportunity also to create a little bit more of an income stream -- a stable income stream over time?

I guess if you think that we're in a rising rent environment, you'd like to have shorter dated leases than longer dated leases. So I think that in most markets where in the convention is a year and outside of New York, we're obligated to offer longer leases, my guess is we'll continue to operate kind of with the convention with a view that rates will continue to rise.

Right. But I guess over long cycles of time, as the consumer is changing from one of investment to consumption, there's certainly part of those individuals that do want a little bit more security and timing that you could create more demand and income stream that's less variable.

Well, except you'd have the charge a rate that accounted for the fact it was a 2-year number and I will tell you that will be a pretty big rate and they'd -- you don't have to compare that to a one year number, and I guess I just -- and also I will to tell you, that some instance is almost an option for the tenant because in most of them -- 1 year out that they want, they're going to kind of come and complain and pay the legislative -- mandated small fee to actually get out. So, I'm not quite sure that there's a lot of upside also in that kind of thought process.

Well, when you go back to the age of our demographic, 29 years old. I mean, a lot of these folks, I think people are willing to pay more for flexibility than certainty. So unless that dynamic changes, I think it we'll probably continue on, unless there's some huge shift in thinking on part of the customer.

And we do offer 2-year leases in New York, in Manhattan and some people take it, but most of the people still go for the 12 month lease term. And there's a lot of smart people that are figuring it out.

And our next question comes from the line of Seth Laughlin with ISI Group.

Just a question on acquisitions. I guess as you're looking at them today, are you adjusting your underwriting given that we're kind of progressing through the cycle and that maybe peak growth rates, are you becoming more conservative either on growth or IRRs?

Well, I guess we're still trying to underwrite to plus 8% IRRs. And we still have an expectation of -- the ability to raise rents over the next several years. So on a market-by-market basis, it's possible the team is maybe rethinking what we may be able to do 12 for 24 months out. But in any event, I will tell you that there's good rental growth in our underwriting assumptions over the next few years.

Understood. And then maybe just a quick follow-up on the tax question. I guess just to help us understand the process, what's the timing of the appraisals and sort of thinking about what time frame if you were to receive increases, either in rate or appraised value. When could that start to hit the expenses assuming that did occur?

Well, let me say this. When we look back over 10 years of year-in real estate tax numbers, the high watermark was in 2007 and 2008 at a 5% growth. Most of the time, the tenure average is about 2.5% to 3%. So, I mean, typically, what happens is that every state is different. New York, we have 421A step-ups. Florida -- and then you have to look where we have vulnerability relative to rate. New Jersey just passed a cap where values can't increase more than 5% versus the 10%. And so it's -- I'm not sure how to answer your question, but all of this, as far as budgeting goes, we're in constant contact with our third party sources in the field. We pretty much know what to expect throughout the year and generally speaking, by the time we receive those valuations, and in some cases we don't find the actual tax rates until October or September, then we need to make those adjustments.

Yes. And let me just add. There's some other items that should be thought about just so there isn't undue anxiety about the 2.6% quarter-over-quarter, third quarter real estate tax number. The prior period was down over 4%. Also, there was an adjustment we had to make, an accrual adjustment of about $500,000 that's in that number, otherwise that number would have been smaller. And a good part of the remainder, and you can see this in our New York expense numbers, is due to the burn off of some abatements in New York City. So these numbers on a quarterly basis are lumpy. It's better to look at the 1.3% year-to-date number, and that's very much in the wheelhouse -- I think absent these $500,0000 or so kind of accrual adjustment we made, would have been rate on that 1% number. So, I don't know if we see very anything really different in real estate taxes beyond accounting adjustments and the like.

And our next question comes from the line of Dave Bragg with Zelman & Associates. David Bragg - Zelman & Associates, Research Division: Just a couple of questions on renewals. What percentage of current residents are pushing back nowadays if you split it between those simply accepting the renewal increase versus coming in to negotiate?

Yes, that's a -- we're still seeing that most people are renewing at the quote, about 60% or so, and that number really hasn't changed. And the only market that I've seen kind of an anecdotal and a little bit of measured evidence of people getting a little bit of price resistance is San Francisco, to be expected. We've had very strong growth there through this year. But again, it's not impacting our results or the performance of the overall demand there. So really in terms of the acceptance of the quote and the -- there may be more negotiations, but we don't see it in the actual numbers. David Bragg - Zelman & Associates, Research Division: That helps. And you want us through expected acceleration for renewal increases for the portfolio as a whole into January, but can you help us understand directionally the trends in the key markets, what markets are seeing the greatest acceleration of renewal increases into 4Q from 3Q? And what markets are they flattish or maybe lower?

