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

Equity Residential (NYSE:EQR)

Q2 2014 Earnings Call

July 30, 2014 11:00 am ET

Executives

Marty McKenna - Spokeman

David J. Neithercut - Chief Executive Officer, President, Trustee and Member of Executive Committee

David S. Santee - Chief Operating Officer and Executive Vice President

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

Analysts

Nicholas Joseph - Citigroup Inc, Research Division

Nicholas Yulico - UBS Investment Bank, Research Division

David Bragg - Green Street Advisors, Inc., Research Division

Jana Galan - BofA Merrill Lynch, Research Division

Ryan Peterson

Ryan H. Bennett - Zelman & Associates, LLC

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Vahid Khorsand - BWS Financial Inc.

George Hoglund - Jefferies LLC, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Operator

Well, good day, ladies and gentlemen, and welcome to the Equity Residential 2Q '14 Earnings Conference Call. Today's conference is being recorded. And I will now turn the conference over to Mr. Marty McKenna. Please go ahead, sir.

Marty McKenna

Thank you. Good morning, and thank you for joining us to discuss Equity Residential's Second Quarter 2014 Results. Our featured speakers today are: David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer.

Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the [indiscernible] 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 it over to David Neithercut.

David J. Neithercut

Thank you, Marty. Good morning, everybody. Thanks for joining us today. And on our last call, I told you that the EQR teams across the country had our properties very well positioned for the upcoming leasing season and that they were raring to go to maximize revenue during this very important time of the year. Well, here we are at the end of July, with a couple months of the leasing season in the bank, with August squarely in our sights, and I'm once again pleased to say that our teams have delivered on their promise.

As we announced last night, same-store revenues increased 4% for the first half of the year and 4.1% in the second quarter. As a result, we've increased our full year same-store revenue guidance to a midpoint of 4%, which is at the high end of our original guidance provided in early February. And we have also increased our normalized FFO guidance for the full year to a midpoint of $3.10 a share, nearly 9% higher than last year and an annual increase that is among the largest we've experienced in the last 15 years. And this is all because the fundamentals remain very, very solid with continued strong demand for quality rental housing like that provided by Equity Residential. We're also pleased that the continued strength in fundamentals is being experienced across nearly every one of our core markets.

Reaching the high end of our original same-store revenue guidance range is not due to any particular market or markets performing significantly better than what we'd expected, but rather nearly every market performing above our baseline expectations and more towards our best-case expectations. Across nearly every market, our occupancy is closer to best case, our retention is closer to best case and market rents and renewal rents are both better than we had expected, even in those markets where there was some concern about new supply. So we're very pleased about our performance so far this year and how things are shaping up for the entire year.

And with that, I'll let David Santee, our Chief Operating Officer, discuss in more detail what we're currently seeing in each of our core markets and how we performed during this all-important leasing season. And he'll be followed by Mark Parrell, our Chief Financial Officer, who will address our updated guidance and capital-raising activities.

David S. Santee

Thank you, David. Good morning, everyone. Well, it continues to be a great time to be in the apartment business as evidenced by our strong revenue performance in the quarter and first half of the year across our entire portfolio. In general, new deliveries that are coming to market are being leased up faster than expected while maintaining order and price discipline, with concessions at stabilized assets almost nonexistent. Continued improvement in job growth, consumer sentiment and added lift, both revenue and expenses, from the inclusion of the Archstone portfolio

[Audio Gap]

guidance for the year. Today, I'll provide color on our 4 key revenue drivers, briefly discuss our expense drivers, and then update you on each of our core markets.

To date, all 4 of our key performance indicators are stronger than expected. Net effective base rents have consistently exceeded our original expectations by almost 50 basis points and are currently 4.7% above same week last year. Renewal increases, originally expected to moderate slightly below 5%, have consistently exceeded 5% and accelerated from 5.4% in Q1 to 5.5% in Q2. With a 5.9% achieved on the books for July and August currently at 5.5%, which we know that will improve throughout the month, we should exceed our full year renewal growth expectations by 60 to 75 basis points.

Turnover for the quarter declined again from 14.4% in 2013 to 14.2%. If you recall, in the previous quarters we discussed our lease expiration management and moving more leases from Q4 and Q1 into Q2. So seeing a decline in both percentage and absolute terms in Q2 is even more meaningful as residents are less inclined to move from quality buildings and neighborhoods that shape their lifestyle. With July stats on the books and notice to vacates given through August and September, it appears that turnover will continue to decline, driven largely by fewer move-outs to buy homes. In fact, move-outs to buy homes declined over flat quarter-over-quarter across all of our major markets with San Francisco being the only exception, which had 3 more move-outs to buy homes. Occupancy improved 20 basis points for the quarter to 95.8%, which puts us right on top of our full year guidance of 95.5%.

Expenses for the quarter were up 1.4%, allowing us to make up some ground after the brutal utility expense for Q1. Excluding real estate taxes, all other expenses declined 1.05%, driven by our expected savings from the inclusion of the Archstone portfolio and a more efficient property management operation. As a result of staffing and process optimizations across the Archstone portfolio, on-site payroll costs for those assets were down 3.2% for the quarter and 10.2% year-to-date.

In the maintenance category, again just for the Archstone communities, turn costs were down 32% for the quarter and 40% year-to-date as a result of implementing our turnover philosophy, which emphasizes the use of in-house labor versus contract services. Additionally, the close proximity of both Archstone and legacy assets have allowed us to optimize our Internet spend and reduce L&A cost across the combined portfolio by almost 20% for the quarter and 17.5% year-to-date. As we discussed previously, the favorable contribution to same-store expense reduction for the Archstone assets will diminish as we move further into the year and begin to realize stabilized comp periods. Real estate taxes, which account for 35% of total expense, remain unchanged at a 6.2% full year growth rate. And we are confident that this number is a worst-case scenario, allowing us to tighten the total expense growth range between 2.25% and 2.75%.

