Equity Residential (EQR) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Equity Residential Fourth Quarter 2012 Earnings Conference Call and Webcast. [Operator Instructions] Today's conference is being recorded, February 6, 2013. I would now like to turn the conference over to Marty McKenna. Please go ahead.

Thanks, Alicia. Good morning, and thank you for joining us to discuss Equity Residential's fourth quarter 2012 results and our outlook for 2013. 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. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn the call over to David Neithercut.

Thank you, Marty. Good morning, everyone. Thanks for joining us today. As we reported our earnings release last night, for the full year 2012, Equity Residential delivered same-store revenue growth of 5.5% and NOI growth for the year of 7.6%. These results are slightly above our expectations at the beginning of the year and are among the best numbers in our 20-year history. We're very pleased that for the very first time ever, we've had 2 consecutive years of 5% same-store revenue growth or better. So we're very pleased with our operating performance last year and we wanted to acknowledge the contributions of the Equity team across the country and here in Chicago that delivered such strong performance for us. And I'm pleased to say that as we sit here today, we continue to see favorable fundamentals across our markets and expect to achieve yet another year of operating performance above historical trend in 2013, and now will continue to string some of the best year-over-year results in our history. Clearly though, with same-store revenue guidance of 4% to 5% and NOI guidance of 4.5% to 6%, we're not expecting our same-store result to be quite as strong this year as they were last year. But things are still very good across our markets. Occupancy is currently 95.1%, which is very strong for this point in the season. We put 5.1% more money in the bank this January compared to January 2012 from our current same-store set of nearly 108,000 units. More than 4,000 January leases were -- lease renewals were completed, up 6%. Nearly 3,500 February renewals have been completed, up 5.4%. And a limited number of March renewals have already been done, up 5.1%. So thus far, the year is setting up pretty much as we expected. To give you more perspective on our operating outlook for 2013, I'll turn the call over to David Santee, who, as most of you know, has been responsible for building and running our centralized operations platform, which has been so important to our past and will be to our future success. And with Fred Tuomi's pending retirement, David has taken on the added responsibility of overseeing our day-to-day on-site property management business, and I know that Fred agrees with me that he's leaving the business in very, very capable hands. David?

Thank you, David. As noted in last night's press release, same-store guidance for 2013 is based on an expected year-end unit count of 80,120 apartments versus the 107,870 we have today. The vast majority of the 27,750 units, which by the way was the size of the company when we first went public, slated for disposition are expected to close prior to or shortly after quarter end, which gives us the confidence to provide you the impact to year-end results today. The net change as a result of these dispositions is favorable to improve revenue growth, neutral to total expense growth and significantly lowers our forecasted resident turnover. What this all means is that we expect same-store revenue growth to improve modestly as a result of the change in our same-store pool. But our number will still be within the range, so we are leaving our 2013 same-store projected revenue growth unchanged from our earlier Q3 guidance of 4% to 5%. Fundamental factors of supply, while increasing, appear to be manageable, while demand continues to be steady, as the economy continues to pick up steam, fueling increased job growth and household formation. As we have discussed previously, we expect short-term disruptions to pricing power in specific neighborhoods in Washington, D.C., North San Jose and Seattle. However, the combined dynamics of favorable long-term demographics and the continued aversion and economic challenges to homeownership will ensure steady demand for rental housing for the near term. Seattle proved to be a testament to this model by absorbing almost 8,000 units in 2012, while increasing occupancy 120 basis points. Move-outs to buy homes, purchased homes for our Seattle portfolio only increased by 65 for all of 2012. For all of our core markets, this is further supported by recent improvements in job creation, especially…

All right. Thank you, David. Normally, at this time, I describe our investment activity and try to give a little color as to what we've acquired and what we've sold during the quarter. Clearly, with the Archstone announcement and all that's been going on around here last 6 months, there's been very little normal activity taking place here. Now in just a moment, Mark Parrell will go through the specifics about the capital market activities necessary for us to move towards -- forward towards the late February closing of the Archstone purchase along with our partners, AvalonBay. But in addition to the capital market execution, there remain another critical part of our funding plan that I want to talk about, and that was, frankly, a very significant but manageable execution risk for us. And that's the disposition of approximately $4 billion of noncore assets, representing 40% of our $10 billion share of the purchase of Archstone. But this was among the most important strategic benefits of the entire transaction for us, so not only acquire a portfolio of high-quality assets in our targeted high-barrier markets, but to do so with proceeds from the sale of assets in our remaining noncore markets and the sale of often older, more suburban or otherwise nonstrategic assets in our core markets. And thereby, complete the last piece of the transformation of our portfolio, which will soon be comprised nearly entirely the best assets in high-barrier markets, with housing cost far in excess of the national average, which we believe will provide superior long-term total returns. So for the last years we'd worked to acquire all or some of Archstone, we had identified the assets that we would target for sale should we be successful in our pursuit. We did all the work necessary to…

