Equity Residential (EQR) Q4 2011 Earnings Report, Transcript and Summary

Marty McKenna - Spokeman David J. Neithercut - Chief Executive Officer, President, Trustee, Member of Executive Committee and Member of Pricing Committee Frederick C. Tuomi - Former President of Property Management David S. Santee - Executive Vice President of Operations Mark J. Parrell - Chief Financial Officer and Executive Vice President

Andrew McCulloch - Green Street Advisors, Inc., Research Division David Bragg - Zelman & Associates, Research Division Eric Wolfe - Citigroup Inc, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Seth Laughlin - ISI Group Inc., Research Division Jonathan Habermann - Goldman Sachs Group Inc., Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Robert Stevenson - Macquarie Research Richard C. Anderson - BMO Capital Markets U.S. Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division Swaroop Yalla - Morgan Stanley, Research Division

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Equity Residential's Fourth Quarter Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, February 2, 2012. I would now like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir.

Thanks, Camille. Good morning, and thank you for joining us to discuss Equity Residential's fourth quarter 2011 results and our outlook for 2012. Our featured speakers today are David Neithercut, our President and CEO; Fred Tuomi, our EVP of Property Management; David Santee, our EVP of Property Operations; and Mark Parrell, our Chief Financial Officer. Before I turn it over to our team for their comments, I want to point out an error contingent of the release we issued yesterday. On Page 12 of the release, the data for our same-store year-over-year turnover is incorrect, as we inadvertently calculated the numbers using 9/30 year-to-date data. The full year 2011 number should be 57.8% instead of 44.4% and the full year 2010 number should be 56.9% instead of 44.1%. Fred Tuomi will provide some color on our expectations for 2012 turnover in his remarks. We apologize for this error, and we'll issue an updated release after our call. And we thank Dave Bragg from Zelman & Associates for catching this error and bringing it to our attention. Lastly, 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 the call over to David Neithercut.

Thank you, Marty. Good morning, everyone. Thanks for joining us today. We're extremely pleased with the company's operating performance in the fourth quarter, which wrapped up a very good year for Equity Residential. And on behalf of everyone here, we want to thank the thousands of our colleagues across the country that continue to deliver these very strong results for us. Our same-store net operating income for the full year of 7.7% was nearly spot-on the high end of the guidance range we gave you exactly 1 year ago. And this performance was a result of continued strength in fundamentals, driven by a huge demographic of our population that is not just simply in their prime rental years, but one that's currently shunning the commitment and financial risk of single-family homeownership, and is instead embracing the optionality and flexibility, the lifestyle really provided by rental housing. At the same time, new supply has been severely limited in some markets and almost nonexistent in others. And this leads to tight markets with high retention, low vacancy and rising rental rates. So we're very confident that 2012 will be another very good year. And Fred Tuomi is going to take a moment now and take you through the baseline assumptions for our key revenue drivers for this year.

Thank you, David. So as noted in our press release last night, our guidance for 2012 revenue growth is between 5% and 6%. And we continue to see strength in virtually all of our markets, actually in all of our markets, and the fundamental factors of supply and demand remain in our favor. The combined forces of demographics, household formations and the continued aversion to homeownership will ensure a strong demand for rental housing. And this is further supported by gradual improvements in job creation, especially within our younger, college-educated urban cohort for unemployment now stands at 4.1% versus 8.5% overall. Our resident base is very healthy due to its high level of employment, good income growth and a demonstrated ability and desire to pay higher rents for quality rental housing. On average as a percent of income, our rent is currently 17.2%. This is a very good number and actually down slightly from last quarter. And this is versus the 33% threshold we typically use to qualify new applicants. And the household income of new residents acquired in 2011 was 4.4% greater than those residents moving in with us during 2010. So this year, some of the strongest revenue growth will come from Boston, New York and San Francisco. And in these key markets, we see continued stability in the financial sector and continued growth from technology, new media, business services and the health sciences. The more challenging markets will include San Diego and to no surprise, the D.C. Metro area. So regarding our 2012 revenue guidance, I'll again discuss the 4 key drivers in more detail. And those are: resident turnover; our physical occupancy; base rent pricing, meaning net effective rates on new leases; and then our renewal pricing. The first, turnover. One of the benefits we've seen from this renter nation phenomenon is structurally lower resident turnover, and this has been evident since really late 2008 and 2009. In 2011, as rents were recovering, turnover actually increased slightly but well inside of our expectations that we gave to you last year. So our turnover assumption for this year's same-store set is 58%, which is up slightly from the prior year. Occupancy. Our occupancy assumption is 95.2%, which is no change from 2011. So with relatively stable turnover, solid occupancy, the revenue forecast really comes again down to rate, meaning base rents for new leases and then the achieved renewal rates. So base rent pricing. Coming into 2012, what we said right now today, our base rents are up 7% over the same time last year. We feel very good about this and the forward trend for the next several weeks looks very encouraging. Throughout this year, base rents will follow the typical seasonal pattern, this means that we'll have continued growth from Q1 and Q2, we'll strike an interyear peak in Q3, and then the typical seasonal softening into Q4. So on average over the year 2012, we expect these base rents to run approximately 5.5% above the 2011 levels. And this implies a narrowing as we approach the peak Q3 comp period of last year. And finally, renewal pricing. We achieved renewal increases above 6% during the fourth quarter and this trend is continuing as we've turned the corner into this year. January renewals are now done at 6.7%. February is at 6.2% so far, and we've booked 1,800 March renewals at an average increase of 6.1%. So for the full year 2012, we expect average renewal increases of between 5% and 6%. And this also implies a narrowing as we again approach the peak Q3 comp period of 2011. So to recap our explanation of our guidance, we expect turnover up slightly to 58% on the 2012 same-store set, occupancy very steady at 95.2%, average base rent pricing growth of 5.5% and average renewal increases of between 5% and 6%. Therefore, the revenue growth for the full year 2012 should come in between 5% and 6%. David?

All right. Thanks, Fred. So as Fred said, the midpoint of our 2012 same-store guidance then is 5.5%, and that's actually 50 basis points higher than our actual results for 2011. I'll have to say that 2011 had a much easier comp set than 2012 will. So clearly, we see continued strength in fundamentals across our markets. Now in addition to delivering great top line growth over the last several years, we've worked very hard to make our operations more efficient, and that's following an extensive review of our operating model several years ago. This has led a compounded annual growth in same-store expenses of just over 1 percentage point in each of the last 5 years. And our guidance for 2012 same-store expense growth is 1.5% to 2.5%. And David Santee is now going to break that down and give you some color as to how we're getting to this range.

Okay. Thank you, David. For more color on our 2012 guidance for same-store property expense, I'll start with the 3 key drivers that account for 68% of total operating expense. These are real estate taxes, utilities and payroll. The headline for 2012 expense guidance can best be explained by this, what the gas man giveth, the tax man taketh away. As expected, real estate taxes are on the rise and account for 29% of all expenses. On a GAAP basis for 2012, and GAAP is gross taxes net of all appeals and refunds, we would expect to see a year-over-year increase of 4% to 5%. 1/3 or approximately 160 basis points of this GAAP increase of 4% to 5% is a result of our scheduled 421a tax abatement burnoff on 5 New York City assets. Given our ongoing portfolio transformation, Florida remains the only significant state with a potential to surprise and adversely impact overall expectations. Utilities and energy, which account for 16% of operating expense, continue to move in opposite directions. Water, sewer and trash utilities continue to grow well above inflationary levels as municipalities scramble for revenue to deal with aging and antiquated infrastructure, as well as finding alternative measures to dispose of waste. It's also important to note that we recover over 83% of this expense on an annual basis through our Resident Utility Billing System or what we called RUBS. Offsetting this growth was our decision to ride the natural gas market to new 3-year lows versus our execution of our annual rate lock in the deregulated Northeast markets. By our measure, lower natural gas rates should also lead to lower electricity costs as generation plants move away from coal as a result of more stringent emission requirements and a glut of natural gas. Additionally, our internal initiatives around waste management will also mitigate rate growth in this area in the near-term, resulting in a year-over-year growth rate for all utilities of 1.5% to 2.5%. For on-site payroll, which represents almost 23% of total operating expense, we expect a year-over-year growth rate in the 1% range. Our laser focus on leveraging technology and automation continue to provide benefits that mitigate our annual merit increases and allow us to find optimal staffing levels across all asset types. All other account groups, making up the remaining 32% of operating expense, contribute an additional 20 to 40 basis points of growth, with property insurance up 6% to 7% and leasing and advertising costs down 7% to 9%. Maintenance, property management and other operating expenses combined are expected to be flat. With that said, we're extremely pleased with our ability to deliver another year of exceptional performance in managing our costs, while continuing to increase our customer loyalty, employee engagement and other internal quality metrics. David?

