住宅地產 (EQR) 2007 Q1 法說會逐字稿

Good morning. My name is Candace and I'll be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential first quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. McKenna, you may begin your conference.

Thanks, Candace. Good morning. Thank you for joining us to discuss Equity Residential's first quarter results and outlook for the remainder of 2007. Our featured speakers today are David Neithercut, our President and CEO; Donna Brandin, our Chief Financial Officer; and Garry Spector, our Chief Operating Officer. Our release is available in PDF format in the Investor Section of our corporate website, equityresidential.com. .

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking 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

Thank you, Marty. Good morning, everyone. As noted in last night's press release, but for some one-time items, results for the quarter were pretty much as we had planned. For the quarter, our markets across the country continue to show very good occupancy levels, 94.8%, and they produce strong revenue growth of 5.2% and that's despite working off a very challenging comp from the first quarter of '06, which produced revenue growth of 6%, so we're very pleased with that. So our revenues came in slightly ahead of what we expected and although we were somewhat disappointed in our expense growth, our NOI growth for the quarter still modestly exceeded our expectations.

And I've got to tell you that we like the markets in which we're operating. We are excited about the progress we've made in significantly changing the portfolio by exiting many secondary markets across the country and focusing on the market that we believe over the long-term will provides higher income growth and total returns on our apartment investment.

And as demonstrated by the $200 million of share repurchases in the first quarter, we think that our existing portfolio represents a great investment opportunity. Fortunately, our board agrees and they re-upped our buyback authorization to 500 million.

And so with that, we'll let Donna take you through the financial results for the quarter.

Thanks, David, and good morning, everyone, and thanks for joining us on our call. I hope that you have all had a chance to review our earnings release. We had a good quarter, but it includes somewhat unusual events related to timing. I wanted to take a few minutes to talk about the following items. First, I would like to talk about our first quarter performance. Second, I would like to highlight our enhanced disclosure in our press release related to Q1 actual results and full-year guidance, and I will finish up with our balance sheet and capital markets activity.

In regards to our first quarter FFO performance, on last quarter's earnings call, we spent an awful lot of time guiding you to the mid-point of $0.48 to $0.52 per share range. As you saw in last night's release, we reported $0.55 for the quarter. In the press release text, also on page 24, we have given an explanation of the reasons for this difference, but let me briefly go over them with you. Our condo business closed more units in the quarter than expected. We expected to get very little contribution from condos in Q1 but we got a $0.01 benefit related to 157 units total. We still expect to sell approximately 700 units this year for contributions to FFO of $0.03 to $0.04.

We also recorded a reduction to G&A expense of $1.6 million due to the successful resolution of a certain lawsuit in Florida resulting in the reversal of the majority of the previously established litigation reserve. This was not in our original guidance.

In addition, we saw some delay of approximately $1.6 million in timing on programs and expenses like travel and legal and professional fees that reduced our G&A expenses in Q1. We anticipate these expenses will still occur in 2007. Our guidance range for G&A for the full year is at $48 million to $51 million.

We had certain dispositions that were expected to have executed in Q1 that did not occur. As a result, we still anticipate the $4.9 million in prepaid and and penalty and write-offs of unamortized deferred financing costs to occur in 2007. David will provide more color on both our condo and transaction activity in his remarks.

We also had slightly higher interest income and slower interest expense -- slightly lower interest expense due to slightly lower short-term interest rates and higher capitalized interest. This favorable amount was partially offset by higher interest expense from the incremental debt due to our share repurchase program and the timing of our acquisitions and dispositions.

Same-store revenues, expenses and NOI each came in at 5.2% and although this is below our full-year guidance range, this was very much in line with our expectations for the quarter.

We continue in our attempt to provide our shareholders with as much clarity and transparency as possible about our operating results and the assumptions we use to determine guidance. We hope that this expanded data in the release meets those expectations.

Now, let me turn your attention to pages 24 to 26 of the release. On these pages, we have provided Number One, a reconciliation of the items I just discussed impacting Q1 FFO actual results versus the midpoint of our first quarter guidance page. Number Two, we also provide a breakout of what we would call non-comparable items. This is in response to your request over the last several years for additional clarity regarding these special items.

We have also established a guidance range of $0.54 to $0.58 for Q2. At the midpoint, $0.56, this represents a $0.01 increase over Q1 2007 actual results. This is due primarily to $0.03 of improved savings from our performance offset by $0.02 from prepayment penalties and the write-off of unamortized financial costs that carried over from Q1. We are also reaffirming our FFO guidance of $2.25 to $2.35 in same-store guidance for the full year.

