住宅地產 (EQR) 2006 Q4 法說會逐字稿

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

Thank you, Bonita. Good morning, and thank you for joining us to discuss Equity Residential's fourth quarter and full year 2006 results and outlook for 2007.

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 laws. 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.

Thank you, Marty. Good morning, everyone.

Thanks for joining us today and I am indeed here joined by Donna Brandin and Gerry Spector. And we're happy to have Gerry here, who spent all yesterday afternoon at the doctor, trying to recover from spending five hours in the pouring rain in Miami on Sunday night. Indeed we're happy you were able to join us, Gerry.

Thank you.

2006 was a very successful year for Equity Residential. We saw very strong property level performance across all of our markets. And I want to congratulate our entire property management team that worked so hard during the year to deliver terrific same-store performance for us. And that 7% NOI growth over the full year was very, extremely strong.

And I want to note that the 5.3% revenue growth delivered in the fourth quarter was also very strong when you consider that the comp period a year ago was up 5.9%. So we're very pleased with our same-store performance.

We were also able to continue the transformation of our portfolio during the year by selling nearly $2.3 billion of assets from our non-core markets. And obviously this includes the large disposition of our Lexford portfolio.

And this has brought the amount of dispositions over the last five years for Equity Residential to $7 billion. And we've reinvested that capital in the right properties, and in the right markets, to take advantage of the operating fundamentals and capital appreciation we expect to see from our core markets.

And we think these markets should experience better than average population and job growth. We think they should produce more incremental demand for market rent properties than can be met by new deliveries in these markets. And these markets should maintain a favorable gap in affordability between the cost to own and the cost to rent.

And as a result, rents should continue to increase across all of our markets and the value of our assets should continue grow. And this gives us great reason, good reason to feel very positive about the next few years in the apartment business.

And with that, I'll let Donna take you through the results for 2006 and our expectations for 2007.

Thanks, David.

2006 was a very good year. We had excellent same-store NOI growth, a 7% increase year-over-year. We had excellent revenue growth, an increase of 5.8% on an [Inaudible] basis. We also had very good core business growth.

Core FFO was 2.25 per share in 2006 and $2.12 per share in 2005. This represents a 6.1% increase. That includes the fourth quarter impact of the 1.1 billion Lexford disposition, which we closed on October 5, 2006.

Despite being dilutive in the short-term in 2006 and, again in, 2007, this was a tremendously successful transaction. It was the right time to sell this portfolio in light of strong demand for lower quality assets and it accelerated our progress towards investing in our core markets.

The performance of our new acquisitions from the last four years have been excellent. 2003, 2004, and 2005 acquisitions that are now in same-store represent approximately 26,000 units.

For the full year, our 2003 acquisitions had NOI growth of 8.7%. Our '04 acquisitions had NOI growth of 11% and our '05 acquisitions through the third quarter also had NOI growing at 6.7%. Consistent with the performance of our other Manhattan properties, Trump Place, which is not yet in same-store, top line growth exceeded our underwriting expectations.

In terms of our 2006 acquisitions, we do not have a full year comparison, although we do not have a full year comparison, we are currently performing better than original expectations. Revenue and NOI growth have been very good. The average rental rate for these acquisitions is $1340 per month and all the indicators point to a very successful execution of our portfolio transformation.

The kind of business for the fourth quarter and for the full year came in line with our expectations. All overhead and taxes, after overhead taxes, we had $0.03 per share for the fourth quarter and $0.11 per share for the full year. Due to equity's decision to halt the conversion of the five properties in Q4, as well as the general slowdown in the condo market, equity revised full year estimate for income taxes.

With full year, FFO was 2.27 per share versus 2.52 in '05. The difference was due to the sale of rent.com, with higher condo sales and land sales in '05, offset by the writeoff of the $30 million goodwill related to Equity Corporate Housing, as well as higher interest expense in 2006.

Same-store results were once again a big contributor to our core business, both in the fourth quarter as well as for the full year. On a quarter over quarter basis, same-store revenues were up 5.3%. Expenses were up 5.2%, and NOI was up 5.4%.

However, occupancy was virtually flat at 94.5%, but I'm happy to say concessions have been virtually eliminated and now represent only one tenth of a percent of total revenue. Our 5.2% increase in same-store expenses for the fourth quarter was due to maintenance and turnover expenses, much of which was delayed from Q3, when expenses were only up 1.4%.

In the fourth quarter, FFO was $0.49 per share. Core growth was $0.58 per share, versus $0.54 in Q4 2005. This represents a 7.4% growth rate, which is consistent with our strong same-store performance.

The difference between the $0.58 core growth and the $0.49 FFO per share primarily represents the [Inaudible] writedown of the goodwill associated with Equity Corporate Housing. Operating margins have improved since the low points during the economic down turn of a few years ago. Same-store 2006 operating margins was 51% versus 60.3% in 2005, or 70 basis points higher.

I would now like to cover the strength of our balance sheet and the company's liquidity position. The company's debt level, which remained conservative and coverage remains strong, with debt to total capitalization of 33% and a fixed charge coverage ratio of 2.6 times.

Equity step balance at the end of the year was $467 million higher. This brings the total debt to approximately $8.1 billion. The cash on the balance sheet and the cash in the 1031 account of approximately $560 million from disposition proceeds relates to the Lexford portfolio which has already been reinvested in early 2007.

Now I would like to discuss guidance for the first quarter and the full year of 2007. Following a very good year, 2006, 2007 will also be a strong year. The same-store revenue range is forecasted at 5 to 6%, a somewhat lower growth rate coming off a very strong 2006.

Core business will also be -- core business will also be very good, but at a lower rate. Core business is expected to grow at approximately 4% in 2007 versus 6% last year. The lower growth rate is the function of slightly lower same-store growth and the dilutive impact of Lexford for the full year.

Results from acquisitions will continue to be good as well. Property such as Trump Place will now be in same-store, but, remember, these properties had great performance in '06, which established a higher base for the 2007 comparison.

Costs are forecasted to come in line with inflation at 3.5 to 4.5%. Our costs and revenues continue to be favorably impacted by our procurement programs and the implementation of our LOR pricing system, which has now been fully rolled out to all of our properties. This results in a forecasted NOI range of 5.5 to 7.5%.

For the full year, guidance is 2.25 to 2.35 per share. To assist in clarifying our guidance range, I would like to run through a list of key assumptions. First, same-store growth should contribute approximately $0.21 to FFO. Secondly, the dilution related to the Lexford sale, which is net of reinvestment of those proceeds, in the reduction to FFO of approximately $0.12 per share. Three, G&A will be 50 to $52 range for the year.

I'm sorry. Excuse me. 50 to $52 million range for the year.

Interest and other income will be down primarily due to lower interest income on 1031 investments related to the Lexford divestiture and the expectation that acquisitions will outpace dispositions in Q1 and Q2 of 2007.

Number five, in addition, there are a few one-time items that favorably impacted 2006. Examples include hurricane receivables, rent.com, and Tyson's land, and forfeited deposits from terminated transactions.

Number six, the 2007 debt balance on average will approximate $8 billion versus 7.8 billion on average in '06. The weighted average interest rate in '07 is 5.75%. In addition, the company will incur $6 million of pre-payment penalties on disposition debt.

Number seven, we will redeem the 175 million, 8.6% series D preferred stock incurring $6.1 million charge in Q3. Condos are expected to contribute $0.02 to $0.03 of FFO after taxes and overhead. And nine, fully diluted shares are likely to increase from 316 million shares outstanding to 320 million shares, resulting in $0.03 of FFO dilution.

For the first quarter, the FFO per share range is $0.48 to $0.52 per share. The first quarter approximates Q4 2006 on a sequential basis. The favorable same-store performance is offset by the Lexford dilution and lower condominium sales.

To summarize, 2007 is about another strong same-store performance, offset by the dilution impact from the Lexford sale and a number of favorable one time items realized in 2006.

I would like now to turn over the call to David to discuss the markets and other strategic issues.

Thank you, Donna.

I want to talk a little about the transactional activity that occurred during the quarter and the year. Starting with dispositions, following the third quarter when we sold only 133 units, during that quarter we had significant transaction or disposition activity in the fourth quarter, primarily for the sale of the Lexford portfolio, selling a total of 229, sorry, 295 assets, 6 of which were conventional assets, and 28,947 units of which 1,832 were conventional units, the balance being Lexford portfolio.

Cap rate for the fourth quarter dispositions was 7.3%, obviously very heavily impacted by the 7.4% cap rate at which the Lexford assets were sold. And as noted on the footnote on Page 9 of the supplemental information of the earnings release from last night, the cap rate for assets sold in the fourth quarter ex Lexford was 6.1%, which is still very high. And this is due primarily to two deals which we sold in the Detroit area at a weighted average cap rate of 7.4%, and one in Fort Worth, Texas, which we sold at 6.5%. The balance of the assets sold in the fourth quarter were at 5 handle cap rates and those were in Jacksonville, Florida, Atlanta and Houston.

For the full year, we were able to sell a significant number of assets in exit markets, which included a total exit of the Detroit market for us, and significantly reduced exposure in Minneapolis, Chicago, Nashville, Tulsa, and San Antonio. We have 22 assets remaining in those markets and we'll sell those markets as in the orderly course of business.

IRRs for the fourth quarter, 14.1% and for the full year '06, 13.1% on all of our dispositions, again, for the fourth quarter and for the full year. On the acquisition side for the quarter, we acquired 7 properties for 1,288 units for $311 million. That was done at a weighted average cap rate of 4.4%. We did-- that's made up of two assets in southern California, two in Seattle, one in Orlando, and one in Scottsdale, and one in the upper east side of Manhattan, which was done in the low 3% cap rates.

Now, this asset's pictured on the cover of last night's earnings release on the upper east side. It was 155 units we acquired for $62 million, or about $400,000 a unit, which we think was a terrific buy on a per pound basis. A third of those units are unstabilized and we are very aggressively investigating the legal occupancy of these units.

And in addition this was a very undermanaged asset. Average market rent in the property we acquired it was $3 a foot. We were getting $3.50 on studios in that property and I can tell you that elsewhere in New York City, we're renting studios today in excess of $7 per foot. Now I'm not suggesting we're going to get to $7 in this property, but there certainly is a lot of upside in this and we're very excited, notwithstanding the very aggressive cap rate going in, we think we'll create a lot of value in that asset.

Just a few comments on the transaction activity for the full year. We acquired just under $1.8 billion for the year, and this was less than our $2 billion goal. Most of that's a timing difference, as Donna mentioned. We've closed on 400 million of acquisitions in the first week of '07 and did 500 million in January, all of that done at about a 5.2% cap rate, with deals in Florida and southern California. And this means our first quarter acquisitions could be close to $1 billion.

But for the whole year '06, our weighted average disposition cap rate, or acquisition cap rate was 4.9%. And as noted, that was a 1.5% spread to the disposition side. Again, very heavily weighted by the Lexford sale. Without Lexford, and that's just to give you a sense of the transaction spread of the more conventional assets, at the 60-basis point spread for the year on conventional assets, and that compares to 50 basis points in 2005.

On the condo side, as Donna mentioned for the quarter and full year, the sales and profitability came in pretty much in line with our reduced expectations that we provided you all on our third quarter call. The pretax profitability per units sold was in line with these reduced expectations, but as I mentioned on our call in November, margins have been reduced due to price reductions, increased marketing and advertising costs and increased incentives.

As I mentioned on the last call, sales and closings in both Chicago and Seattle continue at a very normal clip. Not much to report that there.

And as we've also communicated over the recent quarters, Arizona and Florida have been different stories to that. In both of these markets, although we saw very strong traffic, due to what we believe was continued demand for housing at our price points, sales were slow, as potential buyers saw no urgency to buy.

But we have seen some recent improvements in sales in both Florida and Arizona. In Florida, the market hasn't changed any. We've just simply changed the way that we're selling to it and we're seeing results from these changes. We've changed out the sales team, we've changed the commission structure. We've reduced the deposits that buyers have to put up and we're building out a few more units on spec to reduce the closing delays, the ability to actually deliver furnished units, or completed units to these perspective buyers. And our result, I tell you, in January we sold 23 units at our one property in Florida. And that's up considerably from 2006. So as we've said, in the last few quarters, there certainly is demand for housing at this price point in Florida and we think we're meeting it and we're doing, seeing significant improvement there.

In Arizona, in addition to seeing results from an improved sales process, we're also seeing a modestly improved market there, with buyers not waiting any longer either for prices to drop or for incentives to improve. They need housing in that market. Units are priced at the entry level. Financing rates are great, and they are buying. And we sold 29 units there in the fourth quarter and 10 in January. So we seem to be doing reasonably well for the winter season down there.

And as Donna mentioned at this time, our 2007 budget assumes only sales and closings from the assets currently listed on page 22 of our earnings release supplemental. That's $0.04 to $0.05 per share gross profit. That's before overhead and taxes and $0.02 to $0.03 per share net FFO contribution after overhead and taxes, and I'll tell you that in past years, our guidance has assumed adding more assets either from our own balance sheet or in third party acquisitions, but for our 2007 guidance there, are no such assumptions in our numbers.

On the development side, no new additions or deletions from the third quarter release. We have added three land parcels to the balance sheet during the fourth quarter for a total of $44 million, a deal in New York City in a joint venture, a deal in New Jersey, also in a joint venture and a deal in Florida for our own account. And these three deals are part of a total development pipeline, which is now about $1.6 billion.

And this is in addition to the projects reflected on the supplemental schedule in the earnings release and these are three deals in California, two in LA, one in the bay area, four in the New York City area, three in the city, and one in New Jersey, three deals in Florida, one in Tampa and two in Orlando, and one deal in Seattle. And we currently own or control the land for each of these developments projects.

We expect to start 6 to 800 million of these deals in 2007. And that's a number that's pretty comparable to the 2006 starts and we should see starts in Florida, New York City, southern Cal, and northern California.

Again, target stabilized yields on our deals, both underway and those in the pipeline, remain in the low to mid 6's, to mid to high 7's and we just continue to represent appropriate risk adjusted returns for these transactions. New deals today are being underwritten with yields in the low 6, and in New York City below that.

In closing, I just might want to say that, again, that we've been very pleased with our 2006 same-store and core performance and we believe we'll continue to see strength in 2007. I can guarantee you that we will work hard again this year to drive property level performance for our shareholders. We made a lot of progress transforming our portfolio over the last five years. We accomplished a lot in 2006 and we'll work hard to do so again in 2007.

We remain firmly convinced that the longer term growth rate in operations and capital appreciation is more than worth the short term dilution we will experience from all this activity. And we will work hard to create value in our development business by ensuring that the deals underway are completed on time and on budget by getting our pipeline deals started and by continuing to find new opportunities in our core markets. And with that Bonita, we'll be happy to open the call for questions.

[OPERATOR INSTRUCTIONS] Your first question is from the line of John Stewart.

Hi thank you. I have a couple questions on the guidance. Donna could you clarify for us exactly what charges are included in the guidance.

Excuse me, In terms of which -- 2007, or are you referring to some of the favorable items that were incorporated into 20--

I see. Okay. I thought you were talking about in terms of Q1 '07. And how about in terms of acquisition assumptions I presume at least that the $1 billion in January is filed into the forecast but what sort of contribution are you expecting from acquisitions in '07?

Basically what we are assuming is $2 billion of acquisitions for the full year and 2 billion of dispositions and we've built in a 1% dilution for that activity which equates to about $10 million.

Okay. And maybe either David or Gerry, could you comment a bit on whether you're seeing any pushback in rents, I mean David, you eluded to tougher comps, to what extent are you seeing having difficulty pushing through higher rents.

Not as strong right now as it was through most of 2006. The fourth quarter fizzled a little bit, but we saw a little bit of recovery in December, January and February seemed to be in pretty good space. You know, it depends on what markets there are. Markets continue to tighten up occupancy wise. I think there will be a limit on rates that we'll be able to achieve this year in places certainly like Phoenix, Florida and other areas where we have significantly accelerated rent growth. Those will moderate, but we're seeing improvement in some of the other secondary markets that are getting a little stronger, but probably being a little bit more offset by some of those really strong markets that performed well in 2006.

Then lastly, I think David you may have given the average rent per unit on '06 acquisitions. Do you have that for the entire portfolio?

It's in the release. They are turning to the number. We did put some additional information this year, or this past release, so $1138.

Average rental rate-- that's on Page 8. We've extended out a little bit more information on the portfolio summary, as well as in the same-store information to share with you all what the average rental rates have been across those, across all of our markets.

Thank you.

You bet, John.

Your next question is from the line of Jonathan Litt.

My, it's Craig Melcher here with Jon.

Good morning.

I'm just trying to understand the sequential changes in FFO from the fourth quarter to the first. If I take your core FFO of $0.58 in the fourth quarter versus your guidance of 48 to 62. Can you talk about the main drivers there and if there's any one-time items in either fourth quarter or first quarter?

In the quarter, Q4 2006, we were expecting $0.58. We actually realized $0.58. That was what we said was up $0.54 last year, so a 7% growth rate approximately, kind of in line with the same-store growth rate. And then what I mentioned in my script was that then to reconcile that down to FFO, you really need to pull out some of the ECH impairment charge, which kind of gets you to the FFO charge. But there are no other unusual items in there.

How about in the first quarter, is there anything in that guidance? Or is that pre-payment penalties in the first quarter guidance for '07?

For '07 on a sequential basis as I mentioned, we are pretty much, you know, the $0.48 to $0.52 of guidance is pretty much in line with what we realized in Q4. We're going to-- we continue to have positive sequential same-store growth, which is going to positively contribute to the quarter. That's going to be offset partially by some of the NOI dilution from Lexford, as well as the fact that we're not going to have $0.03 from the condo sales that we had last, in Q4.

You said sequentially. It should be about the same, but sequentially before the charge for corporate housing, it would be much higher. You guided the 48 to 52 without corporate housing, you would have been a 58 in the fourth quarter.

Well, that's what I said. We were at 58 for core growth in the fourth quarter, but if you back out the $0.09 of the impairment charge, you're down to FFO of $0.49.

Right, but why would 1Q start at 49? It should start at 58.

Well, but remember, you have the dilution associated with the Lexford portfolio coming through in Q1 of '07.

The question was do you think the big contributor is that dilution from Lexford that's driving you from 58 to, 48 to 52 in 1Q. Then you think that putting that money to work will cause that to jump up in 2Q or 3Q? It needs to jump in order to hit your--

Correct, that's correct.

You had said interest and other income, you had you outlined in your script, you had talked about the dilution from Lexford, the G&A target was, looks about flat from a year ago. What's happening with your interest and other income? Where do you think that will come in '07? Obviously you had some other, you had some one-time items in there last year.

Correct. What we're expecting is probably somewhere between 5 to $8 million range for next year.

For the full year '07?

Full year '07. Again, that has to do with the fact that you have the Lexford portfolio, 1031 money that's going to go away. We had substantive amount there, as well as some other items that are contained in the category.

You had also mentioned the debt. You went through those numbers very quickly. You said I think you were going to have 8 billion or so outstanding versus 7 billion and change in '06?

Yes, our debt balance is expected to go from 7.8 billion, now I should clarify. I'm using average debt balance as opposed to end of period, because that's more meaningful in determining interest expense. So we, we're at 7.8 billion on average in '06 and 8 billion on average in '07, and if you apply our weighted average interest rate to that number, which is 5.75%, that will give you the incremental increase on that, on interest expense on the incremental debt.

And what was that in '06, the weighted average cost?

It's come down a little bit. It was about, I think right off the top of my head, I don't remember exactly, but it was in the low 5 - - 8.

So in fact, interest expense is going to be down a bit over last year, except for the increase in the amount of debt?

Yes, let me talk about one other point here. Is we also have incorporated in our interest expense budget about $6 million of prepayment penalties associated with the disposition of debt as we dispose of properties throughout the year. So when you take the-- in total, that's about $12 million of incremental interest expense. Now, offsetting that, obviously most of the debt increase I should say, and most of the incremental leverage is coming from the fact that we are refunding the preferred stock redemptions and we did some last year. We've been doing them year after year and that's driving our leverage on our debt up, but at the same time we're saving amounts comparable to that next year. The numbers are slightly off by a million dollars, but we're saving a similar amount on our preferred stock on a year-over-year basis and that includes the $6.1 million charge that we're going to have to take in conjunction with series D.

But those two, the prepayment charge and the redemption charge, $0.04 between the two of them, so we're just trying to see if there was something else driving the interest expense.

No. Simply it's really just the average debt balance increase and the prepayment penalties. And that's what's driving the expense.

Question for Gerry. Is there any reason why-- well, I'm using that wrong. I'm trying to figure out why the NOI growth would, and revenue growth might be weaker this year than it was last year. Is there something last year that was unique in the supply demand equation? From your comments sounded like the supply demand equation is only getting tighter I would think your ability to continue to drive rent growth would remain.

Yes, I think it really depends on the markets you're dealing with. We had a pretty exceptional year last year in places like Phoenix and as well as Florida, and those markets have been impacted by condo reversions and even though there's been little new supply going in those markets, the impact of those are like immediately dropping into the market. I think it's going to be relatively short-term, but that being said, we're still going to have better than, you know, average growth. I mean we're going probably still see 5 to 6% in the Florida markets, we believe, and probably 7 to 8 in Arizona. But that's down quite a bit.

But your biggest market's New York, DC, LA.

Yes.

I would expect the NOI growth to be in excess of the 7.5 top end of your range?

I don't think in California that's the case. California has had pretty consistent results all the way through the last five, six years, and we see that continuing. Again, I don't see it accelerating. You have, I would say normal deliveries in most areas from what I can tell in California, and I think you'll get relatively similar kinds of revenue growth that we've seen historically there in the 5 to 6% range. A little bit better in San Francisco because of the decline that you had over in earlier periods, but, you know, it doesn't represent the highest percentage of our California assets. That being said, it will, again, still be good. New York, you know, there we had exceptional year. In the Manhattan market, we saw a 12.5% increase, and even though there's not a lot of new supply, level of rents moving at that rate will-- has to moderate at some point. I could be wrong and if so, we'll be surprised, but we're trying to be a little more conservative in that market when you consider that market's 8 to 9%. So we are taking a little bit more of a conservative view on that and we could be surprised on the performance. Because, again, most of the markets out there, supply wise, are usually in our favor.

Thank you.

You bet, Jon.

Your next question is from the line of Rob Stevenson.

Good morning, guys. David or Gerry, what are the markets right now that are surprising you both to the upside and down side?

I would say that I'm not seeing any markets that surprise us on the down side. We've anticipated pretty much the decline in the Florida markets. Again, I would tell you that maybe south Florida's declined a little more than we would like, but Orlando's held up pretty well, as well as Tampa, Jacksonville. South Florida, you know, we're hoping to get in the 5 to 6% range this year and we are off to a little bit of a slower start. It's hard to get our hands around the supply of condos in that market, but, again, I think it's small pockets there so that's probably been the biggest decline that has surprised me a little bit. On the upside, we had a decline, a little bit in Maryland, I would tell you. That's primarily driven by a whole series of rehabs. A third of our units in the Maryland market are under rehab, and has drawn lower levels - our expectation for next year is that should moderate and we should start seeing a pretty big pick up in the suburban Maryland area.

So, that's why -- the rehabs are what's contributing to the 88% occupancy or so in that market?

Yes. Our current occupancy if you exclude rehabs in Maryland is 94%.

Okay, and is that across the board that you're leaving the rehabs in the same-store portfolio when that's being done?

Yes, it is.

Okay.

At the current state, that's the way we're reflecting it. And we have a little - actually suburban Virginia, has some rehab in it as well, it's running on a blended basis, 94% but without the rehab it's 95%. Most of our markets have very strong occupancies right now, not a lot of new deliveries. So, we're expecting, again, I think strong performance. The markets like Dallas and Atlanta, we expect to see improvements on, just because they have lagged so far behind and we're expecting better growth in those markets than we've seen over the last two years, a little moderation of the really high fueled markets. But in California we see, you know, pretty close to the same kind of level growth. Seattle, we have seen great growth and we continue to expect great growth in Seattle.

Okay. Have you guys looked at what the impact in terms -- you said that same-store average rental rate is 11.70 on a sequential basis using the sequential same-store portfolio. Have you looked at that, what that's going wind up being here in the first quarter when you add a billion dollars of Trump assets, plus whatever else is flowing through into the same-store portfolio?

We haven't specifically, Rob, but that number would only go up.

But I mean how big, I mean are we talking about-- I mean because Trump has got to be, what, close to 2400, $2500 average rental rate?

Ye, I mean your 4 to 7 bucks a foot, maybe even 5 to 7 Bucks a foot in those markets. You're also going to see as we sell more assets during the year, we'll be selling assets, Rob, with lesser costs or rents per square foot. So we will be seeing other things. But we've not done that arithmetic, but obviously number's only going up.

But I was just trying to gauge whether or not we're looking at something that's likely to jump from like 11.70 to 12.50 or from 11.70 up closer to 1300, 1400.

I can't imagine it's going to be that much.

Okay.

You're talking about a base of 120 some odd thousand units. So when you bring Trump in at 1000, it will be significantly diluted by the remaining assets that are in there.

Okay.

So it's going to be-- it will be an upward movement, but, again, you're talking about a pretty big base that would have to, it would have to carry.

Okay, and then just two housekeeping items, where was the prepayment penalty associated with Lexford, or what was it and where is it on the income statement?

Lexford prepayment penalties were $10.8 million and they went-- it ran through FFO in interest expense.

Okay.

And then--

And then the other question is, there's $8 million tax benefit in the fourth quarter from the condo division on one of the back supplemental. What is that?

That, that is-- basically what we do is when we estimated taxes through the condo division, we estimated on a full year run rate of profitability and based on estimates at the beginning of the year, and so then as we move through the year, we continuously reevaluate that tax provision. When, when we came to quarter four and made this decision, which was pretty significant to pull five condo deals, as well as noticed the continued decline in the condo market, we had to step back and reevaluate the tax provision. So a lot of the sort of year to date adjustment flowed through the fourth quarter because of those decisions.

Okay. Thanks, guys.

There is a question from the line of Lou Taylor.

Thanks. David, could you just touch on just how we should think about the overall reinvestment. I mean if you are going to buy and sell 2 billion in '07, it sounds like effectively you're not going to get the Lexford proceeds really fully deployed this year on a net basis. Is that fair?

I mean the Lexford proceeds have been fully deployed, Lou. I mean if you account the $400 million of acquisitions that we closed in the first quarter of '07, you've essentially cleared all of your disposition activity in 2006.

Okay, but then I guess from here forward if you're going to buy and sell 2 billion, sounds like you're going to be a net seller from February to the end of the year.

That would probably be, that would probably be correct. Again, I mean we're just making best estimates. We'll-- that activity will be a function of what we see our pricing at what we want to sell and the pricing at what we want to buy, but that's just a best guess. We've essentially been on a couple of billion dollar run rate for the last couple of years and we've just communicated to you all that we would hope to and expect to continue to do that this year. Whether or not that, you know, a push or whether or not we're a net buyer by a few hundred million or a net seller by a few hundred million that would be too close to call sitting here in February of 2007.

Also, you guys went through just the one-time items in, that would not be recurring in '07. You had Tyson's land, the forfeited deposit, the rent loss at the rent.com. There was a couple other items in there. Could you just go over those again and just what's the total just impact on '07.

Yes, I can walk through those. Throughout the year we continued-- the total-- the net number bottom line is about 6% we had hurricane receivables that we collected throughout the year related to last year's hurricane. You know, as we continue to get additional intelligence as to the losses, it takes-- there's a long lead time before we get all the information in. We had rent.com, as we mentioned, Tyson and some forfeited links deposits associated with terminated transactions. When you sort of add all those up, you get to about $0.09. Then what you already mentioned, we subtract -- the net of that is the Lexford prepayment penalties, which came in at 9.2 million. So I was a little bit higher. Original estimate was around 10, slightly above 10. The actual number came in at 9.2 and we actually recorded that in disk ops.

Thank you.

You bet, Lou.

There is a question from the line of Alex Goldfarb.

We knew who you were, Alex.

Hey, how are you guys.

Good morning.

Hope you guys are warm out there.

It's warming up. Last week was tough. This week it's warming up.

Okay. Very quickly, just on the Q1, I think if I heard correctly you said on condos you're not expecting any contribution, but you did sell some units in January. Can you just remind me the timing of when units close versus when you book it.

What I said is that for the full year '07, we're projecting $0.02 to $0.03 sort of net FFO contributions from our condominium sales. That's after tax and after overhead. And you, you look on the schedule and see that we've got I think 40 pending sales, all of which will likely close in the first quarter. My guess is that will be generally-- my guess today is that will be sort of ratable across the year.

Okay.

The last few years we've seen ramp-ups as we've put deals into service. We've had most of the closings sort of towards the back end. But because we're now just working off what's existing inventory we're selling across, selling deals in all these markets and we're not intending on adding anything, my guess is that we should see that generally ratably across the year.

Okay. And then on the 6 million of debt prepayments, it also sounds like that's throughout the year, or is it lumpy in certain quarters?

Well, it all depends on when we get to those assets. It's just too tough to tell right now. We're working on some assets. Some assets we expect to sell later in the year. You know we made it. We might not get pricing that we want. We may not end up selling the assets. So I guess it would probably be best for you to just think about that being kind of at a midpoint of the year. Okay.

Getting on to your underwriting assumptions, can you just share with us how your acquisition assumptions have changed going into this year versus last year?

Well, I'm not so sure that they have changed much. I, I think that-- we might have started 2006 communicating that we would hope to sell, or buy 1 billion. Now we're hoping to do 2. I guess a lot of that's because we've been able to front end load a lot of acquisitions, things we were working on in late '06 that will close in early 2007. We continue to find pretty strong bid for the assets that we want to sell, and we continue to think and hope and knock on wood that we'll find decent, and good assets to reinvest that capital in. If you look sort of at our pipeline, the deals that we're chasing, either things that we were in pitching on or things that were under letter of intent or under contract, you know, there's no reason to think that as we sit here today that we won't be able to clear 2 billion on the dispo side and 2 billion on the acquisition side and again primarily in the coastal markets and throughout the sunbelt so I don't think our assumptions really have changed much except I think we are communicating to this [Inaudible] earlier this year of what our total expectations are in terms of absent volume.

But more pointedly, on rental growth assumptions and cap rate assumptions, have those changed at all, or are you using the same assumptions last year as this year?

Oh, no. I think you heard Gerry talk about what's going on in these various markets. Our acquisition growth rate assumptions will be no different really than what we're assuming to take place within our own portfolio. Cap rates, you know, I guess we've talked about 100 basis point spread in 2007, and if you recall, I mentioned earlier if you strip out the Lexford deals, our delta on kind of conventional sales and conventional buys for 2006, with 60 basis points, so we're budgeting, assuming that will widen a little bit and that could widen because of continued competition on the product we want to buy and perhaps more aggressive pricing on the inbound and, you know, I suppose we always are concerned that we'll see cap rates move away from us on the outbound.

Okay. My final question is obviously there's a huge amount of capital that still wants to enter the real estate market. We've seen clearly a frenzy in other parts of the real estate sector. Can you just give us your thoughts if we should expect some spillover into apartments this year in either M&A or privatization?

You know, that's a great question. We saw kind of the privatization, the public to private movement in the multifamily space, primarily in 2005, when [Inaudible] and Town and Country and Gables went private. Boy, I don't know. Your guess is as good as mine as to what's going happen here. I think that if public stock prices don't trade appropriately relative sort of to main street NAVs, I suppose you could probably see some activity. As evidenced by what we've seen recently in office and one very near and dear to us here at two north Riverside. But you're right. There's a lot of money coming. There's a lot of capital. Their expectations are more capital to be raised in 2007 than in 2006 on the private side for real estate, and, you know, I think that, I guess I can't tell you what will happen, but I think that you'll obviously see things take place if the sort of, the Wall Street, the street NAV valuations don't measure up to what we're seeing on main street.

You're saying the stocks are still trading below NAV?

I mean we certainly think so and other people have different opinions, but if that has to happen I think for you to see the public to private transfer.

Okay. Thanks a lot.

You bet.

This question is from the line of David Harris.

Good morning.

Good morning, David.

Good morning. Gerry, question for you. Your best guess as you sit here in early February looking out, is to the same-store performance over the year, are you a little concerned that we may see weaker performance in the second half or do you think it's going to be pretty consistent over the year?

Well, I think if we don't see a decline like we did in the fourth quarter this year, and it wasn't a serious decline, but if fell off a little bit from where it did in 2005. 2005, the last quarter, went up pretty significantly. It softened a little bit in the last quarter of 2006, reflecting a lower same-store revenue than could have happened. So going into this year, if you don't see that little falloff there and the markets are in sync, you would see pretty strong second half. I think, we're anticipating a reasonably strong second half in our numbers.

And as you look at this forecast, what concerns you more, your abilities to maintain pricing power around rents or your abilities to hold down expenses?

Well, I think we focus on both areas and I think that the rents really are dictated by the market and the expenses are more dictated by how we operate. So, I think we have more control over the expense side and feel comfortable we'll bring those in within our estimates. The income can be a surprise either way depending on where the market's go. A lot of it's driven by, you know, job employment, growth, and population, household formation. If that continues to move and the demographics are in our favor, I see no reason why this, you know, the apartment sector should not perform for the years to come, not alone just this year and next. Because the supply side has been very constrained. So one would think that, you know, as these markets tighten, we should get some pretty good revenue growth, maybe to a surprise, but who is to say?

Yes, and I would just like to comment about quote, unquote weaker performance, David. That has a lot to say about the comp level from which performance is being compared. We had 6% or so revenue growth for four straight quarters. That's going to make subsequent quarters from a comparison standpoint look challenging. So close to the same or even the same, if not modestly higher absolute dollar increases are going to appear to be lesser because of just the high comp. So you got to, you got to compare where you're coming from at the same time as when you look at where we're at.

Okay. David, just staying with you for a moment, condo contributions were scheduled to be $0.02 or $0.03 this year.

Net.

I know you talked about this a little bit on the last couple of calls, but is that your view as to the trough in business? I'm just sort of questioning whether it makes sense to keep the overhead there unless you believe that that number is really tropping out and there's a good sign that could be a materially higher contributor on a forward basis.

Well, that's a very good question and one that we're considering. We have already reduced that overhead kind of modestly and have, and are prepared to do it again if necessary, and we'll take a, take a look and see. Interestingly, my conversation with this team just the other day, we continue to see demand for our product in these markets and believe that we could continue to do a fairly decent condo business across many of these markets. The problem we're seeing today, however, is that the income bid for assets are so strong that they are kind of knocking out the condo bid. So the tables have sort of turned. It wasn't long ago when the condo bid was knocking out the income buyers' ability to get assets and today it's the other way around. So, we're going to play that by ear. We've got a terrific team that's creating a lot of value for us and we believe they will continue to do so this year and we'll take a look and see. But clearly if we don't feel like there's a, you know, a long run ahead of us here, we'll have to take the, you know, the appropriate steps. But I'll tell you, based upon the activity we've seen in our two assets in [Inaudible] Florida and Arizona, again, it's telling us that there continues to be demand for this price point and we think we ought to be able to figure out a way to sell condos to that demand.

Okay. Going around the table, and my final question, Donna, a point of clarification on the guidance for this year. Is there any thinking for land sales?

No.

Okay. Is that, is that a wild card? Do you think we get to the year end and there could be something in?

Not that we're aware of at this time.

Okay, great. Thanks, guys.

There is a question from the line of William Acheson.

Yes, thank you. The-- getting back to the condos yet again, the gross margins went from 24% to 14% in the fourth quarter. Is that 14% number the-- I haven't sat down and done the math, is that implicit in your profit expectations for '07?

No, I mean you got to be careful about drawing conclusions like that because you've got-- it's not-- when you're selling some assets you may be changing some of the cost allocations across, but we had started these deals hoping for, you know, low 20 margins and we're probably now, you know, mid to higher teen margins on some of those deals. So you got to strip out, some of those times you're selling one asset and that, or sorry, one unit and that's taking a significant amount of, sort of expense with it and it doesn't give you a clear margin. Margins are clearly down, but now more mid teen to high teens from low 20s.

Okay. Well, that's why I asked. Really quickly, it's series D preferred in the third quarter?

Correct.

Okay. Turning to the development and kind of focusing on DC, the leasing at 2400 M, looks like it slowed down fairly considerably to under three leases a week from over five in the third quarter. How are rent rates doing there? It looks like it's going to be a very competitive market this year.

We're-- we believe that in Virginia and the DC district area that you're going to continue to see, you know, pretty good revenue growth, maybe in the 6% range, maybe up to 7, and, you know, we kind of expected 2400 M to slow a bit right now. But, you know, we don't really see it overly impacted. We're still ahead of our scheduled expectations there. So we're not really anticipating any kind of concern there, but there are a lot of new units being delivered in that market, more than I think they need.So --

We came out of the blocks gang busters on that last number, Bill, and I wouldn't let sort of the holiday season, you know, winter weather kind of things-- it certainly hasn't changed our view as to the success we'll see in that property. And I'm sure as we get into second, particularly third quarter, things will be on track. And as Gerry said, we're already well ahead of schedule.

Okay. There wasn't much of a winter, I got to tell you, through most of December. Anyway, also in Boston, the Emerson, looks like costs went up there by $6.5 million. We were-- we toured that recently. What, what--

Well there, are a couple things that are driving some of those deals. In fact, I think the total costs were up something like $22 million, or let me say the appearance of costs of $22 million. About 6 million, and it's not just Emerson, but 6 million of the total of all those deals under development were as a result of dialing maybe another quarter back of delivery and the expectation of having to capitalize a quarter's worth of more interest. It was also about $12 million of changes that we've added just because of the way we have to account for the, for the assets. We had, had accounted for some things such as we had some tax credit, tax credits that we can sell on a deal that we had originally thought we would use to reduce the basis in that asset and GAAP accounting is requiring us to not reduce our basis, but rather we'll have to recognize that more as some sort of amortized income and so we've had to put that back in the transaction. But the economics of the transaction have not changed by that 12 million. It's just the means by which we account for it. But there was about $6 million or something less than half a 1% of total cost generally coming from having to push back by a quarter or so the delivery of those assets and the increased expected interest will have to capitalize as a result of that.

Okay. There were five projects out of the 11 shown here --

Yes.

-- that did get pushed back at quarter.

Yes.

I mean is that-- are we just slipping from the last two weeks of the quarter, the first two weeks of the next one, or is there anything--

No, I don't know-- on a deal by deal basis whether or not it was just pushing one month, which meant you were in the next quarter. That might be a little more fine tuning probably than is necessary for that schedule. But just talking on the construction people, they thought it would be prudent to push them back.

Okay. Thank you.

You bet.

This question is from the line of Mark Biffert.

Hi, guys. It's Mark. Question for you, David, on the development, you stated in New York your initial yields will be below 6%. I'm just wondering, you know, with cost of debt being able to push -- how much do you think you'll be able to push yields to make that accretive over the longer term?

Well, those are unleveraged yields and the deals we're working on in New York, a couple of them that are in the fives and low sixes, we may very well end up doing with a significant amount of tax exempt bonds so on an absolute leverage basis, the returns would be significantly different.

Okay. How about on the recent acquisitions that you made, where you said you bought it in the low threes, and how many basis points do you think you're going to be able to push that per year?

We hope in a year or two to be in the fives in that transaction.

Okay. Was there-- have you ever thought about [Hunt] management bringing in institutional buyers given the amount of capital that went into some [Inaudible] lets just say apartment [Inaudible].

To do some sort of joint venture?

Yes, or, yes, having like an equity-- selling some of the properties at the 2 billion in assets that you're selling--

Sure, we have, but there's some complications. It's challenging to find, well, two things. One, much of what we're selling are assets that we want to dispose of. Not assets that we're looking to own with someone else's money. We're actually leaving markets, we're exiting markets. We are reducing our exposure there, getting rid of our infrastructure. At the same time, most of those institutional, sort of potential investors are not inclined to take assets off your own balance sheet. They would rather go buy deals with you so you are shoulder to shoulder with them in the entire transaction. Given our own demand for product to be funded by our disposition, we just can't-- our disposition pipeline, we can't find ourselves in a situation sort of where we are competing with some interest of some other money. I'm not suggesting we won't ever get there. But I just think given the transaction volume that we have been experiencing, what we expect to experience for another year, that would be a difficult for us to do.

Okay, and lastly, what is the average age of your assets right now in your portfolio?

It's about 16 are 17 years. That's been influenced by, you know, by some of the older stuff that we bought in New York City, but, you know, it's about 16 or so years right now.

And does that create any redevelopment opportunities for you in '07 greater than what you might have expected?

Well, it's created some rehab opportunities for us. That's one thing that Gerry mentioned we're doing in Washington, DC where we've got some older properties that are extremely well located that we think we're getting a terrific return on rent rehabing those. We've also got some assets that have got some extra land that we're looking at and we have looked in a couple of different places that maybe even raising existing properties and applying for more density and building new. On our scale of our portfolio, I would not want people to think that would be a material impact.

Okay. Thanks.

You bet.

Your next question is from the line of Rich Anderson.

Hi. Good afternoon.

Good morning.

I guess, David, if I could just ask you on the, back to the condo, you've always said that this has been, this is going to be a recurring business for us and, you know, price point, it's something that we can continue to do for, you know, forever, nothing's forever, but for the foreseeable future. And then your comments earlier sounded like a little bit more like you were, you know, at least willing to consider, you know, pulling down the business, you know, more and more as you get more information. I guess the question is has the condo business deteriorated much worse than you maybe thought it could possibly do and maybe you can comment on the overall--

No, no, I don't think it has. Let me tell you, Chicago and Seattle continue to be strong and we've encouraged our condo op guys to look at some other markets. Maybe we should be expanding our footprint just out of the markets we have to be in. We're just starting now to sell units in our first property in Southern California. Shoot, I think California could be a real gold mine for us on the condo side. So, you know, I, I guess what I've sort of suggested is that I believe that there is and will be a continued long-term demand for this price point product in the markets in which we are converting. That doesn't mean that it can't be lumpy and that it won't sort of ebb and flow, but I'm not expecting it to occur what's happened in the past in this kind of business where it's just disappeared for an extended time period. I think as evidenced by the sales that we've been seeing in south Florida and the increase in sales we've now been seeing in Arizona, in these markets in which we continue to expect to see significant job growth and significant household growth, I think that condominiums at our price point represent terrific entry-level priced housing and I don't see any reason why we can't continue to deliver that over an extended time period. I also will say, however, though, that the income bid for apartments is making it very difficult for the condo guys to have numbers make sense. What we've said to our investors from day one in all this is we look at these deals based upon what we could sell one of our properties for to an income buyer and we do our condominium profitability now off that level and it's just challenging right now. But I tell you, Seattle continues to be strong. Chicago continues to be strong. We're just scratching the surface in California, and my guess is that it's not going to disappear in Florida or Arizona either.

Okay. Could you hazard a guess on what the same-store growth rate in the Trump assets might be in 2007 in light of the strong performance in 2006?

We haven't really looked specifically. I don't know-- I don't have that information off the top of my head, but we expect to see, again, the high single digits.

High single digits. Okay so it will be additive to same-store.

Yes. Last question, just to understand the core-- I think this might have been addressed earlier, an hour ago maybe, but the core growth of the company, when you sort of factor out the $0.06 of positive stuff that's not going to recur in '07 and all of the dilutive stuff in '07 that is going to be, you know, unique to that year, I'm coming up with $0.06 of course in '06 positive and $0.27 in '07 that is sort of, again, unique to that, to this year. Is that about right? And then you'll work through and look at the core growth, you know, net of all that stuff?

We haven't really disclosed core growth for the full year, but I would say $0.27 is on the high side and I would expect that perhaps that you're not properly, maybe perhaps you're not effecting the impact of the Lexford dilution in conjunction with some of the dilution activities associated with the 2006 acquisition.

Okay. Well, Lexford is $0.12 dilutive you said in '07.

It's about $0.10. Then there's about $0.02 related to 2006.

Oh, okay. Okay. Then there's condos that are down $0.07 year-over-year.

Yes. That doesn't effect core, though.

No, that's right. But I'm saying I want to strip that stuff out.

Okay if you're looking at FFO rather than core, let's--

Yes, yes.

Let's do an FFO reconciliation. 2006 we are at 2.27. We're-- our guidance is 2.25 to 2.35. There's really, you know, three major components. $0.21of positive impact, what we're saying right now based on our best case scenario for same-store performance, offset by this Lexford / other 2006 dilution, and then back out $0.06 of favorable items that we realized in 2006, which will not recur in 2007, and that pretty much gets you to the middle of the range. Now, one thing that's sort of not obvious about that is we had a pickup, because we had the impairment charge in '06 that's not recurring in '07, but that's being offset by the difference between the $0.11 and the $0.03 of condo contribution. So that kind of gets you into that range of 2.25 to 2.35. Does that help?

Sort of. I'll probably have to go off line.

Okay.

All right. Thank you.

You bet.

Your next question is from the line of Ross Nussbaum.

Hi, it's Ross Nussbaum at B of A. Two quick questions hopefully. One, Donna, I thought I heard you say you thought the share count was going to be up about 3 million shares in 2007.

3 to 4, yes, correct.

Is that all in comp?

No. I mean basically it's influenced by a couple things. One, I mean it's comparable to what we've seen historically. One is stock price obviously, with the growth in the stock price that effects our treasury method of accounting, as well as we've had a lot of stock exercises as a result of the increase in stock price that also flips it from a treasury method to a full share outstanding effectively. So it's basically those would be the two primary components.

Okay.

It's mostly compensation in how you account for it.

Got it.

Meaning the difference in the treasury method. So the higher stock price has more, a more dilutive impact on the way one accounts for it.

Versus just a pure exercise.

Okay. Second question is, from the third to fourth quarter, you kept, looks like you kept portfolio occupancy fairly stable. A lot of your peers saw it go down sequentially. So I guess the question is do you, do you think you were doing anything differently than your peers, any thoughts there?

Well, hopefully we're just continuing to do better, but we have fully implemented our yield management system in all of our new platforms and all those got completed in the fourth quarter. So we had the impact of I would say the first six months kind of starting to flow through. So we're continuing to expect increases in our occupancy that will be driven primarily from that.

Okay.

You've also got to make sure-- we'll make comparisons on a market to market or submarket to submarket basis. You got to be careful about drawing that conclusion from the top line because obviously the complexion of everyone's portfolios are different.

Yes, sure, it's not a silly apples to apples but you were the only, of the reads you're the only company that really kept it flat sequentially, so it was interesting. The other question I have related to that is can you just talk a little bit about net rental rate growth, are you offering more concessions do you think in 2007, or sort of talk about the balance there between absolute rent growth and concessions a little bit.

Well, as a result of moving to our pricing system, we're moving to net effective rents, which will continue to drive the concession part down substantially. We don't have a very material amount of concessions in our numbers currently. It's not that we'll eliminate them all together but I would say it would be a very small impact going forward.

So even in markets where it's almost become customary, where a lot of your private competitors are offering concessions, you're going to back away from it?

Yes, and we have.

Okay. Thank you.

About the only place you'll see concessions in our business I think, is when we are in leased up situations where we believe we need to do that and those numbers won't be flowing through same-store anyway.

Yes.

This next question is from the line of Craig Leupold.

Good morning.

Good morning, Craig.

Donna, just two items I guess on the guidance that I wanted to make sure I understood clearly. I guess the first is I think this is in answer to John Litt's question earlier about interest and other income. I think you said your expectations for '07 are 5 to $8 million.

Yes, that's correct.

Okay. So going from the fourth quarter, I mean if you just did that 5 to 8 million, let's call it 8 million, it's 2 million kind of run rate a quarter versus the fourth quarter at 19.5 million.

Correct.

So I'm curious, what was your average cash balance in the fourth quarter, and what kind of rate were you earning on that cash?

Well, we had two pieces of cash balances. We had the 1031 money, which was about $300 million. And then we have the 5-- we had about $260 million of cash on the balance sheet. So that got invested. That was-- we typically get close to, you know, current money market rate on our portfolio. So you know, that contributed probably in somewhere into the 40% of the, of the amount you're seeing in the fourth quarter, 40, 50% of the $19 million.

Okay, and so what makes up the balance of that interest and other income that would get all the way down to, you know, a $2 million kind of run rate?

We had, we had a forfeiture on a deposit , on a sale, Craig, that was 2, or I guess $0.03.

Yes.

$0.03 in the quarter.

Okay. Great. And then when you give your G&A guidance of 50 to $52 million, does that include the G&A related to the condo activities of, you know, the roughly $6 million per year there? Or do you think of those two separately?

It's both in property management and G&A, but mostly in property management.

Okay, but that is in that 50 to 52 million, plus whatever you have.

A piece of it, yes.

Okay.

Not the largest component.

Okay. Great. And then I guess a question just on, you know, you touched on kind of some rehab activity and David, I know you said it's not really material given the size of your portfolio, but just curious, is that, on page 23 where you have your capitalized costs and maintenance expenses, does the redevelopment activity show up in the replacements and building improvement lines there? Columns there on page 23?

A lot of, Craig, a lot of the expense comes in the maintenance line item, and some of it does flow. It's a bit of both frankly. We might capitalize, if we're spending 20,000 a unit, you know, maybe we're capitalizing 15, you know, 12 to 15,000 and a lot of it is expense as well.

Okay, but for anybody taking sort of a CapEx reserve off of that schedule, it would be including kind of that rehab activity?

Yes.

Well, you pick up a lot of that footnote 8 addresses those larger rehabs.

Okay.

Okay. So there's a specific line item there of other where it addresses the extraordinary work either going on on the condo side or those big rehabs.

Okay. Then on the acquisitions in the fourth quarter, were they heavily weighted towards the front end, the back end of the quarter, or more, more in the middle? I know Lexford closed early in the quarter.

The acquisitions in the fourth quarter, four in late October, one November, one December.

Okay. All right. And then last question, given, you know, Gerry, some of your comments about maybe concerns or if you had any market that was a surprise it might be south Florida, curious, I mean, I know in the first quarter you guys purchased a large portfolio from [Archstone] down there. Just could you just maybe talk through the thought process of making such a large investment there, given some of the things you're seeing in that market?

Again, I think it was pockets that we've seen issues, Craig, and the assets that we just bought in South Florida, actually we've had a positive surprise on those. Those are performing better than we underwrote, and I see certain areas of South Florida that are starting to come back a little bit, but you got to remember on a comp basis, it's going to be hard when you're pushing through those kind of rent increases in previous years and it falls off. That's where the problem comes in, but we, we think South Florida has great dynamics, population growth is strong still there, job formation, everything's working in the right patterns. There's no new apartments being built there at all. These condos will get absorbed. I think a lot of them already have and we're feeling good about it.

Yes, I think it's important to say, Craig, we've got a pretty big platform down there. We've got a terrific group of people running assets for us and that sort of acquisition we're thinking long-term, looking at price per door, and price per foot and what we think cost to build new is today, the direction of that pricing, and I'm not suggesting if things can't get softer, Gerry is suggesting things perhaps could, but we think long-term we're very satisfied.

Great. Thank you.

You bet.

This question is from the line of Bill Crow.

Good morning, guys.

Good morning, Bill.

Just a couple real quick questions. Gerry you said that in most markets, supply is still running in EQR's favor. Which ones aren't, and as you look out a year, which ones would be on the list aside from construction perspective.

I think certainly the DC area has the most deliveries in 2007 I've seen anywhere, so I do think that will certainly moderate, but I think a lot of those will be back half of the year. Boston, which we continue to see, you know, very modest growth there, and there's still delivering a lot of supply into the Boston market that I think will continue to keep us soft there, but other than those two markets, I think Atlanta, Dallas, you can look at those and they're certainly delivering in total numbers, you know, the 5,000 range, but with that being said, that's significantly lower than historical trends, and we don't really anticipate it slowing in upward movement in revenue growth.

Could you talk about the trends in costs for land, A, and then, B, construction costs, whether you're seeing any moderation in the increase of construction costs?

Sure. It's interesting. I think what you have sort of seen is perhaps more potential reduction in land value than you are actually seeing in prices. By that I mean I don't-- you know, we're having conversation with sellers that aren't willing to sell their property for less than what they thought they could get for it not too long ago. We're having specific conversations where somebody said, look, I'll hold it for another year. So there's a difference between land valuations and land pricing. We are seeing more, more people talking. We are seeing more land available. I think that with the increase in performance and fundamentals that we're seeing, we may be able to make more of these numbers work, but I will tell you we're not seeing a wholesale repricing of land out there. As it relates to construction costs, it all depends on where you're building and what type of construction you're building, but I will just tell you generally what we are forecasting for 2007 is for our construction costs to be up 6 to 8%.

All right. Wish you luck in South Florida. We're counting about four years supply of condominiums down there, but you guys are seeing something a little more optimistic than that. Appreciate it. Thank you.

You bet, Bill.

A question from the line of Ben Lynch.

Hey, guys. The $10 million of interest expense and discontinued ops, was that the Lexford prepayment?

Correct.

Okay. And the $0.58 that was sort of the core number, does that include your discontinued ops?

Yes, it does.

Okay. So that Lexford prepayment was sort of in that $0.58?

Yes.

Okay. So if I'm going from that $0.58, I know this question's been asked a couple times, but I'm still not getting it and I take out the three penny as condo to get the 55 and the one penny of NOI that was in there, which is the Lexford dilution to get to 54 and add back the $0.03 of the Lexford charge, I'm still at 57. I guess I take $0.05 out of that for the interest and other income falling, but that sort of puts me at $0.52 and I'm missing the partial NOI from acquisitions. I don't have any same-store growth. There's no net acquisitions in that number and there's no condo in that number. Shouldn't that be the floor to your guidance rather than the ceiling for the first quarter?

The $0.52?

Yes.

That's correct.

Well, but I mean your guidance is 48 to 52. I can't get any lower than 52 sort of before I add the growth, you know, on this quarter, looking at the run rate fourth quarter to first quarter. I'm just curious how you get down to 48 to 52 from guidance.

Oh, okay. I'm sorry.

I'll run through it again if it's helpful.

No, we have a slight increase in property management expenses.

But same-store NOI is going to be positive, or flat, with your guidance?

Yes.

Sequentially.

Sequentially it's up slightly.

Right.

Moderately.

Right. So an increase in expense is offset by revenues increase.

Effectively. We have slightly higher G&A, we have slightly higher property management costs that are flowing into the first quarter that are offsetting some of that favorability on the core performance.

Okay. So we should expect a couple pennies of dilution from that?

Yes.

Okay. In the first quarter.

Yes.

Okay. Thank you, guys.

You bet, Ben.

There is a question from the line of Jonathan Habermann.

Good afternoon. Thanks for going over time. Your credit ratings have been migrating up into the low A range at the same time that the frenzy in the rest of the industry is focused on leveraging properties up. Can you reconcile that for me and talk about what your future course might be?

We have had an uptick in our credit ratings just based on the fundamentals and the improvement in the overall marketplace. We've had some discussions with the rating agencies. Most of them have taken action. Moody's has us on positive outlook. If we were to push that issue, we potentially get, could get upgraded. But at this point with the flexibility-- we would like to retain the flexibility to run the business in the way in which we want to run the business. Our development pipeline is increasing, and so as a result we're not making any additional requests from them, or really pushing them to move forward with that upgrade.

I guess my question was more, oriented toward why do you need an A rating and, as opposed to say a mid triple B rating?

Don't disagree with you. If we find the right opportunity, we're willing to-- and it makes sense economically, to maximize value for shareholders, we would reconsider the capitalization of the company in order to accommodate that.

Thanks.

There is a follow-up question from the line of Jonathan Litt.

Hi, it's Jon. I'm here with Craig. We're going to pursue the same line as Ben pursued, just we still can't figure out how you get from 58 to 49 in the first quarter. And I- Ben had said it was the debt prepayment penalty was in your fourth quarter number, is that right?

Right. So--

But so then your core run rate would have been higher, not lower. That would have--

Can we start with-- okay. FFO for Q4 was $0.49, right?

Right.

Now, can I take you from Q4 to Q1, would that be helpful.

That would be perfect.

Okay. Basically you're going to have $0.03 to $0.04 of dilution associated with the Lexford transaction. You're going to have comparable number for same-store performance. You're also going to lose about 3 or $0.04 in 1031 debt, as well as pick up some incremental interest expense as well as higher property management and G&A, which is partially offset by the Lexford prepayment. So when you sort of net all those numbers down, you're going come into that 48 to $0.52 range.

Okay. Now, just the Lexford dilution, you had the income from the money sitting in cash.

No, that cash is reinvested.

So now that cash is reinvested. You're just saying the negative spread on the reinvestment?

Correct. So, you know, same-store NOI kind of washed slightly enhanced.

Now are you-- are the acquisitions that you're putting the money to work at lower than where you were earning interest at on the cash?

We are probably comparable.

Because you had the Lexford sale in for almost the entire fourth quarter.

Since October, that's correct.

Right, first week of October.

Right, and we're investing at 5% and we're, in terms of the 1031 money, and our cap rates are what you have been seeing as well. So comparable to that.

But it really shouldn't be-- it's like one week of stub dilution that we would see in the first quarter. I don't know how we get the 3 to $0.04. I think-

Why don't we, you know, I could take this off line.

I think we should do it off line. We just can't get it there.

Okay.

One other question on the condo business, as you're ramping that down, what's happening with the G&A there? I imagine the revenues are going down, but you still have some operating costs that you can't eliminate overnight.

Jon, we've cut about 15% of that cost already. We had to layoff some good people in December, and we'll make sure that that level of overhead makes sense relative to the business. But, you know, there will be-- we believe that the business can ramp back up. At some point in time we'll make a decision about how much we want to keep. But, again, the business has slowed. We're only working and only assuming for 2007 the runoff, sort of what we currently have, but I think there's every possibility that we could add some more assets to the portfolio by the end of the year, but we are not budgeting such.

So, that overhead isn't hitting your G&A number, that overhead is along the [TRS] where this whole business is situated, you think that will contribute a couple of pennies this is year after overhead?

Yes. We've said 2 to $0.03 after overhead, after tax.

So overhead's inflating relative to revenues right now. But it's not showing up on--

Overhead will be a higher percentage of revenues than what it has been in the past just because we've got some fixed costs.

But that will all be at the TRS. That's not going to hit the core income at statement, other than the TRS coming through, it's not going to be in your G&A line?

No, most of that cost is not in G&A. Donna said a small percent was in G&A.

Okay. Thank you.

You bet.

The next question is from the line of Anthony Paolone.

Thank you. I, too, was wondering about the 3 to $0.04 of incremental dilution from Lexford rolling from 4Q to 1Q, so I know the call is running long, but if maybe you can address it a little bit more here, or if you still want to go through it with everybody off line. But I would find it helpful to just walk through that a little bit now.

Okay. Effectively we had a partial dilution in Q4. Now we're full dilution, so we moved from, say, $0.03 of NOI dilution, excluding the prepayment penalty to about $0.06, about $0.05 of NOI dilution in the first quarter.

But is it because of the timing of reinvesting the cash flow, because I know like in our numbers, we pretty much had you selling Lexford at the cap rate you talked about at the time and you talked in reinvesting it at a roughly 4 to 5% type of number.

Which is in the fourth quarter, but, remember, we're ramping up acquisitions in '05, I mean sorry, in '07, which is absorbing all that income.

Okay, but you mentioned that that wasn't at a notably different return than what you were getting on your cash in the quarter.

So effectively it's where it comes through on the P&L.

But it's still effecting the bottom line?

It's still effecting the bottom line, correct.

Okay. Thanks.

I mean the bottom line, don't forget you're also losing the $0.03 on condos, as I mentioned, you're also picking up the property management expenses, some additional G&A expenses, that are offsetting some of the favorable items, like the prepayment penalty on the Lexford portfolio that occurred in Q4 2006. So think of it that way. And that kind of gets you to the $0.50 range. Okay.

There is a follow-up question from the line of Ben Lynch.

Hey, guys. Sorry to add to the call, but the Lexford NOI, was it anywhere other than discontinued ops?

No.

No.

So there's just half a penny of NOI, sort of that sequentially comes out, and then you reinvest sort of at your yield you currently have on your cash?

Say that again.

The NOI that was in discontinued ops was about a little over half a penny.

Yes.

Okay. So that's the Lexford NOI that's going to go away and then we sort of just have the dilution of you reinvesting your cash in acquisitions?

I think that that's right. But the problems we're having here is we've got everybody's going at this a little different, a little different angle. I believe what you're saying is correct, Ben.

Okay. I just wanted to make sure there wasn't Lexford NOI anywhere else. But that's my question. Thank you.

There are no further questions.

All right, great. Thanks, everybody. We appreciate the time today. We look forward to seeing some of you in Naples next month. Thanks for joining us today.

This concludes today's conference call. You may now disconnect.