住宅地產 (EQR) 2006 Q1 法說會逐字稿

Good morning. My name is James, and I will be your conference operator today. At this time I would like to welcome everyone to the Equity Residential first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. McKenna, you may begin your conference.

Thanks, James. Good morning, and thank you for joining us to discuss Equity Residential's first quarter results and outlook for 2006. Our featured speakers today are David Neithercut, our President and CEO, Donna Brandin, our Chief Financial Officer, and Gerry Spector, our Chief Operating Officer. Our release is available in PDF format in the investor section of our corporate website, equityresidential.com. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking 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. Now I'll turn it over to David.

Thank you, Marty. Good morning, everyone. Thanks for joining us today. As we noted on our last call, as further demonstrated by the first quarter same store results, the multifamily space continues to benefit from positive factors on both the supply and the demand side of the business. We're seeing continued strong economic outlooks across the country, strong job growth in our markets. We are seeing little new market rent product delivered in any of our markets today. We have seen a lot of units taken off line when converted to condominiums. We've seen soaring single family home prices. And along with rising interest rates, we have seen the marginal buyer taken out of the single family home market. These factors have all combined to create apartment fundamentals across nearly all of our markets that we frankly, have not seen in quite some time. All that and the progress we have made reconfiguring our portfolio over the last few years, gives us good reason to feel very positive about the outlook for 2006 and beyond. With that, I'll let Donna take you through the results for the quarter.

Thanks David, and good morning, everyone. Today I would like to address 3 topics. First I would like to give you an overview of our quarter 1, 2006 performance, including our strong same store performance. Second, I'll give you an you an update on our progress in building what we believe will be the platform that will enable us to enhance revenue growth and reduce capital and operating costs. Lastly, I will provide a preview of Q2 2006 and full year guidance. Let's start with a review of Q1 FFO per share results, and then move to same store performance.

Funds from operations for quarter 1, 2006 were $0.56 per share, versus $0.74 per share in Q1, 2005. Don't forget that in the first quarter of last year, we had 3 1-time items totaling $0.25. We had rent.com and Tyson's land and condo sale. We also had $0.03 in severance cost. So on a normalized basis, that would get you to $0.52 for the first quarter of 2005. This quarter FFO per share is $0.56. After a reduction of $0.02 from condo gains, FFO from core operations is $0.54, or a 4% improvement. The key driver in this increase came primarily from a $0.05 improvement in same store performance, which I would now like to disclose to you in greater detail. Relative to Q1, 2005, in Q1,2006 revenues were up 6%, primarily driven by a 3.9% increase in rental rates. We also had a 57% decrease in concessions, and a 0.8% increase in occupancy. Costs were up 5.7%, resulting in a 6.3% increase in NOI.

Revenue exceeded the high end of our guidance range. Contributing to the strong growth is better than forecasted revenue growth from our 2003 and 2004 acquisitions that are now included in same store sales, in addition to the benefits of our pricing initiatives. Our expenses -- excuse me. Our expenses -- sorry, excuse me. Our expenses increase of 5.7 is in line with our expectations for the quarter. Our 2 major expense categories, payroll and real estate taxes, which total 50% of our operating expenses are in line with inflation. Our expenses for buildings, grounds and maintenance were always forecasted to be higher in the first half of the year, as we prepare our properties for the leasing season, and are expected to moderate in the second half. In addition, we continue to increase support for our systems initiatives, which I will talk more about in a minute.

Due to the increases in oil prices, we have experienced double-digit increases in utility costs, which represent 15% of our operating cost. And while our property insurance premiums increased considerably, our liability coverage is coming in favorable to our original expectations. Insurance cost however, are only 3.5% of our same store operating cost, and have very little impact on our overall expenses. That of course, assumes we don't have a reoccurrence of 2 years of significant hurricane losses. Let me just say, basically our philosophy on insurance is not to insure for losses we expect to incur in the normal course of business, and to only insure for losses above that level. Of course, we're subject to market constraints.

I would now like to tell you about our systems initiative. We continue to roll out new operating platform that will provide economic benefits, as well as enhancing our overall operations and productivity. Our property management system, MRI, is currently rolled out to 30% of our properties, with the expectation to be fully rolled out by Q4, 2006. Again, this will provide property management with realtime visibility into our performance of our properties. We believe this is tremendously significant. The pricing system, LRO, is now being utilized by roughly 30% of our properties, and will also be fully implemented by year end. Finally, the procurement systems [Optech] technology, will be fully rolled out to all of our properties at the end of this month. The pricing and procurement initiative should reduce -- should continue to enhance revenue growth and reduce capital and operating expenses. In addition, [Optech] will allow Equity to more effectively track purchases on a realtime basis. The total cost of the system initiative is still on budget to be $17 million, representing mostly capital costs. As we discussed in previous calls, Equity will incur $0.02 to $0.03 annually of additional costs to support these initiatives, which are already included in our guidance.