Yes. The strong markets in terms of renewals -- San Francisco leads the pack and we're currently achieving, in the month of October, north of 11%. Denver at 8%, Boston at 8% DC, Virginia of 7%, and New York at 7%. So those are the strongest markets, and that's continuing. Actually, the quoted percentages, as David mentioned for November, December, January, are actually going to be above those numbers and it's still -- we have to wait until we actually see what we've closed. On the other side of the spectrum, those that are pretty weak on the renewals. Even Empire as you would expect is 3.6% -- L.A. is below 4% and San Diego is right kind of right at 4%.

Yes. But I just want to make sure -- go through again, if you would, David, just what you're seeing in this renewal rents relative to last year because of what happened last year. It's more about the comp here than it is currently.

Yes. Probably the best example that I can give you is Orange County, where if you look at last year, we had the seasonal fall-off in rents. But this year, we see the exact opposite. So when I look out to my LRO rents for 2 weeks out, I see rent growth of 11.2% in Orange County, okay. So Orange County, even though we've already issued those renewals, 5 weeks ago, rent growth in Orange County was only about 4%. So you have this softening from last year, but you have this significant growth this year,, which is creating this wide gap. So it's not unlikely that come January, February, March, we could be issuing, if this sticks, we could be issuing 11%, 12% renewal increases in Orange County. David Bragg - Zelman & Associates, Research Division: Okay. And just to look at this from one other way. I want to confirm that there are new markets in which you're sending out, renewal increases today for 4Q into January that are lower than what you achieved in 3Q of this year?

That's correct. Yes, absolutely.

That's correct. Remember we price renewal on a forward expected prices. David Bragg - Zelman & Associates, Research Division: Okay, that helps. And then on development, David. You mentioned the lower level of competition potentially for development deals next year. Hopefully you could expand on that a little bit. What have you seen in recent months to cause you to believe that, and then more specific to your company, I think that you've traditionally said that $500 million, $600 million of starts is around the maximum that you would do in any given year. But given those comments, is it becoming more likely that you could exceed that level at some point in the near future?

I guess what I had said about the $500 million to $600 million, David, was I thought that was kind of a normal run rate. It doesn't mean that, that's a limit or a ceiling. I guess -- and my only comment is, that we talk to a lot of banks, to a lot of capital sources. I think we talked to one capital source the other day who said they were pulling back. They were having a wait-and-see attitude. And I just think that the marginals, sort of local developer who might have thought they were going to get something done might be a little more challenged than what they had thought. I think the banks potentially could be a little bit more cautious, equity sources perhaps could be -- they can need a little bit more guarantee and or a little bit more skin in the game. And that's all. It was just a comment based upon conversations we've had with -- Mark and I had with various equity and debt providers, who are leading us to believe that they were going to be a little more cautious going forward as they assess all this uncertainty. David Bragg - Zelman & Associates, Research Division: Okay. And last question, real quick, Mark, you mentioned 4.25 for tenure money from the GSEs. Can you just compare where the life companies are today?

Well, they're running towards the end of their allocations for the year. So again, if we were going to do it at life company deal and size, I think it might be better to just be the first deal out of the shoot in January than it would be the try and get some money now just kind of think a lot of guys have exhausted their allocation. I think we'd be right in that GSE range with the kind of pools we do. Another note is we'd have to choose assets that were very shiny in our core markets. The Lifeco bid is certainly there for the kind of asset EQR owns. But if we were to try to put assets in that we're in the future share in markets we own assets in still like in Orlando, I think we get some pushback on that. And I think if we put in, and we have few of this, but in core market assets that were maybe in slightly less desirable submarkets, I think we get pushed back from the Lifeco too. So I think they can match the GSEs, I just think they're a little picky around their collateral.

And our next question comes from the line of Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just quickly, David. On the last call, you spoke a little more cautiously about acquiring and want to step up your disposition activity. Certainly, it seems like you're re-ramping up the acquisition activity. Given the macro headlines, almost seem worse today than they did with the second quarter call. What's given you more confidence to be a bit more aggressive on the acquisition front?

Alex, I don't think it's -- we've been more aggressive, we've just seen a little bit more product. And I think that on the call -- the second quarter call, I think I might have said that we might expect to see more product as we progress later into the year. I also believe I've said I -- that I said 2010 and it didn't happen, but we have an expectation that we'd see more product towards the end of the year, and that has in fact happened. So it's not being more aggressive, we are just seeing more product. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And do you think that's driven just more by the recovery of NOI that sellers are more willing to let go because values have come up, or what do you think? Or is it more potential people thinking about tax issues that -- tax law changes. What do you think is driving it?

I mean, every single seller has their own reasons, Alex. They may have refinanced risk that they've decided that they don't wish to take. They may have a desire to pay some taxes now before -- maybe it changes. They may just feel like it can get any better than this, who knows. I think every seller has their own reasons. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. Then the next question is, in New York, just the 5 of 6 door that you mentioned for the upper West side, that's the all in, correct? That's not the -- your implied land cost, correct?

Yes, that is without land cost. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. So what if you factored in the ground lease, what's the implied per door for the land?

Well, that's good -- depending on how you do that, I guess if you just do an NPV calculation over a 99-year ground lease, that cost per door could get into the mid-8 -- mid $800,000 per door, call it 860, $860,000 a door depending on how one did that valuation. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: You mean $860,0000 all in, so it would be like another $350,000 a door.

Yes. And I used as a comparison just to kind of put that in perspective, that a property 3 blocks north of there, at 72nd and Amsterdam, Broadway called the Circle traded for something like $1350 a door -- per foot, I'm sorry per foot. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay, so to your earlier comment about values rebounding, based on -- there's the Park Avenue site that you guys reported in with Toll Brothers, and I think it's like $400 a foot. I think that sounds like it's a fee deal. But it sounds like in New York, the land cost have now surpassed prior peaks. Is that -- that seems to be for assessment?

It's not passed, pretty close, again -- but we're talking about entitled, ready-to-go product. And so -- let me put some things perspective because I've got some numbers kind of garbled up here a little bit. So $870 a door is maybe quoted a little more than $1000 a foot, and that compares to the $1350 or so bucks a foot up at The Circle. So, yes, I would tell you on -- entitled zone, fully, ready to go product in New York. I would say the prices are -- will be back close to peak.

And our next question comes from the line of Michael Salinsky with RBC Capital Markets.

First question is, I want to go back to expenses. I know you guys have been proactive in locking in costs, proactively managing real estate expenses. I'm not asking for guidance for '12, but if you think about expenses overall, should we expect more normalized levels or -- and is there anything kind of expense horizon that you're getting a little bit concerned about right now? You don't have a lot of pressure on payroll. But with the supply down -- I'm just curious as you look out over the next several quarters, what you're seeing on the -- what you expect to see on the expense run?

Well I think we have a few treats, not tricks, but I think you're going to see the benefits of our Central Business Group kind of flow through the system, and probably see payroll growth turn to more normal levels, probably the 2 plus percent range. We've always discussed about real estate taxes that eventually, we will see some pressure there. Utilities, I think, it will continue to be the same story. We will continue to see gains from lowered natural gas that offset water sewer and take those 3 categories and that's almost 70% of our expense formula. So I think we have some things in the works that will still allow us to mitigate some of that growth and it's just a matter of how quickly we can get that done.

Okay, that's helpful. Second of all, you had an LRO termination in the quarter, what was that related to?

Well, originally, when we partnered with Archstone, we had a 50% ownership interest in the intellectual property rights. So, I mean, basically, for the last 5 years, we had turned that product -- both Archstone and us, turned that product over to a company called Rainmaker and in the original deal, if Rainmaker achieved certain revenue levels, they had the right to purchase the intellectual property and so therefore, everyone exercised their rights, and now Archstone has full control, I'm sorry, Rainmaker now has full control and ownership of the LRO product.

Okay. And then final question, just in terms of dispositions, I think, Dave, you mentioned in the past about $1.5 billion left to sell, and I was just wondering if your -- as you're going through the portfolio, is that still a good number today? And as you think about disposition activity over the next 12 months, is that something you expect to accelerate given where we're at the cycle or pull back on? Given you were at the cycle.

Well, I would say, I think that today, Mike, we have very little that we need to sell. We've got assets we'd ultimately like to sell as we rotate into core markets and perhaps different product in the same market, which we might want to sell some assets. So I think you should expect $1 billion or $1.5 billion of disposition run rate for us for the next several years. A lot of that though will be a function of, will we find good investment opportunities under which we can recycle that capital. But the product that we need to sell has generally been sold, and now we think it's just more opportunistic trades.

And our next question comes from the line of Rich Anderson with BMO Capital Markets.

