Equity Residential (EQR) Q1 2012 Earnings Report, Transcript and Summary

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

David Bragg - Zelman & Associates, Research Division Eric Wolfe - Citigroup Inc, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Ross L. Smotrich - Barclays Capital, Research Division Swaroop Yalla - Morgan Stanley, Research Division Conor Fennerty - Goldman Sachs Group Inc., Research Division Jana Galan - BofA Merrill Lynch, Research Division Andrew McCulloch - Green Street Advisors, Inc., Research Division Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division Philip J. Martin - Morningstar Inc., Research Division Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division Nicholas Yulico - Macquarie Research Michael Bilerman - Citigroup Inc, Research Division

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the first quarter 2012 earnings conference call. [Operator Instructions] This conference is being recorded today, Thursday, April 26, 2012. I would now like to turn the call over to Mr. Marty McKenna. Go ahead, sir.

Thanks, Jo. Good morning, and thank you for joining us to discuss Equity Residential's First Quarter 2012 Results. Our featured speakers today are David Neithercut, our President and CEO; and Fred Tuomi, our EVP of Property Management. David Santee, our EVP of Property Operations; and Mark Parrell, our CFO, are also here with us for the Q&A. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Securities Law. These forward-looking statements are certain to 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, everybody. We appreciate you taking the time to join us today for our first quarter call. Clearly, the strength and operating fundamentals that the multifamily space has enjoyed the last 6 quarters or so has certainly carried over into the first quarter 2012 and should continue for the balance of the year. And those fundamentals drove our first quarter results, which came in very much in line with our expectations. Our same-store revenue growth in the quarter was 5.5% and same-store NOI growth was a very strong 7.8%. Our new lease rates are pretty much where we thought they'd be and renewal rates continue to trend in the sixes just as we had expected. So we feel very good about where we sit today and to help you understand how we're currently positioned moving in to our primary leasing season, I'm going to hand the call over to Fred and he'll share a bit about the current trends we're seeing across our markets.

Thank you, David. Let me do this, talk about some of our key markets but before I do that, I just want to give you a quick update on our key drivers of our revenue. And for the first quarter, the drivers of our revenue support our full year same-store revenue growth around the midpoint of our guidance that we gave back in January. So let me give you a quick update on each of those 4 drivers. First is turnover. And the recent turnover is up. It’s up 100 basis points the first quarter of this year versus last year. However if you look within the quarter, January and February did have a pretty good spike in move outs compared to the same months last year. But then March came right back in line with 2011 and as did April after the end of the quarter. So look at where we are in the market. Kind of as expected, the markets with the strongest rent growth have been having some price resistance on renewals. And it's natural when you think about it, residents who traded up in quality and in rent levels during the recession will eventually be priced out at some point and that's happening in some of our high-growth markets. Home buying is up in a few areas but not by much and still well below historic norms. Home buying is really not a problem and continues to be in check. That takes us to occupancy. And while occupancy did match the first quarter of last year at 94 9, it was below kind of what we wanted for the first quarter, below our budgets, below our expectations. And the occupancy in our key markets actually declined throughout the quarter as we held on to our higher rates. And we believe that making a trade right now in our strong markets, trading some occupancy or holding those higher rates is actually a good strategy at this point in the cycle. Now as we enter the leasing season, we fully expect and begin to see a recapture of that occupancy at those higher rates that we held onto as we enter the leasing season. And let me make a point here, that new residents still showed no problem at accepting and achieving these new rates. So we are seeing some turnover based on the prices of the stack but not on new leases coming in. So that takes us to the base rents. And as David mentioned, base rents running just as we expected to Q1 averaging about 6.5% over 2011 levels during the quarter. And then finally, renewals. Renewals remain very strong. We averaged 6.6% increases for the quarter and in the month of April, we actually closed out 6.9% real increases for the quarter. Now let's take a quick look in the sampling of some of our markets. First is Boston, Massachusetts. Boston has been on a great run as you know. After several quarters of double-digit rent growth, we did experience price resistance during the first quarter. And therefore turnover did move up in this market. Occupancy is now recovering very quickly at rents 10% or more above last year. In town, in Cambridge, some markets are doing great and definitely Quincy not quite strong as we're having some a little more of turnover and some home buying down in Quincy. New York. Well, New York, the financial sector is still holding very strong, very steady. And the new trend of people coming in from tech, new media and entertainment is continuing. We continue to see folks from those industries moving into our markets, into our properties there, especially in the markets of Upper West Side and Chelsea. Turnover did spike in New York also, being a high-growth market. January and February especially on the loss of some short-term corporate leases and in some anecdotal reports of people trading down and moving into other neighborhoods from -- as the rents recover back to peak periods. Current traffic and leasing trends made in the last few weeks are very strong and occupancy is now rebuilding quickly at rents 5% to 6% above last year. And renewals through the whole quarter remaining stable in the mid-6% increase range from New York. Moving down to D.C. We, like everyone else, expect D.C. to experience the slowdown throughout this year. Government cutbacks and hiring freezes and salary freezes and per diem freezes are in place getting to show up and then contractor uncertainty because of this is beginning to take hold. As we go later in the year, this is going to match up with the delivery of the 8,000 units this year and it's going to create a little more payment in the backside of this year. Renewals remain strong right now however at 6%. And base rent growth still growing but the gap over last year is narrowing to the 3% to 4% range and this will continue as we come up to a tougher comp period from last year. So jumping across the country over to Seattle. Seattle has been a great market. But when we talk about Seattle now we're going to have to talk about it in terms of submarkets. Because I don't know if you know or not, but our Seattle market, as reported, includes 2,347 units from Tacoma. And Tacoma is not really the same market as Seattle. It's pretty much a military town. And the military rotations out of Fort Lewis have been dramatic and ongoing and has been a drag on our results. So without Tacoma, our 6.1% revenue growth in Q1 for Seattle is actually a 7.1% revenue growth. And within that, CBD, in the downtown and East Side are very strong, CBD posted a 6.6, east side a 8.7 and the big tech firms are all continuing to hire. New hiring is strong, interims hiring is strong and they're doing great. So currently, our base rents are up 10% year-over-year and renewals are in the 8-plus percent range in these submarkets. Also in Seattle, Snohomish up North and the King County South are not quite as strong and still doing fine. So we expect Seattle to have a good run here but to eventually slow throughout the year as the development pipeline begins to deliver the 3,000 units this year and I guess looking forward to 2013 and '14, there is still that pipeline of about 6,000 more units coming in, mostly downtown and the near downtown submarkets. Going down to San Francisco. San Francisco as you know has been a very hot market for some quite time now, several quarters, very strong double-digit rent growth. So it shouldn't be a surprise that that's what seeing the most push back on pricing. And the results has been a pretty big increase in turnover during Q1. 30% of our first quarter move outs gave us the recent increase to expenses or my rent's just too damn high. So like Boston, we believe in this market, we have confidence that the new lease potential is there. So we're holding rates in San Francisco at the expense of Q1 occupancy. So we're now filling April and May traffic at rates of 11% and 12% above last year and renewal increases are steady at 10.5% for April. Down to Southern California. Los Angeles is still definitely in recovery mode. It's continuing on but still a little bit lumpy. L.A. is still constrained by its local economic problems, especially in the government sector. However, job growth has been revised up pretty dramatically for 2012 but we just haven't seen it yet. Q1 was flatter down as job growth has mostly back ended in the second half 2012. Base rents are growing steady in the 5% to 6% range, but we are seeing some persistent price sensitivity keeping occupancies below 95% by touch [ph] so far this year. April renewals in L.A., 5.5%. And that takes us down to San Diego and, take us along with others, we'd have to say San Diego remains a disappointment. It's in positive territory, it's steady but at low levels of growth. Base rents are 1.5% to 2% above last year. April renewals are up 4.7% and occupancy just continues to lag on low demand based on military lease breaks and a little bit of an uptick in home buying in San Diego. So overall, as David said, things are kind of as we expected at this point. The leasing season will really make the year. So we look forward to reporting you the results of leasing season on our second quarter call come July.