We have also -- and finally, we have also expanded the disclosure on the assumptions we use to determine our guidance range for the year. We have provided more detail on the debt assumptions, preferred share redemptions, our condo business and some key data points.

Now let me talk about our important capital market activity. During the quarter, as David said, we repurchased 4.14 million shares at an average price of $48.76 for a total spent of $202 million dollars. In addition, the board approved to replenish the program back to the $500 million level that was available at the beginning of the year. We do not believe this additional repurchase will put pressure on the credit -- on our credit rating but we do need to be mindful of this -- the availability of liquidity.

One area I would like to bring to your attention is the fact that we had $947 million outstanding on our $1.5 billion credit facility which is up $460 million from the year end. In addition, 10/31 cash balances and general cash balances declined about $300 million. This increase in debt and reduction in cash was used to fund the $200 million of share repurchase, the timing of our acquisition and disposition activity and our development pipeline.

So in conclusion, same-store performance came in line with our expectation. We are reaffirming our same-store and FFO guidance for the year.

Thanks for your time and attention and now I will turn it back over to David.

Thanks, Donna. So a pretty good first quarter. April, though, was a little different story. We experienced softening in some of our markets that should it continue, would suggest that our overall portfolio results could fall short of the high expectations we had at the beginning of the year. Now I'm happy to say that May is expected to show some improvement from April but we still may fall short of our original expectations for the month of April.

But going into the year, we thought that although it was rather unlikely that we could replicate what was very, very strong results in 2006. We did think, however, that it was possible that we could still see historically strong growth as long as we continued to see strong job growth in the core markets and little new supply being added. And in many of our markets, that's exactly what we're seeing. We continue to expect very strong year-over-year results from those markets.

But other markets may be a different situation and I want to address a couple of them specifically. We're definitely experiencing the impact of condo reversions in Florida and Phoenix that Gerry first mentioned this on one of our earnings calls last year. We're really seeing the impact now, starting primarily in April. We all know that over the last several years, thousands of apartments were removed from the rental pool and either converted or proposed to be converted to condos in these markets. And with the slowdown in retail sales of condos, some of them are now returning to rental inventory and while we're certainly impacted by the invested unit, we're less concerned about that and really more being impacted by these entire properties coming back into the market and commencing very lease-up, very aggressive lease-ups that are impacting our operations.

The good news with this matter is that we expect this to be a relatively short-lived occurrence. Because with the continued population job growth that is expected in these markets and limited new supply, new construction, we believe these markets can reabsorb this inventory in a reasonable timeframe and that they'll soon return to better revenue growth than we will likely see this year.

With respect to our investment activity, we continue to be very active as we exit secondary markets and allocate capital to our core markets. Acquisitions for the quarter outpaced dispositions primarily due to a $400 million portfolio that closed the first week of January that had been scheduled to close in December. And you might recall on our fourth quarter call in February, we mentioned that we were short, we were a net seller in 2006 by about $500 million, so in the first quarter of '07, we were net buyers. If you look at transaction volume over the last five quarters, we were pretty balanced between acquisitions and dispositions.

In addition, I'll tell you that the disposition pace got off to a slower start because we had essentially been out of business on the disposition side since the middle of last year when we announced that we were going to sell the [Lexford] portfolio. We've since jimmied that back up and we now have about $600 million of assets under LOI or contract.

In the quarter, we sold six assets in Texas, four assets in Minneapolis, one in North Carolina and one in Tennessee and we have realized an IRR on those investments of 11%. We're pleased about that, particularly on assets in markets we're looking to exit. That's a pretty good IRR and on our gains, about a third of those gains were economic.

On the acquisition side, we acquired six assets in Florida, three assets in Southern California, two in Seattle, one in Phoenix and one in Atlanta, and as long as relative values make sense for us, we're going to continue to exit these non-core markets. We're going to continue to reinvest capital in our core markets and we expect to get most of this done sometime in 2008.

Returning to condos, as Donna mentioned, the condominium conversion business modestly exceeded our expectations for the first quarter. You may recall in February on our fourth quarter earnings call, I mentioned that we had seen some improvement in unit sales in Florida and we did end up selling 46 units in the first quarter there and closing 34 units, and that was 14 more closings than what we had budgeted. We were also able to close 29 more units than we had budgeted at our Bellevue, Washington deal and these two assets explain the positive variances on the condo business for the first quarter.

We've also added a new property to our condo inventory in Seattle. We've been very successful with our Seattle-based condominium conversion business and we think this asset will continue that success.