Thank you, David. I want to take a few minutes this morning to review our recent capital markets activity, and then give some color on our Normalized FFO guidance and our disposition and funding strategies impacting our Normalized FFO numbers. I will also discuss how we expect our balance sheet, our credit metrics and liquidity to look post Archstone and give you some thoughts about accessing the debt markets. I will end with a couple of accounting housekeeping items. So we've had an extremely busy few months getting ourselves positioned to fund the Archstone deal. So just a quick review of that activity. Immediately after the deal announced that we began, our public equity offering in which we sold 21.9 million common shares at a gross price of $54.75 per share for net proceeds of approximately $1.16 billion, which is about $53.11 net per share. We are very appreciative of the support of our investors in this extremely successful offering. In January, we entered into a new $2.5 billion unsecured revolving credit agreement, with a group of about 25 financial institutions. This new facility matures in April 2018 and has an interest rate of LIBOR plus a spread, which at our current credit rating is 1.05%, the spread is, and has an annual facility fee of 0.15% or 15 basis points. This facility replaced the company's existing $1.75 billion facility, which was scheduled to mature in July 2014. The bank syndicate is broadly diversified and all our existing banks renewed and increased their commitment in Equity Residential, and we added several prominent financial institutions to the syndicate as well. At the same time, we entered into a new unsecured $750 million delayed draw term loan facility with the identical bank syndicate. The maturity date of the facility is January 11,…

[Operator Instructions] And our first question comes from the line of David Toti with Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: I have one question for you, David. It's kind of more of a strategic one around, obviously, commentary that your sales have accelerated beyond your expectation, which is a great sign. The question then is why not be a bigger seller in this market? Why not take the portfolio and distill it even further and intensify that quality in that growth profile from your current projections?

Well, $4 billion is not enough for today. Look, selling these -- our disposition program this year will put us in a position where we will have exited Tacoma, Jacksonville, Atlanta and Phoenix. We'll still have some exposure in some markets, such as Orlando and the Inland Empire and sort of what we call our non-Boston, New England portfolio. So we'll still have some product to sell. And as we get further in the year, we'll see what the market brings. But we acknowledge we have a little bit more to do. We think we can be -- do that over more extended time period and perhaps be more strategic with that. But I think $4 billion is an awful lot of dispositions. And, again, most of them will be done the first part of the year, we'll just see what that -- what happens in the second half of the year. David Toti - Cantor Fitzgerald & Co., Research Division: Yes. I won't argue that's not a big number. Are there other markets that you would say would be potentially flagged as kind of the second level of exit? Could you disclose something like that?

The second level of what? David Toti - Cantor Fitzgerald & Co., Research Division: Of exit. Are there markets that you'd say, "Okay, if we get down to the number...

No, I think we're getting to the point where most of the dispositions will be sort of noncore assets in our core markets, so more older, suburban sort of things that, frankly, we'll be able to rotate out of in the new assets at a much tighter spread than when you're selling noncore markets and allocating in the core markets. David Toti - Cantor Fitzgerald & Co., Research Division: Okay. And then I just have a follow-up question relative to the dynamics in some of your markets where the affordability inversions are somewhat extreme, like in Atlanta and the Southern California. Can you just comment relative to those 2 markets on turn rates and move-out rates? And in some cases, you're seeing some rents strikes, and those dynamics don't really make sense to me on the surface.

Dave, this is David Santee. You cracked up on me a little bit at the end. As far as Atlanta goes, Atlanta is doing very well. I think that's more about -- we've sold down that portfolio. Historically, we were an outside perimeter organization early in the 2000s, we acquired assets in Midtown Buckhead area, and that's really the last of our remaining assets there. So I think Atlanta is probably no different than any other market. You're seeing an urban attraction, people looking for great walk scores. And so those properties are doing well, and Atlanta is -- they're doing a -- billing a 6 year-to-date so far. Southern California is a very vast area. And I would say that the rent income really hasn't changed there. It's been 20. It's always been 20. We continue to have assets up in Santa Clarita. We have a lot of new store assets that are more urban, near more urban centers, L.A., West L.A., what have you. So again, I think one of the more important things to remember is that L.A., Orange County, San Diego, those rents are still not at peak levels that we saw in 2008. So I think we still have a lot of runway left in Southern California.

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 some quick questions here. First, big picture and then just some guidance stuff. Archstone obviously spent a lot of money establishing a brand. You guys have gone the opposite route and not gone the branded strategy. Now that you're going to have all these Archstone communities and have Archstone plastered everywhere, are you going to keep that brand for a while and see maybe if it is worth keeping? Or your view is, "You know what, let's just bring it -- let's just rename all these properties to a generic?"

