Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Equity Residential (NYSE:EQR)

Q3 2009 Earnings Call

October 29, 2008 11:00 AM ET

Executives

Martin McKenna - Vice President - Investor Relations

David J. Neithercut - President and Chief Executive Officer

Mark J. Parrell - Executive Vice President, Chief Financial Officer

David S. Santee - Executive Vice President, Operations

Analysts

David Toti - Citigroup

Michelle Ko - Merrill Lynch

Robert Stevenson - Fox-Pitt Kelton

William Acheson - The Benchmark Company

Alexander Goldfarb - Sandler O'Neill

Michael Salinsky - RBC Capital Markets

Andrew McCullough - Green Street Advisors, Inc.

Operator

Good morning. My name is Ashley and I would be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Martin McKenna, Vice President, Investor Relations. Sir, you may begin your conference.

Martin McKenna

Thanks Ashley. Good morning and thank you for joining us to discuss Equity Residential's third quarter 2009 results. Our featured speakers today are David Neithercut, our President and CEO; and Mark Parrell our Chief Financial Officer. David Santee, our EVP of Property Operations is also here with us for the Q&A.

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Securities Law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now, I'll turn the call over to David.

David J. Neithercut

Thank you, Marty. Good morning, everyone. Thank you for joining us for our third quarter earnings call. Fred Tuomi ordinarily joins us for these calls, as you know he is our Property Management President responsible for our day-to-day onsite operations of all assets and he really is our market expert. But he is under weather today. He is unable to join us. But lucky for so we got David Santee here and with his help and Mark Parrell will do the best we can for his absence.

While as noted in last night's press release, we delivered quarterly operating results and we're at the high end of the range we provided you in our second quarter earnings release in late July.

The primary factor was better than expected property level operations which are being delivered property management teams across the country. They are really doing an outstanding job, I mean a very, very good job in a difficult marketplace and we appreciate all their efforts.

So for the quarter we had revenue of negative 3.9%. That was just a tick that out of the midpoint of negative 4 that we've given you last quarter. Expenses were negative for the quarter at minus 0.6% which show compared to our guidance which was a mid -- guidance midpoint which was flat. Such that NOI was down 5.8% and that level was at the better end of our previous expectations.

Now, during the quarter, we continued to renew our existing residents on average across the country at flat to down 1% which is very consistent level for most of the year.

And we will new leases our new residents on a net effective basis down 9 to 10% and that too is a very consistent level for much of the year. And so we now expect same-store performance for the full year to be down 3% for revenue which is right at the midpoint for our February 2009 guidance.

Expenses up just a 0.5% which is significantly better than our expectations for most of the year. And NOI for the full year down 5% which is towards the better end of our expectations.

I noted earlier that our net effective new lease rate stayed consistently down 9 to 10 or percent since the beginning of the year on a weighted average basis across all of our markets. It's is very important to know this is a weighted average.

Because since January, some markets have begun to show improvement in a net effective new lease rates, some have remained flat and some have continued to deteriorate.

Markets that have seen no net effective new lease rates continue to deteriorate since beginning of the year are all out west, L.A., Orange County, San Francisco, Seattle and Phoenix.

Markets that have seen net effective new lease rates stay pretty much flat since the beginning of the year include New York City, the Inland Empire, San Diego and our non-Boston New England portfolio.

And lastly, markets that have shown some increase in net effective new lease rates since the beginning of the year include Boston, the DC markets, South Florida and Orlando.

So while same-store revenues have decreased quarter-over-quarter and will continue to do so throughout this year and in the next, it's not because net affective new least rates continue to get worse on average, but because we still have above market leases that were rolled down to newer lower levels.

As a result we'll continue to see sequential revenue decreases into next year as well.

Now obviously there remains a great deal of uncertainty in the marketplace today. We watch on with everyone else the reports of economic growth and we were pleased to see today's report and third quarter GDP growth. Let's just hope that expansion can continue without the continued intervention provided by programs like cash for concurs and the home buyer tax spreads (ph).

But we need jobs for our business to really grow and that may take sometime. Yet I am extremely confident that with the work we've done to reposition the portfolio, the demographic picture in the country today and the limited new supply that will be delivered over the next 24 to 36 months that when the jobs work does appear, we will deliver some of the best performance in our history.

Although market remained open for the assets we've targeted for sale and we continue to hit that bid during the third quarter and as a result, we did sell a lot of product in the quarter. Because our strategy has not changed and as I've said for quite sometime now, we want to continue to sell our older non-core assets and complete our market exits.

And we are very mindful of the dilution that occurs in the short-term from these sales particularly when the cash proceeds sit on our balance sheet.

But we are also mindful of the longer time benefits that could be realized by having $900 million of cash on hand at this point in the cycle. Now because of the strong demand we're seeing from buyers of the non-core assets that we've been selling, we have increased our guidance for dispositions for the year by 100 million to 900 million.

We also expect to acquire $150 million of assets by year-end and we currently have assets under contract that will get to that level.

Now it has been a lot of chatter out there recently about some acquisitions that we may or may not be working on. And I'm sure many of you are wondering about what might be going on.

I can tell you that we do have several things on contracts, they are all in various stages of due diligence and as a result, there is only so much that I can say at this time.

What I can say however is that these are all excellent assets in our core markets. They are exactly the kind of assets we want to own going forward. They are under contract, their prices that are discounts to replacement cost averaging 15 to 20% or so. They're well occupied assets. They are currently or will soon be stabilized with rate rolls that have been marking -- expiring leases to market over the last 12 months and are expected to continue to do so over the next 12 months.

Generally, accounting for these marked down rate rolls stabilized cap rates will be in low to mid 6% range with the expectations that they will become 7% yields in a couple of years. And that compares to the mid seven cap rates at which we've been selling our non-core lease desirable assets mostly in exit markets.

