Equity Residential's REITweek 2012 NY Presentation, Part 2 of 3

We're highly occupied now, very tight, very low exposure, and rates continue to grow nicely into the Bay Area. So those are the most favorable for those reasons. The flip side of Southern California is still kind of in the low end, specifically Los Angeles. Los Angeles is growing, it's in recovery mode and continues to improve, but at a much slower pace and at a much more uneven mix. We're finding in L.A. continues to be a little lumpy. We'll get a good run and then we can't hold it. I think that's based on just the employment situation there is not gaining consistent legs. A lot of dependence on local state and city government, and those are still shedding some jobs. Entertainment is up and down, but it's trending down. The port business has been up and down with import exports. It's a big economy now. There are some certain submarkets like Downtown Mid-Wilshire, Free of Town, Little Tokyo, maybe these cities are doing much better. Further out it's less consistent in Valencia, South Arena, and Council. Orange County on the other hand has really gotten a good momentum of late. Very strong leasing season, highly occupied there, left to lease our exposure down five percent range, and we've written growth that's accelerating quickly in Orange County and in San Diego. Everybody knows the story, it's the military town that's been whipped. Military rotations may 21st... saw over the horizon of the Pacific, the Harlem Instant aircraft carrier coming out, and it docked the next day with these 200 pilots, so it's coming back very quickly. It's a small market, that's only about 200 units. So those are the ones we were kind of more concerned about. Phoenix had a great run, it's not quite so strong anymore, and we are starting to see the leading indicators of some single-family home buying and maybe some renting in Phoenix, but that's one of the poster children for the single family, so to be expected.

Well, I guess we've not made a call as to what we think the single-family homeownership rate will kind of bottom out at, but we certainly do think they will continue to decline. And that's just on a national basis. We look at our individual markets, we're not seeing any significant increase in move-outs to buy single-family homes from our residents. In markets where single-family housing is the least expensive, we have seen a little tick-up in people that are moving out of our apartments to buy single-family homes, but it still is nowhere near what the historical run rate has been. And as we think about this demographic, this echo boom demographic of 80 million people, they're marrying later, they're having children later. We just think they're going to be apartment renters longer, and they're going to want to remain in high densities or urban environments longer than what that age group might have been in the past. And just some interesting statistics about our portfolio: 43% of our units across the country are occupied by one person, and then another third of our units are occupied by two or more people that do not have the same last name. So while we're the first to admit that there certainly would be pent-up demand for single-family homeownership across our portfolio, we don't see that as a significant threat to our operations. And we do believe that when that demand begins to be met, it will be an economic climate and a confidence climate in which a lot of the 6 million 25 to 35-year-olds that are still in their home with mom and dad will be coming into the rental market and will be sufficient to backfill anyone that may be moving up to buy single-family homes. So we don't see that as a big threat on the horizon.

Well, we've done a lot of analysis on supply. I mean, you're right, while as a percentage of historical deliveries it looks like there's a whole lot that's coming, when looked at on a historical basis and looking at historical run rates, it's still well below what those run rates have been. When we look at our markets and we look at what household formation expectations are in those markets, and compare and apply to that what we think is a conservative apartment capture rate, and compare that what we would suggest would be the incremental apartment demand to those new supplies, generally we're not terribly concerned. We think that those markets will remain generally in balance, and that doesn't mean that when apartments are delivered in a marketplace it won't have some impact. If you're the property across the street, you'll feel it, but we think that some of that impact will be very short-lived, and that the overall health of the markets on a longer term basis would be fine. There certainly are a lot of apartments in planning stages, a lot of people talking about building. We think that certainly not all of that will get done. But as we look today at deliveries, so that being product under construction will be delivered in 2012, 2013, 2014, and look at what we think the incremental demand will be, those markets we think will remain in balance. And particularly when you're in the marketplaces where we're 96, 95% occupied, if you're in balance of new supply and incremental demand, you'll still be in a position where we will be able to raise rates. If we were at a 90% occupancy or something lower, it would be a challenge to raise rents, but given the very strong levels of occupancy we have and the incremental demand we expect, we believe that these markets will be able to absorb this new supply and it will not be a long-term negative impact on these markets.

Um, I'm not sure that it poses any more threat than any other ownership. I mean, those units exist in a marketplace and they're available to rent by some institutional owner who's aggregated an awful lot of assets or owned by the mom-and-pop, they're still units in the marketplace. We think that much of that product will be occupied by people who were formerly homeowners who might have been dispossessed of their home, but they have chosen that lifestyle, they've chosen that neighborhood, they've chosen that school district, and they're likely to be occupying that again. When we say we've got 43% of our apartments occupied by one person, we're not seeing them rush out to rent those single family homes. Certainly will that be impactful in Phoenix and Atlanta and Orlando and the Inland Empire? Sure. I think that if that product is made available to the rental pool, it will have some impact. But I think when we look at our portfolio, Boston, New York, Washington, Southern California, San Francisco, Seattle, we don't see those markets being hugely impacted by them. And we're seeing statistics of people moving out to rent single-family homes. I just don't think that's a meaningful number for us today.

We think from an institutional perspective, there are a lot of very smart people looking at this, and I'm not suggesting that it can't be done, but I'll tell you from the direction that we look at the business, from an operating standpoint, my team and I operate what we own extremely efficiently, extremely effectively. That's by having a lot of units in a very dense position. There's an awful lot of asphalt, an awful lot of landscaping, an awful lot of siding, an awful lot of roofing on an individual single family home. And I think that if you own a large portfolio of assets across a big geographical footprint, I would not be surprised if financial sponsors looking into that business will woefully underestimate tenant retention costs, what it costs to put a tenant in, they will underestimate what vacancy will be, I'd be surprised if they didn't underestimate what repairs and maintenance would be in the whole process. I think that, you know, can you make money on this by buying these single-family homes at one price and selling them at another price maybe down the road as markets recover? I suppose. Whether or not that will deliver the required returns, I don't know. But I think that it's extremely difficult to really efficiently and effectively own, operate, and manage those things. And they just won't compare to the kind of efficiencies that we're able to deliver in what we offer. So we've looked at that from our perspective and see that as being a challenge. Can I tell you it won't work? I can't tell you that, but I think that people have a lot of work cut out for them to actually be successful.

Well, all we can report is what we see on the ground. And I think the college-educated young professionals, that cohort is highly employed. I think actually their unemployment in that segment of our economy went down and improved again, it's a very low number. So yeah, you read the headlines, but you don't know where those people are. You know, 9% unemployment, you've got 91% employment, because you have to see the glass half full. So what we see from our markets, the submarkets we're in, the buildings we have, the price point we operate at, it's a very healthy demographic. A lot of young people, highly educated, highly motivated, very entrepreneurial, they're engaged in the economy, and they're making some good wages. The unemployment rate of college educated is something in the 4s. So now we're standing at an 8% national unemployment rate, and we talk to a lot of manufacturers, a lot of people in need of skilled labor, there are shortages of skilled labor. So the markets we're focused in, there's been good jobs, there has been income growth, and we'll get credit. We're having no problems keeping our apartments full at ever increasing rates.