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

Equity Residential (NYSE:EQR)

Q4 2009 Earnings Call Transcript

February 4, 2009 11:00 am ET

Executives

Martin McKenna – IR

David Neithercut – President and CEO

Fred Tuomi – President, Property Management

Mark Parrell – EVP and CFO

David Santee – EVP, Operations

Analysts

David Toti – Citigroup

Michael Levy – Macquarie

Dave Bragg – ISI Group

Farooq Gala [ph] – Morgan Stanley

Alexander Goldfarb – Sandler O'Neill

Michelle Ko – Banc of America

Jay Habermann – Goldman Sachs

Rich Anderson – BMO Capital Markets

Michael Salinsky – RBC Capital Markets

Mike Lewis – JP Morgan

Dustin Pizzo – UBS

Andrew McCulloch – Green Street Advisors

Michael Bilerman – Citigroup

Operator

Good morning. My name is Crystal and I'll be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential conference call. All lines have been placed on mute to prevent any background noise. (Operator instructions) Thank you. Mr. McKenna, you may begin your conference.

Martin McKenna

Thanks, Crystal. Good morning and thank you for joining us to discuss Equity Residential's fourth quarter 2009 results and our 2010 outlook. Our featured speakers today are David Neithercut, our President and CEO, Mark Parrell, our Chief Financial Officer, and Fred Tuomi, our EVP of Property Management. 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.

Now, I'll turn the call over to David.

David Neithercut

Thank you, Marty. Good morning, everyone. Thank you for joining us for our fourth quarter call. 2009 was certainly a very challenging year for the multifamily business. Really we've never navigated through such uncertainty caused by such unprecedented job loss. Yet I have got to tell you I could not be more pleased nor more proud of the way the Equity Residential team rose to the occasion despite such challenging market conditions.

For the year, same-store revenue results were down only 2.9%. That number is right on top of the midpoint of our original guidance given to you all one year ago. And our operating platform delivered same-store expense growth for the year down 0.1% and that really is a terrific outcome when compared to the comp year, a year ago when expenses were up only 2.2%.

Now, in thinking about this great expense control, I want to make something perfectly clear, that this is not the result of reducing services to our residents and it's not the result of cutting back on how we care for our assets, and we know that because our customer service scores increased again in 2009. But it's the result of doing exactly what we have always been doing, but using our scale, our concentration and technology to do it cheaper.

So as evidenced by our guidance for 2010 in last night's release, we're expecting the picture to improve a little bit as the year progresses. Now in just a minute, Fred will go into a little bit more detail on what we're currently seeing and how we're thinking about revenues for 2010. But, before he does that, I first want to say that we're already experiencing improving occupancy across many markets when seasonally, for this time of year, we would be expecting just the opposite to be happening.

And while we still have above-market leases, it will need to be adjusted downward. Our net effective new lease rates are beginning to turn a little bit positive in many markets. And while our 2009 renewals were on average extended at flat to slightly negative levels, we're beginning to see more renewals today with a very modest upward bias.

Now, this is all good news for the apartment business. But I want to make sure that everyone understands, I'm not suggesting that we're experiencing any kind of sharp inflection here. I would rather say we think we are at the beginning of a period of slowly, and I do mean slowly, improving fundamentals. But when job returns, if you add job growth to that picture, we believe that will quickly turn into one of the best operating periods in our history.

So with that in mind, Fred, give everybody please a little color on how we are looking at revenues for 2010.

Fred Tuomi

Okay. Thank you, David. So I'll give you a little more detail around our 2010 guidance for the same-store revenue. And this is based on what we're seeing on the ground today and the trends that we expect the business to follow over the coming year.

So first, as you know, rental revenue is mostly impacted by four key drivers. First, we have the continued roll down of those embedded leases that are currently above market rents. Those have to roll down to net effective new lease rates. Second is the rental rates achieved on our renewals. Third is the resident turnover rate. Then fourth is any change assumed in physical occupancy.

So at a starting point, if you looked at this year, first assuming no change in occupancy for the moment, our budgets would lead us to think that same-store rental revenue would decline by about negative 2.9%, as that's just the mix of the first three things without an occupancy change. Then when we adjust for an expected at least half point occupancy gain and some contribution from our other income categories, then we get to the total same-store revenue of down roughly 2%, which is right in the midpoint of our guidance range.

So let's go into little more detail on each one of those.

First, let's look at the net effective new lease rates. And if you remember, these are the current rents that we're achieving on brand new leases on a net effective basis. So new people moving in, net effective rates. And as noted in previous quarters throughout 2009, these net effective new lease rates have remained relatively stable since January of last year. So we had a big roll down late 2008 and we weren't sure what was going to happen in '09 but we were very pleased as each quarter ticked off in '09 that those rents were pretty stable, up a little bit, down a little bit, but overall on a narrow band. That stayed right up through the end of 2009 but right at the end of fourth quarter, we noticed some pretty good seasonal pricing trends begin to develop.

As we turn the corner in late December and into January, we see a slight upward movement, slight upward movement continuing in the first quarter of 2010. So after bouncing along a year-long bottom, we're seeing a modest but definitely noticeable upward trend in rates.

Now the markets that are leading this upward trend include Boston, Washington D.C., Denver, Colorado and now South Florida. Boston is the strongest performer in this regard and rents are up 3.3% from the same week a year ago. Now some markets are a little bit slower; they're lagging. Those that entered the recession later, kind of last into the downturn such as Seattle and San Francisco and then also those with deeper economic problems, larger scale job losses, may be less chance for a recovery, such as Phoenix, Arizona and the Inland Empire; it's going to take longer. They're obviously going to lag in this recovery of rents. They'll get there; it's just going to take a little while longer. Seattle is the furthest behind and their net effective new lease rates are now about 9% below the same point a year ago.

Now, let's talk about the renewal fees. Obviously, the roll down to new pricing levels will continue through most of 2010. However, the downward trend as this process occurs is moderated, kind of a governor is put on it by the achieved renewal rates that you can get on those that do not move out.

As we mentioned through 2009, we are very pleased, initially surprised, but very pleased that the net 12 month renewal rates on those people renewing, we were able to do that basically flat or only slightly down. That was a great kind of proof of consumer behavior. They're satisfied with their apartment, they're in there, they like us, they stay, they pay and they say good things about us.

So the whole renewal process, our strategy starting with our pricing, our sales and communication of it, and we talk to people throughout the chain [ph], communicate, motivate, but do not capitulate on those rents. So despite the reduced net effect of new lease rates, as we turned into 2010, it has turned positive with an average increase of just under 1% up for our January renewals. And the February trend, we've already renewed about 39% for February. We're not done yet, shows another significant increase on this.

So, as we get to the easier comp periods of the past, plus our ability to sell renewals and negotiate tough, we're seeing a good lift on these renewal basis, which is a significant moderator to the roll-down of rent rolls. So, all but three of our core markets are now achieving positive renewal rate gains, led by the D.C. Maryland market that up 4.4% and has very healthy renewal rates in any market.

However, in contrast, Seattle again – sorry to pick on Seattle, but as their rents were declining further as we noted earlier, they're averaging at 2.4% reduction in 12 month renewal rates in January. So, we are seeing some write-down on the renewal side piece as well in Seattle.

Now, coupled with this is resident turnover. And as you know, resident turnover has improved steadily over the past few years. We've been very happy with our resident retention movement, but for the 2010 budget, baked into this guidance, we're assuming that it will remain flat for 2009.

That brings us to the final driver of rental revenue which is that of occupancy. As David mentioned, counter to seasonal expectations, leasing remained strong through late Q4 and well into January. Our occupancy has climbed of late and we're now at 94.6% as of yesterday. And this is a broad-based movement, many markets have experienced recent up moves in occupancy, right at a time when you think it might be moderating or soft.

Some of these markets have made a move as great as 100 basis points, however, with stable or actually improving net effective new lease rates. These include markets like Los Angeles, which is now at 95% occupied; South Florida, 94.8%; and Atlanta, Georgia came in at 95.5%. And again, we did not buy these occupancy gains. And this is the most encouraging signal to me to the start of 2010.

So, to recap our assumptions for the guidance for this year, our portfolio average net effective new lease rates have turned upward and we believe this will continue, returning to a slight and modest growth by the year's end. Renewal rates will remain positive and grow stronger throughout the year. Resident turnover will hold steady at 61%. Put this into the rental revenue blender and you get 2.9% decline, however, offset favorably by a half point improvement in occupancy and a further contribution by other income, and again, that yields an approximate 2% decline in same-store revenues. For the entire year of 2010, it represents the midpoint of our guidance.

So overall, we are very happy to see some positive signs out there in our system. But we have to remember, there is still a long way to go. Our platform and our people served us extremely well in 2009 and we feel right now as we enter this year, we're very well positioned to capture the opportunities of a much awaited and much-welcomed recovery. Thanks.

David Neithercut

Thanks, Fred. Turning to transactions, after sitting on the sidelines for quite a while and not making any acquisitions due to uncertainty about property evaluations, as well as more important need to hoard cash and manage the balance sheet, we've become more active on the buy side over the last 90 days.

Now, as I said for quite some time, we would begin buying again when two things happen. Number one, we need to become confident in our ability to fund our maturing debts in the normal course of business.

Number two, we said we would begin buying again when we began to see attractive pricing on good quality assets in core markets, assets that we could acquire at discounts to replacement costs, and good IRRs and which we thought would create good long-term value for our shareholders.

Well, we did acquire two assets in the fourth quarter of last year. The first we discussed a little bit on our last earnings call in early October – or in late October rather and that was a high-rise tower in the Pentagon City neighborhood of Arlington, Virginia. Built in 2004, we pro forma at 6.1% yield on that asset in our first year. The second acquisition in the fourth quarter of 2009 was Mosaic at Largo Station. That deal is in Maryland, just east of the district near FedEx Field. That was completed in 2008 and was still in lease-up when we acquired it, and we pro forma there a stabilized yield in the high 6s.

And more recently, thus far in 2010, we've acquired five additional assets, the two Macklowe assets, which we announced on Monday, which are just extremely well located and premier multifamily assets. But in addition to those, we acquired a mid-rise property near the beach in Del Mar, California, which was built in 1998. We're going to do a repositioning on this asset and we projected a year two yield of 6.7%.

We've also acquired another high-rise tower in Arlington, Virginia called Vista On Courthouse. That deal was built in 2008 and we pro forma at a 5.9% first year yield on that acquisition. And we've also acquired just this week, and closed on Tuesday, a mid-rise property in Seattle built in 2002 and we acquired that with a 6.6% cap rate.

And of course we're under contract to acquire the third Macklowe asset which will close no later than May 1st. We're also pursuing a couple of additional deals, each of which we think are extremely well located, they are high quality assets which we think we can acquire at attractive prices at good discounts to replacement cost, double digit IRRs, and again which we think will provide better long-term total returns than the assets that we're selling.

So meanwhile, the markets remained open for the assets that we've targeted for disposition. These are assets in non-core markets or assets in less attractive submarkets with risk to valuations going forward.

So, we continue to sell assets through the fourth quarter, sold three deals in North Carolina, 37-year-old deal in Atlanta, a 48-year-old asset in Rockville, Maryland. We've also got a pretty good pipeline of potential dispositions in 2010. We're currently working on several more deals in North Carolina which will nearly complete our exit from that market, working on a portfolio of smaller assets in our non-Boston, New England markets and a property in Jacksonville, Florida, just to name a few.

But I want to just have everyone understand that our motivation to sell today has changed as of late. Going forward, we will continue to sell if we can find attractive acquisition opportunities that make sense to recycle that capital into. Because in 2010, we don't expect to be selling to raise capital for liquidity and debt repayment purposes that was behind much of the selling over the last couple of years. Our thinking is now back to what it was prior to the credit meltdown that we will be a seller if we think we have a core market reinvestment opportunity that will provide a better long-term total return on our capital.

On the development front, our focus in 2009 was to complete the lease and to stabilize our existing deals and we're very pleased with our progress on all fronts. During the year, we completed six assets totaling $670 million of development cost. We stabilized seven projects, totaling nearly 1,600 units. In the fourth quarter alone, we leased 375 units and had 338 new move-ins, just in the fourth quarter of 2009.

Now like everywhere, our rents are below our expectations. They're down about 18% on average on a net effective basis from our original underwriting, but that's just the fact of what is going on out there in the marketplace today. We have four projects that remain under construction at the end of 2009. These range from 70 to 98 or so percent complete, with only about 140 million yet to fund to complete construction on those assets.

But as noted in the last night's release, we have added a property to our development pipeline. We have acquired a leasehold interest in a land parcel in New York City. This is at the southwest corner of 10th Avenue and 23rd Street in Chelsea, right next to the High Line, which is an incredible, incredible thing for that neighborhood, just a great amenity.

This was a distressed situation in which we acquired this interest from an investor who had completed the foundations out of pocket, but was unable to get financing to go vertical, so the project that had little activity for nearly a year and a half. And we acquired this interest for about 50% of what the seller had into all the site and foundation work as well as the architectural and engineering design work.

And we simultaneously entered into an amended ground lease which didn't really change the economics any, but it did make the lease more commercially reasonably to us and it was necessary for us to go forward with the transaction. So, on this site, we'll build 111 apartment units beginning as early as the second quarter of 2010. That will include 9,400 square feet of prime retail at just a tremendous corner in the Chelsea neighborhood.

Total cost, about $53 million. 100% of these units will be market rate. We've underwritten a 7% – a mid-7% yield on cost and that's at current rents today and the deal is subject to a 421A 10-year tax abatement, which is a favorable tax treatment for that site. This really was a unique situation. I got to tell you that our development team led by Megumi Brod really brought to the table and we just did a phenomenal job of making that happen for us and we're real excited about it.

So with that, we'll turn the call over to Mark.

Mark Parrell

Thanks, David. Good morning, everyone, and thank you for joining us on today's call. This morning, I will focus primarily on our fourth quarter performance and our guidance for the first quarter and full year 2010. Same-store NOI declined 6.3% in the quarter compared to the fourth quarter of last year. Revenue was consistent with our expectations, and expenses were better than our expectations.

For the quarter, our same-store total revenues decreased 4.7% over the fourth quarter of 2008 due to a 4.5% decrease in average rental rate and a 20 basis point decline in occupancy to 94%. Same-store expenses were down 1.9% on a quarter-over-quarter basis driven primarily by decreases in real estate taxes and payroll.

Our expense categories are broken out in our detailed disclosure on page 14 of the press release. As most of you know, real estate taxes and payroll are two of our three biggest expense categories. Together they constitute approximately half of our combined same-store operating expenses. Real estate taxes were down because lower valuations were realized more quickly than we expected and because of our success with appeals.

Payroll was down because of adjustments to accruals, lower headcount, and less overtime. The third biggest expense category is utilities, which is about 15% of our expenses. And those expenses were up only 2.7% quarter-over-quarter, less than we expected, due primarily to lower energy costs. The next big category, repairs and maintenance costs, were down mainly because turnover was down 1.3% for the quarter. And I note that turnover was down 2.7% for the full year.

Regarding FFO, we had a terrific incremental contribution, about $6.3 million in the quarter from our lease-up properties. For the full year, lease-ups contributed an incremental $23.2 million to our FFO results in 2009. Our FFO was $0.52 per share for the quarter, down from $0.61 per share for the fourth quarter of 2008 after adjusting for one-time items, including the 2008 land impairment charge and debt extinguishment gain and the 2009 tender offer charge.

This difference was primarily due to a decrease in same-store NOI of about $0.06 per share and $0.06 per share of dilution from our 2008 and our 2009 net disposition activity, offset by the $0.02 per share of higher lease-up results that I just referred to. 2009 was challenging. We came through it well. So with 2009 behind us, let's take a look at 2010.

On page 25 of the release, you will find the assumptions underlying our annual FFO guidance. We have also listed in the release the primary drivers of the difference between 2009 and 2010. Let me discuss further a few key items.

On the revenue side, Fred gave some wonderful color on our numbers, and I wanted to add a few points to help put our 2010 guidance in perspective compared to our 2009 results. During 2009, our same-store quarter-over-quarter numbers -- revenue numbers became progressively worse, as the impact of the roll-down in net effective new lease rates went through our rent roll.

In 2010, we expect our same-store quarter-over-quarter revenue numbers to grow progressively better with the possibility that same-store revenues for the fourth quarter of 2010, when compared to the fourth quarter of 2009, may be minimally positive. This is mostly due to the easier comparable periods we will face in later 2010 as well as the improved occupancy in 2010 that Fred discussed.

On the expense side, we set a same-store guidance range of 1% to up 1% to up 2%. We expect utility increases of approximately 3% and real estate tax increases of approximately 2%. We believe we can manage payroll expenses effectively and continue to find ways to control other costs while keeping our properties in excellent shape.

And I note same-store expenses were essentially flat in 2009 for the year, down 0.1% after having growth of only 2.2% in 2008 and 2.1% in 2007, which again makes for a very tough comparison period for 2010, but Fred and David Santee are up to the task.

The primary drivers of the difference between the midpoint of our first quarter of 2010 FFO guidance of $0.50 per share and our 2009 fourth quarter actual FFO, and I'm excluding the tender offer charge, of $0.52 per share are as follows. A negative impact of $0.03 per share from lower same-store NOI. As I explained earlier, our first quarter 2010 same-store revenue will be down more than the negative 2% annual guidance midpoint, but it will be better than the negative 4.7% quarter-over-quarter number we reported for the fourth quarter of 2009.And I expect a positive impact of approximately $0.01 per share from lower interest expense.

Our full year 2010 FFO guidance of $1.95 to $2.15 per share has four main moving pieces when compared to 2009; lower same-store NOI, dilution from transaction activity, accretion from lease-ups, and lower interest expense. On the NOI side, we expect lower same-store NOI of about $0.16 per share. As for transaction dilution, we anticipate transaction dilution of about $0.11 per share that consists of $0.10 of dilution from our net sales activity in 2009, and $0.01 of dilution from our 2010 transaction activity. As for lease-ups, we anticipate a positive impact of about $0.09 per share from lease-up activity.

And finally on interest expense, we expect a positive impact of $0.03 per share from lower interest expense. And this comes from lower debt balances, caused from paying off debt both at maturity and through tenders, but this is somewhat offset by a reduction in capitalized interest due to our much smaller active development pipeline in 2010.

Now onto capital expenditures. As described in footnote nine on page 22, in 2010, we expect to spend about $825 per unit without major rehabs and about $1,075 per unit with rehabs. In 2010, we estimate that same-store routine replacements will run about $350 per same-store unit. We expect to spend approximately $29.3 million on major unit rehabs on about 3,900 units, which is about $7,500 per unit. This will equate to approximately $250 per unit when averaged out over the entire same-store portfolio. We estimate that we will spend approximately $475 per unit on building improvements in 2010.

I also want to highlight the impact on 2010 earnings and FFO of some relatively new accounting guidance that will impact us more in 2010 than it did in 2009. This rule requires us to expend survey, title, outside legal expenses and other similar costs we incur in acquiring existing operating properties. Prior to 2009, these costs on successful acquisitions would have been capitalized.

Our past history is that on average we spend about 50 basis points or 0.5% of a property’s purchase price on acquisition costs. Therefore, based on our acquisitions guidance of $1 billion, we have budgeted about $5 million of such costs in 2010, with about $2.5 million or $0.01 per share of these costs being incurred in the first quarter. These expenses run through the other expenses line item on the income statement. We have added the other expenses line to our guidance assumptions on page 25.

A quick note on the funding sources for this year's transaction activity. We began 2010 with approximately $150 million of cash available for investment and approximately $250 million in disposition proceeds in our 1031 escrow account. We have budgeted funding this year's acquisition activity with a combination of this $400 million along with expected proceeds from future property disposition. We will pay off approximately $250 million of debt this year, all of its secured debt.

After adjustments for net operating cash flow and some minimal development spending, we expect to have a balance on our unsecured line of credit of about $225 million at the end of 2010. Given that our line costs us about 50 basis points above LIBOR or 75 basis points in total right now, a bit of line usage does not bother us at all.

In the second half of 2009, the capital markets continued to improve substantially, causing us to be more confident in our ability to refinance our future debt maturities. As a result, the company conducted a debt tender offer in order to put to use cash the company had stockpiled in early 2009 to address 2010 through 2011 debt maturities.

As you can see on page 17, we spent about $366 million, retiring about $344 million in 2011 and 2012 unsecured debt. Consistent with our strategy these past two years, we view the tender as a prudent cash management step and as a means to whittle away at our 2011 and 2012 debt maturities. We will remain vigilant of our liquidity position and debt maturity schedule.

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

David Neithercut

All right. Thank you, Mark. Before we open the call of questions, I’d like to reemphasize a couple of points that we've discussed already. The first is as it relates to operations, we will experience a second year of negative same-store revenue growth in 2010. But as Fred said, we expect fundamentals to improve ever so slightly as the year progresses because net effected new lease rates are turning a bit positive, renewal rents have turned upward just a little bit, and we expect an incremental increase in average occupancy for the year.

Though we are a long way from a recovery, these are certainly positive signs for the apartment business. And lastly, on the investment side, the Macklowe purchase as well as the land lease deal were the results of our ability to move quickly, our ability to deal with complex structures and issues, and our ability to fund with cash on hand, regardless of deal size. These attributes enable us to get direct looks at these terrific opportunities and we are very hopeful we will see more of them as the year progresses.

So with that, Crystal, we will be happy to open the call to Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of David Toti with Citigroup.

David Toti – Citigroup

Hi, guys. Michael Bilerman is here with me as well.

David Neithercut

Good morning.

David Toti – Citigroup

My first question has to do with the acquisition. I know you provided some detail on this, but can you just walk us through some of your underwriting sort of outlines relative to what kind of growth you are expecting? The cap rates are pretty low on a relative basis. So I'm just wondering what you are thinking about in terms of growth, exit cap rates, where the risk is, especially with respect to the New York City acquisitions?

David Neithercut

Well, I mean cap rates are low on a relative basis. The cap rates are high depending on how far back one wants to go. And I’ll tell you that particularly as it relates to New York City, we went back over almost 12 years of history to look at where cap rates have been, and these are the highest cap rates that we've seen over that time period. And obviously we look at cap rate, we are also looking at what our price per pound is. And we are very, very pleased with being able to acquire these assets at $470 a door and $545 or so a square foot, but we think replacement cost in that market gave us probably $800 if not $900 per square foot or perhaps more. I will tell you, in 2010, and the acquisitions we've written revenues down 3% during the year. And then we are forecasting improvements in rents going forward.

And on the residuals, I can tell that you that our residual prices per square foot are in the range of what we think replacement cost is on those assets today. So we're very comfortable with that. Clearly there are risks in all of these, but I will tell you that the ability to buy assets today at the discount to replacement costs, we have particularly this Macklowe portfolio, I would be very surprised if we do not wildly exceed what we think are currently in a low-double digit IRRs on an unleveraged basis.

David Toti – Citigroup

Great. And then just along those lines relative to replacement cost, how do you underwrite the risk to replacement cost benchmarks given the squishiness of land prices in today's environment? And I think --

David Neithercut

Well, I will tell you particularly in the instance of the deals we've acquired in Macklowe -- forget about the marks. I mean, there is just no land. The ability -- it's nearly impossible to assemble the types of land parcel, the footprints needed to build these big deals today.

So I guess I will just tell you that we look elsewhere around Manhattan and try and make some judgment as to whether or not it's somewhere between $200 or as much as $300 per net rentable foot. We’ve got a great team in New York that are working on deals. They are working on the Chelsea deals trying to make sure these things triangulate and there is symmetry about it all, but you are absolutely right. It is extremely difficult and challenging to try and determine what the replacement cost would be, particularly in the land value of something that you couldn't have replaced. Well, even more so, we feel great about our price per pound on these acquisitions.

David Toti – Citigroup

Great. Thanks, David. And then my last question just has to do with more of a portfolio strategy. And I think you've sent some pretty bullish signals relative to modest signs of improvement, but at the same time, occupancies continue to ratchet up. And at what point do you attack in a different direction and let occupancy begin to drop as you hold prices a little bit firmer? Or do you think that that doesn't happen simultaneously?