Alright, thanks, Fred. So let me turn now -- about transactions and just like last year, our first quarter acquisition activity was minimal and well below our full year guidance of $1.25 billion might suggest. However, also like last year, we do expect the activity to increase as the year progresses and we've kept our full year acquisition expectations unchanged for the present time. We did acquire 3 assets in the quarter totaling 544 units for $159 million at a weighted average cap rate of 4.4%. We bought 102 units in Marina Del Rey, California. That built in 2003 and was acquired for $371,000 a door. We also acquired 319 units in Redmond, Washington built in 2009 and acquired for $299,000 a door. This asset is in the heart of Redmond in very close proximity to our Red160 develop deal, which should provide some operating synergies for those 2 assets. And lastly, in Redwood City, California, we acquired 123 units and an older asset on the Peninsula, midway between San Francisco and San Jose and immediately adjacent to the Stanford medical facility. It's a terrific value add deal that we acquired for $211,000 a door that we'll spend about $10,000 a door rehabbing. We're very excited about that opportunity. During the quarter, we sold only 3 assets, 2 in Portland, Oregon and 1 near Princeton, New Jersey totaling 1,522 units. We sold those deals for $206 million, averaging $136,000 a unit at a 6.2% cap rate and we're pleased to have realized a 12.6% unleveraged IRR inclusive of management cost in those transactions. Now you'll no doubt notice that the spread between our acquisitions and dispositions in the first quarter was a whopping 180 basis points on that activity, and I ask that you not read too much into that. This book cap rate is probably a pretty good proxy for what we expect to sell at least in the first half of the year but the acquisition cap is on the low end. In fact, just last week, we closed on a $230 million acquisition at a 5.3% cap rate and that averaged that spread down, compressed that spread delta to 127 or so basis point. So we still think this spread at 125 for the full year is the right estimate. So also I'll add, I tell you, I know I sound like a broken record when I say this, but there still is a great deal of capital chasing very few deals in the marketplace today. As a result, at least in our core markets, cap rates remain in the 4% to 5% range, where they've been for much of the last year. And it really is quite simply a very competitive acquisition environment out there today. So with the acquisition market intensely competitive, we continue to look for new opportunities for our development business. Last quarter, we acquired 2 land parcels for future development. One, right on the Biscayne Bay in Miami, Florida where we'll build 390 units for $97 million and we expect to achieve a mid-6% yield on current rents on that transaction. And we bought a land parcel in the South Lake Union neighborhood of Seattle where we'll build 283 units for $66 million and expected to achieve a low to mid-6% yield on current rents of that transaction. So for the full year, we currently expect to be in the position to start 8 projects totaling 1,430 units and totaling $630 million of total development cost. Now you may note this is down about $120 million from expectations at the beginning of the year because we've decided to first see if we can sell one asset that we are contemplating doing some work on that's actually an expansion of an existing property we own on the intercoastal in South Florida where we're recently able to increase the density of that site were going to look at disposing of that first. So the sites for our 2012 starts are all currently on our balance sheet. We have 2 in New York City, 1 in South Florida, 2 in Seattle and 1 each in Southern California and the District of Columbia and current underwriting on those opportunities suggest the yield on cost in the low 6s on current rates. So before we open the call to questions, I what to say a few words about the Archstone situation, which I know a lot of the people have questions about. But you must bear in mind that I'm extremely limited as to what I can actually say. But what I can say is that we remain interested in working with all of the parties that have an interest in Archstone to see if there is not some way we can create a win-win situation for everyone. I'll tell you that doing that is not an easy task because there are a lot of parties involved and that many of those parties have different agendas, and we're trying to get everybody squared away. But to give us more time to see what we can get done, we recently extended, and this being for the second time, the period under which we have an exclusive right to cause the banks to sell the remaining 26.5% interest to us. And any offer that we do make will need for at least $1.5 billion and that offer will again be subject to Lehman's right to match it. And if they do, we'll receive a break-up fee of $80 million. Now we continue to think that much of the Archstone portfolio with hand and glove of ours, make a lot of sense in our platform and we are going to try to make it work. And so with that, Jo will happily open the call to questions.

