住宅地產 (EQR) 2006 Q3 法說會逐字稿

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

Thanks, Heather. Good afternoon, thank you for joining us to discuss Equity Residential's third quarter results and outlook for the remainder of 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 in 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 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.

Now I'll turn it over to David.

Thanks, Marty.

Greetings, everyone, we're obviously very pleased with the performance of the properties across all of our markets in the last quarter with average occupancy of 94.6% and the fourth consecutive quarter of same-store revenue growth of 6%, our third quarter same-store NOI was a very impressive 9.1%, we're extremely pleased and credit to everyone across the country who helped deliver the terrific results for us. With the closing of the Lexford portfolio in early October, we continue to make progress transforming the Company's portfolio and reinvesting this capital in the right markets in the right properties to take advantage of improving fundamentals, very strong fundamentals across our core markets. We continue to see expect pretty good job growth in our markets, perhaps not as much as the recent past but positive nonetheless. We expect more incremental demand for market rent properties that compete with new deliveries going forward.

We think significant reductions in the new home construction will bode very well for the apartment owners going forward. And we expect that there will continue to be sufficient and favorable affordability gap between the cost to own and the cost to rent going forward. So, as a result we continue to think our rents should increase across all of our markets and this gives us very good reason to feel positive about a strong finish for 2006 and a very good 2007.

And with that, I'll let Donna take you through the quarter, our same-store and core operations, and the factors that have caused us to reduce our FFO guidance for the year.

Thanks, David.

We're very pleased with the third quarter results and the continued strong performance from our core business. In the third quarter the company achieved FFO of $0.62 per share versus $0.56 in the third quarter last year. This increase was primarily due to the excellent growth in our core operations. In the third quarter, FFO from core operations was $0.58 per share, an increase of 11.5% over the same period last year.

Core operations include results from same-store properties plus the results from acquisition properties that are not yet the same-store like the Trump Place in New York. Core operations exclude one-time items such as special charges as well as condo gains. In addition to this excellent growth from core operations in our third quarter, we had$0.03 per share contribution to FFO from our condo business. And we also had a $0.01 gain from additional proceeds from our sale of rent.com in 2005 and a $0.01 from an incentive payment from the buyer related to the 2005 Tyson's land sales. The above gains were offset by $0.01 from the write-off of the unamortized financing costs associated with the redemption of $115 million in preferred stock.

All of these items were in our expected results for the quarter. In a few moments, David will talk more about acquisitions and dispositions, development activity, as well condo business. But first I'd like to talk about and highlight our same-store results. The big contributor to our third quarter results was our same-store performance. On a quarter over quarter basis, same-store revenues were up 5.9%, expenses were only up 1.4%, NOI was up 9.1%. The key driver of the 5.9% increase in total revenues was the 6.5% in the effective rental rate modestly offset by 0.6% decrease in occupancy. Effective rental rate is rental revenue divided by occupied units. Effective rent includes the impact of concessions, if any.

We have continued to push rents while eliminating concessions and maintaining good occupancy levels. Concessions decreased 67% in the third quarter and on a same-store basis represent only 0.3% of revenues. Despite pushing rent and decreasing concessions, occupancy declined slightly by only 0.6% to 94.6%.

The largest occupancy declines occurred in Florida and Tacoma. The Florida reduction is due to the softening in select markets as condos have come back into these markets. Whereas Tacoma, it's heavily influenced by military deployment trends. Despite these weaker select moments, occupancy is expected to remain in the mid-94% range for the rest of the year. Our same-store expenses came in at 1.4%, a much lower rate in the third quarter than we have seen in many quarters. This was the result of higher comparative growth rate experienced in Q3, 2005.

In Q4, expenses should return to be more in line with our historical levels. Our same-store performance was again very positively impacted by our acquisition in 2003, 2004, and 2005 that are now in same-store, representing just over 19,000 units. In the third quarter, our 2003 acquisitions have quarter over quarter NOI growth of 13.4%, our 2004 acquisitions at 12.6% NOI growth, and our 2005 acquisitions had 10% NOI growth. The average effective rents for these 19,000 units is on average $1400 a month. And the 2005 acquisitions alone are nearly $1500 a month. This is evidence of the positive impact of our portfolio transformation.

Before I move into guidance, I'd like to cover the strength of the balance sheet and the Company's liquidity position as well as discuss our recent convertible bond transactions. The company's debt levels remain conservative and coverage remains strong with debt to total capitalization of 34% and a fixed charge coverage ratio of 2.6 times. Equity debt balance increased by approximately $740 million since the beginning of the year, primarily due to the fact that acquisitions exceeded dispositions by approximately $400 million, which was funded by drawing down on our lines of credit. Dispositions were slowed down related to the Lexford disposition, which was the result of certain tax constraints.

As a result, peak line borrowing increased $1.4 billion prior to September 30th. In order to reduce our line balance, equity issued a $650 million convertible bond on August 23rd at a coupon of 3.85%. The conversion price on the bond is $61 a share. The transaction was very well received in the marketplace and allowed the company to diversify its investor base. Line balance is currently $450 million and is expected to approximate that level for the remainder of the year.

The final topic I'd like to cover is our guidance. For the full year, we expect revenue and expenses to come in at the high end of our previously provided ranges of 5.75% for revenues, and 3.5% for costs. This will place NOI towards the middle of the range for the year of 7.2%. At our last call, we indicated that FFO guidance would be towards the middle of the range. We have now adjusted guidance to $2.32 to $2.35 FFO per share for the following factors impacting Q4 expected results.

The first item represents $0.01 reduction due to a slightly higher Q4 same-store operating expenses than forecasted. The second item is that condo sales are expected to be $0.02 to $0.03 lower due to an overall softening in certain markets. Number 3, relates to the Lexford prepaid penalties which were $0.01 higher due to lower interest rates at the payoff date. The year-to-date guidance implies guidance for Q4 of $0.54 to $0.57 FFO per share.

Thank you and let me now turn it back over to David.

Thanks, Donna. We're obviously very pleased with the same-store operating results for the quarter and pleased that it was fairly broadly based, continue to have strong occupancy and the fundamentals appear to remain positive. So as I said, we're confident that we'll finish '06 very strong and we're excited about how '07 seems to be shaping up. In selling the Lexford portfolio and reinvesting those proceeds into our core markets, we'll continue this process of transforming our portfolio which really began 3 to 4 years ago.

We've narrowed our focus during that time frame, and today, our largest 20 markets comprise 92% of our net operating income, that's up from 65% in the year 2000. And of course we're investing capital in these markets and we believe will provide higher total returns. As Donna noted and it's worth repeating, we're seeing significant benefit from this capital redeployment. Our '03 acquisitions, which represented 5,838 units delivered 13.4% NOI growth in the third quarter and 10.3% NOI growth year-to-date. 2004 acquisitions representing 9,685 units delivered 12.6% NOI growth in the third quarter and 12.2% NOI growth for the first nine months of the year and our '05 acquisitions and that represents 3561 units acquired in the first half of the '05, delivered 10% NOI growth in the third quarter and we're extremely pleased about that.

On the disposition side of the business for the quarter, there was very little activity there. We sold two assets totaling 133 units, these were two Lexford assets that couldn't be sold as part of the larger transaction. As we discussed on our second quarter call, with the pending Lexford sale, we would have to limit the amount of conventional properties we'd sell to the balance of the year. And that's why we only did the $3 million in the third quarter now with the Lexford sale having occurred at nearly $1.1 billion, we're over $2 billion for the year.

On the acquisition side, we acquired 10 properties in the third quarter, 2558 units, for $505 million and a weighted average cap rate of 5.1%. We acquired a property in southern California, one in Seattle, one in the East Bay and one in Boston. And two each in Virginia, Orlando, and Denver. We're pleased with what we were able to accomplish on the acquisition side.

Turning to the condo business, the short story on condos is that the third quarter came in pretty much in line with our expectations. And the fourth quarter and therefore the rest of the year, will not meet our most recent expectations. Through the third quarter as projected, the condo business contributed $0.08 per share of FFO after taxes and overhead. But it will only come in for the full year in the $0.09 to $0.10 range per share. That will be $0.02 to $0.03 less than $0.12 per share we forecasted really since the beginning of the year and then we confirmed on our second quarter earnings call. In the third quarter we produced $15.9 million of pretax income, about $1 million less than budgeted.

We closed 315 units in the quarter, down 25 from our budget of 340. In the pretax profitability per unit was in the line with expectations at about $46,000 a unit. So with profitability per unit in line 25 fewer units, you get to about that $1 million Delta from what we have projected on the second quarters earnings call. So the third quarter came in pretty much as expected and on the last call, we mentioned that while traffic was still pretty good, sales were slow, particularly in Arizona and Florida. And on that call, we said that fourth quarter condo performance would be decided by September and October sales.

Well, despite surprisingly good traffic, sales have not picked up in either of those two markets. And, as a result, we're scaling back our projected closings for the year to 1,077 units. That puts fourth quarter sales at 243 units, and that's down nearly 200 from our original projection of 441 units in the fourth quarter. Well, so what are we doing about it? As we noted on page 23 of the supplemental information in the today's press release, we're continuing as planned in most of our markets but we'll be making some changes on five specific assets in two markets.

First we'll be continuing as planned in both Chicago and Seattle. Margins are holding in these markets, velocity remains consistent but I will say that we're seeing a little bit of softening in downtown Seattle. And we will complete the conversion of the last asset in Florida. We've got less than 100 units to sell there and we should be able to make progress there, but I tell you, margins have been reduced due to price reductions, increased marketing and advertising cost, as well as increased incentives, those incentives include prepaid Homeowner Association fees, mortgage buydowns and instances where we are paying buyers' closing costs. We'll also continue the approval process of the one small property we have in southern California, but like we always do, we'll make a final decision when those approvals are received what to do based upon the market conditions at the time.

But as I mentioned, we will be making some changes on five assets. First in Arizona, we will not start the sales of the two assets that are currently in the approval process. That's Alameda Ranch and Azure Creek. We have also stopped the sales process at Bella Vista where we have closed 14 units to date. And we will terminate any of the outstanding sales contracts there. These three assets will continue to be operated purely as rental properties going forward.

Now, this has always been our backup plan as market conditions change. And I'll just highlight the Phoenix same-store results. We're putting properties back into rental operations in a market that delivered 12.7% revenue growth in the third quarter and 21% NOI growth in the third quarter. And year-to-date revenue growth of 11.5% and year-to-date NOI growth of 18%, so it's not a bad outcome and a result that we always felt that we could fall back to if there was any change in the condominium market. We will continue selling and closing the one remaining asset in Phoenix and that's Milano terrace, but as I mentioned, just like in Florida, they continue to see some margin pressure based on both price reductions and sales incentives.

And in Virginia, we have also stopped the sales process at both the Oaks and Regency and we'll terminate any outstanding sales contracts on those two assets and these will be returned to rental operations. And in northern Virginia for the quarter, our same-store revenue was 6.4%, same-store NOI, 11.3% positive. Year-to-date, same-store revenue growth 6.3%, and NOI growth 8.4%. So again we're putting the properties back in pretty strong rental market.

From the beginning, when we started our condo conversion business about four years ago, we mentioned that this was an attempt really to be opportunistic and to help create value when the affordability gap between -- favored ownership rather at the expense of renting. And we were prepared to react quickly when market dynamics changed and I think we've done that.

We continue to think that the condo conversion business is a viable long-term business in many of the markets in which we operate. We operate very attractive price points relative to single-family homes. We believe that there will continue to be very strong demand from two very powerful segments of our population that will have huge impacts on housing in our country for the foreseeable future, the first being the wealthy aging baby boomer and the second being the echo boomer. We remain committed to the conversion business, particularly in areas like Phoenix in Florida where we believe over the long term, there will continue to be strong job growth, strong population growth across both of these two segments single family home appreciation and demand for competitively priced housing like condominiums. So we'll have to be smart and know when the market is turning against us as well as when it turns in our favor and today we're reacting to the former but will be prepared for the latter.

On the development side of the business, which is set forth on page 22 of the supplemental today we currently have 11 properties totaling $925 million under development. That's up from 10 properties at June 30 so we started one in the quarter and that is our 77 Hudson property in Jersey City, New Jersey, that's our own development transaction, it's 481 units, $242 million total construction cost, scheduled for a 2009 completion with a project stabilized yield in the high sixes. Our pipeline for development, and this is totals 1.5 billion, and this is in addition to those that are currently under way and reflected in today's press release. That includes three deals in California, that's two in L.A. and one in the bay area. Three deals in the New York City area, two in Manhattan, and one in New Jersey. Two deals in Florida, one in Tampa, one in Orlando, and one deal in Seattle.

We currently own or control the -- projects. And targeted stabilized yields, both goes understand way and in the pipeline remain from a low to mid-sixes to the mid to high sevens. We the continue to believe that these yields represent appropriate risk for the for those returns. We are beginning to see some softening of land prices. I know that's been a big topic of discussion. Perhaps as much as 10% or 15%. And with top lines increasing at the rates we have seen around the country, this could lead to some more apartment construction going forward than we've seen in the last few years. But I'll tell you today that deals are being underwritten in the more the mid to low sixes so we still may be a little bit away from new developments pencilling out.

So in closing, let me say that we continue to be very pleased with the operating performance of the core portfolio, particular the assets we've developed in the last several years as we continue to transform our portfolio. We're extremely pleased that the sale of the Lexford portfolio occurred as planned in early October. Strategically, this was a very important move for us. And although initially dilutive, we continue to position the company for better earnings and better cash flow growth down the road. And we will continue this process of exiting our noncore markets and reinvesting capital in the markets that we believe will deliver higher total rates of return, and we'll also respond rapidly to changing conditions of the condo market. So with that, Heather, Don, and Gerry and I would be happy to open the call to questions.

[OPERATOR INSTRUCTIONS]. We'll pause for just a moment to compile the Q&A roster. And your first question comes from John Stewart from Credit Suisse.

Hey, David. You mentioned that you think the condo business is a long-term viable business. At what contribution level do you see it as a viable business?

Well, as I've said from the very beginning, John, this will be a lumpy business. But I think you're right. In order for us to have a viable business, it has to deliver some minimum types of return and I don't just mean in an individual year, but on a real run rate going forward. And I'm not prepared to tell you where I think that is today. We continue to do very well in Chicago, do very well in Seattle. We'll finish up what we're doing in Florida and Phoenix and my guess is we'll continue to look at opportunities in both Florida and Phoenix.

And there's probably a pause in that business today but we'll assess the situation and make the appropriate decisions going forward. But there will be some minimum level necessary to justify the effort and attention as well as the overhead here in Chicago, but again if you look at the 80 million people in the aging Baby Boomer demographic and the 80 million people in the echo boomer demographic, we believe in our core markets, condominiums continue to represent a pretty strong housing option for those people and we think it will be around for a while.

Okay. Well, let's just for argument's say that it continues at the run rate you expect to see in the fourth quarter, which is $0.01 to $0.02 a share. If you look at your, what you've done for the year, you were running $0.61, $0.62 for the fourth quarter and you're dropping down to $0.54, $0.57. How do you backfill the other three cents a share that was coming from condo gains?

Well, it will be difficult to backfill that last year. We do have deals in Seattle and Chicago that continue strong and we would expect to be strong in 2007 as well. What we're trying to do the deals that we think make sense, not just trying to backfill what we're losing, and this whole year we started this year suggesting that it was going to be impossible to backfill the phenomenal results we saw in 2005. But we'll do well in Chicago and well in Seattle and we'll get done in Phoenix and Florida and we'll assess the situation,next year.

And one quick one for Donna. You mentioned you expect the fourth quarter same store operating expenses to drop back or move back up to in line with the historical levels. By that do you mean recent historical results or more of a long-term trend? Can you give us a bit better sense of what you're projecting for same-store expenses in the fourth quarter?

More in terms of the long-term historical trend. So we had the anomaly in the third quarter which reduced expenses down to the 1.4% levels due to the prior-year comps which included things like the rates that go program, as well as the, we had certain fires in Q3 of 2005, which caused expenses to be high. But we would expect them to be more in terms of the longer trends. So back in line with more inflationary kind of increases.

Got it. Thank you.

Our next question comes from Jonathan Litt from Citigroup.

I'm here with Craig Melcher as well. I wanted to follow up on the question about the condos coming back into the rental market and get a feel for what impact that's having in those markets.

Gerry Spector here, Jon.

Hi, Gerry.

We're seeing pretty substantial returns in the Florida market, much more so than I would say Arizona. Arizona we're continuing to see strong growth in occupancies and revenues, there even with the comebacks in the condos, relatively nominal, we don't see much impact there. But Florida overall, we saw a drop primarily in the months of September and even October that are reflecting a significant number of properties coming back in the market. To our intelligence, we have about 50 properties in south Florida that have come back into the market, driving occupancies down for us. But we're seeing, also some seasonal factors -- looking at my trend charts, I'm seeing very much seasonal effect occur in Florida, a little softening in the summer and actually a bit of a recovery later in the year. Then you see the impact of these reconversions coming back into the market softening a little bit of the uptick in September and go forward. So we see that, we believe that's going to continue to have some slowdown in Florida, although we still believe it's going to be a strong market for us. But it won't be running into the 10 to 12% level that you've seen this last year.

You're seeing converters taking a vacant property and putting it back into the rental pool. What about investors who acquired or homeowners who acquired a condo? Are you seeing them put them back in the market or is it mostly converters that are changing direction?

Well, it's harder to tell with individuals, but actually do track both. I would tell you that certainly in south Florida, what we've seen is more competition coming from individual condo owners through the rental pool. The Internet facilitates a much better rental option for them to put their units in the market, so we're seeing, we're coming up against that as well. But, so you have vacant units coming back in the market on busted deals and you also have the impact of these investors renting, it's increase in supply in those markets as well.

Are you seeing concessions being given, are you seeing them drop rents below market levels to get it leased up quickly.

Absolutely. That's exactly what the impact is. We have to drop our rates and we're not dropping them as quick so we see a little bit fall off on the occupancy side. But we don't want to go too far on the rental side.

But we're seeing lower average rents on the individual investor renting his units than what we're typically seeing, but we require a much larger deposit up front than we would. And then certainly on the developer who is in the conversion, when he goes back into the rental market, in order to get occupancy up quick, he is providing one up to two months of free rent in those markets as well.

Do you see this spreading out to other markets beyond Florida and Arizona?

No.

You think it will be self-contained in those markets?

I think just because of the amount of we'll have a major hiccup, but I don't really see the same impact in Arizona only primarily due to probably more aggressive demand in that market than south Florida.

David, I have a question for you. To the deals which you're no longer going to convert, if you transferred those into the TRS, at a certain price, how do they get back into the -- do they get back into the -- do any writedowns have to happen at the TRS level?

Not necessarily, Jon. There may be reasons to leave them in the TRS. We're in the process of assessing what the appropriate course of action is on those, whether we leave them in the TRS or move them back to the REIT, but I think it all should be transparent.

But if the value you transferred it out is in excess of the market value today because the condo business has dried up is there any kind of writedowns that might happen?

I'm not so sure that that's true. I tell you that the income buyers today are buying some of these properties almost in excess where the condo guys had not too long ago. We transferred some of our deals in Phoenix in the 160 or so thousand dollar unit range and now we're looking at some one-off apartment acquisitions in that range. So I'm not so sure that's the case. You look in the market that is we're in, we've seen such strong top-line performance, as well as such continued strong demand by the income buyer, that I don't think that's a great risk.

Maybe it's more academic, but if that was the case, would there be a writedown at the TRS level, or is that not necessary?

Well, I suppose if it could be demonstrated, if we had to demonstrate there was a permanent impairment to that valuation, we would have to take a charge. If you took that charge, you took it into the TRS. And that would help offset some of the knack we realized in the trs this year. But I don't expect at the present time, I don't expect that to be an issue.

Great. Thank you, guys.

Our next question comes from Alexander Goldfarb with UBS.

Hi, good afternoon. Just further wanted to follow up on Jon's question regarding Phoenix. You guys showed some strong sequential growth there, a number of the REITs have been showing very good rent growth in Phoenix. It's probably one of the markets that a lot of people focus on for single-family housing. Can you just talk about why that market remains so good from a rental perspective, when we may see either homes coming back on as rentals or some of the builders offering cut-rate deals to try and clear inventory?

Well, I'll let Gerry jump in if he feels differently, but I tell you, Alexander, I think what you've seen in Phoenix is what you've seen in a lot of different markets. We've seen some extraordinary single-family home appreciation over the last several years, which has created an affordability gap which is very much favors rental today.

So when you put strong job growth on top of of that affordability gap, that's going to really drive the top line and help maintain our occupancies. That won't suggest that that can't change, but you've seen extraordinary growth in the cost of single-family homes in that market over the past several years and as you know, our rents roll down in that market after '03, and rents have returned to where they were at '01 and have gone beyond but there still continues to be a fairly sizable affordability gap that will either be closed through higher rents or as you say, perhaps, through some decrease in single-family homes but for the time being, the dynamics are very much in our favor.

I would agree with that, David. I think the biggest factor you have is phenomenal job growth and significant increase in the price of single-family homes. And I don't think anybody's going to get discounting single-family homes at the level that it brings the affordability gap into place. There wasn't very much in the supply line at all because of the, the effect of 9/11. So you really did build up a significant shortage of supply and single-family homes were also having problems getting actually produced and so we have people that were staying in apartments longer because their homes, even though they bought them, were actually having problems delivering them. But it could certainly down the road, if single-family homes continue to be built and I see slowdowns in that factor and if job growth slows, you could have a problem there. But we're not seeing any indication of that right now like we have in Florida.

Okay. Looking forward to further dispositions, have you guys quantified how much more you plan to sell over the next several years until you get to what you consider your ideal portfolio?

Well, we still do have markets to exit. And we will do that over the next several years, my guess is we've got another 2 to $3 billion of more market exits, as well as we've got assets in our core markets that we'll want to sell and reinvest that capital in those same markets. So, yes, there will continue to be a push on this about position side here for a couple more years, call it 2 to $4 billion more, and then after we reach that, there will continue every year to be a disposition process which could be maybe $1 billion to a 1.5 billion.

Okay. So another 2 to 4 billion to go and 2 to 3 of that is in exiting markets and obviously the billion then is just in shifting assets within your existing markets?

I think that's probably a pretty good guess.

Okay. Then if we just flip to the accounting impact of that, because you guys have been doing a lot of 1031 exchanges, if you could just talk a little bit about how all these dispositions in recycling affects your capital funding and your ability to manage your taxable income with respect to how much you're paying out.

Well, we've been over the past several years and as we noted on this press release, from a capital funding standpoint, we've been selling as much as we've been buying. So we've essentially been paying for our new acquisitions with proceeds from dispositions. And through 1031s, use the use of 1031s you can help manage your dividend policy and we haven't had any problem managing that. As long as we can continue to find acquisitions that we like, we can use the disposition proceeds through the 1031 exchange process and not have that impact our taxable income and our dividend policy.

And have commented how close your taxable income is to your dividend?

I don't think that we have commented on that. We did have a limitation as to how much we can sell in the call it 2, 3 billion range. I'll tell you that we received a private letter ruling from the IRS which essentially has lifted that limit on us. Providing we use 1031s. So we're not at a point yet that that will drive dividend policy. I think dividend policy will continue to be driven here by how well we're performing in our core operations.

Okay. And then just the final question is, given asset pricing remains pretty tight, if you could just talk a little bit about your thoughts of possibly exploring a fund structure and then I'm finished. Thank you.

Well, those are two separate questions. Let me first address your sort of asset pricing. It continues to be very competitive out there. We continue to look at opportunities to reinvest dollars in our core markets and find, probably find interestingly more opportunities today because the condo player is not providing knockout bids, so there's more opportunities, more deals to look at, but as evidenced in the lower east side of Manhattan not too long ago, pricing remains extremely aggressive. And we've got to work hard to find good acquisition opportunities.

With respect to the fund, we continue to have enough of a challenge in finding good acquisition opportunities for our own account. That we're having trouble finding the rationale of trying to find good investments for someone else's money. I certainly understand the merits of doing that. There are also some challenges, but for the time being to do any sort of fund for EQR we think would cause a great deal of conflict with what we're trying to do with reallocating our own capital, so I would not see any sort of fund in our immediate future.

So I hope that answered your question, Alex. I guess you hung up so we'll take the next question, Heather.

Your next question comes from Rob Stevenson from Morgan Stanley.

Good afternoon, guys. Can you talk a little bit about what's going on right now in your D.C. suburban Maryland portfolio? Looks like in contrast to some of your peers, you're continuing to see occupancy leakage and some very moderate levels of rental rate growth, there.

Gerry?

Sure. Primarily, we have almost 5,000 units in the Maryland sub-market. It's performing certainly much lower level than Virginia.

That being said, of the 4800 units we have there, around 34% of those properties have been impacted by renovations currently under way, which we've taken units off the market and running in the low 80% range and in one property we're actually running around 72%. We have a couple of properties that incurred fires where we have units offline affecting that as well. And we're also seeing actually some very, softness even in properties that are not under renovation that we're trying to get our hands around. These are older properties, they're not of the same caliber and qualities of the Virginia properties.

And we're in the process of assessing what our strategy is going to be in regards to those assets. We expect that it will continue because of the renovations to be a little bit softer for a period of time yet. But I can't quite get my hands around where exactly that's going to turn around. But we do expect an improvement in that overall area, net of renovations.

Gerry, what was the average rental rate per unit for the same-store portfolio and for the total portfolio in the quarter?

The average rent rate, total portfolio, $1,073. And then it was net of about maybe $35 in concessions.

Okay. And the same-store?

That was same-store.

What about when you add in all the non same-store properties?

Then you're at $1403 level with the 2005 acquisitions at about $1482 average rent.

Okay. So the $1,400, it doesn't include the same-store portfolio. It's just the non same-store portfolio?

That includes, yes, it does include same-store in the third quarter.

So if all your properties were same-store today, the average rental rate would be $1,400?

Yes.

Thanks, guys.

You bet, rob.

Next question comes from Lou Taylor from Deutsche Bank.

Thanks. Donna, can you remind us, when did the Lexford portfolio come out of the same-store pool?

We took it out in Q2.

There was a reference to a $4.5 million one-time accrual retention benefits. Did that come out of operations or did that come out of the gain on the sale?

We basically had to record, most of the charges associated with the Lexford disposition will occur in Q4 and will be netted against net gain on sale. However, there are special accounting pronouncements that pertain to severance costs. So we were required for purchases of the Q3 disclosure record those costs and to $4.2 million in disc ops, and to the G&A line which got reclassed on gain on sale in Q3. So not affecting FFO.

And then last question for Gerry. In terms of inland empire that market looked like it was weak for you guys as well. You need to comment on what you're seeing in that market.

Well, what we saw in really I'd say August and September timeframe, was significant increase and move outs due to home purchases. But subsequent to that, the markets have been improving and going back to where our expectations are.

Okay. Thank you.

You bet, Lou.

Your next question comes from Craig Leupold from Green Street Advisors.

You mentioned land prices softening maybe 10 to 15%. Is that in particular areas? Is that kind of widespread? Where is most of that decline occurring?

Well, I'll tell you, we're starting to, we're starting to get a sense of that, Craig. There are deals that are coming back that might been tied up by condominium converters, perhaps in Florida. Some places in California, and so I will tell you, I think that what always happens when there's an inflexion is there's not a lot of trades that take place, right? When sellers still have one expectation, buyers have a revised expectation, and a lot of transactions don't take place. We're getting a sense that there could be some softening on the seller's side, but I can't point to any particular transaction yet.

Okay. On the condo outlook, do you expect to be adding in some of these markets where condo sales are still traffic still good, closing ratios are still reasonable to add to the condo conversion pipeline or do you expect it to fall off over the next 12 or 24 months that we evaluate?

I think we continue to look -- continues to have depth in the present climate. And if things start to get soft, we can back away. But if conversions look like there continues to be demand, I don't see any reason why we won't use the infrastructure that we've got built up in those markets and continue to proceed, but we'll certainly do so cautiously.

Last question for Donna. What's the total expected amount of the Lexford prepayment charge?

It's about approximately $10.8 million.

Okay. Thank you.

Your next question comes from Richard Anderson from BMO Capital Markets.

Thanks. Could you just explain where else in Florida besides south Florida, you're seeing the condo pushed back? Or is it just south Florida here in your perception?

We're seeing it in Orlando and Tampa as well. Not to the same degree we saw the reconversions occur in south Florida. We've had certainly increases in the Orlando market, which is actually reduced overall occupancies in Orlando to the lowest level I've seen in about four years. But it's still not alarmingly high, we're still getting good revenue growth there, and we're not able to achieve our 96+ levels plus levels of occupancy that we've seen for the last couple of years.

Let me just follow up on that. I guess what Gerry is saying and we are seeing sufficient enough of those coming back they're impacting the market. We bought a property in Virginia, which had been, which a conversion had been contemplated, which we've now acquired in our renting. Nothing had ever been sold. There's a deal in New York that we're looking at similarly. There are lots of markets in which there have been conversions which have been contemplated which may not go forward and properties will continue to be operated as rental. But I think what we're seeing Florida, it's enough that it's having an impact on the marketplace.

Thank you for that. You talked about slowing dispositions in the wake of Lexford. And I appreciate your comment, sort of looking out several years. But how long do you think you'll sort of, how long will it be until you start getting back into a more normalized pace of dispositions? Did that happen in 2007 or do you think it slows, stays pretty slow through the the year, still 2008?

This is provided we continue to find decent acquisition opportunities. But I think that we'll continue to operate at a fairly high level for the next two years. After which time we'll revert to a more normal level and I'm going to suggest that that normal level is $1 billion or so range.

You're above that even in '07, you think?

Yes.

The disposition?

Yes.

Okay. And how would you, there's a lot of moving parts with debt offering and everything else. Would you say you got a place, you've got a home for most or what percentage of the Lexford sale proceeds?

Yes. And I appreciate the recognition that there are a lot of moving parts because indeed there are. We closed $500 million in the third quarter, and much of that was allocated for Lexford. We were able to do that through a forward 1031 exchange. And we've got plenty on the board that we do not expect any difficulty at all covering the entire Lexford transaction with 1031 investments.

By year en.

Even by year end. And then last question is, you referenced job growth, the very beginning of the call, maybe not as robust in the test period. You referenced land prices potentially coming down that could at some point lead to an increase in development activity? Then you have sort of noise of the condo business coming back to you in some markets. Is that, or is it not a potentially dangerous recipe for the multi-family sector as all of this stuff collides over the next year or so.

Well, I guess, one could certainly paint a scenario in which everything collides. And I'm going to tell you that's exactly what happened in late 2001 and 2002. I certainly don't expect anything to happen to that magnitude, and I think in our core markets, there has been not enough new supply over the past three or four years to meet the incremental demand we have seen over that time period. I don't think there will be enough supply to meet the incremental demand going forward in some of these markets, and that's why you'll continue to see, in some of them, Some of them our rents go up and I don't think you'll see a great deal of the risk of certain family home prices, but sure, you could always take the picture in which there's too much supply -- condos bust and but again, I think in the markets in which we're in, so Seattle, and the Bay and southern California and Florida and Washington, New York, I don't -- we're in those markets because we don't think that that collision will likely occur in those markets.

Fair enough, thank you very much.

You bet.

Your next question comes from Richard Paoli from ABP Investments.

Hey, guys. I think Donna covered this, but if you could just go over it again. What are you looking for on a sequential basis in fourth quarter from third quarter this year? And then I have another follow-up. If can you kind of outline big picture revenue and expense.

Right. I mean, we would expect just generally the comps for revenues to get a little bit more difficult as we've had a really strong quarter last year. So on a percentage growth basis, we may see some moderation and then costs that we already described.

Yes, I was looking for sequentials.

So again --

Third quarter --

Sequentially, you might see a slight decline in Q4 revenues on the cost side as I described, we are sort of after an understated cost in Q3 so the result on a sequential basis cost will be up.

And you care to put a range around what you think NOI will be in the fourth quarter versus third?

Again, it will be down somewhere in the 5 to 7% range.

Okay. And then what are you seeing on in terms of availability? I don't know if you guys track that, but what's been happening that?

That's on an absolute term, not a sequential term. On a sequential basis, it will decline 2% to 3%.

2% to 3%. Availability? What have you been seeing on that, I guess that's a Gerry question.

What do you mean by variability, Rich?

I guess you notice your tenants, send them a notice that their lease is coming up for expiration and they have to notify you I guess statutorily for 30, 60, 90 days in advance -- forward leasing?

We would call that our left to lease.

Left to lease.

Yes. Yes. We're seeing very acceptable numbers of that level. It's been maintaining it, I would say, on a 60-day basis around 8% all year long. We've not see that change, we're not seeing an increase notices at this point in time. We're seeing lower turnover in our portfolio which is helping that.

Okay. Thank you very much.

You bet, Rich.

Your next question comes from Mark Biffert, Goldman Sachs.

Hi, guys. First question. You bought a parcel for $17 million. Where was that located?

In southern California.

And with the construction costs, are you seeing on projects that you're pencilling, are you holding off developing any of the projects that you have in your pipeline based on construction costs not allowing you to make your yield that you desire?

No. You know, I wish I was smart enough and had a crystal ball that would know whether or not if we waited, we'd be able to get lower construction costs. We continue to think that when you add it all up, we're certainly seeing the rate of change decrease. But we're not planning on construction costs decreasing. At least at the present time. Now, it may in certain areas based upon your type of construction, but in all of our deals, continue to pencil out what we think is the appropriate risk adjusted returns and -- at the present time to go forward with all of them and are happy to price them out right now.

And next question, you said you're having difficulty finding good acquisitions in the U.S. I'm taking it. Would you look at all to international markets like Germany and some of the other runs that are looking at new REIT structures in '07?

I suppose it's possible -- never say never, Mark. But at the present time, we think that it's most appropriate and to our best advantage, our Shareholders best advantage to leverage the platforms that we're establishing in these fewer markets around the country in which we're concentrating our capital, and I'm not saying that we would never do anything abroad, and we have looked at things from time to time and continue to look at things from time to time. But we've always decided that our energies and our capital were best searched by leveraging what we're doing here than by trying to stretch it abroad.

Okay. And Donna, one last question for you. You said you used the converts to pay down your line. Do you plan on doing additional debt offerings to lower that line?

Probably looking out six months when you look at debt maturities -- expect another debt offering probably somewhere on the time frame.

Would you have a preference to do another convert or it depends on the time?

We'll evaluate all alternatives based on market conditions at the time.

Okay. Great. Thanks.

Your next question comes from Bill Crow with Raymond James.

Two quick questions. David, you talked about how you were going to take a couple of properties off the market, reconvert them to apartments and cancel the sales contracts. Does that imply that nobody has actually completed the contract and moved in, or are they going to be mixed use developments?

Only one of the five has had some actual unit closings. And it's 14 units at the Bella Vista property in Phoenix.

Now, typically those sort of communities don't work out very well in the long run, do you -- any pressure to buy back those units?

There's been no pressure to buy back the units as of yet. And I'm not sure I'd say that typically those don't work out -- we have bought properties in the past with some portion of the units owned by individuals and over time, may buy them on a one-off basis. So it's not a preferred situation, but I don't think it necessarily has to be a problematic situation.

In the other deals, we had sales contracts only. We have not closed on any of them. And I'll tell you that we had sales contracts in the deals in Virginia that would have created $2 million or so of fourth quarter earnings of company, and we just didn't think it was appropriate to go forward because we wanted to avoid that situation of having a fractured condo down the road. So it's only the one deal in Arizona and it's listed on that schedule. Something less than 14 units because it was less closings at the time. But it's 14 units today.

I know you haven't provided '07 guidance, maybe Donna, you could help us think about kind of a normalized '06 number if we consider all the dilution from the sales process, the write-offs with the early prepayment of debt, that sort of thing. I mean, where do we start off on a normalized basis on '06 to build our '07 number?

I guess for the full year, we're looking at core growth somewhere around the 224 level, I would say that would be the place at which I would start off at.

And build from the 224?

Did that just a combination of our Q1 through Q4 core growth rate set that we're expecting.

Yes, ex the condo gains --

Condo, rent.com, hurricane.

That's helpful.

Terrific. Thank you.

Your next question comes from William Atchison of Merrill Lynch.

Hi, good afternoon. When you are out in the acquisition markets, have you noticed of late a differentiation of cap rates between supply constraint stuff that you like and the secondary tertiary market properties? We've heard anecdotally that those cap rates are in fact increasing?

Yes, that's, we try to take advantage as much as we could have Bill over the last several years of arbitraging how narrow that spread has been. And we certainly are seeing that widen modestly because the tertiary market cap rates continue to widen out. But I'll tell you, even in those markets we continue to see pretty decent top and bottom line operating performance improvements. So I don't see how much actual change that does to the valuation on a per unit basis. But we're certainly as we think about '07, certainly keeping a mindful eye on the fact that we're likely to see sort of our noncore market cap rates move a little bit more away from us relative to our core market cap rates.

Okay. With respect to development, when we look at outyear development programs, the shadow development programs -- strength in rent rates and the leveling of costs, I believe lumber is near a three-year low, is it reasonable to expect these development yields to be higher, meaningfully higher than the 6.5% or so that we're seeing -- three years out could they be 7.25, could they be 7.5?

I suppose that's possible if some of these markets continue to scream along at the levels at which they have. In some of these markets, you're not building out of sticks so that the lumber decreases don't do you a lot of good unless you're building garden product elsewhere. But I think it's possible that you can see better yields than what people have forecasted, just as people ended up delivering lesser yields than what have been forecasted -- on the other side of the cycle.

So I mean we continue to see some of the rental growth rates that we've experienced over the past 18 months, I think that that's possible. I'm not sure they're quite at the levels that you mentioned. But there's a good chance that one could do better. I'm not suggesting that we're forecasting in '07 or '08 a continuation of these rental levels -- too soon to tell.

Okay. Pricing power in New York City, depending on what sort of analysis you want to perform, rents are approaching 40% of median household income figures in certain of the zip codes. First of all, do you track that figure, and, given that, how much harder can you push rents in New York?

Well, I don't think that we can give you exact measurements of percentage of people's income they're paying. We kind of on average know what it is. I think down the road we'll be able to do that with the new systems we're implementing but at this stage we're still running probably 25% to 30% on average. New York's going to be different. But we see again due to the fact that there's no supply in New York, there's no options to rent, you're going to see Manhattan continue to grow at a pretty aggressive rate, and that should flow over to the Jersey area where we have significant exposure. We're seeing again acceleration in the Jersey side as well as the result of that. So there's just a constraint of supply right now. Even though there doesn't appear to be significant job growth in that market, just general routine growth and, such an international city that people are always flowing in there. It's an amazing place.

Okay. Then last question, when does Trump get into the same-store pool in New York? And I don't know, you do a partial period basis or what's the plan?

We closed in the fourth quarter of '05 so it will be a same-store property in the first quarter of '07.

Okay. And you won't make any adjustments for that in the fourth quarter?

No, nor will we even be tell you -- it won't be part of the '05 acquisition data we'll be able to give you because we didn't own it for the full quarter 4Q'05.

I have seen companies make a partial period adjustment for a same store acquisition made in the middle of the quarter.

We've not done that, Bill.

Okay, thank you.

And the other thing I just mentioned about New York City, a lot of those people are not driving cars, they're not paying for gas, they're not paying for insurance. And I think if you look at percentage of income that one pays for automobiles and the costs along with rent, I'm not sure how much different Manhattan is.

Okay. Okay. It's a difficult analysis.

Yes.

Your next question comes from Steve Swett of Wachovia.

Thanks. Gerry, on your estimate for the number of condominiums that may be reverted into the rental pool in Florida, is there any sense for how many of those are actually vacant versus how many of them might have been designated for conversion that just never got moved along?

It appears to be on days that we have about 30% of the units are going, maintaining about a 70% occupancy. They got to backfill about 30% right now on average.

Okay.

So you're not really seeing them come out entirely vacant. You had a few like that but on average, 30%.

Okay. And then, David, on the on your recent acquisitions, the strong NOI growth that you reported, what portion of that comes from just being in the right markets, the revenue growth being strong versus right-sizing the expenses?

I think it's all top line. We continue to do a better job on expenses each and every year we own an asset but I think it's really mostly top-line driven.

Just a last question. Could you provide just an update on where you guys stand in rolling out your various technology initiatives?

We are scheduled to complete the roll-out by the end of this year. So in the 2007 year, will be our base year for the platform fully implemented. That includes procurement is already in our actual on-site property management system will be in November at all. The pricing system will be implemented by the end of December.

There's still going to be a lot of training and a lot of getting used to these systems. But everything will be implemented by the end of the year.

Okay, thank you --

Your next question comes from David Harris of Lehman Brothers.

Hi, David.

Good afternoon. Sorry to extend this and forgive me if you guys have touched upon this. I was having technical difficulties earlier on. David, just looking into the acquisition totals for the year, are you on target to acquire something like 7 or $800 hundred million of property this quarter?

It's very possible.

Okay. And Donna, am I right in thinking that Lexford was included in discontinued operation in the third quarter?

Yes, that is correct.

Thanks for the clarity.

You bet, David.

Your next question comes from Alan Calderon, European Investors.

Just wanted to clarify, someone said that the Lexford prepayment policy is about $10.8 million in the fourth quarter?

Correct.

And then you also reduced your condo guidance by about $0.02 for the $0.03 for the fourth quarter also?

Yes, that's correct.

So total, we talked about $0.05 to $0.06 reduction in guidance between those two line items?

Actually, $0.04 to $0.05.

$0.04 to $0.05 and that kind of makes up the difference between your former guidance and your new guidance, it seems like?

Correct.

Okay, just wanted to clarify that, thanks very much.

You have a follow-up question from Jonathan Litt at Citigroup.

This is Craig Melcher. I wanted to get back to the sequential NOI numbers you said for the fourth quarter. Did you say NOI was going to be down 2% to 3% sequentially?

I don't have sequential data third quarter to fourth quarter. What we've got is what our expectation for the fourth quarter on a same-store basis, which will provide the full-year guidance of the 5.75 on revenues 3.5 on expenses in the 7.2 on NOI. Okay? So I want to make sure it's a distinction. It's not a sequential number.

It's the same-store numbers for the fourth quarter which take the year-to-date same-stores and then creates what will be your full year same-store. And the revenue expectations are there in the low fives. The expense is in the mid-fours and the NOI in the mid-fives. And if you take that analysis and add that to the year-to-date performance, you'll come up with the ranges, the guidance that we've given you for same-store for the full year.

And you you talk about San Diego and how that market's performing and if you're having an impact from troop deployments or the condo market?

The market's been running relatively stable all year. It's not a runaway situation because it has been impacted slightly by military and by condo. So we're not seeing the level of growth in the San Diego that we're seeing in the rest of California. So it is definitely lower but reasonably good. We expect to see more plus range continue in that market.

And last question, is just on the G&A in the third quarter, is there anything -- fourth quarter?

A good run rate for the year is 48 to 50 million there were small one-time items in Q3, but nothing of any significance

Thank you.

You bet, Craig.

We do have another follow-up question from John Stewart of Credit Suisse.

Hi, just along the lines of Craig's question on the sequential NOI, Donna--what were you referring to with the 5% to 7% decline?

I was basically talking in terms of, when I was talking about the NOI, we were saying we were at 9.1% and David indicated we're going to be in the mid-fives. So for Q4 to come up with our NOI guidance range of 7.2, so that's the 4 to 5% range I was talking about is reduction in NOI.

That make sense, John?

Clear as mud.

So we were 9.1% same-store NOI growth in Q3. We'll be in fives Q4.

Got it, got it.

Make sure people understand the difference between the sequential and the numbers I just gave you.

I thought you were talking about a year-over-year decline, or a sequential decline, but yes, that makes sense. Thank you.

You got it.

There are no further questions at this time.

Thank you all then for joining us, again, we continue to be pretty excited about where we sit today -- strong finish to the year and I'm very excited about 2007. Any questions, please let us know, you know how to get ahold of us and we look forward to seeing many of you in San Francisco next week.

Thanks for joining us. This concludes today Equity Residential third quarter, you may now disconnect.