But all indications show a good start. We continue to maintain our guidance for the year for both same store and FFO, because it is simply too early in the year. In addition, the $0.20 FFO per share range for the year of $2.30 to $2.50 per share was intentionally set at a wider range to allow for the volatility in the performance of our major business segment. Guidance for the second quarter is $0.55 to $0.60 per share. This guidance is influenced by an expectation overall markets will continue to perform well. Our acquisitions and disposition activity remains unchanged at 1.5 billion each. As I finish up, I would like to remind you that we had strong same store growth, the rollout of our system initiative is providing our property management team with better tools to do their job, and we continue to remain optimistic about our overall performance for the year. I would now like to turn your attention back to David.

Thank you, Donna. We continue to execute our long-term portfolio strategy, narrowing our focus and reducing the number of markets in which we operate. In fact, our largest 20 markets now comprise 86% of our net operating income, and that's up from 65% in 2000. We continue to move more capital into those markets that we think will provide higher total returns. And as Donna noted, we are seeing significant benefit from this, as demonstrated by the same store performance of our 2003 and 2004 acquisitions. And our announcement in early March that we will offer our Lexford portfolio for sale is yet 1 more step in executing this strategy.

Now for those of you unfamiliar with the Lexford product, it is a portfolio of low density, smaller size properties, comprised of single ,ranch style apartment ,with none of the traditional amenities one would expect to find in a conventional apartment property. No pools, club houses, etc. The portfolio we're offering for sale is 284 properties representing 26,118 units, that's an average of 92 units per property. The average monthly rent currently in that portfolio is $536 per unit per month. Selling this portfolio or offering this portfolio for sale, represents an opportunity for us to take advantage of the strong bid for large portfolios of properties out in the marketplace today, particularly those that provide an operating platform. And our portfolio is for sale, complete with the property management group that runs that portfolio for us. And it will also further clarify the Equity Residential story, what we're doing with respect to portfolio configuration, and how we're narrowing our focus. While I'm pleased to tell you that investor interest in the offering is strong, we expect preliminary bids due very soon, from which a select group of bidders will be provided more detailed information, and we expect final bids due in early June.

Now, I want to make it clear that we have no need, nor any obligation to sell this portfolio. We will only sell it if we get a price we like, and one that is approved by our Board. Therefore, we're in no position to tell you much of what I'm quite sure you would like to know, and I certainly understand why you would like to know it. Such as, will it actually take place, and if so when, the sales price that the portfolio may sell for, a cap rate, the sales price per unit, impact on FFO and AFFO. Please understand we are in the middle of a process. We don't know the answers to any of these questions, and I really do encourage you not to ask about them when we open up the call later for Q&A.

A few things I can say however, we have kept our guidance for asset sales at 1.5 billion for the year, as Donna noted. We will sell more than 2 billion if we do sell the Lexford portfolio. If we do so, we'll have to postpone -- we will likely have to postpone some conventional asset sales. If we do sell the Lexford portfolio, we won't be able to sell everything we had budgeted on a conventional side. And we will also have to increase our acquisition goal for the year. Now, please remember that our current budget assumes a 100 basis point spread between our disposition cap rates and our acquisition cap rates. If we do sell the Lexford portfolio, that will widen. But as I said, I can't tell you today by how much. But I can tell you, that although a sale will be more dilutive in the short term, we are extremely confident that it will significantly improve the growth rate of both earnings and the Company's cash flow.

So turning now to dispositions for the quarter, where we sold 25 assets, 8,110 units for $800 million, and that does not include $35 million of condominium units sold during the quarter. The average age of the assets we sold was 18 years old, and we had an IRR on that portfolio of 12.9%. The gain on sale of these assets, and this again excludes condominiums, was $358 million, of which $211 million was an economic gain. The markets in which we sold most of these assets were in those previously stated noncore markets for us. We sold 4 assets in San Antonio, 4 in Minneapolis, 3 in Tulsa, Oklahoma, 3 here in the Chicago area, and a couple in southeast Michigan. The weighted average cap rate on all the dispositions for the quarter was 5.6%. And those cap rates range from a low of 4.23% - and this was on a recently built property in a suburban Chicago area which we sold to a condo converter - to a high cap rate of the low 8s on 20-year-old assets in Tulsa, Oklahoma.

On the acquisition side, we acquired 11 properties in the quarter, holding 2,779 units, for $507 million, and these acquired at a weighted average cap rate of 5%. Weighted average age of these acquisitions was 8 years, and we acquired properties in the Greenwich Village area of Manhattan, on the east coast of Florida. We acquired 2 assets in southern California, we acquired 2 assets in Atlanta, where there was an opportunity to buy some in-town in-fill assets at what we thought were very nice discounts to replacement cost. We acquired an asset in Denver, and an asset in Seattle. We also mentioned in the release today, that we acquired 2 land parcels during the quarter, totaling $14 million. Both of these are done in joint venture partnerships. One here in the Chicago's growing South Loop area, and we paid $6 million for some land on which we will build 278 units at a total development cost of $70 million. We hope to deliver this product in late '07, and expect to achieve a stabilized yield in the high 6s. And this will find its way onto our development page when we actually commence construction. Along with a joint venture partner, we also acquired a property in Tampa for $8 million, for 346 units. We also hope to start soon, and to deliver product in late '07 and have an expectation of a stabilized yield in the mid 6s there.

On the condominium conversion side, profitability was very much in line with our expectations. We realized $6.1 million of contributions to FFO, this is net of taxes and overhead for the condominium group. And as expected first quarter closings are the lowest of the year, because fourth quarter sales are the slowest of the year. We closed 171 units in the first quarter, and profitability was in line with expectations. We continue to be on plan for selling more than 1,500 units for the year, and delivering $37 million of net profits for the year. As I noted on our last call, while condo-mania is certainly over, our business remains very solid. Our traffic levels are good. Our monthly sales are in line with expectations. And we continue to like the starter home price point at which we operate, and we're very confident that there will continue to be demand for this product across all of our markets.

On the development side of the business, we currently have $515 million of projects under development. We started a new property, which I mentioned on our last call. This is the expansion of our Charles River Park property in Boston, of a $161 million cost. And of the deals currently underway, so of the $515 million currently underway, 50% of that, so one-half of that is being done on our own account, and the other half is being done with JV partners. In addition, we hope to start another $350 million to $450 million dollars this year. Which will bring starts for the year to $500 million to $600 million. And we expect that the future starts this year will all likely be done with joint venture partners. And as I mentioned previously, a couple of those, one would be the Tampa deal and the other the Chicago South Loop deal.

We continue to target stabilized yields on these deals and on the pipeline in the mid 6s to the low 7s, and I tell you, we have about $1.4 billion pipeline. And these are deals that are not reflected on the schedule that's included in the earnings release. We have got 4 deals in California, a deal in Cambridge Mass., a deal in Seattle, 4 deals in the New York City area, the deal in Florida I mentioned, and of course the deal here in Chicago. And we currently own property for about 40% of this pipeline, and have the balance either under control, or under letters of intent. The last thing to mention on the development schedule page of the release, is that the 2400 M property, which was recently completed and built in a joint venture partner, we recently acquired our partner's interest in that asset, and we do own that outright today.

So just in closing, I want to tell you that we continue to work hard reconfiguring the portfolio, and really the results speak for themselves. The same store performance of the '03 and '04 acquisitions, I think, speak volumes about what we have been doing there. And although initially dilutive, we know we are selling lower IRR's and buying higher IRR's. We continue the process of exiting the noncore markets and reinvesting that capital in markets that we believe will deliver higher total returns, by experiencing population growth, job growth, single family home appreciation, and barriers to new supply that will all exceed the national average. As Donna mentioned, we will also complete the rollout of the technology initiatives this year. So we continue to be excited about the outlook for '06 and beyond. And with that James, we will be happy to open the call to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Jon Litt, Citigroup.

It's Craig Melcher here with Jon Litt. For the full year you have revenue growth of 4.75 to 5.75. What do you think the spread of that is between your top markets or core market versus the noncore markets?

Well, clearly, what we're considering to be our core markets today, as demonstrated by the '03 and '04 same store performance, is it's primarily being driven by those markets. But if you look at the detail in the press release, you will see growth across all the top 20 markets, say some of the New England area.

In the first quarter, you had 140 basis point spread in the revenue growth between the top 20 and the others. Do you think you can maintain that for the rest of the year?

We continue to expect to see very strong revenue growth across our markets. Whether or not that spread will be 140 basis points or not, I don't know. But we continue to be optimistic about same store performance.

There was 5 condo projects in the last release that were expected to close in the -- close out in the first quarter. It looks like 3 of those did not fully close out. Can you talk a little bit about what's going on with those 3 projects?

Well, without getting into a great deal of detail on any 1 project, we've talked for the last couple of calls about how traffic is -- while traffic remains okay, and still reasonably strong in historical standards, the condominium business is not the same as it was 6 and 12 months ago. So while we continue to see decent traffic in selling units, we're not selling or closing units at the same rate that we had previously. But not to be alarmed by that, because what we're now seeing is what we expect to be a normal condominium market. So we are closing units or selling units in 10 to 12 units a month, and that's a perfectly acceptable velocity for us. We are just not seeing the same velocity that we were during what we were calling condo-mania.

David, it's Jon. On the assets that you sold in the first quarter, what's the nature of the buyers?

All over the board. We've sold stuff to advisors on behalf of institutions, and we're selling deals to one off local operators.

Are you seeing as many condo converters coming in?

No, no, absolutely not. The strong condo bid -- well I should say, we did sell some properties to condo converters. I mentioned the deal here in suburban Chicago that we sold. So there continues to be a condo bid for product in certain markets. But it's not to the extent that it was, and a condo bid is not providing sort of the knockout bid that's making it nearly impossible for the income player to participate.

What about cap rates, rates have backed up quite a bit. Are you seeing that impacting cap rates at all yet?

Well, in some markets you may see cap rates backing up somewhat. I think in the noncore markets, there's certainly more risk of cap rates backing up. But don't forget, we're seeing much better operating levels, and better revenue growth than what a lot of people predicted Jon. So if cap rates backed up a little bit, my guess is people are underwriting higher current rents, and maybe even higher growth rates in the next few years. So we're not seeing prices back up.

This might be a question for Gerry, and that is, you're clearly seeing an uptick in revenues here, maybe off the bottom But how sustainable could that be going forward the next 2,3 years?

Seems to me that the trends, or the curve of income, the traditional curve, seems to be returning. So we're seeing a significant reduction of concessions, and real good rent rate growth. So I would believe that over the next few years, due to the supply factors and the demand continuing to grow, that we should see continuing strength in the rents. Similar to what we saw this last year.

Do you see any markets where condo conversions that haven't worked, are coming back into the rental market as increased supply, or where investors that own the condo units are starting to put them on the market as rental?

Yes, we have been seeing that in Florida, Jon. But again, there has been so much demand for Florida, you can see the strong performance in the Florida markets, that while those units may come back, we don't think it will significantly impact, at least our expectations. I suppose if you have more units, I suppose it could. But we're seeing strength across all of our properties in all of our markets in Florida. I don't think that if some of those units do come back on line it is going to significantly impact growth rates there.

Thank you.

Lou Taylor, Deutsche Bank.

David, I know you don't want to talk about Lexford, but I can ask a couple of peripheral questions. Are you selling the entire portfolio, or are there any assets that you may be keeping because it's low density and it might have redevelopment potential that you would want to do on your own?

We are offering the entire portfolio for sale, Lou, along with the management operation of those units. There are just a handful of units that are -- that we don't own outright, that we are hoping to be able to sell on a one off basis. But the -- just a dozen or so properties we're going to try and collapse the ownership there, sell those on a one off basis. But there won't be any Lexford units in the Equity Residential portfolio if we're successful in selling this large portfolio to some buyer, hopefully as early as this summer.

Second question, I mean if it were to go through, and you look at the incremental disposition proceeds that you would have, approximately how would those proceeds -- how would they be deployed, in terms of percent that would go into acquisitions, or development, or debt repayment, etc.?

Well, it all depends on the opportunities that we see, Lou. We continue to see product in the market that we would like to buy, like to own, existing stabilized product. We have got our own development team, as well as working with joint venture partners looking for development opportunities. And we continue to look at our own stock as an investment opportunity, as well. So we will compare the relative value and relative opportunity and risk adjusted returns on all those, and will make the appropriate decision at the time.

Okay. And the last thing, maybe that is for Donna or Gerry. In terms of the expenses, I know they're seasonally up. But in terms of DC and San Diego, they looked like a little bit higher than average. Anything unusual going on in those 2 markets for you?

DC is definitely being driven by gas, that's the whole real push on the expense side. San Diego, we had some -- there was really not any gas or anything significant there. Let me see if there's any item that sticks out. It's really a general increase in pretty much every category there. I can't really highlight anything particular, there's nothing unusual that's happening there. We did some -- we did a lot of tree trimming that we hadn't done over the last few years and that accounts for a little bit of it. But there's nothing -- there's no trend there, there's no real issue. I think by the time you get through the end of the year, it will moderate and come in line.

Thank you.