[Operator Instructions] And our first question comes from the line of Dave Bragg with Zelman & Associates. David Bragg - Zelman & Associates, Research Division: Just wanted to touch on the disposition environment for you. Could you talk a little bit more about your expectations for the year, including whether or not you're current marketing assets for sale and maybe expand on that, as well as your perception of the appetite in this market for a portfolio sale?

Well, we're always actively selling deals, Dave. And we've got properties out in the marketplace in Orlando, Jacksonville and Phoenix and most of the markets that you'd expect us to be disposing of assets. The remains of what we think is a pretty good bid for those assets. Fannie and Freddie continue to finance them. And we don't see any reason why we'd be unable to meet a goal of $1.25 billion on the disposition side. A lot of that will be a function of what kind of acquisition opportunities that we can find. Because our acquisition business is really self-funded from the disposition side. And our guys tell us that there could be interest in a large portfolio. There are a lot of people out there with a lot of capital that would be very interested in putting a lot of it to work in a single transaction. And if we wanted to do that, I think we could and do so very successfully. David Bragg - Zelman & Associates, Research Division: Okay. And now that you've accomplished a lot on the restructuring side. As you look at some of the other markets that you might consider non-core, can you talk about your priorities in terms of incremental exits when you think about Atlanta, Orlando, Phoenix, maybe even Tacoma, et cetera?

Well, I guess, we're -- continue to sell assets in many of those markets. As we continue to focus more on the higher density core markets. But I'm not sure that they are necessarily priorities. We'll continue to sell assets on a one-off basis across those -- some of those markets and continue to reduce our exposure there. David Bragg - Zelman & Associates, Research Division: Okay. And then just a question on the outlook for the year. I think that you have a track record over the last few years of coming in at the high end of your revenue growth expectations. And you seem to be indicating that you're trending towards the midpoint. Can you talk about what has changed or what you're seeing over the first 4 months of the year that causes you to be maybe less comfortable with that high-end?

Yes. This is Fred Tuomi. As we mentioned, the first quarter kind of points to all the indicators right smack dab in the middle of our guidance. And the one area of our first quarter kind of held back a little bit. That would be -- the turnover was up in some of our key markets in January and February. And most of that turnover, when we dissected it, was these short-term corporate apartments that we had in there for late December, January, February in the key markets, the big rent markets like Boston, New York and lesser extent, in Seattle and San Francisco. So we had some of those high-paying premium units vacate during a slow period of the year so it's a little bit longer to refill them, and that's why we carried a little more vacancy during the Q1 than we had hoped for or really planned on. So first quarter was kind of -- the story was increased turnover due to some corporates, especially short-terms, some price resistance in our key markets leading to some lower occupancy. Now if you extrapolate that forward, like we said, that thing kind of guides us right towards the middle, around the middle of the range. We'll know more come July because the leasing season is just really cranking up. And the last couple of weeks, and in fact this week, very strong traffic, very strong leasing momentum building in those key markets like Boston's coming back quickly, San Francisco's coming back quickly, Seattle, Downtown and East Side, very strong, et cetera. So our strategy is that we held rates, we took that vacancy in Q1 and now we're going to refill the leasing season at higher rates. So in a perfect world of -- if the stars align, we could have good results. But right now, as I said before last quarter, we expect our average growth over last year of our base rents to be in the 5.5% range. If we get that, you can just kind of do the math and that's what we're saying kind of around the midpoint. But based on leasing season, that kind of the makes the year. So we'll know more here in just several weeks.

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

I just had a question about Fred's comments about seeing more turnover in markets with the best rent growth. I mean, would you actually see the resident turnover right now as a sign of strength in those markets or is it really more so that you need to start holding back on renewals given a higher turnover?