One deal was significantly further one than the rest and could close as early as tomorrow. That is a 326 unit high-rise property built in 2004 located in Pentagon City area of Arlington, Virginia.

We have that property under contract with $99 million, that's about $305,000 a door, about $350 per square foot. We take replacement costs well in access at that level, call it $400 per foot today if not more.

And to replace that asset today would require 10% low moderate income set asides and all of the units we have under contract in this particular asset are all market rate.

We have an expectation of a 6.1% yield in our first year, again with an expectation that we'll see 7% in short order and a double digit 10 year unleveraged IRR.

Now there's been lot of questions asked lately distressed assets available for purchase or how much opportunity we are seeing.

Well I want to tell you I do not suggest for a moment that this is a distressed deal. Even though we think we are buying at per 30% or so less than it might have traded for several years ago. But this is a great opportunity to add a terrific asset to our portfolio and a fabulous trade with the assets that we've been selling.

Under the development side, as I have noted on several of our last calls, we have no plans to start any new projects at the present time. Our total focus is on completing, leasing and stabilizing our existing deals and we are very pleased that how these deals are listening.

453 of these units were leased in the third quarter alone and 754 units were newly occupied in the third quarter. Only six projects were under construction at 9/30, two of which will be 97% complete at that time.

Only $208 million remained to be funded to complete construction of those deals.

Now we started the third quarter with the total of eight properties in various stages of lease-up. Today, of those eight projects, seven remain in lease-up and yet stabilized and we've added two additional properties to those in lease-up. The first being our reserve at Town Center deal in Seattle and the other our Montclair Metro deal in Montclair, New Jersey.

Like everywhere, rents are below our original regional expectations. They're down 15% or so an average and that's on net effective basis and that's very consistent with the rent levels on existing product in the respective markets.

But we've great product, leasing velocity is very good, right on our expectations of about 20 units or so per month. So we're right on top of that and our leasing teams are really doing a fantastic job getting these deals leased up.

From a return perspective, our development deals have initially underperformed original expectations of stabilizing yields in fives rather than the originally underwritten sixes.

But for all the obvious reasons I have already talked about, they are phenomenal assets, we are delight we own them and do very well for us overtime. So with that, I'll turn the call over to Mark Parrell.

Mark J. Parrell

Thanks David. Good morning everyone and thank you for joining us on today's conference call. This morning, I will focus on primarily on three topics. Our third quarter performance and fourth quarter expectation, enhancements we have made to our repairs and maintenance expense and capital expenditure disclosures and our adjustments to guidance for the full year.

Same-store NOI declined 5.8% in the quarter compared to third quarter of last year. Revenue was pretty much consistent with our expectation and expenses were much better than our expectations.

For the quarter, our same store total revenues decreased 3.9% over the third quarter of 2008, due to a 3.2% decrease in average rental rate and a 70 basis point decline in occupancy to 93.7%. Same-store expenses were down 0.6% or 60 basis points on a quarter-over-quarter basis driven by lower payroll, property management and repairs and maintenance costs and a smaller increase in real estate taxes and utilities that we have forecast.

We also had a 7.6% increase in repairs and maintenance costs in the third quarter of 2008 when compared to the third quarter of 2007. So that helps to explain some other decline in that category.

I'd also note that we have some real good work internally to reduce contract paying to do a lot of work in-house that help push that line item down as well.

Over the last year, many of you have asked for more detail on our operating expense and capital spending.

In our earnings release, we have tried to deliver more information and more importantly more clarity on this important topic. We have introduced new disclosure on our same-store operating expenses and revamped the disclosure of our repairs and maintenance expenses and capital expenditures.

I want to spend a few minutes going through what we did here and I greatly appreciate you bearing with me on this.

So in my suggestion to the group is that you take out pages 14 and 22 of the earnings release and sort of put them side-by-side because I am going to go back and forth between them explaining our new disclosure.

I think you will see that we have delivered excellent cost discipline without sacrificing the condition or the long-term value of our properties.

While we have changed our disclosure here, I want to emphasize that our accounting capitalization policies remain unchanged.

So now going to page 14 of the release, you will find new line-by-line disclosure of our same-store operating expenses for the third quarter and year-to-date.

We have also revamped our repairs and maintenance expenses and capital expenditures disclosures on page 22 of the release to show repairs and maintenance costs on a same-store basis improving comparability.

Pages 14 and 22 work together to help you see what we are spending on asset maintenance or improvement, whether expensed or capitalized. For example, on page 14, the year-to-date and year-to-date numbers on the bottom of page 14, 2009 repairs and maintenance expenses of 73.134 million is the same expense number that appears on page 22 in the repairs and maintenance expense column for our same-store properties on page 22.

Page 22 shows you what we are spending on our assets for repairs and maintenance which are expensed and for replacements and building improvements which are capitalized.

Repairs and maintenance expenses on this page include on-site payroll associated with repairs and maintenance.

So the total on-site payroll number of 119.963 million year-to-date on 14 is approximately twice as much as the on-site payroll that relates to repairs and maintenance on page 22 of 59.057 million in the same-store column there. On page 22, we disclosed that we have spent year-to-date on major unit rehabs that we believe will be revenue enhancing.

In footnote four, you see that we will spend about -- we've spent 21.3 million in the first nine months of 2009 on unit rehabs. In 2009, we are completing unit rehabs on about 2,700 units and expect to spend about $30 million for the full year. This compares to about $34 million that we spent in 2008 on about 2,300 units.

Also on page 22, we continue giving disclosure in footnote nine of our capital expenditures per unit. In other words, what we have expect to spend maintaining the current earning power of our assets.

We estimate that same-store routine replacements will run about $380 per unit in 2009 and that building improvements will run about $420 per unit in 2009.

And so we expect total capitalized expenditures to be about $800 per same-store unit without rehabs and a 1,050 per same-store unit with rehabs.