And moving on to our markets. We continue to maintain our 3 buckets of revenue performance, with the top bucket consisting of Seattle, San Francisco and Denver producing revenue growth in excess of 5%. The middle bucket of 3% to 5% revenue growth includes all other markets, excluding D.C. which is in a bucket by itself, with a projected revenue decline of 1% for the full year.

So starting in the Northwest, Seattle continues its outsized performance with robust job growth and a per capita income 23% higher than the national average. Boeing, Amazon and Microsoft continue to provide a solid economic foundation. Our 2 lease-ups are above pro forma rent and well ahead on occupancy. 320 Pine, a 134-unit presale acquisition, went from 0% occupancy in February to 99% occupancy in June. Our Central Business District Bellevue and Redmond submarkets lead the way with plus 7% revenue growth year-to-date. There are marginal differences when looking at other in-town submarkets versus the suburbs, as all submarkets are producing average year-to-date revenue growth of 6.5%. While the recent Microsoft layoffs were troubling at first, the direct impact of the announced local reductions should have little impact in the Redmond submarket. With new deliveries in Redmond already leased and only 350 being delivered in 2015, Redmond should do just fine barring any further negative news.

Denver continues the outperformance despite delivering almost 10,000 units. With a high concentration of new deliveries downtown, growth in our CBD submarket is a meager 4.3%, while our well-diversified suburban submarkets range from 7% to plus 9% year-to-date. San Francisco continues to be the lead market for the fourth consecutive year. Net effective new lease rents and renewals achieved continued to be in the 9% to 11% range, and we see no signs of a slowdown. Even with elevated deliveries, the level of supply is simply not sufficient to meet demand from the continued tech boom. The Peninsula submarket continues to produce the highest revenue growth, followed by our downtown portfolio. However, the East Bay appears to be accelerating as renters look for more affordable housing.

Los Angeles continues to perform well and as expected. Despite new deliveries being concentrated in the downtown and Mid-Wilshire corridor submarkets, these 2 areas are accelerating and producing the largest revenue growth of our 8 L.A. submarkets, with 5.5% and 5.4% year-to-date, respectively. Our weakest growth is coming from Santa Clarita and West L.A, primarily in and around the Marina del Rey area. With such a diverse and improving economy, we would expect L.A. to continue its positive momentum with above-trend growth for an extended period of time. Orange County continues to produce accelerating growth as a result of few deliveries and well-diversified job gains. Move-outs to buy homes have declined in Orange County more than any other market, about 400 basis points. And it appears that both future supply and expected job growth are perfectly in sync over the next several years. San Diego, with 3,000 deliveries, is realizing price pressure downtown, our lowest revenue growth submarket. The I-5 and the I-15 corridor submarkets continue to do well as minimal supply and decent job growth provide a stable operating environment.

Moving over to the East Coast. Boston, like Denver, is feeling the effects of a concentration of new deliveries in the urban core, although neighborhood and price points can produce dramatically different results. With 6,000 units being delivered across the Boston MSA, and more than half of those in the financial district, there are pricing pressures at our assets that compete head-to-head with new product. We also have assets in that same submarket that are somewhat insulated from new deliveries that allow our in-town submarket to lead all other Boston submarkets with year-to-date growth of 4.6%. All other suburban markets show no signs of outsized growth in the near term as future development begins to move back to the suburbs. Additionally, our significant parking garage operations can impact reported revenue growth, depending upon the postseason success of the professional sports teams. Our reported number of 2.8% revenue growth includes those garage performance numbers. Stripping this out, residential results only were 3.2% for the quarter and 3.4% year-to-date and 2.4% sequentially.

Jumping down to New York. The pause button is off and the music is playing once again. After seeing rents flat for most of 2013, net effective base rents have bounced between 3% and 5% growth for much of the year. Occupancy has improved 20 basis points year-to-date. Demand has picked up noticeably and we appear to be on solid footing once again. Downtown Brooklyn leads our portfolio in submarket revenue growth year-to-date at 6.5%. The Upper West Side, at 2%, is lagging all other submarkets. However, most all New York City submarkets appear to have accelerating revenue growth as rental rate growth shows favorable [indiscernible].

South Florida. Well, the cranes are back and record prices are being paid for land. Miami-Dade leads the charge across the three-county metro area as wealthy South Americans continue to expand the job base by [indiscernible] their businesses in Miami. All 7 of our three-county submarkets are performing similarly as new supply is manageable in the proving economy.

Washington, D.C. continues to perform as expected. With lackluster job growth and outsized supply, positive revenue growth for the metro area continues to be elusive, although net effective base rents across our 8 submarkets can be up 2% one week and down 2% the next. Occupancy and current exposure are all favorable as demand for quality apartments in great locations remained steady and our current residents are staying put, as move-outs for the first half of the year are down more than 400 basis points while we continue to achieve renewal increases above 3%. For D.C. metro submarkets, the Maryland suburbs lead the way. Year-to-date, PG County and the I-270 corridor continue to enjoy positive revenue growth, while South Arlington and Alexandria bring up the rear at minus 2.2% and 1.5% -- 1.56%, respectively. Our district portfolio is negative 58 basis points year-to-date, but August billings are positive 11 basis points versus last August.

