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Equity Residential (NYSE:EQR)

Q2 2012 Earnings Call

July 26, 2012 11:00 am ET

Executives

Marty McKenna - Spokeman

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

Frederick C. Tuomi - President of Property Management

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

David S. Santee - Executive Vice President of Operations

Analysts

Eric Wolfe - Citigroup Inc, Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

Robert Stevenson - Macquarie Research

David Bragg - Zelman & Associates, Research Division

Jana Galan - BofA Merrill Lynch, Research Division

Richard C. Anderson - BMO Capital Markets U.S.

Andrew Schaffer

Andrew McCulloch - Green Street Advisors, Inc., Research Division

Philip J. Martin - Morningstar Inc., Research Division

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

Seth Laughlin - ISI Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Equity Residential Second Quarter 2012 Earnings Conference Call and Webcast. [Operator Instructions] This conference is being recorded today, July 26, 2012. I would now like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.

Marty McKenna

Thanks, George, good morning, and thank you for joining us to discuss Equity Residential's Second Quarter 2012 Results.

Our featured speakers today are David Neithercut, our President and CEO; Fred Tuomi, our EVP 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.

Let me remind you that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the Federal Securities Law. These forward-looking statements are subject to certain to economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

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

David J. Neithercut

Thank you, Marty. Good morning, everyone. We're very pleased to report what has not been a terribly well-kept secret, and that is that the operating fundamentals in the multifamily space continue to be very strong. And based on the activity we're seeing today across our portfolio, we see no reason why strong fundamentals shouldn't continue for quite a while.

As reported in our earnings release and supplemental last night, we delivered second quarter results, which came in very much in line with our expectations and which produced results for the first half of the year of 5.5% same-store revenue growth and 7.5% same-store NOI growth, numbers that are right on top of the midpoint of the full year guidance that we gave in February for both of these metrics. So all in all, the year is shaping up pretty much as we have forecasted, and Fred's going to take a minute now to share a bit about what we're seeing as we begin to wrap up our primary leasing season.

Frederick C. Tuomi

All right. Thank you. As David mentioned, we are very pleased with the first half of the year, and we're confident that the full year 2012 revenue growth will be very close to the midpoint of our original guidance, which was 5.5%. So far, the peak leasing season has shown very strong demand, allowing us to build occupancy and grow rents across all of our markets. The fundamentals of our business are solid, and the outlook for the future remains very positive. And I'll now give you a quick update about each of the drivers of our revenue.

First is turnover. As we continue to grow base rents through this cycle, an increase in turnover is expected and especially from those moving out due to rent increases. However, we're still able to offset this turnover by refilling vacant units with qualified residents at higher base rents. The markets with the greatest increase in turnovers still includes San Francisco and Boston where we have had very strong rent growth, and not surprisingly, the greatest level of move-outs due to rent increases.

Denver is another market where we have seen a significant increase in turnover lately. Denver is interesting in that it recovered earlier than most markets and has seen over 2, or really 2.5, consecutive years of very strong rent growth, and its single-family market is very healthy. So Denver may actually be an indication of other markets in the very near future. So Denver, we're now seeing more price resistance on renewals and coupled with an increase in home buying. Now the good news is we're refilling these move-outs very quickly at current base rents. And today, Denver is 96.2% occupied, the highest occupancy in several years, and 6.1% left to lease, the lowest level of left to lease in several years, while still growing base rents at a nice 10%. So clearly, this is an example where there's ample demand in Denver to refill vacancies due to rent increases and home purchasing at the current high base rents.

At the entire same-store portfolio, move outs due to rent increases grew 50 basis points in the second quarter to 14.7% of move-outs. And notably sequentially, it actually declined from first quarter by 10 basis points. Move-outs due to home buying again picked up slightly to 12.9% for the quarter which is still well below past normal levels. So for the full year 2012, we now expect same-store turnover to finish about 200 basis points over 2011, which should be around 59.5%.

Next is our occupancy. At the end of Q2, our year-to-date average occupancy is 95.1%. And this compares to 95.2% for the same period year to date in 2011. We've had very strong occupancy gains across all markets over the past 90 days, which spans the end of the quarter, reaching to 96% occupancy as of today with a very healthy 7% left to lease. For the full year 2012, we still expect occupancy to be 95.2%.

Next takes us to base rents. Due to higher turnover and vacancy experienced in the first quarter, we held base rents basically steady through April and began pushing rates again in May as the leasing season demand kicked in and occupancy grew. So as of this week, this week, base rents are up 7.5% since January 1 of this year, and they're up 4.2% year-over-year compared to the same week in 2011. And by the way, that happened to have been the peak pricing week that we experienced in 2011. As expected, the year-over-year growth in base rents has moderated since Q1 due to tougher comp periods. We still expect base rents to average 5.5% over 2011 levels over the entire year.

Our strongest base rent growth continues to come from the Northwest. And again, as of this week, San Francisco is up 16% year to date, meaning from January, and 11% versus the same week last year, year-over-year. Denver is up 12% year-to-date and 10% year-over-year. And Seattle is up 10% year-to-date, 5% year-over-year, with the CBD and Eastside submarkets significantly higher than that. The Southwest continues to lag. However, Los Angeles and Orange County are finally improving both in occupancy and rent growth.

Now regarding new residents' willingness and ability to pay these higher rent levels, we experienced very strong leasing velocity as base rents began to accelerate late May and into June, indicating a willing acceptance of these new pricing levels, and many of which now are above peak levels of mid-2008. The average rent as a percent of income remains steady at 17.2%, and this, I think, still remains a very healthy level. So all income and credit quality indicators are keeping pace with the rents of our portfolio.