Big picture. You mentioned the elimination of homeownership as an investment, and I'm wondering why that matters? Actually, that's not part of your competitors that the people aren't going to occupy a home. In fact, if anything, the elimination of them keeps the overall housing market more affordable to the extent that whatever does turn. So why is it that, that's a good thing, if they're not really leaving per se by definition?

I'm not sure -- is that a trick question? The fact that people aren't having second thoughts about leaving our apartments, they go buy a single-family home.

No, that's not what I'm talking about. I'm talking about -- you have an investor, right? Who's not going to occupy a home, he's just investing in it to -- rent it out or whatever? We why does that matter if that appetite is gone for you?

No. I'm suggesting that, that appetite has gone our residents. And that single-family home, that investor wants to buy, that exists as housing inventory, whether it's owned by that person, by original owner, by a bank, I mean, I'm not sure who owns, it's a housing unit. My comments was about our residents no longer thinking that they need to buy these things because they were going to double every 5 years, but rather thinking about as consumption, thinking about the wisdom of putting every penny of their liquid net worth into a home, borrowing money from their in-laws and we think that's just getting people stay longer in our apartments. And it was from that perspective, not from the perspective of an investor buying a single-family home and making it available for [indiscernible].

If one of your renters bought a home as an investment, they may stay in your unit. I guess I don't understand fully the connection between that angle of home buying and your business. That's the part I just don't get fully.

Well, I guess I don't fully get your question. Probably we can talk later this afternoon. I mean...

And your next question comes from the line of Tayo Okusanya, Jefferies & Company. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: I just have one quick question. I'm just trying to understand comments that were made about cap rates with acquisitions and now, kind of 4.5% type cap rates, and given your expectations of 8% IRRs, wondering what you really have underwrite by way of NOI growth and also exit cap rates to feel comfortable with that idea of being able to hit that 8% IRR when the ingoing cap rate is just at 4.5%.

Well, obviously, every acquisition opportunity is different. But as I did say, that we have great -- pretty strong confidence in rental growth over the next 2, 3, 4 years. And every residual cash flow against which 1 applies a cap rate has embedded in a great deal assumptions and certainly the exit cap rate that one uses, is one has an assumption in that as well. I guess I can only tell you that as we underwrite our acquisition cash flows, it does produce sort of two facts. One is, what the entry price is -- an absolute numbers or price per door, and what the exit -- what the assumed cash flow is and you assume cap rate that is used, and when we look at those as a sanity check -- we look at those 2 points, and in most instances, the compounded average growth rate and the absolute value of those assets has a 3 handle on it. So between revenue growth and some appreciation, it's how you get to the at 8% IRR and some of that comes through compounded average growth rate of the underlying asset of about 3 plus -- with a 3 handle, call it mid 3s. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Mid-3% growth for -- over how many years and at what exit cap rate?

Well, again, every asset is different and this is not a formula you jam property into, but I'd say we've been buying out, so I would say some of the assets we're buying, we get value-added opportunities, well, we'll put $3000, $5000, $7000 a door into them and end up getting a low double-digit return on incremental capital so that is embedded in there as well. So there's an awful lot of things that go into these individual assets, but in general, the expectation of the compound average growth rate between the absolute value going in and the absolute value going out is a mid-3% compound average growth rate. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Okay. And then just 1 other quick question. In regards to the dashboard, what would you need start -- what would you need to start seeing, in others words, kind of feel not as confident about the outlook for the apartment space on a going forward basis?

Well, I guess I would see increasing exposure and reduced applications, which would start obviously putting pressure on our price. Homebuying -- move out to buy home is still low. I mean, I don't see that changing anytime soon, but certainly it could happen, but other than that, that's -- looking at the dashboard, that's the critical item is really the exposure and what that does to rents.

And our next question comes from the line of Mark Biffert with Bloomberg Research.

Just quick question. You had mentioned that the average household income for your residence was about $86,000, and if you take the rent that you're currently charging it's about -- we're still about 22% of their income. How has that number traded, let's say over the last 10 years for your portfolio?

I want to make sure you're comparing 2 different numbers. One is the average income of the $17,000 lease we did in the third quarter. The other is what the average rent is across the entire portfolio today. So front Fred you...

Yes. In terms of the average rent as percent of income right now today we're sitting at 17.4%. Yes, the median is 22.7%, but the average is 17.4% and the -- when we look at the income -- average monthly household income versus the rent, actually since the beginning of this year, our incomes have been growing just slightly faster than the rents, which is very encouraging to see. And this number really has not moved. In January it was 17.7%, July I think we mentioned in the last call, it was 17.6%, and today it's 17.4%. So it's all kind of clustered right there -- and so over the last year or so has not budged. Going back 10 years -- it's really not a valid comparison because our portfolio have changed so much. We no longer have those -- the bulk of our portfolio in the Sunbelt, and the markets with lower rents, lower income. So really -- in the -- our current portfolio, the more relevant is like what's happening in the last couple of years and it stayed very healthy and then on the margin, getting a little bit better.

So what was the peak number that you had, say back in '06, where you had the higher end in '07. What was that number at that point, and before you started to see push back on rent or people moving to B-quality product?

Yes. I don't have that number handy, but I can tell you that we don't see a lot of pushback on the rents. Earlier I mentioned San Francisco is the only market that we see a little bit of that on anecdotal-basis and did show in our reasons to move out. Again, it's a very small move, everywhere else very consistent. As Dave mentioned earlier the balance sheet and the income statement of our residents is very strong and getting better. The credit is good. So, we've got that demographic that has great paying jobs, you want a great lifestyle in an urban setting and we're -- that's where we're enjoying.

Okay. And then just lastly, David, you had talked a little bit about the DC market, I'm just curious, given growing concerns about deficit cuts and all these other items. I mean, you have any thought process in terms of reducing your exposure in DC, maybe using those investments sort of in California where you're seeing an acceleration in rent?

Well, we did sell a large portfolio of assets in suburban D.C. earlier this year for $250 million, all paid in Maryland. So we have done that. And DC is a market in which we've sold older, more outlined properties and reinvested that capital into a more into the district and in Northern Virginia. But certainly, and Fred went through I think a pretty good detail the way we're looking at D.C. and thinking about jobs as well as thinking about supply, and it certainly is market we're going to keep a close eye on.

And our next question comes from the line of Haendel St. Juste with KBW. Haendel Emmanuel St. Juste - Keefe, Bruyette, & Woods, Inc., Research Division: Two quick ones for me. One, I guess going back to your Palo Palto deal, you're looking at for a sec, that potential acquisition, which we understand is more of an affordable nature would mark a meaningful departure from your recent focus on higher-quality assets over the past few years. Is that primarily a function pricing opportunity or maybe representing more concerted effort to introduce more B-quality assets to your portfolio?

I guess we'd think about that portfolio as workforce housing. And I guess I think I tried to say and dealt over the last few calls that we're focused more on markets, and while we did buy and will continue to buy if we can find higher quality product at prices that we think make sense. Much of the acquisition activity that we've done since pricing has recovered has been in lesser quality product. And so I think that this is looked at as -- looking at wanting to add assets on the Peninsula, and here is a portfolio that we think if it can be done at the right price will represent a good opportunity to do so. So I think we've been more about locations and markets and not simply about quality of asset. Haendel Emmanuel St. Juste - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And one more, just going back to your answer on a recent question, for some clarification. Looking across the spectrum of quality -- the quality spectrum for deals you're bidding on, can you discuss any changes that you're seeing in the number of bidders as well as the type of bidders, and have you seen any narrowing or change in the bid/ask spread?

Well, I guess I can only tell you -- is that our acquisition guys report to me that they are seeing fewer competitors, but there's still a sufficient number of competitors to make pricing consistent over the past 6 or so months. So, while 6 months ago there might have been -- however many countries and however many tours and offers and people invited to -- in the best in finals they're are probably fewer in each of one those stages, but they're still enough that the ultimate outcome is consistent pricing.

And sir, there are no further questions at this time. So I'll turn it back to management for any closing remarks.

Thank you, Jo. Just a couple of things. I just want to make sure that we put the 11% in Orange County in perspective. I know David said this, and I just do want to reiterate that. That comes from a function of increasing rents today, but more from the fact that rents were decreasing a year ago. So while that percentage of 11% or so potential sounds very high, a lot of it has become, is because of the downturn that we are experiencing a year ago in the comp period that, that represents. So we've talked about rising rents, yes. The 11% is relative to where rents were a year ago, and they were decreasing. So with that, let me just say in closing, I want to say a brief word about our dear friend, Bill Acheson, who was killed recently, went struck by a car while riding his bicycle. Bill was a long time REIT guy who covered EQR and other companies for many, many years. We really enjoy working with Bill. We'll miss him in Dallas in a few weeks, but we'll look forward to seeing everyone else there. Appreciate your time in the call and we'll see you in Dallas. Bye-bye.

Ladies and gentlemen, that does conclude your call for today. Thank you for your participation and for using ACT Conferencing. You may now disconnect.