Equity Residential's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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Equity Residential (NYSE:EQR)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET

Executives

David Santee - Executive Vice President of Operations

Mark Parrell - Chief Financial Officer and Executive Vice President

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

Marty McKenna - Spokeman

Frederick Tuomi -

Unknown Executive -

Analysts

Jonathan Habermann - Goldman Sachs Group Inc.

Jana Galan - BofA Merrill Lynch

Omotayo Okusanya - Jefferies & Company, Inc.

Swaroop Yalla - Morgan Stanley

Richard Anderson - BMO Capital Markets U.S.

Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

Michael Salinsky - RBC Capital Markets, LLC

Ross Nussbaum - UBS Investment Bank

Michael Bilerman - Citigroup Inc

David Toti - FBR Capital Markets & Co.

Andrew McCulloch - Green Street Advisors, Inc.

Eric Wolfe - Citigroup Inc

Gautam Garg

David Bragg - Zelman & Associates

Robert Stevenson - Macquarie Research

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Equity Residential Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, July 28, 2011. I would now like to turn the conference over to Marty McKenna. Please go ahead, sir.

Marty McKenna

Thanks, Mitch. Good morning, and thank you for joining us to discuss Equity Residential's second quarter 2011 results. Our featured speakers today are David Neithercut, our President and CEO; Fred Tuomi, our Executive Vice President of Property Management; and Mark Parrell, our Chief Financial Officer. David Santee, our EVP of Property Operations is also here with us for the Q&A.

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

David Neithercut

Thank you, Marty. Good morning, everyone. Thanks for joining us on our call this morning. As has been the case for quite a few quarters now, despite disappointingly weak economic growth and anemic job growth, apartment fundamentals remain very strong.

Across all of our markets, we continue to experience strong occupancy and rising rates and increasing revenues, which combined with great cost control, and I mean great cost control, produced same-store NOI growth of 7.4% for the first half of the year. As a result, and as we noted on last night's press release, we raised our guidance for same-store revenue to 4.8% to 5.1% for the full year and net operating income to 7.8% from 7% to 8% for the same period.

With 7 months of the year behind us and our August rent rolls in hand, combined with the visibility we have with outstanding renewal offers for September and even into October, we've got a pretty good view as for the full year and how it will be different from our earlier expectations as we have asked Fred to take us through a little bit about where we stand today and how we're currently looking at the full year. Fred?

Frederick Tuomi

Thank you, David. As David mentioned, we're now projecting NOI for the year to be at the top end of our guidance range that we've provided back in February. This means that some or all of the key drivers of revenue that we've been discussing over the last few quarters meaning, turnover, occupancy, base rents and renewal pricing are running better than our original expectations.

So now I'll provide an update on what we're seeing in these metrics and how this shapes our new guidance for the full year. So starting with resident turnover, coming into this year, we expected turnover to reverse the course of the last couple of years and actually begin to increase again, as our rent levels recovered and recording larger increases to our existing residents.

Turnover is in fact up this year but not as much as we originally thought. So first, we've lowered our turnover projections for the full year of 2011 to 57.2%. And while this turnover projection is lower than our original expectation, it does still represent an increase over 2010 of 50 basis points.

So turnover then leads to occupancy. And with very little new supply in the system, turnover held in check, favorable demand indicators through this point of the leasing season, and our occupancy has remained well above our original target levels. We now expect occupancy to average 95.2% for the year, which is like 40 basis point improvement over 2010 levels.

The Northeast markets continue to have very strong demand and very tight occupancies. The Pacific Northwest, including the Bay Area, are now also experiencing very tight conditions and Southern California, who's a laggard has finally stabilized above 95%.

So overall, our portfolio this morning is 95.4% occupied and a very favorable left to lease in a forward-look position of 7.5%.

So that sets up our base pricing strategy. And by base rent, I mean the prices generated by NOL every night that we're achieving in the market for new leases on a net effective basis, prior to the addition of any unit specific amenity premiums. So base rent growth through this peak leasing season has been very encouraging so far, especially compared to some tougher comps last year as we were recovering.

So while our prices are sure to moderate with the upcoming seasonal slowdown in Q4, the margin of growth over the 2010 pricing curve will be sustained. And we expect 2011 base rent to now average 5.6% over the 2010 levels. This is a 60 basis point better than our original projections, primarily due to the strength of market, such as Boston, D.C., Virginia and the San Francisco Bay area. In fact, Boston and the Bay Area are leading all of the markets right now in base rent growth with double-digit growth and no real slowing in sight.

So after 2 years of steady recovery in rent, we recently passed the overall peak set in June 2008. And while at some point, the rate of growth is sure to moderate, the basic factors of no supply, steady and increasing demand and great customer demographic indicate continued strength in base rents through 2011 and well into 2012.

So this all sets up our renewal pricing. With moderate turnover, good, strong occupancy, base rent pricing power, that gives us confidence as we set our forward renewal price quotation. Renewal increases are running ahead of our expectations, and we now forecast the average renewal increase to be 5.8% over the entire year for 2011. And this is an 80 basis point improvement over what we originally projected, and it's really evident across every one of our markets.

Now we expected renewal increases to begin to moderate as we've reached our tougher comp period this summer, but this has not been the case. Our unique renewal process, continued fall in home buying and very strong customer loyalty continue to support impressive renewal gains.

So this leads to our guidance. At this point, we now know the outcome of the peak leasing season, and we have extended visibility into the balance of the year. But based on the favorable trends and the drivers of our core business, we believe revenue growth for the full-year 2011 will be between 4.8% and 5.1%. Thank you. David?

David Neithercut

Thanks a lot, Fred. I'd want to address the transaction market for just a minute here and tell you that very little has changed at least on the acquisition side over the last 90 days. It remains extremely competitive. That's because there's simply an awful lot of capital out there chasing very little supply.

Cap rates on core products in our markets across the country generally have 4 handles. And I'd tell you that the better assets in those markets are certainly trading in the low 4s. And that's because investors continue to underwrite very strong rental revenue growth over the next several years. And depending on the market, we think values, so absolute values are now back to peak levels in some markets and is still down as much as 10% in others.

So during the quarter, we acquired 5 assets for $410 million at a weighted average cap rate of 5%. We acquired assets in downtown L.A., in Encino, California; Seattle, Washington; Arlington, Virginia; and Washington, D.C. As I noticed, it's extremely difficult to buy core assets in our markets today. We are, however, currently working on several hundred million dollars of deals. And we've got properties under contract today that includes 476 units in 3 properties in downtown L.A., a couple of deals on the Peninsula in San Francisco, one of which is a broken condo deal that would require a total lease up, similar to what we've done in a couple of properties already this year.

And during the quarter, we also continue to sell our non-core assets to reduce our overall exposure to our non-core markets. Now we sold 26 assets for nearly $912 million for weighted average IRR of 11.7%. The sold assets had an average age of 22 years, and it included a 7 property 1,626 unit portfolio sale that was done to a single buyer for $286 million. And all those deals were in the Metro D.C.

During the quarter, we also sold 5 properties in Portland, Oregon as we continue to exit that market. Five in Northern Florida, 3 in Phoenix, 2 in suburban Atlanta and one each in suburban Boston, one in Manchester, New Hampshire, one in California's Inland Empire and one in North Suburban, Seattle.

So given the competition we're facing as we try to redeploy this capital, this disposition activity has created a pretty significant cash balance, which stands at nearly $800 million today. Now selling assets in the 6s and reinvesting cash proceeds at next to nothing is a highly dilutive process. And that activity as well as being more of a net seller this year than we originally projected, as well as selling earlier in the year than we projected have all combined to make us modestly reduce our normalized FFO guidance for the year, the midpoint of that guidance for the year. And again, that comes despite extremely strong same store net operating income growth that should come at the high end of our original guidance.

