Equity Residential's CEO Discusses Q3 2012 Results - Earnings Call Transcript

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Equity Residential (NYSE:EQR)

Q3 2012 Earnings Call

October 25, 2012 10:00 am ET

Executives

Marty McKenna - Investor Relations

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

Frederick C. Tuomi - Executive Vice President and President of Property Management

David S. Santee - Executive Vice President of Operations

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

Analysts

Eric Wolfe - Citigroup Inc, Research Division

David Bragg - Zelman & Associates, Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

Robert Stevenson - Macquarie Research

Jana Galan - BofA Merrill Lynch, Research Division

Andrew Schaffer - Sandler O'Neill & Partners

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

Philip J. Martin - Morningstar Inc., Research Division

David Harris - Imperial Capital, LLC, Research Division

Joshua Patinkin - BMO Capital Markets

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

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Equity Residential Third Quarter 2012 Earnings Conference Call and Webcast. [Operator Instructions] Today's conference is being recorded, October 25, 2012. I would now like to turn the conference over to our host, Marty McKenna. Please go ahead.

Marty McKenna

Thank you, Alicia. Good morning, and thank you for joining us to discuss Equity Residential's third quarter 2012 results. Our featured speakers today are David Neithercut, our President and CEO; Fred Tuomi, our EVP of Property Management; and David Santee, our EVP of Property Operations. Mark Parrell, our CFO, 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 economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn it over to David Neithercut.

David J. Neithercut

Thank you, Marty. Good morning, everyone. Thanks for joining us today for our third quarter call on which we're very pleased to report that we continue to see favorable fundamentals across our markets. And this continued strong demand for rental housing produced same store revenue growth of 5.8% for the quarter ending September 30.

As we sit here today with almost 10 months in the bank and a good handle on expirations or renewals for the balance of the year, we're confident that same-store revenues for the full year 2012 will come in at 5.6%. This is just slightly ahead of our expectations at the beginning of the year. And this is a very strong level coming off 5% growth in 2011. And this will represent the first time in our history that we will have had 2 consecutive years of 5% same-store revenue growth or better. And I'd like to thank the hard-working teams across the Equity nation for doing all that you do each and every day to deliver these terrific results.

Looking into next year, we currently expect same-store revenue will grow 4% to 5% in 2013, which will continue a string of some of the best operating performance in the company's history. As we sit here today, a half of that growth is already embedded in our existing rent roll. So that if we maintained our current occupancy and every existing lease renewed at the same rent as we're collecting today, we'd see same-store revenue growth in the low 2s next year. And that's even if we didn't have any rent growth at all next year, which of course, we certainly will.

And to give you some perspective on that, I'm going to turn the call over to Fred Tuomi, our friend, our colleague, who will be retiring next year after nearly 20 years of leading our property management team. And Fred is going to address not just what we're seeing today, but what we're seeing for the balance of the year and how we expect to start the new year. Fred?

Frederick C. Tuomi

Thank you. As David mentioned, the fundamentals of our business still remain very solid. We enjoyed a strong leasing season and remain confident for our full year 2012 revenue growth will finish at 5.6% and by the end of the fourth quarter, we'll be well positioned for yet another year of very strong revenue growth for 2013.

And I'll now provide an update on the key drivers of our revenue in terms of how we will finish this year, and then more importantly, how that would carry over into 2013. The first turnover. We had a trend of higher turnover that we saw in the first half of this year, and that has reversed course. And we now saw that on the third quarter turnover we had levels below those of the third quarter a year ago in 2011. We expect this trend to continue into the fourth quarter resulting a full year 2012 turnover now at 58.2%. Turnover for the year 2013 should be in the range of 58% to 58.5%.

Now the markets with the greatest increase in turnover compared to 2011 still includes San Francisco and Denver, where we had very strong growth of base rents and not surprisingly, high level of move-outs due to those rate increases. But for the entire same-store portfolio, move-outs due to rate increases have moderated, moderated to 11.9%, which is down 210 basis points from the third quarter of '11 and down sequentially by almost 300 basis points. So this moderation indicates further acceptance of our pricing by our newer residents and reflects the seasonal moderation of our rents.

Move-outs due to home buying, I have still nothing to report here. This measure stayed basically flat sequentially from Q2. It's at 13%, which is up 110 basis points over the same quarter last year but still well below our normal levels. So our customers renting in high-quality urban core buildings are showing very little desire to purchase a home.

Now moving on to occupancy. We maintained strong occupancy through the leasing season and we're now well positioned as we enter the final 2 months of the year. Occupancy is 95.6% as of this morning, which is 60 basis points higher than the same point last year. Our exposure is very healthy, and we have a 7.1% left-to-lease today. The normal softening through the fourth quarter has already begun, and we expect occupancy to trend down and close the year at about 95%, a starting point for 2013 which will be 30 or 40 basis points higher than the starting point we had coming into this year, 2012.

And that leads to base rents. The strength of our demands in the leasing season allowed us to keep pushing the base rents through late August. We actually peaked for the year -- the intra-year on August 20. So this intra-year rent peak came 30 days later than it did in 2011, which is an indication of the strong leasing velocity we enjoyed through the summer of 2012. Now normally -- naturally, since then, rents have moderated according to our normal seasonal patterns. The strongest base rent growth continues to come from the Pacific Northwest. Again, as of this week, San Francisco base rents are up 10% year-over-year. Denver is up 7% year-over-year and the base rents from Seattle were up 6% year-over-year, however, with Central Business District and the Eastside submarkets significantly higher and, of course, Tacoma, significantly lower and actually slightly negative.

Southern California base rents continue to improve. Los Angeles is up 3.5% year-over-year as of this week. Orange County is up 4%. And however, San Diego is still lagging with base rents up 2% year-over-year. Regarding our new residents' ability to pay higher rent levels, the average rent as a percent of income remains very healthy at 17.6%. And all other income and credit quality indicators are keeping pace with rents in our portfolio. So as we finish 2012, base rents will be about 4% above December of '11. This gives us an excellent starting point for further base rent growth through the cycle of 2013. Therefore, we believe base rents next year will grow between 4% and 5%.

And finally, renewals. Renewals remain strong and continue to support our revenue growth through the fourth quarter. Recent achieved renewals have been: August, we booked 5.3%; September, 5.7% and October renewals finished up 6.1%. We're quoting November and December well above 7% and expect to achieve increases booked renewals for these 2 months at or above 6%. So for 2013, we expect to sustain renewal increases in the range of 4.5% to 5.5%.

So in summary, we're very confident the balance of 2012 will position us for another solid year of revenue growth in 2013. And as David mentioned, we have embedded growth for 2013 north of 2%. Again, what this means is that if we were to freeze all rents and occupancy as of the first day of 2013 and applied no further increases in base rents and absolutely no increases on any renewals, we would mathematically achieve more than 2% growth in revenue. Of course, that's not going to happen. So based on our current expectations of continued growth, if base rent and renewal increases, coupled with steady occupancy for next year and in-place seasonal lease expiration schedule, we foresee the resulting revenue growth for 2013 of 4% to 5%.

Now David Santee will discuss our expenses. David?

David S. Santee

Thank you, Fred. As we've discussed previously, payroll, utilities and real estate tax account for 68% of our total expense, with real estate taxes being our largest expense line item at 30%. As expected, our core property level expenses, meaning everything but property management costs and real estate taxes, should essentially end the year flat as we continue to leverage technology and find creative ways to reinvent our operations. Innovation and then executing on that change has become a hallmark of our organization, and I would be remiss if I did not acknowledge the efforts of all of our employees, both here at Two North and across the country, for allowing us to realize our 22nd consecutive quarter of expense growth below 3%.

Over the last 3 years, it's no secret that apartment fundamentals have improved dramatically. This continued improvement, coupled with the ongoing economic challenges of states and municipalities has not escaped notice of the tax man either. I'd like to take just 1 minute to walk you through our 2012 real estate taxes and also provide some insight as to what the next year may look like as we have re-forecasted our 2012 tax growth from 5.5 to the upper quartile of the 6 handle.

Because most actual tax bills are not determined until Q3, estimating full year real estate taxes is both art and science. Relying on historical outcomes is key to estimating future taxes. However, present economic circumstances are in no way reflective of historical actions by states and municipalities. Consequently, the actions by 3 states far exceeded even our most aggressive forecast. The State of Washington far exceeded rate forecast resulting in a 6.1% increase. Both Florida and Virginia issued back-to-back annual valuation increases, with 2012 being more aggressive than last year. Historically, when valuations are aggressive, tax rates are softened. This scenario did not play out for this year, which resulted in an 8.8% increase for Florida and a 15.1% increase in Virginia.

As for the Q3 expense of 9.3%, had we known in January what we know today, we would have reported a consistent quarterly expense in the high-6% range. To achieve our year-end forecast, the 9.3% reported in Q3 is the accounting adjustment needed to achieve a fully loaded year-to-date and revised full year expense target.

Now as we think about the 2013 environment, we see a very similar scenario playing out for both core operating expenses and real estate taxes, minimal core growth and another 6-plus handle for real estate taxes. Now again, a key driver, about 150 basis points for both 2012 and 2013 real estate tax growth, is directly attributable to our 421a tax abatement burn-off for our New York City portfolio. The balance is based on our projections of value and rate increases by market. And for now, our assumptions are more influenced by 2012 and 2013 realities versus historical norms. David?

David J. Neithercut

All right. Thanks, David. Let me turn now to transactions, which as we've said for quite some time now is really a reinvestment process for us as we continue to sell assets in our non-core markets and redeploy that capital into our core markets that we think will provide a superior long-term risk-adjusted total return for us.

So in the third quarter, we acquired 4 assets for $236 million, each great additions to our portfolio, 1 in Manhattan and 3 in California, 2 in the North and 1 in Southern California. We acquired a 98-unit property on 37th Street in Manhattan between 9th and 10th Avenues. This project probably was completed this year and originally intended to be condo product. As such, it has a very high quality with terrific finishes. And unlike most of the other condo deals we've acquired, this one was actually fully leased and was acquired for $84 million, $771,000 a door at a 4.9% cap rate.

We acquired 241 units in downtown San Mateo, about 16 miles south of downtown San Francisco. This property was built in 2 phases, an older property, first phase in '64 and the other in 1972. It was acquired for $93 million or $386,000 a door. This is a value add deal in which we intend to invest another $35,000 a door, which will result in a sub-4% yielded in the first year, but will produce a 5% return in short order and will soon deliver 6%-plus returns.

We also acquired a small property on Bluxome Street in downtown San Francisco. It was built in 2007. And I say small, both because it's only 102 units, but also because the average unit size is 233 square feet. It's perfect for our target demographic. The property has average rents of $1,750 per unit per month, which is hundreds of dollars below rents on larger studios in the area. The property was acquired for $23.9 million, $234,000 a door at a cap rate of 5%.

We've added to our terrific portfolio in downtown Los Angeles by acquiring a property that was originally built in 1925 and was -- got renovated and converted into apartments in 2006. This property contains 99 units, was acquired for $35.5 million, which is $328,000 a door at a cap rate of 4.2%.

On the disposition side, through the first 9 months of the year we sold $617 million of non-core assets, $281 million of which were sold last quarter. And so in the quarter just ending, we sold 2,153 units. This comprised of 3 assets in Orlando and 1 each in Phoenix, Atlanta and Maryland. And our last 2 assets developed by joint venture partners, 1 in New Jersey and 1 here in Chicago, which represents our complete exit from our headquarter city.

We've reduced our transactional guidance for the year on each side of the trade by $150 million. So we're now down to $1.1 billion of acquisitions and $1.1 billion of dispositions for the year. Now having sold only 56% of our disposition goal through 9/30, we will have a lot to do in the fourth quarter. But so far this quarter, we've sold or have under contract $160 million of product. We have another $140 million under letter of intent and another several hundred million more in various stages of marketing. So we do think, as we sit here today, we'll be able to accomplish that.

On the development side, we continue to be very pleased with the results of our new developments recently brought online, the rate of unit absorption remains very strong and net effective rents are in excess of our original pro forma in every case. We continue to look for new opportunities to add high quality assets in great locations in our core markets through development and acquired 3 new parcels in the third quarter to do just that. These 3 sites will produce 794 total units at a total development cost of $270 million, with a weighted average yield on cost at current market rents in the mid-5 range, and these are in markets where high quality assets trade today in the low 4s, being Seattle and coastal Southern California.

We started one project in the third quarter. That's the third and smallest phase, our Westgate project in Pasadena, containing 88 units for $54 million. And we have 5 additional projects that are slated to start yet this year, 2 in Manhattan, 2 in Seattle and 1 in Washington D.C. There's certainly no guarantee that we'll get each of these started this year, and if we don't, they'll likely get underway in the first quarter of next year. But assuming that we do however, starts for this year will total 1,051 units, $543 million and deliver a 6% yield on current market rents, which we think will provide a stabilized yield of 7%.

Now we currently own sites for an additional 3,500 units with the development cost of nearly $1.4 billion in great locations in Boston, San Francisco, Seattle and Southern California, and continue to pursue opportunities for several billion dollars' more development.

So with that, Alicia, we'll be happy to open the call to 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

Thanks for all the detail on 2013. I'm a little surprised that you provided so much detail so early on. So just curious what prompted you to put out the revenue guidance earlier than you normally would?

David J. Neithercut

Well, look, we got a pretty clear sense out there that there's a lot of questions about 2013. And we felt that there was a lot of uncertainty, a lot of questions. We just felt that we had a clear enough sense about where we were headed, that it was appropriate to let the investment community know.

Eric Wolfe - Citigroup Inc, Research Division

Okay. And then just trying to dig into that 4% to 5% revenue growth projection a little bit more. You said that you're going to get like 2% or just over 2% from the earn in from last year, and then you're going to get 4% to 5% on base rents, 4.5% to 5.5% on renewals. I think that's what you said at least. Shouldn't that bring you sort of closer to 5% revenue growth or are you expecting a little bit of a dip in occupancy next year?

Frederick C. Tuomi

No, Eric. This is Fred. We're assuming that it's constant occupancy, and maybe a slight uptick in turnover, but you can't just do that math that simply. You have to take into consideration the seasonality of the lease expirations. They don't all expire January 1 and we can move everybody January 1, nor do they all expire conveniently exactly in the middle of the year. So you have to roll that through the actual expirations that we anticipate throughout the year, both those that are according to lease expirations and those that may terminate early. So it's not quite that direct.

Eric Wolfe - Citigroup Inc, Research Division

Right. And then I guess just from a seasonality perspective, you would expect things to sort of trend the same way that you're seeing this year? Or is there any sort of change...

Frederick C. Tuomi

No. We're definitely back to a normal market intra-year seasonality curve. Maybe for the years of recession and the first-year recovery was a little bit different but really not materially. But this year, clearly, was -- we ramped up Q1, really pushed things during the leasing season, separate from the comps, so you really get aggressive on the rents and then we start moderating as demand moderates. So you really have to follow the demand cycle, and demand cycle is certainly is seasonal in this business.

Eric Wolfe - Citigroup Inc, Research Division

Okay. And then just last question on supply. We've obviously seen the starts number continue to decline, I think 260 last month. When you look at that number, is there a certain level that starts concerning you? I know it's very regional for you. So maybe if you think about it just for your markets, like what's the level that starts concerning you looking forward?

Frederick C. Tuomi

We don't really react to an overall number. Just per our core markets, I did look at that. In 2012, we have 37,000 units coming in, which is the lowest we've ever seen it other than the 2011. And for '13, we see 54,000 units coming into our markets, and just for comparison, back in '09, we had 67,000 and in '08 we had 57,000. So still below those years. But that's really not that important. What's more important is that on a market basis and a submarket basis, and really down to the street basis, where are those new deals coming out? How are they pricing? How are they incenting their absorption, lease up schedule through concessions, and what's the impact on our specific properties? You really have to build it from property level up.

David J. Neithercut

Yes, and you also have look at the demand sides, also, Eric. I mean, we look at expected household formations and job growth in those markets and look at what historical average institutional-grade apartments sort of capture rate of that growth is. And frankly, in many of these markets, we don't think that new supply will meet that incremental new demand.

Operator

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

David Bragg - Zelman & Associates, Research Division

Another question on the 2013 outlook that you provided. Can you talk about the markets that will be positive contributors to revenue growth in terms of better revenue growth in 2013 than 2012, and the markets that you expect to see the biggest -- the largest deceleration from 2012 into 2013?

Frederick C. Tuomi

Yes, Dave, this is Fred again. We're not going to give market-by-market guidance. We really don't give it even later in the process, we're certainly not going to give it now. But you can just kind of look at the trends. The trends are very strong. In the strong markets, those trends will continue because we have that embedded growth that's going to carry us forward, and the markets that a little bit weaker, less so. And I would say just generally, in terms of deceleration, the only one I would worry about would be Washington, D.C. We've talked a lot about D.C. It's still holding up quite well right now. In fact, it's looking great. But we all know there's 2 big things coming at us; the big supply coming at us in D.C, highly focused on the district and close in. And then the big question mark of the fiscal cliff or the sequestration, which if it happens, could be very disruptive to that market. So I would expect D.C. really to be the only market concerned about a deceleration, not negative, but certainly deceleration of growth. The others, I think, you just look at the current trends will continue.

David Bragg - Zelman & Associates, Research Division

Okay. And just on the lower turnover, what does this tell you -- that seeing these trends, which I don't think you necessarily expected. Does it mean that the renters that came in at -- during 2009 and '10 at discounted rents, they effectively traded up? That they have departed and now you're working through a resident base with a higher income and a better ability to take on these increases?

Frederick C. Tuomi

Thank you. I couldn't have said it any better myself. Yes, that's exactly it. The turnover being 58.2, that's right, really, on top of our original expectation for this year. But we did revise that expectation up after we saw turnover increasing in early part of the year. And I think that exactly kind of reversed itself, due to -- as newer residents coming in, they're used to paying those levels. They don't have the historical perspective of "Gee, I was paying much lower rent back in '08, '09 and '10." And so it's not as much of a shock. And of course, the incomes, they're moving up nicely as well. So I think people are set and they're not buying homes. They are staying put with this urban core, great assets, great walk score, where they want to live. They're not buying homes because if they were to buy home today, they have to go way up the burbs and fight the inner city. So we're seeing very good stability in our resident base and our retention.

David Bragg - Zelman & Associates, Research Division

And just one question for Mark. Mark, can you talk about the plans to address the line balance?

Mark J. Parrell

Yes. So the line balance is about $850 million. It'll get paid down about $250 million just because we're going to have a lot more in dispositions in the fourth quarter to meet our guidance numbers than we've had to date. So the real amount of issue here is really something like $600 million. Most of that is the term loan that we just recently paid off, which was floating rate debt. So we do want a portion of the revolver to stay outstanding and have a floating rate debt component. And finally, we still do have our hedges in place. We have about $200 million in swaps-to-fixed that protect us. So it isn't a matter of if, it's a matter of when we access the unsecured market. But it won't need to be a particularly large deal and doesn't need to be particularly soon, because I do want to have some floating rate exposure. And with the line, we can maintain exposure around 13%. If we termed it all out, we would end up having floating rate exposure of 5% or 6%, and I just don't think that's quite the number we're looking for. It is certainly a very attractive market to term debt out right now.

Operator

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

David Toti - Cantor Fitzgerald & Co., Research Division

I just have a quick question. I'm not sure if you can answer it, but I just want to talk about some of the acquisitions and dispositions and kind of the math. If we look at the assets that you are buying in aggregate in the quarter, what would you estimate the sort of 3-year growth rate would be on those rents roughly?

David J. Neithercut

I can't tell you what the 3-year average weighted growth rate would -- is going to be on these, but I will tell you that we will -- and these assets will be -- we're buying in the 4s and we'll quickly be in the 5s and moving towards 6. So -- but again on a dollar weighted average basis, I wouldn't have it off the top of my head.

David Toti - Cantor Fitzgerald & Co., Research Division

Understandable. And then on the stuff that you're selling in the 6 cap, how would you put the -- how would you characterize the growth on those rents, maybe on a comparable period, whatever that might be?

David J. Neithercut

Well, I guess, we don't really look at it in that short of increment, David. We really look at over a longer period of time. And while some of those markets may have very strong growth in the next year or so, new supply will quickly put an end to that. We just think over an extended time period, which is really our investment horizon, that we'll have a better overall total rate of return by making these trades. We're also looking at just where we're trading assets, not simply on a cap rate basis but on an absolute basis, and where those dollars are relative to replacement costs in those markets. And we think that the absolute price per pound makes sense for us.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay. My last question, and I apologize if you covered this. I jumped on a bit late. Are you seeing any -- in your transaction sort of pipeline, acquisition pipeline, are you seeing any upward movement in cap rates in some of sort of secondary, tertiary market that might come across your desk?

David J. Neithercut

Well, on the acquisition side, we're only in the primary markets, what we're acquiring. I probably see maybe a little bit on the D.C. side. But generally, I think on average, cap rates have held fairly close, been fairly stable through much of this year. And because of improvements on the bottom line, you've seen modest increases in value during the year.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay. And actually that wasn't my last question. I want to squeeze in one more. Are you seeing any change in the, let's say, on the buyer side for the assets that you're selling relative to how those parties our underwriting assets going forward? If there's no movement on the cap rate, are you seeing any additional conservatism on the part of the buyer relative to their outlook?

David J. Neithercut

No. I'd say I think a lot of this is sort of lender-driven. I'm now -- turning now to the assets that we're selling. I think that a lot of what people can pay is a function of Fannie and Freddie, but they're out there, they're lending. They're going to have big books this year. They're as busy as can be, and that's providing capital that actually allow us to continue to sell these assets and allow us to get disposition prices that are in the high 5s to mid-6s.

Operator

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

Robert Stevenson - Macquarie Research

Maybe one for David or Mark. If I heard correctly, you guys were talking about 6% real estate tax growth in 2013. Did I get that right?

Mark J. Parrell

That's correct.

Robert Stevenson - Macquarie Research

Okay. And then sort of flattish to up slightly for the other 70% of your expense load?

Mark J. Parrell

That's how we're seeing it today.

Robert Stevenson - Macquarie Research

Okay. So that's going to basically put expense growth somewhere in the 2% to 3% for next year?

Mark J. Parrell

That's how the math works.

Robert Stevenson - Macquarie Research

Okay, perfect. I wanted to make sure that I had all of that right. Okay. And I guess the -- a couple of quick other ones. The land parcels that you guys bought this quarter, is it -- is there still a lot of work that needs to be done there is why the construction is not starting there for another 18-plus months? Or is it something that you guys are looking at where you don't want to deliver supply into those markets in according to with the bulk of what's happening there?

David J. Neithercut

Well, most of what we've acquired, Rob, is zoned and entitled, and we just need sort of plan review, and it just takes a little while to get that stuff done. But there's not a lot of risk in getting consents and approvals, it's just getting plans done and plans reviewed and approved.

Robert Stevenson - Macquarie Research

Okay. And then, I guess lastly, what's the size of the redevelopment opportunity in your sort of ongoing core portfolio today that's over and above what is just sort of general sort of maintenance CapEx, which would actually be revenue-producing in terms of -- whether or not it's kitchens and baths or more wholesale stuff on well-located stuff that maybe just has a little bit of age on it?

Mark J. Parrell

Yes. I think, you should expect to see us -- we have something along the lines -- and we talk about that a little bit on Page 22 -- something along the lines of 4,000 to 5,000 units a year in a portfolio, give or take 100,000. So I mean a lot of our locations are just terrific locations and you just need to keep the product up-to-date. So I'm not sure that there is a cumulative number I can give you, which is I think what your question was. But I think a run rate of us doing rehabs that are fairly material on 4% or 5% of the portfolio is probably what we would end up doing.

Robert Stevenson - Macquarie Research

And, I mean, is that just what you think that you can do, or I mean, is there the opportunity for you guys if the acquisition market starts to become less attractive that you could deploy capital there faster than you would otherwise would have, or is it just mutually exclusive, that that's what basically your opportunity that is.

Mark J. Parrell

I appreciate the question, but just on order of magnitude, we spent $40 million on rehabs. And though the returns are very solid, they're -- I mean that's one asset we would acquire. So I'm not sure that toggling rehabs, even doubling them, to a company of our size is going to make a great deal of difference.

Operator

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

Jana Galan - BofA Merrill Lynch, Research Division

I think you have a small handful of assets that cater to students. Given the increase in student housing communities marketed for sale, I was curious if you're looking at those or would want to expand in that business?

Mark J. Parrell

I'm sorry, to increase our exposure or decrease our exposure?

David J. Neithercut

Increase.

Jana Galan - BofA Merrill Lynch, Research Division

Increase.

Mark J. Parrell

No. I think that we certainly got -- have assets, and even assets that we have acquired in urban locations, that do have some students but the percentage is certainly smaller. We do have properties, for instance in Orlando, which would be part of assets that we'd likely sell in the near future. We also do have some development sites in Berkeley, California, which we intend to build, which would certainly be attractive to students. So it's not a big part of our strategy. It would really be just on the margin.

Jana Galan - BofA Merrill Lynch, Research Division

Great. And then Fred, thank you so much for your comments on the supply in D.C. I was just curious if you could talk a little bit about what you're seeing in Seattle?

Frederick C. Tuomi

Yes, Seattle is doing great right now, especially downtown and the Eastside. Snohomish is just a little bit softer. And then Tacoma -- we do have a fairly large portfolio in Tacoma, and it's still kind of underwater. But Seattle has a great run. I mean, tech employment is very high. Amazon is hiring a lot of people. Microsoft has a lot of different projects going on, hiring a lot of people. Google is moving in big time into Seattle. The biotech is great. So it's really a great story in Seattle all the way around. But the supply is an issue. We've got 3,000 units this year, 5,000 units next year, and that supply is pretty much concentrated in the downtown area and the fringe of downtown, in places like Ballard, and some are even in West Seattle. But the absorption is strong. And there's a lot of people in the renter demographic that are coming into the city. A lot of people from the other areas are moving into downtown and doing a reverse commute. So we think the absorption is going to be there to meet that supply. And if it doesn't, we may have a little bit of an issue in certain -- those concentrated areas, primarily the CBD, but it's going to be short-lived. So the supply for '13 and '14 -- I would say it's a moderate issue but not a big issue because the demand should be there to meet it.

Jana Galan - BofA Merrill Lynch, Research Division

And then I guess I'm just curious if the 2013 revenue growth number, is there a certain job growth expectation in that?

Frederick C. Tuomi

No. We don't go from macro to micro. We consider the macro environment, but we build these things from the ground up, what's in place and the trends and asset by asset. So we don't really take a headline number and then peg our operations based on that.

Operator

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

Andrew Schaffer - Sandler O'Neill

Andrew Schaffer here. I'd first like to ask you about -- I think I heard you had $200 million of -- around unassigned hedges, and I was wondering what kind of effect that would have on the all-in rate of a 10-year or a 30-year unsecured issuance?

Frederick C. Tuomi

So that 10-year hedge is about $200 million or $44 million to the negative right now. So basically you'd take the $44 million divide it by 10 and then whatever the amount of the notional is. So I'm not sure I'm going to do that math in my head right now, but it's probably on a $400 million deal, something like 1%.

Andrew Schaffer - Sandler O'Neill

Okay. And does that change the way you think about the -- issuing 10-year versus 30-year paper, because I know in the past you said you kind of prefer to shy away from the 30-year?

Mark J. Parrell

The hedges don't really have anything to do with our thought process on 30-year debt. The hedges are there to just allow us to access the market at an opportune time. Our concerns about a 30-year debt have a lot more to do with just having covenants that are real and substantive continue on for such a long period of time. To handcuff our successor-successor-successor with those kind of important and substantive covenants on leverage is just something we need to be careful about. and to this point, we haven't had any appetite to do.

Operator

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

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

You talked a little bit -- you gave quite a bit of detail on operations for '13 and you also talked about development starts in the fourth quarter. Can you give us a sense just as you're putting the plans together, what you're thinking on the development side, what you could start for '13 as well?

David J. Neithercut

Well, again, a lot of it is just timing and what can actually be started in the year, what might have to be pushed into the next year. But as we look at our agenda today, we've got $700 million of product that could start in 2013, Mike.

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

Okay. And that's in addition to the $540 million you talked about in the fourth quarter?

David J. Neithercut

That's correct.

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

Okay. Second question, you had a 170 basis points spread during the quarter. And I know you've talked about looking at price per pound as well, but at what point does that spread become too wide?

David J. Neithercut

Well, again, it's more value. Look, we have -- we're on record as having said that we're going to exit certain of these markets and try and redeploy that capital. And when we find assets to buy that we think makes sense for a long-term investment standpoint and can match that up against sales that we think make sense -- and it's not just simply cap rates. I mean, we certainly do pay attention to that delta, but it's also just where can we sell assets on a price per pound versus what we think replacement costs are on those markets and we try to decide if that makes sense. So I wouldn't focus so much on the 170. A lot of that is just the complexion of what happened to be sold in one quarter versus what happened to be acquired in one quarter. Historically, we've seen that delta to be about 125 basis points. It'll be a little wider now because we've seen more aggressive pricing where we want to invest, and cap rates, I think, being held up a little bit in the markets we want to sell. But we really -- we do look at the absolute values in those markets and still do think that those represent decent prices for us to exit that.

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

But as you're underwriting these transactions, have you changed your rent growth assumptions at all in the last 6 months?

David J. Neithercut

Well, I guess -- I've been asked that question a lot. And I will tell you, our 2013 sort of rent growth assumptions are probably pretty consistent with what they thought they -- we -- they were going to be back in 2010 and 2011. So as we look forward 12 months today, they're probably less than what we look at 12 months forward, 12 months ago. But I don't think we're looking at 2013 today any differently the way we look at 2013 for a while.

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

Okay. And then the final, where could you issue unsecured paper today? That one is probably for Mark. And then I'm just curious for your '13 outlook, what your expectations are for Southern California? Seems like you had a pretty decent ramp-up there. I wonder if you expect that to continue into '13, and if you expect Southern California to be among your better performing markets there.

Mark J. Parrell

I'm going to address the debt issue. It's Mark. Right now, I think, we could issue 10-year unsecured paper at something between, say, 3% and 3.1%. On the secured side, just by means of comparison, I think, that would be more like 3.3% right now. And I'll push it back to Fred for the SoCal question.

Frederick C. Tuomi

Yes. Southern California continues to improve. You can see that in our numbers. I wouldn't say it's like screaming back. But it's good, steady, consistent improvement, whereas 18 months ago, we were complaining that it was start/stop, 2 steps forward/1 step back, kind of lumping [ph] kind of thing. So it is consistent improvement in moving up. I'd say that both L.A. and Orange County have some good job growth rate now. L.A. is a little bit more back-loaded this year, so it remains to be seen. But Orange County has some good broad-based steady improvement on the job front. So rents are still below the peak levels. We still have a little bit more juice to get back to those levels. So I think it's to be expected they'll continue to be one of our better performers, I wouldn't say maybe the best, but one of the better performers next year. Now, there's 2 risk areas. The biggest risk is just California. It's still very messed up as we know, and they've got some serious fiscal issues in the state of California and some legislative things coming up here in this next vote which is really going to be an issue. If California has to really cut expenses, then there could be some severe cuts in government jobs and education, et cetera. So that could take some of the growth fervor out of it. And then also, we have a little bit of supply coming into L.A. On a macro basis, it's not a big number based on the size of that market, but it's highly concentrated in downtown, Wilshire and San Fernando Valley again. So maybe a little bit of issue there. Orange County looks great. San Diego has always been the laggard, but it's got a lot of good things going on, broad base, good job growth. But the military and defense sector overhang there is a little bit of a concern. It's going to keep San Diego, I think, still in third place.

Operator

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

Philip J. Martin - Morningstar Inc., Research Division

A question on just the overall Equity Residential portfolio. Nationally or by individual market, are you experiencing any meaningful shift in average length of stay by the tenant?

David S. Santee

This is David Santee. We look at that every quarter. I would say that -- well, as we continue to transition our portfolio, typically, high-rise buildings have much lower turnover than garden communities. When you look at on a market-by-market basis, the average length of stay in, say, a New York, a New England, a Boston, a San Francisco is double that, almost 3 years, versus the commodity markets like Phoenix, Atlanta, Orlando, which is about 1.6 years.

Philip J. Martin - Morningstar Inc., Research Division

Okay. Okay. And when you look at the 17.6% rent -- average rent as a percent of income, take us back over the last, call it, 5 to 10 years and what has been -- kind of pre-crisis, what was that number and how has that changed over the last 5 years or so?

Frederick C. Tuomi

This is Fred. I can't give you that number going back 10 years. But since we've been focused on here the last several years, it really hasn't changed. It's 17 range. The median is 21, 22. And it's been fairly consistent, and if there's been any movement, it's just getting more favorable. Again, related to what David mentioned about our portfolio shift, we're getting better assets, better locations, better residents, better incomes and much higher rents. So I think it's very steady and stable, and if anything, improving on the margin.

Philip J. Martin - Morningstar Inc., Research Division

Okay. Okay. My last question. In terms of the new supply, it sounds like in certainly your core markets, the supply -- existing and new supply coming on is not of this institutional quality where yours is. Is that a fair statement? Because, I mean, again, I know it's property-by-property as opposed to market-by-market, but I'm just trying to get a sense of -- because we hear "new development starts," and it may look high, but is it really competitive product when compared to your institutional quality product or your location? I'm just trying to get a better sense of the competitive supply.

Mark J. Parrell

Right. Yes. I understand. We look at it really asset-by-asset, and what's coming into its location is going to be a competitive threat to our existing assets. Now, in some markets you do see a headline numbers, like say, Boston is going to have 3,000 units delivered. Well, if you look at those, we're not really too concerned because a lot it is out in the suburbs and a lot of it are small properties and a lot of it are affordable product. So you're right. So a lot of these are smaller in-locations that don't impact institutional assets and are affordable nature that don't compete with our resident set. But I can tell you too that we do have an issue. D.C., a lot of these products coming out are right in our wheelhouse. I mean they're institutional grade, high-quality, great located buildings are being developed. So I'm not going to say we're not going to have competitive threat, but you just can't react to a headline number.

Operator

Our next question comes from the line of David Harris with Imperial Capital.

David Harris - Imperial Capital, LLC, Research Division

Excuse me if you did not cover this, because you've already made reference to these points. But NAREIT over the summer, David, you referenced to some elements of conditionality regarding the Archstone payments. Those no longer are relevant to the second payment that -- what you've referenced is being likely to be included in the fourth quarter.

Mark J. Parrell

David, it's Mark Parrell. That expired about October 4, that conditionality. So we will recognize the remaining $80 million in income in the fourth quarter.

David Harris - Imperial Capital, LLC, Research Division

Okay, good. And then one final question on the acquisition and sales, to meet your full year targets, it looks like you've got to be looking to buy about $200 million and sell $500 million, is that right?

Mark J. Parrell

That's the math.

David Harris - Imperial Capital, LLC, Research Division

That's the math. Any idea or timing on some of that, David?

David J. Neithercut

Well, it will be in the fourth quarter David. I mean are you looking for November 17?

David Harris - Imperial Capital, LLC, Research Division

Well, I don't know where I'm going with that question. It's always good to introduce levity into these rather [boring] [ph] conference calls, I have learned after all these years. The -- where I'm going with that is, are any deals this side of the election or are any people expressing any sensitivity, either both buyers or -- you as a buyer or potential sellers, around the election?

David J. Neithercut

No, I don't think so at all, David. I think that certainly you can see changes in activities result of year end. But I don't think -- we've got nothing that's contingent on the election that would change the sellers' mind or our mind. That's -- we're running our business, we're going -- doing what we can do, and are not concerned about the election.

Operator

Our next question comes from the line of Josh Patinkin with BMO Capital Markets.

Joshua Patinkin - BMO Capital Markets

On the development side, you're underwriting projects to 5.5% yield on today's rents. Just trying to get a feel for if project costs or material costs are going to move commensurately with rent growth or how you're viewing that?

David J. Neithercut

Well, we do trend increases in construction costs from our underwriting to the time that we would expect to be able to start pricing jobs out. And I'll tell you that we think construction costs are still maybe down 10% from peak, but are rising. And most of our markets will be up sort of mid-single digits this year.

Joshua Patinkin - BMO Capital Markets

And how about labor costs, or is that part of the whole picture?

David J. Neithercut

Well that would be part of that calculus.

Joshua Patinkin

Okay. Great. I believe Rich is on the line with a question as well.

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

Let's assume for a second that the housing recovery is real and that we don't go to 59% homeownership rate. Tell me what the opportunity is from your perspective, the multifamily perspective, considering that people getting a job, rent -- building a home, for example, may not be your target tenant?

David J. Neithercut

I'm not -- I mean, people that are getting a job and building a home?

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

Yes. I mean, everyone is saying, "Well, this is great because it will create job growth," but are those the types of people that are going to rent an apartment from you? And I'm just curious if there will be downward pressure in that environment from people [indiscernible].

David J. Neithercut

I think that improvements in the single-family space is just good for the economy. And whether or not the guy who is now hanging drywall is our resident or not, I think that's good for the economy. And that will be good for everyone. So...

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

But as good, as good -- I mean, a moderation should be expected, correct, even in that improving economy environment?

David J. Neithercut

A moderation of what?

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

Of growth, rent growth.

David J. Neithercut

Well, we just said we're going from 5-plus to 4 to 5.

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

That's really not moderation. That's rounding or kind of...

David J. Neithercut

Well, call it whatever you want. I mean, look, we think that multifamily supply, new incremental multifamily supply will not meet what we think will be incremental new demand. We obviously targeted on this 80-million strong echo boomer generation, and we think they are interested in buying a single-family home, while they may want to, they'll act on that later. David Santee told you what the average occupancy is in our units. So we don't think the single-family homes are a huge threat to us. We don't think multifamily supply, maybe outside of D.C. and San Jose and maybe a little bit in Seattle short-term, will be long-term threat. We think that the space today is pretty well-positioned to perform above -- well-above trend for some time to come. I mean, I can't tell you that's -- what level of moderation that sort of means, but we're certainly not suggesting 2013 will show the same percentage growth we've seen the last couple of years. But still, we think very strong on a historical basis.

Mark J. Parrell

I would think that the majority of people who are going to be the first to jump and buy a home are probably those renting homes today, not living in apartments. And those that are come back onto the payroll, from the construction jobs and other homebuilding-related recovery, I don't think they're going to go from unemployed to employed to homeownership.

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

Okay. And just an unrelated question. Is -- in your mind, putting aside your involvement in Archstone, is an IPO from that company good for the space or bad for the space, in your opinion?

David J. Neithercut

I guess I'll leave that up to the analysts like you and to the investors. We -- they're hell-bent on going public. We continue to think and have thought as you know for a long time that it made sense to maybe do something with us. But looks like they're going to go public, and the market will react to that.

Operator

[Operator Instructions] Our next question comes from the line of Tayo Okusanya with Jefferies & Company.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

No, I'm good.

Operator

I'm showing no further questions in the queue at this time. Please continue.

David J. Neithercut

Well, good. Thank you, all, for joining us today. We look forward to seeing you in San Diego in just a few weeks.

Operator

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.

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