Terrific. Thanks a lot, David. Well, turning now to transaction activity, you'll recall that we suggested at the beginning of last year that we expected our acquisition activity to be very lumpy, and indeed it was, having closed more than 50% of the entire year's acquisitions in the fourth quarter alone. In the quarter, we acquired 11 assets representing 3,669 units for $681 million. 4 of these were in Southern California, 3 in Northern California, 2 in Boston and 1 each in Brooklyn, New York and Bethesda, Maryland. Lastly, we also continue to sell noncore assets and reduce our overall exposure to noncore markets. We sold 47 assets during the year or just under $1.5 billion at a weighted average cap rate of 6.5% and realized a weighted average unleveraged IRR, inclusive of management costs, of 11.1%. And again, a very lumpy activity with nearly 80% of these or $1.2 billion being done in the first half of the year, when we aggressively hit good bids for our noncore assets, after which time we had to take a breather and let our acquisition activity catch up. We begin 2012 looking at the transaction market as very similar to last year, and that means an awful lot of capital, chasing relatively little supply in our core markets, as well as continued demand for assets in noncore markets, with a cap rate spread between the 2 that remains as wide as we've seen for quite some time. Now brokers are telling us that they're being asked by owners to value more core assets, which lead these brokers to believe that more product might be coming to market. But I'll tell you, we haven't seen it yet. And cap rates on core product in our markets across country today remain in the 4s, as investors continue to underwrite strong revenue growth for the next several years as well as enjoy a low interest rate environment. With the acquisition market intensely competitive in 2011, last year was a big year for our development business. We started construction on 6 projects last year, totaling $656 million in completed costs. Now of that, $423 million is really our share because 2 of those deals that we started were done with a joint venture with an institutional partner. We expect our 2011 development starts to deliver weighted average yields in the low 6s at today's rents and we started 3 of these in the fourth quarter. The Madison in Alexandria, Virginia, $115 million total cost, we have an expectation of a yield in the mid-6s on current rents in The Madison. We started the deal in Ballard, Washington, our Market Street Landing property with a $90 million total cost and a low 6% expected yield on current rents. And we also started construction on the second phase of a property in Pasadena, California for $125 million total cost at a high 4% or low 5% expected current yield on that property. During 2011, we also acquired 6 land parcels that entered into a 1 long-term ground lease, all for future development totaling $725 million of new product. 4 of these properties or these parcels were acquired in the fourth quarter. A property in San Francisco's Mission Bay area for 273 units, $154 million total cost at a high 5% yield expected on current rents. We also acquired a land parcel on Anaheim, California for 220 units, $52 million total cost and a low 6% yield expected on current rents. And also a parcel in West Seattle, Washington for 206 units and $62 million of total cost, where we expect a 6% yield on current rents. Lastly, we also acquired a site in Manhattan, the southwest corner of Park Avenue South and East 28th Street. That property was acquired with Toll Brothers, with whom we will develop -- co-develop a 40-story building on the site. Of the $134 million paid for that land parcel, $76 million was contributed by Equity and $58 million was contributed by Toll Brothers. When completed, EQR will own 6,500 square feet of ground floor retail and 265 rental apartments on floor 2 through 22 and Toll will own and sell as condos 99 units on floors 23 through 40. Now Equity Residential's total cost or what we will own at the end of the day is $238 million. That's $897,000 a door and a little more than $1,000 per square foot. Well, we've underwritten an expected yield on current rents in the mid-5s. Now I'll tell you, current rents of what we underwrote were rents in the mid-$6 rent per square foot, and we're very pleased to report that our recently completed Ten23 asset on the High Line in Chelsea is at lease-up today and achieving numbers in excess of that. And as described in the footnotes in last night's press release, until the core and shell are complete, we will own the land and building in a joint venture with Toll. And as a result, we will have to consolidate all the costs for that project while it's consolidated. At that time though the core and shell are complete, our interest will be converted into condominium interest. They'll own their floors, we'll own our floors, each subject to a master condominium regime, and we will no longer consolidate Toll's interest in the building. So in 2012, we currently expect to be in a position to start 8 projects, representing 2,014 units, totaling $750 million of total development costs. These land sites are all currently on our balance sheet, but will be by the end of February. We have 2 in New York City, 2 in South Florida, 2 in Seattle and 1 each in Southern California and D.C. Current underwriting suggests the yield line costs in the low 6s on current rents on these assets, and we're very excited to soon add them to our portfolio. I'll turn then the call now over to Mark.