As we look back to our original guidance, we believed that many of the markets could absorb the new deliveries without major disruption. So far, they have. We also thought that if we could see improved job growth that we could produce better revenue results, and we have. And finally, we knew we had significant opportunity to optimize the Archstone portfolio and deliver exceptional results, and we did, which altogether give us the confidence in raising our guidance for the full year. Mark?

Mark J. Parrell

Thank you, David. I want to take a few minutes this morning to review our revised guidance for the year and to give the group some background on our recent debt raise and its impact on our balance sheet. We have provided revised guidance for our same-store metrics as well as our normalized FFO per share for the year. We now expect to produce normalized FFO of $3.08 to $3.12 per share. And that's up $0.02, or about 1%, at the midpoint from our prior range.

This growth in normalized FFO, as David Santee just described, is being fueled by our expectation of better-than-expected growth in our net operating income, and that's both in the same-store set and the lease-up set, offset by about $0.02 per share of additional interest expense as a result of our recent debt deal. Our previous guidance included a smaller debt deal later in the year than the one we ended up doing. On the transaction activity side, we did not change our guidance assumptions on volume or cap rate spread. And there was no net impact on our revised normalized FFO guidance from transactions.

David Santee reviewed the factors driving our same-store expectations. And I'm pleased to say that we have increased our targeted range on our same-store revenues to 3.9% to 4.1%. And that's up from 3% to 4% from our February guidance. And we've narrowed our expectations on expense growth to a range of 2.25% to 2.75%. And that all results in an expected net operating income range of 4.5% to 5%. And this continues the strong growth we have produced over the last several years and that we continue to expect to deliver. And as a reminder, the Archstone assets we acquired last year had been in our same-store numbers this year since the beginning of the year, both in our sequential, quarterly and year-to-date same-store sets.

In June, on the debt side we decided to take advantage of the incredibly attractive rates that were available to us. And we went ahead and issued $1.2 billion of unsecured debt. And we issued 2 pieces of debt. We issued our first true 30-year debt piece and a 5-year issuance. We issued $450 million of unsecured 5-year bonds at an interest rate of 2.4%. And we issued $750 million of 30-year unsecured bonds at an interest rate of 4.54%. We used the proceeds from this offering to repay our $750 million term loan facility, which was scheduled to mature in January of 2015, and to repay the amounts outstanding on our line of credit. These issuances were very well-received by our fixed income investors, particularly the 30-year issuance. In fact, the 30-year bond was issued at the lowest interest rate and the lowest spread above treasuries of any 30-year bond every issued by a REIT, while the 5-year bond issue was priced at near-record low levels.

The 5-year bonds were swapped to floating, and we will therefore actually be paying an all-in rate of LIBOR plus about 75 basis points. And right now, all-in that would be around 1% on the $450 million in 5-year bonds that we issued. About 11% of our debt now carries a floating rate. As we draw on our revolver during the balance of the year to repay our September bond maturity and to fund development, floating rate debt will increase until it is about 16% of total debt. And that's right in our 15% to 20% target zone for floating rate debt as compared to total debt. And at the end of the year, I expect our revolver to have a $550 million balance.

There were several advantages in our minds to issuing this debt now. The term loan facility was about 50 basis points more costly than the swapped rate on the 5-year notes, so we do have some immediate cost savings. But more importantly, our long-term cost of capital was reduced with such a cheap piece of long-term debt. Also these issuances extended the weighted average maturity of our debt to 7.9 years, which is the longest in the apartment space and one of the longest among all large REITs. When rates do begin to rise, this will be a big advantage to us. Finally, by completing all our 2014 debt refinancing activities and a large portion of our 2015 refinancing activities now, we are in an even better liquidity and funding position over the next couple of years.

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

David J. Neithercut

All right. Thanks, Mark. Clearly, we remain very excited about the strength and fundamentals that we continue to experience across our markets. And we're going to remain confident that due to a very favorable demographic picture and continued improvement in the overall economy, that we have a lot of runway yet ahead of us for continued favorable revenue and NOI growth, which will result in strong growth and normalized FFO and dividend payments and total shareholder return for years to come.

So I just want to make a couple of comments about transaction development activity. We did buy a couple of properties in the second quarter as noted in the release. In Seattle, we closed on a deal that we'd put under contract in 2011 before construction commenced. And that was the 134 units that David Santee mentioned, which we acquired for $36 million. Recently completed and 67% occupied at closing, it's now fully leased and occupied. It should stabilize at a return in the mid-6s. And that deal would trade at a cap rate today in the low 4s. And we also acquired 208 units in Glendale, California about a block from GGP's highly productive Glendale Galleria property. We acquired that property for $70.5 million. It was built in 2013 and was 81% occupied at closing. Today, that deal is 91% leased and 87% occupied and should stabilize at a yield of 5%. The one property we sold in the quarter was in Orlando, Florida, 336 units that we sold for $41 million. And in our press release, we reflect the yield that we sold of being one of 6.7%, and we refer to that as the cap rate. The true cap rate, however, that being the yield that the buyer acquired, would be closer to 6% when adjustments are made for real estate taxes and insurance.

Now as Mark said, our guidance for the year remains to buy $500 million of assets and sell $500 million at a cap rate spread of 100 basis points. That said, I'll tell you we are seeing a lot more product in the market, a lot of which we'd very happy to own by trading them with -- into them with proceeds from noncore assets. But bidding remains very competitive and pricing remains very aggressive. So if we're able to find more investment opportunities that make sense for us relative to the assets we desire to sell, and that's an important caveat, then our transaction activity this year could exceed current guidance. Interestingly, if that were to happen though, the cap rate spread might actually decrease or narrow because the incremental assets we might sell will be less desirable assets in our core markets. And these would trade at lower cap rates than the assets we've been selling in our exit markets.

Real quickly on development. While we may not have completed nor started any projects this past quarter, there was and remains a great deal of activity taking place. And we currently expect to complete another $254 million of development deals yet this year, which will bring total completions to $621 million or so for the full year. Starts this year currently look like they'll come in around $1 billion. That's slightly higher than our original expectations, which simply means that some early 2015 starts could now occur in late 2014. And that would suggest additional starts yet this year totaling about $500 million.

During the second quarter, we acquired one land site also in the Capitol Hill neighborhood due east of downtown Seattle for 140 units, which we'll develop for a total cost of about $45 million. That deal should -- would yield about a 5% at current rents today, and we'd expect to stabilize somewhere in the low to mid-6s. And with this newly-acquired land parcel to our inventory and assuming we do get to $1 billion in starts this year, that would then mean we'd have about 5 development projects that we'd start next year, for 1,200 units at a total construction cost of nearly $600 million. And similarly, those deals would lease at current rents in the mid-5s and stabilize yields in the low to mid-6s.

So with that said, operator, we'll be happy to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear first from Nick Joseph with Citigroup.

Nicholas Joseph - Citigroup Inc, Research Division

To issue 30-year debt. What made you change your mind on that?

Mark J. Parrell

Nick, it's Mark Parrell. Did you ask why did we decide to issue 30-year debt? You were cut off there.

Nicholas Joseph - Citigroup Inc, Research Division

Yes. David, you talked in the past about maybe reluctance to actually issue 30-year debt. So I'm wondering what changed.

Mark J. Parrell

Yes. Well, it's Mark Parrell. We have been thinking about it a while, Nick. And it's been attractive for awhile, but particularly so the last few months. And we've always thought it's a great way to match these long-hold assets we have that we've built and we've bought lately with a long-term low cost of capital. And our anxiety always centered on the covenants, the meaningful covenants that exist in REIT bonds in just binding ourselves for 30 years, who knows what will change in that period of time? But as you look at a rate as well as we were able to get at 4.5% and you look at the average rate the treasury has been, so imagine 10 years from now, we want to repay these bonds. We did a little research, and even in the low-interest climate we've been in lately the last 20 years, about 2/3 of the time, the 20-year treasury has been at or higher than 4.5%, meaning we'd have no prepayment penalty. So in our minds, just boiling it all down, we were getting a great piece of debt. And there is a pretty fair probability that in the future, the company would have the opportunity to take it out for a small or no prepayment penalty if we ever needed to do that. So again, we think it's a great piece of capital to have in the structure long term.

Nicholas Joseph - Citigroup Inc, Research Division

And then can you talk about what you're seeing in D.C. in terms of the transaction market and if there's any opportunities to acquire there?

David J. Neithercut

Well, we've seen a little bit of transaction activity other than a couple of deals that have traded before any lease-up occurred to avoid the TOPA transaction issues. But I will tell you that I'm not quite sure I can define any of that as an opportunity. We think those were still very aggressively priced. So not unlike what David has said just in terms of total operations, things are going reasonably well in D.C. given the supply. We're just not seeing a great deal of transaction activity at prices that we would consider to be opportunistic.

Operator

Nick Yulico with UBS has the next question.

Nicholas Yulico - UBS Investment Bank, Research Division

Just turning to your guidance and your outlook on the markets. I mean, if you look, it sounds like D.C. got a little bit worse in the second quarter. New York City got a lot better. West Coast was still very good, and Boston got a little bit weaker. How are you expecting those markets to play out in the second half of the year? Is it going to be something similar? And what's the big sort of variance -- where could the big variance to your guidance be? Is it Boston getting weaker, D.C. getting weaker or New York City getting even better?

David S. Santee

This is David Santee. We've already issued renewals out through August and September. And really when you just look at the flow of the numbers, once you lock down September, it's really hard to move the full year numbers. And really the only way to move the full year numbers significantly would be having a significant drop in occupancy. So that's why we're confident in our range, in our very tight range.

Nicholas Yulico - UBS Investment Bank, Research Division

And then your occupancy comps, I'm assuming you feel pretty good about in the second half of the year?

David S. Santee

Yes. I mean, we already have notices through September. Those are normal to lower than last year, which would imply we maintained the same level of occupancy. And then really, there are so few transactions in the fourth quarter relative to the full year, it's just very hard to move the full-year-number.

Nicholas Yulico - UBS Investment Bank, Research Division

And then just turning to the development pipeline, can you just remind us where you're expecting the stabilized yields for the pipeline in place today, and whether you've now think that those yields could be higher than you thought they were, say, last year?

David J. Neithercut

Well, I guess, everything that we delivered last year is probably performing better than expectations just because for all the comments David had said about how well we're doing in our markets. What we're working on today, starting today and expect to start is really a story of 5s and 6s. It's a story of deals yielding at current rents somewhere in the 5s and we think are stabilized 2 years or so out or 3 years out in the 6s.

Nicholas Yulico - UBS Investment Bank, Research Division

And is that consistent with the existing pipeline? Or is the existing pipeline yield a little bit higher?

David J. Neithercut

Well, the existing pipeline, you mean those things under construction today?

Nicholas Yulico - UBS Investment Bank, Research Division

Yes, that's right. And what's been recently delivered.

David J. Neithercut

What's been recently completed would be in excess of that. Right, so anything to start in 2011 is really gangbusters. Everything you start in 2012 would be a little lesser than, et cetera, et cetera. So now it's down to a point where anything started today would yield in the 5s at current rents and again we would expect to yield at 6%.

Nicholas Yulico - UBS Investment Bank, Research Division

Okay, got you. And just one last question, David. You mentioned acquisitions maybe being more attractive today, yet there's a significant spread where you could be buying at a lower initial yield than where you're selling. How do you balance that if you're also trying to create earnings growth? I mean, that sounds like that would be a dilutive process.

David J. Neithercut

Well, no company knows more about that than Equity Residential after all the activity we've taken place and we've conducted over the past half a dozen or so years. But that's certainly part of the balancing process. And we would balance that, as I noted in my opening comments, by selling assets in core markets that would be less desirable assets. And we would sell those at lower cap rates than exit markets. And again I don't -- didn't mean to suggest that we thought acquisitions were more attractive. What I suggested was that we expected to see more opportunity, but what we are seeing today remains very, very competitively sought for and pricing to be very aggressive. So we're going to see more product. We'll see if we're able to make sense of the pricing of that product relative to the proceeds and yields we'll be able to sell and raise capital assets to your point, because we do want to manage that dilution. Our sort of pledge to the market has been that the dilution experience is part of this transformation that we've taken place over the past 6 years or so will slow considerably. And we aim to deliver on that.

Operator

Moving on to Dave Bragg with Green Street Advisors.

David Bragg - Green Street Advisors, Inc., Research Division

The cost savings that you outlined as having achieved on the Archstone portfolio are pretty impressive, especially considering that Archstone was considered to be a good operator. Can you talk about how those compare to the general cost savings opportunities you see in the broader transaction market? Were you able to save more or less on that integration than what you generally expect as you underwrite deals?

David S. Santee

I would say typically, we -- it's hard to look back and say what we actually say because we don't really have new acquisitions' previous results, so to speak. I mean, we just underwrite it. But I would say, typically, what we see are the 3 areas of opportunity are always leasing and advertising, payroll and turn costs. I can't say that most acquisitions produce that degree of savings.

David Bragg - Green Street Advisors, Inc., Research Division

Okay, that's helpful. And then on the transaction market, David, can you just talk about why you think that you're seeing more opportunities than you expected this year? What's the nature of the sellers? Are these...

David J. Neithercut

I think pricing has been very strong, and I think sellers of assets that think that they will likely want to monetize their interests sometime in the near future are thinking this might be a good time. And a lot of that feedback comes from the brokerage network that do let us know that they've been requested by sellers to give their opinions of value. And normally, when more of those inquiries are made, that then does produce more deals coming to the marketplace. So I will say, however, though that there have been several instances in which properties have been pulled back from market because the perhaps sellers' overly-inflated expectations failed to be met. But the brokerages are telling us more is coming. We are certainly seeing more. And I think it's just more of a desire of shorter-term holders thinking today would be a great opportunity to monetize their equity investment.

David Bragg - Green Street Advisors, Inc., Research Division

Okay. And what's the landscape for portfolio purchase opportunities?

David J. Neithercut

There have been a few out there. Some concentrations in some markets, and then some larger portfolios of disparate assets across lots of markets, some of which would be considered as sort of noncore from our perspective. But I would not say that there has been an abundant amount of sort of larger portfolios. There have been just a small handful.

David Bragg - Green Street Advisors, Inc., Research Division

Okay. And the last question is as you talk about starting to sell some of the noncore assets or less desirable assets within your core markets, can you just walk us through the process in which you analyze your own portfolio and discuss the attributes to some of the assets that you might be selling from these markets? Are they older? Are they more suburban? Any insight like that would be great.

David S. Santee

Yes and yes. All right. They remain older assets and more the sort of suburban circus park garden kind of product. Suburban D.C. is an example, Inland Empire, some stuff in various submarkets of Southern California, maybe even of Seattle. So if there are assets that ultimately we know that because of their age and location might not be long-term holds for us, and if there are opportunities to sell those at attractive yields relative to what we can buy, we'd be more than happy to make those trades. But there's no pressing need to do so today.

Operator

Jana Galan with Bank of America Merrill Lynch has the next question.

Jana Galan - BofA Merrill Lynch, Research Division

For David Santee, can you comment on what the new lease rent growth was in July?

David S. Santee

New lease rent, I have it for the quarter, which was 5.5%.

Jana Galan - BofA Merrill Lynch, Research Division

And then any comments on As versus Bs within your portfolio?

David S. Santee

Well, when I look at our results, and I tried to allude to that in my prepared remarks, I guess I would just say, "It depends." It depends on what the -- where you are in the market, what type of supply you have, what type of new product is coming online. We have some of our best-performing urban assets in Boston are B communities. Some of our best-performing assets in Seattle are B communities. So it's really a mix of location, which I think is becoming more and more critical. I think people are looking for a place that is going to shape their lifestyle. Neighborhood is ultra important. And I think if you're in those neighborhoods, both As and Bs will perform equally well.

Jana Galan - BofA Merrill Lynch, Research Division

And then maybe just a quick question on the transaction market. Just maybe, David, your view on whether you're seeing any -- there's only a small amount of portfolios, but whether those are looking like they would get premiums. Or could they actually be at a little bit of a discount because there's only a limited number of buyers that could take down a very large portfolio?

David J. Neithercut

Well, it doesn't take an awful lot of buyers. It only takes 2. And I think it's very possible you could see some premium pricing on those portfolios because of size. Again, there's an awful lot of capital chasing few deals in the space. And if one has a desire to get capital out in the multifamily segment, a large portfolio may be a way to do that. And that could result in maybe some modest premium pricing.

Operator

Moving on to Ryan Peterson with Sandler O'Neill.

Ryan Peterson

You've talked about your ability to grow rents this quarter. There seems to be a lull in land large ability [ph] to push rents at the end of '13, the beginning of this year. Do you think that was seasonal? Or did it just take some time for renters to adapt to the new asking levels?

David S. Santee

I would say, in general, there is -- at the top level, portfolio level, there is definitely seasonality in the pricing. We track that. We've tracked it for the last 8 years. And basically, rents, call it, rents drift off 3% to 5% in Q4 and Q1 just because of lack of demand.

Ryan Peterson

And then on a separate note, do you think there's going to be a trend of more condo and apartment deals like yours at Toll Brothers? And if not, what are the challenges that would limit more of these deals?

David J. Neithercut

Well, I guess, it's -- we've had a very successful transaction that we've done with Toll Brothers. And I will tell you we have had numerous conversations with others on similar opportunities. But a lot of things have to come together. Pricing for the apartments have to make sense. Pricing for the condos have to make sense. The totality needs to make sense relative to the land pricing, et cetera, et cetera. And so I'm not -- I would not be surprised to see more of that, not unlike mixed-use projects you've seen. We've got a lovely property in Manhattan that's above a hotel, for instance. I think it's a great way to share cost and to mitigate risk. But again, it's just one of those things that's got to come together. It just adds more complexity and more moving parts that just makes it more difficult to accomplish.

Operator

We'll now hear from Ryan Bennett with Zelman & Associates.

Ryan H. Bennett - Zelman & Associates, LLC

I appreciate the color by submarkets in your prepared remarks. Just curious where you see the peak of new deliveries across your submarkets now versus what you saw probably at the beginning of the year.

David S. Santee

Well, you mean for '14?

Ryan H. Bennett - Zelman & Associates, LLC

Yes. I guess, when you're expecting the highest number of deliveries across your submarkets.

David S. Santee

Yes. So I think that the easiest way to look at it is just the calendar year. I mean, when we kind of review each of these markets on a quarterly basis, which we did last week, it was clear that about 60% -- we're about 60% of the way through our deliveries at the top level, so -- which means you have 40% to go.

Ryan H. Bennett - Zelman & Associates, LLC

Got it. And how do you see that playing out into 2015? Does the comp get significantly better across your submarkets based on the data that you have?

David S. Santee

Well, I guess, I would say we made some minor changes to deliveries this year. But they're only going to be pushed into 2015. So when you look at 2014 and 2015 combined, the totals haven't really changed. So we would expect declines in deliveries next year. And hopefully, with continued improving job growth, a great GDP number today, that the economy will continue to improve, and we'll continue down this path of absorbing units with relatively little disruption to our day-to-day business.

Ryan H. Bennett - Zelman & Associates, LLC

Okay, great. And then just to follow up. I think in your prepared comments, you mentioned Boston is typically seeing some increasing development shifting back towards the suburbs. Have you seen that in any other of your major markets?

David S. Santee

Yes. So when you -- probably the most obvious is Washington, D.C. You start to see development move back out to Reston and outside the Beltway beginning next year and beyond. Every other market, not so much.

Operator

The next question comes from Richard Anderson with Mizuho.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Just a couple maybe smaller events that maybe tell a bigger story. The first is to Mark Parrell, swapping to floating. It seems like you're getting a little greedy there. Can you talk about that strategy to go floating from a good rate to begin with?

Mark J. Parrell

Our thought -- we have a strategy on that, Rich. I mean, what we're trying to do is avail ourselves of 2 different points on that debt cost curve. And long is great, 30-year is terrific. And the other side we like is LIBOR. We think being floating rate and being short when LIBOR is 25 basis points, and feels like for the near term it'll be around that number, that feels pretty good to us. And I think with the kind of portfolio we have with the lease growth we expect, if rates do go up because, as David Santee just alluded to, we have more growth, then I think the revenue line and the interest expense line item will move in sync, and it will all make good sense. So I guess, I would say I don't get particularly greedy about that. I think that was part of the strategy.

David J. Neithercut

And we take[indiscernible].

Mark J. Parrell

Yes. I mean, we're incrementally down on floating rate debt. We're lower than most of the guys in the apartment space right now. But we'll end up at about 15%, 16% by the end of the year.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Okay. And then to the land purchase in Seattle, despite the nice GDP number today, it seems like there and elsewhere you're kind of operating fundamentally at a hyper level -- good, solid demand offsetting increases in supply. And I'm just curious with Seattle, in particular, you have a lot of supply going on. The rationale to continue developing that market maybe, is that -- what's the thought process there? I mean, it seems like it's been great but maybe again getting a little greedy.

Mark J. Parrell

Well, again we've got a very low, relatively low, percentage of our income coming out of that marketplace. This was just about a $45 million total cost project, so not quite sure how a $35 billion company can be greedy with a $45 million development deal. And then I also suggested that in response to one of the other questions that some of what we may sell maybe some suburban Seattle stuff. I mean, what we're building is kind of downtown close-in, in Capitol Hill, in South Lake Union, in Ballard downtown. So we like those locations. And as David said, we're performing very well in those locations. So again, at less than 7% current NOI exposure, I'm not quite sure that doing a $45 million deal is getting us over our skis in Seattle.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Fair enough. And then bigger picture, David, the 2 deals in the second quarter acquisitions were kind of a value-add sort of swing to it with buying some vacancy. Do you think that will be more and more a part of the acquisition story for you to get reasonable pricing on deals to take on a little bit of lease-up risk in the front end?

David J. Neithercut

Well, the one deal, we put under contract in 2011, so it was not a recent decision on that. The one deal we did buy in Glendale was that. And we bought vacant properties, maybe half a dozen vacant properties. So I think that anything that we do that we believe gives us a competitive advantage to buy a property at a more attractive price is something that we'll do. So we're certainly not afraid of that. And that again was an example of someone looking to monetize their interest in a good market, and not willing to sort of wait the extra 6 months or year for a deal to get stabilized. And we're happy to be there to take advantage of that. And again, we'd buy the deal at stabilized 5%, then trade it at a low 4%, maybe even a high 3%. So it's one way a company of our size can take advantage of our balance sheet to maybe get a premium return.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Okay. And then last question maybe for Santee. 30 -- I'm sorry, $20 million in incremental rental revenue, second quarter versus first quarter, understanding the seasonality issues and the strong performance during the quarter. But is that a good number? Or is there anything kind of lumpy in the second quarter revenue number, top line?

David S. Santee

Just pure, good revenue, Rich.

Richard C. Anderson - Mizuho Securities USA Inc., Research Division

Okay. So my NAV is now $80.

Operator

Vahid Khorsand with BWS Financial has the next question.

Vahid Khorsand - BWS Financial Inc.

First question, on the Washington, D.C. market, it looks like it's stable but has -- could grow and could improve. Is that what it looks like to you?

David S. Santee

Well, D.C., we have, what, 20,000 deliveries this year? We're roughly 60% through that. However, when I look at our billings today, we are, for the month, minus 10 basis points. So we are seeing better occupancy. We are seeing the net effective base rents stabilize. I mean, as I mentioned, some weeks, they can be up 2%. Next week, they could be down 1%. It really just depends on what's available and where and to what degree that impacts the portfolio. But I guess, I would say that I'm very pleased with how D.C. is behaving. And if the next 6 months are like the last 6 months, then I think we're setting the stage for some reasonable stable performance.

Vahid Khorsand - BWS Financial Inc.

With that in mind, do you think we're approaching a timeframe where you might be looking to add assets in the D.C. market?

David J. Neithercut

Yes, I responded to a similar question earlier suggesting that what we've seen in terms of pricing, what's taken place, is that there have been not anything we define as opportunity. So I don't think that's a market that we're going to be pursuing at the current time. But we never say never. If, not unlike the lease-up deals we just did, we found something that we thought we could do at a premium, we may very well do that. And we'd pair that with a sale of something onto the suburban market so that net exposure would not increase.

Vahid Khorsand - BWS Financial Inc.

Okay. And my final question on the leasing and advertising line, what do you attribute to the drop that seems to be happening every quarter on that? Is that related to the efficiencies through the Archstone deal? Or is that something else?

David S. Santee

Well, I guess, I would say that it's related to the Archstone inclusion. However, the savings is spread across the entire legacy portfolio. And probably the best example, if you go to New York City, where we have 2 properties right across the street, Archstone used to be in ForRent, in Apartments.com and what-have-you. And we would have our property in all those same 3 or 4 ILSs. And basically, what we do is we go in and we optimize so that perhaps the Archstone property goes from 4 ILSs down to 2. And our property goes from 4 ILSs down to 2. And we'd cross-sell those properties on our website, so you're basically eliminating half of your ILS spend due to the closed proximity of the assets.

Operator

We'll now hear from George Hoglund with Jefferies.

George Hoglund - Jefferies LLC, Research Division

I just have 2 questions. The first one is on Orange County. Since it's had some strong performance this year so far, they've got increasing supply coming on in the first half of '15, how do you view that market being able to absorb that supply?

David S. Santee

It's -- we've seen extremely good job growth in Orange County. I would say that there's maybe 1 or 2 large deals that could have some short-term impact. But we feel very comfortable that, that market can absorb the supply that's on the books as of today.

George Hoglund - Jefferies LLC, Research Division

Okay. And then just the second question is with the homebuilders moving moreso into the multifamily development, how do you view that going forward as sort of impacting things in terms of will it be moreso deals like your existing deal with Toll? Or do you think that it will be moreso homebuilders just doing these deals on their own? And do you think this will have a significant pressure on supply or potential pressure on supply going forward?

David J. Neithercut

Well, from what we understand, from my conversations with the few that are doing it, is it's more of the latter. It's just them thinking it's a good business for them to be in directly. But I think thus far, it's really been in markets in which they've got large single-family home presences and just really haven't bumped up [indiscernible]. It's a lot of Sunbelt product that we just don't think competes with us. So at the present time, we don't see it as a competitive threat to us.

Operator

We'll now hear from Nick Joseph with Citigroup.

Michael Bilerman - Citigroup Inc, Research Division

It's Michael Bilerman. I just had a couple of quick follow-ups. One is just sort of capital structure. If your thinking has evolved on the 30-year debt, I'm curious how you're thinking is on common equity. And the reason I ask is when you did the Archstone deal, you obviously issued a billing in the, call it -- I think it was $54.75-ish [ph], if I remember correctly, stock is up north of 20% since then. I guess, how do you think about using equity? If you can't find the dispositions or you haven't brought stuff to market and you find some acquisition opportunities, would you use equity?

David J. Neithercut

It's certainly [indiscernible] in our quarter. I guess, we're at a point, Michael, where we continue to have some odds and ends of assets that we'd like to use as the capital to provide proceeds to buy whatever we think we may like to do out there. I don't think there's anything that's terribly important or strategic or overly compelling for us at the current juncture. So my guess is our expectation would be to buy with what we can with what we can sell, to buy assets at these prices and issue stocks at these prices. I mean, maybe there's some modest kind of arbitrage in there, but over 375 million shares I'm not quite sure that there's a whole lot of purpose there. But we certainly do look at all of the [indiscernible] capital -- all of the different segments of capital. And Mark and his team have done a great job across the debt side. And obviously, we're very pleased with where our stock is today and have that be at a place where it might make sense to actually do that. But again, that's also a function of what [indiscernible] you can buy and what the right proceeds. And we always consider all of those options.

Michael Bilerman - Citigroup Inc, Research Division

I guess, there's no need for what you have on your plate today to even tap the ATM?

David J. Neithercut

That's correct. I mean, our development pipeline, as Mark has said over the past several calls, between free cash flow, the disposition of proceeds, we can manage the pipeline of development that we have. So we are not obligated to go into the market to address them.

Michael Bilerman - Citigroup Inc, Research Division

Okay. And then I assume there's been no change or evolution in terms of how you're thinking about some of the adjuncts to housing, whether it be single-family rental, student housing, senior housing. There hasn't been any shift in your or Sam's thinking on any of that, has there?

David J. Neithercut

That's correct. There has been no shifts. We looked at single-family years ago and didn't see it as anything but a distraction. And as we think about the markets we're in today, the assets we own and operate, they're attractive to students. They're attractive to seniors. And we don't think we need to move into sort of purpose-built product to access those 2 segments.

Michael Bilerman - Citigroup Inc, Research Division

Okay. Just last one on conversion to condos, anything that you're sort of working on where you can sort of raise capital that would be a pretty low effective cap rate? I know you talked about selling some potential core assets -- noncore assets in core markets, but I'm curious as the conversion play.

David J. Neithercut

Well, so far, I think that's been a little bit more talk than action. I think that certainly, we look at our assets and there could be condominium premium embedded in those. But so far, that's probably been more talk. We've seen pricing on the post trade that seemed to have been gone off at some kind of premium. Again, a lot of that is a function of what are you going to do with the proceeds, because those have to be reinvested. But certainly, it's something that we're thoughtful of and keeping an eye on.

Michael Bilerman - Citigroup Inc, Research Division

Can you do that on any of Upper West Side buildings, the Trump buildings?

David J. Neithercut

You mean structurally?

Michael Bilerman - Citigroup Inc, Research Division

Well, I just think the pricing of what Extell is doing.

David J. Neithercut

Say it again?

Michael Bilerman - Citigroup Inc, Research Division

The pricing of what Extell is building south of that obviously would mean a very high value as condos for some of those buildings.

David J. Neithercut

Well, obviously, that's extremely brand-new product being built to a particular spec. You can't necessarily extrapolate that directly to a product that was built as apartments that could be now 15 years ago. But clearly, we're aware of what's happening and the timing of activity around our properties. I'll also sort of tell you that much of what you read about condos in a place like New York City with a very high-end luxury, large price point stop, and you read very little about what's happening at the more middle range. But it's something we'll keep a close eye on.

Operator

And our next question will come from Michael Salinsky with RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

A couple of quick follow-ups there. David Santee, you mentioned a 5.5% on new leases. I think that was second quarter. Do you have the -- is that a year-to-date? Or do you have a lease-over-lease rate there? And then also given the occupancy and lower move-outs that you're seeing, can you talk about the strategy with new leases in the back half of the year, whether you expect to continue to hold that out a bit more or you expect that to follow more normal seasonality?

David S. Santee

Yes, I'm glad you asked that question because I quoted the renewal rate at 5.5%, 5.5% versus the new lease. So the base rent year-over-year is 4%. So new leases are 4%, renewals are 5.5%, and then the combined for Q2 is 4.1%.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. And then how does that translate to the back half of the year strategy in terms of new lease rates? Do you expect anything different relative to the normal seasonality we've seen the last couple of years?

David S. Santee

No, I think what we see year after year is that rates will drift down. I mean, we are attempting, as we discussed previously, to minimize those expirations in Q4, to minimize that drift in both the occupancy and rental rate. In a place like D.C., we're probably going to be a little more defensive in maintaining that occupancy only because we're not done yet. We still have another year of big deliveries. And the stronger we can maintain occupancy in a market that's delivering units, the more pricing power or the less susceptible we are to having to give concessions. So that will be our strategy in that market. But typically, the seasonal pattern is identical year after year after year. It's just -- but what we see is that we see the same gaps. So if rents are up 4% today, we would expect that -- those rents to drift off, but still be 4% above last year in Q4.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

That's helpful. And then David, just the $500 million you've identified as your acquisition and disposition target, how much of that has actually been identified at this point? You talked about a potentially large pipeline. But just curious of the opportunities you're looking at today, how much of that has been identified?

David J. Neithercut

I mean, I guess, enough of it that we think that the $500 million and $500 million can and will be achieved. And I guess, again my comment is we think that as the year progresses, there will be more opportunity and perhaps we'll have an opportunity to identify more. But as we looked at what was kicking around out there that we were working on under contract, et cetera, we've felt confident that $500 million and $500 million was still doable.

Operator

And gentlemen, we have no further questions. Mr. McKenna, I'll turn the conference back to you for closing or additional remarks.

Marty McKenna

All right. Thank you all very much. Enjoy August and the rest of summer. And I'm sure we'll see a lot of you around in September. Thanks for joining us today.

Operator

And again ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.

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's (EQR) CEO David Neithercut on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts