May 1, 2010
Executives
Martin McKenna - IR David Neithercut - President and CEO Mark Parrell - EVP and CFO Fred Tuomi - President, Property Management David Santee - EVP Operations
Analysts
Michael Levy – Macquarie Eric Wolf Michelle Ko Dustin Pizzo Shane Buckner Jay Habermann Rich Anderson Alexander Goldfarb Dave Bragg William Acheson Michael Salinsky
Operator
Good morning. My name is Sandra and I will be your conference operator today.
At this time, I would like to welcome everyone to the first quarter earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks there will be question-and-answer session. (Operator instructions) Thank you.
I would now like to turn the call over to your host Mr. Martin McKenna.
Sir, you may begin.
Martin McKenna
Thanks, Sandra. Good morning and thank you for joining us to discuss Equity Residential's first quarter 2010 results.
Our 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 it over to David.
David Neithercut
Thank you, Marty. Good morning, everyone.
Thanks for joining us for our first quarter call. Well what a difference to year make some and I’ll say the way things are changing today what a difference 90 days mix.
One year ago we were facing extremely serious headwinds in our business with domestic and global recession full swing and job losses of 500,000 per month really with no end in sight. And we’re rolling down our rents on average 10% to 11% across our portfolio.
Yeah we ended last year with same-store revenues down only 2.9% and we shared with you in early February our sense that we are at the beginning of a recovery. We said in February that we are experiencing improving occupancy across many markets when seasonally we would have been expecting just the opposite at to be happening.
We also have said that our net effects in new lease rates were beginning to term positive in many of our markets and that we are beginning to see more renewals with an upward bias. During the first quarter, those trends have continued and we think they are even stronger today.
Our occupancies continued to improve; it’s up 100 basis points from January 1, to 95.3% today. Our net effective new lease rates continue to increase, up 2.3% from one year ago and 4.6% since the beginning of the year.
So that for the month of April, the difference between move-out rents and net effective new lease rates was on average across the portfolio down only 1%. And this is quickly trending towards flat with some markets today already positive and to put this in perspective, you recall that this delta was negative 10% one year ago.
We continue to renew our residents 23,000 so far this year and those renewals have been up 2% and not a single market across the country is renewing leases today for less than at least a 1% increase. The 13,000 renewals that we’d already done year-to-date, there were new leases a year ago so that a year ago the lease rates were likely down about 10% on average.
Those 13,000 renewals have been renewed on an average increase of 3.2%. We’re clearly beginning to recover some of the reduction of rents that we needed to give the market a year ago.
And we’re delighted that sequential revenues were essentially flat in the fourth quarter of ‘09 to first quarter ‘10. This is of course primarily the result in the pick up in occupancy while increasing net effective new lease rates contributed as well.
Clearly, even without job growth fundamentals are improving and our expectation today is for continued in improvement in fundamentals. We originally thought to pay that sequential same-store revenue growth would turn positive in the third quarter of this year and we now expect sequential revenue performance to be positive in the second quarter.
Said differently we expect to collect more revenue from same-store properties in April, May and June that we did in January, February and March and it will be a first time since mid 2008 that we've been able to do that. And while we originally expected that the fourth quarter of this year would be the first a quarter-over-quarter revenue growth it's possible, but we could now see that occurs earliest in the third quarter.
And as a result we think the better end our same-store revenue guidance for the full year is no longer simply possible, but it is now probable. Also what’s happening?
Why are we seeing this improvement of fundaments without any reported net new job growth when history would suggest that really have to be happening for any of this take place? While prior downturns watching the pain and flicked it on our space was due to oversupply and as a result when the economic picture began to improve multifamily property said 3, 5, 7 points of vacancy if not more that needed to be reestablished in order to start to see an increase in rental rates.
What we’re seeing take place today is very much what we thought could happen given a significant reduction and new supply over the last several years. As well as the powerful impact to be applicable in generation 85 million people strong but just having a profound impact on rental housing and we think will for many years to come.
So last year we were able to maintain occupancy despite the massive job was, we have to reduce rents of course but occupancy was maintained. And now with the economic picture improving, the 90% of the workforce that has remained employed that during the downturn is no longer concerned about losing their job, which is enabling us to increase rents nearly across the board, it was still a long way from recovering all the reduction of rents that occurred doing a downturn and it will take a while to get it all back.
But we are encouraged by what we are seeing without any real job gains and I am optimistic about the impact on fundamental to job growth we’ll have when it actually does return. One the transaction side of our business, we were relatively inactive for quite some time.
But a window of opportunity opened in a late in the fourth quarter of last year and since then we are delighted to have acquired nearly a $1 billion of assets, Six of those were acquired in the first quarter of this year for $639 million and all of those that I have been discussed on our prior calls or otherwise publicly disclosed. Those include the three macro assets, I’ll highlight that in the Arlington Virginia that was build in 2008; a mid-rise property near the beach in Demark, California and a mid-rise property in Seattle.
All of these deals we feel primarily extreme well located with the high quality assets and we were able to acquire them at very attractive prices at discounts to replacement cost and what we think were double digit IRRs. We also recently announced the acquisition of another great opportunity for us in Washington D.C.
is of 425 Mass Avenue property. This is the property which conceived and completed in 2009 as-for-sale condominiums.
And we acquire the property totally vacant and have a major lease up on their way. We acquired that asset for slightly less than $300,000 at door which represented about 80% of what we think of replacement cost side and about 70% of what it actually cost to build.
So we projected an 8% but not more stabilized the return on net asset three years [out]. I’m happy to say it in the first two weeks of leasing we’ve done very well and I want to remind you that this leasing began from a dead-standing start because we bought this asset but we didn’t develop this; we didn’t have months to prepare for this leasing activity.
But in the first two weeks of leases we’ve written 31 leases and also been done at rate right on top of our $3 per square foot pro forma and while we assume that average of slightly more than one month concession on each week during this lease up concessions has been for no more than one month end up third of the leases. Third of the leases have been written with no concession what so ever.
So I am very happy with the progress of [Bobbi Pollard] team that have managed to-date. So we continue to be thrilled about this asset.
All that said I wish I could tell you we had a pipeline flow of similar acquisition opportunities but we don’t and this is not the lack of trying. But as you know there is lot, a lot of products being offered today.
But certainly as more than a year ago, but volume is still way down from normal levels and there was a place of capital, plenty of capital chasing these deals. So, properties have really come in, in fact we think that come at 25 or 50 basis points more adjust in the last few months alone.
And values have increased significantly, and we are not expecting to be able to replicate the extraordinary success we’ve had with our last way of acquisitions. So, while we’ve increased our acquisition guidance for the year, this is due more to what we’ve already done rather than what we are currently working on or see ahead of us at the present time.
Meanwhile, like the fourth quarter of ‘09, a disposition activity was below our average run rate for the last several years. This was due to the fact the pressure on liquidity, we had ease to great deal and we thought that values would likely improve so we decided to wait and see how things evolve.
In the quarter we didn’t sell eight consolidated assets. We were in continuation of our non-core market exits with five deals in North Carolina and one deal in Dallas.
It also did include a two phase asset in San Diego, which was a 30 year old product but we saw that big capital meets in the near future and was in imperial location. We’ve also increased our disposition position guidance for the year and this is a result of our renewed willingness to transact, since value has increased.
But March will depend on what acquisition opportunities we see. And as like disposition activity fixed up it will likely be towards the latter part of the year.
And many of that will likely be back into a training mode in which we will transact if we find acquisitions that make sense relative to the pricing we can get on our disposition assets. On the development side we’ll continue great progress there, the deal that being completed on time and under budget, leasing continues to exceed our forecast on our absorption rates and like our stabilized assets we are seeing a lift in net effective rates there.
Only three projects currently remain under construction, they range from 67% to 90% complete. And only a $106 million remains to be funded to complete construction on those deals.
And it’s been a couple of years since our last development starts, and that was our Red 160 property in Redmond, Washington which we started in June of 2008. Now we do expect to soon start on our $53 million development deal in Manhattan Chelsea neighborhood.
We also have recently acquired a land part so in Arlington, Virginia, this is the site for 188 units, and this is adjacent to our Sheffield court property there in Arlington. Total project cost about $67 million and adjustment per value for the ground floor retail that’s about $297,000 a unit, $312 per square foot.
We’ve been looking at this site since 2005 and we acquired it from a pension fund at about 60% of their cost. That seller was successful in getting the property rezoned and fully entitled.
We expect to receive all final approval, that’s early is late this year and construction should start in the first quarter of 2011. We anticipated plus 7% return on the current rent on that development in Arlington, Virginia.
Now development very much remains a core competency of EQR, and just as we did during the last couple of years we are going to continue to underwrite development opportunities, that will start with own land inventory and we will compare those opportunities to acquisition opportunities as well as deals in IRRs and disposition candidates in order to allocate capital in the highest risk adjusted way possible for credit long-term value for our shareholders. Now I will turn the call over to Mark to go through the quarter and our guidance.
Mark Parrell
Thanks, David. Good morning, everyone, and thank you for joining us on today's call.
This morning, I will focus primarily on our first quarter performance and our guidance for the second quarter and the full year 2010. Revenues were better than our expectations.
For the quarter our total same-store revenues decreased to 2.9% when compared to the first quarter of 2009, which was a better performance when we expected really for four reasons. Firstly, at 100 basis point increase in occupancy to 94.7, we had budgeted occupancy to go up but it happened faster than we though and as David said this trend continues as we are 95.3% occupied today.
Second factor would be 170 basis point decreased in resident turnover for the quarter. Over the past few years we have seen a steady improvement and lessened our retention as our customer royalty programs took hold and as people across the country chose to hunker down and weather the recession in our apartment.
We were not expecting to be able to drive turnover down further and our guidance indeed anticipated that turnover would be flat compared to 2009. So this continued improvement is the good sign, our residents are very satisfied in their homes with us and happy to stay longer.
Third factor as David noted when new leases were executed at better than expected increases across all of our markets. And finally on average across our portfolio the difference are spread between the rent we were receiving from move-out and the lower rent we will receive from new leases on a net effective basis was slower than we expected.
In some markets like DC Metro, South Florida, San Diego and Denver the spread was already positive in the first quarter, meaning, that new leases in those markets are being written at higher rents on average than the average rent on move-outs. In most of our markets this spread was still negative in the first quarter.
While net effective new lease transaction is still lower on average than rents on move-out. But as David said that gap is closing more quickly then we had expected.
In several of our other markets like Boston and Inland Empire spreads turned positive or likely to turn positive in the second quarter. We find all of this very encouraging, assuming current rent hold which is something that we are only be able to validate once the primary leasing season concludes.
We see our year-over-year at same-store revenue number very much at the better end of our guidance. On the expense side same-store expenses increased 1.5% on a quarter-over-quarter basis.
In this quarter lower real estate taxes in payroll expenses where more than offset by an expected storm cost. Without the storm cost our quarter-over-quarter same-store expense number would have been flat and same-store NOI would decline about 4.8%.
However for the year we remain comfortable with our plus 1% to plus 2% range for 2010 expense growth and here is lot. On the real estate tax side which constitute about a quarter of our property operating expenses, these did increase slightly but this increase was lower than our expectation.
Because of this early point in the year and it is early yet. Government revaluations were lower than we had anticipated and because we continue that’s a good success in the appeals process.
I do know that most of more material property tax jurisdictions do not announce property tax rate until the second half of the year. So further movement either way in this number is possible, on-sight payrolls the next item and it’s about quarter of our operating expenses as well.
This item was down 2.1% due to reduced headcount resulting from our continued efforts to create efficiencies in our platform. We expect growth in this category to remain sub due this year.
Our third biggest expense categories utilities which is about 15% of our operating expenses and those expenses were up only 2.1% quarter-over-quarter. We’d budgeted 3% increase for the entire year.
We saw lower gas and electricity costs but saw increases in water and sewer as municipalities look to close budget gaps which rate increases by municipal utilities. So again the municipalities are increasing municipal utility rates.
Our fourth item is repair and maintenance. The main pressure from our expense number came from this line item.
Specifically, from costs for snow removal from the extraordinarily severe storm that hit East Coast this winter, as well as costs from the damage caused by rain storms in California and Arizona. The majority of these costs are included in the repairs and maintenance expense category, which were 6.7% quarter-over-quarter.
Without these unusual costs, this category would have increased about 1.5% quarter-over-quarter. Please note that we believe all of our material storm related costs were paid or accrued for in the first quarter.
And we do not anticipate an expense in tax and as long as in the second quarter. On the collection side, the field and property operation teams have done a fantastic job managing credit risk to this recession.
We saw delinquencies decrease in the quarter to 2.7% down from 3.2% a year ago and well inside the normal historical range. Also delinquency declined in the first quarter of 2010 compared to the fourth quarter of 2009 by 20 basis points.
The usual seasonal pattern here is that after Christmas going into the New Year delinquency has actually increased, so this is a very good start. Bad debt was 0.9% in the first quarter down from 1.1% a year ago and also well within historical ranges.
As you saw in our release, we reported FFO of $0.49 per share for the first quarter of 2010, we are slightly higher than expected same-store NOI and a terrific incremental contribution about 7.2 million in the quarter from our leased up properties and we have reported $0.51 per share not for the cause from the storms I mentioned as well as some accelerated property acquisition costs. Last quarter I informed you of the new accounting rule which requires us to expand survey titles outside legal expenses, and other similar cost we incur in acquiring the existing operating properties.
Prior to 2009 these costs on successful acquisitions would have been capitalized. These expenses now run through the other expenses line items on the income statement and are included in our guidance assumptions on page 23.
Based on our old acquisitions guidance of $1 billion we budgeted about $5 million to such cost in 2010 was about $2.5 million or 1 penny per share of these costs being incurred in the first quarter. Because we closed on the long acre acquisition in the first quarter, one quarter earlier than we expected and because in the first quarter we incurred substantially all of the acquisition cost for the 425 Mass Avenue deal we had more of these costs earlier than we expected.
Besides the shifting of transaction costs forward one quarter we have also increased the midpoint of our other expense guidance for $1 million. Consistent with our increase in acquisitions guidance from $1 billion to $1.25 billion, of course our second quarter number will benefit from the shifting forward as well as from the fact as David mentioned that are relatively small acquisition pipeline means that we don't expect to incur much in transaction cost in the second quarter.
On to guidance, on page 23 of the release we gave guidance for the second quarter of 2010 FFO between $0.53 and $0.57 per share. The primary drivers will difference between our first quarter 2010 actual FFO of $0.49 per share and the mid point our second quarter 2010 FFO guidance of $0.55 per share are as follows: we got about $0.03 per share than increase from same-store NOI approximately $0.02 per share increase from 2010 acquisition and the lease-up activity and about 1 penny per share increased in the timing of the property acquisition cost that I’ve just discussed.
We have left our annual FFO range in past for now and revisit it as we customarily do in July when we report on our second quarter results. I do note that if we are able to maintain our operating momentum during the leasing season we would expect to be in the upper end of our annual FFO guidance range.
We have revised our acquisition guidance for the year. We now expect acquire about $1.25 billion operating properties up from $1 billion.
As of today we have required $806 million of operating properties. We have also increased our disposition guidance from $600 million to $850 million.
We are marinating our guidance of 1.5 % spread between disposition and acquisition cap rate because we expect as David mentioned that the cap rate spread between our acquisitions and dispositions will be narrower going forward then the 1.9 % year-to-date thread. Now a quick note on funding and expected sources and uses in 2010.
On the sources side we have budgeted approximately $1.25 billion of 2010 sources consisting at $850 million in expected disposition proceeds and $400 million in 10.31 proceeds and cash on hand that we had at the beginning of 2010. We had not budgeted any additional issuance of stock under the ATM program and have in fact now issued any stock under that program since January 14, 2010.
It is not our intention to increase our permanent leverage levels to fund, incremental investment activity. So you will see temporary swings in our outstanding line of credit balance due to transaction timing issue.
Not withstanding recent problems in the overseas debt market it is fair to say that the capital market at least for large well capitalized real estate companies like Equity Residential at fully recovered from the credit crisis. I expect that the company could issue 10 year unsecured debt at rate of about 5.4% as we have not issued unsecured debt since May, 2007 and have repurchased a substantial amount of our unsecured debt directly or through tenders there is a scarcity value in our paper that would make any issuance particularly well received.
The bank market is also recovering strongly as banks try to put more money to work for desirable low risk clients like equity residential. Finally funding from the GSCs also available to us at slightly better than unsecured rates.
Our company is fortunate to have minimal debt maturities in 2010 and to have hedged the portion of our interest rate exposure. With our expectation that the line of credit balance at December 31, 2010 assuming no debt activities this year, will be only about $250 million.
We are going to be opportunistic in expecting the debt markets to refinance our maturing debt. Now, I’ll turn the call back over to David.
David Neithercut
Thank you, Mark. Before we open the call to questions I want to provide a little perspective release our perspective on the impact in the single family housing market on our business.
And I am going to start by telling you that only 65 more of our residents told us that they moved out to buy a home in the first quarter of 2010 versus the first quarter of ’09. Only 65 more move outs to buy a home and I was on a base of 12,000 move outs.
Now that activity to purchase homes concentrated only a few of our markets Phoenix, Inland Empire, Orlando, Denver and Northern Virginia. But it appears that much of our reconfigured portfolio seems unaffected.
With the strong increase in occupancy we’ve realized during the quarter it seems us to indicate that increased new home sales even though, that’s juiced by the expiring government subsidies has not hurt our operating results and at least not in the near term. The other question is, as economic conditions improved will the single family housing market have a material negative impact on our results.
And I will start with an increasingly we believe the answer is no. We certainly acknowledged that there is certainly some pent up demand for single family homes within our resident population but it seems that this demand is greatly reduced; it seems to us that the physiology of potential home buying appears to be changing.
There is a much greater understanding and focus now, on the many down sides of homeownership, especially the heavy acre homeownership can have on a generation of young adults that understand that they may work for many different employers and possibly in many different cities over their working lots. This is yet a another reason we feel so very optimistic about the fundamentals of our business going forward.
And with that operator will be happy to open the call for questions.
Operator
(Operator Instructions). Your first question comes from the line of Michael Levy
Michael Levy - Macquarie
Good morning. I was wondering whether you can give some color as to whether there are certain unit types that are doing better than others that would signify that household formation is taking place.
David Santee
When you look at our occupancy today at 95.3 most every unit type that we have is very highly occupied. And we do have some pockets of softness whether pent houses in Boston what have you but, you know now in general all units are in high demand, and were starting to see increased demands, studios in the lower price units in the New York as well which clearly imply that people are unbundling for a room mate what have you?
Michael Levy - Macquarie
I was just wondering if the current trajectory holds, do you have any sense or can you give any guidance as to where we might expect to see same store NOI in 2011, 2012? I'm not asking you to give guidance obviously, but just in general market trajectory, where do you guys see the market 24 months from now?
David Neithercut
I tell you Michael we’ve had the improvements in fundamental we’ve experienced today without any real net job growth to speak of so if you are going out 12, 24 months and there are many out there I am trying to make you think that we could be adding 3 million jobs a year we just think fundamentals are only going to get better.
Michael Levy - Macquarie
Okay. And finally, just as I think about the CapEx on just for the rest of the year for stuff that you're planning to sell versus the assets that you're buying, is that net neutral on an AFFO basis?
David Neithercut
I am sorry CapEx as come on assets we are disposing of whether that’s neutral on AFFO basis.
Michael Levy - Macquarie
Versus the assets that you are buying.
David Neithercut
The assets were buying generally have less capital, per unit than the assets that were selling and one of the reasons we often sell assets is because they have a disproportionate amount of capital relative to the returns. I don’t know that it’s fair to do that to suggest that the dispositioned assets are going to have less capital I think they would have more capital in general.
Michael Levy - Macquarie
So I mean, if you're buying assets with an implied cap of 5.5, and you're selling them at roughly seven is what I guess the simple math would be. I'm trying to calculate what the net impact would be on the FFO and the AFFO.
David Neithercut
Well clearly AFFO was significantly less dilutive particularly when you account for the fact Michael that our history has been we’re selling 2 if not 3 units of what might be averaging plus $1000 of CapEx to buy one unit which would be CapEx on the lower side of a $1000 so the number on an AFFO basis that dilution is far less.
Michael Levy - Macquarie
That’s what I thought I just wanted to confirm that thank you very much.
Operator
Your next question comes from the line of Eric Wolf.
Eric Wolf
Hi guys. Michael Bilerman is on the line with me as well.
And just going off Michael's question a second ago, in thinking about past 2010 and the velocity of rent recovery, what type of job recovery do you think your need to see to actually really push rents? Or do you think it's not going to too much due to lower homeless rates, low supply, etc.
David Neithercut
I can’t tell you exactly some sort of number that equates to a certain amount of rental increase. I can just tell you that we are already seeing rental increases net effective increases in rents across all of our markets today and that is again with little net new job growth in those markets.
So if the pattern holds with no new supply and what we think is maybe a change in the perceptive or the attitude about homeownership of many of our residents and we get job growth they obviously we think that they were going into a 12, 24 maybe in 36 month period here some of the best rental growth that we seen.
Eric Wolf
Right. With the better than expected sequential improvement that you saw, was it driven by particular markets?
Or was it just completely broad based, or did any of the markets come in much stronger than you originally anticipated.
Fred Tuomi
This is Fred Tuomi. It’s pretty much a broad based recovery that we are seeing and we are very happy we have to look pretty deep to find some negative news right now.
So we are very pleased with this the scope and the breadth of this recovery. Certain markets are on the leading edge of that and some are lacking, those typically that went in first are coming out the strongest.
And those like the West Coast market that kind went in last fell little bit deeper they are likely little on recovery but all markets on recovery right now.
Eric Wolf
And then lastly, as far as the increase to your acquisition guidance, it looks like you're primarily going to fund those from increased dispositions. Given the rise in your stock prices, can you just share your thoughts on funding the increase through dispositions versus perhaps continuing to tap your ATM program?
David Neithercut
Well, I guess we will continue to look at both and trying to do what we think is the right thing for our shareholders. We are certainly aware of the increase in that stock price.
We did issue stock to help acquire the macro portfolio. But we still do have 1.5 billion or if not more of assets that we probably like to sell and if we can sell those at attractive prices we think that would be the best way to fund our acquisition pipeline going forward.
I think if we were to get ourselves into a net acquisition mode, then we would have to look seriously at the ATM. But I think that a lot of those great opportunities are behind us, we were a net buyer over the past four to five months.
But I think that we will probably look the more just in a trading mode going forward.
Operator
Your next question comes from the line of Michelle Ko.
Michelle Ko
I was just wondering if you could talk a little bit more about the acquisitions, where you're seeing the best opportunities, and which markets you'd like to increase or decrease.
David Neithercut
Well for an acquisition side, I wish we are not seeing a lot of opportunities today. We did as I said in the fourth quarter saw some opportunities come at a time when we became far more confident in the capital market and our ability to fund ourselves going forward.
So we were able to take a lot of the cash we had quoted and jump on those opportunities. And I think the macro acquisitions, the deals we have done in Washington DC have just absolutely been a tremendous deal and you think about what’s happened to care free compressions since those deals have been acquired as well as what’s happening in the top lines since those deals have been acquired.
We’ve done exceptionally well on them. I wish we had a pipeline of similar opportunities, Michelle but with few deals that are out there and the amount of capital that’s there those key deals that are being offered are being priced very competitively.
In fact we are looking at a deal now and I won’t say the market, but we think it's probably being offered close to replacement cost today. Now recently built deal stabilized but we can sort of buy out of development cost without any of the construction risk.
But our focus continues to be on Boston, New York, Washington, Southern California, Seattle San Francisco markets that’s where our key focus has been, but again as I said which we could I can tell you we have lot more opportunities there, but we have not for lack of trying our guys are out there talking to everybody underwriting a lot of stuff, but there are few deals and lot of people looking to buy them and we’re not terribly interested in being the winning bidder of our deal that's been competed on by 100 other people.
Michelle Ko
Okay, great. And just going back to your earlier comment about markets and you're seeing kind of a broad based recovery.
Just to take that one step further, would you say for those markets that are maybe more supply constrained are you seeing more job growth pickup in those markets first? Or what is your sense of are those supply constrained markets going to recover in terms of magnitude more so than maybe some of the other markets?
Fred Tuomi
That’s absolutely true, the supply constraint markets are complete in recovery and that we’re seeing some very strong spike ups in the rent that along with the occupancy, first we got the occupancy started in Q4 we continued through Q1 and just recently we have seen the rates fall and pretty dramatically Seattle is a good example of that. Seattle was the last one into the recession it fell hard it fell deep that is coming back extremely fast our rents are up in Seattle almost 20% from the beginning of the year and with that they did loose a lot of jobs but we see jobs coming back they may not be reported in the national statistics yet, but this anecdotally on the ground, we’re hearing and we are seeing examples such as technology input jobs coming back in Seattle, Microsoft is certainly stable and adding to their new hiring and their intense Amazons bringing lot of new people in, the bioreceptors hiring mowing is stable and probably will start ramping up and in San Francisco we are seeing on a leading edge the return of temporary tech workers and that I think is a leading indicator that the tech sector is recovering and is going to continue to hire as they invent new ways to ploy the technology both on the software and the hardware side and the same thing in New York on the ground we are seeing new people coming in with fresh new jobs, new pay checks need not be high as the other folks a few years ago but we’re seeing new people in terms of consultants, accountants, attorneys, professional services coming into New York, coming into Virginia, so we’re seeing lots of little examples out there leading indicators of job growth in those supply constraint markets because that is where the job centers are that ‘s where these people want to live and we are very excited about this trend.
Michelle Ko
Great. And just last question.
Given the improvement that you're seeing in fundamentals at this point, what do you think is the biggest risk now?
David Neithercut
Well, I guess our biggest concern for a long time has been a double dip and it looks like that’s behind us so we are delighted that we are seeing improvement in our business that we are without a lot of job growth and so we will not get the kind of inflection that we are hoping it will get along with that job growth. We certainly concerned about interest rates and interest expense going up in March done a great job, hedging some of that exposure for us going forward but we certainly aware of the impact that could have on our balance sheet going forward.
Operator
And your next question comes from the line of Dustin Pizzo.
Dustin Pizzo
Hey, good morning guys. David, not to beat the acquisition question to that.
But given your statement that you're not as big of a buyer at this level and your answer to Eric's question earlier that you may be a net seller in near term, should we just infer from that that the current cap rate levels, or that you view the current cap rate levels in the private market as being somewhat unsustainable and more a function of that supply of capital simply outpacing the level of assets that are out there?
David Neithercut
Well, that’s an interesting question, because we asked that our sales, is the change that we’ve seen in cap rates, would that happened if there was a normal level of supply being offered in the marketplace. But I tell you I think that’s been it’s been a function of the amount of capital versus the little supply, as well as just be expectations of the improving fundamental that we are seeing.
So, I am not sure but it solely because there has been so much capital and little supply, Dustin I think it’s all for just a recognition that, we are at the beginning of some serious improvement in operating fundamentals.
Dustin Pizzo
What type of IRRs are you underwriting to on potential deals?
David Neithercut
Well, all the acquisitions we’ve done over the past five months we were underwriting in the low double-digit IRR, and I’d said quite strongly on our prior calls. That I still saw no reason why we couldn’t significantly out perform those.
With pricing where it is today with initially yields having going down 75 basis points maybe with the 100 basis points are some of these markets. I hopefully get underwrite to nine handle IRR but it’s might even be solve for that.
Dustin Pizzo
And I believe Ross has a follow-up as well.
Ross Nussbaum
Good morning. I'm just thinking through.
You were able to achieve occupancy increases. You pushed new rents up 4.5%.
Your renewals are up 2%, and you did all that with no job growth in the economy. What's to stop you 12 months from now from having 5% growth on renewals, and 10% growth on new rents and occupancy up another 100 basis points?
If we get 300,000 jobs a month.
David Neithercut
Hopefully nothing.
Ross Nussbaum
I say it half jokingly. But?
David Neithercut
Fred just said we are doing 20% ay NCL I mean we are. But you know you are just seeing some retail sales up, you are seeing fine dining up without any of the job growth.
So I think people that have been hoarding their cash sitting on their savings worried about going outdoors are finally realizing that the sun starting to come out and its maybe sort time to live again and again with occupancy as tight as it is in many of these markets and very low new supply, we are being able to push this through. So I think there is very little out there.
That is going to keep us from really being able to push rents going forward particularly when we get some of this job growth happening again. Its going to be a long lag before any new supply comes on line I mean we have got 36 months before anybody can start delivering any meaningful supply in New York may be we got little bit of supply coming now and but longer term across the portfolio we think that the fundamentals looking absolutely tremendous.
Ross Nussbaum
I go back and look at early 2006 when the economy was doing quite well, you guys put up 6% rental rate increases back in earl '06. I think that was the peak of the last cycle in terms of your growth.
Do you think you're going to beat that at some point during?
David Neithercut
I don’t I mean I mean I am not going to forecast that, but there were markets in which we had double-digit year-over-year rental growth for two, three years in a row. If there is one thing out there maybe it goes back to Michelle’s question, and Fred already alluded to it.
We just don’t know how much money these new jobs are going to be paying and we are able in a place like New York to get double-digit revenue growth from multiple years in a row because incomes were high and really growing not quite sure what’s going to happen to income and maybe what kind of impact that could have what government could have on some of our increases, but I will just tell you that I think people are going to be cognoscenti and accept to the fact they may have to pay more of their income for rent going forward.
Ross Nussbaum
Do you worry at all that in an environment where you're jacking rents, that that's a signal that there's more inflation out there in the economy than perhaps we're all seeing today?
David Neithercut
Well how much of PPI is rent; I mean it’s not a big number, its 30 or so percent. If you X that then you got to look at PPI impact just in what you might be able to get from the efficiencies and economies and what have you, but I think that putting all that aside I just think that we’ve got fiscal sort of issues in the country that are going to have an impact on inflation at some point of time and it could be in a very near future.
Ross Nussbaum
I'll end with this. So is it safe to say you don't think the 10-year treasury is going to be a 3.7% in an environment where you're really pushing rent?
David Neithercut
I think that’s probably a safe assumption but our hedging strategy would support that notion.
Operator
Your next question comes from the line of Shane Buckner.
Shane Buckner
I'm staying along the same trend of the questions so far in terms of underwriting criteria and cap rates. Looking at the past 10 years, you've had a few years of mid-single digit NOI growth and a couple years of down NOI.
And you're talking about low double digit IRRs. I'm assuming those are un-levered.
And you're buying properties at 5.6% cap rate. Is it safe to say you're assuming 4.5% growth rate in NOI from those properties?
Is that how you're looking at it from an underwriting standpoint? And have you gotten more conservative given the downturn in terms of your underwriting criteria and long term growth expectations?
David Neithercut
No I think that we probably got more aggressive on our underwriting expectations giving the low starting point and the improvement in fundamentals that we began to see as early as the fourth quarter. Well we might have underwritten some of these acquisitions, a decline in revenues in the first year meaning 2010.
We underwrote probably in every single acquisition of four, five are up, six at least one year and then we would have stabilize maybe in a 3% to 3.5%, maybe year five going forward. I am happy to tell you that the macro portfolio that we acquire in New York our current treatment there today about 4% higher then what we had underwritten back December-January.
So I distressed in the discussion we’ve had about those acquisitions that I had every expectation that we should outperform just given the way that we had looked at those in the early years and the improvement that we thought we were seeing right around the corner.
Shane Buckner
And kind of following up on the last question about interest rates, what is your view about its impact on cap rates? Or do you think the supply of capital out there will keep cap rates kind of constant even if rates rise?
David Neithercut
Well, clearly this is where a yield generating cash generating asset and interest rates will impact our yield requirements, but increasing by interest rates that inflation or good for real estate and increasing interest rates will impact family home mortgages which is not a bad thing for us. But there is very few sticks and bricks available for the amount of capital is out there today and there is no more being build and so while cap rates or yield requirements might have to go up, I don’t think that they will go up at the same rate as they might have in the past with an increase in interest rates.
Mark Parrell
And I guess I would just add it. Interest rates go up for what I call a good reason, because of growth in the economy that means our rents are going up maybe and hopefully a lot more given the supply constraints and the demographic advantage we have at this point.
So for us that would be just fine. If interest rates are going up, because they are [stagflation] in the economy, I’m not sure is the single business in the country that would be pleased to hear that.
So we are obviously thinking about it as the first not the last.
Operator
Your next question comes from the line of Jay Habermann.
Jay Habermann
David, a lot of focus on acquisitions, can you talk about development a little bit? I know with cap rates obviously moving lower and the capital that's on the sidelines, and you've talked in the past about the eco-boom generation, and the positive impact there and can you expand a bit on perhaps your willingness to allocate additional capital to development and the types of returns you think you would need?
David Neithercut
I guess I’ve said a lot way that with the improvement in fundamentals and with the compression in cap rates on existing assets that developments could make sense more quickly than what a lot of people thought. And again we are doing our deal in Manhattan and we just bought that the partial in Virginia.
We continue to look at finding existing streams of cash flow and comparing those yields in our IRRs to create building or creating new streams of cash flow and needing to make sure that those makes sense. So if initial yields continue to go down and IRRs are in the eighth range it could make development, make more sense sooner.
And again it’s a core competency of ours. We’ve got the terrific team across the country and if it makes more sense on a risk-adjusted basis to pursue development we won't be afraid to do that, I think that we’ve demonstrated with the properties that we’ve delivered recently and know that we will soon deliver then it’s a core competency and we have the ability to deliver terrific assets and assets today but I’ll tell you that a year ago we probably deliver at a value that was less than cost, but today giving were yields are and leasing and we are probably going to deliver these today at cost which is a terrific turnaround for that portfolio.
So again we’re going to look at what we have to pay for just in terms of income versus the build streams of income and we’re not afraid to do either.
Jay Habermann
And then just switching to the D.C. acquisitions to get to your 8% stabilized yield, what rent growth assumption are you assuming for the next two years?
David Neithercut
None, I mean as of current rent expectations, we lease that up at current rents today we’re just a little under 8% and if we trend those all were over 8%.
Jay Habermann
And are you seeing more willingness in the part of the bank to move product like that, or are you seeing more of those discussions take place?
David Neithercut
We aren't seeing a lot more. We are involved in lot of discussions Jay, with a lot of banks and we keep up about of other financial institutions that have troubled books, but really with LIBOR as low as it is in their cost of funds so low and the banks really not wanting I think to raise capital again some of the losses they would then after.
There just has not been a lot of product which really spin often frankly. We speculate, we wonder internally whether an increase in LIBOR might force the banks to get rid of some of these assets they have in their balance sheet, that makes it harder for them to carry those assets makes them harder for them to pretend that the asset is carrying because they re-strike these loans of LIBOR plus 300 which is great when LIBOR is 25 basis points, it will be that harder when LIBOR is 2%.
So we are vigilant, we are out there, we’re talking every bank as much as we can but the truth in not much have happened that way.
Jay Habermann
And just last question for me. In terms of rising interest rates, you do have a billion plus maturing next year.
You mentioned the scarcity value for your unsecured notes. Would you consider issuing sooner than later?
And giving that you can issue today at about 5.5%.
David Neithercut
So we think about a couple with things when we consider whether to issue now or to issue later. First is the existence of our hedges, so we have about $900 million of hedges that exist right now to hedge some of that risk.
So some of that risk is 2011 rate, some is 12, some is 13 so not all of that applies to be a debt that we need to refinance. Some of our debt next year must be secured debt because of the restructuring which it is, so 300 of that have to be secured debt so that won’t be financed unsecured.
As a final sort of factor, if we refinance the debt now and carry it, so it just sits on our balance sheet as cash for certainly a great amount of dilution and we sort of calculate that to mean that we would be paying 30 to 40 basis points more for the money. So effectively right now EQR can borrow as 540 have that cash and sit there to the middle of 2011 and the real cost to us is about 517.
So I can wait till rates move to 570 and (inaudible) in terms of the cost to our shareholders. So we just kind of balanced those two out, Jay.
We just don't ever use for the money on the debt side right now.
Operator
And your next question comes from the line of Rich Anderson.
Rich Anderson
I'm just trying to, again on the topic of acquisitions and specifically, the Manhattan deal. I hear you on the discount to replacement cost and the IRRs and all those are kind of long term value creation numbers that no one can really argue too much with them.
But in the near term, how accretive are those, if at all, are those acquisitions to your bottom line? And before you answer, I would think funded conventionally with 50-50 debt and equity would probably break even at best.
But if these are 10.31 proceeds that were sitting in some escrow, you kind of took the dilution in ‘09 and then you get the full amount of the five, six cap rate in 2010. Am I thinking about that right?
David Neithercut
I think you are right, I mean we sold we were selling deals in 2009, late ‘09 with a seven handle and we bought this deal the macro transaction to 5.5 but that’s on the FFO basis and I forget who was asking about AFFO, it was Michael I think. So the real dilution is less now but it is dilutive and it could be dilutive for longer than just one year.
But we think that the gap will rapidly close and certainly from a total return basis we will do significantly better with the assets that we’ve been buying versus also we’ve been selling.
Rich Anderson
But it is fortuitous, right? That the sale happened last year and the accretion kind of happened this year in terms of your annual FFO estimates?
David Neithercut
Timing matters a lot, Rich as you’re suggesting. Our disposition, our back end loaded our acquisitions are front end loaded.
Rich Anderson
I am just making sure.
David Neithercut
Because of that our line is going to carry some of these deals for quarter or two as we go and sell for that.
Mark Parrell
Yes if you track some of these acquisitions solely because of most recent use of the cash that was used to fund them they’ve been very accretive because the cash is, no one was sitting on our balance sheet turning 60 basis points and at some point 20 basis points. If you track that cash all the way back to prior source which was ideal earning 7.5% then it is dilutive but a lot of that dilution came in ‘09 when we saw seven handle cap rates invested the money in cash at less than one and now we took it off the balance sheet to 1 and invested 5.5 it does have the appearance of the immediate impact of that accretion.
But we also track all the way back was original source. Final point just on the $0.02 QC that guided you two in terms of increase in NOI in the second quarter for lease up in acquisition.
The acquisition number just to be clear, that’s our $607 million of acquisition that incurred in the first quarter, the 425 Mass Avenue deal, which really there is not producing the increment fact is dilutive in the second quarter offset by all that disposition income already. So, we’ve already sold on $15 million of asset.
So, it’s the difference between those two numbers Rich that we guide you to in terms of acquisition accretion.
Rich Anderson
On the net effective new lease statistics that are looking better and better every day, how much of that kind of reduction in that spread to now negative 1% from negative 10%. It has been a function of burning off some of the exposure from your pure leasing activity?
And how much has been from market rents actually going up?
Fred Tuomi
It’s a combination of couple of factors. One is that the significant lower turnover.
One thing we are seeing in the marketplace is people aren’t moving. They are not transferring to within our communities to lower price units they are not taking their room mates, they are pretty much (inaudible) in the renewal leases.
And on those renewals at higher retention rate we are getting higher increases. So, we are seeing that renewal increase is up 2.6 of this and in April we have finished and May and June are looking like they are going to be 3 and maybe 3.5.
So, we are getting good lift from the renewal base. Traffic overall has increased over last year.
So, the demand is there but we are actually leasing fewer apartments, there are occupancy gain that is really a function of increased retention a lower turnover primarily. That gives us the opportunity then to start pushing the new lease rate.
So, I noticed that the new lease rates as David mentioned are up year-over-year because the line early March and they are up significantly year-to-date from January to now and that trend is actually accelerating as we speak. So as the combination of the rotation of the rent roll, people are staying put at a higher proportion, they are paying higher rents and those coming in are paying closer to the rent of those closer to move-out.
Put all that together and is building a good firm, steady consistent growth in our rent rolls.
Rich Anderson
Okay, I’ll take a transcript for that. And finally for all this good stuff going on, how is Florida still the thorn in your side?
Fred Tuomi
Florida has been interesting; it’s been in dislocation for a quite some time. There is one of the first ones going to be in a trouble.
We’re happy to see South Florida is quickly coming back. It’s one of our leading recovery markets right now, occupancy firmed up and now we are seeing some good strong rate growth in South Florida.
Rates are up, net effective new lease rates are up 6% little bit more than 6% year-over-year from this time last year and since the begin of the year up almost 5%. So we’re seeing a good stable occupancy and good rapid current lease rates and renewal rates in South Florida.
I think as the single family is clearing right there, job losses have stabilized, they have got some infrastructure projects going on, might give us a little bit job growth, long term and still worry about South Florida because population and helpful formation data is still slightly negative. Going up to state Northern Florida is little bit behind that Orlando is having little more problem in getting risked off in Orlando.
Its starting but its starting very recently, we had okay occupancy but rate is tougher in Orlando to push the rate. There they have a significant single family over-hang a very cheap single family, lot of people are still buying homes, lot of investors are buying homes and putting them in the rental market.