Well, I'll answer that question in 2 parts. I'll let David talk about our perspective about branding. But I'll just start out by telling you that our arrangement with AvalonBay is the name will be off all of the Archstone buildings by the end of 2014. So the Archstone brand itself will not continue. And I'll let David talk a little bit about the way we thought about branding.

Yes. So I've been to most of the Archstone communities. I would tell you that -- I mean, in their structure, I think they had probably 14 different marketing regions, so to speak. And each property is branded to varying degrees. I would say the more high-end communities are more hotel-like. I mean, there's not a lot of Archstone logos everywhere. But then again, some buildings have pretty significant Archstone logos and what have you that we're currently having our marketing folks go property-by-property, assess what we need to do, and then we will make decisions over the course of next year and then most likely execute into 2013 or 2014. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. Okay, that's helpful. And then second, just a few quick guidance things. Does the guidance for the year, does that reflect the accounting treatment for the Archstone acquisition?

As best -- it's Mark Parrell. As best as we can determine it. And I make that answer for this reason. Because the accounting rules require us to book the acquisition at fair value. And because fair value includes our stock price, the $2 billion or so of stock that we gave to Lehman will be repriced on the closing day and issued to them on that day. And so that will have a big impact on how all the assets and all the rest of the things look. And on certain fair value adjustments we make to like things like retail leases, I'll tell you at the margin, it doesn't matter much and we gave it our best guess. But there could be a little bit of noise there as well. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. But as far as the debt coming over and what have you, I mean, all that, basically, the numbers are pretty good. There may be some tweaks, it sounds like. And then just finally on that front, what is the impact to Archstone on a same-store perspective, if you have your guidance, the 4.5% to 6%, Archstone, you expect to do better than that, worse than that, on par?

This is David Santee. I mean, basically, when we're head-to-head, block-to-block, say, Manhattan, say, D.C., I mean, we would expect those properties to perform very similar, identical to our own properties. Again, we've had a long-term relationship with Archstone. We know what their previous performance has been. It hasn't been too dissimilar from our own. So on the revenue side, we would expect to see similar performance compared to similar geographically located assets.

And on the expense side, Alex, and some other things, it's just not comparable because the companies have different capitalization policies and things like that. And they're just really -- and plus when the acquisition occurs, real estate taxes will be repriced and things will occur. So a same-store kind of expense comparison won't really make any sense.

Our next question comes from the line of Dave Bragg with Zelman & Associates. David Bragg - Zelman & Associates, LLC: On G&A, is $14 million a quarter an appropriate run rate going forward? Or is this outlook for 2013 inflated temporarily as you work through this integration of Archstone?

Yes. No, that's not -- it's Mark Parrell. That's not a correct sort of -- I mean, the guidance number that we put out there of $55 million to $58 million, it is going to be front-end loaded because of some accounting conventions that we use, mostly related to compensation-related grants. So you can spread it evenly. But I'll tell you that the number will start up higher and will end up, so call it in the first quarter maybe $16 million. And by the end of the fourth quarter it will end up something like $10 million. So it will go down quarter-by-quarter over time, and we think end up right in the middle of that range. David Bragg - Zelman & Associates, LLC: Okay, great. That makes sense. And then on a related note, Mark. The property management cost as a percent of revenue, I think over time, you've been successfully pushing this down to now below 4%. Once you have the dispositions executed on and Archstone integrated, where does that ultimately settle out?

Yes. I think that goes -- and this is, again, there is some variability here. So that probably goes from about 3.75% to 3%. And some of that has to do with just revenues going up so much. But property management costs in total are very well in check, as David Santee has said. They will go up in total this year. So property management costs in their totality, not the same store but in totality, will go up somewhat this year. But as a percentage of revenue because revenue is growing so well, it will go down in approximate sort of call it 3.5%. David Bragg - Zelman & Associates, LLC: Okay. And the last question is on development. Last quarter on that call, you suggested near-term start potential of about $450 million, and then an additional potential $700 million of starts in 2013. Now you're talking about $500 million of potential starts in 2013. So is this pullback on development solely due to the focus on Archstone? Or are you finding development to be less compelling right now?

No. I would -- certainly it'd be the former, Dave. We slowed down, as I said in my prepared remarks, we had development deals on our inventory that could have started in 2012, which we've postponed, unwilling to make the capital commitment, that capital obligation, with all of the execution risk we were looking at as part of the Archstone transaction. And so we just sort of postponed that, but we continue to think that development makes a lot of sense for us. As I said in the past, I don't think you'll see us ramp development up as a percentage of our balance sheet as some of our peers. But I think you can count on us as a $500 million to $700 million or so annual starts on an average basis.