Finally, renewals. Renewals remain strong and in line with current base levels -- base rent levels. Recent achieved renewals have been April, 6.9%; May, 7.0%; June, 6.4%; July, 5.8%. Because we price most renewals at market levels, renewal increases will track closely to the year-over-year base rent growth. This means renewal increase percentages will also moderate as we enter tougher comp periods but still average around 5.5% for the full year.

So overall, the fundamentals remain solid and right in line with our original expectations of a narrow range around the midpoint of our guidance of 5.5% total revenue growth for the full year of 2012. David?

David J. Neithercut

Thanks, Fred. So as noted by Fred, the strong performance we're delivering is really the result of continued demand across our core markets today. And despite continued concerns about job growth, I can tell you that we're not seeing any reduction in demand for these apartment units. We're certainly seeing, as Fred noted, more people moving out today because they're unable to afford higher rents, but at the same time, seeing no slowdown in new prospects able to pay market rents and willing to take immediate occupancy. That said, longer-term, we're certainly mindful that rents could be rising faster than incomes, particularly given the level of high unemployment in the domestic economy today. But we remind you that unemployment rate of the college-educated is only 4%. And as a Fred noted, our average rent to household income ratio is currently only 17%. So we think we have plenty of runway yet on this particular metric. We're also mindful about the risks of new supply to longer-term performance. And while starts will certainly be up this year and next, the numbers seem to be bigger when looked at on a percentage basis, than they really are when looked at on an absolute basis.

We've done a lot of work looking at new supply, not on the top line national numbers, of course, but by focusing on our specific submarkets within our core markets across the country and by looking at it on an absolute basis. And what we've done is by starting with our teams across the field in these markets and others' forecast for actual deliveries over the next 3 years, focusing on projects that are actually under construction today. And we compare that to new supply -- that new supply to the expected marginal rental demand in those markets. And we get there by looking at projected household growth in these markets and applying it against that a conservative multifamily capture rate of about 20%. And that helps us come up with an estimate for incremental future demand.

And in general, when we compare future deliveries to that expected incremental demand, we see markets able to absorb this new supply with no long-term disruption to the marketplace. Now that's not to say that if we operate an asset near a new delivery that we won't feel the impact of that new supply. But we think that absorption will be quick, and overall, our markets will remain healthy, allowing for continued strong growth in rental rates.

Turning now to our transaction activities. In the first half of the year, we've acquired 5 existing assets for $670 million. And much of that activity occurred in the second quarter with 2 very large acquisitions for $511 million. The largest of these 2 acquisitions was the Beatrice, which was pictured on the front of last night's earnings release. This represents 301 units on 6th Avenue in Manhattan's Chelsea neighborhood. The project was built in 2010. And what we acquired was the top 30 floors of a 54-floor high rise. We acquired that in a condo structure, and the other condo user, representing floors 1 through 23, is a very popular hotel named Kimpton hotel named the Eventi. We acquired our 301 units for $280 million, which represents a purchase price of $930,000 a unit and $1,340 per square foot. And that asset was acquired at a 4.76% cap rate. Rents in the building currently average about $7.25 per square foot, and this is really truly an exceptional asset with great location and unparalleled views.

This quarter, we also acquired 510 units in Chevy Chase, Maryland, in an asset built in 1996. This was acquired for $231 million or $450,000 a door at a cap rate of 5.2%. During the quarter, we sold 9 assets for $130 million totaling 1,662 units. We sold 2 assets in Phoenix, 2 in Atlanta, 1 in Orlando. And we also sold a portfolio of 4 properties in various suburban Boston markets, which were encumbered by highly structured debt from the Massachusetts Housing Finance Authority.

We've kept our transactional guidance for the year at $1.25 billion of acquisitions and $1.25 billion of dispositions. Now despite a competitive marketplace, we're about halfway towards that acquisition goal. Clearly though, with respect to dispositions, we have some ground to cover. But we sold $385 million of product year to date. We have another $320 million of product under contract and several hundred million more in various stages of marketing.

We'll have no issue meeting our disposition guidance if we can find suitable reinvestment opportunities because the demand for the assets we would sell to fund reinvestment into core assets remains very, very strong. That's the good news. The bad news is that this demand for these noncore assets is a function of how competitive it is to acquire the core assets, say, that we'd like to buy because there remains a great deal of capital chasing very few core deals in our markets today, which is creating a very competitive acquisition environment.

Development side of our business, we continue to look for new opportunities. Yet we've only acquired 2 land parcels this year, both in the first quarter that were each fully described on our April call. So while we did not acquire any new land sites last quarter, we are moving towards closing on 3 sites this quarter, 1 in Southern California and 2 in Seattle. And we have several additional sites that could close yet this year.

For the full year, we've reduced our expected starts to about $525 million. This is down about $225 million from expectations at the beginning of the year because we've had 2 potential starts that will not likely go forward this year because we've created much of the expected value in getting these sites fully entitled and we might simply monetize that value without taking any additional risks.

Our core underwriting of our development deals, those both underway and proposed, suggest yields on cost in the high 5s and low 6s on current rents and the mid-7s on stabilized rents.

So I'll turn the call over to Mark.

Mark J. Parrell

Thanks, David. Good morning, everyone, and thank you for joining us on today's call.

This morning, I'm going to cover 2 topics. I'm going to give you some detail on our same-store operating expenses, and I'm going to explain the changes to our full year normalized FFO guidance.

So first on the operating expense side. Year to date, same-store operating expenses are up about 1.9%, which is right about in the middle of our 1.5% to 2.5% guidance range that we put out in February. We still expect expenses to grow at about a 2% rate, so we have not changed our same-store expense range. And this is just a terrific number on its own, but its especially impressive on top of the modest 0.6% or 60 basis point increase in same-store expenses we had in 2011. However, we have had some additional pressure on the real estate tax side since we've set guidance in February, which has been offset by utility and property management cost savings. And I do want to give you a little color on those 3 important line items.

First on the real estate tax side, we have said for some time that we expect property taxes to rise more sharply as assessors recognize the recent improvements in apartment values, and that time has certainly come. We originally anticipated our property taxes to be up about 4.5% this year. We have seen rates and values come in higher than expected in some markets. And as a result, we now expect our property tax expense to be up about 5.5% for the full year. We have, however, benefited on the utility side to offset some of that property tax increase. We now see lower utility costs, and we see them as flat or slightly negative year-over-year, and that compares to the up 1.5% to up 2.5% thought we had on utilities back in February. This year, we decided not to hedge our natural gas costs, and that certainly ended up being a good decision. And as a result, our energy costs, especially these natural gas costs, should be modestly lower than we thought back in February. But we do continue to feel some upward pressure on water and sewer costs.

Another favorable expense variance is the important property management expense line item. And there, we continue to benefit from our efforts to centralize bookkeeping and our other property accounting functions. So when you put all this in a blender, same-store expenses are well under control and about where we thought they would be back in February.

And also just a quick note on the changing makeup of our same-store expenses, property taxes are becoming a bigger slice of our expense pie. In 2009, property taxes were 27% of our operating costs. That now is 30% of our operating costs. And because the growth rate of taxes will be higher than that of our other expense line items, the share that real estate taxes take of our operating expenses will continue to grow.

I'm going to chat for a moment about our normalized FFO guidance. Our normalized FFO guidance range for the year is now $2.73 per share to $2.78 per share, meaning we've moved our midpoint up by about $0.03 per share. I'll quickly highlight the 3 major variances from what we thought back in February when we gave you our original guidance.

First off, we see property NOI, or net operating income, is about $0.01 higher than we thought in February. It's mostly due to lease-ups and other non-same-store activities. We see interest expense is $0.01 lower than we thought back in February, and that's mostly due to our application of the $150 million in Archstone-related termination fees to our revolver balance. We currently expect outstandings on the revolver to be $700 million at December 31, 2012, if we do not transact in the debt or equity markets. As always, we will be opportunistic in accessing the capital markets with an eye towards minimizing our long-term cost of capital.

Final reconciling item is the series end preferred redemption. On July 20, we called for redemption of the $150 million of this outstanding of our 6.48% Series N preferred shares. Our guidance assumes the funding of this preferred redemption using the line of credit. This will increase 2012 normalized FFO by about $0.01 per share. We will take a $5.1 million noncash charge in the third quarter for the write-off of the original issuance costs. This charge will run through EPS and FFO and will not run through normalized FFO.

And while we're on the topic of accounting, I want to provide a quick housekeeping note on the Archstone fees. While we have previously disclosed that we received $150 million in termination fees in connection with our pursuit of Archstone, all or part of the fees must be returned if we acquire all or substantially all of Archstone within a 30-day period. And that 30-day period applies to the $70 million we received from Lehman Brothers or a 120-day period, and that applies to the $80 million that we received from Barclays and Bank of America. And all those time periods are measured from the June 6, 2012 date, that Lehman acquired the Bank of America and Barclays interest in Archstone.

Because this condition was not satisfied by the end of the second quarter, meaning that we were not yet at the June, July 6 date that we would have fully earned the Lehman $70 million fee, the entire $150 million in termination fees were recorded as deferred revenue in our second quarter financial statements and placed in the other liability section of our balance sheet. And that's why you see the large increase in other liabilities. The time period for that first $70 million fee portion from Lehman Brothers has passed, and those funds will be recognized in our third quarter financials in interest and other income, and we will relieve our other liabilities down by $70 million. We will recognize the remaining $80 million fee from Barclays and Bank of America in the fourth quarter, assuming no transaction occurs. Neither of these fees will be included in normalized FFO.

I will now turn the call back over to George, the operator, for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Eric Wolfe with Citi.

Eric Wolfe - Citigroup Inc, Research Division

I just wanted to make sure I understood the point you were making on Denver and how that could be the model going forward. I think you were basically saying that even though you expect turnover due to home purchases and financial reasons and everything to keep moving up, that you're confident you can replace those tenants with rate increases. Is that the point you were making?

Frederick C. Tuomi

Yes, this is Fred. That's exactly the point we're making. Looking at the kind of metrics across our portfolio, Denver just kind of popped up. On one hand, it was worrisome in that the -- in its high turnover. It was growing. It was due to rent increases that are due to home purchasing. But then on the revenue side, it's one of the top performers there as well. So we have great rent growth but then also very strong leasing velocity through to this leasing season, high occupancy, low left to lease, and it just continues to grow. So it looks like even though that market has recovered, the single-family is healthy, people are buying homes, there's plenty of demand for our product from our profile, and they're ready, willing and able to lease apartments at the current rents, that continue to grow and refill those vacancies.

Eric Wolfe - Citigroup Inc, Research Division

Got you. Understood. And so I guess also as part of that, we should probably expect to see turnover keep rising in your markets. I mean, is that an expectation that we should have? Or is that just sort of you're saying we might see this in isolated cases in certain markets like Denver?

Frederick C. Tuomi

I think clearly this year, you're going to see turnover increases over last year. In the last couple of years, it's been kind of low. It will normalize, probably, I would say, probably after next year. But yes, turnover will continue to grow from increased rents and from home buying. And Denver just happens to be an example where we're seeing both at the same time. Other markets with big increases in turnover like San Francisco and Boston, we're not seeing home purchasing. They're too expensive or they're hard to get. And other markets where home buying is picking up, the rents are low and we're not having the increased pressure.