Yes. That's the essence of our -- what I meant by our strategy right now. We're happy right now to take that trade at a little more vacancy early in the year when there's not many transactions anyway. And keep our rent roll growing, keep our base rents up there and then just be waiting for the traffic to flow in the leasing season and fill up quickly at the higher rates versus tanking the rates, filling up and then be stuck with those leases throughout the year. So that shows confidence in the forward of the market in terms of demand will be there. And as I said earlier, the prices that we're at right now, we're not having a lot of resistance from new people coming in. Our rent to income ratio is still strong, credit is still strong, none of that has changed. So there is an ample supply of people willing, ready and able to pay the new leases. But we are already pitting that point of resistance on some renewals. And as I mentioned, the corporate people, as you top out the rents, plus the corporate premium, we're squeezing their margins. So naturally they're going to look for some alternatives at some point. So I would agree with you that things play out perfectly, that's going to be actually a good thing and not a bad thing at this point in the cycle. Different points in the cycle, you may play a different strategy.

Right. That makes sense. I just had a question on your leasing and advertising costs. I guess I look at your advertising cost for the last 2 years. They've come down pretty dramatically as has the rest of your peers. So I'm curious, is that just renegotiation of rates or was print that big a piece of your advertising? And I guess, thinking about it from another perspective, if you're reducing your advertising budget, is there a risk that you're not creating the same number of leads that you were before and it's having an impact on revenue?

This is David Santee. When you look back, I think you have to go back about 4 years. And prior to the downfall in 2008, I mean, basically markets like New York and Boston were -- those are 2 big broker markets. And then during the downturn, the obligation to pay broker fees switched from the resident to the landlord and we increased those fees several million dollars. So when you look at our advertising costs today, you see that decline. All of that decline is associated with less broker fees in Boston and New York. All everything else -- I mean, certainly we've done a great job of reducing print. We continue to optimize our paid search and our other ILS's [ph] but really the entire savings is due to less broker fees than last year.

Got you. And then one more quick question along those lines. I guess, how would you think about your sort of average customer acquisition cost in terms of advertising or however you allocate sort of the expenses to that category?

Well, I mean, certainly the largest cost to acquire a new resident is the vacancy. But as far as hard cost go, when you have 50% turnover, 50-plus percent turnover and we're in $100 a unit, we run in the $200 to $250 range as far as all-in L&A [ph] cost.

And our next question comes from the line of Ross Nussbaum with UBS.

A couple of different questions here. First, can you remind me how much of your unit base is in corporate apartments? Trying to figure out -- I didn't think it would have been that meaningful to have caused that much of an issue or the amount of commentary we've already had on this call.

Well, when we look back, we had roughly 700 corporate units. I don't know that it's a matter of the sheer volume. It's more about when they vacate. So when corporates take units in the summer, typically when our rents are at the peak. And then in addition, we are getting a premium on top of that, which is typically 20% to 30% on top of peak rents for that year. And then they move out in Q4 or the beginning of Q1 when rents are at the bottom of the cycle. You're re-renting those apartments for sometimes 20% to 30% less when your average renter rents them at a 12-month lease. So we just saw a lot of volatility. We saw some spikes in some markets, particularly Boston, New York City. And we constantly strive to kind of minimize our exposure to the corporate business because like we've just discussed, it creates unneeded volatility and it really doesn't align with our goal of creating loyal customers.

Okay. Given your strategy here of letting the occupancy slip a little bit and rebuilding at a higher price. To me that implicitly would suggest if the turnover maintains on a up year-over-year basis, ultimately you're going to need higher traffic levels relative to last year. Is that what you're betting on? Is that you're going to see more traffic flow into your units this year?

This is David, when we look at all aspects of our traffic, everything for the quarter was up. So applications were up. Move ins were up 4-plus percent, phone calls were up 20%. Foot traffic was up. The only thing that was down were e-leads and I attribute that to, I think, our industry or at least the larger players in our industry. We continually play cat and mouse with Mr. Craig from Craigslist as far as playing by his rules. So we really suffered in Q1 as far as our ability to promote our properties through Craigslist as they change the rules. But as far as all the indicators, everything is up and I have no reason to think that, that won't continue through the leasing season.

This is Fred. One other point is, yes, we have that confidence at this point in the cycle also not only because of the traffic that as David mentioned, but based on the demographics, but don't forget about supply. There's still very little supply in the system this year, especially the first half of this year. So again that gives us confidence that this leasing season is going to be pretty favorable.

Okay. And David, last question for me on Archstone. Can you give us a sense of how much of senior management's time has been spent locked in rooms with bankers and lawyers? And how much of a -- I don't want to use the word distraction. I guess that's probably not the right word. But how much time has been committed over there?

Less than you think. A lot of people have worked a lot on this over the last 9 months or so to get us in a position to have made the original bid that we made back in the fourth quarter. But since that time, I'll tell you it's just been myself and Mark Parrell and Bruce Strohm, our General Counsel. They're just the guys that are really running the railroad day-to-day basis, have not been distracted at all.

And do you see any real possibility at this point that you wind up with the whole thing or are you playing for a result realistically other than...

I can't comment on any of that.

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

I wanted to touch upon the guidance specifically. You mentioned that -- I mean, I think your guidance for G&A is up by $2 million or so and also the ATM issuance was a little bit higher. So just wondering, the FFO number seems to be the same. Are there any one-time items that aren't discussed in the guidance?

No. It's Mark Parrell. I mean, on the G&A side, it’s just an estimate change on some comp expense. When we put our guidance together. We do it earlier then done with our comp process. So that's the reason for the change on G&A. The delay in disposition activity has been the offset, so G&A is certainly up. And the addition of the shares to the fully diluted share count from the ATM issuance is also a reduction to our FFO number. On a compensating side is we have less a dilution from transaction activity because we're going to be selling assets later in the year than we thought. So before our assumption had been, we more or less were selling $300 million of assets each quarter. And now we'll sell, we think, about $300 million to $350 million in the totality of the first half of the year and that difference is the offset and that's why we're still really right at the midpoint.

Great, that's helpful. And then David, there were all these news headlines about housing finally hitting the bottom. And you mentioned that home buying move out to home purchases were up slightly. If you can just give us a little bit more color on that, which markets are you specifically seeing that? And what are those numbers relative to?

Okay. Swaroop, this is Fred Tuomi again. I mentioned home purchasing did tick up a little bit but still well inside of historic norms and still not really an issue on most of our markets. For the whole portfolio, Q1 of last year, home purchasing as a reason for move out was with 11.6, a very low number. Q1 of this year, its 12.6, so it's up 1 point. So up directionally, but still very, very small. The markets with the least home buying and actually a reduction, continued reduction in home buying, Seattle was down almost 1 point, Denver is down, Orange County is down, San Francisco is down, Boston is down. Those that did show an uptick, Maryland, where it's housing is fairly pretty cheap and plentiful, it went up 470 basis points. Atlanta, as you'd expect, where housing continues to go down the tubes, was up 380 basis points. Phoenix, we did see an uptick of 310 basis points. San Diego, as I mentioned earlier, did tick up, 240 basis points. L.A., we saw some home buying. So showing some confidence there maybe that's a good thing, it's up 200 basis points. In South Florida, with the continued clearing of the condos there and some of single-family I think that market has definitely bottomed out, prices are recovering strongly there in South Florida as well Phoenix, so that's why you see some people jumping in to buy there in South Florida.

And just lastly, sorry if I missed this, but what are the renewals being sent out for June and July? May and June, I guess?

Renewals, as I said, for the quarter averaged 6 6, April we closed out at a 6 9. May, we're quoting basically 9% and expect to achieve 7 or low 7s. June, we're quoting in the above 8 range and expect to achieve in the mid-to high 6s. In July, we're quoting an 8 as well. [Technical Difficulty]

And our next question is from Conor Fennerty with Goldman Sachs.

Fred, can you provide a little more color on L.A. You mentioned obviously job growth got -- revised up a little last year or, excuse me, in 2012, but you also talked about price sensitivity. Can you kind of bridge that disconnect there?

Yes. Well, job growth was revised up. We're saying now that we're going to get 50,000 jobs this year. I mean, that's the economist's prediction. I hope that's true. But so far, Q1 actually the local economic reports showed a job loss in L.A. So it's really bad -- that's what I meant when the job growth is expected to be back ended. You're still seeing some losses from the local city county state government and some manufacturing and some defense areas there. But entertainment is up slightly. The port net-net, imports, exports is up about 1%. And some of the defenses now retooling and selling to foreign governments, et cetera, et cetera. So that's our -- the expectation is some good growth coming second half of the year. And if you remember back the last couple of years, L.A. has kind of been fits and starts. It'll start getting some traction and then pause, and get some traction and then pause. And now it's on the steady upward swing but I'd say, the accelerator continues to go up and down. So we push rents, we get some good results and then it kind of stalls. So we actually -- we had rents up about 7% there for several weeks and then demand kind of slowed, occupancy dipped, so we had to bring the rents back into the 5% range. So it's still -- I have confidence in L.A. I think it's going to be fine. It's just not -- doesn't have that consistent, strong, steady power curve of a recovery like we've seen earlier in the cycle in markets like Boston, San Francisco and New York.

And David, you mentioned the seasonality of acquisitions. But has Archstone impacted the pace of acquisition for the year either or is it just mainly the seasonality?

Well, I guess I'm not so sure. It's sort of seasonal.

For available product?

I mean it's just like there's just not a lot of supply, not a lot of product and we sort of seen this for the past 3 or so years. And generally, the beginning of the year, we've not seen much and it sort of picked up more towards the end of year. But that's something that's happened over the last several years and I wouldn't say that's its seasonal would imply that it's been for an extended time period. I think if you would look back at our acquisition activity over an extended time period, it's been fairly ratable during the year. But it's just been over the last few years or so that, that has been a little early on and we begin to see more as the year goes on.

Okay, and then just lastly, on land sales or land acquisitions -- excuse me. You guys have been obviously active on the land front last kind of 8 quarters. Any change there in terms of pricing? I mean, you guys still expect kind of weighted average yields to be in that kind of 6.5, 6 area going forward on land deals?

Yes. If you look at some of our pursuit log right now that the guys are working across the country, I tell you, yes, that it is high 5, low 6 to maybe a mid-6s is generally what we're looking at across the markets today.

And our next question comes from the line of Jana Galan with Bank of America Merrill Lynch.