Ross Nussbaum, Banc of America Securities.

A couple questions here. First, on the LRO, as that gets rolled out to the properties, will the property managers have any say whatsoever in the pricing? Or is that decision making going to be made 100% through headquarters, sort of systematically.

Well, certainly during the first few years of the implementation of this program, we're going to allow the field to challenge prices, if they feel they're somewhat out of kilter. At the end of the day, we will make an assessment as we go down the road to see what percentage of variance we find of change that occurs. And frankly, if at the end of the day there isn't a whole lot of change, we may ultimately shift to a mandated price, whatever the system says. But certainly not in the early stages.

Okay. Second topic is, you do have a small investment in the military housing business. Are you -- have you talked to GMH? Are you looking at that at all in terms of expanding your military housing presence?

We have not talked about expanding our military housing presence. We are very happy, frankly, with the results we are seeing at our Fort Lewis property in Tacoma, but have not found the time and trouble and expense that one incurs to try and chase more business, to be worthwhile at this time. But we're happy with what we're doing in Fort Lewis, it works very well with our management operation that we have up in Seattle. And the size of operation we have there. So we're able to manage that very efficiently, and very happy with the results.

Okay. Then my final question is on the discontinued operations line, I'm assuming that Lexford is now being accounted for in that method. What else is in there, besides Lexford?

Right now, under statement 144, we do not meet the criteria to reclass Lexford into discontinued ops at this point in time. We will relook at it in Q2, but right now it is not being included in discontinued ops. It still is income from continuing ops.

Got you. Okay. I think Karen has 1 question.

Just 1 question, what was same store rental growth in the quarter? And how have you seen April trending since the quarter end?

Same store, let me just pull that here. I can tell you that the trends are continuing in April. We really don't see any change from the first 3 months. We had about a 5.3% increase in our rent rate in the first quarter.

Okay, thank you.

Rob Stevenson, Morgan Stanley.

What was the average rent in the portfolio on a same store basis, and for the total portfolio?

The average for same store was $936. And for the total portfolio, it was $973.

Okay. Does that exclude Lexford, or does that include Lexford?

It includes Lexford.

What if you strip that out? I mean how high does the average rental rate go on this portfolio these days?

Lexford represents $531 of rent, so it moves the same store from $936 to $1,016. And in the total rent, it moves the conventional rent to $1,055. Again using $531 average Lexford, which nets to the $973.

Okay.

Let me make another comment here. These are based on what we call gross rent potential. So we haven't offset concessions on that. And we will be shifting, as we go forward, into net effective rents with our rollout of the platform. Okay? So as we go forward, we are going to be speaking about rents more on a net effective basis, which would put the rents at about $995.

Okay. What is happening these days to turnover costs for you guys?

What's happening on turnover costs?

Yes, is it increasing dramatically? Or have you guys been able to hold some of that down? And where is that in terms of hard costs these days on average?

We picked up our rate of turns over the last 2 quarters of last year. It is still running a little bit higher, but what we have done now, is we've changed the nature of it a little bit in our numbers. We now -- we used to have our housekeeping in payroll. Now we contract that out, so that's generating a higher turnover cost than we have historically, because we don't include that payroll piece in our historical numbers. What I can't tell you is exactly what that number is right now. I'll look for it.

And I guess the other question I had was, there were 3 markets sort of stood out from a sequential occupancy decline. San Diego down about 170 basis points, Boston 140, and Houston down 120. What's going on there, especially Houston? We have been hearing from other people, that that market is extremely strong given the sort of lack of supply in the wake of Katrina, et cetera.

Yes, well, we have seen a slight decline in Houston really because of some of the vouchers burning off. But that really isn't what's generating our decline. Our decline is really we have these 2 properties that are sitting in the Medical Center, in the Kirby area, and there's major road construction going on there. It's cut our traffic off and dropped our occupancy, on 2 large assets that we have there. So that's what's driving the Houston numbers more materially. In Boston, we have a rehab where we took more units off line, and that's in our same store numbers. And there's also continuing softening, especially in a couple deals that we have out in the Milton area, in the suburbs, that are generating a significant decline there, along with I would say, a continuing general minor decline.

In San Diego, we have 2 rehabs in process there. Which are pulling some more units off. We had a very strong quarter in the fourth quarter, which is really basically moving us down in terms of decline. But the revenue growth in San Diego is very strong for the first quarter, and continued to increase. So we saw some pretty good rent increases, and renewal increases there, and that's helping to offset a bit of this occupancy loss. But again, it was really primarily from a strong fourth quarter. We also had a series of corporate units, 1 of our major properties there, that moved out in January, which affected that, as well.

Okay. But San Diego wasn't anything to do with troop rotations or anything like that?

There is a little bit of troop rotation in there. I wouldn't say it's material. We don't have significant exposure there. We have some exposure there, but there was some movement there.

Okay. And then last question David, given the current size of the portfolio, what's sort of the maximum level of dispositions that you could wind up doing in a year, without sort of running afoul of the rules? You said that you might have to push some stuff into '06 -- or '07.

It's modestly over 2 billion.

Okay. Okay. Thanks, guys.

William Aikson, Merrill Lynch.

Hey, I wanted to go into something a little bit more mundane, not as exciting as what we have been talking about. But on interest expense, our EBITDA and NOI numbers were very much in line with what you reported, but interest expense came in markedly higher. And I understand how that could have happened. You did consolidate several joint ventures in the quarter. But I would have expected NOI to have gone up by at least the same amount, as a result of that. And I was just wondering, what am I missing there in terms of the modeling?

Basically, you're missing a couple items. We had some prepayment penalties associated with dispositions of properties, which was about $3 million. We did have about $400,000 related to consolidation of some of the Lexford syndicated transactions, which was $400,000. But all in all, if you add up the components, we also had some preferred stock redemptions, which were about $700,000 of write-off this year. It was $25 million [notional], that we paid down. And so when you add those items up, you're in the $4.5 million range for those types of incremental expenses.

Okay, that's very helpful. And then in terms of the average interest rate in your supplemental, you say weighted average it's 5.86. Should I be adding 25, 30 basis points to that to account for fees, does that also get included in interest expense?

No, that would be incorporated into the aggregate debt rate. But if you want to get an indication of what we're assuming for our floating rate debt, basically we're around 520 on our line balance. We are assuming 1 additional fed increase of 25 basis points in around the Q2 timeframe, so that will help you kind of forecast that going forward. I also would want to explain to you as we continue to dispose of assets, as we continue to pay down preferred stock, we are going to incur a $0.01 a quarter at least of those prepayment penalties. Q3 will be slightly higher, because we have $115 million preferred stock redemption, which will trigger about a 3 -- $4 million incremental cost associated with write-off of amortization costs.

Okay. And then finally, capitalized interest in the first quarter, what was that?

About $4 million.

$4 million. Do you guys have an estimate for that for the year?

Probably comparable to what we saw last year, which was around the $15 million to $16 million range.

15 to 16.

Yes.

Okay, thank you so much.

Craig Leupold, Green Street Advisors.

David, just going to Lexford, it looks like you have consolidated all of the Lexford properties at this point?

I don't think they are all consolidated. The lion's share of it, but all of them are not -- all of them are consolidated, yes

They are all consolidated?

Yes.

In aggregate, how much property specific debt is there at Lexford?

There's about -- basically the EITF 04-5 -- 05 has added about 20 -- just generality, $24 million in the real estate side of the balance sheet, and about a similar amount on the debt side. So effectively, not very material at all to our operation, because we consolidated the majority of our acquisitions and went in conjunction with 1046. And so as a result, it's about $400,000 of incremental interest expense for the quarter.

Okay. And for your overall portfolio, if I look at your consolidated debt, what portion of that would be attributable to parties?

In terms of total Lexford debt, are you referring to?

Lexford, and any other consolidated JV's.

Total Lexford is $35 million. Other consolidated JV's, about 200, and, hold on just a sec.

There's very little debt from -- that comes on the balance sheet from the consolidated Lexford portfolio. There are very few properties, and they're very small properties, and there's not a great deal of of debt. Most of the debt that we consolidate because of the joint ventures, comes from the development transactions that we're involved in.

Right. And that's what I'm trying to figure out, what that total amount is. That would be associated with third parties, as opposed to your own.

Approximately $120 million.

Okay. All right. David, you made a comment when somebody asked about cap rates earlier, about your belief that core markets are probably less exposed to a backup in interest rates versus kind of the noncore markets. And I'm wondering what you attribute that to? Is it the composition of buyers, and what's happening with interest rate? Or is there something else that you attribute that to?

Well, I think it's a combination of factors, Craig. I think there's the continued strong demand by institutional investors for product in these markets, as well as very strong operating current growth and future expected growth in these markets, that are combining for pricing to stay at least pretty consistent. We haven't seen continued absolute increases in prices on a per unit, per square foot basis, but nor have we seen them start to decrease as a result of the back up in interest rates. We do expect to see more, and we have seen, I think, more modestly that occur in what we consider to be our noncore markets, where there is probably less institutional demand and more demand for products from the leveraged player.

You mentioned, obviously you bought some of this JV. Is the JV land that you just purchased, is that on balance sheet, or is that off balance sheet?

It's on balance sheet, but not on the development schedule yet in the supplemental.

Right. How much total land do you have that's owned and held for development on balance sheet, that's not in that development schedule?

About $190 million.

Okay. And then 1 last question, related to the buyout of your partner, M Street? On your supplement page 19, your total capitalized cost, does it include the adjustment for that purchase?

Not at 331, because we hadn't acquired it. But that will go up by about $30 million to reflect the purchase of that partner's interest.

And what does that do to your overall expected yield on that project, blended with what your initial equity investment, plus now the buyout of partners?

That's a good question. The original yield, based when we started the project, was in the low 8s, high 9s. That would have been back in the early 2000, probably. When we valued the property to determine our partners interest, that yield was essentially -- to trade that property today on a -- at a point in time where it was not occupied, was about a forward stabilized yield valuation of about a 6. We are expecting our yield to be now on our fully capitalized investment having bought them out, to be about 7.9 or 8%.

Right, very helpful, thank you.

Bill Crow, Raymond James.

3 quick questions here, big picture sort of things. Any change in the move outs due to home purchases during the quarter?

Continuing to decline. We are seeing a higher renewal rate and less move outs for homes. So we're down to around 20%.

And where was that at the peak, if you go back a couple years?

About 24.

Okay. Any pressure yet on tenant credit due to higher cost in the consumer space, whether it's credit card minimums or higher gasoline purchases, etc.?

We're not really seeing any change. We have had positive change in our bad debt, so we're seeing that decline, our bad debt write-offs. The credit is better. People have more spendable income, even with all the other attributes, because there's so much demand.

Yes, okay. And then finally, on the supply side of things. Just give us a picture for what you're seeing, maybe some markets that you might be concerned about from a new supply perspective.

I think it's the same old suspects. In Texas where they can build them quick, we are seeing more units in Dallas than you need, and you're seeing more in Atlanta. We're not seeing really any other markets of any significance. Denver, there seems to be a build up pending there, although it's not all in the ground yet. But, that would be a little bit of concern. There's a little bit of build up in the Inland Empire in California, but there's nothing in any of these markets that's going to significantly change where the trends are. I think the trends are going to continue to be somewhat slow in Dallas, for example, and Atlanta. And primarily due to the fact the supply goes in so quick.

Great. Thank you for your time.

Mark Bifford, Goldman Sachs.

Hi guys, Mark Bifford with Jay Habermann, here. A couple quick questions. In regards to the JV developments, just wondering the structure of those deals, as far as the capital structure and the timing, if you plan on taking any of those over and bringing them into the portfolio at some point in the future? Or do you plan on maintaining them all as a JV?

The JV structures will each be different. But in general, they all provide for Equity Residential to put up the necessary equity to fund the construction loan. We get a preferred return on that equity from the minute it goes into the transaction. And then, a preferred return of various levels, generally about 9%. And then up to, call it 12 or so, there's various levels of participation. And then after 12 or 13% overall return, our investor -- our partner may be realizing 50% of anything over that level. They all provide for Equity Residential to have the ability to monetize our partner's interest within a relatively short period following stabilization, to enable us to get the property 100% on our own balance sheet, as was the case of the 2400 M property in the District of Columbia.

In regards to that 2400 M property, I notice the percentage lease or percentage occupied numbers were zero. Is that a podium product, and you just can't prelease it until you have got the building complete? Or is that something that has just taken time to lease up?

What happens there, is that the District of Columbia has some tenant right regulations that restrict the ability of owners to sell properties, without first offering those properties to the existing tenants. We had had conversations with our partner for some time as to whether or not we should convert that property, and actually offer it for sale as condominiums, similarly to what we had done with the Radius property -- or with the 2 properties with them that we built and immediately put them in condominium conversion. We decided that we would not convert, but we would buy our partner out. And we had to stop -- had to delay leasing until that acquisition of their interest was closed. Otherwise it would have given those tenants some rights that would have held up the sale for another 60 or 90 days. So we did acquire their interest last Friday, and we are off and running there, and have got great traffic, and are taking applications, and are well on our way to getting that property leased up.

And finally, related to expected condo sales for the year, you had mentioned, I believe 1,500 units you plan on selling?

Yes.

And you're at 171 currently, correct?

Yes.

What's the timing there? What's the breakout amongst the quarters that you see you selling up to that 1,500? Was it 10 to 15 a month you said you would have to sell?

That's -- what we're averaging on each individual conversion property. Essentially what happens is, we will sell about a third, close a third of the sales in the first half of the year, and the balance in the second half of the year. The primary selling season of the condominiums is probably not unlike single family homes. But it begins kind of February, and rolls through early summer, and then there is a little lull. And it picks back up again September, October, early November. So you roll the closings forward 60 or 90 days from that period. Because you have fewer sales in the fourth quarter, you have fewer closings in the first quarter. But, so the closings are kind of a back end of the year event, and we will have two-thirds of our sales -- our closings, rather, in the second half of the year, as compared to only a third in the first half of the year.

Okay, great, thanks a lot.

[OPERATOR INSTRUCTIONS] Richard Paoli, ABP Investments.

I just have a couple quick questions. I don't know if you stated it or not, I had to hop off the line for a second. The backlog for your acquisition volume, did you mention what you have on the letter of intent or what you're looking at for -- ?

I did not mention it. I will tell you that if you look at the acquisitions we have done over the past several years, we have been acquiring a lot. At any given time, Rich, we have always got a significant kind of pipeline of stuff either under contract or letter of intent, or things that we're having conversations about. So I mean, at any given time, it's 5 or $600 million worth of product.

Okay. And that's basically a good run rate, I presume, to use then for the balance of the year? Or something, perhaps some back end loading. I know a lot of people like to sell.

Again, depending on how much dispositions we're able to do, then that will determine how aggressive we want to be on the acquisition side.

Okay. And turning to the dispositions for a second, I just want to make sure that I'm clear on understanding what your policy is now. You have done 800 million practically for the first quarter, so you're about halfway done on that 1.5 budget for the year.

Right.

Explain to me what's going to happen now. I don't know if you have a bunch of stuff under contract or what have you, but what is second quarter on sales looking like? And then without trying to corner you on Lexford, what is your -- what's the calculus that happens after that? Do you slow down?

Thank for not trying to corner me with respect to Lexford. Here's essentially what happens. We did do a great deal of disposition volume in the first quarter of the year. We have had to slow down the disposition volume of the convention product in anticipation of selling the Lexford product. I did mention in my opening remarks, if we do sell the Lexford portfolio, we will not be able to sell as many conventional product this year as we had originally planned. So while we wait and see what happens on the success of the Lexford sale, we have had to dial back the volume of the conventional product. As we get into June and get some clearer picture as to the possibility and likelihood of a Lexford sale, that will then dictate what happens to conventional product for the balance of the year. So if we get into June, and we're not liking our bids, and we get to the point where maybe we don't think we will sell Lexford, then we'll have to -- we will [inaudible] the sale process of the conventional product back up. And if we do get comfortable with the Lexford sale, then that will limit the amount of incremental additional conventional product we will be able to sell.

Okay. And then this is just a minor question, but just on the acquisition side again, are you including in your acquisition volumes and in the cap rates, the projects that you're buying, or at least the portion of your -- the JV projects, development projects that you're bringing in house, or is that just a separate -- ?

On acquisitions? No, we have not. Any JV development project we have got, Rich, is already in our property and unit count, and that is not included in what we say we acquire in any one quarter and is not reflected in what we say the weighted average cap rates are -- .

So the dollar amounts and cap rates are separate?

Dollar amounts, we did $500 some odd million of acquisitions for the quarter that does not include the buyout of any of our joint ventures partners interest in any development deal.

Okay, thank you.

Jay Habermann, Goldman Sachs.

Just 1 question. David in your comments, you mentioned 4 future developments in New York City. Have you locked up the land there, and what's the expected timing on those projects? And do you actually -- can you provide locations as well?

No, I won't provide locations. We have locked up a couple of -- we do own a couple of parcels in Manhattan, and we have got -- we control a couple of properties in New Jersey. The -- and there's a possibility that the New Jersey -- both the New Jersey deals could start this year. It is unlikely that the Manhattan deals would start this year.

Okay, thank you.

There are no further questions at this time. Will there be any closing remarks?

Yes, thank you, James. Again thank you all for your participation in the call today. We're very excited about the way the year is shaping up. We have got strong operations in the core of business across much of the Company. The wind is at our back again. And we're really benefiting from the hard work that we have done in reconfiguring the portfolio when the fundamentals were much, much worse. I will tell you that the 6,000 people that make Equity Residential what it is, we have a spring in our step again, they are out there aggressively raising rents and working hard to reward your trust in us. So, thanks again for joining us. We look forward to seeing many of you at the [inaudible] REIT meetings in June. Have a great day.

This concludes today's Equity Residential first quarter earnings conference call. You may now disconnect.