We are spending the same on routine replacements this year as last year about $385 a unit.

And now just a quick note on comparability. The replacement number we disclosed in the 2008 disclosure material did not include rehab spending.

That was footnoted below and put into the other category.

Our 2009 rehab number does include rehab spending.

In both time periods we gave you all the information you need to assemble and disassemble those numbers.

On building improvements, so now I'm on the building improvements category, we are making tremendous progress reducing costs while improving asset quality. Last year we spent abut $598 per unit on building improvements. This year we expect to spend about 30% less.

Getting this sort of improvement to the lot of effort. We re-bid every contract we could, we narrowed scopes where possible without sacrificing asset quality and we took advantage of lower material prices.

Another big contributor to the change here was the overall improvement in asset quality from our portfolio repositioning. We've sold many of our biggest capital hobs. We didn't neglect the basics. Our residents are very pleased with the appearance of their homes as proven by high and improving customer loyalty scores. We pass on a big well done to our capable investments and facilities' teams, their hard work and excellent results here.

Let me finish on this topic by saying that, while all our capital spending is carefully scrutinized our rehabs go through an extensive internal review for the potential for increased rental income before they proceed.

We consider the assets competition, resident profile and many other factors.

In the end, we commence only those rehabs that we believe can deliver targeted rental increases and we discontinue those that do not meet our expectations.

Because our portfolio is increasingly investing in assets that we intend to stay in for the long haul, rehab will become a more important part of the process of keeping our assets fresh and competitive.

Now back to the big picture, FFO. We had a good incremental contribution about $6 million in the quarter from our lease-up properties. We anticipate that these properties will contribute an incremental $23 million to our FFO results this year. Our FFO was $0.53 per share for the quarter, down from $0.64 per share for the third quarter of 2008, primarily due to a decrease in same-store NOI of $0.06 per share and a $0.05 per share of dilution from our 2008 and 2009 net disposition activity. And that's a little bit somewhat offset by higher non-same-store results.

Now moving on to our expectations for the rest of the year. As you saw in our release we provided guidance for the fourth quarter and revised guidance for the full year 2009. On page 25 of the release you will the assumptions underlying our annual FFO guidance.

The primary driver of the difference between the $0.51 per share midpoint of our fourth quarter FFO from our actual third quarter FFO number of $0.53 per share is a negative impact from lower total property NOI from our same-store portfolio and some dilution from 2009 transaction activity.

We have increased the midpoint of our annual FFO guidance range from $2.15 per share to $2.20 per share. Substantial expense savings offset by lower FFO due to earlier and higher fiscal activity than we had budgeted drove this change.

For the full year, we have revised our guidance ranges for same-store revenues, expenses and NOI. We are improving our revenue guidance slightly to negative 3% for the full year but do want to remind everyone that our expectation is that on a quarter-over-quarter basis, fourth quarter same-store revenues will be the worst quarter of the year for us as we continue to feel with impact of rents slowing down to market.

We are very pleased to revise our expense growth guidance to 0.5% for the year, primarily due to better property tax and utility expenses than originally anticipated as well as good overall cost controls.

As a result of our revised guidance, revenue and expense guidance, we have improved our NOI guidance number to negative 5% for the year, the prior midpoint was negative 6%. We have increased our disposition guidance from 800 million to 900 million and left our acquisition guidance at 150 million.

The additional dilution is included in our revised guidance and can be managed on the tax side without triggering a special dividend. In 2010 and our new dividend rate, we can be net seller of approximately $300 million of properties without impacting our distribution requirements.

Now I want to briefly touch on liquidity. As you know, we've been focused on having a conservative balance sheet by maintaining ample liquidity and pre-funding our debt maturities. Our cash position is strong. We have about $540 million in unrestricted cash today, plus about $370 million in the 10/31 account.

We can also rely on a revolving line of credit that does not mature until 2012 and has about $1.36 billion in borrowing capacity.

The company is in outstanding shape in terms of managing its debt maturities. Tomorrow we will be prepaying at par $164 million of secured loans due in 2010, this has been in our guidance. After those pay offs, we will have only $150 million of debt, less than 1% of our total capitalization, coming due to the rest of 2009 and in all of 2010.

Please also recall that next year we will exercise the automatic extension option that we built into our term loan and we'll push that loan's maturity from 2010 into 2012. Cash on hand at year end is expected to be 580 million. Using this cash and the line of credits, the company can repay all of its obligations through 2011.

The company plans to continue the strategy of maintaining excellent liquidity and addressing funding obligations well before loan maturities. Besides playing decent with our balance sheet, we've also started to play a bit of offence by using our resources to opportunistically retire some development debt for $42.4 million gain to the company.

In the past, we took advantage of opportunities to repurchase our public debt at attractive prices and now see some opportunity to do the same in the bank market.

As we've said in the press release, we did roll out an ATM stock offering vehicle on 8th September. But as we said at the time with our large cash balances as well as our untouched $1.36 billion revolving line of credit and currently do not see a need to sell shares and have had no activity under the ATM.

The debt capital markets do continue their healing process. Unsecured 10 year debt is available to each our insides and net attractive rates of 6% or so.

Other types of unsecured debt such as convertible debt and retail executed debt have also made come back and are available to us as well. Sufficed to say that the unsecured markets are functioning well for strong borrowers like EQR.

The GSEs continue in their mission to provide reliable reasonably price capital for the multi-family housing business.

This quarter we sold almost $400 million in assets and the two GSEs funded essentially all of the debt financing needs for our buyers efficiently and relatively cheaply.

As we have said in the past, the big wild card for the future of the GSEs continues to be the political resolution of their long-term status.

In sum, we are in excellent position when it comes to our liquidity and on balance sheet. Should we want and need to we have the ability to access many sources of capital and we'll continue to be opportunistic in doing so.

And now I'll turn the call back over to David.

David J. Neithercut

Thanks, Mark. Ashley, we'd be happy to open the call for the question now.

Question-and-Answer Session

Operator

(Operator Instructions). We do have a have a question from the line of Twirl Puala (ph) with Morgan Stanley

Unidentified Analyst

Good morning. Great quarter guys.

David Neithercut

Good morning. Thank you.

Unidentified Analyst

I have a question on the sub-markets, specifically, this quarter we saw in New York Metro area rent showing a 7% decline year-over-year. When do you see rents eventually bottoming out there? And is it fair to characterize places like San Diego and South Florida are close to the bottom and are seeing some sort of recovery in the process?

David Santee

Hi. This is David. Let me say that we are getting very close to where our current market rents are intersecting our declining rents from last year.

So everyday, especially in Manhattan we become less upside down and we'll reached parity probably in December or January. The other market, the story is pretty much the same aside from the western markets. The western markets seem to lag the rest of the United States as far as rent declines by anywhere from three to five months.

So those have been a little more volatile lately, but pretty much every other market we're starting to see a leveling off here in the next 60 to 90 days.

David Neithercut

Yeah West Coast market were so too late to the party, they are going to take a little longer to recover.

Unidentified Analyst

And then specifically about the home owner tax credit, actually we're hearing that's going to be extended to April of next year. Obviously, this may not have an impact in higher price markets like New York or San Francisco, but is there any anecdotal evidence of move outs to home purchases in some other markets you are seeing?

David Santee

This is David again. Let me say that Q3 did show some also I use the word significant changes in move outs to buy homes. But I would also caution you to not get too caught up in the percentages as well.

As an example, Boston increased to 15.8% of move out, but because the turnover is so low, that 15.8% amounted to only 89 move outs for the quarter to buy homes.

Other markets, more notably, Inland Empire, Denver, Phoenix showed signs of returning to normal historical home buying levels for Q3. Portfolio-wide we saw 14.2% which was an increased over Q3 of 08 but still below Q3 of 07. So you did see more of the commodity market increase in Q3, but more of the -- constrained markets continue to show declines.

Unidentified Analyst

I see. Thank you

Operator

And our next question comes from a line of David Toti with Citigroup.

David Toti - Citigroup

Hi. Good morning everyone. Michael Bilerman is here with me as well. Can you just expand a little bit on the issue of home buying, my understanding is that there is very aggressive tactics being taking by the home builders and some home sellers with respect to targeting large apartment complexes; are you guys combating that in any way or have you addressed that directly?

David Santee

Over the years, we have had a rent with equity program and we've partnered with a lot of home builders. I would say that a lot of them are much more interested today in speaking and working with us than they were two years ago.

But I would also say that, we are being a little more cautious with that. Typically, they want to come to the properties, they want to do home buying seminars and what have you and we're not as minimal to that as we want to work.

David Toti - Citigroup

Okay. And then with respect to the maintenance, forgive me if I missed this, could you mention what conditions you need to see for you to exercise that plan?

David Neithercut

Well we just talked about -- we said we lot of cash on the balance sheet, we had line of credit. We put that in place to be there and take advantage of what might be net buying opportunities. At the present time what little bit acquisition we're doing is more sort of trading dollars on 10/31 but we'll go into 2010 with our eyes wide open.

David Toti - Citigroup

Okay. And then my final is question is with respect to the kitchen and bath upgrades, I understand you paint the disclosure around a little bit something not be internally comparable but it does look like net, net there is an increase, are you getting a little bit more aggressive overall relative to tenant retention? Is that something was more seasonal in nature? If you could just expand on the kitchen and bathroom a little bit, that would be helpful?

Mark Parrell

Sure. Part of the difference between the years -- its Mark Parell, David. Last year we did about 2,300 units for about 34 million. Last year while all those units that we did were Arcalo, CM (ph) and Upper Westside New York City deals with a cost much higher on a per unit basis.

Those turned out very well for us. But they do skew the spend a little bit. So that's part of the difference this year. Again, we're going to spend around 30 million.

So it's not really all that different on give or take 2,700 units. So I guess I wouldn't read much into it. We've been actually pretty careful about keeping scale of those kitchen and bath upgrades relatively small and not spending too much on any one of them.

David Toti - Citigroup

Great. Thank you

Operator

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

Unidentified Analyst

Hi, good morning. It is actually Jehan, I am here with Jay as well.

Just first question, given occupancy was down about 70 basis points year-on-year and then also occupancy in lower in your core versus the non-core markets, are you seeing pricing cuts as may be a less -- as being less effective as tenants might be affected more by just a job less downsizing and then may be then move from class A to class B here?

David Santee

I would say that key drivers no matter what market you're in are simply jobs. That's the gasoline for our engine and that's what makes the difference.

As far as all the other components that impact occupancy, we continue to see a high level of transfers, people that move from one apartment to another, whether they're doubling up with roommates or what have you. And beyond that there is different dynamics depending upon which market you're speaking about.

David Neithercut

But I guess in terms of occupancy, we did say our lowest left lease and we've in some many entire year. So occupancy is strong and again left leases the best that place to spent for the entire year (ph).

Unidentified Analyst

Thanks, that's helpful. And then, just going back to the special dividend for a second and the potential possibly having the payout a dividend based on the asset sales that you've done this year, would this decision change at all if you end up investing below the 150 million that you currently anticipate?

Mark Parrell

No, we have enough flexibility in the number, the gain is different on every asset. So even if the reinvestment activity is 150 that we've guided you to doesn't occur I don't anticipate that we would have to pay special dividend.

Unidentified Analyst

Thanks. And then just lastly on the converts, are you considering at all prepaying or would you just leave them outstanding until August 2011?

Mark Parrell

Sure, so we did repurchase opportunistically during the height of the difficulties in the financial market, about $120 million of that covert at a price of 110.

So we did have a pretty substantial gain back a little while ago. We continue to monitor that market. We'll take advantage of that if there is some distress and maybe buy some of that back.

But at this point that is accruing at 3.085% rate and I am not in any great hurry to redeem those securities. We'll just continue to be mindful of opportunities as the markets get better and dislocate as time goes on. And we'll just kind of play it that way out.

David Neithercut

Actually what's the discount on average at which we bought those?

Mark Parrell

We bought it about 15 to 18% discount.

Unidentified Analyst

All right, that's helpful. Thanks guys.

Mark Parrell

Thank you.

Operator

Our next question comes from the line of Michelle Ko with Merrill Lynch.

Michelle Ko - Merrill Lynch

Hi guys. I was wondering if you could tell me whether you're seeing some so far now in October in terms of the markets, is it still consistent with what you've been seeing all year or are there any particular markets that are deteriorating or recovering faster than you would anticipate it?

David Santee

Well, this is David again. As David just mentioned as of yesterday, we achieved the lowest exposure that we have seen all year at 7.9%. Our occupancy appears to be trending up. I would say that we feel good with what we see occurring in many of the markets and I feel positive about where we're headed through the end of year.

Michelle Ko - Merrill Lynch

As in terms of your 24 asset sales that sold in the quarter at an average cap rate of 7.7%. I was wondering if you could tell me -- give us more details on which markets those assets where in and if you could give us a sense for what the cap rates were by the various markets?

David Neithercut

Well, in general we seven handle cap rates or high six handle cap rates. So we are out liners in there a bit. But we sold assets rural sort of New England portfolio or non-Boston portfolio about six assets. We sold a couple of assets in Suburban Denver, couple in Texas as we continue to lead Texas.

I think we've got one or two assets left there continue to -- we sold a couple of assets in North Carolina and we soon to exit (ph) in North Carolina in totally.

Four deals in Suburban Atlanta. So again, and these are just -- these are all our assets 25 years are so average age. Average purchase price 15, $16 million. So they've been very small assets and again continue executing the strategy to exit non-core assets -- and exit the markets that we've set for quite sometime, we intend to exit.

Michelle Ko - Merrill Lynch

Okay, great. Thank you.

David Neithercut

You're welcome.

Operator

And our Next question comes from the line Rob Stevenson with Fox-Pitt Kelton.

Robert Stevenson - Fox-Pitt Kelton

Hi, good morning guys.

David Neithercut

Hi, Rob.

Robert Stevenson - Fox-Pitt Kelton

Mark, you guys have, I think surprised both on the street on the expense side year-to-date. When you take a look sort of where you are today and rolling forward other than the taxes, the utility and the insurance that are largely out of your control, I mean, do you think at this point you have gotten the systems and everything in place that you need to be able to sort of maintain the sort of level of expense run going forward? Or is there likely to be some leakage up as we start running into stronger employment markets et cetera?

Mark Parrell

Great question. I'm going to start, Mark Parrell and I am going to kick this to David Santee who has just a great grasp on this. You can't forget the big three expenses when you start. And we are looking towards next year and seeing utility costs, some of which we already locked in and prepaid locked in for next year as being a positive variance to 2009 or none of much.

We feel pretty good about property taxes being up, not nearly as much as we thought they would be up this year. So not a 4, 5% increase, but a 2, 3% increase.

So those big drivers of our cost and we feel like we got payroll in hand. So I just want to say those two-thirds of our costs we feel pretty optimistic about that we have a lot of work to do yet before giving any manner of guidance to you.

We do feel good about those items and I differed to David on some of the other line items.

David Santee

The only thing I would add is that we do have several key initiatives that involve leveraging technology to optimize our day-to-day operations and I think going forward, the future of our expenses at least for the next two years is not invisible.

It is very visible to us, and we have complete control over our destiny and I think next year, we will show some very good results.

David Neithercut

Yeah, there was the piece that I saw distributor run some investor today sort of thinking about 2010 in light of an expense increase that we had seen back in sort of '02, '03. But back then I will tell you that we, our expenses, we did drive our expenses down but one of reasons why we did it is because we did not have the traffic that we need, that we vacancy has increased so we're able to let people go on site. Then we no longer needed to deliver ready units at the same rate that we had previously and we recognized that we would the hire those people back and that would lead to expense growth in the subsequent quarter.

We're fully occupied today, fully staffed. Our occupancy is in the 94s and get the low after week (ph).

So we are operating -- we've got all of those costs are fully loaded. There is nothing -- and we're not going to be hiring people back in 2010 that's going to spike that expense growth on a year-over-year basis.

Robert Stevenson - Fox-Pitt Kelton

Got it. And second question for you David, how close are you to starting new development in a market that's performing relatively well like D.C. and what's at this point the determining factor for you guys?

David Neithercut

Well, we're not close at all. I will tell you that we'd continue to look at opportunities, as well as we do continue to have some land on our balance sheet that might make sense to build some time soon. We don't expect to do anything this year.

But we do look at what we think expected yields will be on development relative to acquisition yields on product that we can buy our existing stabilized streams of income and sort of make a comparison.

The time being, we we're seeing assets. We have assets on the counter and we think discounts to replacement costs. Once we can buy existing streams of income at discount, I think you can see us doing that.

Now that being said, if we want to increase our exposure in our core markets, development will make sense at some point in time and you can count on us -- go ahead and get after that. It just may be a little later for us than others.

Robert Stevenson - Fox-Pitt Kelton

Okay. Thank you.

David Neithercut

You're very welcome.

Operator

And our next question comes from line of William Acheson with Benchmark

William Acheson - The Benchmark Company

Thank you. Good morning guys.

David Neithercut

Good morning, William.

William Acheson - The Benchmark Company

Hey. One of the things I think you said more and more institutional investors are entering the market bidding on quality properties. But we've also been hearing that there is a pretty wide spread between the winning bids and the rest of pack and if you kind of use standard game theory there if you will, that kind of indicates that there is lot more competition for available properties coming. Is that kind of the way you see what's going on now?

David Neithercut

I guess I suggest you both on the assets, we've been buying the assets, we've been selling. We're seeing more bidders at a pretty tight range of bids.

Certainly people always fall out after the first round But there are always enough people remaining that it has been competitive and I think if you just look at the deals that have traded -- understanding and very few assets that have traded. There are bidders out there.

I don't think that there is a wide spread between the top five or so bidders, I think that the bidding has been very tight.

William Acheson - The Benchmark Company

Okay. And then second question. The CMBS default rate in San Francisco has simply just gone through the roof lately. It's actually close to 22%. And most of that is due to one buying family who shall remain aimless. But do you see any opportunities there either to loaned, owned or takeover a property in that market? We know it is target market for you.

Mark Parrell

Yeah, I mean we're obviously aware of that. It's Mark Parrell. We monitored the CMBS watch list and we know about that -- those debt portfolio and a lot of these other transactions.

I guess the one comment I made before, David talks about markets is, we're interested in owning assets, not only in complex CMBS securities. We spent some time trying to educate ourselves on that and decided that was not the right way to go.

So I will say that at the beginning the interest we would have would to acquire the assets from the special servicers or from the creditors, it's a group somehow but to own some tranche or something and hope for the best.

William Acheson - The Benchmark Company

Okay

David Santee

And there is much risk of maturity extension and bankruptcy and different complexities that just we're not equipped to handle and don't want to underwrite.

William Acheson - The Benchmark Company

Okay. Fantastic. Thanks.

David Neithercut

You bet.

Operator

Our next question comes from the line of Dave Frac with ISI (ph).

Unidentified Analyst

Hi, good morning.

David Neithercut

Good morning.

Unidentified Analyst

Just a question on acquisitions, you mentioned the double-digit undelivered IRR on a pending acquisition, is that -- is 10% so in obtainable rates that we should expect going forward as we move into next year?

Mark Parrell

Look, I say there is a great deal of one uncertainly out there, Dave. And I would say that we are underwriting low double-digit IRRs and I'd be very happy if we could underwrite IRRs even higher in that going forward.

I think its going to have lot to do with the amount of -- with the supply of product is bought to the market. We can't help but things that banks will begin soon to offer more product and just from a typical classic supply and demand situation, there maybe opportunity to see those increase modestly. But what we are underwriting right now is low double-digit IRRs but unleveraged.

William Acheson - The Benchmark Company

Okay. And then just in terms of the NOI growth that you are modeling obviously there is by market, but can you give us general sense as to the trajectory that you're expecting over to the next couple of years?

Mark Parrell

No, I'd say the trajectory in the four -- in the first 12 months is down. And then in typically and again everything is different as you know but then we might expect to see a modest increase thereafter. And then depending on what market it is, I would say that a year or two after that we would expect to see a really good single-digit increase.

William Acheson - The Benchmark Company

Got it.

Mark Parrell

But we just can't help to think with such little new supply, with the current occupancy growth that we have across the portfolio and the markets we're at, we have job growth. There is going to some really terrific spikes out there, may not happen until you're two or three, but we are certainly -- have that expectation.

William Acheson - The Benchmark Company

And last question, could you just talk a bit more detail about the Seattle market given the results there in the quarter?

David Neithercut

Seattle is certainly been a tough market for us. It was extremely late to the party and has had a severe downturn. I will tell you that for us Seattle was the tale of several markets. We've been -- our results in Seattle have been significantly negatively impacted by our Tacoma portfolio which we got with our well expert merger which came from Holly.

We were down 15% in Tacoma as a result of significant amount of troop rotation out of Fort Louis not troops coming back to Backfield. We didn't get temporary situation but that is certainly negatively impacted our performance there.

We've also been negatively impacted in the CBD, we have negative 10 in the CBD of CL and we're seeing significant improvement there. And we are very excited about the news that northwest chosen moving management to the companies that the Wallen (ph) is doing which is right across the street of most significant asset we have there.

So we think that's somewhat of a temporary uplift as well. There are other Seattle markets. So not Downtown, not Tacoma, Belleview, Redmond and Northside (ph) has been negative six. So I think that's a better comparable against what others might be reporting for the Seattle performance.

William Acheson - The Benchmark Company

And do those numbers you're referring to are same-store?

David Neithercut

That's the third quarter same store revenue.

William Acheson - The Benchmark Company

Got it. Thank you.

David Santee

I beg your pardon. Thank you for having me clarify that.

Operator

And our next question comes from a line of Alexander Goldfarb with Sandler O'Neill.

Alexander Goldfarb - Sandler O'Neill

Good morning.

David Neithercut

Good morning, Alex.

Alexander Goldfarb - Sandler O'Neill

I just, covering back on the pending acquisitions, I was wondering are any of these 10/31 related and are these focused or replacing I should say, any legacy tax protection bills that you may have sold?

David Neithercut

Yes. I would expect that every acquisition we're going to be going forward will be a 10/31. And we do have some legacy, some obligations to third party OP unit holders to go ahead and provide that protection going forward

Alexander Goldfarb - Sandler O'Neill

Okay. So the part of these acquisitions have part of that in there?

David Neithercut

Well, I am not sure what you by in there. I mean we are buying them under 10/31.

Alexander Goldfarb - Sandler O'Neill

Okay. Then that helps. Second is you appreciate to enhance disclosure on the operating expenses. Year-over-year the leasing and advertising seems to be pretty much flat, given your previous commentary on calls about going more to the Internet less print. I would have expected that to decline. I am not sure may be it's because you have to pay leasing brokers this year. But just want to get a sense for have we reached the bottom as far as how much cost you can cut from leasing and advertising? Or would we expect this to go down next year if you don't have to pay leasing brokers in New York?

David Santee

This is David. The quick answer is, yes. Year-to-date we spend about 1.5 million on broker fees. So you can figure out that we have reduced other cost. We are out of print that has produced significant savings. We use a lot of toggling of key work purchasing. So once we can get away from the broker fees in New York, we'll continue to see some savings there.

Alexander Goldfarb - Sandler O'Neill

Okay. Final question is and one of the office companies called yesterday they spoke about more foreign capital taking a look in the U.S. especially in the New York. Are you seeing that same capital coming in to look at apartment properties or is your sense that they're looking at other assets types?

David Neithercut

I am not sure that we are seeing that capital on multi-families. It is very impossible. My guess is we've been looking in New York a little bit, but we haven't actually competed anything in the New York. So I can't tell what the capital that's there.

It's very impossible that we're seeing some of the -- my guess is on things that might be more highly discounted like the office space.

Alexander Goldfarb - Sandler O'Neill

Okay. Thank you.

David Neithercut

You're very welcome.

Operator

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

Michael Salinsky - RBC Capital Markets

Hi, good morning.

David Neithercut

Good morning.

Michael Salinsky - RBC Capital Markets

You talked a lot about acquisitions. I am just curious in terms of dispositions. How much do you have left to complete to sale here over the next couple of years to really hit where you're trying to get the portfolio at this point?

David Neithercut

Well, I guess it's a god question and one that's tough to answer because I think that our portfolio giving our side every single year, we will be working our portfolio.

I don't think we ever get to steady state which you will not see us be doing 6, 7, $800 million worth of dispositions per year. We do have some dispositions to finally exit some markets other the minimums relative to the dispositions that we've done. And we've got more to do on older suburban assets even in our core markets.

That would be a process that would ongoing for sometime. My guess is billion classes of assets and we've already identified and maybe 1.5 billion of assets that we've identified. But just recognize that once we go through that, it not necessarily it will be done, there will others who'll be coming on the list. Mark mentioned in his remarks assets that from time to time become very big capital hobs that we may think that we can a get better price and ought to sell. So there is going to be every single year you'll see us we'd be doing a meaningful amount of dispositions.

Michael Salinsky - RBC Capital Markets

Talked about a bit a really quick question expectations in terms of recovery how that plays out. I am just curious among your markets which ones do you feel are best positioned for the early recovery which ones are going to take sometime?

David Neithercut

Washington's happening, Boston's happening. David had mentioned that we're beginning to see some story in New York City, so we're very excited about that and we mentioned earlier that the market for the West Coast, primarily California I think, Seattle we're beginning to see some -- a reduction in a rate of decline in Seattle, but I think that the California markets will continue to be challenged for sometime. I would expect California to recover less.

Michael Salinsky - RBC Capital Markets

And finally just with, I mean, you got proceeds coming up from disposition obviously. As you look at over the next couple of years with acquisition opportunities, you have the control equity release program in place, how do you feel with leverage at this point? Are you comfortable where leverage is at or would you like to take that up or down?

Mark Parrell

Well, right now let just talking about leverage we need to define what leverage means and we have always kind of used the book metric. So again, that is the numerator and book value on depreciated book is the denominator.

And we talk about before we talked to the street about that number being 50 to 55% or 51 or so now. I think you probably will see us over time go more to a 45 to 50% metric. I feel okay about our leverage right now.

I think our commentary from the various rating agencies indicates that they are generally okay with it. I think our net debt to EBITDA ratio heading into the edge is probably just a touch higher, but I don't feel like there is a lot of work to be done here.

Operator

And our next question comes from the line Justin Fiseo (ph) with UBS. And sir your line is open.

David Santee

Come in Justin.

Unidentified Analyst

Hi guys. How are you doing?

David Neithercut

Hi.

Unidentified Analyst

Given the job is really to driving force here behind fundamentals and you guys stated as well from the prior answers. What is your view is the probability that you may need for further estimates further in most markets been in three to six months in response to that continuation of a weak labor market?

David Neithercut

Again, we've reduced rents significantly at the end of last year, the beginning of this year and have again on average held them pretty flat throughout most of this year.

I can for a minute suggest that if things get worse we won't be able to hold those. But so far with the lowest left lease and we've experienced for the entire year the occupancy that we have got. I am not telling overall we're on a way up yet. But so far as we look out the four or weeks we seem to be - we don't see anything to suggest that we're going down.

One never knows, job loss doesn't stop soon. If it doesn't begin to add, I mean that could certainly be an issue. But we have got nine and ten months at pretty consistent net effective lease rates and we think our forecast lease for the balance of this year. So we're going to -- will stay there.

Do you have a follow-up Justin?

Unidentified Analyst

Yeah, are you guys there?

David Neithercut

We're here.

Unidentified Analyst

Just on some of your underwriting assumptions that you talked about earlier in regards to the NOI growth over the next couple of years, should we take it to mean that it looks like you are not expecting NOIs to turn positive until 2011?

David Neithercut

It depends on how you talk about -- because there is positive year-over-year, there's positive quarter-over-quarter and there's positive sequential. So my guess is we'll see some sequential positive growth next year. And we could end next year with some quarters that are positive. But the year will not be positive.

Unidentified Analyst

Okay. Thank you.

David Neithercut

You bet.

Operator

Our next question comes from the line of Shane Butler, World Capital Management.

Unidentified Analyst

Yes. I just wanted to ask question about for property taxes, I realize California is kind of a unique situation but how aggressively are you pursuing appeals of property taxes and do you expect any further progress on that front?

David Santee

This is David again. We actively pursue appeal each and every year. I will say that this year particularly busy, the pipeline is full. Things are taking probably a lot longer to resolve and we'll probably push a lot of our outcomes into 2010.

David Neithercut

Any follow-up questions? Ashley? You there Ashley?

Operator

Yes sir, I am here.

David Neithercut

Thank you.

Operator

Our next question comes from the line Jeff Stanley (ph) with Wells Fargo.

Unidentified Analyst

Good morning guys.

David Neithercut

Good morning, Jeff.

Unidentified Analyst

Question about Florida, its been tough for so long, can you guys take a moment and talk specifically about what you feel is fueling the growth in effective rents in South Florida and Orlando? Is it really just the local economy maybe finding a bottom or is there been some measurable improvement in economic activity that you think is manifesting this turn?

David Santee

This is David. I think in Florida you have to go back a few years. I think the slowdown really started when we have that rash of hurricanes.

One metric that we use was the number of drivers' license applications from out of state folks that are moving to Florida. Those declined after the hurricane. And then we have the housing, the bottom fall out of the housing market down there. We continue to see out migrations especially in South Florida.

But I think that's good news. I mean housing got to a point where it was just really unaffordable. And now it's is affordable again. We just had a gentleman leave here to move down to South Florida to take a position.

So I think South Florida is becoming attractive again to folks. And it's definitely more affordable today than it was last year or even four or five years ago.

Orlando, on other hand I think is, it's just a matter of I think the wild card there is housing. There was some stats out last week that showed 26% of our first lean mortgages were delinquent or in foreclosure.

So we'll have to see how that plays out from an apartment demand perspective and finish up these reversions in Orlando. But ultimately, I think, Orlando continues to diversify employment phase. There is some increased healthcare and UCF continuous to increase its enrollment and develop as a pretty dominant educational institution in the area and I think the long-term prospects for Orlando are good.

Unidentified Analyst

I'm curious how do you think about Tampa versus Orlando and I know it's a smaller market for you and I guess as you just think about the shape of recovery for South Florida and Orlando.

Would we characterize it as fairly sluggish even you might have hit the bottom or do you think it could fairly healthy particularly for Florida.

David Santee

Gosh! I've been running Tampa for the last 14 years and it seems for the last 14 years. But on the other hand, I've always said if you're going to Florida, why would you move in the middle of the state.

Tampa is -- it did show some pretty significant recovery in home buying this past quarter. But again the -- it's always been known as more of a back-office kind of location, lot of call centers, lot of the mid-ranged type jobs. So unless Tampa reinvents itself I think it will continue to be the same.

Unidentified Analyst

One last question if I could, is the West Coast market that you guys mentioned we're seeing the brunt of the revenue hit. But occupancy really seems to be taking a dramatic impact, given the relative cost of home ownership there, if I am wondering do you think you are losing folks to doubling or the class Business mom's basement or folks relocating maybe out of the metro areas, do you mean other states? Any sense there?

David Neithercut

I think it’s all of the above. And I think what's -- we're just seeing what's occurring in the West Coast just having happened a little later than what we saw in many markets on the East Coast.

There is a significant amount of job loss and I think, yes, I think that's done a lot of doubling up. Perhaps are people moving home, leaving area. But occupancies remained reasonably strong there. And there continues to be demand for housing. We just have to adjust pricing to capture that.

Unidentified Analyst

Thank you.

David Neithercut

You bet.

Operator

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

Andrew McCullough - Green Street Advisors, Inc.

Hey, good morning.

David Neithercut

Hi, Andy.

Andrew McCullough - Green Street Advisors, Inc.

Most of my questions have been answered. I had one question. Can you discuss what impact if any the Peter Cooper sites really have on your portfolio?

David Neithercut

None whatsoever. That ruling was for a very specific type of rent control regulation, J-51 and we don't have that. We were not subject to that specific regulation.

Andrew McCullough - Green Street Advisors, Inc.

And then just follow-up on that. If and when that asset does come back to market, would ever consider making a run at it either on a wholly owned or JV structure?

David Neithercut

I am not sure that we would. I mean we did look at it for a nanosecond back when it was first offered for sale. I did spend sometime down there looking at it with our team. Price stock became available and we didn't spend another second on it. But it's a base and I am not quite sure if that would be the right thing for us. But one never says no.

Andrew McCullough - Green Street Advisors, Inc.

That's all I had. Thank you.

David Neithercut

You bet.

Operator

And we have follow question from the line of Dave Frac with ISI.

Unidentified Analyst

Just a quick follow-up on expenses and thanks for the comments earlier. But I wanted to ask about onsite payroll line could you give us sense as to the headcount change that you've seen over the past year?

David Santee

Hi, this David again. We have not actively made any significant changes to our on-site payroll as a result of the economy.

We have implemented an application called Position Management, it gives us tremendous visibility into the types of positions that we have at communities, as well as the overall headcount. And that's maneuvering the different positions and restructuring kind of how we do business over the next two years and leveraging this technology as all part of our road map to 2011.

Unidentified Analyst

David, can you give us an idea -- of a perhaps a targeted headcount per unit. And how that might have changed recently or might change as you go out to 2011?

David Santee

Well, I mean in general -- in general our industry kind of runs. If you talk about a garden community, call at one per 100. So you have 300 units, you typically have three people in the office. And in our shop, we have three people in maintenance and you kind of mix and match that headcount with the level of contract services that you have.

But going forward, we've had a call center for almost 14 years and our new platform allows us to consolidate a lot of the back of the house function. By February of next year, we'll have all of our leases and renewals and a lot of our resident notices so to speak on our resident portal in electronic storage. And we'll continue to create tremendous efficiencies at the property. Now the outcome of that over the next two years is yet to be determined.

Unidentified Analyst

That helps. Thank you.

David Neithercut

You got well (ph).

Operator

And there are no further questions in queue at this time.

David Neithercut

Well, thanks for joining us. We look forward to see many of you in Phoenix in a couple of weeks. Have a great day.

Operator

This concludes today's Equity Residential third quarter earnings conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Equity Residential Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts