Feb 5, 2009
Executives
Marty McKenna – Investor Relations David Neithercut – President and Chief Executive Officer Mark Parrell – Chief Financial Officer Fred Tuomi – Executive Vice President, Property Management David Santee – Executive Vice President of Property Operations
Analysts
Michael Bilerman – Citigroup David Bragg – BAM-ML Jay Habermann – Goldman Sachs Michelle Ko – UBS Alexander Goldfarb – Sandler O'Neill Michael Salinsky – RBC Capital Markets Lou Taylor – Deutsche Bank [Lee Christiansen – Isthmus Funds] [Scott Kirk – TCAP]
Operator
Welcome to the Equity Residential fourth quarter earnings conference call. (Operator Instructions) I’d now like to turn the call over to Mr.
Martin McKenna of Investor Relations. Sir, you may begin you call.
Martin McKenna
Thank you, Rodney. Good morning and thank you for joining us to discuss Equity Residential’s fourth quarter 2008 results and outlook for 2009.
Our featured speakers today are David Neithercut, our president and CEO and Mark Parrell our Chief Financial Officer. Fred Tuomi our EVP of property management and David Santee our EVP of Property Operations are also here with us for the Q&A.
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.
David Neithercut
Thank you, Marty. Good morning, everyone, and thanks for joining us for our fourth quarter conference call.
As noted in last night's press release, we delivered full year and quarterly operating results and we’re pretty much right in line with the expectations that we provided you on our earnings call in October. Same store net operating income growth was 2.8% for the quarter, on revenue growth at 2.4% and NOI growth of 3.8% for the full year on revenue growth of 3.2%.
We’re very pleased with these results and I want to congratulate our teams across the country for their hard work last year. And I will tell you we continue to benefit from the changes we made in our portfolio over the last few years.
For the full year 2008, our same store net operating income growth for the assets we acquired in 2006 was 7.8% on revenue growth of 5.5%, and assets acquired in 2005 produced 5.7% NOI growth for the full year '08 on a 4.7% increase in revenue. But our performance for the year belies what is going on in the economy today.
The first nine months of the year really carried the day for us and the fourth quarter saw a dramatic fall off of pricing power. We are clearly experiencing one of the worst economic climates in anyone’s memory.
According to some, unemployment could climb as high as nine to 10%. These would be levels we have not seen since the late '70s or early '80s.
There is no question that we are in unchartered waters regarding the economy. No one knows what impact the government's attempt to jumpstart the economy will actually have, nor how long it could take to actually have any impact.
But we do know it is jobs that are the single most important determinate to the health of the multi-family industry, and today’s jobless claimed at is further evidence of how bad the job picture currently is. So, 2009 will undoubtedly be a challenging year, most likely one of the most difficult we’ve experienced in quite some time, and so we’ve given same-store revenue guidance for 2009 a negative 1.5% to negative 4.5%, which in this economy might not sound like much of problem to many businesses, because now those businesses are dealing with massive decreases in revenues as their customers drastically cut spending.
But we benefit from the fact that housing remains a basic need, and we’ve got a great portfolio of well built, well located assets, but not withstanding all of the bad news that’s out there today, remains 94% occupied due to very positive demographics in our core market. Yet there’s no denying that we expect to have very little, if any, pricing power across our markets in 2009.
Now this has been an equal opportunity to recession. It appears that no industry, no SMSA, no market, no submarket has been spared.
It’s possible that even our best markets could experience no better then flat revenue growth in 2009, and it’s likely that most of our markets will be negative year over year. That’s the bad news.
The good news is we’ve been through this before. We have a seasoned group of professionals across the county that I assure you will deliver the absolute best performance possible.
I’m extremely confident that the experience we’ve gained both in the field and at corporate from running our revenue management tool the last couple of years will serve us well. And I’m also very confident that the multi-family space will have the swiftest and strongest recovery ever.
This will be due to the complete lack of new construction expected for some time across the country and due to a very, very favorable demographic picture for many years to come. These factors suggest a very strong rebound in the fundamentals of our business when the economy begins to recover and produce jobs once again.
Now at Equity Residential, we benefited from taking a defensive stance early. In just a minute, Mark will take you through our balance sheet, which is in very good shape thanks to the $1.6 billion we borrowed from both Fannie May and Freddie Mack last year, and due to having been a net seller of assets in 2008 to the tune of nearly $500 million.
In fact, we only bought one asset in the entire second half of 2008 when we closed on a recently built property in Phoenix, Arizona, which we had put under contract in 2006 in a pre sale arrangement. Meanwhile, we continue to sell assets by taking advantage of the strong bid for properties with smaller price points, in slower growth, or in our non-core markets.
And we expect to continue to be an active seller in 2009, because there continues to be a bid for the assets we’re selling and the GSEs continue to assure us that they stand ready to finance our buyers at attractive rates. We’ll be subject to tougher underwriting, but they stand ready to refund our buyers.
I’ll also tell you that cap rates have certainly increased, and values have definitely decreased. In 2008, we sold 41 properties at a weighted average cap rate of 5.9% and realized gross proceeds of nearly $900 million.
This was 101% of the value that we had attributed to these assets in the first quarter of 2007. In the fourth quarter of '08, we sold seven assets at a 6.7% weighted average cap rate with gross proceeds of $90 million and that represented 85% of the valuation that we had given those assets in the first quarter of '07.
So, obviously this is not an apples-to-apples comparison, but it is just clear that cap rates have increased and have increased considerably in the last 90 days. Now, I want everyone to know that we are very mindful of the dilution that results from being a net seller of assets, not just the current cap rates but at any cap rate.
But we believe that in the current economic climate turning non-core assets into cash at the right price is a good decision. So, before I turn the call over to Mark, I’ll just address development really quickly.
You all know we have significantly reduced our development business in response to the current economic climate. We started only two projects in 2008, both of which were started in the first half of the year, one in Pasadena, California and one in Redmond, Washington.
And as we announced in December, we've significantly reduced expectations for the immediate future, our development starts expectations, which led to the $116 million impairment charge. We do not expect to start any new developments in 2009 because they are very difficult to underwrite today, and it is simply impossible to justify the use of precious capital to fund it, but we still have nearly $2 billion of projects under construction or in lease-up.
So, our energy will be spent completing those deals currently underway and getting everything leased up and stabilized as quickly as possible. So, I’ll now ask Mark to give a little bit more color on our operating performance for '08, our '09 guidance and our liquidity position.
Mark Parrell
Thanks, David. Good morning, everyone, and thank you for joining us on today’s call.
I will first spend some time on our 2008 results and how we believe some of those numbers will trend in 2009. I will give some color on our 2009 guidance and I will end with a brief recap of the company’s cash position, funding needs and our plans to meet those needs over the next few years.
As for our 2008 results, we are pleased to report same-store NOI growth of 2.8% for the quarter and 3.8% for the year. For the quarter, our same-store revenues increased 2.4% over the fourth quarter of 2007, driven by a 2.5% increase in average revenue rental rates, solid occupancy at 94.3%, and an increase in other income.
As we said in our last call, our growth rates moderated in the second half of the year in virtually all of our markets. We anticipated this trend and this pattern of weakness carries forward into our ’09 guidance numbers.
We continue to demonstrate strong expense controls with same store expenses up 1.8% up for the quarter and 2.2% for the year. In the fourth quarter, insurance costs declined and we saw relatively minor increases in payroll and maintenance.
The majority of our expense increase came from uncontrollables, predominantly higher utility costs up 5.5% quarter-over-quarter or $1.3 million, and higher property taxes up 7% quarter-over-quarter or $3 million. Unfavorable expense trends in property taxes and utilities will continue into 2009.
Our G&A spend came in within guidance and was approximately 4% lower than 2007. We are working hard to drive this number down further in 2009.
We expect a $4 million or 9% reduction in 2009 G&A, driven by lower personnel costs. We continue to look hard at every dollar spent here, and feel that we have institutionalized in EQR a frugal spirit that will serve us well in 2009 and beyond.
We also had a good contribution in the quarter from our lease-up properties. As we told you in our original guidance for 2008, we expected our lease-up properties, which are not yet in same-store, to make a positive impact of $25 to $30 million for the year and those assets met those expectations.
Despite the current conditions in the economy and credit pressures on the consumer, our bad debt was 0.9% or 90 basis points of revenue in the fourth quarter which is very much in line with our historical standards. Delinquencies were about 3.1% of rental income in the fourth quarter, which is also very much in the historical range and actually a little bit lower than the fourth quarter of 2007.
As you saw in our press release, our decision to take impairment in our development business resulted in a fourth quarter 2008 FFO charge of about $0.40 per share. Looking at our fourth quarter 2008 FFO before the impairment charge, we actually came in about $0.07 per share higher than the mid-point of the guidance we had provided.
We have listed the reasons for this difference in this release, but are happy to discuss further any details. I would like to address guidance for the first quarter and the full year 2009.
On page 26 of the release, you will find the assumptions underlying our annual FFO guidance. We have also listed in the release the primary drivers of the difference between 2008 and 2009.
Let me give some added color on a few items. Our revenue forecast calls for a reduction in same-store full year revenue in all of our major markets, though flat results are possible in some of our best markets like Washington D.C.
This is the inevitable result of the deteriorating national job situation. Assuming the economy continues to shed job, our operating numbers will be hit harder in the later quarters of the year because of the typical lag in job losses impacting our results and accumulative effect of these job losses.
We also see the potential for some pressure on our occupancy numbers as the year wears on. Our preliminary same-store revenue numbers for January and February 2009 imply approximately a negative 2.5% full year same-store revenue number.
The midpoint of our revenue guidance is slightly lower than this number, reflecting our view that the rental housing market will likely continue to deteriorate further throughout 2009. The better end of our revenue range can only be obtained if employment markets stabilize and we get some minimal improvement towards the end of the year.
On expenses, we set a same-store guidance range up 2.5% to up 3.5%, expected utility increases of approximately 9%, and real estate tax increases of approximately 5% will pressure us in 2009, as these two large expense line items together comprise 40% of our operating costs. Also, we’re victims of our own success.
We produced excellent same store expense growth of only 2.2% in 2008 and 2.1% in 2007, making for a very tough comparison period in 2009. Our FFO guidance of $2.00 to $2.30 is based on four main assumptions to get to the midpoint of our range.
First, rent and occupancy declines along with more normalized expense growth will combine the reduced same-store net operating income by an estimated $0.27 per share. Second, dilution from planned 2009 transaction activity will total about $0.06 per share.
We have budgeted for property sales to occur roughly evenly throughout the year, while we have assumed no acquisitions occur until late in 2009. We are mindful of the impact of this dilution, but as David noted, we believe that converting non-core assets into cash is a good trade.
Third, the $0.08 in lower interest and other income mentioned in the press release takes into account that we have not budgeted any gains from debt repurchases, which in the fourth quarter in 2008 added $0.06 per share to our FFO number. We will continue to be opportunistic here, but as capital markets have begun a tentative recovery, these opportunities have become fewer.
Fourth, we’ll be carrying higher debt balances into 2009 than we otherwise would because of the December Fannie Mae loan that I will describe in more detail later. This cash will be gone by mid-year.
Now, I want to highlight some of our recent capital markets activities and discuss our liquidity and sources of uses of capital for the next few years. In late December, we closed on a $543 million secured loan from Fannie Mae.
It's interest-only, matures in eight years, and carries an all and effective interest rate of about 6%. All told, we borrowed about $1.6 billion from Freddie Mac and Fannie Mae during 2008 at an average rate of 5.7% and an average fixed rate term of nine years.
Being proactive in addressing our debt maturities and development funding needs has been the priority, and we are very pleased with what we were able to accomplish in 2008. With the Fannie money, we had more than $1 billion in cash on hand at 12/31/2008.
We took some of that money and launched a very successful tender for two of our outstanding unsecured note issuances. We purchased at par, $105.2 million of the $227.4 million outstanding of our 4.75% notes due 2009 and we also bought $185.2 million of the $300 million outstanding of our 6.95% notes due 2011.
The goal here was two-fold – cash management and debt maturity management. On the cash management side, our cash on hand was earning 1%.
These debt issuances were paying 4.75% and 6.95%. The tender enabled us to pick up the spread.
On the debt maturity side, the very reason we accumulated this cash in our balance sheet was to discharge these debt obligations and other debt maturing over the next few years. If we could do that on an NPV positive basis and extend the duration of our liabilities at the same time, all the better.
We have also opportunistically purchased our convertible notes in private transactions. Our convertible date is putable until 2011 and repurchasing this debt at an attractive yield to put of about 11% is both a good investment and sound liability management.
As we said in the release, since we’ve started repurchasing our straight unsecured notes and are convertible, in the third quarter of 2008 through today we’ve spent about $446 million, purchasing $464 million of these convertible and straight debt notes. We are especially pleased to have purchased $101 million of our convertible debt for a cost of only $83 million resulting in $18 million of economic gain to our company.
A quick comment on the state of Freddie Mac and Fannie Mae. The two GSEs continue to be active lenders in the multi-family space and there is plentiful debt capital available from them at attractive 10-year rates of about 6%.
However, underwriting standards continue to be tightened, especially on refinancing transactions. Some cap rate floors have been instituted and lengthy interest-only periods are less common.
Now I want to speak a bit about liquidity. Let’s start with our sources and uses of capital in 2009.
Beginning at 1-1-2009, we had $1.02 billion in cash; we had line availability of $1.3 billion and therefore had total liquidity of $2.320 billion. As for uses, we expect to spend in 2009 approximately $1.178 billion.
Of that, $863 million will be used on debt payoffs, including development loan payoffs. And I note that we have already spent $185 million to repurchase our 2011 bond to our recently completed tender.
The $105 million in 2009 bonds purchased in the tender are already included in the $863 million debt payoff number I gave you above. Also in this discussion, I'm assuming no additional debt repurchases in 2009.
We’ll also spend about $130 million this year on existing development projects and other investment spending. So, again, a told spend of $1.178 billion.
As a result, at 12-31-09 we’ll have $50 million in cash and line availability of approximately $1.100 billion and total liquidity of approximately $1.15 billion. And that $1.15 billion of availability is very conservatively estimated, as it is before any additional financing activities.
Also, while we are planning to have net sale proceeds of $450 million in 2009, for purposes of this liquidity analysis, I have not included any net sale proceeds. Now on to 2010, in the uses category, we expect to spend about $600 million; $500 million in debt payoffs including development loans yet to be fully drawn and $100 million in development fundings and other investment spending.
Our $500 million term loan that initially comes due in 2011 has an extension option, which we can use to make the effective final maturity October 2012. We intend to exercise that option and therefore is not included in our refinancing needs for 2010.
Therefore, at December 31, 2010, we will have cash on hand of about $50 million and line availability of about $500 million. Again, this is before any disposition proceeds in 2009 or 2010 and before any financing activity in either of those years.
In summary, we believe our cash on hand and line of availability will allow us to meet all of our funding obligations through 2010 with no refinancings required and still have approximately $500 million of availability on our line at the end of 2010. Also, our 2009 and 2010 projections are before any proceeds from asset sales.
Going beyond 2010, we would expect to finance ourselves in the agency debt market through life insurers and other traditional lenders to our sector, through our disposition activities and through capital markets that have recently shown some light and that we hope will reopen soon. I also want to remind everyone that our recent tender and convertible bond repurchase activity and through those we have reduced our 2011 maturities by approximately $287 million.
Let me finish by emphasizing again that we believe we have a strong balance sheet and sufficient liquidity to weather the uncertainties in the credit markets and that management is committed to being aggressive in maintaining the company’s liquidity and credit strength. Now, I will turn the call back over to David.
David Neithercut
Thank you, Mark. Before we open the call to questions, I’d like to make a couple more comments.
For 2009, we will have two primary areas of focus; number one, maximize our property operations just like we did in 2008. We’re going to collect as much rent as we can,.
We’re going to be diligent on our spend and we’re going to take care of our residents so they’ll happily renew with us. Secondly, we’re going to continue to be focused on liquidity.
We’ll be a net seller of non-core, that is if we can realize prices that make sense, we’ll continue to turn these assets into cash. We will not likely be much of a buyer, just like in the second half of 2008 and we will not likely start any new development projects in the year but we will get what we have underway, completed, leased and stabilized.
And we will continue to be opportunistic in accessing the debt markets just as we were also in 2008. This is what will drive the EQR team in 2009.
And lastly, I would like to address the topic of dividend policy and the composition of our dividend because at the present time, we plan on paying an all cash dividend in 2009. As Mark noted, we’re comfortable with our liquidity position and our ability to address our debt maturities as they come due and we’re comfortable with the outlook for our sector, particularly in a recovering economy with virtually no new supply being added and the demographic picture ahead of us.
Well that’s how we see it today. Going forward, as we have done each and every quarter for the last 16 years, the board will review all necessary factors regarding dividend policy and will act appropriately.
But again, we see no change, a need for a change in our dividend at the present time and we expect to pay it completely in cash. So with that, Rodney would be happy to open the call to questions.
Operator
(Operator Instructions). Your first question comes from the line of Michael Bilerman – Citigroup.
Michael Bilerman – Citigroup
One question about your refinancing goals, can you indicate if there’s any maximum level of agency financing to one entity?
Mark Parrell
There is, I’m sure inside of each agency, a process of determining that number. We have spoken to both Fannie and Freddie very recently and we’re assured that frankly we’re nowhere near that goal, or that limitation.
Michael Bilerman – Citigroup
And then along the lines of something you discussed relative to other sources, you mentioned life insurance companies. What are some other potentials, assuming the capital markets remain where they are?
Mark Parrell
Well, I want to address both parts of that. Certainly the life insurance companies, maybe in the mid sevens is our source.
I certainly see some progress in the unsecured debt markets, our notes have traded better, our CVDS has come in. That’s occurred across a lot of different sectors, a lot of issuers with similar ratings as ours or even lower ratings of access to markets.
So, I don’t want to put aside the unsecured debt market. I remain hopeful and tentatively optimistic that that market may open to us soon.
Other options again are the convertible debt market, which was a very good place to finance ourselves but I think is very sick for now and will take some time to sort itself out. Beyond that, I would suggest again the disposition activity the company has undertaken, is an indirect way for us to borrow from the GFCs and it’s been a good source of funding as well.
Michael Bilerman – Citigroup
I just had a couple questions around guidance. Can you just indicate maybe a couple of markets that you think are going to be better performers and I know you mentioned D.C., but also highlight which markets you think may fare the worst in the next 12 months.
Fred Tuomi
On the upside, Boston continues to be very stable and I think Boston will have a good year this year. Everything depends on the job situation but all the indicators right now, Boston should be a good solid year.
We have a couple of lease-ups that are going extremely well including our new one in Cambridge. The D.C., Maryland, Virginia markets should be stable.
There is good job growth there the last couple years. It is predicted to be slightly negative next year but I think with the government rallying and creating a lot of jobs right there in their own back yard will be pretty stable.
We’ve absorbed a lot of new units there, extremely well the last two years and I think that should continue into 2009. So D.C.
and Virginia I think will be a good performer. I think Southern California never really goes as far down as the national economy.
I think there’s some pressure in Inland Empire clearly but Orange County should be bottoming out. San Diego has been stable.
L.A. is very diverse.
Entertainment sector is doing well. So L.A.
has got a little bit of supply issues but they have been almost close to finishing the lease-ups there. It will take a little bit longer but Southern California could be better than some.
San Francisco I expect to be better than the national average. It’s been very stable through 2007, 2008.
Some risks with tech jobs but so far, we’re doing well there. We’re well occupied and still getting good, strong rent increases in the Bay area.
Seattle was one of the few markets that had positive job growth in 2008 and the only market with predicted job growth in 2009. So Seattle not withstanding all the press about Microsoft going, etc., should do pretty well.
But the markets that we’re most concerned about are the shock markets; New York due to the shock of the jobs and the financial situation and then the traditional housing boom shocks that continue in Florida and Phoenix.
Michael Bilerman – Citigroup
Another question relative to guidance, you note 125 basis point cap rates, Fred? Isn’t that the spread between where you’re buying and selling and it seems to be wider than historically averaged?
Could you just provide a little color on that expectation?
Fred Tuomi
Well it’s wider, Michael, than what we have seen most recently but if you go back further, I think you’d see where it sort of generally has been historically a normalized delta. Certainly in 06 and 07, that did narrow as we were able to sell an awful lot of assets, very strong bids, on the stuff that we were selling because of the amount of financing was available.
And I think that that spread, if you look back historically, David, would be very consistent with what we would have seen prior to 2005, 2006.
Operator
Your next question comes from David Bragg – BAM-ML.
David Bragg – BAM-ML
Just broadly speaking on guidance, could you talk about the level of job losses nationally, that the range that is assumed in your revenue growth guidance.
Mark Parrell
We don’t think about jobs in that manner. We think about jobs in our [sub] markets and down in our properties, so we don’t think about it from a national perspective; we think about it by market by market prospective.
And Fred has given you a little bit of color and we can screw that down more if you need it, in terms of the job situation in the markets in which we operate.
Fred Tuomi
So, we’ll look at the major employers in each individual market and each individual sub-market and understand what’s going on there as well as understanding the supply situation in each of those individual markets as well as the single family situations and we’ll do that more of a ground up. So, we don’t announce to our people all across the country that they ought to work from a certain job loss starting point.
It really is done at the grass roots level.
David Bragg – BAM-ML
Well then as we think about the pace of the decline throughout the year, could you provide the same store assumptions for 1Q?
Fred Tuomi
The same store assumptions, I would expect same store NOI in the first quarter to be down. I would expect it to be down for two reasons.
First, sequential revenue will be down, okay, and I would expect that to be minimal though. So, when you look at a quarter-over-quarter, first quarter ’09, first quarter ’08, the revenue decline won’t be that substantial.
It’ll accelerate as the year goes on. What we do have in the first quarter is the beginning of higher expenses for us that we alluded to on the call, so that’s where we get that.
Now as the year goes on, that quarter-over-quarter revenue number will deteriorate. But in the first quarter, I wouldn’t expect that number to be too terribly negative on the same store revenue side.
It’s just, from that point on, this stuff will leak through the system.
David Bragg – BAM-ML
Okay. And, then, last quarter, I believe that you talked about having price and tower on renewals, at least having flat rent rates in every key market.
Where does that stand a few months later?
Mark Parrell
Let me just say, so you’re right. What we talked about on the last call was, in the first nine months of the year, we did see pretty strong renewal levels and we did start to see that weaken.
Fred Tuomi
Yes, I can tell you this, as of January, our January renewals that are basically complete right now, every market is positive expect for two, New York and Phoenix. New York is flat and Phoenix is flat.
All of the other markets were still being able to achieve a net renewal gain of all of our leases expiring in January and the blended average is 2%.
David Bragg – BAM-ML
Okay. That’s interesting and just, like New York and Phoenix, what’s the magnitude of the decline that you’re seeing there?
Mark Parrell
Like I said, they’re flat. The renewals that we achieved in both of those markets were flat.
I think that New York was down a tenth of a point and Phoenix was down a tenth of a point as well.
David Bragg – BAM-ML
Got it and, then, just lastly, what strategies might be adopted to keep current tenants in place at least at those rates? I had read something recently about you were moving some pricing from your website?
David Santee
Good morning, this is David Santee. Regarding the website, if you go back to the last downturn, basically, no one was doing real time pricing via the Internet and we are using this opportunity to tinker with some different strategies and kind of measure our customer’s reaction and interactions with our online website at the department.
To date, we haven’t seen any material change in how people use that. We’ve seen – we continue to see increases in the number of guest cards that we receive online and we’ll continue to modify and experiment with different strategies as we move throughout the year.
Fred Tuomi
And as – at our retention rate or our renewal rate, the amount that we achieve is up. The fourth quarter was a very good performance in terms of our number of retained residents on our renewals.
David Bragg – BAM-ML
Okay. So, the thought is, though, that, perhaps, a little less visibility could assist in renewal rates?
David Santee
Well, possibly. I mean, basically, what we see with LRO is there, within our industry, there is a seasonality, if you will, to the flow of rent throughout the year and, typically that season is the trough of that seasonality is in the winter months and what we saw with the shot that occurred in, call it October/November, we felt that perhaps there was some overreaction to some of the rent changes that we saw in LRO.
So, we didn’t want to market rents that we felt were not sustainable at those low levels. Already, as we begin to come out of this seasonal trough, we’re seeing rents in many markets start to pick up, as we would expect each and every year.
Operator
Your next question comes from Jay Habermann – Goldman Sachs.
Jay Habermann – Goldman Sachs
Hey, David, you mentioned Freddie, Fannie and obviously more difficult underwriting and you clearly have some sales expectations for the current year, but could you provide a little bit more color there as to what you might see this year?
Mark Parrell
What we’re seeing is an increased – a tightening really in agency underwriting standards. They’re looking for coverage is more, like, 1.3 times debt service; where, in the past, that had gotten as low as 1.15 or 1.2 times debt service.
I’ll also tell you that I think quite smartly the agencies have focused and preferred to do acquisition loans than refinancing. There is such as dearth of pricing date out there.
If they’re able to do an acquisition and get an arm’s length price, that really helps them determine their loan to value. So, what I see is just a continuing increase or stringent – increasing the stringency of the underwriting standards.
I will say, though, that as you switch away from your question, which was what our buyers do to what EQR does, I don’t expect our terms to vary that much because we finance ourselves. We do it on such a large bulk basis with diversified pools that we get better pricing and we have better terms.
Jay Habermann – Goldman Sachs
But, this isn’t so much a change, quarter-over-quarter, I mean, the 1.3 times is pretty consistent with where we were, maybe, a few months ago?
Mark Parrell
Well, I think they have become more stringent in enforcing that standard and, in fact, one of the GFCs recently came out with sort of written, explicit new underwriting guidance on that point.
Jay Habermann – Goldman Sachs
Okay. And, in terms of just, I guess, future use of proceeds, I mean, you didn’t include those in your assumptions going forward for debt pay downs, but would you anticipate being more proactive with 2011?
I mean, given that that is the big maturity year?
Mark Parrell
Sure. I think we’re going to continue to look at that both secured and unsecured.
I mean, we may be able to get some of that secured debt, some of which is with life companies, and we’re working to do that. It’s not just the unsecured debt market where there’s opportunity.
Certainly, some of our secured debt may be available for par or discounted repurchase, so we are looking at that, both in 2011, 2010 and anything else that we might have missed in ’09.
Jay Habermann – Goldman Sachs
Okay. And, then, also, did you mention in New York just how bad you expect NOI to get this year?
Mark Parrell
I don’t think we did specifically, Fred?
Fred Tuomi
It's going to be a function the of the revenue side in New York and that one’s hard to call. What’s the job situation going to be?
It’s interesting if, today what we’re seeing, we’re not having a mass exodus of people from New York. People are moving around and down.
There’s lots of rotation. They’re moving to cheaper units; they’re moving to cross neighborhoods; they’re getting roommates; but, they’re not leaving the town.
So if that trend continues so we get some stability, then I think this initial kind of write down in rents and this fervor to offer concessions will stop and we can get some sort of stability in New York. But, it’s difficult to estimate how it’s – what the situation’s going to be.
Jay, it could be down as little as 3% or 4% too as bad as, maybe, 6% to 7%. We just don’t know.
Jay Habermann – Goldman Sachs
Okay. I mean, at a minimum, though, it’s one month free?
Fred Tuomi
Actually, on the concession side, you hear a lot about those concessions and the owner pay brokers, but not every unit gets a concession, okay. What we’re seeing in our portfolio is the smaller units, the studios and those more geared towards, maybe, not the top end rent, and we have a lot of those units in our portfolio, those are still extremely – doing extremely well.
We’re highly occupied on those buildings. We’re renting them quickly.
Especially after the turn of the year we saw a little surge there so we’re not offering concessions on those types of floor plans. The one’s where you hear about the concessions, and it really is a factor, are the higher ticket, bigger units.
The two bedrooms that are with the higher floors with the views, and have been fully amenitized, we got very good premium rents over the last few years. Those are difficult right now to sell at the same rate, so you have to have concessions there.
So, maybe, about 40%, 45%, at the most 50%, of leases in a given week are going to have a concession, the rest won’t, and about 30% carry the owner pay broker.
Jay Habermann – Goldman Sachs
Okay. And, just lastly, for David, just in terms of the economic stimulus and focus on home owners, and sort of that combined with prospects for, perhaps, a weaker recovery if you look out to 2010, what are your general thoughts on sort of the propensity to rent versus own in terms of the recovery?
David Santee
Well we want – we look very, very closely at anything that’s included in those packages that's single-family home oriented and, then, on one hand, we certainly are in favor of stabilizing the single-family home business because we think that that’s – the single-home market, rather, because we think that’s important in helping to stabilize the economy. I will tell you, though, that I think that until our residents have a better picture and more confidence about their job and about the overall economic outlook, we’re not expecting people to be leaving our apartments to go buy single-family homes regardless of what the mortgage rate is.
I think that a lot of people have done – did that in ’04 and ’05 and they learned the hard way that that is not for everyone. I’m not suggesting that we don’t have some pent up demand in our units for single-family homeownership, but I don’t believe that that will take place until the economy is stronger, people have – feel better about their jobs, about the overall economic outlook, and we will be producing new jobs to create the traffic to back fill those people that do leave.
Operator
Your next question comes from Michelle Ko – UBS.
Michelle Ko – UBS
Hi, just about a little bit on David Bragg's question. I was wondering if you could talk about the renewals and how you’re still able to get increases when some of your competitors are giving concessions and, also, are you trying to lengthen your leases to 14 to 16 months?
David Neithercut
I can give you some color on that. We have a very well defined sales training program which includes a thing we call action renewing, so there's a defined process that we use which gives our managers market intelligence, pricing recommendations and a process of negotiation to go through with our customers.
And it's amazing how steady we have been in the result of that. About 30% of the people will sign at the quoted rate.
So the first part of this is to define the quoted rate, accurately. We continue to be confident in the value of the products we provide, so we're quoting some in most markets increasing still, and we have a negotiation in time with those residents and we get to the final result.
That's still resulting in the ability to get net increases on many of our renewals, not all of them, but the vast majority of them. Right now, a lot of people are satisfied with a flat more down markets, and very rarely are we reducing rents, and I think that's pretty much true with the industry, that we're not giving renewal concessions.
Concessions you hear are on the new leases where you have extra inventory on the vacant units, or on high priced units, but I'm not aware of anyone giving concessions on a renewal. You read about this sometimes in the paper and there's been some press recently about the big negotiations but I think that's isolated and in very few cases.
So we're not seeing that in our portfolio, which is a good cross section of the United States. We're still getting rent increases, even in places like Atlanta.
And like I said the only places we're not are New York and Phoenix and they're flat.
Michelle Ko – UBS
Okay, and can you also talk about your assumptions for acquisitions and dispositions 700 for dispositions seems to be a bit of a high number. I was wondering if you could comment on as you could see who the buyers might be, and also could you give us a sense of how large each asset you intend to sell is?
Are most of these assets going to be $50 million or less or $100 million or more, and what do you intend to use the asset proceeds for?
David Neithercut
Michelle, I think what you'll see in 2009 if we are successful in continuing the disposition process that we've been undertaking for the last few years, we'll continue to be smaller priced individual assets. Particularly, we've got a portfolio of assets that we expect to sell that came to us from our purchase of our Grove Realty Trust, back in the '90s.
There are a lot of smaller properties, average unit size, 95 or so units, so what you'll see us selling will continue to be smaller, lower priced, assets, probably sub $50 million. We currently as I mention the market remains there, Fannie and Freddie continue to provide financing and so we do believe that there will be a bid for what it is that we want to sell, but of course that could change.
I don't know if we'll get to 700 or not, but as we look at what we have out under letter of intent, what we have out under contract today, what we expect to be marketing soon, our expectations is that we can do that. On the acquisition side, as Mark noted, if we acquire anything it won't be towards the back half of the year.
We've not really bought anything, or put anything under contract for quite some time and I don't expect to for awhile, as we continue to look at the market place, but also I think value more dearly the cash than any individual assets. So the use of proceeds really will be cash.
We think that that's far more important than owning some of these non-core assets today. And then if we're successful in continuing to buy back some of this debt that Mark talked about, continue to buy, convert, continue to buy some of our unsecured debt, and perhaps we're successful in buying back or repaying early at par or at a discount some mortgage, existing outstanding mortgage debt that is expected to mature in the next several years.
That will probably be a likely use of that excess cash.
Michelle Ko – UBS
Okay, and just do you have any more acquisitions that are contractual obligations?
David Neithercut
No.
Michelle Ko – UBS
Okay, thank you.
Operator
Your next question comes from Alexander Goldfarb – Sandler O'Neill.
Alexander Goldfarb – Sandler O'Neill
Just going to the debt markets for a few questions, Mark what are you looking for as far as the attractiveness for the unsecured market? What sort of rate are you looking at, and are you looking at an all-in or are you looking at a spread
Mark Parrell
What we look at on the unsecured side it is the all-in rate. I'm not a spread product, we're an all-in rate finance shop here so what we need to compare it to is our Fannie, Freddie cost of funds which call it in the 6% range.
It's not uncommon, it's been true in the past, that we've paid a premium to borrow unsecured. I'd expect us to do the same here.
It's just a matter of how dear that premium needs to be. I think borrowing unsecured proves to the market that we're able to access multiple sources of capital.
I think that's useful and appropriate, but you know we won't do that at some kind of ridiculous price. We had seen really quite tremendous progress there.
I mean this was, on the last call I think someone asked a similar question, I think we said it was by appointment. There's really no ability of EQR and other good real estate credits to issue.
I don’t' think that's true. I think we can issue now.
I don't think that rate is a double digit rate. I think it's a single digit rate, but it's not yet in the strike zone.
Alexander Goldfarb – Sandler O'Neill
Okay, and then as far as incremental secured borrowing, how much more secured borrowing can you guys do and still maintain your existing rating?
Mark Parrell
Well, let's talk about covenants first, so that we can borrow another $3 billion under our covenants secured without throwing the vehicle out of compliance. In terms of the ratings, the rating agencies and you know we do visit them and speak with them constantly, their focus has been a late liquidity in maturity management.
That's appropriately where I think their focus is at this time. I won't pretend to speak for them, but that's what they care about.
They love the fact that we have cash in the balance sheet. They love the fact that we're very conscious.
At some point certainly, and the number is well before $3 billion, our rating will be pressured if we continue to be a secured debt borrower. And all the better reason to maybe do a little unsecured debt, even if it is at a premium to a Fannie or Freddie execution.
Alexander Goldfarb – Sandler O'Neill
And then just the last question goes to your line of credit. How easy is it to replace one of the banks on the line of credit?
Mark Parrell
Well, to replace them at the same pricing which is this L plus 50 pricing is effectively impossible. So the line of credit is something that is very valuable.
It's going to re-price in 2012 and likely at a considerably higher number based on today's market conditions and is likely to be smaller.
Alexander Goldfarb – Sandler O'Neill
So along those lines, are there any banks in your line that you're concerned about?
Mark Parrell
We did disclose that one of our lenders is insolvent. We have removed that lender from our calculations so all the liquidity information I gave you excluded that particular lender.
I feel confident in the remainder of the bank group. It's 28 odd banks, it's very diversified.
It includes the primary money center banks as well as some large regional, some foreign banks, so we feel good about the quality of the bank group at this time.
Operator
Your next question comes from Michael Salinsky – RBC Capital Markets
Michael Salinsky – RBC Capital Markets
David, you touched upon a dividend in terms of not paying any amount in stock. Given the projections for 2009, it looks like there may be a short fall.
Would you cover any bit of that with borrowings on a line of credit?
David Neithercut
Well, I guess I would hope that Mark had mentioned that his analysis didn't include disposition proceeds so I mean my guess would be that we'd have ample cash proceeds from dispositions to be able to cover any shortfall on that.
Michael Salinsky – RBC Capital Markets
Second of all, in your prepared comments you mentioned the cap rates over the past 90 days were up meaningfully, could you put some numbers behind that?
David Neithercut
Well, I guess what I'd tell you is that thinking about the assets that we have acquired in the past and we would be acquiring if we were using our liquidity to acquire assets today, and again, I'm going to talk about some mid points and some ranges here, but I also do want to say there's not been a lot of transaction activity out there. But our best guess is if deals were trading today, back one year ago, most of the markets in which we were buying assets were probably had four handle cap rates and today many of those markets do have six handle cap rates.
So I would tell you that generally in the better quality properties, in the markets in which we have been buying, cap rates are up 100 to 175 basis points.
Michael Salinsky – RBC Capital Markets
That's very helpful. Third can you touch upon whether private equity is still has any interest in multi family or has it pretty much exited the space at this point?
David Neithercut
Mike, we've not seen any, I mean if you're talking about private equity in the EOP type private equity. I mean that certainly is not out there, but there's I think, everybody talks about funds having been raised to buy distressed debt, or to buy assets.
There are people who have cash having raised to do that, but we've not seen any of that play in any of our space as of yet.
Michael Salinsky – RBC Capital Markets
And specifically the amount of stressed assets in the market, I mean are you seeing that tick up meaningfully or if not, when do you expect to see that tick up?
David Neithercut
Sure, what I would say is talking to the GFCs, is they have pretty clean books, where I think there may be more opportunity and activity there as in the CMBS market where there are some very large well known deals that are under pressure. So those deals may be where there is a more meaningful opportunity for people to buy debt or buy assets at discounts in distressed situations.
And that really hasn't manifested itself much. I mean we've seen a couple of broken, fractured condo deals here and there but we have not seen meaningful distressed asset sales yet in our space.
Michael Salinsky – RBC Capital Markets
And finally you talked about the prospects for a pretty strong recovery here in 2010, 2011, 2012. Just given the excess supply of single family housing inventory that's out on the market do you think that eats into the recovery?
David Neithercut
Well certainly that is inventory and that is inventory of housing so I can't imagine that won't have some impact on the recovery. But really you're talking I think about the Inland Empire, you're talking about Phoenix and I think you're talking about Florida.
In the other markets in which we operate we don't look at single family housing as being over-supplied to the extent that it would have a negative impact on that recovery.
Operator
(Operator instructions) Your next question comes from Lou Taylor – Deutsche Bank.
Lou Taylor – Deutsche Bank
It looked like estimated stabilization to date on two Massachusetts properties was pushed back a quarter. Wondering if you could provide color on that and a few of the concessions in the lease process?
David Neithercut
In many instances pushing something back a quarter means instead of stabilizing in March you might stabilize in April. So I don't think there's anything to sort of read into that.
Now with respect to concessions we do underwrite up to one month free on our lease-ups on our development transactions. I will tell you that what we are leasing up today that's averaging between a half a month and as much as two month's free just on average across that product that we are leasing up.
Operator
(Operator instructions) Your next question comes from [Lee Christiansen – Isthmus Funds].
[Lee Christiansen – Isthmus Funds]
I'm just curious about the gain on the buy back of the convert. Where is that showing up on the income statement?
David Neithercut
Sure so the gain shows up in the other income area.
[Lee Christiansen – Isthmus Funds]
And how much was that?
David Neithercut
It was $18 million.
Lee Christiansen – Isthmus Funds]
And also what do you think of the impact of the proposed changes in the New York rent controls? What do you think that impact will have your portfolio?
David Neithercut
Well we haven't gone through that arithmetic yet. It looks like it's gaining some momentum but nothing's happened there yet.
I will tell you that we're involved with the Real Estate Board in New York. There's a meeting today that's taking place that one of our senior is at and we're working very hard to try and combat that.
So it's premature to tell you what impact we think that will have because it's not quite clear what, if anything, is going to happen. But clearly that's something that we're watching very carefully.
Operator
(Operator instructions). Your next question comes from [Scott Kirk – TCAP].
[Scott Kirk – TCAP]
I've got three questions. First I wonder do you all break out the end-markets by industry exposure like what percentage of your end market is financial services versus other industry groups?
David Neithercut
No sir.
[Scott Kirk – TCAP]
Is there any kind of way to ballpark that?
David Neithercut
You mean if you were to look at our residents across all of markets, what percentage is in financial services?
[Scott Kirk – TCAP]
Exactly.
David Neithercut
We do know that by property in individual regions but have not totaled that up to add up New York with San Francisco with Seattle with Orange County for instance. But we are very much aware of who our core employers are in every market in which we operate.
[Scott Kirk – TCAP]
If you looked at the biggest geographic exposure could you kind of ballpark what that would be? Would financial services for example be one of the bigger employers in the big geographies?
David Neithercut
Does anybody know this off the top of their head?
Fred Tuomi
The clear choice is New York on financial services and to a lesser extent Boston and the Northeast Bay of San Francisco. But our systems do have it down to the resident level all of the information about who they work for, the type of work, etc., and whenever we hear a news report of a certain employer who might be reducing size we can know within a matter of minutes how many residents that we have under lease that work for that employer.
[Scott Kirk – TCAP]
I would just be interested on a consolidated basis but maybe I'll follow up offline but because it doesn't seem –
David Neithercut
Let me try one other way to think about it. One of the banks that sort of disappeared in 2008 I recall that we thought we might have had, in New York, 50 residents maybe out of 150,000 that may have worked at that particular bank.
So I know you're interested in industries but it's a very diversified portfolio of employers that we cater to.
[Scott Kirk – TCAP]
On delinquencies can you give us a sense of what you're thinking is? Do you think we've reached kind of a – you're in a very good level and historically in the level that you have been which isn't true of some of your peers – do you expect delinquencies to rise from this level or what's your thinking about that on a forward basis?
David Santee
I would say that I'm more than pleased with what we see. I think one of the keys to our success was our implementation of a proprietary credit model about two years ago.
And we've seen pretty tight ranges as far as our FICO score distributions and the overall creditworthiness of the people that are coming through our doors. And part of that model depending upon your creditworthiness requires you to pay additional deposits all of the way up to one to two months worth of deposits.
And those deposit levels have grown at a healthy rate over the past two years. So if someone begins to default we have a lot of coverage on the back end.
So personally I don't see any reason why that should change over the next several months. Delinquency is a measure of people that currently live with us.
I think what we see is a person that is reputable and is concerned about their credit standing is not going to ride out an eviction process. They're going to come in.
They're going to work with us. They're going to hand us back the keys and that becomes a bad debt.
[Scott Kirk – TCAP]
So it would be fair to say that you don't delinquencies going out of the historical range in the near-term.
David Santee
Not based on what I've seen today, no.
[Scott Kirk – TCAP]
And thirdly, and thanks again for the time, on occupancy can you give us a sense of how low that might get? How low it's been historically and what the ramifications on pricing and FFO could be if that sinks much below the historical range?
David Santee
You know with the yield management system we're not really targeting occupancy and we're not targeting rate. We're optimizing both of those to produce a consistent revenue stream.
I would say tell me what the job situation is and I can tell you possibly how low occupancy rates could go.
[Scott Kirk – TCAP]
You mentioned a 9%, 10% earlier let's just say a double digit level.
Mark Parrell
We did assume in our guidance a reduction of 100 basis points in occupancy. So from 94.5 which was sort of '08s number to 93.5, so we do expect and I mentioned in my remarks some occupancy pressure and have allowed for that in the guidance for sure.
If you go back into downturns that have occurred over an extended time period, let's just talk maybe late 80s where we saw occupancy go into the 88% or so. But that was a time when there was massive over supply.
I mean a massive over supply. We're in a situation today where we have better demographic picture, we have declining single family homeownership and very little new apartments being delivered to our space.
So we continue to think that pricing can remain reasonably healthy. We expect pressure on our rent levels but we're looking at occupancy to not have to drop down to where it's some sort of low-water marks over previous downturns.
[Scott Kirk – TCAP]
And what was the low-water mark in previous downturns?
Mark Parrell
I guess 88% or so, I'm thinking back pre-RTC.
David Santee
Yes, that's way back. I think the last time we were hit maybe at the worse case in 92.8% or 92.9% mostly around the 93% range.
And the nice thing that I'm pleased with is the health of the occupancy and our exposure we measured left to lease of our entire portfolio. David mentioned we finished January at 94.0% occupancy right on the button.
We have markets like Inland Empire, they're sitting there at 94.9% with 8% left to lease, 94.7% in Virginia, even Atlanta 94%, New York 94.5%, Orange County 94.2%. It goes on and on.
[Scott Kirk – TCAP]
It's encouraging. Would you all as a management team venture to share your thoughts on – you talked about the supply constraint when the economy turns that will create a great opportunity.
What are your thoughts on the economy and when we can see some improvement? I know it's anyone's guess but what are you thinking about?
Mark Parrell
It's anyone's guess. I mean you just said it.
We gave a wide range for revenue guidance for this particular year because of the uncertainty that we have. Clearly '09 is going to be challenging.
Many people expect 2010 to be challenging as well, but if we can start to get some traction based on some of this government stimulus I think you can start to see some improvement in 2010.
Operator
(Operator instructions) Your last question comes from Michael Bilerman – Citigroup.
Michael Bilerman – Citigroup
All of our questions have been answered. Thank you.
Mark Parrell
All right well thank you all for joining us today. If you have any other questions you know where to find us.
Thanks very much.
Operator
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.