As Donna mentioned, as part of the expanded section of the supplemental from yesterday's press release on our guidance, we provided a bit more detail on our current expectations for the condo business. Current profitability expectations of $7.5 million to $17.5 million. That's after overhead and after taxes. You won't be surprised to hear or learn that the downside is a function of maybe closing fewer units than we project, primarily at the Seattle, the [Isaqua], Washington deal. On the high side would be by selling more -- closing more deals and units than what we had -- we're budgeting and, again, the upside primarily coming from the ability to get more of those deals in the Seattle transaction closed this year.

And I've said it before and I'll say it again, we're making good returns on this condo business and even during this downturn in for-sale housing. There is now, and we expect there to be quite for some time, demand for this low-priced point starter housing in our markets and we expect to be in the business for the long haul.

Not a lot of news to report on the development side except our JV with [Serrus Regis] in Riverside, California was completed and is leasing up on plan. Our JV with Lincoln Properties in downtown L.A. also completed during the quarter, and is leasing up on plan.

We also added three new land parcels during the quarter, one in a joint venture with Wood Partners. We acquired a site for 405 units on a parcel directly across from the University of Miami in Florida and on land that we acquired directly from the University and we have expectations of about a 6.25% yield on that transaction. In a joint venture with Lincoln Property Company, we bought a site in Chino Hills, California, for a 286-unit development, with expected yields in the low 6's and for our own account, for 100 units on a land site adjacent to an existing property that we own called The Reserve at Town Center in Mill Creek, Washington. We took that property down and we're expecting a mid-6's stabilized yield on that transaction.

And this development business continues to be a very important part of our strategy to create value and invest capital in our core markets. I'll tell you we're pleased with the progress we have made to date in building this capability and we continue to source deals for our own account and with a select group of top-quality partners and we're again, very pleased with what we managed to accomplish there.

So just in closing, let me again say that we're very pleased with the operating performance of the Company for the first quarter of the year. Again, we did see some markets that produced somewhat slower sequential growth in April than we had expected but May has showed some modest improvement for that. But nevertheless, we still do expect a very good year of overall performance for our portfolio and I assure you we're going to be working hard to deliver very good overall performance, good revenue growth, keep that on track, and we're going to aggressively manage our operating expenses.

And lastly, we think our existing portfolio represents a great investment opportunity. We're pleased the board has re-established the share buyback authorization of $500 million because share buybacks represent an extremely important means for us to create shareholder value and we're going to continue to take advantage of the opportunity, when appropriate discounts exist, to continue to buy our stock.

So with that in mind, Candace, we'll be happy to open the call to questions.

Operator?

Candace, are you there?

Operator?

Yes, sir.

We'll open up to questions now.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Jonathan Litt with Citigroup .

Hi, it's Craig Melcher here with John.

Good morning, Craig.

I was hoping to get a little more information on April. Outside of Phoenix and Florida, are there any other markets that are surprising you either on the upside or downside?

We'll let Gerry take you through that, Craig.

I would say there are a couple of other markets, although not at the same level of decline, but we saw a little softness in Virginia, a little bit in San Diego. San Diego, however, looks like it might have some pretty big improvement in May. So it's a little bit of a mixed bag but I would say primarily it's Phoenix, South Florida, and when I say Virginia, that -- we're affected by some reversions there as well so it seems to be a pretty consistent story that where there were reversions, for some reason, we felt that a little more in April than we might have expected. But I wouldn't say it's a serious -- I mean April came in relatively flat and usually see some uplift in May -- in April in a typical year.

So if you think about revenue growth year-over-year in April, how would that compare to what your results were for the first quarter?

It certainly will be less. You know what? The whole picture of where things end up will be a summer issue. Again, we have had your big lift in August on revenue where you have, I'd say a pretty significant increase there. So it looks like it will certainly be softer but still some pretty good numbers, just not quite at the pace that we thought the first quarter.

And to get to the upper end of the range of that to see a pick-up in the third and fourth quarter?

Absolutely, yes. I think that is really going to be the story for everybody out there.

And on the stock buyback activity, what is your flexibility on it today? Could we expect more activity now or do you need to sell some of the assets you currently have under contract before we could see some more buyback?

Our stock buyback is not predicated at all, Craig, on disposition activity. And we, we're happy to buy at the prices that we did previously and if the stock has since traded off -- we have not bought any stock in the past month or so. I didn't think it was appropriate going into the earnings call. But now with the press release out and when the call is over, you can expect us to give that a great deal of thought.

