Equity Residential (EQR)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET


David Santee - Executive Vice President of Operations

Marty McKenna - Spokeman

Mark Parrell - Chief Financial Officer and Executive Vice President

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

Frederick Tuomi -


Jonathan Habermann - Goldman Sachs Group Inc.

Jana Galan - BofA Merrill Lynch

Swaroop Yalla - Morgan Stanley

Omotayo Okusanya - Jefferies & Company, Inc.

Richard Anderson - BMO Capital Markets U.S.

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

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

Ross Nussbaum - UBS Investment Bank

Michael Bilerman - Citigroup Inc

Michael Salinsky - RBC Capital Markets, LLC

David Toti - FBR Capital Markets & Co.

Eric Wolfe - Citigroup Inc

Andrew McCulloch - Green Street Advisors, Inc.

Robert Stevenson - Macquarie Research

Gautam Garg

David Bragg - Zelman & Associates


Question-and-Answer Session

Frederick Tuomi

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Previous Statements by EQR
» Equity Residential's CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Equity Residential Q1 2010 Earnings Call Transcript
» Equity Residential Q4 2009 Earnings Call Transcript

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

Andrew McCulloch - Green Street Advisors, Inc.

But when do you think stabilized yields going to come out once it restock?

David Neithercut

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


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

David Bragg - Zelman & Associates

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

Frederick Tuomi

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

David Bragg - Zelman & Associates

Got it. And about how wide is that gap?

Frederick Tuomi

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

David Bragg - Zelman & Associates

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

David Neithercut

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

David Santee

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

David Bragg - Zelman & Associates

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

David Neithercut

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


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

Michael Salinsky - RBC Capital Markets, LLC

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

David Neithercut

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

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