Eric Wolfe - Citigroup Inc, Research Division

Got you. All right. That's helpful. And just last question. You also made the point that your rent-to-income ratio is only 17%, so you're pretty confident you can keep raising rents. But I guess if you only have 17%, why would turnover trend up? I mean, I would think that if people are only paying 17% of the income out in the form of rent, that they would be more inclined to stay where they are and renew their lease. I don't know if there's a different dynamic going on there, but that would just be what I thought what happens.

Frederick C. Tuomi

Well, the situation on that, that 17% is the marginal resident. Those are the residents who have moved in. The actual residents who've been there for a few years, we don't have way of keeping up with their income after they moved in. So I think a lot of the turnover you're seeing now because of rents are being too expensive. One of them is just really just the reaction to 2 or 3 years in a row of big rent increases. Then the other is during the downturn, when rents were down 10%, 15%, 20%, a lot of people were able to afford a nicer apartment at the same rent. So as that rent recovers back to a normal basis, they either are going to choose to or not be able to pay that rent, and they will just go to a less costly housing alternative.

Eric Wolfe - Citigroup Inc, Research Division

Got you. So the 17% is the incremental renter, not the average renter?

Frederick C. Tuomi

Yes, it's not the entire install base, correct. Because, someone who's living there 5 years. We have their income as of 5 years ago. We don't have recertification of income each year.

Operator

And our next question comes from the line of David Toti with Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

You guys were pretty clear about markets that you sort of find attractive for various reasons and markets that you're exiting like Chicago. Strategically, what are your thoughts on markets like Vegas and Phoenix in particular? Counter-intuitive markets that offer higher cap rates and potentially [ph] higher rent growth? Is it hard to get into those markets?

Frederick C. Tuomi

No. We've not been in Chicago for quite some time, and we've not been in Vegas for quite some time. But I think that you should continue to expect our investment activity to track very closely to what you've seen us do over the past half a dozen years. We think that focus has served us well and notwithstanding the fact that we may be getting better going-in cap rates in some of those markets today. We think those are more trading markets, and it's difficult for us to kind of play that game. We think our total return will be better achieved in the markets that we've been focused on.

David Toti - Cantor Fitzgerald & Co., Research Division

You guys mentioned the OP usage in the period. Is that just an aberration? Or is that something you think we're going to see more of in coming quarters?

Frederick C. Tuomi

Well, I guess it's in aberration because we haven't done it in quite some time. And frankly, I've been surprised about that. But this was just a situation with a family selling an asset that they had owned for many, many years for tax planning purposes. Taking OP units made sense for them. But I have expected for some time, and I have been wrong, frankly, in this expectation, that the OP units would be a security that we use in more acquisitions. But so far, I've been surprised that we haven't. But I would have an expectation, particularly in a rising tax rate environment, that we could see more OP unit issuances. And frankly, I've been surprised that we've seen so little thus far.

David Toti - Cantor Fitzgerald & Co., Research Division

Yes. I was thinking in the context of, potentially a political change that, that would have some effect. David, just quickly, my last question, how was the residential [ph] performing in the last couple of quarters. I know we haven't focused on it much because the market's been strong. But how does the performance compare today versus, let's say, if we go back to 2007? What are the primary differences in how [indiscernible] is performing?

David S. Santee

This is David Santee. And the first obvious answer is, I mean, it works the same day in and day out, whether it's an up market or a down market. I think it's more about what levers we decide to pull, how much we decide to intervene from a strategic position. We have executive level reviews, myself, Fred, a couple of other folks every other week. And that's where we kind of determine what levers we want to pull to achieve specific goals in specific markets. So I would say that historically, we have intervened more and being aggressive with the rate increases that LRO has put out. And I would say that at this stage of the game, we're probably letting LRO run more independently and letting it address the various markets.

Operator

And our next question comes from Rob Stevenson with Macquarie.

Robert Stevenson - Macquarie Research

You made a previous comment on turnover, moving up, et cetera. Can you get into the lower foot traffic environment going forward? Does that sort of force you to reign back on the rental rate increases?

David S. Santee

Well, I guess what I would tell you is, is that foot traffic has remained fairly constant. It was up 5% in Q1. Again, it was up 5% in Q2 over last year. The difference is really the outcome of that traffic, whereas in Q2, we saw a result of 7% more applicants. And then those 7% more applicants turned into 9% more move-ins. So that's how the numbers work for Q2.

Robert Stevenson - Macquarie Research

But I guess in terms of the sort of overall operating strategy, I mean, normally apartment companies, once you start getting into the fall or trying to hit the fall with a higher level of occupancy, it starts reigning in rental rate increases anyway. Does this cause you to have to start that process a little other sooner than you otherwise would have?

David S. Santee

Well, I would say that there's just a natural seasonality in our business. A large percentage of our leases don't make it to term, people get transferred, what have you. And when that happens in Q4, so to speak, you're throwing unexpected supply into the market. And your less sophisticated operators, people that don't have LRO, smaller operators, they're just going to kind of turn to the concession or drop rate because perhaps their ownership structure just requires a higher occupancy, which really just puts a whole pressure on the market. And so I would say that every year, since we've been operating LRO, we've seen that seasonality and that seasonal softness, and so it's really just a matter of to what degree that impacts our business in Q4. Obviously, we want to be in a position, especially in the northern markets, Boston, New York, where people just don't choose to move. People that are moving in those markets in Q4, Q1. Those are people that have to move for some reason or another.

David J. Neithercut

I guess the only thing that I would add to that, Rob, is the fact that notwithstanding this increase in turnover, our net exposure, our left to lease is still reasonable at this point in the season.

Robert Stevenson - Macquarie Research

Okay. And then, David, given your comments on the difficulty in the acquisition market and the ability to still sell significant amount of assets, I mean, how willing are you to see the spread in terms of gross dollar valuation -- dispositions and acquisitions, widen? Given the fact that you may sell some development sites and you're not spending as much on development these days, is there a tolerance to do $1.5 billion of dispositions but not do any more acquisitions and just take the dilution on the near term on that?

David J. Neithercut

No, Rob. I mean, I guess what we look at, and we talked about it in our weekly investment committee meeting, is the trades that we're making between selling certain assets and having the opportunity to reinvest that capital into other assets. So there's no magic in our minds as to what that going-in delta might be, but rather, what's the long-term total return and how do we feel about selling certain assets and rotating that capital into other assets. I tell you, as we look at the assets we're selling today and look at what the prices per door are today and what those yields are, we don't believe we're in a position where we're terribly concerned about those values going forward. So selling those assets today at a high 5 and low 6 and putting the money in the bank and taking that dilution doesn't make that much sense because at an absolute dollar basis, absolute price per pound basis, we think that those values are solid, and we can always sell the asset next year if it takes until then to find an appropriate reinvestment opportunity.

Operator

And our next question comes from the line of David Bragg with Zelman & Associates.

David Bragg - Zelman & Associates, Research Division

Can you talk about the trends on new move-ins during the course of the quarter and in July?

Mark J. Parrell

Yes. David, what do you exactly mean by new move-ins? You're talking about the rates?

David Bragg - Zelman & Associates, Research Division

Yes. So you're percentage gains on new move-ins over the prior lease on the same unit so that we can compare those to renewal gains?

Mark J. Parrell

Okay. Like the new lease replacement rent? Yes, basically, the way we look at that is the most important thing to look at is what are your base rents doing? What are you getting on new people coming in? And like I mentioned, we're still going to average 5.5% for the year. We are at 6.5% for Q1 and about 4% in Q2, and we are at 4.2% today, and which matches up with the peak of last year. And because we price pretty much at the market, that's really what we look for. So we're at 5.5% for the year, 6.5% first half, 4% right now, and that might grow up a little bit through the end of third quarter. So that's really what you're going to see it grow to. That actual statistic, it moves around a lot. We've talked about that before. There's a lot of noise in that actual measurement. So really, we like to look at just what are the base rents doing, and you're going to -- right now, we're at the 4% range.

David Bragg - Zelman & Associates, Research Division

Okay. So that 4% is specific to July?

Mark J. Parrell

That's 4.2% right now, this week. It was 4% for the quarter. And I think Q2, we're at 4.2% today. So basically, in theory, if someone moved in exactly last year and paid market rent and they moved in, they moved out and somebody moves in, that same apartment, identical apartment, at the same point now a year later, you're going to see a gain of 4.2%. But noise in that number comes if they're different units, different unit types, different lease terms, different amenities on the units. There's lots of other noises in that statistic.

David Bragg - Zelman & Associates, Research Division

Right. Understood. Just trying to think about your same-store revenue growth guidance range for the year. It's very precise. So I want to make sure that we understand some of the components of that. You touched on many of them. But I was surprised that you expect occupancy to dip back down to only average 95.2% over the course of the year. Is that accurate? Or do you expect a big dropoff in the fourth quarter?

Mark J. Parrell

Well, we expect some dropoff in the fourth quarter. As David just mentioned, there's definite seasonality to this business. Right now in the moment, in this leasing season, things are a little bit hotter than we kind of expected, but it's not over yet. So we're, like I said, we're 96% right now, 7% forward exposure, very healthy numbers. So could that number be higher? Yes, it could, it could be. But we're not going to let it get too high because we're going to -- our bias -- and our company is biased towards rate versus occupancy. So we're not going to -- you're not going to see us kind of post these big, giant occupancy numbers over a long period of time. So could it be more than 95.2% for the year? Yes. Will it be significantly more? No because we’re going to crank up rates to manage it.

David Bragg - Zelman & Associates, Research Division

Right. Okay. And then on leases expiring in September, October, what are the renewal increases that you're asking for?

Frederick C. Tuomi

Okay. For, let's see, August, we ask 6.8, got a 5.2; September, we asked a 7, and we'll probably achieve north of 5. In October, it's really kind of early to talk about October, but we're going to probably quote in the high 6s and probably get in the low 5s, I would say. So too early for that. Just a few have been put out so far.

David Bragg - Zelman & Associates, Research Division

Okay. One final question. David, you mentioned an interest in analysis or study in your opening comments. And could you just talk about how the results of that compared to your investment decisions? For example, you're selling assets in Orlando and Phoenix, but those happen to have very strong job growth in very little multifamily permitting activity right now. I'd have to imagine that they stack up very favorably as compared to your markets as a whole.

David J. Neithercut

Yes. But that's also -- those are very easy markets in which to start new product. And they're also marked, so I think there are far more risks to single-family home, right? So we've not really done much of that work on those assets -- on those markets that -- more commodity-like markets, but the focus has been on the high-barrier markets.

David Bragg - Zelman & Associates, Research Division

Okay. So it's a much longer-term perspective that you're taking than maybe a favorable relationship over the next couple of years?

David J. Neithercut

Well, I mean, we have a long-term bias for the higher-density, higher-barrier markets. But the analysis we've done here is just a 2- or 3-year analysis really focused on the starts that we know are the -- the developments that we know will actually take place.

Operator

And our next question comes from the line of Jana Galan with Bank of America.

Jana Galan - BofA Merrill Lynch, Research Division

Thank you for the earlier remarks on how your thinking about future new supply and absorption. I was wondering if you could comment on the D.C. market in particular and if the spring, summer leasing was better or worse than you had actually budgeted or expected?