I appreciate your earlier comments on the 4.4% average cap rate being kind of on the low end of your acquisition cap rate range. I was curious if these deals, do they have -- are they significantly below market or is there more redrive or value add opportunities outside of the Redwood, California acquisition?

Well, a little bit on the one deal in Redmond, Washington where there's some vacant retail we think we can turn into some residential units. But generally, we think -- it was only the deal on The Peninsula that we think we'll see here to a significant increase in that cap rate through the work we'll do on the rehab.

And were there rents below the market?

On The Peninsula, I'll tell you that we thought the rents to the Peninsula were very much below. So in addition to what we think we'll achieve because of the rehab, there was opportunity to bring those to market. But I'll tell you just in general, the other properties were probably more stabilized and I don't think represent the same opportunity.

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

You guys are always in the market I guess on both the acquisition and disposition fronts. Can you talk a little bit about how the spike in treasuries that we saw in March impacted the investment sales market? I know rates have since retreated, but did you see any disruption in the market in the form of either re-trades or deals falling apart?

Well I guess I presume that there were a lot of deals, Andy, and I don't know if there are a lot of deals. I can tell you that just on the construction side, we've heard from more merchant-like developers that there continues to be equity out there. But the merchant builders are sort of fighting for it. There's not enough equity to fund all of the opportunities that are there. How that changed may have affected -- the change in treasury may have affected what the preferences might be for that equity. I don't know. I think, it's probably -- construction financing probably plays as big a role in that and that continues to be fairly inexpensive. Difficult to get but relatively fairly inexpensive. So I don't think it was as disruptive to that business as your question might imply.

And I guess it was more geared towards how sensitive is the investment sales market or the acquisition market for lower quality assets that you might be selling to short-term move in treasury.

Again, I think it's more sensitive to -- okay, how treasuries may impact Fannie and Freddie financing?

Right.

I'll tell you, on the assets that we've been selling, it is very sensitive to that, which is why, as you know, that we've been fairly aggressive on the disposition side, thinking that increases in interest rates will negatively impact the values of those assets we want to sell, as well as any change in the liquidity that Fannie and Freddie provide that space. Now, in addition to just treasuries going up though, it is all-in spreads do matter and the agencies will, if necessary, will trim their spreads in order to offset that if it's important to maintain their share.

Okay. Thanks. And then just generally on asset value. Can you talk about what movement you've seen so far this year across your major markets?

Well, guess, as I told you in the kind of more prepared remarks, I think that cap rates have generally stayed fairly consistent. But we've seen bottom lines improve and so I think you've seen values increase modestly.

Just one quick question, on your JV to main development, San Jose, looks like inflation stabilization dates got pushed out quite a bit. What's going on there?

Yes. Well, it was just time that it took to pull permits. I think San Jose is not unlike many municipalities where they're a little understaffed and it's just taken longer to get the permits pulled to get through that process than what we had hoped.

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

I just wanted to go back to the base rents. I think you said 6.5%, which I'm assuming is a blended number. Can you give us what new lease rates were in the first quarter? And not necessarily year-over-year but on a lease over expiring lease basis?

You mean the replacement rents?

Yes.

Yes. It was up 4.3% during the month of April. During the quarter, it was kind of ramping up from the 2 as we came into the year up to that number. So we're right now at 4.3%.

Okay. That's helpful. And then traffic during the quarter, I don't think that there was any mention of that. Can you give us a sense on how that's trended as well in April as well?

April is up, e-leads are up, our daily traffic to ea.com (sic) [equityapartments.com] is up over last year. Things appear to be strong on all fronts.

Okay, so it wasn't traffic, it was really just holding on price then is where the occupancy [indiscernible]...

Right. And as I've said earlier, when you look at our move outs and move ins, I mean, our move outs for Q1 were 10% more than Q1 of last year. Yet move ins were up over 4% over last year. That's driven by more foot traffic, more phone calls, more applications, et cetera. So it's really on the back end.

Okay. That's helpful. David, a question on Archstone not pertaining to negotiations. But the $1.5 billion purchase price you are talking about now, when you announced the $1.325 billion purchase price, I think you said that was a 5 recap rate on in place. Where does the 1.5 pencil to on current cash flow in terms of cap rate?

About a 5.

About a 5, okay. And then finally, just a question on financing. Where are you seeing GSE rates today? And also, where could you guys do unsecured paper 7, 10 years?

It's Mark Parrell. On the -- you said 7 and 10, I'm more focused on the 10, but I have some color for you on the 5 as well. On the unsecured side, assume the treasuries at about a 2% rate. I think our spread would be about 2% and we issue around 4%. For 10-year unsecured paper. On the secured side, the GSEs are probably for guys like us and this would be an interest-only loan with favorable terms given our scale would be about 3.85%. So maybe 15 basis points or so better. That relationship reverses on 5-year debt, the GSEs don't particularly care for 5-year debt. And they would be more like 2.5% over the 5-year treasury which would be about 3.3% where I think the public market is happy to do 5-year debt and they would be more like 2.7% or about 180 basis points or so over the 5-year treasury. GSEs, as David Neithercut said earlier, continue to be very active and continue to be very good sponsors of debt in the sector.

And our next question is from the line of Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just going back to the whole occupancy versus rate, is there's some sort of occupancy floor where if occupancies were continuing to fall, at some point you guys would say that's it, let's just cut rate, fill back up occupancy?

Alex, this is David Santee. I mean, first, I think we needed to keep things in perspective. Our occupancy was right on top of where we were last year. So I mean, yes. Yes, there is a floor but we didn't come close to that floor. I think it's more about our expectations for improved occupancy versus being flat on occupancy over last year.

Right. And I would say that would be really a property by property sort of decision, Alex. We run these things, not just property-by-property but unit type-by-unit type. So certainly the answer to your question is yes. But really would be on a property-by-property basis. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: And then on the Marina del Rey and Redmond deal, if those are sort of market deals sort of curious why you did them if you think the cap rate, was this 10/31 driven or is there something beyond where getting those properties and those areas helps you further down the road with something else?

I think you should -- it's a very good question and you should interpret that as just kind of trading, right? We're trading out of Jacksonville and trading some assets in Orlando, and trading some assets in Phoenix and were just trying to trade into other assets that we think will represent a better total return over an extended time period than what we realize if we were to stay in the assets that we're selling. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. Then that makes sense. And then finally, David, on the Archstone. It's just hypothetical, if there were a deal for just some assets, do you have a preference for markets versus quality or age of asset or you're agnostic if it came down to that decision?

I'm not going to comment on any of that, Alex, I'm sorry.

And our next question comes from the line of Jeffrey Donnelly with Wells Fargo.

I guess, Dave, how do you think about rent affordability from this point? I mean, as consumers ability to digest incremental rent increases regardless of whether or not they had a housing alternative and ownership. I guess I'm wondering if you might think we're running out of room in consumers' wallets at this point?

Well, look, we track rents as a percentage of income, and the numbers are still -- demonstrate that there's significant amount of runway across all of our markets.

Do you feel though, maybe on more of a disposable income basis, or, something that actually takes into account all the other pressures on consumer's wallets, that you maybe have less run rate than you think? Or do you still feel pretty confident by those markets.

Well, I guess, we just stayed in perspective relative to the past, the actual numbers kind of come down. As Fred and David mentioned that, we're losing residents that are unwilling or unable to pay our higher rents but having no problem attracting new residents who are willing to pay that rent. And those people that are willing to pay that rent have got incomes that support that rent significantly better than past residents.

That's helpful. Just one last question. Just considering that we are a little further into the cycle and growth has been certainly good to date. How are you or are you changing your underwriting on future growth as it relates to acquisitions and how does that affect your going in cap rates, are you sort of tweaking down your growth expectations for multifamily or has it been really unchanged the last few months?

We feel very good about the multifamily space in 2012 and beyond for all the reasons we've been talking about for the last several years. Just the supply and demand situation is very compelling. The single-family homeownership situation is very compelling. The markets in which we're in, given the cost of the single-family home ownership kind is very compelling. So we continue to feel very good about this space. As I mentioned in response to Alex's question, we're trading assets from one market going into other markets and we think that the trade makes a lot of sense for the long-term.

And our next question comes from the line of Philip Martin with Morningstar.

Just a quick question, again, following up on the move outs. Can you give some clarity as to the profile of the move outs? Are they more heavily weighted toward a certain age group or income profile?

Well I would say it's probably more weighted toward specific markets. So I think Fred mentioned earlier, in San Francisco, 30% of our move outs, really for the last 2 to 3 quarters, have been due to price or too expensive. So when you see 30% for 3 quarters, that pretty much covers all profiles and demographics. And I think we've seen that for the last 2 quarters in Boston as well, 20%. So it's more of -- it's probably more of a lifestyle preference. And we just see it across all demographics.

Is it fair to say, it sounds like the rent to income profile is being maintained if not improving a bit. So are you seeing -- is it fair to say that we're seeing more of a want-to renter as opposed to need-to renter?

When I look at our credit statistics, we have a credit model and for the last 2 years, the number of people that are auto-approved, meaning we receive their Social Security Number, we run their credit and they're instantly approved, that number has been increasing. For Q1, it was the highest it's ever been. We look at the distribution of our FICO scores across all of our properties. The percentage of FICO scores above the 720 are the highest it's ever been. Again, this is partly due to the profile -- I'm sorry, the property repositioning but I think that's what we're after.

Okay. Thank you for that. Now on the acquisition. I know there weren't too many here in the first quarter, was it $150 million, $159 million, I missed that number.

Yes. $159 million. And all that's laid out in the press release.

Exactly. So the $159 million, you mentioned that on one of the acquisitions, you were looking to spend $10,000 per unit. Is that a fair assumption across the entire $159 million?

No. $10,000 a door is what we budget to rehab 123 units that we acquired in Redwood City, California.

Exactly. Now, looking across this portfolio, what is the CapEx per door?

It's Mark Parrell. If you turn to the release and go to Page 21, there is some pretty detailed disclosure on CapEx, both for the same-store property set where we have given guidance of about $1,225 a unit for 2012. That is inclusive -- these are same stores. These are stabilized assets. On acquisitions, there's a different number and those are non-same-store property set. So you do have some visibility into those numbers as you go through the release.

Okay. And then, just the existing portfolio. When you look going forward, can you give us some sense of just the organic growth potential that you have in your existing portfolio from a redevelopment value add, just looking out a bit?

Well, we continue to rehab. Probably spent $40 million to $50 million a year on rehab of properties out there. So that's 5,000 or so units a year, and we think there will continue to be some opportunity there. And again, we just think that the fundamentals of the business are such that we're going to have some pretty strong organic growth just through the ability to raise the top line just in our existing portfolio. So again we think that there's a lot of opportunity for the foreseeable future on the top line of our portfolio.

And our next question is from the line of Omotayo Okusanya from Jefferies. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Just a quick question in regards to the tenant survey that you do. Just trying to get a sense of apart from moving out because of higher rents, if there's any real change in regards to the key reasons tenants are moving out?

Changes on the reasons people are giving us for moving out? Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Yes, any big change trend-wise?

Well, I mean, the over-arching trends kind of a remain the same. Of course, they just from the historical patterns but the number one reason has always been job, job transfer, job change. Historically, the number two reason was always buying home and then, rent increase. Too expensive was number four or number five on the list. Now depending upon which market you look at today, in some markets, home buying is number two, a place maybe like a Phoenix. But yet rent increase too expensive to be number three. In markets where we see tremendous rent growth, places like Denver, places like Boston, San Francisco, certainly without a doubt, the number two reason for moving out is rent increase too expensive. And every quarter, we pull the aggregate verbatim results. You mentioned our surveys. We look at the verbatim remarks that all of our residents moving out make. And it's definitely -- the rent increases are definitely a key driver in their decision.

This is Fred. I'll add to that. That's a natural thing to expect and to observe at this point in the cycle. Because during the recession when rents were going down 5%, 10%, 15%, 20% in some cases, not everyone lost their job and those people with steady income enjoyed an increase in their housing value by being able to afford a nicer apartment, better location, better building at a lower rent. So they actually basically would have profile shift up and they were the beneficiary. Now that rents are pretty much back or above peak levels at some of these key markets, now we've had a couple of years of very strong rent increases, those people have traded up now are going to just to trade back down. They're not going to be able to either afford or want to afford those rent levels. But the good news, as we mentioned earlier, is there's plenty of people behind them who are willing to fill those apartments especially during the leasing season. So when we look at the marginal resident coming in, all of the credit and income statistics are very favorable and encouraging and those moving out, we have a special case in the corporates whose margins get squeezed. Then we have a case of those people who traded up who are now trading out. Then one other just anecdotal comment, we looked at our transfers. Early on in the recession when things are really going down, we analyze our transfers within our system and people were transferring out of expensive apartments and into cheaper apartments [indiscernible] and what's happening now is our transfers why we look at those. And more people actually transferring to larger more expensive apartments within our buildings versus the contrary. So it's another indicator that our resident base is healthy and...

That's an important thing to point out as well. Fred mentioned that our turnover was up 100 basis points and 20 basis points of that stays within the family of Equity communities, either they are moving from one apartment to another or they're moving from a community in New York City to a community in L.A., and we track all of that.

And our next question comes from the line of Nic Yulico with Macquarie.

Just quickly on the acquisition guidance. If we're to assume that you do get Archstone? Would you then also have the desire of doing, say, $1 billion on top of that acquisition so you could actually be a significant net acquirer this year?

The guidance that we've given in the press release has nothing to do with Archstone and if something were to happen to Archstone, I'm not quite sure what would happen to the normal transaction activity.

Okay. And just I guess assuming that at some point if you did become, say, net acquirer of say over $1 billion, I mean how should we think about how you guys might finance that? I mean do you sort of target -- what's sort of target leverage level that you want to keep the company at these days?

Well, we've not suggested at all. Our guidance suggest that we -- we have no intention of being a net acquirer this year. And in fact we'll acquire -- we'll sell whatever we need to sell to match the acquisitions and we're comfortable with our leverage levels. They're well within the ranges that we've been operating for the last 19 years and sometimes we've been up within that range, sometimes down in that range, and we're very comfortable with where we are today.

And our next question is from -- a follow-up question from Eric Wolfe with Citi.

It's Michael Bilerman. David, I just wanted to come back just in terms of the Archstone cap rate. And I don't want to split hairs. But you talked about a 5 3 and then you said it went down to a 5 at the $1.5 billion implied equity. I get something closer to 5 10, 10 basis points depending on how much you acquire, if you acquire, could be a lot. So I just didn't know if there was something I was missing in that math?

No, Michael, I mean we're just talking generalities here.

I know but 10 basis points on $18 billion potentially could be a lot depending if you're at 5, 5 3 or 5 10.

You're speculating a great deal. And should we be able to work something out, we'll be delighted to give you the specifics at that time.

And just to make sure I remember correctly when you guys originally did the $1.33 million implied a $5 billion equity value -- sorry, a $5 billion equity value now at 1 5, you're at a 5 7 equity value. And I think I remember Lehman was at that point where they said they thought it was worth at least a $6 billion equity and then another $1 billion enterprise value for the platform. Was that sort of general how things had gone?

I mean, is that what Lehman said, is that the question? I do believe Lehman said -- it's publicly stated something on along those lines, yes.

And there are no further questions at this time. So I will turn it back to management. You may continue.

Great. Thank you all for your time today. We appreciate it. And we'll see you around.

And ladies and gentlemen, that does conclude your call for today. Thank you for your participation. You may now disconnect.