Well I'd tell you we're selling assets that simply do not fit into our longer-term plan. These are assets that we think don't have the rent roll upside that we see in our core assets in our other core assets or they have immediate or pending capital needs that we don't think add value. And these are assets that we can trade today for prices that we think represent pretty good value on a per pound basis. We also think these are properties with values that are most at risk of rising interest rates, of changes in GSE commitment to multi-family and growing capital needs.

So this activity is certainly more dilutive than we like, but we expect that there will be more opportunities to buy good quality assets in our core markets in the near future, and we'll be able to put that money to work soon. We are already seeing an increase in deal flow and our sense of the market today is that there will be even more coming down the road.

So all that said, we've changed our transaction guidance for the year to acquisitions of $1.15 billion and dispositions of $1.5 billion. Now that level of acquisition activity will require nearly $600 million of additional acquisitions in the second half of the year. We have $325 million that we've identified today, but we will also need to find new deals to hit that goal. On the disposition side, to start $1.5 billion this year, we have to sell only $326 million of additional property in the second half of the year. And most of that is already identified and in process.

Now we've also changed our guidance as to the expected spread we expect to realize during the years as a result of all this activity. And that's due primarily to the fact that cap rates have compressed more in our core markets than they have in our non-core ones. And that expected spread is now closer to 150 basis points for the entire year. Now because that spread to the first half of the year is 120 basis points, basic arithmetic suggests that our activity in the second half of the year must produce a wider outcome. And don't forget I said previously, acquisition cap rates and the target markets are in the 4s, the yields we're selling at today in our non-core markets are in the high 5s to low 7s. And that's going to create a wider reinvestment spread in the second half of the year.

On the development side, during the second quarter, we are very pleased to complete the initial lease-ups of our development projects in Brooklyn, in downtown Renton, Washington, and downtown Pasadena, California. Also during the quarter, we acquired a land site in D.C. It's on I Street, which is right behind our 425 Mass Avenue property. And we'll build 162 units there for about $57 million. We expect a stabilized yield on rents today in the low 60s.

And lastly, during the quarter, we commenced construction on one new development deal that was our Sunrise Village property in Sunrise, Florida, that's adjacent to Simon's Sawgrass Mills property. The 501 units, $78 million total cost deal with projected yield on cost at current rents in the mid 7s. And as I noted on our last call, we are doing this with an institutional partner.

Now looking forward, we now think that our starts for year could come in around $500 million to $600 million. And this is more than we have suggested previously, but it's now possible that some -- what we thought might be early 2012 starts could be moved into late 2011. So in addition to the $93 million deal in downtown L.A. that we started in the first quarter and the South Florida deal I just mentioned, additional starts this year could include sites in Seattle; Alexandria, Virginia; San Jose; and Pasadena.

Now over the past year, we've secured over $1 billion of new development rights. We've closed $485 million of those, and we continue to work on another $590 million of secured rights in New York City, in South Florida, in Southern California, in Seattle, and due diligence will determine how much of those we take down.

And we also continue to pursue new opportunities across all of our markets some -- we have some executed NOIs and others we've submitted proposals that we hope will turn into NOIs and yields an estimated cost based on current rents, all these development deals we're working on today are in the high 5 to the mid 6 ranges.

So, I'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 2 topics, guidance for the entire year and a little bit color on our new revolving credit facility and then on our balance sheet.

For the full year on the guidance side, we have revised our ranges for our same store operating metrics, revenues, expenses and NOI, and as David Neithercut described, we've also revised our transaction assumptions in the fall as our normalized FFO range for the year. I will give you a quick rundown of our new ranges and the main drivers of our guidance changers.

Our new same-store revenue guidance range is 4.8% to 5.1% versus our prior guidance range of 4% to 5%. Fred has described the drivers behind our strong same-store revenue growth and improved guidance, so move right along to expenses. And on the expense side, our new same-store expense range for the full year is 0 to up 1%. The old range was an increase of 1% to 2%.

There really are 3 drivers on the expense side to this improvement in the expense guidance, 2 up and one that's modestly down. On-site payroll, reductions in health insurance costs along with lower-than-expected salaries and overtime are producing some savings for us here. We said in February that our on-site payroll will be up less than 1%. We now see it was down about 2%. And we have process and technology initiatives that we've discussed with you before in our field operations that continued to let us do more with fewer personnel.

Also on the positive or helpful side, on utilities line item. On the February call, we said utilities would be up 3% to 3.5% this year versus 2010. We now expect utilities to be up more like 2% to 2.5%, with the favorable variance coming from lower-than-expected electric costs.

And on a slightly less favorable side, property taxes, our biggest single line item, about 27% of operating expenses. As you may recall from our prior calls, growth in this line item has been muted. I think we're all a little bit surprise at that given some of the fiscal issues local governments have. It will be the case again this year that this line item will be at the lower end of expectations, but at the higher end of the range we gave you back in February 2011. So up about 1% year-over-year.

There's still a fair amount of uncertainty here between pending appeal activity and the tax bills or pre-bills that we should receive shortly, so this number may still move around a little bit.

In 2012 or 2013 we would expect property taxes to rise more sharply as the sensors [ph] recognize the recent improvements in apartment value.

And just to sum it up, on expenses. I think we've done a tremendous job controlling expenses through the efforts of David Santee, Fred Tuomi and their dedicated teams. From 2009 to the present, the company's compound average growth rate for expense growth has been only 1.3%, almost half of the last 12 quarters have shown an actual reduction in same-store quarter-over-quarter operating expenses. And while it is impossible for us to promise to maintain or better this result, we do feel that our people and our processes give us a sustainable advantage in managing expense growth no matter what the economic climate, with no compromise to quality or resident service.

The cumulative result of these changes in our revenue and expense guidance is that we now see NOI up 7% to 8% for the year versus our prior guidance of 5% to 7.5%.

Now I want to talk a little bit about normalized FFO guidance. Our new range for the year is $2.40 per share to $2.45 per share. And there's really 3 large variances here that I want to speak to. Property NOI will be up about $0.07 over our February expectations, $0.05 of that is same-store, the rest is lease-ups.

On the transaction dilution side, we expect about $0.10 of incremental dilution from our transaction activity. And David has discussed the reasons for our accelerated pace of disposition activity in his remarks.

We really see that dilution is coming from 3 aspects of our transaction program. First, transaction timing. So we're basically disposing off assets earlier and buying assets later in the year than our February guidance assumed. We have now assumed that all of our remaining dispositions will occur in the third quarter and that all of our remaining acquisitions will occur in the fourth quarter. We have also increased our reinvestment spread and the reinvestment spread again is the difference between the cap rate on the assets we are selling and the cap rate on the assets that we are acquiring from 1.25% to 1.5%. And the third driver of transaction dilution is just having a larger net disposition program than we had suggested we would have back in February. Back then, we thought our disposition program would be about $250 million in net sales. Now we expect transactions to be more of $350 million in net sales activity.

So all of this disposition activity has left us with around $800 million of cash on hand, and that does include $10.31. That cash, together with our new line of credit, which I'll discuss in a moment, allows us to move the target date for our unsecured debt offering, which was previously planned for this summer, back into 2012. However, as always, we will be opportunistic in accessing the debt market, especially during this turbulent times. And that gets to our third driver, which is interest expense, which we see is about $0.03 lower than we had expected.

We're going to have less outstanding debt than we thought on joint venture development deals. So these are deals that have stabilized so that interest expense is expense not capitalized.

And so overall, we'll have less interest expense there because we have paid off or expect to pay off loans on a few large development deals coincident with taking our partners out of those deals. This is a marginally accretive, short-term use of cash for us that we did not expect back in February. Much of the remaining savings is due to postponing the planned summer 2011 debt offering into 2012.

Offsetting these positives, we will incur about $7 million of expense relating to $350 million in interest rate hedges that we have in place to hedge the debt offering we had expected to do this summer. These forward starting swaps start in July of 2011, so we are required to begin paying interest on them whether we've issued a new debt or not. This $7 million payment increases interest expense and reduces normalized FFO.

In addition to the $7 million of additional interest expense, by moving the debt issuance period associated with the hedges back by 6 month, we have, under the accounting rules, incurred a $2.6 million noncash hedge ineffectiveness charge.

And we think about it this way. The hedges anticipated that we would have new debt outstanding for a 10-year period that would have begun in July 2011 and ended in July 2021. The company will now issue debt in early 2012, resulting in a life for the new debt, this new 10-year debt instrument, of January 2012 through January 2022.

This mismatch by 6 months is what creates the hedge ineffectiveness charge. Other ineffectiveness charges are possible in the future. This $2.6 million ineffectiveness charge does not impact normalized FFO. The remaining reduction in normalized FFO guidance is mostly the result of lower interest income, along with the dilutive impact of stock option. And finally, as you might expect, our current guidance does not anticipate the use of the company's ATM stock issuance program.

And just a quick final note here on the balance sheet. And our balance sheet is just in terrific shape. And it gives us just tremendous flexibility and our strong credit metrics continue to improve as our operating business thrives. On July 18, we announced that we are calling for redemption, the $482.5 million outstanding of our 3.85% exchangeable senior notes, which are due in 2026. These are our convertible notes. The redemption of these notes has been planned since the beginning of the year, and the impact has been included in the normalized FFO guidance we have given you for the year.

Just as a sidenote, for every dollar that the company share price during this exchange period exceeds $61, the company will owe roughly $8 million to the convertible noteholders. This excess amount is payable in cash or stock at the company's election, and is not a charge to earnings or normalized FFO.

As we disclosed a couple of weeks ago and as you saw in last night's press release, we have entered into a new $1.25 billion revolving credit facility. This new facility with a group of 23 financial institutions, both U.S. and international, matures in July 2014, subject to a one-year extension as the company's option.

Diversifying our bank group by type and strengthening our bank group was a big goal of ours, and we think we've succeeded marvelously. Pushing pricing is also an important goal. With favorable demand and an improving bank market, we have came to borrowing a spread at our current credit rating of LIBOR plus 1.15% along with a 0.2% annual facility fee paid on the entire line amount. This is the lowest cost of any revolving credit facility closed in the last 2 years.

One of the company's unique credit strength that the bank group recognized is our massive unencumbered asset pool. We have approximately $800 million in unencumbered NOI and about $13.8 billion in undepreciated book value of those unencumbered assets. This produces an unencumbered debt yield, which is the ratio of net operating income from unencumbered assets, the amount of unsecured debt of over 15%, which we think is an extremely strong number relative to our peers. This very important, debt statistic will approach 17% by year end. We could not be more pleased with our bank group, with our pricing and with this process.

So in sum, the combination of being very liquid, having a new longer-term line and having a strong balance sheet, means added future flexibility to take advantage of investment opportunities.

I'll now turn the call back to Mitch for the question-and-answer period.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Toti with FBR.

David Toti - FBR Capital Markets & Co.

I just have 2 questions. First, David, can you give us a little bit more detail on the cap rate range within the disposition that took place in the quarter at the high end and the low end?

David Neithercut

Well the cap rates have been in the low 5s on the -- but [ph] the portfolio that we sold in the Metro D.C. area and then in the low 7s away from there.

David Toti - FBR Capital Markets & Co.

Okay, great. And then given that this seems to signal your view is that we are in a very attractive pricing environment, potentially the peak pricing environment. Why not sell more into that?

David Neithercut

Well I guess, we're not calling kind of peaks. We're just identifying assets, Dave, that we know we don't want to own long term. And we're in the process of selling at values that we think are pretty good values. And I guess as we exit markets, there's only so much that you can sell in a market at any one time. So we sold some properties in Portland. We still have more properties to sell in Portland. And you wouldn't want to bring all those to the market at the same time.

And that would be the same in Tampa and Jacksonville and other markets that we've identified for exit. So we're managing the process, the most appropriate way that we think that we can. We also are trying to balance that with redeploying that capital. I'm trying to find the right path. So last year we were a net acquirer of assets. This year will be a net seller of assets. And then we'll continue into 2012 and see what that balance will be going forward.

David Toti - FBR Capital Markets & Co.

Okay. That's helpful. And then just lastly, have you considered other options with the proceeds in terms of potentially a return of capital, what have you sort of tabled relative to reinvestment or distribution?

David Neithercut

Well, we haven't tabled anything. I mean we'll do what we think is the right thing by our shareholders as we move forward. So it's premature to say what -- but what we'll do, if it makes sense to distribute, we will. If we find an opportunity to invest then we will. And I think we've been pretty good stewards of capital in the past, and I expect us to be that going forward.

Operator

Our next question comes from the line of Swaroop Yalla with Morgan Stanley.

Swaroop Yalla - Morgan Stanley

Fred, can you talk a little bit about the trend in new and renewal rents as you saw them in August, September, October?

Mark Parrell

Yes, in terms of renewal rent, what we're seeing right now is July we finished up 6.3%. And as we go forward into August, we're quoting in the 7s and we expect to achieve in the low 6s. And beyond that, we're quoting in the mid 7s. And maybe a couple of market will be a little bit stronger. And we expect this to maintain in the low 6s in the going forward. We have a little bit of a tougher comp period. But so far it hasn't really slowed us down. And in Q4, you'll have a little bit of softness due to the seasonal slowdown, so you don't want to be wildly aggressive. You have to maintain a good balance there, but I still think the 6s [indiscernible] Will be achievable, perhaps a little bit better.

Swaroop Yalla - Morgan Stanley

Okay. So just going back to the guidance that -- assuming you achieve some of the renewals, it just seems, looking at the momentum in some of your markets, I mean is the second half of the year just primarily because of the tougher comps? Or is there some other macro-factor, which are affecting your view of the second half of the year? Just going by the momentum in some of your West Coast market, I would have expected sort of third quarter sequential growth to be on par with second quarter and maybe a little slowdown in the fourth quarter.

Mark Parrell

Yes. As we look forward into the balance of the year, we still see, we have very strong indicators. I mean the renewal increases are good. Occupancy should be fairly stable. Although, it will soften seasonally in Q4. It always does, probably it always will. And then the rents over last year I think as I mentioned will maintain good healthy spread over that but we will see some softening of rents from the peak now as we get into Q4, that's the seasonal slowdown. So that's to be expected. And when you look at the numbers that I gave you for how we're going to achieve it this year, when you look at the total net result of the revenue change, you have to keep in mind that still in 2011, we have some leases in place that are either equal to our current rents or maybe a gain to lease situation. Back in January, I mentioned that we had at that point in time 20% of the leases to be in our rent roll in January were actually paying rents above market back then by 5%. So that's kind of a constrainer or a governor on your overall growth. You don't get these growth numbers immediately impacting the rent roll. You have to burn off the existing legacy leases. And that's happened but it's going to impact our numbers this year. Right now, in July, we only have 3% of our people in our rent rolls today that are paying rents equal to or above our current street rents, and it's only by $5. So we're basically flat. So we've burn through most of that and that will set us up great for next year.

Unknown Executive

And just to supplement that, I mean we expect very strong sequential growth for the third quarter to the second. I mean we're still talking about a number that -- to be somewhere in the range of 1.8% or so. So in this number we just put up was an outstanding number and is one of the best sequential growth numbers we've ever had. But the next quarter is not going to be a great laggard in that regard either.

Swaroop Yalla - Morgan Stanley

Got it. That's helpful. And just lastly, to touch upon Manhattan market, given the negative press we're hearing on job cuts in financial services funds, how you're seeing things on the ground and your ability to continue pushing these high single-digit renewals.

Frederick Tuomi

Yes. I mean New York, Manhattan in particular and the Gold Coast of Jersey just continue to motor on. And, you ask if we're seeing an evidence to that? The answer is no. I would have to ask you all if you're seeing any evidence because we don't. And I've asked this recently just a few days ago, our managers there. Have you heard any talk in any verifiable evidences, any of our residents losing a job or getting a severance or worried about it. And the answer is no, resounding no. To the contrary, we're seeing stability in the financial sector and we see growth in the entertainment and tech sector. So New York right now, I mean we have very strong occupancy. We're 96.2%, 7% rest of lease, rents are up almost 11% since the beginning of the year. And we're getting very good renewal increases with virtually no push back or kind of real legitimate resistance to pricing. So New York is still looking -- a great place to be.