Frederick C. Tuomi

Yes, Jana, this is Fred, Fred Tuomi. D.C., kind of as reported in the first quarter, continues to surprise us on the upside. I mean, we had lower expectations. We thought things would be moderating consistently and maybe a little bit faster by this point of the year. And good news is, it's not. I mean, we're 96.8% occupied in D.C. today, 8% left to lease. Rents are up from the beginning of the year over 10%. And they're about 4% year-over-year right now, and renewal is at 4.5%. So we're in a very healthy state right now in D.C., and we kind of cover all the good submarkets there. Now I'm still concerned because of 2 things. One is just the job picture there. In the moment, the jobs are great. I mean, we still have job growth last year and this year. Unemployment is at 5.3%. That tells you something about the federal government. They're going to take care of themselves. So it's looking very good. Demand is high. Labor market is still growing, although there's still a lot of uncertainty and anxiety about what's coming next. But that shoe has not started to fall yet. So in -- well, with respect to supply that we kind of worry about it. We know it. So there's significant supply coming in D.C. Everybody knows that, 8,000 units this year, 10,000 in 2013. And then the pipeline shows, if everything gets delivered, which it won't, you could have about another 10,000 coming in, in 2014. And most of that is clustered in the good areas, Mt. Vernon Triangle, NoMa, Silver Spring, RBC Corridor [ph], Carlyle, et cetera. Very competitive with our portfolio. So today, what we're seeing, which is encouraging on this, the leading edge of the supply wave is coming at us right there in the district. We've got several high-profile lease-ups, but they're doing extremely well. Those lease-ups in the Mt. Vernon, NoMa markets are doing 40 units a month, each, of absorption. That's very strong. So the absorption -- D.C. has always proven to be able to absorb a lot of units quickly. So if we don't see a big reduction in government employment, a big reduction in defense employment, I think we could moderate through these next couple of years with very little disruption and through strong absorption. But time will tell. So far so good, I would say.

Operator

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

Richard C. Anderson - BMO Capital Markets U.S.

I want to ask a little bit about the 14.7% of move-outs because of rents being too high. It seems -- it occurs to me that, that's a really big number. And then -- and so isn't that so kind of beginning, not the end, but at least some kind of deceleration in rent growth? I mean, that has to happen first. I mean, that's the kind of way we're looking at it. And then you tack on 13% of home buying as just being the turnover, so those are your 2 kind of kryptonites, right? So like should we -- is it fair to say you're taking your foot off the gas a little bit, David, by not starting those 2 developments because of these 2 factors?

David J. Neithercut

That's not what's driven this development decision, whatsoever, Rich. But I guess I'll just kind of go back to Fred's comments about Denver. Yes, we have seen an increase in people moving out because of pricing and it's higher than it's been at a historical context, but it's not a crazy number though. And we've noted we're seeing some people move out, an increase and people buying single-family homes. And as a percentage, that might be high, but it's still low in historical context. And then just again, using Denver as that example, notwithstanding increases in both of those areas, we see Denver at the highest occupancy that we've seen in last several years and the lowest left to lease in the last several years. So I guess what we're sort of suggesting to you is we think that the incremental demand is there, that these markets can absorb this activity.

Richard C. Anderson - BMO Capital Markets U.S.

Right. But how long can that shell gain last, right? I mean, you are, in fact, growing successfully, but I mean, how long would this typically go on? There is this demand to stop up of all these people moving out because the rent is too high.

Frederick C. Tuomi

Rich, this is Fred. A #1 reason for move out is people's job situation changes, job change, job transfer. And that continues to be #1.

Richard C. Anderson - BMO Capital Markets U.S.

And how big is that?

Frederick C. Tuomi

And that's in the 20 -- 20 range.

Richard C. Anderson - BMO Capital Markets U.S.

And then you have -- the top 3 have always been job change or job transfer, home purchasing, rent increase. And then it drops off significantly from that from a myriad of other reasons, okay? So depending on where you are in the cycle, we're going to be jockeying for position for what's going to be #2 and #3 because #1 is always going to be job change and job transfer. It used to be home purchasing was up in the 20 range. Now it's down in the 12, 13 range. So naturally, it's going to be the rent increases is going to be floated up to #2. So really, it's kind of a mix of what people give us as a reason of moving. And don't forget, we had a lot of people move in to apartments that got really good rates during the downturn, and now they're going to reach a point where they're going to think you know what, I think I'll just do something different. So I think it's a healthy sign of the market that people are moving out because of rent increases. If it ever slows down and our absorption slows and leasing velocity slows, then we'll back off, and you'll see that number kind of shift back. And the other thing we look at is the fact that people are moving out consistently because of job opportunities. That's a good sign of our resident base, that they're employed, they're active and they have job opportunities.

David S. Santee

Just a little color on -- all of these are not due to rent increases. I mean, some of this is a result of life changes with people. If you remember, we talked about we only measure people's income when they move in. So I mean, when we see this activity spike in a market, most of you know we go right down to the transaction level, and we can see that, yes, someone did get an increase, but it was a 2% increase. But their life circumstances just changed and perhaps they had -- got a new job in the last 2 years that doesn't pay as much. So this isn't all about rent increases. It's probably 50-50 about changes in their life circumstances.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. And then just one last question for David or anybody. Renting single family, that's kind of become in vogue with a lot of participants looking to get involved in that opportunity. How do you see that as a trend for opportunity for EQR? Or is it kind of a non-issue at this point?