Thanks, David. This morning, I'm really going to focus on 2 areas. First, our recent financing activity in our balance sheet, and as you can see from the release, we're very busy in that area this quarter, as well as our 2012 guidance. So we've been busy both refinancing our 2011 and early 2012 debt maturities and also lining up financing for our potential acquisition of an interest in Archstone. So the first thing we really needed to do is to address our 2011 and early 2012 debt maturities. Up until December of 2011, we had raised almost no money in the debt markets to finance 2011 debt maturities of about $1.1 billion, so we had some work to do. There were really 2 reasons for that. Our large cash balance through most of 2011, as David said, we were big net disposers early in 2011, and the existence of our interest rate hedges. So through the third quarter of '11, we were such a large net seller that the substantial excess cash we had, we invested temporarily in repaying our debt. As I said in my third quarter earnings call remarks, it was always our intention to reborrow these funds once acquisition activity caught up with dispositions. As I also said on the third quarter call, we expected a catch-up in investment activity to occur in the fourth quarter, and that indeed is what occurred. We also had about $750 million in interest rate hedges, which locked in a borrowing rate for us. So on to the specifics. We did $1 billion unsecured notes offering in early December 2011. These notes mature December 15, 2021. They have a coupon rate of 4.625% and an all-in effective rate of about 6.2%. And that includes the effective fees and interest rate hedges. And really most of that difference between the 4.625% and the 6.2% is the amortization of the $150 million in swap termination costs that the company incurred. So we were very pleased with how the fixed income offering went. We had a terrific response from our investors. We had over $3 billion in solid demand, and that allowed us to substantially tighten the spread and increase the size of the offering. The remaining proceeds from this offering, which sit now on our balance sheet in cash, will be used to repay the $250 million in unsecured debt that matures in March of 2012. And this prefunding will lower 2012 Normalized FFO by about $0.01. Now just a comment on the ATM . As many of you know, we use the ATM primarily to fund our normal investment activity, including our increased development activity. So we did access the ATM program in the fourth quarter. We issued about 828,000 common shares at an average price of $57.31 per share for total consideration of approximately $47.4 million. And we did access the ATM again in January 2012. We issued about 201,000 common shares at an average price of $57.87 per share for total consideration of $11.6 million. And there is no other ATM activity contemplated in our 2012 guidance. And now just a bit of background on how we thought about financing the Archstone acquisition. In December when we made our offer, we created a situation where we needed to have substantial and certain liquidity available if we were successful, but we did not want to burden our balance sheet with the cash if we were not successful. In other words, we wanted certain but contingent capital. To accomplish this, we began by entering into $1 billion bridge loan, and that was done simultaneously with announcing the Archstone acquisition in early December. The bridge gets expensive the longer it stays outstanding, so we very quickly replaced the bridge with a $500 million expansion of our existing unsecured line of credit and a new $500 million delayed draw term loan, both of which are cost-effective, contingent and could be available to us, Archstone or not. So just a few points on the expanded revolver and the delayed draw term loan. The revolver expansion took our overall revolver size to $1.75 billion. It did not change our July 2014 maturity date or any of the other important terms in that facility. The cost in 2012 from the revolver expansion will be about $1.9 million, and that will reduce Normalized FFO. Now a comment on the delayed draw term loan, which is a very interesting and useful financial tool. It operates much like a bridge loan, except it's cheaper, more flexible and has a longer term. At any time up to July 4, 2012, the company can draw on the delayed draw term loan for any reason. The spread on it is 1.25% over LIBOR and that's based on the company's current credit rating. Our guidance assumes that we'll draw on this loan in July of this year, July of 2012, until we pay at par the existing $500 million term loan that matures in October 2012. And this is the only material debt activity that company is budgeting in 2012. Fees from the delayed draw term loan will be about $1.9 million in 2012 and will reduce Normalized FFO. And I just want to express the company's appreciation for the overwhelming support we received from our bank group in the revolver syndication process and the delayed draw term loan syndication process. Both transactions were well oversubscribed. So with these financing activities, we created ample liquidity, not only for our normal investment activity and upcoming debt maturities, but also for our pursuit of an interest in Archstone. A few more notes on the balance sheet, and then I'll move on to guidance. In 2012, we expect to have free cash flow from operations of about $150 million. This is after capital expenditures, including rehab spending, and after payment of our expected higher dividend. David Neithercut mentioned that we could start up to $750 million in development deals in 2012. We expect to spend about $250 million on construction in 2012, including projects already in progress and projects slated to start. That $250 million amount does not include any yet-to-be-identified land acquisitions. We'll continue to be conservative in financing our development business. We'll use proceeds mostly from dispositions, free cash flow from operations and the ATM. This increase in development activity will result in an increase in capitalized interest, which I'll go over with you in a moment when we go through guidance. As of today, cash on hand including 10/31 escrow balances stands at about $375 million. The revolving line of credit has about $1.72 billion in capacity and the $500 million delayed draw term loan is undrawn. At the end of 2012, we expect to be on our line to the tune of about $200 million. So let's go through guidance here. Normalized FFO guidance range for 2012 is $2.68 to $2.78. The $2.73 midpoint would be a 12% increase over our 2011 results. As usual, the biggest driver is our same-store operations, and Fred Tuomi and David Santee have already capably described that. But that same-store line will generate about $0.28, we think, in incremental Normalized FFO. Our nonsame-store properties led about $0.04 more of FFO to our Normalized FFO to our 2012 numbers. Our interest expense is going to increase Normalized FFO by about $0.01, but there's a bit going on here and I just want to go through that. We will benefit from the $0.04 per share of higher capitalized interest due to this increased development activity that both I and David Neithercut have referred to. And we'll also have $0.04 of benefit from lower secured debt balances. Almost all the debt that was repaid in 2011 was secured debt. And that's going to be offset by about $0.06 per share of increased interest expense due to higher weighted average amounts of unsecured debt. So again, this prefunding activity, this $1 billion issuance is going to create a higher unsecured debt balance for us. It also includes the swap termination cost I referred to. And we're going to have $0.01 negative from these facility fees from the revolver and the expanded revolver and the new delayed draw term loan. So again, about $0.08 to the good and about $0.07 to the bad nets out to about $0.01 to the good on interest expense for 2012. The last big driver is share count dilution. We expect our average share count to be about 5 million shares higher in 2012 than 2011. This will cost us about a $0.03 drag on Normalized FFO. This is mostly a result of employee stock option exercises in 2011, getting the share count for a full year in 2012, as well as expected 2012 employee stock option activity. We also expect to issue 1 million operating partnership units, which count as shares, of course, in our share count in connection with the planned 2012 acquisition, and all of that is in our guidance right now. A relatively small amount, about $0.01 negative of the $0.03 negative is the result of issuance that has already occurred on our ATM. As I said previously, no further ATM activity is contemplated in our guidance. Just a reminder, all the numbers I've just gone through are on a Normalized FFO basis. Our guidance on Page 27 in the press releases is also on a Normalized FFO basis only. And on Page 28, we gave you all the information you need to reconcile Normalized FFO to either FFO as defined by NAREIT or to EPS. And finally, let me just reiterate that our earnings per share guidance, FFO guidance and Normalized FFO guidance assume no impact, positive or negative, from Archstone. Further, because our Normalized FFO definition is designed to eliminate noncomparable items, things like pursuit cost and break-up fees will not be included in our Normalized FFO guidance or results in any event. Now I'll finish up with capital expenditures. So guidance for total capital expenditures in 2012 is $850 per same-store unit without rehabs and about $1,225 including rehabs. And in 2011, we spent about $850 per same-store unit without rehabs and we spent about $1,200 when we included rehabs, so a slight increase this year. And details on all of our capital expenditures are on Page 24. We rehabbed about 5,400 units in 2011, and we expect to rehab about 4,700 units in 2012. In 2012, we expect to spend about $8,300 per unit rehab, and that's up about $1,300 from the $7,000 we spent per unit in 2011. We're going to be doing more rehabs this year in higher cost markets like New York, and we'll be replacing carpet with more costly hard surface flooring, which we believe in the future will lower our replacement costs. Now I'll turn the call back over to David Neithercut.

All right. Thanks, Mark. So before we open the call to questions, let me just say a few more words about Archstone. And there's really not much I can say and certainly not much more than I can say than what many of you already know and we mentioned in the press release last night. But let me say that the Lehman estate has always had the right to match our first offer. They had an ace, an ace of trump, if you will, and they played it. And they did match our offer and they acquired the first half of the bank's interest that we put in play late last year. We are currently now inside a 30-day window, during which time the banks are obligated to contract with us to sell the second half of their interest in Archstone, provided we offer to do so at a price that's no less than $1.325 billion. That's the same amount that we offered on their first half. Now I will tell you, we've not yet made any such offer, although I expect that we certainly would. But we're not obligated to do so. And any offer that we do make will again be subject to Lehman's right to match it. And if they do, we'll receive a break-up fee that's a function of the size of our bid. And that break-up fee could be as little as 0 or as much as $80 million. I'd tell you, we continue to think that much of the Archstone portfolio would fit hand-in-glove with ours. As Mark said, we certainly have the capacity to pay for it. Stay tuned, more to come. So with that, operator, we'll be happy to open the call to Q&A.

[Operator Instructions] And our first question is from the line of Andrew McCulloch with Green Street Advisors.

Can you guys talk a little bit about the trajectory of asset values in the quarter and if you saw any big divergence between markets and/or product quality? I'm kind of just looking at the momentum of asset values.

Of what we've acquired or just what we're looking at?

Just what you're seeing in the market overall.

Well, look, generally, let me tell you that we think that asset values today could be above peak levels in Boston, in Denver, in L.A. and San Diego. We think they're kind of back to peak levels in Orange County and D.C. and they're still below in Seattle, New York City and South Florida, as well as the commodity markets in the Northern Florida, Atlanta and Phoenix. I'd tell you recently, I don't think we've seen a great deal of change, Andy, in those values. But I'll tell you that there hasn't been much transaction activities, so the data set is reasonably small. Our team, led by Alan George, thinks that we're probably within the range of values across those markets and will likely stay within the current range of values for some time.

And then on supply. We know supply is not a big concern nationally this year. But can you talk about any specific markets or submarkets that maybe you're worried about actually near-term?

Yes, Andy, this is Fred Tuomi. I can talk about that. Really looking at this year, there's really no markets that I'm concerned about this year and same for 2011. And we had very good environment of low supply there. But where there's concern is kind of the building pipeline in a couple of markets, and most notably is the D.C. market. And there's a lot to talk about D.C. and which ways it's going to go on the demand side as well as supply. So D.C. has demonstrated it can absorb a lot of units. It absorbed a lot while the government was growing, so if the government becomes a factor in terms of either stopping the growth or receiving, then the coming supply pipeline is going to be an issue there. So in D.C., we see about between 6,000, 7,000, maybe 7,500 units coming in 2012, depending on what actually gets delivered. And then right behind that, the next year, you can see maybe another 7,000, 8,000 units. So D.C. has got the #1 supply issue. Beyond that, there's really no real markets of concern, in New York, no; Seattle, a couple thousand units but kind of distributed equally; San Jose, a couple thousand units, but I think we have plenty of demand to absorb that; and L.A, maybe San Fernando Valley, again, but again, small numbers. So really, it boils down to D.C. is going to be the issue.

Great. And just one more question on capital recycling. David, you had mentioned, you talked a little bit about cap rates in your prepared remarks in core versus noncore markets and that, that spread is as wide as you've ever seen. Given that you're planning over $1 billion in capital recycling in '12, does that mean you think that spread is still not wide enough?

No, I guess, I'd tell you, Andy, what we've given you in our guidance, not so much of what we think our budget is for sales or budget is for acquisitions, but more to tell you that embedded in our guidance is that assumption. Not unlike the beginning of last year, we'll go into this year and we'll try and transact if it makes sense to do so and we won't if it doesn't. So it's very difficult for us today to tell you exactly what we'll do on the buy side and the sell side. Our expectation frankly is that delta will narrow, that there just continues to be an awful lot of capital. We think that capital will be forced into the noncore markets or lesser-quality assets and we'll see a little bit more competitive pricing on that, and that will bring that cap rate down somewhat. But again, I'm not quite sure I said we thought that delta was as wide as we've ever seen. We just said it's been the widest we've seen for quite some time. I would tell you I think maybe 125 or so basis points is somewhat of a normal level, over an extended time period, we've seen that narrow to as little as 60. It was 130 or so in 2011. But I just do want to make the point that, that was wide, it was one -- on the wide as I remember [ph], but we do expect it could narrow during the year as capital gets forced into lesser core assets and noncore markets.

And our next question is from the line of Dave Bragg with Zelman & Associates. David Bragg - Zelman & Associates, Research Division: A related question. If we go back a year and think about your disposition activity at the beginning of '11, it seemed to be front end-loaded due in part to your view of a risk to higher interest rates over the course of the year. And now the outlook is agreeably quite different. Could you talk about how that plays into your strategy on the transaction front?

Sure. So we did start 2011, Dave -- and by the way, thank you for your catch on our earnings release last night. We did start 2011 with a desire to sort of hedge somewhat in what we thought could be risks of value of noncore product just as a result of Fannie and Freddie and uncertainty in issues like that. I think we're in a point today where we've done an awful lot of that heavy lifting. I don't think that while we continue to have questions about Fannie and Freddie, we don’t think that there's anything imminent. They did big volume last year, and I'll tell you after being in South Florida earlier in January, they continue to talk about doing big volumes again this year. But I'll also tell you that last year, we were seeing what we thought were very reasonable prices per door, prices per square foot on that product. And we went ahead and hit that bid. I think that we'll continue to sell those assets or those noncore assets, noncore markets today, provided we find opportunities to reinvest that capital. And as Mark noted, one such opportunity is the development pipeline that will be up in 2011 and will be up again in 2012 and likely 2013. But I don't think that you'll see the rush to transact that we started in 2011 just as -- that we did as a hedge to what could happen, evaluations of those lesser-quality products. David Bragg - Zelman & Associates, Research Division: Okay. And then shifting over to expenses. On real estate taxes specifically, can you talk a little bit more about the outlook in some of your major markets? You touched on New York and I think we could understand where you might lie on California. But can you talk through some of the other major markets in terms of your outlook and the risk to that outlook, given the different timelines in each?

Dave, this is David Santee. When you look at the distribution of our increase, 34% of our increase is coming from the 421a burnoff. And then I mentioned the volatility of Florida. When you look at these other states, California, especially -- beyond that, there's just not a whole lot of risk. But California, we're subject to the 2% cap of the Prop 13. And even in New Jersey and some other locations, the ability to predict or at least understand what the ceiling is on real estate taxes from year-over-year is just much more transparent. So in the case of Florida, we won't know what actual rates are probably until October, November. And so we're having to make some assumptions there, just as we make assumptions every single year on our ability to drive lower valuations or win appeals. And then I'll just add an additional piece of color. When you look back going back all the way to 2001, the highest increase in real estate taxes that we've had occurred in 2007, 2008. 2007 was 5.6% and 2008 was 5.0%. And so I think, given that our industry really experienced a V-shaped recovery, perhaps this year is just a recapture and we could see a little more stability after 2012. David Bragg - Zelman & Associates, Research Division: Okay. And one last question on expenses. Can you just put in perspective for us what you're doing on the payroll line? Perhaps talk about -- I don't know if you could relate it back to the number of people on site per 100 units or another metric such as that, and then compare that to what those on a same-store basis might be seeing in terms of wage growth. Just help us understand how this continues to be a flat line item.

Dave, that's like asking me to give you the formula to Coca-Cola. Now really, it really is -- we continue to focus on specialization. Our industry, the folks at the site, they're running little cities, so they have to be well-versed in many different activities. And basically, when you're doing a lot of things, you don't do anything great. You just do a lot of things okay. And so what we've really tried to focus on is carving out specialized groups, whether it's procurement, obviously the pricing. We're in the final stages of centralizing our CBG group into Phoenix, which is really that is the key driver of some of our payroll growth, where we really just kind of peeled 400 some assistant managers out of the equation, with an average salary of -- base salary of $35,000. And we backfilled not all of those bodies, but we did backfill some of that headcount with additional salespeople or customer service people with a base salary in the $25,000 range. So we're still seeing some favorable impacts of that. And then for this year, we're even seeing efficiencies in that CBG group. We started with 50 people in that group. 2012, we'll operate at about 36 folks. So our ability to automate kind of -- instead of doing all the calculations, the cash register does it for you. We just continue to see benefits from this approach.

And our next question is from the line of Eric Wolfe with Citi.

You mentioned that New York was one of your top markets this year. But just thinking about what's happened on the compensation side across the major banks and financial institutions, I'm wondering if you've started to see any sort of weakness in New York City markets or if there's any hesitancy you're seeing among the tenant base there.

Yes, this is Fred again. I'm happy to say no. And I stay very close in touch with the New York market. I love talking to our people there. And still, even though there's some -- more talk about cutbacks or lack of growth in the financial sector, again, in our properties, our resident base, we are not seeing any job loss and people leaving the market. It's very solid. And we're actually seeing growth in the area from some new sectors, as I think I mentioned last quarter. And that's the tech sector and the new media sector and some entertainment sector. It's become very vogue for companies like Google and a lot of these other tech companies to be hanging out around Chelsea neighborhood in New York City, having a presence there. So we're seeing strong demand, very strong demand at the high end. Again, our penthouse units, our larger units, our combined units and all the submarkets are well occupied, they're full. We're seeing very little kind of deviant behavior from our private competitors there, meaning concessions and the broker fees. There's still some of that in the downtown market, but very few compared to the last couple of years. And so I think New York is very solid and we're bullish on it. The current trend is still very favorable. And David mentioned Ten23, our building there on the High Line at Chelsea, and we were very confident on that one. I think we hit the timing just right with that one, and it's a great building and a fantastic location. And we took a little bit of a risk on the lease-up in that we decided to do it with no upfront concessions, no discounts whatsoever, where we just took the confidence route. And we actually released our highest ticket units for the lease-up, for the prelease-up. We held the studios, the lower-priced tickets back. And fortunately, that worked quite well. And so we preleased over 20% of those units before we opened. We opened right on time, and so we're leased like 25% now and actually occupied about 15%. And the kind of weird thing about that one is that the bigger the unit, the higher the rent per square foot. Our 3-bedroom unit that we leased was $8.90 a foot, okay? But on average, we're now at a little over $7 a foot. And as you remember, our underwriting on that one was about $5.60. So we're thrilled with the demand there. And again, that's fueled by this cohort of the young people, highly employed, making good wages and from great sectors who want to live right where the action is.

Right, that's very helpful. I guess, we're probably more biased on our end in terms of what we're seeing. But just trying to get a sense of what the exposure is to financial institutions, I mean, do you track what percentage of your residence work at, I guess, those institutions? And is it a large number, like a 10% to 20%? Or is it pretty irrelevant kind of like in the low single-digits?

Anyone in business New York is going to be dependent upon, to certain extent, either directly or indirectly to your industry, the financial services sector. We look at that, and we're not concerned about a heavy concentration. In Jersey City at our 70 Greene building, we do have a lot of Goldman employees. But recently as last week, they're continuing to bring people in. So yes, we have that exposure if there was a mass layoff in that sector, but I think it's well-distributed amongst the firms and in the neighborhoods. And again, the neat thing is on the margin. The marginal growth of our demand there seems to be kind of led by this tech, new media, entertainment, lawyers, business services in addition to the finance.

Got you. And then last question, for the Toll Brothers deal that you're doing. I think you said rents were in the mid $6 a foot range or that's where you intended them to be. Just curious whether it's going to be more expensive to rent there or just to pay a mortgage on the condos that Toll is selling.

Well, I did say that we underwrote, Eric, $6.5 or so rents per square foot. And who knows where the condos will be sold? I think it'll be quite some time, won't be until 2014, 2015 when those condos will be sold. So my expectation is, I believe, it will be -- we'll continue to be cheaper to rent.

And our next question is from the line of Ross Nussbaum with UBS.

A couple of questions. I believe on the last conference call, you had talked about renewal rates increasing, I'm going to say, I think it was 7.4% in November, 8% in December, 8.3% January. And I know those weren't your full resident base that was rolling at that time. But those actual renewal numbers came in, for instance, in the month of January, I think, was 160 bps [ph] lower. Were you surprised at that sort of differential between where you saw things back in the last conference call and where you are today on renewals?

Yes, this is Fred again. I think what you're referring to was our quoted rates versus the achieved rates and there's always a spread between those. We priced our renewals forward-looking. We see the trend where prices are going to be, not where they are today. So we'll price pretty aggressively, and then we'll actually quote above that. So it gives us plenty of room on the quote, the forward quotes. And then if rents escalate faster than we expected, then we kind of hit right on the mark. If they don't, then maybe we have a little bit of a margin where we can negotiate down. And we always give in the system just a little sliver of negotiating room for our folks to get the deal done to a point where we don't have excessive turnover. So there's always going to be a gap, a spread between what we quote and then what we actually at the end of the day on any given month. So those numbers of 7.5% and 8% were forward quote numbers that we talked about last quarter, and then what we achieved were in the mid-6s. So that delta's going to be anywhere from 150, sometime, some month maybe 200 basis points, depending on the trajectory of the rents. So that's continued what we see right now. So I said we achieved 6.7% in January, we actually quoted in January, 8.7%, so it's a 200 basis points spread there. At February, we're quoting an 8.1%, and I mentioned we're so far, it's not done yet, and that would probably come up. But so far, we've achieved about 6.2%. So again, you're going to be anywhere from 150 to 200 basis points spread between quote achieved.

That's where I was going. So for February and March, those are about 6.2% and 6.1% numbers you gave, those are actuals, those are not the quotes.

Yes, those are actual booked, signed leases in the hopper right now against quotes in the high 7s, low 8s. And those are early returns, so to speak. And by the time we actually close out the month, I think those numbers will move up a little bit.

Got it. Okay, understood. David, you had referenced earlier in the call that you thought cap rates in core markets were in the 4s, I think, was your statement. And when I look back over the last year on the $1 billion plus you've acquired, I think it was around 5.2% or so. How should we be thinking about reconciling the difference in those numbers? Have you just been that good of an acquirer? Or is there a little apples and oranges in those statements?

Well, I guess, if you go back to prior calls, we talked a lot about -- we were big acquirers of that core product in '09, in the first half of 2010. And then that market got very competitive, and we started to look for good acquisition opportunities that might not be the core stuff that a lot of this new money would be chasing. And so we started buying some older assets, some assets that needed repositioning. We bought a very interesting asset in East Palo Alto, California, a 6.5% cap rate and $71,000 per door. So we started doing some direct deals. So when I give you this cap rate number, I'm telling you, Ross, that, that's what we're suggesting are the rates for recently built kind of core product. And we bought some older product, again some stuff that needed repositioning, as well we've done some things direct that we think have maybe given us a little more yield than what the market might have provided.

That's perfect, understood. Last question, when all is said and done on Archstone, if I take the assumption for a minute that Lehman exercises their final ROFO, ballpark, where are your total cost on the transaction if I add up legal and advisory and financing? Do you have sort of a rough guesstimate as to where all those come in?

So Ross, it's Mark Parrell. We gave some idea just historical cost back in our reconciliation page, that's Page 26. So we've incurred right now about, call it, $4.5 million worth of costs as it relates mostly to the financing activity but also the pursuit cost. I would think if the transaction ended up the way you described, we'd certainly have several hundred thousand dollars more of legal and other fees to get ourselves under contract, go through the process with the banks, and then be ROFO-ed away. So I see that as almost certain that the cost would be kind of all-in $5 million to $5.5 million. If the transaction goes another way, of course, then it could be a considerably larger amount of transaction costs.

But most of the cost really are sunk. It was the cost to get up to speed. Our deal under this option with the banks is to enter into a contract that's substantially the same contract that we've already negotiated. So Mark's point here is that not a lot of additional incremental legal expenses to incur, and he's outlined the financing charges that we incurred last year as well as those that we'll have this year as a result of the expanded credit facilities as well as the delayed term loans. So there should not be a lot of incremental costs related to Archstone to go through what would be the step 2.

And our next question is from the line of Seth Laughlin with ISI Group.

I just had a quick question that was mentioned earlier, that interest rate expectations have moved decidedly lower. I was wondering if you could just kind of give us an update and sort of how that's impacting underwriting in terms of levered and unlevered IRRs, both for you guys and also what you're seeing in the market. I think what we're trying to get to is whether those have come down with a view that the debt costs are going to be much lower than they previously thought for longer periods of time.

Well, I guess, I've said several times on this call that I don't think that we compete for the core product that we would like to buy with people that are that sensitive to interest rates, actual borrowing rates. I think they're probably more sensitive to just with their alternative reinvestment opportunities are for those dollars. We are more concerned about what happens with interest rates with respect to the deals that we're trying to sell, and that's why we think we've continued to see an increase in valuation over the year of what we consider to be our noncore product. But clearly, I think that with interest rates being down and given the lack of alternative investment opportunities, that's brought a lot of capital into the multifamily space to chase the few core assets that are available at any given time.

Just to give you a little color on what might affect disposition values, which certainly the GSE debt numbers do affect that. We see 10-year GSE money as between 3.6% or 4% right now, so very inexpensive. But the reason I don't think it's going to necessarily help that much more on asset values in some of those disposition markets for us is that the GSEs have rate floors. So the fact that your interest rate is 3.75%, they're underwriting at a 5%, 5.5% rate, so your proceeds aren't going up, so your leveraged IRR isn't going up that much. And so I don't think you're getting that as a seller in your price. So again, I think just some of the adjustments the GSEs had made lately to their underwriting means that I don't think asset values will go that much higher, even if rates decline somewhat because of these interest rate floors that they use for underwriting.

Understood. And then again, just quickly what are you guys targeting? I know it's maybe noncore, but in terms of levered and unlevered IRRs today.

Well, I'd tell you, everything we've acquired this past year has generally been plus 8% long-term IRR. And that's why we've sort of had to back off chasing a lot of the core product. And I'm saying that's an unleveraged number.

Understood. And then maybe just one quick follow-up for Fred. Do you have any color in terms of how you expect D.C. to play out inside versus outside the Beltway in 2012, any meaningful differential in performance?

Well, it depends on which way it goes. If you think about D.C., we had a very strong run there, both inside and the near-term, the Beltway there while the government is growing. And even through 2009 and '10, we're delivering 7,000 units. I mean, the absorption was just phenomenal, actually record-setting absorption in there. So we kind of motored right through that. But we can't really expect that to be sustained forever because the government is not going to continue to grow at that rate, at least I hope it doesn't. So really, kind of the watchword on D.C. right now is we have to wait a few more months and see which way this goes because government jobs have slowed, it actually declined. There's a hiring freeze and loss through attrition that all the GSA functions. The military is kind of in limbo right now. And on the private sector, we're still seeing growth from tech, education, health and business services, but these contractors related to the government have kind of -- they're dealing with a great amount uncertainty right now, so they kind of like stopped. They're not hiring ahead, anticipating the next big procurement contract, whatever it is, so they're just kind of stuck there. So we're dealing with uncertainty on the demand side. And then on the supply, it's coming. And it could be 6,000, 7,000 units this year, it could be more next year, and then after that, it remains to see how many deals will actually get delivered. So I think it's going to impact over -- I think starting in the second half of this year, late 2012 is going to impact in the district more, as you're going to see more these developments, all high-end, competing for the same renter cohort, whether it's U Street, I Street, the Triangle area, all Northwest D.C. is going to have these great buildings coming online. And there's going to be a little supply issue there. Perhaps at the same time, we're going to have more slowing in the government sector. So that's could be problematic for the second half of the year. We just have to wait. So I think by second quarter, certainly at third quarter, we're going to know how that's going to play out. The closed-in areas, Arlington, Alexandria, aren't going to have quite as much new supply. Our D.C. corridor will have a couple, but mostly small buildings. So I'm not as worried about those. It's really the district.

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

So back to Ross' question, I guess, on sort of cap rates and returns. I mean, how much are you guys willing to lower your initial yields for the right product?

Hard to say. It's difficult to say. But again, it's also a function of what we're getting for the assets that we're selling because we're really thinking a lot about it, Jay, as just a trade. So what can we get for that next incremental disposition in pick your market and what are our reinvestment opportunities. So we're really -- I mean, that's really just sort of a -- it's a trading process for us, and it remains to be seen on any individual asset. I mean, I just can't tell you anything specifically.

Okay. Well, I asked the question because you guys still feel pretty good about growth this year, same as you were last year, and you've obviously seen spreads compressed a bit in the last couple of months. But we're just trying to gauge your appetite there. And I guess, just a second question, you've mentioned as well rent as a percentage of income had actually dropped in the fourth quarter. And I know rents were up 7% year-over-year. Are you seeing income grow that much greater? And I guess, speak to sort of credit quality of the tenants that you're seeing coming in the door today.

Yes, this is Fred again. All fronts, we just feel good about our resident base, like I mentioned, in terms of their employment level, the types of jobs they have, where they're located, where they want live and then their ability and desire to pay the rents, including the increases for the people there. Our average income right now is $8,288 a month. That's just under $100,000 a year, which is remarkable. And if you look at the kind of the margin of people that moved into us versus people that moved in last year on a same-store set, I mentioned that the household incomes are up 4.5%. Now rents are up like 6% and the average rent as a percent of income over the entire portfolio stayed pretty flat, actually improved just a little bit to 17.2%. Southern California markets, again are the ones where you're going to see the higher. They're going to be in the low 20s, but they've always been higher in California. And then New York remains the lowest, where we have the highest rent. We also have even more so the higher incomes. So again, the credit quality is good. I think we continue to get people with higher FICO scores. That's the trend, that continues this quarter. We're seeing more automatic approvals, which means slam-dunk applications are approved right there on the spot because of their FICO scores, their incomes, et cetera. And we don't see any kind of a slowdown or hiccup or any pause at all to be concerned about on the credibility and the viability of the balance sheets and the income statements of our resident base.

And I know you mentioned tenants are shunning the single-family market at this point and homeownership is declining. I guess, with some improvement in consumer confidence, are you expecting that turnover to pick up? I guess, what's the catalyst to sort of turn things in a different direction at some point?

Well, eventually, it's going to happen. There's a pent-up demand for home buying. We're not going to say it's never going to happen. Although I wouldn't be surprised if it's going to be a long time before that paradigm shift is going to reverse. And it probably may never in a generation get back to the way it was. But we watch that closely. And Q4, we just finished at 13.3% moveouts for home buying, which is exactly equal to what it was a year ago. So no real shift. Within the markets, kind of no surprise. Phoenix is the only one that really moved up. They moved up over 200 basis points, and to a kind of a little bit of a higher number, 21%. Now in the heydays, Phoenix probably would have been 35%, 40% move up for home buying, but still it's kind of remarkable that Phoenix is now kind of the first market to get back up with the 2 handle [ph], so it's 21%. Other markets that moved up were Orange County, Inland Empire. Inland Empire is maybe just second to Phoenix, they're at 17% and they did move up 100 basis points. And so on those cheap, cheap single-family commodity markets, I think those are going to be the first ones you might see people eventually get tempted because the pricing is just so low, well under $100,000. But then in the core markets, New York actually went down, it almost got cut in half. Only 4%, 4.5% of our people moved up buying homes in New York, which was down significantly as well as Denver and D.C. So again, on that front, steady as she goes. We don't see any leading indicator of home buying picking up in a meaningful market. And then Phoenix and Inland Empire would be the only small exceptions, but again not a big, big move.

Yes. I guess, I'd also add that even at the lowest down payments required to get into a single-family home, you're still talking about thousands of dollars that I don't think a lot of people might have. And I think while it's appropriate to think about single-family homes and the number of our folks that could -- that might have a desire to own a single-family home, I think that in a better economic environment, I also think you need to keep one eye on the millions of 20 some-odd-year-old people that are still living with mom and dad, where households yet to be formed. Because I think we believe strongly that if and when the confidence of the consumer and the strength of the economy will allow people to leave our apartments to go buy single-family homes, we remain confident that there will be ample backfilling of potential households that are still living with mom and dad.

Our next question is from the line of Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just a question on Archstone, and I'm not asking for you guys to divulge your strategy. But in just thinking about it, you haven't exercised the option yet. The banks clearly want to sell -- Lehman has the ROFO right regardless of who tries to buy the bank's thing. There's also the ride-along, the tag-along right that they have. So in this scenario that's existing, you guys have the potential to get upwards of an $80 million break fee if you exercise the option, the bidding goes through and they ROFO. Is there a reasonable scenario where you wouldn't, you'd let the option lapse?

Well, I guess, I'm not sure how I could answer that question without divulging any sort of strategy. But I guess, what I'm trying to tell you that I think that there's an $80 million sort of payment sitting there on the table, and I'm not quite sure how we'd go forward without taking it, Alex. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay, yes. That's my thought. I was just sort of intrigued that you guys hadn't exercised the option. So that's why I asked. Just switching to construction, it's a sort of a two-parter. One, you guys are ramping up the development program pretty strongly. Just curious if you're doing all this in-house or if you're sourcing some outside developers to help. And then along those lines, just given that construction lending remains really tight and a number of the merchant guys can't get financing for all their pipelines, are you seeing more people, more developers coming to you guys to either do presales or to ask you to come in on their deals?

Well, the answer to your first question, Alex, is we're doing this all on our own. The only ventures that we've done are the ones in which we have brought an institutional partner into as a capital source to do the transaction with us. And then as I said, the codevelopment deal with Toll in Manhattan. But we're not doing ventures, where we're providing the capital and third-party developers are providing those services. We're doing it all on our own. I'd tell you that we have for some time tried to do kind of takeout deals for developers that owned land, that are having trouble getting capital, the debt capital or equity capital, whereby our contractual takeout upon completion might enable them to go get the necessary construction financing and done a lot of talking but have not been terribly successful. We continue to work on a handful of those deals. But I can't tell you that any of them are imminent at this time. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay, is there a particular reason that they don't -- is it that the developers want too much or prior experience gives you some caution about entering those sorts of deals?

Well, it's a lot of it is because we do get the developers pretty carefully before we consider them to begin with. A lot of this is just the availability of the capital from the banks. And the banks are interested in lending. They'd like to do more development lending. Many of them will say that to you, and they have relaxed spreads and they have increased proceeds. I think getting a 65% to 70% loan to cost construction loan is not at all that difficult. But what is difficult about that process is you need to have a real balance sheet behind it. The bank wants some principal recourse, the bank wants to see that you have net worth, the banks want to see that you have true liquidity and cash. And those are the things that we see holding up developers from being able to do that.

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

David, can you talk about what you see is the magnitude of the redevelopment or repositioning of opportunity in your portfolio, given the earlier comments on buying older assets today?

Well, I guess, there are 2 comments. One is what Mark had talked about, Rob, with respect to our existing portfolio of assets currently owned. And we continue to think that there are opportunities to put $7,000, $10,000, $12,000 a door into those units and get a good double-digit of return on those transactions, and we've got a lot of history of actually providing that. If your question is about acquisition opportunities to do likewise, I'd tell you even those are becoming more challenging. It wasn't long ago when institutional money was no longer pursuing value add, but we're seeing a lot of demand for value-added transactions as well. But we bought some older assets, several on the Peninsula and we're doing pretty significant repositioning on -- by 3 or 4 deals on the Peninsula right now. So we'll certainly do that, but even those deals are becoming competitive to find.

Well, I guess, my question in essence is Mark said basically that you guys would do 4,700 units at $8,300 per. So that's a little bit under $40 million in '12. And given the historical returns that you guys and lot of the peers have been able to drive off of that type of program, I'm surprised it's not greater, given the lack of strong returns in either the acquisition or the development market today.

Well, I guess, that's kind of been a pretty normal run rate for us. I think we've probably done $30 million to $40 million of spend in each of the past 3 plus or so years. And we just continue to churn through that. We haven't talked about ramping it up. We've just been talking about consistently spending around that amount of money each year. And I expect to do so for the next handful of years as well.

Okay. And then turning to development. Assuming that you could find the land, I mean, what's the upper end of your comfort range in terms of the size of the development pipeline going forward?

A good question, but one that's difficult to answer. We have -- we will have a higher level of activity over the next, last year, this year, maybe 2013. A lot of that is because we saw opportunity to acquire land in '09 and 2010, and we're executing that. I'm not sure that I'd expect that elevated level to continue. But I mean, it just remains to be seen what the opportunities are relative to the acquisition opportunities. But I think we kind of historically had a $500 million or $600 million run rate, and now we'll be maybe plus $700 million for a couple of years. And we'll see what the opportunities are come 2013, 2014 and kind of take it from there. I think that if you've seen the assets that we built, I encourage you to see Ten23. I think we've got a fantastic team that's delivering absolutely tremendous product. And if we felt that it was appropriate to build that up, I wouldn't hesitate to do it.

Okay. So it sounds like, I mean, assuming that you don't get Archstone, there's probably not a high likelihood that you're going to take some of that $1 billion plus and either materially expanded the development pipeline from here or materially ramp-up or get more aggressive on your traditional acquisition program.

No. I think that, that -- the availability of that capital has always been available to us. I mean, it wasn't like all of a sudden it's newfound capital, we just asked for it. But no, just because it's on or available we can mean draw on it, it doesn't mean we're going to change our investment activity or philosophy in a world that does not include Archstone.

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

So what would you prefer, as much as 1,600% return on $5 million investments to get an $80 million break-up fee or to own 26.5% of Archstone for like several years? What would be the better outcome for you?

Look, I guess, I'll only tell you that we've not been in this for a break-up fee. We've been in this because we felt that those were a good quality assets that one way or another, we're at a time sort of in this life cycle that those they needed to come to market one way or the other. And it was an opportunity for us. So I mean, it's not an easy answer to your -- question to answer, but I can tell you, we didn't do this trying to play for a break-up fee.

Okay. I mean, I wasn't suggesting that. But okay, just on the issue, a question was raised about interest rates and timing of acquisitions and dispositions. Just from a pure modeling prospective, would it be fair to just kind of straight-line acquisitions and dispositions, unlike last year where it was more lumpy in the beginning and the end of the year?

Yes. Rich, it's Mark Parrell. Yes, our guidance does assume that acquisitions and dispositions are evenly spaced throughout the year.

And again, that doesn't necessarily mean we think that's how it's going to happen, we're just telling you that, that is what is embedded in the guidance that we've given you.

Okay. On the topic of development, a lot of talk here about expanding the development pipeline. I guess, what gets you comfortable 3 years from now or whatever when you ultimately deliver product that the market is going to be suitable to bring product to market? I'm thinking specifically about the Toll Brothers deal. But I mean, just generally speaking, how do you have that kind of vision 3 years from now?

Look, I mean, therein lies the risk of development, but also therein lies the risk of underwriting even existing stabilized asset, right? I mean, we underwrite -- we buy assets today and we underwrite what we think rents are today and where rents are going. So it's just a question of are you willing to own an asset at this basis for the next x number of years throughout this marketplace. And while I'll tell you that I think that lesser capitalized companies have to really be more concerned about that, I think that we're in a place where we deliver a great product in a great location in a market that we know long-term is going to be fantastic. Whether or not it comes out of the blocks, a little underexpectation is not the big worry for us. We were trying to buy, identify for acquisition or development assets that we think we're going to own happily for 15 or 20 years. And what happens in the 6-month period that it gets lease up when it's delivered is not terribly important because we believe long-term, we're building the right product in the right markets, and we'll be properly rewarded. If we had a smaller balance sheet or we were a merchant builder and all of our upside was dependent upon what happened within 1 6-month window 3 years out from now, that would be a different story.

Right. Okay, that makes sense. So like if you say a 15- to 20-year time horizon on any kind of investment you make, be it a large portfolio or development, I mean, is there a timeframe from the completion of that project or the closing of the transaction where you would not want to see fundamental start to flow? I mean, in other words, if you take any portfolio, you need at least 3 or 4 years of pretty good stuff happening before it starts to slow down? Or does that not matter?

Well, we've got land today that we're going to start building on in 2012 that we acquired before the bust that because of the carry -- and we're at a point where we probably have a carrying value for that land that is below real market value today. And that's why I mentioned the 1 deal in Pasadena, California will be a high 4%, low 5% yield. Well, that's because legacy sort of pricing. We could've started that earlier. We can kind of start it later. But again, we felt when we bought the property years ago, and frankly, now we're going to start building on it, we're quite comfortable that this will be a very successful project at the end of the day. It may underperform relative to our basis, but long-term, we think we'll do okay. But you just can't be as precise as I think you're suggesting one would like to be.

Right, and very well said. And then the last question is on the dividend. I'm not so sure I'm comfortable or I like the fairly kind of, I guess, clever dividend policy of kind of paying out the leftovers at the end of the year. It kind of demonstrates to me a little bit of a lack of commitment in terms of the full year. And I'm just curious, what would you say to somebody that kind of thought that way, that just from the starting point, you're kind of -- you never have a situation where you're going to have to cut the dividend because you're not committing to a full number at the very beginning of the year. How would you respond to that?

I guess, I think you just did. I mean, we think an appropriate dividend policy is not to establish some number that if things go sideways, you have to fight to defend because you're so concerned about ever having to cut it. We think that like any partnership, whatever, we'll split the rewards at the end of the year. We do acknowledge that at points in time, we'll need to address how much of that we intend to pay in the first 3 quarters of the year. We didn't want to set a situation which we were constantly changing that. But at some point in time, I'm sure we'll address what is the appropriate payment for the first 3 quarters, what's the appropriate percentage it ought to be paid out in the first 3 versus the last 1. But when we established this level, we went back over the past 10 years of operations of the company and try to find something that we knew we would have been able to cover throughout some of the most challenging times. So whether it's clever or not, I mean, we're not trying to be clever. We just think it's frankly more appropriate way to run the railroad.

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

The legacy hedging there, was that all taken care of with the offering in the fourth quarter? And also, I believe you said a $250 million spend for 2012 without land purchases. Can you give us the number you're kind of baking in, in terms of your sources and uses for 2012?

So the hedges that were terminated, the $750 million of hedges, had about $150 million of costs that we talked about in the script. There are still a couple -- I think it's actually about $300 million worth of hedges that remain. They have a negative value around $35 million today. Those numbers sit in our deferred until we do our debt offerings in 2013. So that's the current mark on that portfolio of debt. In terms of the quotes on how much land, we don't have any land purchases baked in except for one. There is one land purchase that we are either under contract or LOI we're close enough. We've decided internally that we did include it in the number I quoted. But there are no other land purchases that are in our guidance.

Okay, that's helpful. Second of all, I believe you completed a couple of acquisitions since the beginning of the first quarter there. How much of the $1.25 billion has been identified? And also can you give us a sense of how much of the $1.25 billion of dispositions you guys are actively marketing at this point?

There's been very little activity on either side of the ledger up to now. I guess, the guys will tell you that things don't get started until -- they've been slowed dramatically at the end of the year and don't start until after the National Multi Housing Council meetings. But I'll tell you, we had a lot of contacts and a lot of people there, and we'll begin to see more activity there. But there's a very small pipeline of transaction. But there is 1 large acquisition we're working on, and Mark noted that he had budgeted for 1 million OP units being delivered as part of that 1 acquisition. But that's really what the limit of what the supply looks like today.

Okay, that's helpful. Third question relates to Archstone. I know you guys are in active discussions with the banks. Have you engaged Lehman in discussions? Or can you comment on that?

I guess, I really can't comment on that.

Okay, fair enough. I thought I'd I try. And then final question, just to go back to your opening comments and also understand the underwriting. As you're looking at this cycle, how long do you think the benefits of lower move-out to homeownership, how long do you think that could continue? And how long do you think that we can continue to see above-average growth in the multifamily space?

Yes. It's very difficult to answer that question. But I just don't see any reason why we don't have several more years of above-average performance. As we mentioned earlier, and Fred acknowledged, I'm sure we've got people interested in buying a single-family home in our portfolio, but they either don't have a down payment, they've got too much school debt or other debt and they can't get financing. But if they do, I'd tell you, I think that there's an awful lot of people that, 20-somethings that live with mom and dad, are looking to create a household as soon as possible. And I'd tell you, I think that we'll see increased levels of supply this year and next year. And I think -- but it's still well below historical run rates. And I think you're really seeing the result of an awful lot of product being sort of held in inventory through '09, 2010, 2011 that's finally coming out. And I think that you'll see an elevated level of supply again well below historical run rates. And I think that, that number will then drop off because people have got to be working now for stuff for 2014, 2015. And so I mean, we're not terribly concerned about the supply side, also because of the financing challenges that Mark said. So I think the multifamily space is at a real sweet spot and will be there for some time.

And are you assuming that sweet spot continues in the 8% IRR you're underwriting? Or are you assuming normalized kind of growth patterns?

Well, I would say a lot of the IRR is a function of what's your inbound kind of yield is. But we're still going to try and target that. I'm not suggesting that, that number can't come down. But as I mentioned earlier, that's going to be a result, if we're getting better disposition values on what we want to sell, well, that will influence what we'll be willing to pay on assets that we acquire.

And our next question is from the line of Tayo Okusanya with Jefferies & Company. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Just a quick question. I mean, this year, there's been some interesting trade between the homebuilders as well -- versus the multifamily REITs based on this whole expectations of Refi.gov. And Obama put another plan where foreclosed homes can be sold to private investors and kind of issued out as rentals. Just kind of curious, one, what do you think about this trade? And then two, if some of these proposals, what you actually think the impact of some these proposals could actually be to apartment fundamental?

Look, I think that on the one hand, anything that can help stabilize the single-family home business or inventory is going to help our economy will be good long term for everyone. To the extent that some of these programs allow investors to acquire properties and lease them to people, we believe that most of the occupants of those homes will be those that had been previously dispossessed of their own home. We've not seen a lot of people come running back into our apartments who left us during the heyday of '06, '07, '08, and we think they're still out there. And if they're no longer in a home they own, they're probably renting a home. And also, I think a lot of is limited to a handful of markets that have seen a significant oversupply or significant inventory of unsold homes. And I don't think that's really a problem in the markets in which we have most of our capital committed.

And our next question is from the line of Swaroop Yalla with Morgan Stanley.

I was just wondering if you can tell us how you expect same-store revenues to trend for the year. Fred mentioned that we could see some narrowing of comps in Q3. Is that when you expect the inflection point to occur for the same-store revenues?

Yes. This is Fred again. When we look at a year forward, it's going to follow the typical seasonal pattern of our business, which means we'll start in January, and then we'll have gradual growth in February, March and then come April, start seeing demand pickup, and therefore, we see lift in our pricing, both in absolute terms and relative to a year before. So if you can imagine kind of the 2011 pricing curve, starting off low and then it peaks and then it falls off, that peak does happen sometime in the August timeframe. So that's what I inferred when I said that peaking in Q3 and then the seasonal softening again in Q4. So when you look at a year-over-year basis, it's really that gap between those 2 curves and what's the distance between those lines. And for this year, the midpoint of our guidance kind of assumes that, that gap is going to on average be 5.5% over the year, kind of the area between those 2 lines. Now this time last year, as we looked forward into 2011, for the mid-part -- midpoint of the guidance last year, which was between 4% and 5%, we said it was base rents that would go up 5%, kind of the same kind of the average for the year. Now what happened is we actually did better than that. We did 6% on base rent, actually a little bit more than 6%, almost 6.5%, and then renewals were 6% instead of 4% or 5%. And that's why we ended up at the top of our range instead of midpoint. So could that happen again this year? Absolutely. I think there's more of a chance that we could come out hotter than a chance that we would actually fall short on this. So that's how we look at it. But again for guidance, it's kind of that midpoint was going to happen, and then we'll know really when we update guidance at the middle of the summer kind of what the next leasing season is going to give us. Because last year as we entered the leasing season, that gap narrowed below 5%, it was actually 4.5%. But then once we hit like July -- actually no, really in the middle of June to July, we motored right on through and that actually expanded up to a 7% gap. So that's why we came out at the high end in 2011.

That's helpful. The other question I had was on Southern California. I mean, you talked about L.A. and Orange County showing momentum. If you can talk about the markets which are showing momentum. And then most specifically, San Diego, you mentioned is challenging. What markets -- and what is really driving that? Is it supply pressures? Is it military rotations? If you can just shed some light on that.

Yes, San Diego is not a big market for us, but it's just been frustrating in that it really hasn't had a powerful recovery yet. We started off okay. It was actually one of the last ones to really go down back in '09 and '10. But I was expecting it to come back a little bit stronger, and it has not. The reason is military rotations. Okay, the big Navy base there. We've got all 3 of the big aircraft carriers are out, either on maneuvers or up in Bremerton for repairs. And that is a big sucking sound to the economy of San Diego when those things pull out. And all of them are out at the same time right now. And we don't expect any of them to be back until next year, early next year. So it's going to be kind of -- it is lower than average, still positive, still growth, but still lower performer in San Diego for the rest of this year. And we saw that, as they call it, go out, we saw immediate increase in military lease-up breaks. Almost half of our lease breaks were military, and then we have some corporate nurses. And that's affecting the South County and the Mission Valley markets in particular. And we have a big presence in our portfolio of South County and Mission Valley in particular there with La Mirage and others. The central business district, Downtown San Diego, continues to be hot. I mean, our Vantage Pointe deals is great. We're basically all done with the lease-up there, and then our 1 same-store property there is doing extremely well. So we kind of have suffering from our concentration. And then North County, with the Pendleton base is doing while they're building all that housing on base. But now it's done, so all these soldiers are moving on to base. That's really the military thing. The other sectors biotech, tech, healthcare, education in San Diego are favorable, but they're not big enough to overcome the military. And then L.A. and Orange County just continue to do good. The momentum we talked about last quarter continues. Orange County is going to have a good year, L.A. is finally seeing some job growth. And I think it's going to have a good year, especially the downtown and those areas.

Mark, can you just -- last question. Can you talk about the secured and unsecured financing costs you're hearing based on your discussions with GSEs and life companies and your bankers?

Sure, happy to do that. On the 10-year side, the unsecured market is actually a little bit more expensive right now. I would say EQR would issue debt about $200 million over the tenure, while I see on the secured side, we'd be issuing more like $180 million over the 10-year. So that's not surprising, that's a pretty common relationship for secured to be a little bit cheaper. That relationship very interestingly changes when you talk about 5-year debt. The GSEs are not particularly fond of 5-year debt, so they would price a 5-year note to us probably at $220 million over, which would give you about 2.9% to 3% note rate, whereas the unsecured market likes shorter paper, likes 5-year duration. And they would price it to us more like 2.6%. So again, the GSEs for a lot of reasons don't like 5-year paper. They also give you less in proceeds all things equal on a 5-year versus a 10-year deal. So again, for us, that's how we see. The life companies are active, they're in the market. There are selective about what they price. They like the core markets more than they like the noncore markets. The GSEs are beginning to skew some of their activity by submarket. They are still active in every market, but there are submarkets they're less active or less interested in.

And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Great. Thank you, all, for your time today. And again, as a reminder, there will be an updated release out later this afternoon. Thanks so much.

Ladies and gentlemen, this concludes the Equity Residential Fourth Quarter Conference Call. Thank you for your participation. You may now disconnect.