Our next question comes from the line of Eric Wolfe with Citibank.

You talked about the great demand, I think that's how you put it in your press release last night, for the assets and how this has allowed you to sell assets a little bit earlier than you thought. Just looking beyond the Goldman-Greystar deal, can you talk a little bit about the buyer pool you're seeing for your assets and how this might compare to what you were seeing last year?

Well, I guess on a one-off basis or small portfolio basis, I don't think it's changed at all. It's a lot of local and regional people, many of whom have got access to institutional money to do smaller transactions. The one thing that did change as a result of selling so much property was we had a lot of big buyers come to us, people that might not be interested in a $50 million one-off deal but be interested in deals of size. So that did open up the buyer pool somewhat for us, and that did lead us to doing the Greystar transaction. But most of the deals are being done on a onesie-twosie kind of basis to the same kind of local and regional fellows that might have been buying these assets back in 2012.

Got you. And I guess these bigger buyers that you refer to, I mean, these are institutional buyers that are always active? Are they sort of, I guess, new buyers who are looking to put new money to work? Is there a way to sort of qualify those types of buyers?

Well, I guess these are kind of more financial buyers that are looking for almost any kind of real estate in size, or they need to play in size, which has made it difficult for them to play in the multi-space. And obviously, we're not selling as much as we did. They came knocking on our door. We were reluctant, frankly, to do a big deal because we did not want to get ourselves in a position where we had a lot of eggs in one basket. But we had enough going away from Greystar that we were comfortable to do this transaction with them, and they were willing to do it in a structure that gave us confidence that they would be there at closing, and they have $150 million up at risk. So but again, there's -- these are financial buyers who needed transactions of size, and this was an opportunity for them to get into multi because many of them are short multi today.

Right, understood. And then just in terms of the pricing, you said that the pricing was in line with your original expectations. It sounds like from commentary from you and your peers, cap rates really haven't moved up all that much, which I guess is a little surprising because growth has slowed. So I'm wondering kind of why you think that's been the case that your cap rates have stayed somewhat stable even as growth has decelerated a little bit. Obviously, it's still very, very strong, but it has slowed, as you mentioned in your remarks.

Well, look, these are still huge spreads to underlying treasuries. And on a spread to financing cost, it's the best arbitrage even at these rates that people have seen in their careers. So you can finance it in the mid to low 3s today. So even at this rates, these continue to be very good leverage returns. And frankly, there's a shortage of product, and I think there's a competitive bid for product.

Got you. And but the financing on the private side, I mean, have you seen that change at all? I mean, as you've gotten more aggressive in terms of leverage, or it's just been -- is it just literally just the dearth of supply out there of quality assets that's making people chase a little bit?

Well, I'm not sure I could comment. It's Parrell and all the buyer motivations. But on the debt side, I mean, Fannie just announced a record year at $33 billion or so of -- and I understand that Freddie has done something pretty close to that number. So I think the unsecured market is just -- the GSE market is just very good. And when you can borrow for 10 years in the low to mid-3s, maybe not have many amortization for a couple of years, the cash-on-cash return when you're buying product from us is 6. It just makes a ton of sense, and I think it's compelling in a world starved of yield. So I would say, to me, none of this is really all that surprising. Fannie's rates haven't changed, their advanced rates. They've just tightened a few things but not materially. And so Fannie and Freddie continue to be very good sources of capital for our buyers, and almost all our buyers are utilizing GSE debt at this point.

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

Mark, in your same-store expense growth of 2.5% to 3.5%, can you talk about what the underlying sort of major bucket there are? I mean, it seems kind of low given less than 25% or so of your assets are in California and sort of limited from a property tax standpoint by Prop 13. Just what you guys are doing to control expenses around the other buckets?

Sure. Well, I think David Santee is going to give some specific color. But I can talk about a couple of the line items. I mean, he's talked a lot about real estate taxes and that is certainly the negative. That's the item that's going up the most. In general, schematically, everything else is kind of well under control. And then you've got insurance, which is a small line item for us, about 3% of our expenses. That's going to go up again. And our budget this year is 12% to 13% increase in that line item, driven by probably a 15% or so increase in our property insurance premiums, which renew every year in March. So I'll let David Santee give you some commentary. But we don't -- again, we didn't see a difference in expense results between, I'll call it, current same store of a hundred and some thousand units and new same store of 80,000 units, the year-end same store of 80,000. So David, do you want to?