David J. Neithercut

Embedded in that question, perhaps, is 2 separate questions. One is what kind of threat do we see these single-family homes being acquired by investors and being offered for rental? What kind of threat do we see those -- that to our business? And we don't see it as a terribly big threat. We think that those units are occupied by people who have already elected to make that sort of lifestyle change. And most likely, those homes are now be rented by people who have been dispossessed, perhaps, of the home that they had previously owned. And then with respect to any involvement or participation we might have or interest we might have in being that owner, we work very hard to really narrow our focus and operate very efficiently by sort of gaining size and scale in smaller footprints. And I think that it's going to be a challenge for these investors to operate these properties the way that they had hoped, and I would not expect us to have any interest in being involved in purchase and ownership of single-family homes for rental.

Frederick C. Tuomi

Yes, this is Fred. I'll add that just from a feedback from our site people, it's not even in our radar. You never hear about it. And in the markets where you think you would like Orlando, Atlanta, Phoenix, Inland Empire, San Fernando Valley area, perhaps. If it comes up in conversations at all, it would only be 3 bedrooms. That segment that is a very small piece of our unit base.

Operator

And our next question comes from the line of Andrew Schaffer with Sandler O'Neill.

Andrew Schaffer

I have 2 questions. First, in regards to Beatrice acquisition, I was wondering how much the going cap rate is affected by the 421a tax abatement?

David J. Neithercut

The 4.7% -- 6% or so cap rate is impacted by that. I would tell you that -- and our guys would suggest to you that if that property did not have that tax abatement, that would easily sell with a 3-handle.

Andrew Schaffer

Okay. And then secondly, going forward, are you looking to do additional deals with the home builders or hotels? And do you see value in that structure? Or is it just another way for you guys to mitigate your risk?

David J. Neithercut

We didn't build this deal with this hotel operator. It was built by a third party and built with it -- with the 2 different uses themselves. And we were willing to acquire the apartments with the hotel below because we do have experience operating a mixed-use structure like that. The only deal that we have done -- well, I guess we've done 2, one in Jersey City in which we did a joint development venture with the K. Hovnanian company. And then most recently, we'll start construction soon on a property in Park Avenue South in New York with Toll. I think in very expensive product, mixed-use product, if we believe we can make a smart investment and lay some of that off to someone like we did with Toll or work in venture with Toll, I think that we'll be happy to do that. But you'd seen that in markets in which the cost for land is so expensive that hedging that risk, ensuring that risk is smart to do. I would think that there's some conversations, perhaps, about doing something similar in Boston today. So I think in those very high-density, very costly markets, you could see us do that kind of thing, Bob. And I would say, I mean, it's not a focus, but again, if there is opportunities to build the right product, the right market, and it makes sense to do so with a third party, we'd certainly consider it.

Operator

And our next question comes from the line of Andy McCulloch with Green Street Advisors.

Andrew McCulloch - Green Street Advisors, Inc., Research Division

A question -- on the 2 acquisitions, what are the unlevered IRRs?

David J. Neithercut

We have an unlevered IRR expectation on the Beatrice in the high 7s. I'll tell you, I would expect to achieve better than that just because that $1,340 per square foot for the units on such high levels of those floors with the views that they've got, retail condo product sells well in excess of that today. On a pure rental value, we've looked at it in the high 7s, but I think that we should exceed that. On the property we bought on Chevy Chase, we're in a low 9s. That is a property that we will do some significant investment into for some rehabs, and we'll get some benefit from that. So high 7s on the Beatrice, and the low 9s on the deal on Chevy Chase.

Andrew McCulloch - Green Street Advisors, Inc., Research Division

And then just generally on unlevered returns that you're targeting for your kind of core deals in the markets that you're going after, have those moved around all that much?

David J. Neithercut

No, no. We've continued to -- on most product -- be in that high 7 range, really, as a floor. Mostly -- frankly, it's been mostly 8s and above. And the Beatrice, I think, it has -- given the fact that it's a brand-new product, it had -- it would be high-floor product. But that was something that maybe got us a touch under 8 on an IRR basis. But generally, everything else has been plus 8%.

Andrew McCulloch - Green Street Advisors, Inc., Research Division

On Archstone, are there any blocks of assets that are being marketed?

David J. Neithercut

We've heard about assets for sale that Archstone has got out there. And perhaps -- but there may be more coming.

Operator

And our next question comes from the line of Philip Martin with Morningstar.

Philip J. Martin - Morningstar Inc., Research Division

I'm interested in the change and the nature of the underlying credit and what the household makeup in your community is the last several years certainly given what's going on and has gone on in single-family housing and et cetera. I'm interested as to what this may mean for future CapEx gains. Are your tenants and households demanding something a bit different than they have historically because of the change in the household makeup within your communities?

David S. Santee

Well, I guess I would first start by saying that half of our apartments are really occupied by one person. So it's not like a lot of families are flocking to our communities. I mean, we -- our supply of 3 bedrooms are very minimal across the portfolio. And as we continue to shift to our core markets, the percentage of studios and smaller one-bedrooms really don't accommodate families. On the credit side, again, much of this could have to do with our portfolio shift. But we continue to see the percentage of people with credit scores above 720 increase each and every quarter. And then those folks below 500, that number is decreasing. So it's definitely a sign. It coincides with what we're saying in that we have good, qualified residents coming to backfill those that are moving out. They have higher incomes. They have higher credit scores. And that's the goal that we're trying to accomplish.

Philip J. Martin - Morningstar Inc., Research Division

So from a higher income profile, I'm assuming maybe a high -- an older tenant and obviously paying higher rents that may be competing more closely with single-family home ownership in the future. Would you expect to see your CapEx demands potentially go up if you're dealing with a tenant that's wanting more amenities in the unit or at the property, community level?

Mark J. Parrell

Your question has both sort of long-term and near-term aspects to it. But the near term aspects to it are we left our CapEx guidance alone on Page 22. And we expect to spend $1,225 a unit all-in, and we spent about $1,200 last year in that the same area. And certainly, these are higher-touch properties we're purchasing, and our residents have a very high expectation of us, consistent with their higher rent. But I'll also point out that a lot of these high rises operate very differently than our garden-style apartments in terms of the kind of capital we spend money on. And the rent ticket is just so much higher that CapEx as a percentage isn't necessarily going up.

Operator

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

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

Dave, could you give a little more color on the developments specifically which ones you guys have looked to cancel? And also just an update on what you guys expect to spend, total for the year on development given the land parcels that you mentioned?

David J. Neithercut

Well, the deals we have contemplated in starting this year that we do not expect now to start were a couple of land parcels in South Florida. Again, I think we've made considerable profit in the entitlement [ph] work that we've done down there. And rather than complete that, we decided we think we might just explore going and monetizing that value today. And what I talked about in starting $525 million of starts this year, but just in terms of land acquisitions this year, will be about $42 million -- incremental from this point forward.

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

Okay. Second of all, just going back to leasing, what's the average lease duration? Have you seen any change in that? As you're pushing the rent and that [ph] pricing is it still running at 12 months? Or have you seen kind of a pullback on that?

David S. Santee

Well, our typical lease term, probably 87% of our leases are 12-month leases. In New York, we have a larger percentage of 24-month leases as those are required by law. And then really all the rest are just a function of how LRO prices. I mean, there could be some days where a 10-month lease is less than a 12-month lease. But the bulk of our targeted leases are 12 months. As far as people staying with us, we continue -- even with the turnover, we continue to see our average length of stay increase. So in Q1, our average stay was 1.8 years. That's what it had been in the previous 2 or 3 quarters, I believe. And then in Q2, we saw that inch up to 1.9 years.

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

Okay. That's helpful. Then the final question just in terms of as you're looking at underwriting today, obviously, you've captured quite a bit of the pent-up rent growth there just to get back to market. You expect rent growth to remain above average, I think, in your comments you put in the press release there. But when do you expect to start to see -- as growth rates slow over the next couple of years, when do you expect to start to see cap rates rise? Are there any markets today where you're seeing upward pressure on cap rates?

David J. Neithercut

I guess no. I think in our markets, we're either seeing, generally seeing, cap rates in our core markets really sort of stabilize. So we've not seen them continue to go down nor are we seeing them reverse. And I think what it sort of suggests then is we just think that absolute value continues to increase, that the absolute price per pound continues to increase.

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

So you're seeing more price per pound than underwriting on cash flow?

David J. Neithercut

Well, no. What I'm saying is that if cap rates are staying consistent and bottom lines continuing to grow, then valuation can continue to go up even though cap rates don't continue to compress. So even though cap rates have been fairly stable across our markets for the past 6 months, values have continued to increase because bottom lines have continued to increase.

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

Okay. So you haven't seen any changes in actual underwriting, the growth rates being underwritten are still the same?

David J. Neithercut

Well, I guess we continue to expect, in the next several years, better-than-trend bottom line growth, certainly top line growth. But in every pro forma, we'd expect to sort of trend -- get back to historical levels somewhere in the 2 or 3 years out. But again, I have an expectation that we could continue to run above trend for a while, but we'll get back to what we think trend would be in the marketplace. At least in our pro formas, maybe by year 3.

Operator

And our final question comes from the line of Seth Laughlin with ISI.

Seth Laughlin - ISI Group Inc., Research Division

Just a quick question on revenue guidance. When you guided this year in February, I guess we were looking at [indiscernible] and compare that to today, the last 3 months have been under a hundred thousand. Is that original guidance just conservative on your part, allowing for a possible slowdown in the economy? Or is it really a matter of your markets just holding up much better than the national average for that?

Frederick C. Tuomi

Yes, I think I heard that. Just talking about the expectations of job growth has moderated. And I'm sure everybody gets the same or similar economic reports. And overall, the expected job growth for 2012 has been reduced in many markets. But most of all, it's been shifted into 2013, so the 2-year total is very close to the same. But you have to look at it market by market and really kind of core area by core area. And some good -- for example, New York. New York had -- lately has been a job production machine. I mean, that was revised dramatically up, not sideways or down. And in fact, New York, New York City is back above its peak employment of several years ago and back above peak population, right there in Manhattan. So other markets, San Francisco, very strong on the job front. Boston is very strong on the job front. We had good revisions up. Other markets like maybe -- I think it was L.A., revised down. Orange County, revised down but still positive. So it's a mix. You really have to look at it market by market. But we are blessed with the portfolio that is heavily weighted on the economic centers that continue to produce jobs and employ people who are college-educated in the urban core who want a rental lifestyle that we deliver. So it's really kind of on that basis versus the macro overall global or U.S. economy.

Seth Laughlin - ISI Group Inc., Research Division

Understood. And then in the interest of time, just one quick one that I had. Is there a formulaic relationship between your turnover and expenses, in other words, a relationship where 100 basis points of turnover equals x percentage of expense growth?

David S. Santee

This is David. Turnover, all of our L&A spend for the most part is Internet-driven. So I'm to the point where I kind of look at that as a fixed cost. And then our turnover, the actual painting, the cleaning, the shampooing of carpets, what have you, I mean, that averages $234 of move-out in our portfolio. So even though we do see increased turnover, the impact on expenses ends up being very, very minimal.

Operator

And I'd now like to turn the conference back to management for any closing remarks.

David J. Neithercut

Thank you very much for your attention today, and we look forward to seeing everybody in the fall.

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