Operator

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

Jana Galan - BofA Merrill Lynch

I was wondering if you could touch on supply and kind of what quarters do you expect it to impact maybe D.C., Seattle and Northern California those kind of sound that they're being built out more so?

Frederick Tuomi

This is Fred again. Supply is really a good picture for 2011 and 2012. For example some markets like Phoenix, San Diego and Orange County have virtually no deliveries this year. We have 800 units in Phoenix, 500 in San Diego, 300 in Orange County. And looking next year, we actually have goose eggs for Phoenix, which is something we've never seen in any time in history of the valley there. So it's still a very good supply situation, 2011 and 2012. This year, on the higher end, you are delivering 3,600 units still into the Virginia, D.C. markets but those are being absorbed very quickly and that's not an issue. L.A. still has deliveries of about 2,300 this year, meaning 2011. That has caused a little bit of friction there in certain markets such as San Fernando Valley, Warner Center, some areas of downtown. Because L.A. is not as robust a market. And then Atlanta still has -- 2,000 units coming this year to digest. And even though that seems high given the situation of Atlanta, that's kind of an all-time historic low. And then Seattle has 2,000, which is really no issue to Seattle. Looking forward, in 2012 and 2013 of the higher markets, everybody knows we have a pipeline that's been building in D.C., I mean D.C. and Northern Virginia. And 2012, we expect more than 7,000, maybe 7,500 units to come into the D.C. market. And for 2012, we're not too concerned about that. We had very strong absorption even through the recession and that should continue into 2012. Now D.C., looking forward into 2013 and plus, that could get a little sketchy. Because there we see right now we've identified about 12,000 units or more in the pipeline, more to come. Some of these deals may get canceled or delayed, but it's going to be a pretty healthy delivery in 2013 and 2014. So if the government hiring and all the other great things going on in D.C. continue, we can absorb that. If there's a slowdown, then we're going to have a little bit of a supply demand mismatch for a couple of years there in '13 and '14. South Florida is another one, virtually nothing coming next year, only 400 units. So South Florida will, I think, have a great year next year. But beyond that, 2013 and 2014, there is a pipeline building. There's lots of proposed developments including some in our schedule. And it could be more than 10,000 units in the pipeline for '13 and '14 down there in South Florida. L.A., less of a concern. Next year will be good. And then as we look forward to '13 and '14 and maybe about 5,000 units of bestowed of [ph] Highly localized. Again more coming in Warner Center, unfortunately, and then the downtown close in areas. And then Seattle is another one. Again, it's going to be great next year, only 1,000 units. But then in the pipeline, we're looking forward to about 4,000 units plus in the downtown, East side, a little bit on North. We've got some great projects there as well. And I'm not too concerned about the Seattle. So really it boils down to D.C. in South Florida in '13 and '14, but between now and there, it's all systems go.

Operator

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

Robert Stevenson - Macquarie Research

Can you talk a little bit about what's going on in terms of your rents in your major markets versus the market rent. I mean if turnover is basically flat and you're pushing rental rates, 6%, 7% and you're not seeing a big bump in turnover, is it just the market rate, the gap between you and the market that's preventing you from going 8% and 9% on renewals?

Frederick Tuomi

Well pricing, the base rent pricing through NOLs [ph], that sets up everything. And we aren't really constrained. The major impact of that is the competitive rent, but we're not necessarily actually constrained by that. We are running a margin above our comps right now, but you can't be an extreme outlier in the market. [indiscernible] correct, based on the sensitivity of the market. When you give a big rent increase, the first thing people are going to do is they're going to be in shock. They might come in and talk, they might complain, but then they're going to shop the market. And when they shop the market, they're going to see if that price is valid or not. And we're seeing that they are validated vis-à-vis the comp. And that's why they come back and they renew because it's a hassle to move, and that's not generally satisfied. So another indicator of that is people that tell us that again, we're moving out because my rent is too expensive. And if home buying has gone down the last couple of years, we are seeing that on the relative mix, the makeup of reasons for move out, but that one's floating closer to the top, change in job or change in life situation is always #1. But move out because it's too expensive has moved up over the last several quarters, but really not to an outrageous level. In fact, I'd be surprised if we didn't see some of that. So I'm not sure if I answered your question specifically. But all those factors come into play, the supply, the demand, it's your comps, it's their satisfaction level, et cetera. And I can just tell you that our goal in revenue is to optimize, which is to hit the right points between occupancy turnover and rate. And we're always trying to optimize those numbers.

Robert Stevenson - Macquarie Research

Can you remind me how many units you have today that are not in the same-store portfolio? And sort of what the operating trends are there relative to the same-store portfolio sort of in line, a little bit stronger, a little bit weaker, et cetera?

Mark Parrell

So we have approximately 106,000 same-store quarter-over-quarter units. The total unit count is about 120,000 units. So the difference there, 5,000 of that 15,000 are military units, and that's just a different market altogether. So call it 10,000 units in the non-same stores set. It's hard to talk about those trends. Those development deals tend to do very well for us. Those tend to be in the markets that David described, the lease-ups occurring in. Those also include the big Vantage deal in San Diego, the 425 Mass Avenue deal in D.C., so I suggest to you that those deal will do [ph] very well. I'm not sure if they're going to move on their own, the entire mix of the company just because it is such a substantial same-store set at 105,000 same store units versus the -- call it 15,000 less the military housing that we actually have.

Robert Stevenson - Macquarie Research

Okay. And then last question, David, in terms of presale deals out there, is there an opportunity today to sort of fund developers looking to get back in the game and take those out in your core markets to even ramp up your development over and above what you would normally do with less risk to the company?

David Neithercut

Well we're trying to do that Rob, and I would hope in the next quarter or 2, [indiscernible] would say that we've done that successfully. But we had got numerous conversations taking place with owners of existing land to see if there's not some way by which we can provide them with the bankable takeout upon completion of construction and do some sort of presale. And that's a much more efficient way for us to deal with our disposition activity 12, 24, 36 months down the road. And we'd like to do that. And I will tell you that anyone who's got a good piece of dirt in one of our core markets. We've got an awful lot of people trying to have those same conversation with them right now. But we are having, as I said, numerous conversations with people hoping to do that and I'd be disappointed if we didn't do one or 2 in the next 90 days to 6 months.

Operator

Our next question comes from the line of Jay Habermann with Goldman Sachs.

Jonathan Habermann - Goldman Sachs Group Inc.

David, if you look at acquisitions, and you talked about another $600 million perhaps by year end. Can you also talk about portfolio transactions. I know there was a report that you guys might be looking at a portfolio in the Silicon Valley area, but can you give us some sense of -- are your seeing better pricing for larger transactions?

David Neithercut

Well, anything that we're looking at that you might consider to be a portfolio is still relatively small. So I'm not so sure that it would get to a level where there may be some kind of discount for something of size. And anything that might be a portfolio, just in terms of absolute dollars, is just not that much. So everything we're looking at today is pretty competitive across all the markets. They said we've got $325 million of the balance that we hope to do this year already tied up and in various stages of due diligence, then we'll have to identify some new opportunities. And we are working on lots of things at all times. But no, we're not seeing anything of real size at the present time.

Jonathan Habermann - Goldman Sachs Group Inc.

And can you just remind us as well the sort of your underwriting assumptions versus what you're seeing in the private market? How your assumptions compare for the 5% yields? And whether do you expect those to trend over the next couple of years?

David Neithercut

Well, I can tell you that on the things that we've acquired most recently that have been acquired in that 5-or-so percent weighted average cap rate for first and the second quarter, we think in a couple of years we will be in the high 5s and even in one of them hopefully in the 7s because we're going to be doing some significant rehab work to that transaction. But if we can achieve the same kind of rental growth that we have over the past 6 to 12 months, kind of going forward, 5% yield will become high 5s and 6s reasonably soon.

Jonathan Habermann - Goldman Sachs Group Inc.

Okay. And if you think about asset sales I guess beyond the $1.5 billion that you have planned for this year, can you talk about any markets that you plan to exit or even non-core assets in some your top markets, can you give us a sense of what remains perhaps after this disposition this year?

David Neithercut

Well, I guess I've said on the last call, we still have $1 billion or $2 billion of assets that we think we'd like to sell. Again, I don't think that's there's necessarily [ph] an urgency in those. And I would say that as a company of our size, we will always in every year have assets that for various reasons that we think we want to sell. But we're still working on some markets in Northern Florida. And again, we'll exit Portland soon. And we're selling some properties I guess in Phoenix and Atlanta. But there's probably still $1 billion to $2 billion worth of stuff that we've identified that we're fairly confident we don't want to own in the medium term.

Operator

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

Eric Wolfe - Citigroup Inc

Just along the lines of Jay's last question. David, you've been pretty focused on upgrading the quality of your portfolio for quite some time. It's been a process that I'm sure it's been going through for the better part of the decade. Just curious whether there's some sort of level of internal target that you have for a quality core product versus the non-core B product. And if there's any goals around where you'd your average rent, average age of the portfolio to be, et cetera?

billion

David Neithercut

No. I think it's less of the goal in terms of average rent or quality of asset and more of the markets we want to have the capital invested in. Because even in core markets, we'll have B quality product. In fact, we bought properties, one could argue lately a C quality products, which we intend to bring up to a B quality. It's not an average rental rate. It's not an average of asset quality. It's what markets do we want to be in, what markets do we believe will provide the best total returns going forward. And within that marketplace, you might find us in lots of different assets and of a different quality and of different price points.

Eric Wolfe - Citigroup Inc

Got you, that makes sense. And you mentioned in your remarks some of the statistics about cap rates being in the low 4s, being I guess in the mid-4s or maybe not as a quality product, and our buyers were factoring generally a very strong level of rent growth. The first question is just whether you think that level of rent growth that has been underwritten is reasonable? And second, whether you have some sense of what total returns these buyers are underwriting?

David Neithercut

Well, I guess we think that they're underwriting -- the people that we're competing with for product probably 7 handle IRRs, and we're still trying to achieve. And I think we will achieve IRRs with 8 handles. But I think, of course, depending on the market, people are underwriting 6 if not more percent of rental growth over the next couple of years before they begin to moderate those expectations.

Eric Wolfe - Citigroup Inc

Okay. And just one last question. Obviously, long-term rates have stayed pretty low now for quite some time. But if they were to move up 50 to 100 basis points, do think that low 4 cap rate valuation is sustainable from here?

David Neithercut

Well, I think that valuations are certainly impacted by interest rates. I think the better quality product that we own and that we've been acquiring is less susceptible than the lesser quality non-core assets that we've been selling that we believe are much more subject to a leveraged bid, and therefore, would be much more impacted by changes in interest rates. But if increasing interest rates also come as a result of economic expansion, then we think our top line's going to grow, and that doesn't necessarily mean the value of our assets will go down.

Michael Bilerman - Citigroup Inc

David, it's Mike Bilerman speaking. Just a question the expense side, you've opened up in your comments saying, "You had great, and I mean great expense control." And it really sounds like you've been able to move a lot of stuff on line, leveraging technology and really reducing STEs at the asset level. I was just curious how real time of a reaction are you getting from the tenant base given the fact that multifamily, it is a touch-and-feel type of business at the asset, has it impacted anything on the customer survey side? And could there be the potential that you may have to reengage and put more employees back at the asset level to maintain the higher service level that's required on the assets in your portfolio that you've driven towards?

David Santee

This is David Santee. I think you're referencing kind of some of our portfolios we took off of our property. When you stand back and look at that, that really ended up only impacting probably 10% of our communities. And really all we did there was rightsize properties relative to the efficiencies that we've created through technology. But when you look at -- your other question about reengaging, we are super focused right now on continuing to redevelop our resident portal. Most recently, we've seen record highs on our online payments, well over $100 million a month electronically. And what we see are our residents engaging each other. We are building a community, residents reaching out to other residents. So we're focused right now on continued development of applications or other tools that residents can use to become more engaged within their community. Not necessarily with us, but with other residents because if your friends live in your building, you're less likely to move. And already we've seen a pretty dramatic improvement in the length of stay of many of our residents.

David Neithercut

I guess, Mike, I would tell you that I think it's a very good question. It's certainly something one needs to keep an eye on. But I can tell you that across our property management functions, both those that are directly involve in property management directly and David's team. And I would tell you, for Fred and David as well, their compensation structure includes not simply how we've done in terms of raising revenue and dealing with our expenses but also customer loyalty scores. So there's a check and balance in the -- evaluation structure here that make sure that we're not raising revenue and cutting expenses at the cost of reduced customer loyalty scores. And that is not an under-weighted component relative to the others, that is a strongly weighted component relative to the others. And again that's Fred, David and their teams all the way down.

Frederick Tuomi

This is Fred. I would like to add 2 other quick things to that. One is that our Resident surveys tell us that our residents are really for the highest degree of value on online services. They told us that they wanted to communicate with us electronically to do their lease administration, check balances and their service request and their payments are better. So we thought early on, really, a few years ago, a significant increase in resident survey responses saying that they wanted this technology. And as David Santee referred to is the STEs really didn't go down dramatically, but we reshaped the existing STE [ph] property. Meaning that we took the administrative functions off, the back office things off of the site people, put those in the hands of specialists off-site that the residents never really saw or could appreciate, and we redeployed those things headcount with customer service people at a lower comp level, but in a closer touch to the resident.

Michael Bilerman - Citigroup Inc

And that's why when you look at your on-site cost, about 1/3 of the OpEx, which is down about 3%. Part of that shift is I guess going to corporate G&As, you're moving those expenses there.

Frederick Tuomi

Property management.

David Neithercut

Yes, not corporate G&A, but property management expenses.

Operator

Our next question comes from the line of Derek Bower with UBS Securities.

Ross Nussbaum - UBS Investment Bank

It's Ross Nussbaum here with Derek. I have 2 questions. First, will the disposition activity exceeding acquisitions result in a need for any form of a special dividends from a [indiscernible] perspective?

David Neithercut

As of current levels, no.

Ross Nussbaum - UBS Investment Bank

Okay. Second question, I'm looking back over the last decade, looks like the peak revenue growth for the company was right in the 6% ballpark in any given quarter, and it looks like you're going to be pushing toward that threshold in the back half of this year perhaps. What do think the likelihood is that you can push past that as we look ahead into next year? Or is 6% about what you can do? And it sounds like from the renewals that are going out for July, August, September, you're sort of in or slightly above that ballpark and it's holding folding there.

David Neithercut

Well, I'll let Fred talk about where we think we can go from here because that's a function of income, et cetera. But Fred did note in his remarks that we're just kind of back at peak rent. So rents went down, and we're just now recovering where we were. So that's one thing to keep in mind. But from here going forward, just rent as a percentage of income, et cetera. Fred?

Frederick Tuomi

Yes, I mean we're going to go for all the gusto that we can get here but who knows how high we can take it next year. We're not really going to talk about next year numbers, but you can tell from the momentum that we're building and the information I gave you earlier that things are looking good for a set up into 2012, especially the fact that our gains of lease [ph] Or the ones that equal current pricing is pretty much burned off. So now we'll be in an overall kind of cross lease [ph] Situation. But the other factor is all -- I've heard this question often especially in neighboring [ph] -- a couple of months ago, how can these people afford more rent gains [ph]? Aren't you going to hit the wall where people who just can't pay the rent? And we look at the rent versus income ratio of our residents. And back in January, the average rent as a percent of income was 17.7%. And today, it's 17.6%. It actually improved a little bit. In fact, our average income in the rent roll back in January. Today, is up 4% and the rents are up 3.2%. So that's a healthy level. 17%, 18% is very healthy. 20%, 22% is healthy. We quantify up to 30% without additional deposits. So I don't see any kind of in the near-term cap on people's ability to pay, especially in the markets that we're in and the type of products that we're providing. I mean New York is one of the most expensive places to live, where we have the lowest rent-to-income ratio. it's only 14.5%. And Southern California are the high ones in the low 20s. But it traditionally has always cost more for housing in Southern California. So no one can really say how high we can take this. We'll take it to the highest level we can, but right now given the supply, picture for the next 18 months to 24 months, the demand picture, which is stable even though with the low job creation, maybe this morning's report about the unemployment picture is encouraging. And then the demographics in our portfolio mix, it's pretty compelling for continued good results.

David Neithercut

I guess I'd go back to Fred's comment earlier. Ross, we talked about we see an increase of people moving out, and they can't afford rent. But we are not seeing any problem with traffic backfilling that of potential residents who can pay the rent.

Ross Nussbaum - UBS Investment Bank

Last question and I think I know the answer to this but I'm curious, David, for your thoughts, there's been some talk recently about the government considering renting out some of the foreclosed homes. And at first, I thought you'd say, "Okay, that's a good idea." But then on the second thought is who the heck is going to manage that program for them? And I would think that your name would come to the top of the list, but I'm not so sure you would even consider doing that. Can you give us some thoughts on that topic?

David Neithercut

Fred and David are so excited about that opportunity. Even [indiscernible] right now. I think that we've experienced a good deal of success over the past handful of years, and I think that's because we've had a pretty specific narrow focus in what we're doing. And I'm not sure that I'd allow us or these guys would allow us to be distracted from that.

Ross Nussbaum - UBS Investment Bank

Do you think anybody is capable of managing such a problem or such a portfolio if the government tries to go that route?

David Neithercut

Can someone? I suppose. I mean what will the cost per revenue dollar be to actually do that? I don't know, but I think it would not be the way that we're running our properties today as a percentage of the revenue dollar.

Ross Nussbaum - UBS Investment Bank

Do you think there is any realistic probability that, that could occur?

David Neithercut

I can't speak to that. I don't know. I mean I do know that at the GSEs [ph] there was talk about maybe doing something like that. Again, how that gets run, how that gets leased, how you manage that, how you deal with CapEx, every single unit has got 4 exterior walls, a roof, blacktop and landscaping. That is not a recipe for great rental opportunity. So I don't know how you do that.

Ross Nussbaum - UBS Investment Bank

That's what I thought you'd say.

David Neithercut

It may be a good way to inventory product, and we're seeing a de minimis yield while it's in inventory, while your waiting for some kind of recovery in absolute volume. I just think from pure operating standpoint, I think it's a nightmare.

Operator

Our next question comes from the line of Alex Goldfarb with Sandler O'Neill.

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

David, a question you had mentioned to an earlier question response that you weren't seeing any portfolios of size out there, just sort of curious given some of the news reports about Archstone potentially selling either assets or potentially markets, just curious if that's more just newspaper chat? Or if the stuff that they're marketing is not product that would be of interest to you guys?

David Neithercut

I'd say there's not much I can talk about Archstone. So I'll just -- I'll have you go to your next question.

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

On the debt hedge, sort of curious how much -- as you guys planned your debt offering for this summer, just curious how much of that offering was hedged. And where I am approaching it from is you guys have obviously been impacted by delaying an offering, I'm thinking back to another company that entered a hedge and rates changed and the hedge worked against them. So I'm just sort of curious as you plan your hedging and your offerings, do you hedge the whole amount that you plan to offer in the debt? Or is it a portion? Therefore, you have some flexibility in there.

Mark Parrell

Alex, it's Mark Parell. It's a terrific theoretical conversation because we do think about this as how much debt is coming due in an entire calendar year, which for us in this calendar was give or take $1 billion that we thought we would refinance and we hedged about $350 million of it. So it generally will hedge somewhere between 40% and 50% of what we think will come due. We don't pretend we know what interest rates are exactly going to do, but we look at our P&L and we look at our balance sheet and we say, can we manage our single biggest expense item and it is interest expense? If I can keep that number lower next year than it otherwise would have been. So that's rolling off, had a higher rate and the new debt that's going on and extend duration appropriately as we buy assets that have longer lives. That's kind of the goal. The debt thought processes is kind of integrated with the investment strategy. So I tell you we hedged give or take half of what we expect to issue in the calendar year. In our guidance specifically, we thought we're going to do a $400 million debt deal, give or take, July or August 1, 2011, that we now placed in our own minds in January 2012. So that's what impacted guidance. But our theoretical construct is we hedge about half.

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

Okay, that's helpful. And then just finally, with all the talks about the AAA rating of the government, just sort of curious as you talk to your GSE contacts, has there been any change in GSE pricing? Have investors who buy, who would rebuy the GSE debt that multifamily would fill, have they changed any of their desired returns or so far it's been pretty muted?

David Neithercut

We haven't seen any change in that. We haven't seen any issues in the production line over at Fannie or Freddie. So we haven't seen that manifest itself yet, Alex.

Operator

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

Richard Anderson - BMO Capital Markets U.S.

The $325 million of identified acquisition is that the 3 in L.A. and 2 in San Francisco? Or is there more?

David Neithercut

That includes those and there's more. There's a South Florida deal in there and some other things that are kind of maybes.

Richard Anderson - BMO Capital Markets U.S.

Okay. What would you identify to be your down costs? Because when I look at -- your new leases are still not growing as fast as your renewals, if I'm hearing you right. So you're not kind of getting compensated for the times when people do vacate. So I'm curious what your downtime cost would be when you think of the cost to upkeep the unit and also the vacant period of time.

David Santee

This is David Santee. Our average vacate day is about 28 days. Does that answer your question?

Richard Anderson - BMO Capital Markets U.S.

Yes, I guess. And so then it would be the average rent roughly plus some CapEx?

David Santee

Very minimal CapEx.

Richard Anderson - BMO Capital Markets U.S.

Okay. And I just have one more question and it has to do with New York City. And I mean it as a serious question, so just hear me out. You said that things are kind of going well there and better than you expected but there's been a new thing in New York, right? We have legalized gay marriage. And I'm curious if you see any demand to your space from people moving in New York to get married or any rainbow-colored flags from the terraces going on? Or you're not feeling that yet?

Frederick Tuomi

No evidence of that. No reports of that yet. That's an interesting concept. And I can see that, that can be the case. And there will be great residence to welcome, so we'll see what happens.

Richard Anderson - BMO Capital Markets U.S.

Okay, but again there's no way to track that because that would be a difficult question to ask I guess.

Frederick Tuomi

Yes, it's very difficult. So that would be purely anecdotal observation, and that one has not bubbled up to the surface yet.

Operator

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

Andrew McCulloch - Green Street Advisors, Inc.

Just to ask a previous question maybe a little differently, when you're looking to recycle capital and you're analyzing that reinvestment spread that you now thought you want to buy and what you want to sell, how wide is that long-term NOI growth profile between those 2 buckets in your opinion? And I guess essentially what I'm asking is there a target cap rate spread in mind that you guys have? Would you either get more or less aggressive on that capital recycling front?

David Neithercut

Yes, I guess I'll tell you, Andy, that we look at disposition IRRs, we're selling an acquisition IRRs we're buying. And we think that we're on leverage. So we think we're selling somewhere maybe in the 7s or low 7s and buying 6s when one -- and buying 8s rather, when one is honest with what the CapEx needs of the assets that we're selling. So it's not simply a first-year delta on yield but it's a longer-term total return calculations. And as we exit markets, when we make decisions to exit markets, we kind of go through that process. It's not -- we're not looking at every single asset. We're getting now to the point now where we got 2 properties in Portland, Oregon. And we'll end up selling them. So I'm not quite sure we're going to worry about necessarily about what the absolute cap rate is. It's time to complete that exit, and we'll realize a lot of benefits on the property management side. And we haven't had the total exit there. So again it's not simply first-year kind of yields, but it's a longer term decision.

Andrew McCulloch - Green Street Advisors, Inc.

On the assets your selling, how different do you think the buyer's CapEx assumptions are versus what you think the real CapEx needs are going to be for those assets?

David Neithercut

Well one never knows. We know that when they come back and they try and retrade based upon what they think CapEx needs are. But one never knows what they might identify, what they really will actually spend or what they claim they're going to spend. We also think that generally the insurance costs will go up. Generally, we think that their insurance costs are not the same as ours, and will likely go up. And I think I mentioned on the call last time, when we think we're selling some cap rate [ph], we think our buyers are probably buying something that might even be 50 basis points lower than their yield because of insurance, because of real estate taxes, et cetera. But we don't know really what CapEx dollars they'll actually spend.

Andrew McCulloch - Green Street Advisors, Inc.

Great. Just one other quick question. It looks like you've bumped up the expected stabilization for Vantage Pointe, I think by 2 quarters. can you talk a little bit about what's going on there?

Frederick Tuomi

Yes. It's Fred. There's a lot of demand, a lot of leasing, and a lot of new [ph] leases. That product just kind of sat there in limbo as a for sale product. And I'll tell you, once we got in there and understood it, positioned it, marketed it, all online, it's just has been gangbusters demand. We're just way ahead of our expectations. And frankly, when we did underwriting that one, I was a little concern about the velocity, leasing velocity in the early months that I actually took them down a little bit on the margin, and they prove me wrong and they do those numbers. So we're very happy with the demand there. And this is another example of people didn't want to buy that product, but it's a beautiful asset and a great location in an exciting market, and they're certainly willing to rent that lifestyle.

Andrew McCulloch - Green Street Advisors, Inc.

But when do you think stabilized yields going to come out once it's fixed up?

David Neithercut

I don't know offhand where we thought we were probably in the 7s, it's a guess, maybe original underwriting and again, like 425 Mass, we'll exceed that. I wouldn't be surprised if we'd be in the 8s.

Operator

Our next question comes from the line of Dave Bragg with Zelman & Associates.

David Bragg - Zelman & Associates

Just a couple of quick follow-ups. First on Fred's answer to Rob's question earlier, what is your margin above your comps? And how has that relationship turned it over the last few years? You seem to be early to the game in terms of pushing rents. So it would be helpful to get a little more insight on that.

Frederick Tuomi

Yes, it's Fred. Overall, enterprise level and this can change market-to-market, but our overall top level of our rent, we're pretty much equal to the comps coming into this year. And stayed that way through the slower Q1, where you don't have enough transactions to really fuel rent growth there. But once we saw lift off in the leasing season, which should be late April, early May, if we saw separation. And actually the gap is at its widest point right now. So it's one gauge. It's certainly not the most important one, that's just something relative we look at. We certainly don't like to see it going the other way, but from our competitive sets that we logged into NOL, it's telling us that right here in the moment, we like what we see because we feel like we're on the more aggressive side and we're riding the top end of the pricing curve.

David Bragg - Zelman & Associates

Got it. And about how wide is that gap?

Frederick Tuomi

About 1/4 of an inch. It's more like 3/8.

David Bragg - Zelman & Associates

All right, I'll just go on that one. And then could you just talk about the residents who came in during 2009 at highly discounted rents versus perhaps the rest of your tenant base, which would be closer to current street rents. And can you talk about the renewal increases that you've achieved this year on that group that came in '09 versus the rest of the tenant base? And any notable differences in terms of turnover and also income levels of that group that came in at that time versus perhaps new tenants coming in today?

David Neithercut

First of all, the -- kind of those legacy leases that people in their -- throughout this whole process, as I said earlier, the gain to lease situation is pretty much gone. We're basically flat now. A couple of market such as Phoenix, South Florida and L.A., we still have some more exposure to that, but it working it's way through the system. Now the -- it's from 2 components. One is rents go up, and the other one, people either renew to those street rents, or they do, in fact, move out, then we have to replace them. In terms of our renewal strategy, through the downturn, we learned that consumer behavior is very interesting that a lot of people would take flat to down 1%, while market rents were going down 6%, 8%, 10%, 12%, 20%. So it's no different now. So even though they're been paying rents that were higher, and now maybe equal to or, in some cases, maybe even much higher than current street. What we're doing now is we're still offering a slight increase. It may not be a 6% increase, but we'll offer an increase, what we call a minimum increase. And in some cases, we achieved those. Other cases, we're willing to negotiate down to flat, okay? So depending on a lot of situation, the aspect of that particular market, that property, that unit type, and on their personal situation exactly, so far. The propensity to stay increases with residency. So those cohorts that went 3 years, 4 years, 5 years, they get very sticky. They continue to stay so we know that, that's a kind of potential there. And that we have not seen a change in that. And as David Santee mentioned earlier, our length of stay has increased in the last year by about 3 months, I believe. So -- and that's the loyal customer base that continues to stay. In terms of their income level versus average, I don't have that information handy.

David Santee

Yes. If you want to go back 2009, so last year in 2010, those residents that have been with us 12 to 24 months was 18%. When you take that snapshot this time -- same time this year, that percentage of 12- to 24-month residents jumps all the way up to 24%. So we have a significant loyal group of residents that continue to stay with us regardless of the increase.

David Bragg - Zelman & Associates

That's helpful. Last question, just on the acquisition activity, you seem to be making a noticeable shift towards West Coast opportunities this year as compared to last. Can you talk about your outlook for asset values on the West Coast versus the East Coast?

David Neithercut

Well our activity is just a function of the opportunities we see. So I can't tell you that last year, we were focused on the East Coast and this year, we're focused on the West Coast. We're focused where we find the opportunities. And last year, the opportunities were in D.C., and we hit it pretty hard with 425 mass and our deals in Arlington and made a lot of great acquisitions. There was little product available a year ago in Southern California. This year, we're seeing more. And so we just happen to be more active there. But we've got guys in every region that are actively looking for product, and in any given point in time, there might be more opportunity in one over another, and it happens to be in Southern California now. And Southern California's kind of been a laggard. It's been -- slow to turn. We think long-term, it's a great market. And we think that the assets that we've acquired in downtown L.A. will do -- will do very well for us.

Operator

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

Michael Salinsky - RBC Capital Markets, LLC

David, you talked about accelerating development starts here in the second half. What are the pro forma yields on that? And what spread do you need for -- do you need on development relative to acquisitions right now? What's the premium?

David Neithercut

I just want to make it clear, the acceleration of the development. So we've talk about starting $400 million to $500 million this year. And I think that number now may be $500 million or $600 million. And all that means is some deals we thought might be first quarter 2012 are now going to be fourth quarter 2011. So it's not that we've decided to not mothball something and get at it. It's just the timing of the stuff that we're working on. And the deals that we have in the pipeline, the land deals that we bought with the very aggressive buyers a year ago, we think will be in the 7s. And in fact, it's probably up now because I know of those are our current rents at that time. We all know that rents have gone up considerably since then. New land deals today, we're looking at mid-5s to low 6s probably. I will tell you that we have lost some land deals to people that we think were taking development yields in the 4s or low 5s. And I will tell you that we have always looked at getting 100, 150 basis points or so kind of spread over acquisition yields if we can, but there are certain time in the market where there's nothing to buy. So that kind of spread is irrelevant. But I will tell you that it's not simply in our minds the spread to acquisition yields. We also think that there's some kind of a minimum to what one ought to get to become properly compensated for the construction risks. So if acquisition yields go to 2.5, that doesn't mean that we're building a 3.5. We think there's some kind of minimum return expectations that one ought to have. And we've lost a lot of the land opportunities over the last 6 months. We've been a bridesmaid an awful high a number of times.

Michael Salinsky - RBC Capital Markets, LLC

Okay. Second question relates to your comments about the spreads widening from 125 to 150 basis points. Are you seeing that -- are you seeing -- and you're talking about demand in your primary markets. Are you seeing demand, just given the pricing in the primary markets, starting to shift to maybe some of the secondary markets?

David Neithercut

Well, yes. We've seen that for a while. And that's why we have been selling the assets that we've been selling that we think are pretty good prices. So yes, I think as soon as it gets very, very competitive, kind of buying core products, core markets, capital will find its way into higher yields in other markets. And they'll be willing to take a little but more risk at little less yield. And we've certainly seen that. I think that's the case with the portfolio we sold in the Metro D.C. area. And I think that, that's the one of the reasons we're getting what we think is pretty good pricing on our Portland asset, in Tampa, in Jacksonville, et cetera. So certainly, if capital can't get what it wants in the core assets and higher barrier markets, it will migrate its way in other markets, and we're taking advantage of that.

Michael Salinsky - RBC Capital Markets, LLC

Okay, that's helpful. And finally where is pricing -- I mean, where are spreads right now? Where could you go out and issue unsecured today?

David Neithercut

Sure. So assume a 10-year rate of 3%, Mike. Then you add to that about a 1.6% spread, I'd say, give or take, call it a 460 10-year unsecured. And I think we're an 1/8 to 1/4 wide of that if we did a secured deal right now. So unsecured pricing, like I think we mentioned on the call just before this, was -- has been better unsecured than secured for a while now.

Operator

Our next question comes from the line of Gautam Garg with Crédit Suisse.

Gautam Garg

A macro question, are there any markets where you see the rent versus buy argument, beginning to switch? And if yes, what kind of impact are you seeing on your portfolio?

Frederick Tuomi

Yes. This is Fred. Not really. The home purchasing, as I mentioned earlier, continues to go down. I mean, this quarter, second quarter versus second quarter of last year, so at the same point in the season, we do not have a single market where the home purchasing has increased. They all continue to fall. And when I look at the -- in terms of affordability, some of the commodity markets for housing such as Orlando, Atlanta, Phoenix, they continue to go down. They're just not buying even at almost any price. So it almost doesn't matter what the rent versus buy ratio is in theory. In practice, people are not buying homes in the commodity markets or in the really -- any market. It continues to go down. It's down 270 basis point quarter-over-quarter this second quarter. And we don't see any kind of beginning of a trend of that going up.

David Neithercut

Yes. Not for a minute do we think we don't have residents in our properties that are ultimately want to be home buyers. And at some point in time, when they're willing to make that decision -- that's not simply an economic decision. It's a lifestyle decision as well. So we are looking at that. I'll tell you, a lot of those homes that might be value homes are sort of in the exurbs of where we operate. That's why I think it really is as much as a lifestyle decision as it's an economic decision. And I think when people exercise that decision to go do that, I think, that would be at point in the economy at a time when there's job growth, where there'll be more than ample traffic to backfill those people who do decide to leave us and go buy a single family home.

Operator

Our next question comes from the line of Tayo Okusanya with Jefferies & Company.

Omotayo Okusanya - Jefferies & Company, Inc.

Just a quick question in regards to the cap rate spread and its -- the guidance revision. With it widening out, I mean, if I'm understanding it correctly, that means you're expecting more dilution from acquisitions and disposition activity in the second quarter. I'm just wondering with that backdrop, what the rationale is to continue with the amount of acquisition and disposition activity you're talking about.

David Neithercut

Well, again, this is not simply an earnings process. This is a ultimate total return in value creation process. And if we think that we can sell assets today that are at risk to interest rates, or risk to GSE financing, or risk to capital needs, and sell them at the prices that we're seeing in the marketplace today, we think long term, that's the right thing to do. I don't think we'd be selling assets today that at call, the 6.5% yield if we thought that we could sell it at 6.5% yield, 2 years from now. We might not be doing that. So we think that those valuations, these are good. We know we don't want to own these assets long term. And we think that those values are potentially at risk. And so we think it is the right thing to do, notwithstanding what the amount of immediate first year dilution might be.

Omotayo Okusanya - Jefferies & Company, Inc.

Okay. Could you talk a little bit about the IRRs that you're currently underwriting both acquisitions and dispositions too?

David Neithercut

Well as I said earlier, I think the disposition IRRs that we're selling, we think are in the 7s and the IRRs that we're underwriting are in the 8s. And I'll tell you that we make sure that our assumptions about residual value are not outlandish. We make sure that we understand what goes on price per pound, or price per unit basis and what the compound average growth rate would be for a net 10-year hold period. But again, we think we're buying better long-term IRRs than what we're selling.

Omotayo Okusanya - Jefferies & Company, Inc.

Okay, that's helpful. And just a quick question, occupancy at the end of the quarter was what?

Mark Parrell

94.3.

David Neithercut

Yes, I think it was 95.3.

Mark Parrell

95.3, 95.4.

David Neithercut

95.3 and today it's 95.4.

Omotayo Okusanya - Jefferies & Company, Inc.

And that's for the total portfolio?

David Neithercut

Yes, that's same store.

Omotayo Okusanya - Jefferies & Company, Inc.

What about for the total portfolio?

David Neithercut

Not really relevant if you have at least that [indiscernible].

Mark Parrell

So that's stabilized portfolio...

David Neithercut

Stabilize, we're 95.4 this morning. As I said earlier, currency factor is at this point, leasing fees, and we have a lot of transactions coming through the system. We're only 7.5% less the leases this morning. At that's a forward indicator of exposure, which is very healthy. Typically you might see that closer to 800 at this point in the cycle.

Operator

And our final question comes from the line Haendel St. Juste with KBW.

Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.

Just a couple of quick ones here. David, not to beat the dead horse, but how confident are you that you'll be able to meet your acquisition target this year, especially given the still fierce competition for high-quality assets? And would you be willing to lower your cap rate IRR minimum target threshold to get there?

David Neithercut

I will tell you that we don't do that to meet "goals." I don't sit here and say $1.51 billion of acquisitions, and we'll do whatever it takes to meet that goal. What we try and tell you is the assumptions that are embedded in our guidance. And if we can't find anything good to buy, we won't, I assure you. That's merely just the assumptions that have been baked into the guidance that Mark and his team have prepared for you. And as I said, $325 million has been identified, and we're working on it. And then the rest is yet to be seen. I'll tell you every year, we expect there to be opportunities late in the year. I'll be honest with you and tell you I thought that last year and we didn't see any. But our guys out there in the field are saying that the brokers are giving them notice that they're working on a lot of potential transactions that they would expect to be bringing to the market in the short term and in the near term. And we'll have an opportunity to look at those. I'll also tell you that it's very possible something that we've identified to close this year could close in January of next year. That could just be pushed from one year to the next. So again, these are just sort of guidelines and the assumptions we give you, and they don't sit around and worry about whether or not we actually make that goal and do stupid things to make sure we don't.

Haendel St. Juste - Keefe, Bruyette, & Woods, Inc.

Okay, fair enough. And then, on the acquisition deal that you've missed lately, how much lower are you in terms of pricing, either on a cap rate or a percentage of value to the winning bids?

David Neithercut

Well, I guess, I'd probably tell you in some deals we might be right in there. And have just missed by a little bit. And I also know there are other things we've lost where we were 10% off. I'll say we're just -- we get price talk, whisper talk about where things are going. And we'll just abandon working on them knowing that we won't get close to those levels. So we think that there've been deals trading with 3-handle cap rates and we had just go -- we'll find something else to work on.

Operator

Ladies and gentlemen, that concludes the question-and-answer session. I'd like to turn the conference back over to Mr. McKenna for any closing statements.

David Neithercut

David Neithercut here. Thank you, all, for your time today. We appreciated it. And I'm sure we'll see many of you in September. Have a great summer. Thank you.

Operator

And ladies and gentlemen, this concludes the Equity Residential Second Quarter Earnings Conference call. You may now disconnect, and thank you for using ACT Conferencing.

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