Yes. Well, as far as real estate taxes go, on the original same-store set of 100,000 units, we were anticipating 6.5% growth, and really almost half of that comes from California as well as our 421a abatement or burn-offs in New York City. Everything else is very small percentages, so that's kind of the key driver on real estate taxes. And then when you look at the 3 groups, when you take real estate taxes, payroll and utilities, which is 70% -- or 68%, that group is growing at 4.2%. And then everything else -- so as an example, selling all of our garden communities in Phoenix and Jacksonville and Atlanta, I mean, there's pickup in grounds expense. But it's just, they're small numbers, so I think we're very comfortable with our expense range. And really, just like 2012, real estate taxes is the key driver.

How much is real estate taxes as a percent of the operating expenses? If the charge is 3%, what is taxes?

In the current same-store set, the full 107,000, it's 30%. In the year-end same-store of 80,000 units, it moves up to 33%.

Okay. All right. Great. And then, David, what's been the conversations that you guys have had with Lehman about the holding period for their shares? And has the board discussed putting in place stock repurchase plan or some other mechanism to make sure that if they decide to exit in a sort of relatively quick fashion, there's not a material disruption to your stock price?

Well, I guess, I'll start by saying first things first, Rob. We've got an awful lot of work to do to get to the closing table and actually acquire Archstone and issue that stock. I would tell you that the registration rights agreements were among the most heavily negotiated parts of the entire transaction. And I can tell you that shortly after closing, we will take the time to sit with them and make sure that we have an open dialogue with them about doing what we can do to help them meet their goals and have it not be disruptive process. The only thing I just ask you to sort of bear in mind is that they are not in any hurry. They've got quite a long -- quite a bit of runway in which to complete the liquidation of the Lehman estate. If -- and I feel if Archstone truly was an option for them, they would have been looking at an awful long time to monetize their interest. So these are very smart people. I think they're very patient people. They're charged to maximize the returns to the creditors, and I don't think they will have done all they've done here to do anything hasty. I think it will be a very thoughtful process, one that I know that we'll be engaged in with them and try to help them do that in the least disruptive manner as possible.

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

David, just a follow-up on that point with respect to the registration rights. Is there any ability to sell the shares in the open market versus a block trade or an overnight offering?

There is an ability to both dribble the shares out in what amount to a reverse ATM transaction. There is also the ability to do block trades that Lehman can do. They can use executives to go on road shows. They have a fair amount of flexibility. And understand, I mean, that flexibility inerts to our benefit. I mean, we'd like them to get out of the stock in an orderly fashion. And as David said, we intend to facilitate that exit to the best of our ability.

Okay. On the FFO front, can you clarify specifically what is in the guidance with respect to the mark to market on the Archstone debt? Is this -- we're coming up with a number, is it $0.11 a share, give or take?

So let me just direct you to Page 27. So this is the Archstone interest expense and just total interest expense. So we give you detail both, again, on Page 27, of interest expense inclusive, of course, in both cases of Archstone, but also as the capitalized -- or excuse me, the mark to market in it. So you can see 2 different numbers. At the top, it's kind of got a $477 million to $498 million range. And then in the footnote, $518 million to $541 million range. So the effect of the mark is, give or take, $41 million, $42 million. You asked about what the interest expense is for Archstone. It's about $0.11, call it, $0.12-ish for the mark -- I'm sorry, the mark is about $0.11 or $0.12-ish. And the total amount of Archstone interest expense for the year -- let me see if I can find it for you here, balance effect. Yes, that's about $0.19 a share is our calculation. Remember, we have in our guidance the probability of repaying some of that Archstone secured debt in the second quarter. If you remember that comment I made about repaying $800 million. So that -- that's a second quarter event, give or take, for us. So I have $0.19 of Archstone interest, using the mark to market in our guidance rate now.

Got it. Okay. That's helpful. Finally, David, on Avalon's call, they used the term transition, transitional year in some of their markets to describe 2013 with better time, potentially heading '14, '15. At the risk of asking you to comment on what a competitor said, I'm just curious what you thought of that kind of comment because your numbers wouldn't suggest, necessarily, that this is any kind of a transition year.

Well, I've not -- in preparation for our own, I've not spent a lot of time reviewing or reading anything what our peers or competitors have said. I guess I'd suggest to you that, depending on who you speak to, there's an expectation of better job growth and better household formation down the road. And based upon what we see as new supply in 2013, 2014, 2015, I think the fundamental, if those household formation expectations and if those job growth expectations hold true, you'd see better supply-demand fundamentals in future years. Now who knows what those numbers will be. I can tell you that estimates for 2011 will roll back and for 2012 will roll back. So one never knows. But based upon what we see as supply in '14 and '15 and what other people say about job growth and household formations, you do see, if you use those numbers, a better supply and demand picture.

Our next question comes from the line of Andrew Rosivach with Goldman Sachs.

This is Matt Rand on the line with Andrew. Two questions for you. First, AvalonBay gave a sense that there was $0.15 of dilution in their 2013 guidance as a result of the common stock offering held before the Archstone deal close. Can you say what the comparable number would be for you guys?

Yes. I would say that number would be give or take $0.05. The fact that we have -- we're carrying around $1.1 billion, $1.2 billion of cash and the related shares for January and February, not really using the money till the end of the year, not giving the Archstone NOI till the end of February, has that general impact on us. But remember, our offering was smaller than theirs by half.

Got you. Got you. Okay. And then the second piece is you gave the guidance of how much doing all of these asset sales is going to dilute calendar '13. What's the run rate once it's all in place? So what would be, say, your fourth quarter level of dilution from these sales?

By the time you get to the fourth quarter, you've got, pretty well, all the dilution you can have, right? Because there's only -- in our current guidance, all but say $200 million to $250 million of the sales that we're projecting will have occurred. So when you get to the fourth quarter, there isn't between the third and the fourth quarter, if that's your question, much in the way of incremental dilution. In fact, looking at the numbers specifically, it really -- there isn't much between those 2 quarters because, again, you've not sold a great deal of incremental product between those quarters.

Got you. Got you. So I guess, said a little bit differently, what would be kind of a run rate almost like a '14 dilution number relative to the calendar '13 that's in your guidance?

'14 dilution number. So the question is the remaining dilution in '14 that is not recognized in '13?

Exactly, yes.

Okay. I'm not sure I have an exact number, but we'd say maybe, give or take, on the order of $70 million.

Our next question comes from the line of Tom Truxillo with Bank of America Merrill Lynch.

You mentioned leaving the $750 million delayed draw term loan out until the end of 2013. But that seems like a pretty cheap cost of capital even in today's environment. Why not just plan to leave that out until '15 or '16 with a 1 year extension? And then secondly, you mentioned the $950 million of Archstone maturities in '14 or '15, I missed which one it was, and $1 billion in '17. And that you'd look to refinance that. Can you talk about prepayment penalties associated with that, and maybe what those rates are to see if it would make sense to do so?

Sure. You are breaking up just a bit. But the first question on the term loan, I did not mean to imply that we will definitely pay it off at the end of 2013. In fact, that isn't the plan currently. It is cheap money. We don't have that much floating rate debt on the balance sheet in general. And so as opposed to doing some long-dated swap, it seemed to us that using this delayed draw term loan and having a little bit on the revolver that's this big was a thoughtful way to balance our fix-to-float mix. On the Archstone '14, as I recall, that interest rate and I don't have that rate in front of me, being give or take 6%. When we affect it by the mark to market on that debt premium, it will be more in the 3s. So there is that accounting difference. The 2014 Archstone debt, becomes due in November 2014, prepayable at par in May of '14. Probably not a lot of reason to run out in deal with that by prepaying it. The prepayment penalty is very substantial. Again, I can't give you an exact number offhand, but I'm guessing you can do that calculation pretty readily. 2017, that debt is the same structure, prepayable at par in May of '17, maturing finally in November of '17. That debt is, I think, a little over 6%, maybe 6.5% as a coupon rate. We have the right to extend some of that debt with the lender, and that is one thing we're considering doing. We could term it out in the unsecured market. I think the unsecured market, and you'd know it at least as well as I, is very open to companies like EQR, in the low 3% range for 10-year money. We would think about doing preferreds as well and we would consider taking advantage of this extension option with the secured lenders. So all of those are kind of on the table to deal with the '17s. I'm not particularly worried about the '14s. We'll just deal with those as they come. But it'd probably be a good idea to add some duration to those '17s, but we're in no rush to do so.

Okay. And you talked about leaving some floating rate out there. How do you feel about your secured debt mix right now, given what you're assuming from Archstone? Does that have any -- is that an impact on what you decide to do with this 1.9?

Yes, great question. Absolutely. I mean, the implication is that the unencumbered pool is smaller because of Archstone. That's absolutely true. That's mostly true because every Archstone asset we're acquiring has secured debt on it. And all the assets we're selling have no secured debt on it. So there is a little bit of a pinch point in 2013. That said, I still expect total unencumbered NOI to be 55% of -- 55% of our total NOI will be unencumbered in 2013 at the end, and that number will just improve. All things being equal, we probably would like to do a little more unsecured debt and have that number go up. But we're going to just -- we have enough debt to deal with here where I think we could access the unsecured market. We could term some out in the secured market, and it still would leave us with some great numbers. Our debt yield on the unsecured side is 17%. So unencumbered NOI divided by kind of a cap rate, right, divided by the whole unsecured debt, that's got to be one of the best numbers out there. I mean, this unencumbered NOI is approaching $900 million in its totality. It's a very, very strong company on the credit side.

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

So you've been a very active capital recycler and once Archstone and your disposition is closed, you'll kind of have the target portfolio that you've been working toward. And I was curious if this will change your focus to do more redevelopments. And if maybe you could talk about what the potential is for enhancement CapEx in your portfolio and in the Archstone portfolio?

Well, just to give you some additional disclosure on CapEx. So first of all, just to comment on the Archstone CapEx, our view and we're not, of course, yet in the properties as the owner, is that these properties were pretty well maintained. We're not seeing a great deal of deferred capital in the Archstone system. We are saying potentially, and we're still diligence-ing this, some opportunities on the rehab side. And there'll be more detail about that later in the year, and I'm not in a position to kind of give you much there. But certainly, there was probably less capital to spend on rehab than maybe there is at EQR, and we're going to take a hard look at that. We've revised our CapEx guidance on Page 24. You can see that. We now expect to spend about $1,500 per same-store unit. These are EQR 80,000 units versus $1,200, which is about what we spent or $1,225 in 2012. So our remaining 80,000 units have a lot more rent per month. So our average rents per month are going to go from $1,700 now with 100,000 units to about $1,900 with 80,000 units. You're going to see an increase in CapEx consistent with additional building improvement-type costs that you have in high rises, which is a lot of what we'll own when you get down to that 80,000 units. So your question on Archstone, just to sum it up, is we feel very good about where we stand on the capital side with Archstone. We see some opportunity there. But again, we need to get into the properties and really run them for a little while to be more definitive on that.

And just in terms, Jana, of capital recycling, we will always be a capital recycler. We will always be trying to sell slower-growth properties and reinvest that capital in higher-growth assets. We may not be doing it at the same run rate that you've seen us go run at over the last 6 to 8 years as we've changed the complexity of our portfolio. But you also won't see that be done at the cap rate spread that we experienced over those half a dozen or 8 years or so. We'll be selling assets in core markets to buy assets in core markets, which means the dilutive impact of that -- the initial dilutive impact of that capital recycling will be significantly less than what it's been over the past few years. So yes, we'll always going to be looking at our assets, reviewing our portfolio, ridding ourselves of slower-growth assets and try to reallocate that capital in the deals that we think will provide us a better long-term return.

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

Most of my questions have been asked, but just one follow-up for Mark. As you guys continue to sell assets and refortify your balance sheet, do you see a A credit rating as a possibility come '14?

I guess, again, it's sort of a first things first. Right now, to do that, I think we would need to complete the disposition program as we plan. We need to be very -- kind of get the whole integration done and over. I guess, what I would say mostly is what's the advantage of that? I'm not sure that we would get much of a savings in terms of debt costs to make a promise to our fixed income investors and the rating agencies and tie up our equity investors with a much lower leverage ratio than we have already. so I guess I just don't know that I think the risk reward there is all that beneficial. But I think, over time, naturally, this portfolio gravitates to that sort of rating. It's just whether as a management team, that's the right thing to do as a trade-off because it does come with obligations that relates to leverage that I'm just not sure we want to undertake.

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

David Neithercut, if you have known -- you've seen deceleration in your same-store performance this year. If you knew that, say, '15 would be flat or negative in terms of same-store growth, would you still have pulled the trigger on this with a long-term mindset? Or would that have held you up?

Well, I guess I'll answer your question just by saying, Rich, that we think that over the long term, trading out of the assets that we're trading out of to buy the Archstone portfolio is a terrific long-term opportunity. And I guess, regardless of what we thought 2015 might bring or might not bring, just looking at the -- what we thought we could sell our current portfolio at, what we could buy the Archstone portfolio at, we thought that was a great trade. And again, maybe there'll be bumps in the road in sort of later years, but we think that we'll look back on this in 2020 and think it was absolutely perfect, spot-on, strategically important thing for us to do.

Okay, fair enough. You mentioned always kind of constantly looking at the portfolio and -- portfolio management type of activity on an ongoing basis. Do you think that there'll be a larger percentage of kind of dispositions out of the Archstone portfolio than the EQR portfolio? Or do you think it will be kind of equivalent?

Well, I think at least for the foreseeable future, you'll see more EQR assets. The Archstone...

I mean, after -- I should say after the $3 billion -- $4 billion or so that you're doing now, but once you're kind of in a steady state.

Well, as I say, we're still going to have exposure in Inland Empire. We'll have some exposure in Orlando. We'll still have some exposure in, again what we call, our non-Boston, New England portfolio, which for those of you who've been around a while, means growth. And so I think you'll probably see more sales of EQR assets in the foreseeable future than of Archstone assets.

Okay. Interesting. Why do you think -- maybe a question for Mark or someone else, why do you think your acquisition costs were $26 million and AvalonBay's were $123 million? Obviously, there's -- they're too different -- they must be 2 different numbers, but maybe you can help me with that.

Well, they are just estimates. We give a little bit of a break out. I thought, when I looked, that I thought they were broadly consistent. I mean, clearly, we're doing the same things here. Most of these costs are terminations and severance costs. There's also some transfer taxes that there's been developments on the positive side, and that's a very large number in between our 2 earnings calls. And that also, I think, probably influences that estimate. So I would say that's the answer.

Okay. And as long as I got you, Mark, you mentioned 7x debt to EBITDA as a year-end target. What will that number be right when you close Archstone? I'm trying to get a sense of how significant of a change that will be.

I'm going to have to do this a little off of memory because I don't have that here. But I think it will be probably in the order of 7.3x to 7.4x.

Okay. Okay. And I guess on the issue of Normalized FFO definition, you're including the mark to market in that number?

We are. So our guidance does benefit from that mark, correct.

Okay. Interesting. And then I guess last question to David, not to forget about you. Very early on in the conference call, you said your higher-quality residents coming in replacing those that are leaving that got set up with the big rent increases that they've been enduring. Why do you think they're higher-quality residents?

Well, they can afford the higher rent.

Why is that? Are they more wealthy than the people leaving?

One would assume. I mean, it's really -- probably the -- if you want to take it to the extremes, go to San Francisco and Boston. I mean, that -- those are the 2 highest turnover markets. Boston saw 900 basis point increase in turnover last year. Reason for move-out due to rents being too expensive for most of last -- well, for all of last year and still through this year is increased to expenses. So 30% of move-outs in San Francisco were too expensive. So one can only assume that if someone moves out, that can't afford to pay $2,000 and someone moves in and can pay $2,000, that's probably a more healthy resident.

Yes. And as David said, we've seen our FICO scores continue to improve.

Our next question comes from the line of Tayo Okusanya with Jefferies. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Just 2 quick questions. Could you talk a little bit about Archstone integration and what ultimately the plan would be to make sure you kind of get the best of both worlds in regards to what you like at Archstone and what you want to kind of continue to keep at EQR?

So this is David Santee. I will tell you that this has been a very exciting exercise. And again, we've had a long-term relationship with Archstone, going back to our partnership with LRO. So I wouldn't say that there's anything surprising. I think we've known our philosophical differences from an operating perspective. I think that, a, they have some great ideas. I think that we see things that we're well ahead of them on from a technology perspective. I think we will -- as I talked to the board early in December, I mean, we're -- our portfolio is improving. Our portfolio is different than it was 5 years ago, 10 years ago, and certainly very different than 20 years ago. And our thinking has to continue to evolve. And I think that's what we're doing, is we're evolving as our portfolio evolves. There are definitely synergies. There are definitely immediate benefits that we'll accrue to our same-store portfolio more from just how we expense items. But more importantly, as an example, giving us high concentration in D.C. just gives us more bargaining power on a lot of goods and services. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Okay. That's helpful. And then, again, post Archstone with the increased exposure in D.C. and some of the supply issues going on in the D.C. market, can you kind of talk about how you're thinking about that? And if there's any possibility of you guys reducing your to exposure to D.C. as part of your future asset sales?

Well, I will say that we've current -- of the properties that we have either sold or have under contract since the announcement of Archstone, about 3,000 units are coming out of Washington, D.C. But just in terms, in general, how we're seeing the D.C. market with new supply and all, why don't you comment on that, Dave?

Yes. So relative to Archstone, I think that's a very favorable picture from the D.C., Downtown D.C. perspective. We've plotted all of our communities, all the Archstone communities, all the new construction on one of our math applications. And the great thing about D.C. is all of the Archstone assets are pretty much in a straight line, Northwest, straight out Mass Avenue and Connecticut Avenue. There's virtually 1 development that has just broken ground that's remotely close to those properties. Now when you go down to -- when you get to NoMa, you can stand on the roof deck of 425 Mass and scan the horizon and see 15 cranes, which is primarily NoMa. It's not all apartments, but certainly most of the apartments, and then north up U Street. So for the most part, I think D.C. really is really suffering from the fog of the uncertainty of the fiscal cliff. And I think most of the damage that -- I think the fog has created more damage than actually the outcome of going over the fiscal cliff. Does that answer your question? Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: That's helpful. That's a good context.

I'm showing no further questions in the queue at this time. I'd like to turn the conference back to management for any final remarks.

Terrific. Thank you, all, very much for your time today. We look forward to seeing many of our investors down in Florida in early March. Thank you very much.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.