And could we maybe see you be a net seller of assets and take some of those proceeds that may have gone into acquisitions to buy back stock?

I think that is possible but it depends on just what kind of prices we'll see on the dispositions. It depends on the opportunities we see to invest capital in new acquisitions. But we do believe we've got ample credit capacity to continue to buy stock back and it's not predicated at all on what happens on the sales side.

Okay, and I just want to make a clarification on the second quarter guidance. That preferred redemption charge, is that in the third quarter? The 6.1 million?

No, that is in July.

So that will hit in the third quarter?

Yes.

Okay. Thank you.

You bet, Craig.

Your next question comes from the line of Christeen Kim with Deutsche Bank.

Hi. Good morning, guys. Just on the condo sales and you guys did a little better this quarter that you'd expected, what what was driving that? Was it better pricing? Better traffic?

Well, it's interesting. We continue to see, and I think I have said this on every call for the past year or so, continue to see very strong traffic. We did and I think we mentioned on the last call, Christeen, we did start to use a little bit more sales incentive. I know we changed out some of our sales teams in several of our properties. We just, we knew that we were going to negatively impact our margins a little bit and we talked about that, but we were certainly trying to, through buying the rates down, through providing paying all the closing costs, whatever, just trying to make ourselves a little bit more competitive so that we could capture more of that traffic and we did, in fact, capture more in the first quarter.

Great, and in terms of your commentary on those entire condos coming back as apartments and you said that you expected to be -- have a short-term impact. Does that short-term mean, I mean once these properties lease up, you will go back to normal? Or are you expecting a ton more of these whole buildings to come back into the apartment supply pool?

Well, I think that certainly the major portion of that is already back and I think you will see there is still some completions that will take place that certainly could impact you there. The supply, although there are a lot of reversions going back, the real vacancy factor in that isn't that high, okay? So you're not talking about 50%, 75% vacant properties coming back, more like 20% vacant. So you had an immediate supply hit that you didn't anticipate. It shouldn't take years to absorb. I mean, you're talking months. And we really think that certainly in some markets, and I feel like in South Florida, we're pretty close to getting there right now. And it's where they don't have any new supply coming in, which South Florida doesn't, and even Phoenix to some extent has little supply, I think you will see recoveries there probably a little quicker.

Yes, I think that's a very important point to mention because as you read statistics out there, you're going to see people reporting that thousands of these units are coming back into the rental market and you just need to understand that properties that were in the process of contemplating going to condos but didn't still remained some reasonably percentage occupied. So the number of vacant units that are coming back into the rental pool significantly less than the number you will see in some of these statistics. For instance, we talked to our guys down in Florida the other day. They were talking about 9,000 or so units coming from condominiums back into the rental pool. Well, the fact of the matter is that it's like 25% of those units are vacant. So it's certainly units than we would like that are coming back vacant into the rental pool but it's 2,500 or so units. We believe that the job growth is strong. There's very little new supply. We'll absorb those units. We're certainly impact, being impacted by people aggressively leasing those units, either cutting rent or giving free rent, but we believe those will be absorbed in a very reasonable timeframe and we'll get ourselves back into seeing the kind of rental growth going forward that we had expected to see this year.

Great, and my final question is also on this share buyback. How long have you guys had this program and when was the last time you had executed on it prior to the first quarter of '07?

Well, we have had the program in place for sometime. We, I guess six or so months ago, we increased the authorization of 500 or so million and we started buying in, I guess, late January, early February.

$48 million in Q3 of last year.

Yes, okay.

All right. Thank you, guys.

You bet.

Your next question comes from the line of John Stewart with Credit Suisse.

David, I was wondering if you could quantify what exactly you mean by an appropriate discount when it comes to the share repurchase.

Well, I'm not going to get myself in the box of saying what some kind of percentage is, John, because I think from time to time, that can change. But I'll just tell you that the -- we discuss this regularly with Sam. We discuss it regularly at the -- at our board with our trustees and they certainly do understand that from time to time there are opportunities to buy our own portfolio at discounts to what you can buy one-op assets for, and again, I'm not going to say it's this level or that level, but just suffice to say that today we believe it's certainly an appropriate level and we watch it all the time.

And can you speak to third party interest in the great investment opportunity that your portfolio represents at the portfolio level?

No.

Does that mean there is none?

None that I know of.

Okay.

I'm not suggesting there is not any, but none that I know of.

Okay. And just to clarify, David, when you were talking about potentially falling short of high expectations, were you referring to the high end of guidance or were you suggesting that if the April trend continues, then we'll need to take guidance down?

I guess I think that we had a very strong 2006, and we thought that 2007 had the potential to not be quite as strong but to be strong. And so what I'm suggesting is it's unlikely -- to be very challenging to get to the high end of the guidance. I think it's still possible to get to the midpoint of the guidance. But again, as Gerry mentioned, our primary leasing season is yet ahead of us and it's too early to say. We'll certainly have more visibility on that matter when we get on the second quarter call.

Helpful. Thank you.

You bet.

Your next question comes from the line of Alex Goldfarb with USB.

Good morning, UBS. I just want to go back to the rental condos. From your comments, it sounds like it's a lot of failed converted deals that are ending up coming back on the market as rentals. What about either brand new condo deals that end up becoming rental or the half-baked kind?

Well, there is a series of different things that affect you and certainly those are -- all these affect your supply. There are still deals in various stages of completion and when they go complete, people will re-evaluate the market and some of those may continue to go into the market as new supply. And you have a shadow market building up in a number of markets. We have a lot of rental activity going on in the condos that investors took on as well as even some single family home pressure that continues to add, affect the demand and the supply. So I think that those are the things that are kind of keep -- holding you back but that being said, the markets that these are occurring in have great job growth expectations going into this next year which should help keep it in balance so it doesn't get really all that bad.

Okay, but the bulk of what you're seeing is on just sales converted deals?

Well, I think that was the immediate impact because that supply gets hits real quick and I think some of these others will get staged more like a traditional supply line would.

Okay. On -- switching topics, given the dramatic selloffs in the apartment REITs over the past quarter, are you seeing any spillover into the private market or are you seeing private buyers reassessing valuations or you think that the two markets are disconnected?

We believe it's disconnected, which is why we have been buying our own stock. We are very active in the disposition side and the acquisition side and the development side. And we have not seen any softening, really, in valuations on what we have been looking to acquire. I think we probably have seen a little bit on assets that we want to sell. You have seen our cap rate, this delta between our disposition cap rates and our acquisition cap rate widen a little bit in 2007 compared to 2006, but there continues to be, we believe, to be strong demand for sticks and bricks, and for our assets. It continues to be very competitive, the assets we want to buy, and we continue to have a lot of interest in the assets that we want to sell. So we believe that there's a disconnect.

Okay. And my final question is at the property level. It seems that tenants are become increasingly demanding, whether they're A's, B's or what have you. Are you finding that it's necessary to change the level and caliber of the staffing at the property level and/or that you're having to increase the staffing level to accommodate today's seemingly more demanding tenants?

Well, I would tell you that with the change in the type of asset that we're buying, high-rises in New York and high -- stuff we're developing, there is no question that we are providing higher levels of service in those properties. But I would say the traditional garden property that we own in Atlanta and Dallas really hasn't seen any change in that respect, but we are moving our portfolio toward higher quality, higher-end, higher-dollar monthly rents and when you get in to that environment, you definitely have -- you can expect increased cost factors with that.

But the NOI margins that we would see historically would remain in place?

Well, look. I think you could see some increase in the margins even with that because the rents are so high in some of these markets, okay? And they have that potential so I would expect to see improving margins in spite of that.

Okay. Thank you.

Your next question comes from the line of Rob Stevenson with Morgan Stanley.

Good morning, guys.

Hi, Rob.

Gerry, what was unit turnover in the quarter and what was the move out to home purchases?

Well, I would tell you, strangely enough, and this has been going for years, home purchases have stayed at 23% in our portfolio for I can't tell you how long and we've monitored this through two different systems that we have had over the years. It's amazingly consistent at 23%. For the quarter, we're -- our turnover is down 40 basis points. We're about 13.5% so we're continuing to see our turnover come down over the last year and a half.

o you haven't seen any impact on the move out to home purchases from a tighter lending standards and such and a falling single family housing market as of yet?

We are not sensing this and you would just -- even when interest rates drop 200 basis points back when, it just didn't seem to drive that many more people out of our property.

Just to understand though, Rob, we're seeing fewer people move out but of those that do move out, we're seeing a consistent percentage attributing that move out to a home purchase.

And what, and I know it varies depending on what you have to do and by market, et cetera, but what is a rough number in terms of the hard cost for a unit turnover for you guys?

Well, we -- this first quarter was a little over $700, okay? For the year, we would expect about a $650 hard cost, which is about what we incurred last year as well.

And I mean in terms of your expense growth assumptions for the year, are you anticipating any sort of decline in turnovers throughout the year? Are you expecting it to -- in other words, is there upside if turnover continues to trend down to the expenses?