So Orlando is going to take a little bit longer conclude the single family issue but I’m optimistic on Orlando because their economy is really well positioned. In fact well diversified, it’s not just tourism anymore; UCF is now the third largest university in the country.
They've got Lockheed getting a lot of good contracts. They’ve got a biomedical facility and use medical school.
Tourism has stabled. Disney has now stabilized in terms of deployment and growing hours.
So that’s the good thing from a horizon for Orlando.
Operator
Your next question comes from the line of Alexander Goldfarb.
Alexander Goldfarb
I just wanted to follow-up on Jay's question for you, Mark. I hear you on the hedges that you put in place and sort of limited use of proceeds this year.
Why issue if you don't have to? But I'm just curious, is there sort of a tenure or a credit spread where if it suddenly hit that level sooner than that, like this year, you'd go early and take the dilution just to lock in some money?
Mark Parrell
You've seen us of late do that. I mean we’ve not been hesitant about pre-funding where we thought that was a good idea.
There isn’t a magic number that we have in mind. There isn’t some level with an all in rate something on 10 year basis we would hit it.
It’s more just looking at our funding source of the newer system; still we have on the investment side. If there are any other issues in the capital markets we see coming.
So I would tell you there isn’t a magic formula, but we do talk about it internally or really on a constant basis.
Alexander Goldfarb
So it’s pretty to safe to assume that in your guidance there is no sort of question in there for any pre-funding in this year?
Mark Parrell
No debt issuance is assumed at all in our 2010 guidance.
Alexander Goldfarb
And then switching to the development side, are you seeing any of the merchant guys sort of get the band back together as far as like the JPIs, Lincolns, Hanovers? Are you seeing any of those guys suddenly being able to access capital and put deals back together?
Mark Parrell
There has been some chatter about a little bit of that happening, there was some talk at ULI about some institutional capital being made available to some other people who had been some of larger builders, how much of that will actually take place, I don't know. What all that's going to be debt financed, I don't know but there had been some conversation about some of those guys having some access to at least some equity capital.
Alexander Goldfarb
Okay, but it sounds like nothing is imminent this year but something to watch next year?
Mark Parrell
I guess, if you are asking me are they going to get back to that 12,000; 15,000; 18,000 a year sort of start run rate I think they are long way from that asset.
Alexander Goldfarb
And then last question is just sort of a foot nail question on page 18, you guys are buying back JV interest or buying out of JV partners, I mean its small but just curious if this is like a deal where the other side can no longer fund or just a little perspective on this?
Mark Parrell
This was just on the end of a ten year run and we had a mechanism to do a buy/sell that we chose to go down that road and we had a view that valuations were improving and we had the ability to buy this and comparatively spy out their interest and a very attractive imply yield then we will hold some in, sell some. But we thought we had an end to buy this equity attractive price or at least buy their interest out, that's some pretty attractive price.
Operator
Your next question comes from the line of Dave Bragg with ISI Group.
Dave Bragg
Just a few occupancy questions. So you're at 95.3% today, and I think your guidance level for the full year is 100 basis points below that.
Could you talk about what you planned to do from here, what’s your strategy, where you would like to be occupancy wise for the full year, would you like to run ahead of where you originally planned or will this enable you to get more aggressive on rates and we could see occupancy come back down?
David Santee
This is David Santee. I would say that our targets, we wont necessarily focus on occupancy obviously it’s important, but kind of daily number is our level of exposure.
And that’s what gives us the confidence to determine what levels that were due increases or aggressiveness that we do. And exposure is really just you know left to lease how many un-rented apartments we have.
So while we are at 95 free today, we would be comfortable running in the high 94 as long as we are seeing aggressive rate growth. And I believe that’s what we’re seeing today.
So everyday I am upstairs with the pricing team push it, push it, push it. And we just don’t want to get a little optimizes rate and occupancy together.
So we’re not focused on occupancy.
David Bragg
And then just thinking about occupancy levels historically back in, I believe, 2003 when the national market seemed to bottom at around 93%. Your portfolio was right there with the national level, whereas today at least according to one third party provider, the national level is 92% and you're obviously well above that.
So given that I guess first, maybe the question is could you just looking back over the past year or so, how have you held up as it compares to the rest of the country? And then second, what are the implications for lower occupancy levels nationwide on your ability to push rents from here?
David Santee
I looked at the dynamics wanted back in 2003 versus today, and I think what’s going on is completely different. Back in 2003 we had many markets that as Mark had mentioned earlier that had tremendous over supply.
Places like Atlanta had 12,000, 14,000 units coming out of the recession that was pretty consistent in many of the markets. Additionally, you had the beginnings of the housing bubble, people started to buy single family homes, so we have those two headwinds at that time.
Today is different, our turn over is significantly lower today. Our net turnover when you exclude your transfers with the same properties on an annualized run rate at 42% I mean that is phenomenal.
And as Mark said, earlier there is just no supply, so I think the dynamics are completely different, I think the prospects just a little bit of job growth and I think everyone will benefit from increased occupancy.
David Neithercut
And we do have a significantly different portfolio today. Dave, than we had back in 2003.
David Bragg
Just thinking about a couple of specific markets, Orlando is one that you've mentioned on this call that you seem a little less optimistic about near term. Just so happens that that market level occupancy rate is below 89%.
Can you just compare that market to two others where occupancy levels are low at the market level and those are Phoenix and Atlanta?
Mark Parrell
Phoenix, Atlanta, Orlando pretty much similar dynamics, Phoenix actually its been dragging along the bottom for quite some time here, significant job losses and lot’s of supply coming in time, right at the same time, it really got hammered. But right now today, Phoenix we are sitting at 95% occupied and it’s up almost 200 basis points from this time last year.
So we had a decent winter season in Phoenix and were headed into this typically slower summer season at a very high occupancy pretty low left to lease and we are actually getting little funds in rent growth in Phoenix. I think Phoenix after a long time came in the ditch we are seeing we could have some good things to report in the balance of the year in Phoenix.
Now given its still has a way to go on job growth and a single family is really still pretty much on that. Atlanta throughout this thing I think we have significantly out performed the market in occupancy and in rent growth if you look back, Atlanta we are sitting at 95 rate right now.
Exposure little bit higher at 9%, we had some good occupancy firming up so we pushed rates in the Atlanta, we actually got a little bit lift during the middle of first quarter, but then it kind of flattened out and we have to take it a little bit back down. So Atlanta is getting better, but it’s not on a sustainable trajectory right now.
So it may actually take a little bit longer. Again these are the supply stock market, not the supply constraint markets.
The supply constraint markets we’re seeing the good fundamental up lift than accelerated momentum from where we sit today.
David Bragg
Rates are up 20% in Seattle year to date. Could you just talk a little bit about that market?
Mark Parrell
Going back a little you have to be careful these overall statistics nation wide in 92 or Orlando in 89 they must be putting everything in the kitchen sink in that including mobile homes if you look at just institutional quality investment grade assets the markets are doing much better in some of the statistics with implied. Seattle is we got to explain what’s on in Seattle and its all good.
First of all our numbers are down 701 for the quarter in revenue lets pass that a little bit if you take, we own significant portfolio in Tacoma, Washington its far south it’s a military town we own 2000 of our 8400 units are in Tacoma and we include the Tacoma results in with our Seattle reports. Tacoma has gone through a major down turn right now lot of the military rotated out of Port Louis's and McCord.
Last summer we lost may be some reports 15, 20,000 soldiers rotated out and none came in, we had some very large asset there on the market rate side that we’re in the 70 in occupancy but Tacoma revenue is down almost 15% for the quarter included in our 7 if you take that out and just look a the core Seattle was a CVB Eastside to gnomish in the north and few in the south our results were negative 5.5% for the quarter. It’s a little different story there.
Central business district is on fire right now I mean downtown Seattle where we own 2186 units has shown just a dramatic unbelievable recovery. Our rents are up 20% since the beginning of the year renewals are up 5% occupancy is very high demand is really the price of how strong it is and then given that we got couple of things coming that is going to make situation even better for us there is a property that was only 9 years old downtown that has to be demolished 272 units very nice luxury asset coming out of the market and in the Russell relocation from Tacoma to downtown Seattle and the old WaMu building its just getting started this summer.
We see nothing is going to hold us back in the CBD of Seattle which will be fantastic. Eastside is doing but a little more actually a lot more supply pressure in Bellevue and Redmond that ones holding back a little bit but still we are seeing on the e side some good occupancy and rents are just after being flat for two quarters are just beginning to move up
David Bragg
If you take out Tacoma and just think about the broader Seattle portfolio, how does that compare the plus 20 and the plus 5 you gave for downtown?
Mark Parrell
Its not all going to plus 20 right now for running in the current month on a year-over-year basis I mean looking at where we think May is income will coming versus last May, here the downtown is down about 2% east side down about 8% and then the other market down about 5%. So but Tacoma down 11, so I can give you an idea for the relative performance there.
Operator
In our next question comes from the line of William Acheson.
William Acheson
Thank you, guys. Great to see the turn in fundamentals here.
I just wanted to make sure that we have our shorter term expectations in a more reasonable manner here. In the first quarter, one thing that I read about and heard a lot about, was there was a lot of perspective renters that were out there hitting the streets looking at apartments, because they had the feeling that all the best deals were drying up.
So that increased traffic. Is there any chance or possibility that that might make the second quarter a little bit more muted?
And of course, that's a period where you have a lot more leases coming up for expiration.
David Santee
Bill this is David Santee. You are definitely right when you start looking at some of our areas of demand I have an example our TV, internet sources were up 30% over last year for the quarter.
Our initial contact via phone was up 55%, when you start looking at those numbers that translated into an increase in foot traffic people that actually walk to the door as a result attending an mail or making a phone call. That was up 9% but I think as you said a lot of these folks were shopping, I don’t think we stole from future quarters because our net applications were down 7% and that kind of plays through the movement number 2 or the number of movements that we had for Q1 of 2010 were really identical.
The movements that we had for Q1, 2009 so what’s driving the occupancy as Fred said earlier is really the state say, okay initiative keeping those residents living with us so I think people are just preparing for the spring leasing season and recalibrating, what they have to pay.
Fred Tuomi
Yeah, we were talking about this phenomena recently and we feel also what’s happening out there is this is a rotation of our renters. Earlier in the downturn we had the rotation again the people were moving out they are going home to their parents they were doubling up or tripling up households they are going to more cheaper living accommodation that we had people move outs and transfers we can see a reduction.
Now I think we are beginning to see the unwinding of that and this anecdotally comments we got from people in our field that people are starting to uncouple these room mates. We are selling lot of studios right now New York by like David Santee had mentioned that’s an indication that people feel confident, that’s they are willing to take on a living space by there own, on their own and may be they are just getting sick and tried of those roommates after six months and those people living at home with their parents and probably the parents are sick and tired of them what help they are living at home so I think people get a little more confidence in the economy those who have jobs feel more secure perhaps without jobs are optimistic and now we are seeing a little more rotation and movement within our sector.
William Acheson
Okay. You mentioned Manhattan right there.
The Real Estate Group of New York came out with some figures just yesterday and actually showed that depending on what type of unit you were looking at, doorman, non-doorman, rents from January were up 1.5% to 4%. Your comments are well taken.
One last question. On the acquisitions, how would you compare the quality of the acquisitions you made in the first quarter to that of the overall portfolio?
David Neithercut
At the high end I mean this is it would be very equivalent to our highest quality properties that are currently in our portfolio bill.
William Acheson
Okay. And I think I heard you say that if you had to buy those properties today, the cap rate could be down 25 basis points?
David Neithercut
I don’t think there is any question that are resolved of better underwriting as I told you our macro deals that are asking rents today are consistent with what you said you heard at Manhattan 4% higher market rents today that we underwrote as well as cap rates that have come in 25, 50 basis points plus so would have been significantly more expensive to acquire those assets today and my guess is you could say that about every asset that we bought.
Operator
Your next question comes from the line of Michael Salinsky.
Michael Salinsky
Going back to development real fast here. Given your comments about not seeing a lot of acquisition opportunities right now, what spread do you need to see on development to warrant getting more bullish on development versus buy right now?
David Neithercut
It depends on a market-by-market, sort of analysis we, that the deal we did in Manhattan, with the deal in Chelsea, and a place like that would probably be much narrower than if you are trying to do something and wont be considered s non-supply constraint markets. So again it depends on each individual situation and frankly also depends on whether or not they really truly are acquisition opportunities.
Sometimes, we gone forward with development deals when there have been actually no acquisition opportunities available in those market place, so there really was nothing to compare that development yield to that particular time. But clearly you need to make sure that you’re getting some premium when your building a stream of income as opposed to be able to buy an existing stabilized stream of income.
Whether or not that’s 100 or 105 or 150 and I’m not so sure they will be dictated by each individual situation.
Mike Salinsky
On the Chelsea and Arlington ones, which I think you mentioned north of the seven, where's the rest of the pipeline stand today if you put the shovel in the ground today?
David Neithercut
Well, if I would put the shovel in the ground today we would be building those at less cost than what we actually did build them at. So I will answer the question little differently by telling you that what kind of yield we think we will now achieve on those deals at the actual cost we incurred, again which will be a premium to current replacement cost.
And those are probably low five handles, but those are markets where cap rates are at low fives if not fours, which is why I say I think we’re back to a point where values are close to cost.
Mike Salinsky
Switching over to dispositions there. This past quarter you revised your disclosures down from the top 20 markets you disclosed before, down to 15.
Have you and from the previous year you talked about trimming market exposure. Is it those 15 markets?
Or are you still comfortable in 20? Or have you actually revised that down to 15?
And the five that were cut off is where you're going to be focusing your disposition efforts going forward?
David Neithercut
I mean I think that’s a pretty fair characterization, it’s only about 7.5% of our NOI that sits in those other markets. When we look at the really incredible transformation of the company over the last two years on the concentration of our efforts to concentration frankly of your questions of our investors concerns are all on those markets listed in 15 up.
So that’s really where we focused its not necessary true that every single asset in that 71 property list that is in the all other categories is a disposition target but many of them are.
Mike Salinsky
Finally just from an operational standpoint, you talked about seeing very good rent growth and seeing market trends improving. Just curious as to where the mark to marketer gain or loss to lease in the portfolio is right now versus where you're seeing the market moving.
How is your portfolio performing relative to the market? And do you see the market also moving the same direction as you guys have been able to move?
David Neithercut
Well, I am not sure I understand the question the last part of that but just in terms of gain of lease or loss of lease that’s not anything that we calculated Michael, clear we got some markets where rents are still rolling down to lower number but we got more and more markets are single day and which expiring leases are now going to be rewritten had add to higher numbers. But just in terms of taking of the entire portfolio looking at of that manner we not bother did you that.
Mike Salinsky
If you are looking at your town set for reaching in your mutual market essentially are you a seeing outperforming by a significant amount or is this what you're seeing across the board in these markets?
David Neithercut
Well I guess people will be reporting over the next weaker so and I think you’ll have be yet [Technical Difficulty]
Unidentified Analyst
Across the country can you talk about the regional viability in demand for assets or institutional buyers still largely concentrated on the coast or you seeing them migrate more to the interior secondary markets giving the more pronounced cap rate compression that taken place in the coast.
David Neithercut
Well I think you will have been seeing, essentially what happened in the (inaudible) is that as we got in towards the end ’09 and early 2010 you saw cap rate compression in the more higher barrier, more institutional quality markets and did not see much of a change in the secondary or tertiary markets. And that’s one of the reason we slowed down our disposition process, because we thought that Delta had widened out and essentially what happens I think is that capital see our competitive pricing is in the better quality assets and those better quality markets, its gone, it seeks a more appropriate yield elsewhere.
And so we are starting to now see that (inaudible) of cap rates are coming a little bit and that lower quality or secondary and tertiary markets and you are starting to now see more imbalance between the spreads on the cap rates between those two market places. So, yes I think the answer to question is yes, you are seeing that capital goal elsewhere it just finds its required yield and has to go down quality do so it will.
Unidentified Analyst
Can you talk a bit about the difference in growth rates that prospective buyers are underwriting on the coast versus some of those non-coastal markets?
David Neithercut
Well, I’m not quite sure exactly what people are underwriting on the non–coastal markets because we are not underwriting any ourselves, but I will tell you that what we’ve seen across our portfolio is pretty as Fred had said earlier is pretty consistent across all the portfolio, when I would expect that even in those non-core markets what we consider our secondary markets you are seeing in fundamental improvement there. I would not expect those to be quite the same because I think they don’t have the barriers to supply and much of the place that they are having some other job growth at the price point of job that we might see in some of our markets but I certainly believe you’ll be seeing some improvement in fundamental and those other market as well
Unidentified Analyst
One more bigger picture question here. Given the sizable delta between the low cost to capital available today for a quality apartment and the strong prospective IRRs, are you surprised or not seeing more talk of some of the private portfolio perhaps coming over to the public side?
Fred Tuomi
We have heard that there are conversations of those sorts going on with all sorts of private folks who look at their portfolio. Sometimes it's an exit from being over levered, frankly, which is a lot of what occurred back in ‘93 as well right.
In some cases I think these folks are going to realize the amount of G&A involved in that exercise, the amount of effort involved in that exercise and those companies may become available to us and to others. There is a more buzz about that; there are not a lot of, if I think posted activity yet.
Operator
Your next question comes from the line of (Inaudible)
Unidentified Analyst
David, very quick question. I'm surprised about the low move-out to home buyers.
You mentioned 65 move-outs?
David Neithercut
No, only 65 more in the first quarter of 2010 versus the move-outs in the first quarter of ‘09.
Unidentified Analyst
So I was just wondering the tax credit had to be signed by tomorrow and transactions have to be completed by end of June. So I was just wondering if you anticipate any pickup in that rate in the second quarter of this year.
Are you seeing any trends like that?
David Santee
This is David Santee. Many of our markets are 60 day notice market.
So we’re going to look out 60, 90 days from now and kind of look at the reasons why people have given notice. Even though they haven’t moved out and we really just don’t see any significant material change in any of these numbers no matter which way you look at.
Unidentified Analyst
And then very quickly on the turnover improvement in turnover, how much of that is attributable to the bad weather in the early part of this year, versus the retention program, which value will do?
Fred Tuomi
Looking at the turnover, quarter-versus-quarter basis, same seasonal period’s first quarter this year versus the same period last year. So you don’t worry about the seasonal differences of our cycle.
We were at 13.5 last year and we are at 11.8 this year. So there is an improvement of 170 basis points that Mark had mentioned earlier.
So it is a real season to season, quarter-over-quarter improvement in retention. And what causes it?
We are working on retention on a number of fronts, so we can only say one specific thing improves, but if put all that together, we’re seeing the behavior of the consumers. We’ve put a lot of emphasis on our customer service, customer loyalty over the last two years.
We have programs to improve our customer loyalty, we have ways to measuring it in real time from our customer surveys and we have a lot of recognition programs if you are a company based on that. We’ve seen significant steady climbs in our customer loyalty scores, in fact March we had seen all time high.
And we open up to our research that those they say that they are very loyal to us, they refer people, they pay higher rents on the margins and they stay with us significantly longer. So we know that that’s a contributing factor.
But I think also is as to what’s going on with the economy right now, I think people ate staying put, they are not moving and we’re seeing our renewal retention rates go up and with that we’re able to increase our renewal increase rates on our rents.
Operator
Your next question comes from the line of Michael Levy.
Michael Levy
All my follow up questions have been answered, thank you very much.
Operator
And next question is a follow-up from Eric Wolfe.
Michael Bilerman
David, I just want to come back to the supply question and we totally agree with you in terms of looking at supply, not only multi-family, but across all the commercial real estate sectors being at 40 year lows. I guess the unique thing within your sector and clearly you took advantage of it this past quarter is being able to purchase a broken condo deal and turn it to rental, we’re clearly seeing other multi-family units pursue similar strategy.
How much supply do you think comes into the multi-family space from those sorts of deals, which clearly are going to be at the higher end and so more competitive space to what you own today and probably in your core market?
David Neithercut
Very good question one that I am not going to be able to answer with the great deal of accuracy. For several reasons a lot of those condo deals that might be also had a lot of retail sales going into them and so they are just remaining units and some third parties made buy those inventory of units and turn them into some sort of rental operation.
The ability actually find 100% vacant probably that has been conceived as condo and convert it in its totality into apartments. We’ve not seen a great deal of opportunity there, we have seen some over the last few years; I mean obviously we've just struck this once.
There are other things in some of the part and also condo that don't make really sense for apartments, to be operating as apartments. Some of those condo deals are just individual apartments are just too large.
We’d like to operate one bedroom apartments that are 600 or so square feet and some condo properties have been conceived and built of 900 square foot one bedrooms and what we’d like to operate two-bedroom properties at 900-950 or so square feet, some of those condo deals can be 15,000 square feet so they don’t work as a parts and so just the number of those that I am really do work as apartments I cant tell you that we’ve worked on probably over the last year looking may be a half a dozen opportunities and we just struck on this one and I am not terrible optimistic that there will be a lot of other such opportunities but if we could find them that they were totally vacant that had apartment sizes that our unit sizes that make sensible apartments we’ve be happy to do it again.
Michael Bilerman
You don't see that as negatively impacting big growth trajectory that you're now on?
David Neithercut
I beg your pardon.
Michael Bilerman
You don't view the condo to rent as being a negative impact to the trajectory that you're on today? More of these deals occurring.
Fred Tuomi
This is Fred Tuomi we track these buildings both one when they are initially be points of conversion and new construction we track this bridge our investment opportunity feels know where these factors are. And in our key core market there is very few remaining that we come back through out in terms of the rental market this may be one or two still in Virginia there is some down town San Diego, there is one in Bellevue that just announced, that hand full of key assets couple of hundred each and we do include those in our supply numbers that we track and with those added in the supply number for 2010 is almost half what it was in 2009 and when you look in 11 there is a significant optimum drop, of OEM supply from any source that not I don’t think it’s a it could be a disruptive factor to us may be one we set here and there but certainly not on a overall basis.
Michael Bilerman
And just going back to the occupancy of 95.3 relative to again the broad market at 92 when you look at your competitive set of your current portfolio today where do you sort of see market occupancy for your portfolio today?
Fred Tuomi
Well I think if you just look at our competitive set over the past years, you know our peers all occupancy in many, many market has been lower. And that was part of our strategy last year.
Michael Bilerman
If the broad apartment market, which includes everything, is at 92 and you're at 95.3, would you say your direct competitive set is 94? Is it right on top of you?
Is it 95? Is it 93?
I'm just trying to get a sense of?
Mark Parrell
I would say that there is not a material difference between our direct competitors, that is one of thing that we track on a weekly basis and putting our competitive rents and understanding what their occupancy is, is part of our data collection process each and every week. But the unique algorithms within LRO are such that once your exposure, your available units to lease far below certain point, you kind of break away from that competitive set, so you’re constantly pinging your competitive set but you are not competing for occupancy which competitive set that makes sense.
Operator
Your next question comes from line of Andrew (Inaudible).
Unidentified Analyst
Are you ever concerned that if the margin continues to improve Fannie, Freddie and major bank may start to aggressively really their REO inventory creating an expected headwind?
Mark Parrell
Hi, its Mark Parrell, Fannie and Freddie don’t have effectively any substantial REO inventory and certainly what they do have and not competitive with our product. What they do have is walk up to the 560 unit multifamily stuff.
The multifamily business in Fannie and Freddie was run in the different manner and was target underwriting single family and this isn’t big pile of things waiting to fall on top of us in our competition. I would say that the banks have a lot of loans outstanding that are in default or close to be being in default or been reworked in someway to be extended, but again as Fred said most of buildings are occupied or close to occupied already.
The bank may want to change its situation, but it isn’t like those units are going to suddenly put on the market there are already in the market the question is the ownership of the building. So I guess I don’t hear that at this point.
Unidentified Analyst
Any concerns on the single family front, obviously different situation?
David Neithercut
Well, I think that we are impacted I think ever so little about single family product being made available for rent in certain markets but again we have not seen a big move out as I mentioned earlier people moving out of our apartments to buy single family homes nor to move out through rent single family homes. It doesn’t mean that can happen that won’t happen but I would say even if it goes we think that’s going to be in an economic climate in the job climate in which there will more than enough new prospects to back field that vacancy.
Operator
(Operator Instructions) We have no further question sir.
David Neithercut
Okay will great well, for those you got it out today. Thank you very much and I appreciate your time to look forward to see many of you here in Chicago at June may release.
Thanks very much.
Operator
Thank you for your participation in today’s teleconference. You may disconnect.