Equity Residential Properties Trust (EQR) — Q1 2015 Transcript

Thank you, Ann. Good morning, and thank you for joining us to discuss Equity Residential's first quarter results. Our featured speakers today are, David Neithercut, our President and CEO; David Santee, our Chief Operating Officer and Mark Parrell, our CFO is here with us for the Q&A. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now I'll turn it over to David Neithercut.

Thank you, Marty. Good morning, everybody. Thanks for joining us today. As reported in last night's earnings release, our teams across the country did a great job during the first quarter, achieving 5% growth in same-store revenue, which was driven primarily by the continuation of the strong occupancy that we saw in the fourth quarter of last year. We also did a terrific job controlling expenses and delivered first quarter NOI growth of 7% and normalized FFO growth for the quarter of 11.3%. There is absolutely no doubt that we continue to enjoy very strong apartment demand across our core markets. And David Santee will go into much detail in just a moment. But the strength is being experienced in nearly every market in which we operate, driven by all that which we’ve talked about over the last several years, including a modestly improving economy that helped produce a million new jobs in the last four months and 3.3 million in the last year. The creation of new households by the millennial generation is generating significant demand for rental housing, which is not being met by new supply today and the desire of so many to live in 24x7 cities across the country that have very high costs for single-family home ownership. So, all in all, multifamily fundamentals remain very favorable. The first quarter of 2015 produced very strong operating performance, and we’re pleased with our results here to-date and how we are positioned going into the primary leasing season. This has enabled us to raise our same-store revenue guidance for the year to 4.3% to 4.7%. With that said, I’d let David Santee discuss in more detail what we’re seeing across the country today.

Okay. Thank you, David and good morning everyone. Today, I’ll be reviewing our results for the quarter, discuss our current position with respect to base rent and renewal increases and then update you on our markets and our three buckets of revenue growth. All of these give us the confidence today to tighten and raise our full-year 2015 revenue guidance. While our expectations for Q1 performance were high, actual results were even slightly better. However, we remain full in the peak leasing season and peak deliveries across all of our markets are still ahead of us. Q1 performance was a result of the continuation of the strong operating metrics that we delivered in Q4 with the key driver being elevated occupancies compared to Q1 of 2014. In the same-store portfolio, we realized an 80 basis point pickup in occupancy; however, more notably, our core markets delivered a 100 basis point pickup ranging from a low of 50 basis points in Boston to a 180 basis point increase in San Francisco. We continue to believe that these improved results are driven by strong demand from an improving economy, a shift in generational lifestyle preferences as more and more methods are chasing the urban lifestyle, and continued declines in home ownership. As a result of the strength that we saw in Q4 and the expectation that the trend would continue, we have the confidence to extend renewal offers that achieve 6.3% growth for the quarter, higher than since Q1 of 2012. Additionally, the percentage of residents that chose to renew with us this quarter was the highest since Q1 of 2008, at 56.1%. Turnover continues to decline quarter-over-quarter, falling from 11.3% to 11.2%, with the percentage moving out to buy homes dipping to 11.9%, the lowest percentage we’ve seen since 2012. In terms of real numbers, moves out to buy homes declined from 1,330 to 1,296 quarter-over-quarter, representing about 1.3% of our total same-store unit count. Net resident turnover, which factors out same-community transfers, fell 30 basis points quarter-over-quarter from 10% to 9.7%, as residents desire to remain in their building and their neighborhood calls to them to move either up or down in rent, with 60% choosing to move up. Net effective new lease rents, the foundation for determining renewal increases, averaged 5.1% year-over-year for the quarter versus 3.1% in Q1 of 2014, and it continues to remain at these levels even today. As we introduced the second quarter, the significant occupancy gains that we enjoyed in Q4 and Q1 have begun to moderate as expected. Although today we still enjoy an exposure rate that is 10 basis points slower than the same week last year, an occupancy at 96.4%, which is 50 basis points higher than the same week last year. Renewal increases achieved for April and May today are 7.2% and 7% respectively, and based on our results thus far for June and July offers, we expect to achieve similar results for these months. While Q1 produced outstanding revenue growth, those results were slightly better than our expectations that drove full year guidance, the peak leasing season is ramping up, and reminding ourselves again that 2015 will see peak deliveries. We’re extremely pleased with our quarter-to-date results and expected outcomes until May and June. Expenses for the quarter were generally in line; however, the route we took was quite different from our original roadmap. The Northeast storms resulted in significant snow removal costs and also impacted our ability to perform many services in-house as our staff dealt with the adverse effects of the storm. We were simply not able to make it to work. On the plus side, all of these unexpected events were more than offset by the sharp declines in energy costs. Real estate taxes, representing over 36% of total expense, are being revised downward from 5.35% to 5.1% for the full year as a result of lower than projected values in Virginia and lower overall taxes in Denver and King County in Washington state. On the minus side, the savings in real estate taxes will be offset by higher payroll costs, which now account for 22.5% of total expense, as a result of the overtime from the Northeast storms and fewer vacant positions across our portfolio. With energy costs remaining sharply lower and a slight reduction in property insurance costs, we remain confident that we’re on track to hit the midpoint of our expense guidance range of 2.5% to 3.5%. Moving on to the market lead up with the Washington DC metro area, despite anemic job growth and record deliveries during 2014, the DC metro area was able to absorb more than 14,000 units. As many government retirees live in suburban homes, their younger replacements are choosing to live in the city with the amenities and transportation they need right outside their front door. New lease rents remain under pressure and on average are flat across the portfolio; however, renewal rates achieved have increased from the low 3% during 2014 to the low 4% in Q1. Renewals on the books for April and May indicate this trend will continue throughout the year. Improvements in job growth are beginning to materialize, and the previous multi-year declines in the professional service sectors have bottomed out and are expected to be positive going forward. At 17% of total NOI, any improvement in Washington Metro will certainly have a favorable impact on our full year results. With 13,000 units being delivered in 2015 and another 9,700 in 2016, the metro area continues to be fairly stable. With occupancy up 100 basis points today, but with the same week last year being dead on our projected revenue growth assumptions. Seattle continues to meet expectations with concentrated deliveries in the East and North. Amazon’s recent financial results bode well, and their 4,000 plus open positions in downtown, which pay an average of $90,000 per year, increased by 200 jobs versus the same time last year. Expedia recently announced they will be relocating its headquarters from the suburbs to the city, which a high-quality talent chooses to live, work, and play. Corporate relocations from the suburbs to the urban core are playing out in every major city across the U.S., and we would expect this trend to continue. San Francisco was the biggest beneficiary of the improved occupancy that we saw in Q4 and Q1, with a 180 basis point increase over Q1 of '14. With minimal deliveries relative to outsized demand, we see no reason why San Francisco should not lead the way again in 2015, and we look forward to scaling our results as we begin lease-up on our new product in Emeryville and Downtown. Denver continues to maintain its ranking as the second-best market across our portfolio with peak deliveries of over 9,000 units this year. We would expect softness in the urban core to continue, with softness being defined as only 5.5% revenue growth. With the majority of our portfolio located in the suburbs, we wouldn’t expect to see any material deterioration in revenue growth for the full year. Additionally, reports of actual or projected job losses as a result of the energy crash are few and far between. Los Angeles has shown tremendous strength in recent leases, with net effective new lease rent growth approaching 7% today and renewal rents averaged 7.5% thus far for Q2 versus 6.5% in Q1, moving Los Angeles to our plus 5% revenue growth bucket for the full year 2015. With most of the port drama behind us and very strong demand in the valley and far North, our broad-based economic recovery has clearly materialized. With only 8,500 new deliveries expected in 2015, there should be minimal impact for this improved trajectory. Today, representing almost 11% of our NOI, LA is delivering outcomes of 96.6%, which is 100 basis points higher than the same week last year, with exposure that is 100 basis points lower than last year. It appears that LA is now on track for an extended month that will provide outsized growth for an extended period to the EQR portfolio. Orange County, San Diego, and Emeryville Empire are all performing as expected. There is some softness in Downtown San Diego for new deliveries, which will constrain new lease rents. However, renewal increases achieved across the three markets range from the mid-6s to the mid-7s. Jumping over to Boston, new lease growth is going to continue to be under pressure as 70% of the 5000 new deliveries are concentrated in the urban core and Cambridge, with late 2004 deliveries spilling over into 2015. However, despite the pricing impact from the winter storms, Boston absorbed over 4,600 units in the first quarter as demand and rental activity were impacted. As newly delivered office and lab space comes online, we would expect to see increased demand in the urban core as the financial services and biotech industries continue their expansion. Our Boston portfolio is slightly better positioned than the same week last year with lower exposure and 30 basis points better occupancy. With new lease pricing under pressure due to concentrated deliveries, the key driver of revenue growth for 2015 will be in the form of renewals, where we achieved plus 5% through June. New York is steady as she goes. For Q1, the Jersey waterfront beat out Manhattan, but only as a result of the poor results they experienced in Q1 of 2014. Going forward, we expect Manhattan to continue to lead the metro area in revenue growth with modest weakness on the upper west side due to new and large unit count deliveries. Improved job growth in the higher-paying sectors of business and professional services will certainly bolster demand for all the high-end products that have been recently delivered. In addition, it will help now to drop losses, and the financial sector appears to have found the bottom. With the outsized deliveries in Brooklyn and Jersey City coming online, we are already seeing new lease price pressure, and we would expect that to play out in the next 12 to 18 months. Last but not least, South Florida, with over 12,000 units being delivered this year across the three-county metro area, we expect the most severe pricing pressure in the downtown Miami submarket, where 50% of these new apartments will be located. The balance of new deliveries are mostly east of I-95 from Lauderdale all the way to West Palm Beach, which insulates the bulk of our portfolio from direct competition. With only two EQR assets near downtown Miami and the balance of the portfolio further west of I-95, we should be well-positioned to deliver another year of plus 5% revenue growth. Job growth remains strong and diverse across the entire region, with the potential implications of Cuba's new open-for-business policy providing more questions than answers. So, summarizing our buckets of revenue growth, we now see the DC bucket as half full versus half empty and have challenged our team to meet or exceed 1% revenue growth for the full year. With 13,000 new units still to come and meaningful job growth in the early stages, Washington DC will be a slow and steady climb from the bottom. Our 3% to 5% revenue buckets now contain San Diego, New York, and the cautiously optimistic Boston, which will be challenged to achieve a 3 or better. Our plus 5% bucket has the usual suspects with San Francisco and Denver leading the way yet again. LA is now breaking out with 6% plus revenue growth, followed by Seattle with a solid low 6%, and then South Florida and Orange County in the low 5s. As we’ve demonstrated, it’s still a great time to be in the apartment business, and the improving economy and the generational shift in lifestyle choices will continue to produce outsized demand in the urban core. A decline in deliveries in 2016 across most of our core markets will most certainly extend the runway we have to grow revenue and produce results that are above the historical trend for the foreseeable future.

Great, thank you, David. As evidenced by the recent activity in our sector, there remains a very strong bid for multifamily assets among many different segments in the investment community. As a result, the first quarter saw no acquisition activity on our part as pricing remains aggressive. We did sell three assets in the first quarter, two in Redmond, Washington, and one in Agoura Hills, California, for a total of $145.4 million at a 5.27% cap rate, which we sold with the expectation that the buyer acquired about a 5% yield on those deals. These assets were each multiple building, garden-style assets average in 31 years of age and represented opportunities for us to sell into a strong investor demand for value-add products. Thus far in the second quarter, we've had some transaction activity occur that we think is an interesting example of the market trading that you’ll see us try to undertake going forward. Two weeks ago, we acquired a recently completed 202-unit property in Boston for $131 million and a low four cap rate. Around that same time, we also sold a 41-year-old, 193,000 square foot medical office building in Boston for $123.5 million or $639 per square foot at a mid-four cap rate. This property is located next to Mass General and was acquired as part of our charges with investment 16 years ago. With the current demand for healthcare assets, we saw a great opportunity to dispose of this building and trade into a multifamily asset with far more upside in both earnings and NAV growth going forward. On the development side, we commenced construction on one new project in the first quarter, representing the last of the four downtown San Francisco sites that we acquired as part of the Archstone transaction. We’re building 449 units at a cost of $290 million and expected yield on cost at today’s rents in the mid-fives. We continue to assume that we’ll start about $450 million of new development this year and we have a couple of smaller deals that we’ll have to get underway yet this year to reach that goal. But more importantly, similar to the acquisition market, there is a lot of capital chasing development opportunities and land pricing has increased significantly. As a result, and noted on our last call, we’re not acquiring land for new development at the same rate as we’re commencing construction on existing sites in inventory. So, in addition to reductions in starts this year, we would also expect starts in Q3 to be down from the levels seen over the last several years. And with that, Ann, we’ll be happy to open the call to questions.

Thanks so much, on the Boston acquisition, I wonder if you can talk a little more about that. What was the attraction of that deal and if your underwriting criteria have changed at all?

Well, I’m not sure it changed at all. We think that deal today, Nick, is probably our best-located asset in the city. And we underwrote that deal at a high 7% IRR, and I think that our expectation over the last several years is high 7, low 8, and we think that this will deliver within that range.

And I guess just more broadly on the transaction environment today. You mentioned the strong bid and aggressive pricing. Is this an opportunity to actually trade out some of your non-core markets if you can sign core deals to redeploy the capital?

Well, essentially all we have been doing over the last half a dozen years. So yes, the challenge there is not finding interest in those assets we'd like to sell, as evidenced by $4.5 billion of assets we've sold to help fund the Archstone acquisition. But it's finding the uptake to redeploy that capital. And I can tell you that of what we currently own that we'd like to sell, we're in no hurry to sell any of it. We're happy to continue to own it. We will exit Orlando in the next month or so, but other than that, what we have on our list is itself we’ll in the meantime, and when we find the right opportunities to reallocate the capital, we will, but we’re in no rush to do so.

Thanks. And then just finally on those dispositions, will they be from non-core markets or will they be non-core assets in your core markets?

I would say it would be all of the above. We’re getting to a point today where we can sell last non-core assets in our core markets while we continue to sell out of non-core. So you’ll see us do both.

Great, thanks. I just had a question on the guidance and the outlook. I certainly appreciate the guidance rate for the full year, but it still implies deceleration to the back half of the year, especially at the top end. So can you just elaborate a little bit more on maybe the risk factors that get you to the midpoint? The top end of guidance still has deceleration, you had turnover I think down lower since 2008 renewals or high 2012. So can you just elaborate a little bit more on maybe what brings the deceleration throughout the remainder of the year, just given how strong the household formation numbers have been?

Hi Jack, it's Mark Parrell, and I think David will probably supplement this a little, but we have mentioned before we really got a substantial occupancy and as such in the fourth quarter and again repeated that in the first quarter. And occupancy, as David just mentioned, remains very high. And so we do have positives in all regards on the operations side. But as you compare our occupancy in the second quarter; that we expect in 2015, to the occupancy that we had in 2014, and you keep doing that throughout the year, they get closer, those two numbers and there's just less occupancy benefit. So I don't think it's really as much anything about slowing down or decelerating our household formations being worse or anything like that. It's just the mechanics of the numbers when you have this occupancy improvement that was so substantial, and that was in the slower part of our year in the end of the fourth quarter and at the beginning of the first.

And the only thing I would add is, the fourth quarter and the first quarter, the numbers are great. Both on new lease rents and renewals, but your transactions on those quarters are so few. So that's why I remind everyone that we do have peak deliveries. We're just now entering the peak leasing season where more than 50% of our leases will turn, and that's where we will make most of the money. So we don't see any real deceleration, like Mark said, it's just the mechanics of the numbers.

Okay, got it. And then just touching on margins, there was a bit of a deceleration sequentially from the fourth quarter. I know that's typical from a seasonality basis, but you had 100 basis point margin improvement last year in 2014 over 2013. What do you think is the projected run rate for '15 again?

Yes, we anticipate a margin of 66% to 67%, which is strong. I want to emphasize that our margin is comprehensive. Our property management costs include everything related to running that operation, such as IT, legal matters, and all property-related accounting. It’s important to ensure proper comparisons are made.

David, you mentioned the transaction market and suggested that pricing is currently quite favorable. When it comes to selling an apartment, the cap rate is likely about 100 basis points higher than what you have in your portfolio. Given that you don't need the capital, how do you consider the possibility of entering a joint venture with your best-performing asset at the lowest cap rate to illustrate current market pricing and reflect the value of our stock?

Well, I guess we consider such an event if we did have a use of the capital, and I guess I would suggest to you that every day away from us, there are trades being printed that demonstrate the value of these assets. So I don't think we need to do something to make that clear to the marketplace. That's happening every single day all around us. So again, it's something we would consider if we had a use of the capital. We don't at the present time. Development is fully funded. But it's not something that we would not consider. We will certainly be open-minded if it makes sense.

Okay, and then going back to this occupancy issue you talked about. It looks like the comps get a little tougher throughout the year. You also said that I think in the second quarter so far you are over 96% occupied, and you're showing a good year-over-year growth and occupancy. So how do we think about this idea of recognizing that? The whole industry is kind of peaking occupancy and people are worried about year-over-year occupancy growth and yet maybe we would get a push through that as an industry just because the main trend is so strong. What was considered as peak occupancy won't be peak occupancy?

Well, I think you are referring to kind of 97 is the new 95, and I mean I think we are optimistic that could play out. We didn't do anything differently relative to pricing philosophies or processes in Q4 and Q1, but yet demand really is the key driver and if you take the position that some of these core markets are really under-housed going back 10 years and we have an improving economy, I completely agree that there is no reason why 97 could be kind of the new standard for the years to come in some of these core markets.

Thank you. I really had just one data point with some seasonality. But how concerned are you about the weak GDP number that came out this morning? And particularly if GDP moderates, let’s say 2% growth this year, how much will that impact your ability to raise rents at two times that rate?

We haven’t had time, of course, to analyze the GDP number that just came out a couple hours ago. But some of that relatively low number was based on lower exports and U.S. dollar strength and things that just don’t really have a direct impact on our residents or employees being from export-oriented industries. But it’s just, I think one number for one quarter and it’s been a pretty uneven recovery. So I guess we feel like supply and demand balance at this point in our business.

Okay, and on the asset sales during the period, was it an important distinction that they were sold in the sub-urban markets? Are you continuing to focus your portfolio in the core studies?

I guess they are representatives of the assets that we’ve been selling over the past half a dozen years, being older garden-style park properties and in response to one of your earlier questions that you’ll see, more of that in our core markets going forward. So the older garden-type product in our core markets, you’ll see us trade out going forward, providing we can find the reinvestment opportunity.

Got it and then also on your development pipeline the stabilized deal you disclosed this period on complete and stabilized development with 5.9%, which I think was one of the highest numbers you produced in the last few quarters. But I was wondering if you could disclose the yield of the developments that were stabilized this quarter of completed in prior quarters?

Stabilized this quarter, I mean approaching 6%. I guess the deals that we completed in 2014 which I assume will then be those would stabilize this year. We think we will stabilize in the upper fives close to 6%.

Good morning, just a few questions here, and I’m going to guess that they are both for Mark. The first is the Fannie and Freddie issue with their production caps. If the FHA doesn’t increase those caps, are you concerned about an impact as far as in the most multifamily market or is it something the private lenders already stepping up? And even if both Fannie and Freddie have accounted for $60 billion in total, is it not going to impact because private lenders will step in there but it won’t disrupt pricing or transactions in multifamily?

I mean we’ve been monitoring that situation for a while and just so everyone has the fact straight, Fannie and Freddie were given by the regulator a $30 billion per year production limit and they are getting relatively close to those limits. Currently the regulator is considering this matter and may have some sort of decision in the near term. What I’ll say about EQR’s capital needs and you were asking more about this positions which I’ll get through in a minute but I mean we’re lucky and in a enviable position of having access in the secured market and preferred market and the like company market which will trade now is very competitive and very strong and all those markets now except the preferred market are cheaper than Fannie and Freddie for us. On the disposition side, we have not seen any impact and in fact just sold an asset a few days ago in Orlando, and though there has been a lot of discussion about this matter in the investment sales community, there wasn’t any impact on our pricing; we weren’t re-traded on it. So we’ll have to see what the regulator decides, I’m more of the opinion that the market can adjust to some of this if given time, but we’ll just have to wait and see.

Let me add just one thing here if I may. I’d be far more concerned about this if we still owned the $5 billion of product that we had sold over the last couple of years than what we own today. As I’ve noted in one of my responses to one of the previous questions, we’re fine with what we have today and I think that the source of debt capital is far more important than what we have already sold and what we would sell going forward.

And then the second question is on your CP program. The recent articles in the newspaper about moving some of the money markets to flooding any of these rather than fixed, does that affect the buyers of your CP paper? Would those buyers now buy short-term governments or are the buyers of your CP paper not the same as the people who have the prime funds, etc.?

Yes, I think the latter. We’re A2/P2 rated, so corporates own us; maybe a life insurance company or two own us. They put money aside waiting for long-term bond issuances to come out in the market generally. It is at high quality. They’re not really allowed to own A2/P2 paper, so I don’t think that’s going to make a great deal of difference to us.

On the topic of elevated occupancy, we seem to be attributing not a lot to strong demand, but can you talk about what you’ve done to reduce frictional vacancy? If that could get everyone a lot more comfortable with this idea of sustainable higher occupancy levels?

Your largest expense linked to vacancy is turnover, and the costs associated with turnover are relatively low. Recently, we've held sales meetings across all markets twice a year, and I attended four of these meetings in the past two weeks. One effective strategy to lower frictional vacancy is through improved retention. Many in San Francisco are aware of the current situation, as residents anticipate significant rent increases. We receive numerous emails regarding renewal hikes, so we've worked hard to equip our team with the tools to educate our residents rather than just negotiate. Our renewal conversations focus on comparing our rates with those of competitors and displaying online rents, helping residents understand that this isn't just an EQR issue but a broader trend affecting the market. This approach has been quite successful; even as renewal rates climb, turnover has been decreasing. Additionally, buildings in prime locations with nearby amenities and excellent service from our staff greatly contribute to higher retention rates.

Also, can you point to a change in the number of days that an apartment is down between when a renter departs and the new renter comes in? Have you been able to achieve any efficiencies on that front in the last call it five years or eight years?

Well so, so that’s – there was a seasonal impact to that, so kind of average days vacant call it November through January are probably in the high 20s as you start getting into the high traffic season, it comes down to the low 20s; it's not 20 on average, but there is a lot of noise in those numbers. What we do is we really hold, we measure how many days our staff are holding apartments for people that are moving in the vacant unit. Someone wants to run a vacant unit, they have to take occupancy financial responsibility within five to seven days. And we try to do that on our notice to vacant unit as well, and some of those vacancy days are influenced to some degree by the level of rehabs that we’re doing, because it just kind of extends those days by two to three weeks.

Yes, I just want to reinforce that distinction between the time of economic responsibility and the time of occupancy. Right, some of the comments any department 60 days is declining to choose or paying for today. And that’s one let me take off a lot of people out there. I think on the top operations that will not require as strict about when to take on the financial obligations relative to actually occupancy.

And David, just as a final note. David Santee mentioned on the last call, we've moved a lot of our lease expertise around. So we had four of them in the periods of time where, as David Santee said, we had the longer hold period. So we have moved a significant amount of our lease explorations out of that slower period of demand. So that should give you higher occupancy over time as well.

Okay, thank you for all of that. The next question relates to the Boston acquisition. Can you just walk us through what looks to be a mid-four cap purchase to a high seven IRR?

Well, it’s call rental growth, all being in a great asset, in a great location that may, as David Santee is discussing today, be one that is maybe challenged because of new deliveries, but we think over an extended time period we’ll do very well for us.

Okay. Just rental growth, no cap rate compression.

No, no. In fact, not cap rate compression at all.

Okay. Last question just goes back to this broad currently very robust appetite for multi-family assets. Given the interest some interest in other asset aggregators. This is always a tough thing to quantify. But David, do you observe any degree of portfolio premium today?

I guess it’s portfolio premium or platform value. I don’t know, I think it’s quite obvious that the private equity firms have raised a lot of capital. Many of them underweighted, under-invested in multifamily. Multifamily is an extremely leverageable asset, and I think that’s may people are very interested in the space and be willing to be very aggressive in pricing. Whether or not that creates a portfolio premium, I can’t tell you what platform value, I’m not sure. But there is no question that is a lot of large capital sources out there that have been looking at this space.

Good morning. Most of my questions have been asked and answered. However, could you elaborate a bit on your comments regarding Washington D.C.? You mentioned yesterday that the recovery in D.C. is primarily occurring in the urban core. I was hoping you could clarify that statement and possibly differentiate between central business district and suburban markets.

Yes, let me, it’s can’t jump around for a few moments. The numbers play out, you see the strongest growth in the I270 corridor or suburban Northern Virginia and then South Arlington. However, this year you are going to see most of the deliveries in the I270 Corridor more pressured. So Q1 the only market that was really negative for us was Alexandria, and again South Alexandria is where a lot of the deliveries in 2015 will occur. So what was good this past year will probably be under pressure this year. If that helps.

That’s helpful. Thank you. And just one final housekeeping issue, it looks like there was $6.9 million or so in income from the lawsuit settlement that JV in 1Q that should be backed out to keep the normalized FFO. It looks like you are backing out $0.02 more in 2Q, is that also from a lawsuit settlement or is there something else going on?

Correct. That’s another expected $10 or $11 million we’ll see. Timing could shift, and ops can shift.

I guess when I just do a quick look at my NAV and I put a four quarter type cap rate, I mean I get to something close to $90 for you. I mean is EQR too big to sell?

I wouldn’t think so. I think Sam has demonstrated the sale of EOP means that we wouldn’t be too big to sell.

Okay. I mean we talk about portfolio premium all the rest; maybe it just occurred to me maybe we should be talking full anyway. The other question is much more term of a small level on the Boston acquisition, would you have made that deal in the absence of the MOB sale or is it all about the trade?

I guess I’m not sure I can answer the question, Rich, because we didn’t think about it in that manner. We liked this asset, we’ve looked for this asset for a while. It had been first part of a like portfolio sale and there was one that we had identified. But we would like to own if we could break it out of the portfolio. When it became available, we moved on it, and my guess is we probably would have bought it. We think positively long-term about this location about the quality of this asset, about what’s happening in Boston, and my guess is that we probably would have bought it without the sale of the office building. But being able to trade with the office building I think probably just helps. But I think it is something that we would have strongly considered even if we didn’t have the office building as a source of capital. Yes, just the change in estimate. This is a charge we thought pretty exact comp program would be $11 million, and now it’s at $9 million. And we, as we got full information, we just refined the estimate.

Good morning guys. How active these days are you on the redevelopment front? Are you taking on wholesale redevelopment, or are you basically just selling those assets and redeploying capital?

We are doing and we give you a fair amount of disclosure and then on page 21, our kitchen and bath renovation process which we call rehab and we spend about $50 million doing that. Some of that is asset preservation and some of that is certainly optional and accretive. We are doing a couple of large redevelopments, one specifically out in Los Angeles. We took that asset at the same store. So I think as you see that we own more and more of these that are very hard to replace. I think you’ll see us spend money on these larger-scale renovations and we move those from same store like other folks do. And now these kitchen and bath refreshes I think will stay in the same store and be something we spend $30 to $60 million on by year-end. Just help us to stay current in the market.

Yes, I would say in general, Bob, assets that we consider to be medium to long-term holds will continue to do these rehabs as Mark suggested. On assets that we think would be short-term holds that might benefit from such a capital expenditure, we might often sell that asset not unlike the three that we sold in the first quarter for a value-add player. We think that we might realize more value selling that upside to a third-party rather than trying to do it ourselves and then sell it after the fact.

In terms of the 144 million of land for development on page 19, how many projects does that include and how many of those are shovel-ready today?

I can’t say definitely how many that includes and any that would be shovel-ready today may very well be starting. We do have a couple of sites in DC that have kind of been ready for a while that we kind of put on ice, but anything outside of that, they’re not shovel-ready yet. And when they are ready, we’ll start construction on them.

And then lastly, given the commentary around the reduction in real-estate tax expectations for this year, do you guys think that you’re finally over the hump in terms of the really big increases, or is this just a specific instance where you got a good benefit out of a couple of markets?

Well, I think if you go back and listen to some of our previous discussions, the 421 A abatement or burn-off in New York City will add 160 basis points to maybe 180 basis points to our real-estate tax number for the next four to five years. So I think this year, we’ve kind of a couple of breaks. There are still some bright spots that could materialize throughout the year, but I think high 4s, low 5s are probably in the cards for the next several years.

I was wondering if you can just talk a little bit about DC. I think with that comments of in terms of having a site that’s ready you’ve been waiting on. It seems that there are many others as well in that position. You have any concern that when you do see some sort of recovery in the market that there’s enough supply that comes that ends up being a very immediate recovery there?

I guess that’s how the process that will analyze Dan when we believe that it might make sense. I’m not sure that if there are a lot of other sites they’re ready to go, I’m not sure the owners of those sites will have the capital and the financing given that marketplace to go forward, and there may be an opportunity for the more highly-capitalized companies to actually get ahead of that. But it’s certainly something that we’ll consider when we decide to go forward on that.

And then in terms of 315 on A in terms of the acquisition there buying a one-year-old asset there for value add projects, do you think it’s a better market in terms of the acquisitions for those where you can buy something that’s recent development but without the lease-up risk to it that way?

I’m not sure I can say anything for certain. Last year, a fairly significant share of what we did acquire, we bought either in some stages of lease up and even considered buying something that was under development. My expectation is we’ll continue to consider those kinds of opportunities because I think that can help us get an enhanced yield, but it’s very difficult to say if there’s anything going on out there of any sort of opportunity other than there’s just not a lot of supply and a lot of capital chasing it.

Yes, I just wanted to see on San Francisco and Northern California in general, if the strong job growth continues, how long do you think we can see these sort of high single-digit low double-digit rental increases?

Well, we’ve been asking that question for four years now. Who's to say? I mean the deliveries are primarily in downtown San Francisco. So, you’re not delivering much of anything in the peninsula. A lot of your growth is being, you’re seeing double-digit growth far out in Dublin and now Auckland, which was not a desirable place to be. So I think what was a Facebook added double the number of positions or increase 50%. As long as that continues, I don’t see any end to these increases.

And let me just maybe answer that question in a different way and say that our average rent in San Francisco is still well below New York City and Boston. Right, so putting aside the rates of average, the absolute rents are still not at the highest in our portfolio.

I think I’m just suggesting that we would see that there would continue to be headroom there.

Okay, thanks for that color. And then also on DC, just given the recent trends, when do you think we could really see material improvement in DC? I mean, giving all the delivery still coming online?

I mean, we’re still at that flat to down. So I think it’s just going to be the velocity of job growth, perhaps change in administration and reallocating more dollars back to defense spending. I think it’s going to take something from the government to really jump start the economy. But like I said, I think it will be a slow crawl back until there is some meaningful catalysts which most likely would be the federal government.

Thank you. Just a quick question on the development pipeline; looks like 170 Amsterdam pushed that one quarter. Was that just weather-related?

Yes, I guess, I just got to know that you can push property back one month and have that be one quarter was really nothing to be. There is no story there, Jana.

Okay, thanks. And regarding the energy cost savings, does that affect the outlook for the remainder of the year or could we see some advantages as the year progresses?

Well, I guess I would say that we’re from a natural gas perspective, we’re riding the market. We did take average of some great for the winter strip beginning December, and that continues into March of 2016. So we've locked in some material savings there. But I think we’ll continue to see days in both electric. Electric, actually, is the bigger driver, and as more plants in the Northeast convert to natural gas, I think we’ll continue to see benefits from that on both natural gas and electric.

Dave, I believe the market can be described as having a lot of demand but only a little supply available today. Is the current supply of high quality that we have in-house, or is it mostly focused on value-add? Additionally, after several years in this cycle, as the initial supply has been built, do you expect to see more of that type coming to the market and thus restocking the pipeline?

Well, we keep expecting too. I will tell you every year Alan, George and his guys come back and may senior into January saying that the brokers have been telling them that they’re getting being also requests for opinions on value, etc. and we continue to expect to see new supply. But I guess maybe with financing rates available to refinance these assets and just the scarcity of them, it’s possible people that are not willing to sell at this period of time. Clearly, we’re probably a little bit more selective in what we’re willing to buy today, which may have served to narrow the scope of what we’d be willing to consider. But there are just not much out there, we do underwrite a lot, we bid on what we know, and that we’re not likely to win. So we stay in touch with the market. But I think that we've never seen our acquisition list as be as it is today.

Okay. That’s helpful. We’ve seen a lot of actual grounded up to that kind of development in New York City right now. Have you seen any pickup in terms of conversion activity, be it New York or any other market right now?

I believe the talk about conversion has been more theoretical than practical. There have been some limited instances, but they involve significant risks and require a substantial amount of capital and a lengthy execution time. Although there has been considerable discussion about the potential for conversion, the actual progress we have observed is less than we would have anticipated based on what we've heard.

Thank you very much. So, before you hang up, I want to thank everybody for your time and your interest in Equity Residential today. And to let you know that on Monday afternoon of the meetings in New York City in June we're going to be hosting some tours of our new developments our Park Avenue South and Amsterdam at 68th street. You all will be receiving a notice and invitations for that. So, stay tuned for more details. So, thank you very much, looking forward to seeing you all in the meeting in June.