Yes.

Okay. And then the other question is are you guys seeing any differentiation in the performance between your A and B units within markets these days?

It's a mixed bag. I wouldn't say that anything really stands out, frankly, that we're seeing certainly because our high A properties in these premier markets are very strong downtown Manhattan and Seattle, Boston. We are seeing some pretty strong occupancies there. I'd say really, even downtown Boston, where there is a lot of low revenue growth. The downtown assets, which I'd say are the bigger A assets, we're seeing a little bit better play on that.

Okay.

I'll just say just in Manhattan alone, if you say Trump is an A property and our Hudson Crossing is maybe a B property within that market place, relative performance is very consistent. I mean, double digit NOI growth, in both of those assets.

Okay. And then if you take a look at what -- when you're going through your markets in terms of supply expectations, leaving the condo stuff aside, where are you seeing the sort of most building and the most -- and you have the most concerns about just generally people that were building condos, now building ground-up apartments that are going to start being delivered in the back half of this year and into '08?

Well, okay, first of all, I would say Boston, you continue to see delivery of new apartments. I don't think you will see a lot of new starts, but you're still seeing the deliveries on a huge amount of inventory that exceeds the demand there so that will continue to soften a little bit. A little bit into Washington, D.C. area, we're seeing some supply issues there. Dallas. Texas in general, I would tell you. Texas in general, the supply side, whether it be Houston, Dallas, even Austin, we're seeing supplies start to move more in that direction but not seeing it in the west coast anywhere, not seeing it very significantly in Phoenix, certainly not seeing it in Florida. And actually in Atlanta, I would say a little bit of supply there but we think the dynamics are a little bit better in Atlanta right now.

So the supply in Phoenix, as far as you're concerned over the next year, is just simply going to be constrained to -- the extra supply is going to wind up being from the condo stuff, not so much from ground-up construction?

There is a little bit of ground-up but it's significantly less than what you -- it's traditionally have had.

Yes, I think there is probably more supply being expected in some of these markets than we've seen over the last couple of years but nothing close to what you would think was a historical run rate in these markets.

It's a little bit higher than it was last year. Maybe it's approaching 2004 levels, but it's about -- no real serious change from our point of view and I would say Texas is probably your biggest risk on supply like it always has been.

And then, I mean, the last question in terms of having seen some of the homebuilders really pull back on some of their operations, are you seeing any sort of relief in land pricing these days?

Well, depends on where you are, Rob, but a lot of the homebuilders are building out in the far suburbs and that's not where we have been buying our product. The development deals that we're looking for in our core markets, the -- either the apartment bid has replaced what had been a condo conversion bid so I think that the fact that homebuilders are maybe pulling back, I think that those land sellers will just continue to run the orange grove or continue to just have (inaudible) develop that or use it, grow crops on that property. We have not seen any real abatement in pricing out of land that we want to build on in our core markets.

And then, I guess to sort of follow up that, has there been any relief in the last 90, 180 days on construction costs?

Well, we're certainly not seeing them trend up at the same rate that they were, but we're still fore -- there was a time, not too long ago, when we were forecasting construction costs going up 1% a month. And now we're probably half that so we're 6% or 7% growth expectations as we were previously seeing 12% and 15% on an annual basis.

Okay. Thanks, guys.

You're welcome, Rob.

Your next question comes from the line of Mark Biffert with Goldman Sachs.

Hi, guys.

Good morning.

Looking at your spread on your acquisitions and dispositions, I'm just wondering how that is trending as you move to acquire more assets and move markets?

Well, we had budgeted 100 basis points spread and we still believe that that is a good spread for the year. I guess we were 90 or so basis points for the first quarter. It all depends on what actually gets closed and what -- both on the buy and the sell -- and it may move around a little bit quarter-to-quarter but we still think 100 basis point spread's a good [bogey] for the year.

And what markets do you expect by the end of the year to exit as a result of the year disposition activity?

Well, we are in the process of exiting Houston and Minneapolis. Other than that, I'm not sure we'll be fully out of -- and Milwaukee. Other than those three, I'm not sure we'll be fully out of markets. We're going to continue to work on Charlotte and Chicago, but I do believe that those three we will definitely be out of in total by the end of the year.

And do you have a target rate for the New York market as a percentage of your NOI?

No, that is a good question. We do believe it can be higher than what it is. We have not established a ceiling yet. We'll tell you we do talk about it at our board meetings, but we've not gotten there yet and so we haven't worried about what that might be.

Okay, and also related to the operating expenses that were higher than you expected, what was that attributed to in the quarter?

There were a couple of points. Number one is we incurred some significant weather-related issues, the snow in Denver drove our building expense up as it did in actually D.C. There were two markets that we -- exceeded our expectations there and what we have done as well is that we have pushed a few expenses earlier to the first quarter to kind of prepare the properties for the leasing season so I think that the expenses are a little more front-loaded than we might have typically done but I think that will moderate as we go through the rest of the year.

And you should be able to meet your guidance that you think?

That is certainly our goal.

Okay, thanks.

Your next question comes from the line of Ross Nussbaum with Banc of America.

Our questions have been answered. Thanks.

Your next question comes from the line of Susan Berliner with Bear Stearns.

Good morning, a couple questions. One if you could comment or give any specifics on your incentives on your condos, where those have been and where they were this past quarter?

I don't think that they have changed. But what we have done and it depends on a market-by-market and we talked a little bit about this in detail on the last call but we have done things such as we have provided -- we paid closing costs. We provided, at the same price, some upgrades in kitchen finishes, et cetera. And it's just things -- we are not trying to reduce price but are using other sort of sales incentives to -- increasing brokerage commissions. Like I say, we've also changed out some of our sales agents. So just different things you can do to make it more attractive to what continues to be very strong traffic trying to get those people to actually close.

And can you provide any contacts, I guess, as a percentage of the price? Is it 5% discount? 10%?

That would be tough for me to say. It's different by market. It would be nothing, really, in Seattle, for instance. We continue to do very well there. So yes, my guess is you can probably, 2% or 3% or 4% increase in what our sales concessions might have been.

Okay. Great. And my second question was it sounds like you guys will probably be looking to the capital markets to refinance at least some of your outstandings on your bank line and I was wondering if you could comment on your appetite or what you see in the second half of the year as well as comment on the recent bond issuances with limited covenants that [Kimco] and [Camden] did.

Clearly we recognize our balances are high on our $1.5 billion credit facility, and so we know we're going to have to do something there to relieve that liquidity because we don't believe that in terms of that being a permanent source of liquidity, so we'll do some combination of issuance, probably some time throughout the year. We haven't identified the exact timing of that. In terms of the Kimco covenant and what's been going on in the market with Camden, et cetera, we're evaluating those covenants at this point and we have not made any definitive conclusions as how we're going to proceed on our next issuance.

Great, thanks so much.

You're welcome.

Your next question comes from the line of Craig Leupold with Green Street Advisors.

Good morning. Follows up on Susan's question, could you comment about, I guess, maybe your appetite for straight debt versus converts?

Clearly at the current price, we did the convert back last year and so we're not probably going to think about doing a convert at the current price. So our appetite would be more in line with fixed income where rates still remain attractive and spreads remain relatively tight for our sector so right now, we would be leaning more toward a fixed-income issuance.

Okay, and then two other questions. One, David, in terms of student housing, I know you guys recently made a purchase up in the Berkeley area and you mentioned on the call today that you bought some land across from the University of Miami. Just curious is that an area that you're targeting to maybe expand your exposure to student housing or is that just sort of coincidental?

I think it's just coincidental. The Berkeley portfolio, we just thought was terrific real estate. Just terrific, just huge barrier of real estate that we thought we'd make a good return on and we think the same thing on the across from the University of Miami, and I want to make it clear that what we have done in the Berkeley acquisition and what we're doing in South Florida across from the University of Miami is not what I think many people think about what student housing is. This is not stuff that is a common area and four or five bedrooms off that common area with individual leases on each one of those bedrooms. This is traditional apartment product that happens to be in close proximity to universities and so the majority of the residents happen to be either a lot of grad students, even faculty, and what I would guess we would see in, in particularly University of Miami, wealthy undergraduates.

Okay, and then last question. In terms of cap rates in the market, are you seeing anything at the margin is -- clearly the condo issue has gotten more press, growth rates seem to be slowing a little more quickly than most people expected. Is that showing up in the underwriting of yields at the margin such that cap rate might be starting to inch up or is there just so much capital still in the market that you don't see that?

I guess I would have to say today, Craig, and it could change, I suppose, by our next call but what we've seen through the first quarter and what we're working on today, there continues to be a great deal of demand for sticks and bricks, and I guess we're not just seeing it in the apartment sector but across all the sectors. There's limited supply of, of good product and there's huge demand and we have not seen any changes in cap rates, at least for the present time, or absolute values on a per unit per square foot basis.

Great. Thank you.

You're very welcome.

Your next question comes from the line of Ben [Lynch] with LaSalle Investment Management.

Hi, guys, I was wondering if you could give us an estimate of revenue growth for Florida for the year?

Not that I -- I don't think we'll go into that level of detail but it certainly --

Do you think it decelerates from here?

I beg your pardon?

Do you think that year-over-year revenue growth decelerates from here?

I think that the big wild card will be the summer issue.

Okay.

We're not quite sure that, for example, in Orlando, you did not see any softening last summer, okay? And typically in that market you would see some level of softening. We did see it in South Florida but not in Orlando, so if there's a little bit of a softening in the summer due to snowbird issues in Orlando, that would certainly drive another level of lower expectations, okay? But I think that in many cases, there should be, because of the decline in the last half of the year as these reversions started, an ability to get a little better same-store growth recovery in the latter part of the year compared to the first part.

Okay, great. And then my other question was the halted condo NOI. I think you reported in the quarter it was 87,000 or something like that. What do you think that is when it's stabilized?

What we're expecting is somewhere in the range of at least for the current year, somewhere in the range of $5 million to $6 million.

Okay. And when you say the current year, would there still be some lease-up after that or do you think that' s -- ?

There potentially could be some incremental lease-up after that, yes.

Okay, great. Thank you very much.

You're welcome, Ben.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of David Harris with Lehman Brothers.

Hey, good morning, guys. A couple of small points, if I may. Looking on the condo disclosure page, it looked like tax paid in the quarter was minimal. I thought you burned all your NOLs off. Is there something aberrational occurring in the quarter?

No, it's just a function of the way we do our taxes. We look at the full-year annual expected results and then we make some adjustments that come through in the quarter, so it's just the timing on them. We are expecting to pay, based on our 700-unit run rate, some level of taxes. It will just come throughout the rest of the quarter.

Am I right in thinking that all the NOLs burned off some while ago?

That is correct. That burned off several years ago but we do still continue to have some shelter associated with the goodwill amortization associated with it -- a previous acquisition as well as some interest expense due to the capital structure that we composed in our TRS structure.

So as a ballpark figure, would 20% be as good a number as any?

Yes, that is pretty close.

Okay. And then excuse me if I missed this, but if we look out to the share buybacks, are you intending to do this on a leverage neutral basis?

Look, I think we're prepared to add some more incremental leverage into the Company, David. I think that -- I think it's prudent. I think we've demonstrated that the leverage levels that many of the apartment companies and us included have operated since we went public in '93 might be ultraconservative and we would be comfortable adding some more leverage into the equation.

I guess that's within the context of the existing program. If you would enlarge it, you may have to revisit that thought?

No, I think that we're comfortable adding (inaudible). We're not going to 60%, 70% leverage, obviously, but we're comfortable modestly adding some leverage to the existing capital structure.

And these are levels that are in mind with what levels we have discussed with the agencies and when we're upgraded last year and so as a result, we feel like this is still within the range of our discussions and expectations for incremental leverage that the Company can absorb.

I can't remember, I mean I have been following you guys for more than several years, I think. I don't remember a time when you have been particularly active on share buybacks. Is the stock trading so much cheaper today that it has? David, you go back, obviously, a long time.

There was a time, I say, when we bought $100 million or $200 million back some time in the '90s, David, but I think that, we're looking at pretty meaningful discounts today.

Okay. All right. Thanks for reminding me and I can't always remember the details. Thanks, guys.

(OPERATOR INSTRUCTIONS)

Any more questions?

Your next question comes from the line of Alan Calderon with European Investments.

How you doing, guys? One question on the sales process in Houston, can you talk about that a little bit? What type of investors were look at the portfolio? Are we going to be surprised on the positive side or negative side on the cap rate you might sell that at? that at?

Well, I don't know what your expectations are about the cap rate we're going to sell. I'll tell you we're very pleased with the cap rates at which we have been selling the properties in our non-core markets, Houston included. With respect to buyers, generally local players that have got small portfolios. From time to time, we do sell properties to institutional investors. Sometimes we sell to institutional capital on a value-add play. It's kind of a mixed bag but I think we're very pleased with the cap rates and especially with the absent values per square foot and per unit and which we're selling these assets, particularly compared to the opportunities we're having to redeploy that capital into our more preferred markets.

Okay, thank you for your time.

You're welcome.

There are no further questions at this time.

All right, thank you all for joining us. hope Rich [Paoli] is not sick because we didn't hear from Rich on this call like when he was -- he missed us down in Naples with (inaudible). But thank you all for joining us today and we look forward to visiting with many of you in New York City next month.

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