David Santee

This is David Santee. I would say that -- our occupancies -- probably if you look across the public space, our occupancies have been I would say on the low side relative to our competitors. We don’t chase occupancy. Our strategy is more about optimizing the two inputs, which is rate and occupancy. So we made the decision early in the year to try not to get involved in the move-in concession games, stick with our net effective rent strategy, and frankly put a lot of faith and effort into using LRO as it was intended to be used.

David Toti – Citigroup

Great. Thanks for the detail.

David Neithercut

You're very welcome.

Operator

Your next question comes from the line of Michael Levy with Macquarie.

Michael Levy – Macquarie

Hey, good morning.

David Neithercut

Good morning, Michael.

Michael Levy – Macquarie

Can you please talk as a follow-up to David's question about the competitiveness against which you are purchasing assets? Are you bidding against the same number of buyers that were looking at purchasing the Pentagon Row assets?

David Neithercut

You raised a good point. On the Pentagon Row asset, which we acquired in the fourth quarter, there was a very significant competitive bidding process. In all of the other deals that we've acquired, Michael, there has either been an absolute direct transaction or a process by which there was a very small group of people that have been approached. You are right, there is a lot of money out there. Coming back from the National Multi Housing Council meetings in Florida last month, I can tell you that there is a lot of money out there and a lot of people that would like to buy multifamily assets for all the reasons that we've talked about.

Extremely competitive at smaller price point transaction, very competitive at stabilized assets, and fortunately we bought some things that had come to us direct. We bought some things that we had some conversations with someone -- people months ago who might have come back to us and said maybe I'm willing to talk to you today and we were able to do something on a direct basis. The Pentagon Row would be the only deal that I would suggest to you has been -- was one that was really fully brokered and heavily shopped.

My objective this year is to buy as much as we can outside of a large heavily brokered process. I'm not interested in being the winning bidder out of a 100 people chasing some of the stuff. I think that the size of the Macklowe transaction, their desire for something to be done quickly and confidentially enabled us to get that transaction done. And I'm hopeful we'll be able to shake some other things loose. We’ve got a lot of very capable, very confident acquisition people around the country that know locals and we're trying to have conversations, trying to get as much done as we can on a direct basis.

Michael Levy – Macquarie

That's helpful, thanks. Do you think, just as another follow-up to David's question, that when you gave guidance -- when you gave projections as to where you think revenues may be headed over the first couple of years post purchase, do you think -- is that based on your market view or based more on the fact that you have a stronger platform and you might be able to drive yield higher through more efficient operations from the get-go?

David Neithercut

Well, I will tell you that I think on most properties we underwrite on the expense side we do believe that we can have some immediate savings on expenses. And I will tell you that I guess as we project where we expect rents could go going forward, I think it's more of a view of an individual market of what we think the supply constraints are in that individual market, what we think growth expectations, demographic trends are in that particular market, and that the input that that will have on revenues. I'm not suggesting that we're buying stuff because we think we can get a whole lot more revenue than the next guy. Perhaps we can, but we're not paying the third party for that.

Michael Levy – Macquarie

Okay. One final question, I'll get back in the queue, is -- in the South Florida market, can you talk little bit about the strength you're seeing? Are the tenants that are moving into the EQR asset coming from foreclosed assets or just they are taking a quality uptick or are they folks that just moved down to the area? I guess I am asking that with the oversupply of housing in the market, it strikes me as a bit odd that results are as robust as they are there.

Fred Tuomi

Michael, this is Fred Tuomi. We are very pleased with the recent trends at South Florida. We've seen strong increases in occupancy, really about 200 basis points over the same time last year, and rents are starting to move up. I’d say, in South Florida, we definitely have a liftoff, but one of the concerns there, one of the drivers of the downturn was that oversupply of single-family homes especially concentrated there in the Miami area.

So the issue there with our portfolio, we have primarily a suburban portfolio. We're not in the ground zero of all the housing mess [ph] down there. We’re in Broward. We’re in Palm Beach. We’re in the more suburban area. So we haven't been directly competing with some of this shadow market inventory there at these condos there. A little bit on the fringe are properties nearby, but it really hasn't been a factor. Anecdotally, I have heard recently that they are seeing people who are losing their single-family homes that come to rent with us. We welcome them as long as they can get their income qualified, but I don't think it's a massive influx.

I think South Florida has been bouncing on the bottom for a couple of years now, and we are seeing some good signs of demand. They’ve got some construction, some infrastructure projects going on there. One thing I do worry about South Florida is the continued negative growth in population and households. If that continues, there could be kind of a slowdown for us, but so far so good.

Michael Levy – Macquarie

Great. Thanks. That's really helpful.

David Neithercut

You're welcome.

Operator

Your next question comes from the line of Dave Bragg with ISI Group.

Dave Bragg – ISI Group

Hi, good morning.

David Neithercut

Hi, Dave.

Dave Bragg – ISI Group

David and Fred, your discussion earlier on revenue growth, your outlook there was helpful, but could you take a top-down approach and help us think about what employment assumption underpins that forecast?

David Neithercut

Yes. The job forecast is not a primary input to our budgeting or forecasting models. It's a macro kind of secondary, just overall feeling for it. When we look at our business, we do know which markets maybe have gotten hit hard with job losses, which markets are continuing, which markets are forecasted to be improving or reaching some sort of stability next year. And we use the same economy.com statistics that others do. But we kind of leave it there. It just sets the table. We really run our business based really from the bottom up. What are the trends or the metrics that we have available to us? The platform we have now gives us just incredible time series of metrics, incredible visibility, and then on top of that, incredible ability to forecast. And we've been very accurate and very fortunate so far.

So we're not so anxious about job number X or Y or Z. We're more anxious about what’s the absorption rate, what’s our leasing velocity, what’s the traffic, what’s the demand pattern, where were we last year, what are the seasonal factors, and what’s the occupancy trend, the left the lease trend, what our salespeople are telling us, what our customers are telling us. I think that's more effective way to predict the business that we can control versus assuming you're going to have an outcome based on job forecasts, which are done by economists, you know what that means, and then setting a strategy that way. We would rather set a strategy based on what we can control.

Dave Bragg – ISI Group

Right. I understand. But ultimately jobs will drive that demand and the absorption that you are looking for. And I’d point out that a couple of your peers did provide this assumption, so therefore it would be helpful for us. Maybe I'll just try it a different way. A couple of peers suggested that their forecast is based on negative job growth in 2010. If that were to play out, how would that affect your forecast? Would it still hold?

David Neithercut

But again, we're not looking at national job forecasts. Okay? We're in an individual market and we look at the major employers in that particular market, looking at employers of our residents and trying to make some judgments about what's going on in that market or submarket. The fact that they lose a bunch of jobs in Cleveland or whatever doesn't impact us. We're looking at the 15 or so kind of core markets in which we are operating and trying to understand what we think is happening to job activities in those markets as well as supplying all of the other demand characteristics. But this is not -- we don't start by saying we make this assumption about national job loss or job gain, David. I mean it just doesn't work that way for us.

Dave Bragg – ISI Group

Just one last question on this point. Just drilling down to the 15 or so markets that you mentioned, which of those markets are you seeing the most hiring activity, or are you feeling most optimistic about hiring activity at least in the first half of this year, for example?

Fred Tuomi

Okay. I can handle that. Boston has been very stable. We had some significant job losses last year, but Boston has stabilized and recovering. We have got some good education, government, healthcare and some technology issues there that are helping us. Virginia and Maryland and basically D.C. Metro, very good job situation the last couple of years, minimally negative and now going to come back more robust on a positive basis. And these are great demographics. The jobs being created in D.C. right now just fit us perfectly. The young digeratis, they are the lawyers, they are the first-time accountants, consultants, defense piece, government piece, it all seems to be growing. So D.C. area is very favorable.

Denver is coming back. Inland Empire, probably not. Los Angeles is going to be a little sketchy. New York is one that we are seeing some job stabilization and recovery. Anecdotally, our people in New York were telling me just recently that all of the big houses are hiring, JPMorgan Chase, Goldman Sachs. We’ve got a number of new leases just recently both in Manhattan and over in Jersey and are leased up at 70 Greene coming from the bankers.

So we're happy to see that sector coming back. So a lot of markets -- we're seeing the manufacturing kind of went away, the real estate related got hammered, the construction went away probably slow time coming back. But what is coming back right now are some of these technology companies, investments in infrastructure, investment in energy, and then also the consultants, the bankers, the engineers, and those type of things are starting to coming back.

Orange County, we're not seeing that. Orlando is kind of a mixed bag. Phoenix, not -- and so it's really kind of a market-by-market situation the way we look at it. I guess sort of -- and one market of note is Seattle. Seattle had significant job losses last two years, as everyone knows, but it's one of the stronger forecasted recovery markets on the job front. Microsoft has started hiring again. Amazon has been hiring. The WaMu building, which recreated [ph] the downtown is going to be replaced with Russell. So a lot of good things really happening in Seattle, and of course Boeing has now a deep backlog of deliveries and they need a lot of people.

Dave Bragg – ISI Group

Thank you.

David Neithercut

You're welcome.

Operator

The next question comes from the line of Farooq Gala [ph] with Morgan Stanley.

Farooq Gala – Morgan Stanley

Yes. Good morning.

David Neithercut

Good morning.

Farooq Gala – Morgan Stanley

Could you give us some details on the land parcel purchase in Manhattan, some idea of the price you’re paying [ph] from the peak you've seen in this market, and when do you anticipate development on that site?

David Neithercut

I'm sorry. The price we paid?

Farooq Gala – Morgan Stanley

Yes.

David Neithercut

We paid about $12 million or so for the property as well as the incremental costs that we'll need to incur to get all the engineering and everything right. We're making some modest changes to the plans and specifications that had been in place. So then again, your follow-up question to that was?

Farooq Gala – Morgan Stanley

So when do you anticipate development?

David Neithercut

As I said, we expect to start construction as early as second quarter of this year.

Farooq Gala – Morgan Stanley

Thanks. And I guess my follow-up question is, as you look at dispositions in 2010, are you targeting any particular markets, any plans to exit any particular market?

David Neithercut

No, we're getting very close to having exited the -- all the target markets that we’ve talked about. And I think we'll complete that process as well as we’ll continue to look at older assets in perhaps in some of our core markets or submarkets that we are less interested or assets that have got some capital issues or valuation risk. And again, as I mentioned earlier, our disposition process will really be a function of our investment opportunities going forward. They will be much more closely linked today than they had been in the past couple of years.

Farooq Gala – Morgan Stanley

Okay. That's helpful. Thank you.

David Neithercut

You're welcome.

Operator

Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Alexander Goldfarb – Sandler O'Neill

Good morning.

David Neithercut

Good morning.

Alexander Goldfarb – Sandler O'Neill

I just want to go to the tender. Just want to get your thoughts, some of your peers did the concurrent issuance with the tender speaking to some institutional investors. It sounds like they're pretty receptive to that. Just wanted -- given your size on the unsecured market, just want to get your thoughts on why on doing that strategy versus just doing the outright tender without the concurrent offering?

David Neithercut

Yes. When we thought about the tender, we really we thought about it as a primary means to manage our cash. Back in June of '09, when we did the large Freddie Mac secured financing, we were doing that, Alex, with the thought that we would need that money potentially to meet maturities coming up in '09 and in '10 and that we couldn’t count on the capital markets to refinance us in the ordinary course. As we all got more confident here about that, we decided late in 2009 to go ahead and apply that cash right now to maturities, the public -- the nearest public maturities we had, which were the ‘11s and ‘12s that we took out.

The reason we didn't couple that with another issuance is we frankly didn't need the cash. I mean, the only reason to do an issuance in connection with a tender, I think, is to either extend duration or to manage interest rate risk. And we've done some hedging away from this that we think manage interest rates risk just fine. Our duration stands at seven years. We think that’s okay. So we just felt that we had managed that risk in another way and that that was just as effective or more effective, frankly.

Alexander Goldfarb – Sandler O'Neill

And just on that duration, can you -- what's the split between secured versus unsecured duration?

David Neithercut

Secured versus unsecured duration, okay. Well, that’s -- nine years is our secured duration and unsecured is five.

Alexander Goldfarb – Sandler O'Neill

Okay. And then the second question is, given that the trillion in the quarter buyback program is almost I guess coming to an end in March. What are you guys hearing or what's the take on GSE rates? Is there a view that they will go up and that will make other portfolio lenders more competitive or the GSEs are going to try to compress spread and hold rate?

David Neithercut

Yes. The GSEs have done a pretty good job of, frankly, lowering their guarantee fees, their profit to try and keep their rates in that 5.5% to 6.0% quarter, Alex, to date. I can't accurately predict the future very well on that, but what I would say is as those rates go up, investors I think would start to buy that security. So it becomes a bit of a comparative -- comparatively more attractive security.

So, again, as the fed withdraws support and maybe government agencies otherwise stop purchasing Fannie Mae and Freddie Mac, MBS and conduit product, I think other investors, fixed income investors, will step up because there is just such a hunger for yield in this climate that that will offset it. So could it go up modestly? Absolutely. But I don't see a big jerk up here just because again I think there is so much fixed income demand that any yielding product like this would get bid up.

Alexander Goldfarb – Sandler O'Neill

And then if I can just follow up on that. Just given the appetite for yield, what is -- I mean, you guys are a big unsecured issuer. What’s -- what would it take for you guys to come to market? What are you looking for in the market to issue?

David Neithercut

Again, when we need the money and we have a debt maturity that's coming up, we'll do that. At the end of the year, we’re only going to be $250 million on the line. I mean, pretty modest line exposure, $225 million on the line. So I do expect that in the next year or so, we'll access the debt markets in one way or another and I think we'd prefer that to be the unsecured market. But gosh, until we need the money, just stockpiling it and carrying that the illusion around, that’s been the plan the last two years, and I just don't see the need for it at this point anymore. So when we need the money, we'll borrow the money.

Alexander Goldfarb – Sandler O'Neill

Thank you.

David Neithercut

Thank you.

Operator

Your next question comes from the line of Michelle Ko with Banc of America.

Michelle Ko – Banc of America

Just along those same lines, recently one of your peers had issued unsecured debt. If you were to tap the market today, what rates do you think you would be able to obtain?

David Neithercut

Yes. I think we could do a 10-year unsecured at maybe 175 or so over the 10 years. So I think that's in the 5.5, 5.75 range really. The really interesting thing, Michelle, of late on that is that there is getting to be great compression between Fannie/Freddie rates at least for us -- our Fannie/Freddie rate and our unsecured borrowing rate. So those two are pretty close together. You might remember that gap has been pretty large and that’s why we were a pretty big secured borrower. As that gap tightens, that makes us more able inclined to borrow unsecured in the future than secured.

Michelle Ko – Banc of America

Okay, that’s helpful. Thank you. Also I was just wondering if you could talk about what markets you might like to increase your exposure in.

David Neithercut

Well, I’ll tell you, Michelle, we don’t have particular goals in any of the individual markets. But we have been focused over the past five or so years on the New York, Washington, Boston, Southern Cal, Seattle and San Francisco. So if you were to see us acquiring, it’ll likely be in those markets. We consider those would to be our core market sales today. Our activity will be in those markets.

Michelle Ko – Banc of America

Okay, great. Thank you very much.

David Neithercut

You're very welcome.

Operator

Your next question is from its line of Jay Habermann with Goldman Sachs.

Jay Habermann – Goldman Sachs

Hey, good morning, everyone.

David Neithercut

Good morning, Jay.

Jay Habermann – Goldman Sachs

Just a comment, you did take about rates on renewals, and obviously you guys are seeing some modest increases here. What are you sensing from your competitors at this point? Are they -- are they buying occupancy or are they changing the game as well and starting to bump up rates?

David Neithercut

Well, the only thing we see on the competitor side of -- what's really important is the new lease-up competition. In certain pockets of areas where we have supplies still working through the system, that will disrupt a local market or a submarket basis. So if someone starts offering one month, two months, in some cases, you hear three months free rent on a lease-up, until they get stabilized, that will kind of disrupt the market. And sometimes that does impact not only your net effective new lease rates, but also your renewal rates. If you get more -- more customers may come to you and say, well, gee, I can go and get a brand new property for two months off. That's really the most kind of noticeable change. Other than that, I really don't see any kind of disruptive behavior or competitive threat from anyone else on our core markets or core assets.

Jay Habermann – Goldman Sachs

And can you talk about the move-outs to single-family? I think you expect turnover to be roughly flat year-over-year.

David Santee

This is David Santee. When you look back over the past fourth quarter, there was a lot of news about increased home buying. When I look at our markets, at first glance, on a percentage basis, the percentage of move-outs, those numbers were quite elevated. But if you look at our actual turnover, which was considerably lower, and you convert those to raw numbers, the numbers just -- they are not meaningful. Probably the most two meaningful markets as far as increased move-outs to buy homes are Phoenix and Northern Virginia. And those -- in Q4, those numbers were elevated well above Q4 of even 2008. But when you look back over 2008, 2009, 2007 across almost all of these markets, very few markets are even close to 2007 levels.

Jay Habermann – Goldman Sachs

And I guess as you think about in terms of acquisitions, you still got another $500 million to go for the balance of this year. In which markets are you seeing the greatest discount to replacement cost? Is it New York, or is that really a unique situation?

David Neithercut

Well, I think New York was indeed a unique situation. It all depends on who knows where pricing goes from here, Jay. I mean, just past acquisitions are no indication of what future acquisitions are going to be. So I don't really know. But we have been --we did get -- we did think New York was a pretty sizable discount to replacement cost and certainly more of a discount than the other deals we've been buying, which have probably been more -- 90% of replacement costs down to more like 80% of replacement costs. But just remains to be seen based upon the opportunities that are presented.

Jay Habermann – Goldman Sachs

And what about the distressed selling, the land deal? Are you seeing more of that activity as well?

David Neithercut

Not really. Not distressed enough for pricing that makes sense at least in our judgment. I'm not suggesting that land parcels are not today available at lower prices than they were in the not too distant past, but they are still not making sense to us relative to what our acquisition opportunities are. So as long as we believe we can buy existing streams of income at the right price, we would favor that. I would tell you we are looking at acquisitions and we're constantly underwriting things, but have not yet seen anything from a new purchase standpoint outside of the unique situation in Manhattan that would -- is getting us moving towards taking down new land parcels today.

Jay Habermann – Goldman Sachs

Thank you.

David Neithercut

You're very welcome.

Operator

Your next question comes there the line of Rich Anderson with BMO Capital Markets.

Rich Anderson – BMO Capital Markets

Thanks. Good morning, everyone.

David Neithercut

Good morning, Rich.

Rich Anderson – BMO Capital Markets

I just want to make sure I understand this net effective new lease math that you are talking about turning positive. It was down -- new lease effective leases were averaging down 9%, 10% last year, correct?

David Neithercut

That is the change from the expiring lease.

Rich Anderson – BMO Capital Markets

Right. So what is that apples-to-apples number looking to be for 2010?

Fred Tuomi

Well, there is -- this is Fred Tuomi. There are a couple of concepts I don’t want to get confused on. First of all, the net effective new lease rate is kind of your current price on the margin, the new person coming in. And that's the piece that fell dramatically late '08 and stayed flat. And those are now starting to move up. The replacement rent, which is when someone does not renew and they move out and then that new person comes in at the new lease effective rate, then that gap has been as wide as maybe 10% or 11%. And it is narrowing as we get improvement and as we get better comps, and it's right now about between 6% and 7%.

Rich Anderson – BMO Capital Markets

Okay. That's the number I was looking for. So down 6% and 7% today, and I guess I am maybe getting a little tangled up in terminology here. But what do you say -- what do you think turned positive -- what's turning positive then in 2010?

Fred Tuomi

Two things are positive trends. One is on the price that we can get. That's the net effective new lease rate, which is new on the margin, new person coming in. That is an upward trend. So sequentially it's getting better.

Rich Anderson – BMO Capital Markets

Okay. So that's the market.

Fred Tuomi

Right. It’s the market. Then the -- your embedded lease is another factor. So when someone does move out, they don’t renew, and then we are taking it, basically filling that unit with a new resident coming in at the new market rate, that’s the write-down. And that write-down is improving. Every week we see it improving because of an easier comp period the year before and because of that slight, modest, but continual upward tick of the market rate.

Rich Anderson – BMO Capital Markets

Got it.

Fred Tuomi

So those will compress, and the magic moment when they become flat [ph] would be later this year.

Rich Anderson – BMO Capital Markets

Okay. So that minus 6% to 7%, you think, can go to almost a flattish-type number toward the end of the year?

Fred Tuomi

Yes.

Rich Anderson – BMO Capital Markets

Okay. Thank you for that clarification.

David Neithercut

Just to be clear, I’ll just want to add, a lot of that is because, Rich, or some component of it, is the leases that we are renewing that were newly written in '09, right?

Rich Anderson – BMO Capital Markets

Right, yes.

David Neithercut

So a new lease that was written in '09, down in ‘10, will be rewritten flat or maybe up a little bit, so -- maybe up one or two, and so that will have an impact. So that number will go from ’09 to ‘10 and progressively come down a lot because of the comp of the leases that were expiring as well as a little bit of the increase in the market rent.

Rich Anderson – BMO Capital

Right. So assuming market rent stays stable, if you take that movement out of the equation, if market rent stays stable in the next year, if you have a new lease, then it would be a flat number, the roll would be flat?

David Neithercut

Yes.

Rich Anderson – BMO Capital

If market rent goes up, then you would roll up?

David Neithercut

It would just occur a little bit earlier.

Rich Anderson – BMO Capital

Right. Okay, got it. On the acquisitions, the most recent acquisitions in the fourth quarter and also during the first quarter, how depressed -- you mentioned looking back 12 years in New York, for example, how depressed are the rents on a per square foot basis that you see today and that you're kind of pro forma-ing for 2010, how depressed are they relative to sort of history and what kind of pent-up upside can you see, say, three or four or five years out from here?

David Neithercut

Well, I guess I'll just tell you that our portfolio-wide in 2009, we were at market rents that were down 10 from the previous year. And so I think that that sort of shows you I think some of the gap that needs to be built in generally to get back to what might have been a high water mark. But beyond just sort of getting back to historical numbers, I just cannot impress enough upon everyone the benefits that I think we'll get from absolute lack of new supply in our markets going forward and the demographic picture that’s out there today. So -- and we do believe that when we can establish job growth into this very modest but long kind of recovery that we think we're experiencing now, you have to introduce some job growth into that, and I believe, Rich, that we’re going to see some rents that will be spiked up on a very material basis over an extended time period.

Rich Anderson – BMO Capital

So the history is one thing. The future might be something even better considering the lack of new supply?

David Neithercut

And the demographic picture.

Rich Anderson – BMO Capital

And the demographic picture. Okay. Thank you.

David Neithercut

You bet.

Operator

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

Michael Salinsky – RBC Capital Markets

Good afternoon. Just had to pick on Cleveland?

David Neithercut

Sorry about that, Michael. I meant Milwaukee.

Michael Salinsky – RBC Capital Markets

No offense taken. Just revisiting the development here. I mean, I think the Manhattan property was probably a one-off opportunity. Are you guys looking at additional opportunities on the development side right now? And where would cap rates have to drop right now before you begin aggressively looking more on the development side?

David Neithercut

Well, look, I’ll tell you that we’ve got a development team that are looking at opportunities out there all the time. Again, we’ve not seen anything compelling, and so the only deal we’ve done is the transaction, which I agree with you was kind of a one-off unique situation in Manhattan. And I think that the development opportunities will be a function, as you point out about where pricing goes or where valuations go in the marketplace, as you get more transaction activity and more sort of value marks going forward. I'll tell you, in just -- in more commodity-type markets in which we're not playing, you can look at transaction comps and sort of use that as a baseline because you might always have the ability to buy assets at those cap rates. I will tell you in more supply constrained markets, you don't always have the opportunity to buy assets. And so I think you would be willing to start development deals at sort of a narrower spread because there really is no transaction activity or the ability to buy existing streams of income. And so we will monitor that and watch that. I think 2010 will be extremely interesting year of far more marks in our business about valuations and transactions pricing than we had in 2009 and 2008, and we will just have to see how it plays out. But I can't sit here today and tell you at this cap rate, this development yield things make sense. It's just not as easy as that.

Michael Salinsky – RBC Capital Markets

That's fair. Second of all, it sounds like on the 2010 transactions thus far, there is a little bit of redevelopment built into those. What kind of IRR have you underwritten those to? And then just curious, as you talked about the property in D.C. seeing a number of bidders and stuff, where is kind of the market right now? What are you guys competing against in terms of people underwriting?

David Neithercut

Well, I guess there is a great deal of money that is -- people have raised or is currently available, interested in owning well-located existing streams of income I think in core markets. I think -- Washington, D.C., I think, attracted probably a much larger number of potential bidders just because of the stability that that market has demonstrated over the past year or so. I'm not sure you get quite as much demand in looking at some other markets as you might there in D.C. As it relates to that, one of the deals we acquired, we're going to do a little bit of repositioning. It's only a 10 or 12-year-old asset. We just think it had been sort of under-cared for and under-managed, and we think that by putting some money into it and fixing it up a little bit, we'll be able to get a good return. But all other acquisitions have been written with low-double digit IRRs. And again, as I mentioned earlier, I think that buying at this point in the cycle on rents where they are today, at the discount to replacement costs I think we're buying today, and the quality of assets and the locations we are buying, I would be extremely surprised if we didn't wildly exceed those expectations.

Michael Salinsky – RBC Capital Markets

That's helpful. And then finally, on disposition activity in the past, I think you provided color as to where those valuation -- where the pricing came out relative to a benchmark there. Just curious how those played out relative to your underwriting. I think it may have been 2007?

David Neithercut

Yes, right. So 2007 was a high water mark for us, we think, in sort of property value rates. I can tell you what we sold in 2009 was done at about 25% off of that, so about 75% or so of what that high water mark at 2007 valuation had been. And again, recognizing those are what we would consider to be our least desirable, older assets in non-core markets.

Michael Salinsky – RBC Capital Market

Thank you.

David Neithercut

You bet.

Operator

Your next question comes from the line of Anthony Paolone with JP Morgan.

Mike Lewis – JP Morgan

Hi. This is Mike Lewis on Tony’s line. My first question is about -- you showed some year-over-year savings in property taxes in the fourth quarter. And given where municipalities are now, how are you feeling about that in 2010? Do you think you'll get a lot of pushback?

David Santee

This is David Santee. 2010 taxes kind of rolled out like this. For the most part, we expect to see politicians have a little more pressure on them to possibly raise rates. Many states do not publish rates until third quarter -- third or fourth quarter, which --that’s why you see the adjustment in Q4. So right now, today, we're saying, next year we're going to see on average across the portfolio somewhere in the neighborhood of 4% to 5% rate increase, but as of today, we have record dollar volume appeals in the pipeline. So assuming we apply our historical win rate on those appeals, we're saying that that 4% to 5% will be lowered down to about 2% as far as year-over-year growth.

Mike Lewis – JP Morgan

And then secondly, another expense question. Just wondering how long you could kind of constrain your payroll or your G&A costs either through staff size or pay rate to your staff? I realize you gave G&A guidance, but I'm just wondering if you feel pretty lean at this point.

David Santee

Well, I would say that we have always kind of been a lean shop relative to our industry. But on the other hand, we continue to leverage technology. We try to automate first, then educate. We are -- we have considerable initiatives to automate many of the day-to-day kind of core transactions that happen at our properties. And I think we have another at least two years of opportunity relative to payroll. And other categories, things like leasing and advertising and things like that, we have fully automated via the Internet. So I feel very good about our ability to control expenses over the next two to three years.

Mike Lewis – JP Morgan

Okay. And then my final question, and this is something you hinted at and -- but there was language in the press release about your -- you thought you had an advantage in your ability to close large, complex transactions. And I was just wondering if you could give a little more detail on that. You talked about some of the deals being large ones and limiting the pool of potential buyers. Could you talk a little more to that?

David Santee

Well, I'm not sure what more I can say. I think that there is a much deeper pool of potential buyers for mid size price, call it $50 million or so assets, fully stabilized $50 million assets than there are for larger assets that might have more lease-up or other sort of things. So just the higher the price point and the more complexity to getting to a stabilized income stream, I think will separate a lot of buyers. And I just wanted to note again our ability to get the Macklowe transaction as well as the Chelsea development site were a result of being able to do things quickly that were extremely complex. And I do mean extremely complex, with cash on the balance sheet that not everyone would have been able to do. I'm not suggesting we're the only people that can do this. But I would be very surprised, frankly, if a few other people didn't knock on our door based upon what we've already demonstrated our willingness and ability to do.

Mike Lewis – JP Morgan

Okay, great. Thank you.

David Neithercut

You're very welcome.

Operator

Your next question comes from the line of Dustin Pizzo with UBS.

Dustin Pizzo – UBS

Hi, thanks. Good afternoon, guys. David, my understanding is that the New York assets are completely unencumbered today. So can you talk about your plans, if any, to put mortgage debt on those assets or potentially…

David Neithercut

Thanks, Dustin. I just want to repeat the question. I'm not sure I heard it. You asked whether the assets will be -- the Macklowe assets will be unencumbered?

Dustin Pizzo – UBS

Or that -- my understanding was that they are unencumbered today. Do you have any plans to put debt on them?

David Neithercut

Yes. The two we’ve acquired are unencumbered. We have no plans to put any debt on those assets, nor do we have any plans to put any debt on the third asset once the debt referred to in the press release is discharged.

Dustin Pizzo – UBS

Okay. And then just looking at the GSEs, do you have any thoughts on Washington's plans to transform or restructure Fannie or Freddie in the future in light of some of the comments that Barney Frank has made over the past couple of weeks?

David Neithercut

Yes. I don't think there has been a definitive plan that I’ve seen put out on what the GSEs will look like in the future. I took a lot of encouragement I will tell you for the time being out of the Christmas Eve announcement, out of the Treasury Department that the government would effectively -- the Treasury Department, provide an unlimited amount of support by buying preferred stock in Fannie and Freddie along -- so to keep them solvent and allow them to do their -- to continue to provide liquidity to the single-family market and to us. So I found that announcement very encouraging. They also gave a bit of flexibility on the shrinking of the portfolio that had been something that Secretary Paulson spoke to two years ago. So you don’t have to shrink their owned portfolio much. So I really thought that was pretty encouraging. I don't think there is yet any political plan that at least I've heard of that has been yet communicated that’s definitive as to what the GSEs will look like two or three years from now. So I don't know how to take Mr. Frank's comment except to say that in the context of all the other comments, it's just part of the stew. Is there another question, operator?

Operator

Yes, sir. Your next question comes from the line of Andrew McCulloch with Green Street Advisors.

Andrew McCulloch – Green Street Advisors

Good morning. I know the call is getting a little longer. I just want to follow up on some previous questions. Your comment seemed to imply that market rents will slowly improve from today throughout the rest of the year. Considering that market rents usually lag job growth by three to six months and we haven't seen material job growth even in your main markets, how do you reconcile that disconnect between kind of market rents and the historical relationship with jobs that you're seeing on the ground and that backed your guidance?

Mark Parrell

One of the things that we're seeing is some seasonality impact to the rents. I mean, historically, I think David mentioned earlier that our results over the fourth quarter were kind of the opposite of what we've experienced over the last, say, 10 years, where demand drops off in the fourth quarter. I would you say that we also took some proactive steps in the fourth quarter to ensure that our rents did not drift downward. We focused on lease expirations. We moved some lease expirations. And when you have less exposure, you can have the same demand and that puts pressure on the rents to move up. So we're not saying that we expect to see tremendous growth in rents over the next year, but we are expecting to see increased, slow, but steady movement up as we retain more residents and have lower exposure, which just naturally allows you to grow your rents organically rather than from external demand.

David Neithercut

Yes. I'll add to that, Andy, because I think you're right historically, and had our occupancy dipped as a result of this, let's just say we were 92 and change, I would agree with you. It would take us a while to build that occupancy back before we could begin to see this increase in some sort of net effective new lease rate. But throughout 2009, as we're sitting here in 2010, we are sitting here with very strong occupancy. We don’t have any occupancy to have to build back first. And as we've said, I think for quite some time, and perhaps this is what we're seeing, we felt that we had the ability to incrementally and just incrementally start to move rates if people who were employed no longer worried about losing their jobs. And we may very well be experiencing some of that.

Andrew McCulloch – Green Street Advisors

Okay. And then could you give us some additional color on the increase in other income that you have embedded in your same-store revenue guidance? What is that exactly?

Mark Parrell

Sure. Andy, a lot of that is we referred to an increase in utilities. Well, utilities also affects other income for us because of the increase in reimbursements from residents. So a lot of that is a component of utility increases, plus some additional focus on other income items at the property, parking and the like. But it's more -- I mean, on the kin of 30 basis points of that number we quoted of benefit to us, not a huge mover.

Andrew McCulloch – Green Street Advisors

Are there any associated increases in operating expenses with that?

David Neithercut

Yes. The utility costs run through the -- we mentioned that those were going to be up give or take 3%. So that is included. These are consistent -- the expense and the revenue forecast are consistent with each other.

Andrew McCulloch – Green Street Advisors

Great. And one last question, sorry if I missed this. Did you mention what your current gain to lease is in your portfolio?

David Neithercut

No. And we’ve not talked about loss to lease, we've not talked about gain to lease in the past, and we're not going to start today.

Andrew McCulloch – Green Street Advisors

Okay. Great. Thank you.

David Neithercut

You're very welcome, Andy.

Operator

You have a follow-up question from Michael Levy with Macquarie.

Michael Levy – Macquarie

Thank you. Just some questions about the land purchase. I'm trying to get a sense of the relative cost at which you purchased the land in Chelsea. By point of comparison, like just doing some Internet searches, it seems that Boymelgreen bought the land in 2005. Do you happen to know the price that they paid for that?

David Neithercut

Again, the land is subject to a ground lease. So what we entered into was an existing ground lease. No one bought or sold the land. We bought an existing leasehold interest. And we paid essentially for that interest along with all of the site work as well as the architecture and engineering design work that had been done by the previous lessee.

Michael Levy – Macquarie

Okay. I think I understand that. Thank you. And just one more question on the New York City market. What percentage of new tenants are using brokers to get an apartment relative to those that come in on their own? And are tenants that are moving into the New York City assets today paying broker's fees when a broker is used?

Fred Tuomi

This is Fred. That's a great question, a great indicator of the health of the New York market. In terms of what percent of the overall renters are using brokers, I think that probably hasn't changed, maybe it’s even gone up a little bit here recently. So I’d say 30%, 35%. And that’s what we had seen before, was about a third of our residents would use brokers. And in the good times, we would not have to incur any of those fees because the resident would pay the fee. And once things got a little challenging here, the owners in New York quickly switched to what’s called OP or owner pay. So that was kind of a huge drag to us last year in our performance, not only the rent declined, but then also the expense associated with brokers.

As the occupancy recovered, started kind of in the early summer of '09, by the time we hit, like, August, we decided to take a bold move and said no more broker fees, knowing that our traffic would go down. But we knew that there was sufficient other non-broker demand to fill our units. So as exposure went down, occupancy was firming, the first move we made was to eliminate the brokers. That stuck on most of our portfolio. Since then, we had to put it back on a couple of properties. One of those, we've already now switched again and are not taking brokers.

So today, we’ve got one property close to some of the significant lease-up activities in Hudson Yards in Midtown West that we are still offering brokers. And then the others are a sprinkling of properties on the penthouse units only. The big-ticket penthouse units sometimes traditionally use brokers. So we're not going to let those sit vacant because it adds up. And as of today, we only have two penthouse units currently available. So the trend is good on the brokers.

Michael Levy – Macquarie

Okay. And so I guess it sounds like the majority of those -- okay. I think I get that. In other words, you're not paying brokers anymore, for the most part.

Fred Tuomi

For the most part.

Michael Levy – Macquarie

Okay. That's helpful. Thank you.

David Neithercut

You're welcome.

Operator

You have a follow-up question from David Toti with Citigroup.

Michael Bilerman – Citigroup

It’s Michael Bilerman. I'll take the penthouse in New York at a discount.

Fred Tuomi

I didn't say anything about a discount. And you’ve got to pay your own damn broker fees.

Michael Bilerman – Citigroup

That’s great.

David Neithercut

We will need a reference check as well.

Michael Bilerman – Citigroup

Do you accept Citigroup stock? All right. I have two questions. On the other acquisitions, I know you said there was no debt and you weren't planning on doing any Fannie or Freddie. On any of the other acquisitions, were there any mortgages or all free and clear?

David Neithercut

We did assume a small piece of debt on one of the properties that still had seven or eight years to run. The other ones had either been (inaudible) paid off by the seller.

Michael Bilerman – Citigroup

And you had no desire to try to even lock in what is an attractive rate and term today? I know you don’t need the money, but one of those things.

David Neithercut

Mark just got done saying that our senior unsecured levels are comparable to our Freddie and Fannie levels. And so there is no reason for us to be locking anything in today. He said we've done a lot of hedging. So we have done some work for forward rates, but we just don’t need to go today.

Michael Bilerman – Citigroup

And on the third asset, what is the value of the third Macklowe asset?

David Neithercut

Which is it?

Michael Bilerman – Citigroup

No, the value.

David Neithercut

The value? We are under a confidentiality agreement to talk about this in the totality, Michael, and so I'm not going to talk about any of the deals or values on an individual basis.

Michael Bilerman – Citigroup

Well, how much would you have closed in terms of acquisition? You have the guidance for the full year. How much is effectively -- including all of the deals that you've done, how much is effectively closed or under contract?

David Neithercut

Call it half or so of what we are suggesting of $1 billion for the year. Actually probably more than that, close to the $600 million, I suppose, with the new -- with the Macklowe transaction as of yet to close.

Michael Bilerman – Citigroup

Right. So, $600 million total year-to-date is effectively all done.

David Neithercut

Inclusive of the deal under contract from Macklowe.

Michael Bilerman – Citigroup

Okay. And the last thing just on your comments in terms of this potential pent-up demand as we turn the corner on job growth and the supply situation being what it is and then the demographic turn, gets you pretty hopeful and pretty bullish about the future prospects for multifamily. Can you talk a little bit about the housing -- the single-family housing situation and how that may put a wrench into the some of the upside that you may see, just given the affordability gap that has narrowed and also what the government is doing in terms of stimulating single-family ownership? I'm just wondering how much of that could depress some of the upside.

David Neithercut

Well, we've acknowledged for quite some time that there will certainly be in our unit’s pent-up demand for single-family homeownership. And perhaps that's what David had noted that we were seeing in Phoenix and in Northern Virginia. But we believe very strongly, Michael, that as that demand is met, that there will be more than sufficient backfill of people with new jobs to backfill that incremental vacancy. I will tell you that I just think that the homeownership rate has come down and my guess is likely will continue to come down. And I think that the -- much of that reduction is coming from the demographic, the age segment that makes up much of our rental population.

So while we certainly do look at that housing as potential competition and will monitor it closely, we don’t think that it's going to be -- the flood gates are not going to open. I'll also tell you that we've looked at in our core markets like New York, Boston and others, and while -- we do see much of this data about the homeownership versus rent and these numbers kind of converging, I’ll tell you that we have to be very careful about the SMSA or the size of the geography that’s being considered there. I'm sure that you’ve got plenty of people that work for you that pay rents in Manhattan. If they want to go, buy a house in Bergen County, New Jersey, you can do that at some very attractive rate, but that doesn't mean they are going to go do that.

Michael Bilerman – Citigroup

Right. And thinking about -- you think about Manhattan on the upper west side where you have the Trump building, have you not found that with the Extell developments going up, both the existing condos and the future condos and I think they also have a rental building going up, that you're not finding that push, if you're just sticking Manhattan to Manhattan for a second?

Fred Tuomi

Actually, Manhattan is one of the markets where the homeowners -- the move-out for home-buying actually went down. So we're not seeing people buy. I think there’s still some price shock and maybe some confidence shock there, but we do not see home-buying, in effect, is slowing.

Michael Bilerman – Citigroup

Okay, great. Thank you.

Mark Parrell

You bet.

Operator

There are no further questions at this time.

David Neithercut

Great. It's been a long one today. So thank you all for your questions and your comments and your patience, and we appreciate your time today.

Operator

This concludes today's Equity Residential 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 Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts