住宅地產 (EQR) 2007 Q2 法說會逐字稿

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

I would now like to turn the call over to Mr. Martin McKenna.

Thank you, Jennifer. Good morning, and thank you for joining us to discuss Equity Residential's second quarter results, and outlook for the remainder of 2007, our feature speakers today are David Neithercut, our President and CEO, Donna Brandin, our Chief Financial Officer, and Gerry Spector, our Chief Operating Officer.

Our release is available in PDF format, in the Investor section of our corporate website, equityresidential.com. Certain matters discussed during this conference call may constitute forward-looking statements, within the meaning of the Federal Securities law. These forward-looking 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. And now, I'll turn it over to David.

Thank you, Marty. Good morning, everyone. Thanks for joining us for our second quarter conference call. I'm going to cut right to the quick, and discuss our outlook, for same-store revenues for the full year, which I'm sure many of you know that we have reduced from a rage of 5% to 6%, to a new range of 3.75% to 4.25%.

In the short, the explanation is the continued drag on our performance by those markets, most impacted by condo development and reversions, as well as high single family home inventories, and specifically those markets are Florida markets, Washington DC, Phoenix, and the Inland Empire. We talked about this most recently on our last call, and on that call we noted that we were experiencing some softness in April, and we said that should it continue, it would suggest that our overall portfolio results could fall short, of the high expectations, we had at the beginning of the year. At that time, we noted May was expected to show some improvement from the April levels, and it did, but it was still short of our original expectations.

June continued to show a positive trend line, but one that was still below our expectations, and slowing modestly. But July was really the most telling month, with a sequential growth rate from June, that was half of the sequential growth rate from a year ago.

What we're seeing today is very strong average occupancy across our portfolio, but we're seeing reduced occupancy in the key markets that I mentioned, and resistance in pushing through rent increases, and again, this is due to condo units being made available for rent, condo reversions, bringing vacant units back into the rental market, and single family homes that really having a double impact.

The first is they're for sale, cheap, today, with all of the concessions and incentives, that are being made available, or they are being offered for rent. All of which have had a greater impact on our operation, than we initially expected. So the next obvious question is, of course, how long will this last? And certainly the balance of 2007, and we expect to see some recovery, and some improvement, in these markets in 2008. Because there continues to be, pretty good population of job growth in these markets, limited new supply, and so we believe these markets can recover, we just expect them today, to recover as quickly as we might have thought, earlier in the year.

And with that Donna will be happy to take you through the financial results of the quarter.

Thanks, David, and good morning, everyone. And thanks for joining us on the call. I hope that you all had chance to review our earnings release, but I would like to provide a little more color on the following items. First, I'll address our second quarter FFO performance, I would also like to cover some of the key items impacting Q3 and full-year guidance. Then I'll finish up with a brief discussion of our balance sheet, and capital markets activity.

In terms of our second quarter FFO performance, we reported $0.60 for the quarter, which was $0.04 higher than the $0.56 midpoint of our guidance range. Let me walk you through some of these primary differences. We sold the parcel of land in New York City for $4.5 million, which resulted in a $0.02 per share benefit to the quarter. We also had better than expected contributions from our condo business of $0.01. And we also had lower prepayment penalties and G&A spending of $0.01. The increase in interest expense that you are seeing, is due to the share repurchase activity, and being offset by a lower share count, and is FFO neutral at this price.

Now let me talk about guidance for the third quarter. We have established a guidance range of $0.54 to $0.58 at the midpoint of $0.56, this is $0.04 lower than Q2 actual results. This is due primarily to -- due to the $0.02 of gain on the land sale we realized in Q2, and the $0.02 charge from the redemption of our Series D shares, in Q3. We also has slightly lower property NOI and lower gains on condo sales, which will be mostly offset by lower debt prepayment costs, and higher interest income in Q3.

In terms of full-year guidance, we are reaffirming our guidance range of $2.25 to $2.35, as some one-time items, such as the contribution of the land sale, and lower G&A spending, will offset the $0.05 shortfall in same-store performance. As David already talked about, we have lowered our same-store guidance for revenues, expenses, and NOI for the year. On the positive side, expenses for both property management and G&A, are favorable to our budget, as we continue to enjoy the cost efficiencies of our new platform.

Other major guidance to changes I would like to summarize, are as follows. We lowered our guidance range for G&A for the full year, to $46 million to $49 million from the previous range, of $48 million to $51 million. This savings, is attributed to the continued focus to right-sizing our cost structure, to match our transformance portfolio.

Two, we have raised our expectations for interest and other income for the year to $20 million to $25 million, from $5 million to $7 million. This is due to higher anticipated 1031 account balances, due to timing of our dispositions and acquisitions. This increased amount, will be offset by a lower contribution, from new acquisitions, making it relatively FFO neutral. Excuse me.

Lastly, due to our share purchase activity, we lowered our weighted average shares outstanding to 306 million from 315.7 million. As I previously talked about, the increase in interest expense from borrowings to fund this program, made the reduced share count FFO neutral.

So in conclusion, despite the pressures of the $0.05 reduction, from our same store performance, our FFO guidance remains unchanged at the $2.25 to $2.35 range. Let me briefly discuss some of our important capital markets, and balance sheet activities. In order to take advantage of attractive market conditions, we executed a $1 billion bond issue on May 30th. It was a combination of a 5-year bond and a 10-year bond issue. And we were fortunate to execute this transaction, right before the significant widening in credit spreads, in the marketplace. In addition, on July 18th, we closed a $300 million secure debt issuance, at an all end rate of 6%. Then on July 15th we redeemed our 8.6% Series D shares, at their $175 million liquidation value.

As we noted in the release, we will take a charge of $6.1 million, or $0.02 per share in Q3, for the write-off of the issuance cost. We currently have approximately $575 million available on our line of credit, as well as $300 million in 1031 funds, giving us substantial liquidity, to conduct our business, and pursue opportunities strategy. Thank you for your time and attention and now I'll turn it back over the David.

Thanks, Donna. During the second quarter, we continue to be active on the investment side of our business, continuing to exit our secondary markets, and allocating capital to our core markets. Acquisitions equalled dispositions, on a dollar basis for the quarter, at about $550 million each. The cap rate spread for the quarter, of 160 basis points was impacted by opportunity to acquire three properties, totaling 479 units on the upper West Side of Manhattan, very close to Central Park, all three assets just a short walk from Central Park.

The properties were acquired at an initial cap rate of 2.7%, but 44% of the units are rent stabilized, and we will quickly see the yield on our investment increase, and expect a second year return in the 4's. 40% of the units are studios, 55% one-bedrooms, with an average unit size of 518 square feet. This is an ideal size for this market and this location. At an acquisition price of $376,000 a door, we expect to realize a solid total return on this investment.

Without this acquisition, our cap rate spread for the quarter was 90 basis points, consistent with our transactions year to date, and with our projections for the year. We're pleased with what we were able to accomplish in the first half of the year, but we have reduced our transaction expectations for the full year, due to an expected slow down in deal activity for the balance of the year. With a backup in the debt markets, we expect to see a widening in the BITAF spread, and that usually leads to a reduction in deal volume.

While you might think a target of $1.75 billion might be a stretch on the sales side given that we only have sold $790 million for the first six months of the year, I will tell you we have sold $381 million of product in July at a 4.3% cap rate, and we have another $500 million under contract, and in various stages of diligence or closing, and those are about a 5.6% cap rate, pretty consistent with our cap rate on a year to date basis.

On the condominium conversion side, that business exceeded our expectations for the second quarter. That group was able to close, roughly the number of units that they had budgeted, but they sold more units than expected in California and Seattle, and those markets have larger profit margins per unit, than, where we sold fewer units than expected, those being Illinois, primarily in Illinois where we achieved a lower profit per unit, and as a result, for the same number of units closed as budgeted, we earned about $0.01 more of FFO, than we had expected.

I'll tell you that traffic remains pretty good across all of our conversion properties, and conversion ratios are frankly very pleasant surprises, particularly for this time of year, in Florida and Illinois.

Last week in Illinois, on two properties, we sold seven units on 45 pieces of traffic, for a 16% conversion ratio, and in Florida last week, we had four net sales on 24 pieces of traffic, for a 17% conversion ratio. These are very strong, and far from typical from the last week in July, where we would have expected very low traffic levels. As I said many, many times, there continues to be demand for our entry-level priced units, across our markets.

We have add two new properties to our condo inventory, one in Seattle where we have been very successful with conversion business, and we think this asset will continue that success, and perhaps surprisingly, we acquired an asset in South Florida. This was an halted conversion asset, by a third-party and 50% leased. We underwrote and we acquired the property as an apartment, but later considered a conversion, and have opted to see if we can sell a critical mass of units, to complete the conversion. If not, we won't sell any of the unit, cancel those efforts and put the property back in the apartment pool, and get it leased up. We expect to see a second year return of more than 6%, if we were to have to go that route.

On the development front, we have about 1.1 billion of development, currently underway, we have a development pipeline of opportunities, of another $2 billion in various stages of planning and diligence. During the quarter, we completed our Highland Glen and Bella Vista properties, and those were additional phases, of assets we already own, and both of those phases are now in lease-up.

We commenced the construction of the second phase of an asset we acquired this past quarter in Orlando, and we have increased our construction budget on our 77 Hudson, deal in Jersey City, by $28 million. That's based in part, due to a change in the unit mix, of the billing and some other design changes, that were reflected in the final GMP contract.

We added two new land parcels during the quarter, both brought on account, the first being the Orlando asset which I just mentioned, and the second is a site in downtown Redmond, Washington for a 250 unit development, which we are also very excited about.

As Donna mentioned we did sell a land parcel in New York City, this part quarter. We did own that in a joint venture with the Lincoln Property Company. That was very reminiscent of the land site that we owned in Tyson's Corner, Virginia with Lincoln, several years ago, and at the basis in which we were in at that property, we could have realized a reasonably attractive return on an apartment development. However, what the land was then worth, particularly to a for-sale developer, the yield on the apartment deal did not make sense for us, so we chose to sell the land and just take the profit.

Lastly, during the quarter, we acquired 14.3 million shares of our stock, in early July another 1.1 million shares. For the full year we now have 19.6 million shares acquired at an average price of $46.82. We said, for some time, that we think our portfolio represents a great investment opportunity, and we've demonstrated that belief with this level of buy-back. Obviously we the benefit of 20/20 hindsight, I wish we'd waited until current pricing to begin this repurchase program, but the mid-40s represented a very steep discount to the underlying value of our assets, and we took advantage of the opportunity.

And, I'll tell you, that we will continue to watch the way Wall Street prices our shares, and the way Main Street prices our assets, and continue to buy stock back, when the appropriate discount exists. Jennifer, with that we'll be happy to open the call to questions.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Jonathan Litt, with Citigroup.

Good morning, it's Craig [Mautzer] here with Jon.

Good morning, Craig.

I was just looking to get more color on-- you mentioned the revenue growth is about half, if you could talk about what the revenue growth was in July, specifically, and a bit more on the, push-back on the rent increases. Is that -- so what's the rent growth looking like on renewals relative to new leases?

Well, I'll let Gerry answer the second question. But the first question, what I said was that the sequential growth, from June to July, was about half, of what the sequential growth was a year ago. And on an annualized basis, what we saw a year ago, was about 4.6, 4.7, and the sequential growth that we saw recently on an annualized basis, was about 2.2 or so. And so what was the second half of the question, Craig?

How did the rent increases look like on the renewals relative to new leases?

We're getting fairly aggressive increases in excess of 5% on renewals, which is definitely edging the overall average of rental growth, which is about 4.5.

On the Florida acquisition, I might have missed it. What was the going yield on that?

It was -- you know, in the 2% or 3% John. The property is 50% leased. In a lease-up situation -- and believe me this was not the first property we have acquired in a lease-up situation. First year lease-up yield is not as relevant, as what we think a stabilized yield would be, and we've underwritten a second year yield in the 6s. We have not elected to start lease-up of those 50% units vacant. We're in the process of determining -- of going through a marketing process on a conversion, and if we believe that we can be successful there, we'll go ahead and commence that conversion.

This property is less than a mile from the beach, terrific location, surrounded by other previously converted condominiums or built conversions, and we feel pretty good about where we're at on our basis. We think we'll do just fine there. As I mentioned our other property in Florida we're working on we had great traffic, and great sales, a year ago. At our price point we continue to do okay in Florida. We think this one would be successful as well. If we decide not to go ahead and go do it, we'll put it in the rental pool, and we'll do 6% in the second year.

If you are looking at doing the condo piece, how do you-- do you look at an IRR that you expect to earn? And what kind of numbers--

Yeah. We look at our margins, and we look at IRR's, and our margins are in the mid-teens, and our IRR's in the high teens, and low 20's on the deals that we have been doing.

I guess as we look at your stock buyback, and think about some of these distressed opportunities, that are out there, where do you thing you are getting the better returns? If you could do a lot more of these condo type things at those levels, where do you think you are better off being?

Well, we have not ramped up the condominium conversion business. I will tell you, what we have done, is we have elected not to pursue some acquisition opportunities that we were working on, not because we believe those acquisitions, or those deals, will not trade at the prices we were looking at or worth the prices we were considering, but as we look at our stock price, we couldn't justify buying some of these assets at those prices, and elected to keep our capital available to buy our stock.

Right. I see that. But I also think, that probably there are some distressed situations out there that might-- and they might get more interesting, with time.

Absolutely. We'll evaluate every one of those opportunities, relative to other opportunities, which include buying the stock back.

Okay. Thank you.

You bet.

Our next question comes from the line of Bill Crow, with Raymond James.

Good morning.

Good morning, Bill.

I wanted to ask you about Florida, because one of the things I recall from last year's NAREIT conference, was your optimism about the recovery of the Florida market. And even today you sound fairly optimistic, that by, I think you said early '08, that you thought, you would see recovery in this market. The builders themselves are talking about an '09 recovery at the earliest. What are you seeing out there that should give us some hope that, that market--

First of all I don't believe I said early '08. I said '08.

Okay.

So I'm not making a call when. It's a single family, and the multi-family is related to some extent, but I don't think are perfectly correlated. There continues to be very good job growth, in our Florida markets. We have seen what we think is terrific job growth. Certainly not what we saw a year ago, but very good job growth.

We look at the inventory of apartments and inventory of reversions and we think, that product can be absorbed. I'm not telling you we are, in the short term overly optimistic about Florida, but I do believe that over the longer term, Florida has gotten all of the dynamics, and the demographic characteristics that we think will make sense for apartment investment over the long term.

Could I be wrong in '08? Sure. We could be wrong about if it's '08 or '09. But we're 93% plus, leased in most of those Florida markets. We have had positive revenue growth, year to date in those markets, perhaps less than what we had expected, but we're well occupied, we're still seeing traffic. The markets are seeing good job growth. There will be some overhang from reversions, and shadow market condos, as well as single family homes, but we think that market will work itself out. And over the long run, we think Florida will be a great market.

Then on the condo business what -- maybe I missed this in your package, but what is your net, new orders year to date? The new orders less the cancellations?

Well the numbers we have got on there sold -- I mean, it does say year to date, I think, on that schedule so what we have sold --

I'm looking at new orders --

We can get you that number. I don't have that number right now--

I'm just trying to figure out the new orders--

I think we had 79 or so, sold, but not closed units, at the the end quarter. We did 34 sales in July, so I think we're on track for the closings that we expect for the third quarter, and then sales in, you know, obviously August and September, will help dictate how many -- you know, what our closings will be for the end of the year. We are not projecting to hit the ball out of the park on condominium sales, this year, we have increased our guidance by $0.01, but as I mentioned, we have pretty good traffic, and continue to sell pretty well.

Okay. Thanks, David.

You bet.

Your next question comes from John Stewart, with Credit Suisse.

Thank you. David it sounds like you are obviously weighing share repurchases, in your allocation of your marginal investment dollar, but I wanted to just touch on your comment in the press release, that you're revising your investment forecast, due to the pullback in the debt markets, and expectations for what is going to play out there. Is that -- can you comment on what you have seen to date? Or is that just based on what you expect to happen in the second half?

I think it's more the latter. And I'll tell you that -- as I said we closed some deals in July, at very aggressive cap rates, on the sell side. We have got properties in various stages of contract and diligence, that we think will sell, at very decent cap rates, but I will tell you, we have had some people walk from some one-off transactions citing changes in the debt markets. And I think that we haven't seen any real change -- a whole lot of change yet, it's just generally, that when you do see changes in the debt markets like this, the BITAF spreads widen, and you do start to see a little bit of decrease, in the velocity of transactions.

I tell you on the stuff that we are interested in buying, or that we would be buying. We haven't seen any change in cap rates. We still think that there's a pretty agressive institutional bid for that product, and I'm probably less concerned about seeing changes in cap rates there, as much as I might be for the product that we're selling, which is probably being sold to a more leveraged bid. So I think that our acquisition pace, will be slower, because we think stock will represent a better opportunity, and I -- you know, I just look at what could happen on the disposition side, and, history would say, that, that velocity would slow a little bit.

Okay. And it looks like you have got about $285 million remaining on the current authorization. Should we expect that's the limit of your appetite? Or do you expect to go back to the board and increase that authorization?

I would expect if we think it continues to make sense, that we would go back to the Board and increase that authorization, and I would expect to have that happen.

Okay. Can you give us just a bit more color on the land parcel sale, in New York, in the joint venture with Lincoln? Who drove that decision? What was the rational? Where was it?

It was on the upper East Side, and I guess we mutually agreed, that where the land was priced-- I mean, we look at all of our developments, and in much of everything we do here, really starts at, what is it worth today? Not, what did we buy it at? But, what is it worth today? And we looked at what we thought we could sell that product for to a for-sale builder, and compared the yield on an apartment development at that basis, in the land, and just felt that it didn't make sense to take the development risk that the yield -- you know, we were just better off taking the profit, and selling it to a third-party.

And, I tell you we go through that process a lot here. As I mentioned we sold a couple of properties in July with a $380 million total, we sold in July, at a low 4 cap rate. Embedded in that, were some properties we sold, which was, one was late 20--year-old, and another in the 30s, which we thought were some opportunities to create value, but we were going to take some pretty extensive rehab. We did our analysis based upon what we thought we could sell those properties for today, and looked at the rehab, and didn't feel like that return is was going to be good for us. And we just went ahead and just sold the properties to third parties.

Everything starts from, what is it worth today? And is the incremental risk worth it, from that starting point. And we've elected to go ahead and sell. Again, that was a very similar thought process that took place when the sold the land in Tyson's Corner several years ago.

Just one quick one for Donna. With respect to the lower G&A forecast, should we expect to see any one-time severance charges, or how are you going to get -- achieve those savings?

Basically, if you look at the first quarter and you annualize it, you would get somewhere in the 45 to 46 range for the full year, which is sort of at the lower end of the range that we're talking about, $46 million to $49 million. We do tend to have a little bit of volatility in the second half of the year, in terms of G&A spend, but our expectations would be, not a lot of one-time charges and, you would be, definitely at the middle of the range, and hopefully a little bit better.

Great. Thank you.

You bet, John.

Your next question comes from the line of Jonathan Habermann, with Goldman Sachs.

Hi, how are you.

Good morning.

Just a quick question, David, are you seeing any weakness outside of the four markets you referenced? The Florida, DC, Phoenix, Inland Empire? Obviously your reductions in revenue growth expectations, as well as NOI growth.

Gerry Spector here. The answer is, that we're seeing a little bit of slowing in a number of other markets as well. It's not just limited to those four, but we're not seeing a serious decline relative to the identified four markets we're talking about. Atlanta, Dallas, are definitely slowing a little bit, the Carolinas are slowing. Denver is actually moving very aggressively. Seattle is moving aggressively, for the last half of the year we see. Overall, markets are slowing a little bit. New England we're seeing some slowing ,compared to the first six months. It's not a serious slowing, but a slowing compared to what our expectations were.

And is that more of a pricing problem, or where are you seeing the weakness there?

It tends to be a, I think, just a slowing in job growth, a little bit. Just the economy, I think slightly fizzling, in those markets that are just, slowing the momentum a little bit.

Okay. It sounds like you are making good progress now on the asset sales. I'm just curious of the types of buyers that you're seeing for your properties.

We're selling a lot of product, to value-add people. We're selling product, to some institutional players, as well as, well capitalized local people. That problem -- that really probably hasn't changed a whole lot over the last few years.

And David, in terms of incremental asset sales, what do you think in terms of, beyond the existing program?

We continue to have assets that we would like to sell, and continue to have markets, that we have talked about exiting, and we'll just see what the market will allow us -- allow us to do over the next, you know, next few months, but I think we can get to our 1.75 billion for this year, and we'll still have, I think more than a normal run rate of dispositions in 2008, provided the market is there.

I think Mark has a question as well.

Hi, guys, when you look at the acquisition that you made in New York City, what kind of competitive bidders are you seeing on those assets? Are people still willing to pay a 2.7, obviously you guys did --

Again, you got to be careful about the 2.7. I will tell you, we looked at -- and didn't buy, but we looked at a brand new property for $1,200 a square foot that was vacant, well, what is the cap rate on that? You got to really look at these things on a stabilized basis, and look at these things on a total return basis.

We looked at the 2.7 and looked at it on price per pound, and did a lot of work on what we thought would be the ability to convert, those stabilized units, into market rent units, the current rent levels are close enough to the threshold, that when we put some capital into these properties, we'll be able to get them to market rent, and again we think we'll be a 4% plus in the second year, and it will only go up from there.

Is there the potential of a condo conversion in that at some point?

I think there's's potential for condo conversion at a great deal of our portfolio, at the right times, and in the right markets, but I'll tell you at 370 some-odd, thousand dollars a door, the answer would be yes. There would be great value there. But it takes a long time to get there, when you're looking at a property that's got 44% stabilized units.

And one last question, related to the operating expense growth in your DC, and Atlanta, and Orlando markets, can you provide color behind what is driving that?

I think it's primarily -- in Orlando, it's clearly a payroll change that we had in third and fourth quarter last year that drove cost up, that we should see the benefit of that in the second half of the year, and I think that's true in most of those markets, that we'll see the expenses moderating, as we go through the second half of the year. I think a lot of it is based on previous-year change. But the markets that will have, higher than what I call average cost, would definitely be Orlando, Denver, DC. Those will be markets that will probably finish the year, at around 5% level growth.

Okay. Thanks.

You are very welcome.

Your next question comes from Brian [Lig], with Millenium Partners

Thank you. Just going back to the share buybacks and asset sales, where from a tax perspective, how many more assets could you sell, before you run in to issues with taxes, to use those proceeds to buyback shares?

We believe we have flexibility to do about -- it's in the range of $400 million, before we would have -- we would run in to constraints on the ability to 1031 assets. But we continue to monitor that situation. Obviously it changes on a -- on a quarterly basis, and so we do have flexibility for that, which would cause us some difficulty.

Is that 400 million in addition to the assets, that you have under contract? I believe you talked about early in the call, like 500 million of additional assets that you plan to sell?

Yes.

Okay. So you could sell -- your total disposition is -- 1.75 billion, you could sell 400 million more, than that guidance and still be okay?

Approximately, $300 million to $400 million, correct.

Okay. And so what is -- what is the total capacity, to buy back shares today, relative to what you have already purchased? If you $575 million under your line of credit, $300 million in cash, and this incremental $400 million, are those the right numbers to say, if you could buy back everything, you could do that much more in share buy backs going forward?

No. I don't think we're constrained by the capital markets. We have many forms of ability, to tap the capital markets, whether it's the bank market, whether it's Fanny -- or the Fanny markets, they are still out there, they are ready to do business. The unsecured market is a little less attractive right now, but that is not the constraint, that prohibits us to increase, and ramp-up our share repurchase activity.

And that takes me to my last question, and this is on borrowing in the secured market. Can you just talk about what fixed rates you could borrow at today, using maybe Fanny and Freddy, and compare that to, what it was earlier in the year, just to get a sense of how much spreads have widened, and what type of LTDs you could get on that debt?

We didn't -- we're not seeing significant increases in that marketplace, and maybe the LTDs have softened just a little bit, but I would say the big significant change is in the unsecured market, where when we did our $1 billion issuance we're looking at 98 basis points on the 10-year, somewhere around the 80 basis points level on the 5-year issuance. Those spreads have blown out, probably 40 to 50 basis points. Which is why I said that, that probably would not be the market we would tap, to increase our debt capacity to do additional buy back.

What fixed rate could you borrow at using Fanny and Freddy?

It was 6%.

6%. Great. Thank you.

You're very welcome.

Your next question comes from David Harris, with Lehman Brothers.

Good morning. I have a question for you, over the last couple of years, you guys have introduced rent pricing systems in place, and generally put in a time when rents have been either stable, or rising, what is your take in how they are -- what are your results looking like, as we're in a decelerating environment, where you have been somewhat stress tested?

Well, I think that we have had certainly better controls on our renewals, even in a declining market and number of markets, our renewals are holding up pretty well, the street rents are moderating, because of supply.

But I think that the system is reacting appropriately, considering where the changes are occurring, and I think, on the lead time I'm seeing -- left to lease grow, the system is really responding, based on what the traffic trends are. So it's doing its job the way we believe, it was supposed to do. Time will tell the full implementation will finish at the end of last year, so this the first full year, we'll be able to measure the growth on a fully implemented basis on the system, so I think next year will probably be a better guide for us, but I think all of the indications we have now, we're monitoring it very tightly, it looks like it is doing what we want it to do.

If we think about a market which appears to be more under stress than others, you cited Florida, obviously with the condo slow-backs, have you pulled the plug, in any office or have you got manual override?

No, not really. I wouldn't say we pugged the plug. What we have done is we have modified for example, for up-front concessions, we went to net effect of leasing in most of our markets, but we had to respond in some cases in certain markets, to properties competitors, offering one and two month's free rent.

So we had to, manually intervene, and probably bring back a level of concessions, in certain markets, but overall concessions are dawn dramatically. A couple of markets like Orlando for example, and to a great degree in Scottsdale, and Phoenix, we had saw concessions being put in the market, and we had to modify our approach on that.

David a question for you, not with-standing your remarks about no change in cap rates, just as yet, when you are underwriting development trends -- obviously you just bought a couple of land parcels that you referenced as well, have you increased your return expectations?

Well, the things that we have taken down, were deals we had underwritten earlier in the year. And we're looking at our return expectations relative to cap rates, in those markets, and I think those continue to be 100, 150 basis point spread.

I'll tell you we have changed sort of what our rent outlook might be in the immediate future, but again, we're looking at development yields relative to acquisition yields in those markets, and still believe that deletes the deals we elected to execute, were getting the appropriate spreads.

But you are obviously today, looking at taking down land, you are not going to be, looking at stabilizing returns out for a couple of years, 18 months or so--

Correct.

I mean, are you using higher cap rates on your underwriting?

We're going to be looking at that, based upon the activity, if there's any change in the markets, as we go forward. You know, the things that we underwrite, the things we have not committed to today, we'll be very thoughtful about what our expectations are for those markets, and we'll have to be thoughtful about where we think there could be some change, or maybe some change in valuations, and have to underwrite that accordingly.

What is the return expectations on the billion or so that you have got under construction at the moment?

Those are all -- we have yields, generally in there, in the low 6s to low 7s, and un-leveraged IRR in the call it, low 10s.

Thank you, guys.

You are very welcome.

Your next question comes from Rich Anderson with BMO Capital Markets.

Hi. Just a quick one, or two, on buybacks, just so I understand. Donna you said 400 million of additional asset sales, above what you already have planned, so another billion dollars of dispositions planned for '07, you can do $1.4 billion of asset sales, and not have to buy other property with those proceeds? Do I have that right?

Just be clear, we're at 1.75 for acquisitions and dispositions. And I guess what I'm saying is, we can do above the-- about 300 million to 400 million above the 1.75 without triggering issues related to taxable income complexities.

Okay. Maybe I'll talk to you some more about that offline. And the other question is, we just talked about sort of what the cap is, on what you can the from a buyback standpoint. You mentioned the markets out there, are accommodating for you, to be able continue to pursue it. But what about from, and maybe you referred to this, I apologize if you did, what about just leverage capacity? How high are you willing, or can you go, from a leverage standpoint as a company, or can the next authorization be, you know, a million, trillion, gazillion shares.

We believe we have got continued capacity, at the current ratings. Then if we were to go beyond that, there will certainly be some level, that we go beyond, which would have a negative impact on our credit ratings. And so we'll determine whether or not we believe that's the appropriate course of action, when we get to that point. And when we sort of see where the stock is relative to what we think the underlying value of our assets.

But I mean, I think that a multi-family company that's, you know, 35%, 36%, 37% leverages, there's a significant amount of capacity, embedded in the company, the question is how far would one go? And we'll look at that, as each opportunity presents itself, and on a case-by-case basis.

Do you have any idea what the next sort of, bogey leverage level might be if you're at a 36, -- when does it become a conversation?

I think, you know, we sort of look at -- you know, sort of the 50% debt to -- debt to total assets as sort of the -- a range where we start to look at -- and get a little bit more concerned. But right now, we're not seeing any indications from any of the rating agencies, about any of the buyback activity. We had a little bit of a move down, when we did announce the orignal program. At this point, you know, we don't see any kind of expectations that they are going to take any additional actions if we complete the program.

Sounds good. Thanks.

You bet.

Your next question comes from Dustin Pizzo with Banc of America.

Hey, thanks. Good morning, guys.

Good morning, Dustin

David looking at the remaining acquisitions and dispositions, and as you look out in to next year as well, do you think you could see some pressure on the 100 basis point spread, as-- potentially with the moving the debt markets, the cap rates move in the markets, that you are selling, and it sounds like there's no move especially in markets like New York.

Well, sure because we have seen -- in the last couple of years, that was 50 or 60 basis points spread. We've seen it move to 100. So we already have seen that. I think what we are sort of suggesting here, is that we can continue to sell our assets at the cap rates, and at the yields, that the market has allowed us to do up to this point, now that the stock represents a better reinvestment opportunity, than one-off assets.

But certainly, the debt market is going to react the way they have, that's going to have more of an impact on the leveraged bid, which is more of what we're selling, than it would be on the less leveraged bid, which is the assets that we're buying, and the type of capital that we're competing with to buy the assets we would like to be acquiring.

Donna, just quickly, I may have missed it somewhere, can you just clarify what is driving the $16 million increase in interest and other income?

Yeah, sure. Basically, the way we did this was -- when we constructed our guidance, we kept our debt balances, if you recall, they are about $9.3 billion at the end of June 30th.

We assumed that they would remain relatively stable throughout the year, and what we allowed, the excess dispositions that we're expecting in the third quarter, to flow through, is in our 1031 account, and our cash balance accounts, and so as a result, you are not seeing lower interest expense, but as a result you seeing higher investment income until that -- those funds get reinvested. It was just the methodology we chose to employ.

Got it. Thanks.

Your next question comes from Lou Taylor with Deutsche Bank.

Thanks, good morning. David, Gerry, could you just go back to some of those tougher markets for a second in term of Florida, DC, Phoenix, and England empire-- can you give us a little bit more color in terms of which of the markets are you feeling the most pressure from, condos, condo reversions, and which ones from single-family home rentals?

I tell you they all have very similar dynamics. There has been a tremendous amount of condo supply in the Phoenix, and Orlando, and South Florida. South Florida has probably had the biggest impact. We saw that fall off a little bit earlier. Phoenix didn't really fall off until April, and the first three months of Phoenix continued strong. And now we're seeing, you know, certainly, a bigger concern. In Phoenix you have a significant number of single-family homes in the market, probably more so there, than in the other markets, I would say. Washington DC has also moved up, where we have condo reversions, about 12,000 units which is a big number, and about 50% of those units are not yet absorbed, so we're expecting to see in DC, some continued struggling there for a while.

There's also additional, about 6,000 units of additional condos coming out in that market. More so there in Washington DC, than in Florida, and Phoenix. Phoenix, pretty much, a minimal amount of condos left to go on the market. Reversions have already occurred.

That's true in Orlando, there's about an 8 month supply, of reversions in rental units, in the condo market sector there, and certainly, a huge supply of single-family homes in Orlando. We're not seeing that in South Florida. It's primarily all condos. Then you get in to Inland Empire, California, you are seeing -- we saw about 26 condo deals revert there, in that market, and there are about 20,000 home on the market.

They all have, I would say, pretty significant single-family homes supply, that are moving in to a two, or three year time line, and that's really, I think what's the risk of creating a shadow market that we have trouble tracking.

I'm sorry can you say that again. Two to three years of what, homes that have just been trying to be sold, or being rented for two to three years?

I think, for sale. The average time line, might have been, eight months to twelve months, of homes in those markets, and now it's about a two to three year supply. All that tells you, is that as people get more desperate, they will probably be more apt to rent those, as opposed to just sit on them, but the ability to sell those homes on the open market, are getting more difficult, and it will result in further price compression on single-family homes and will probably push a number of those in to the rental market, that's our guess.

Thank you.

(OPERATOR iNSTRUCTIONS). Your next question comes from Alex Goldfarb, with UBS.

Good morning.

Good morning, Alex.

Going back to the share buyback. So if you exhaust the current program, which I think you have like 284 left, if you go beyond that, then it would affect the ratings, or is it--

I can answer that, we have not had any definitive discussions with the rating agencies, with regard to going beyond that. I would not expect significant deterioration. There could be some tweaks down a little bit. But we have not had those conversations, so I would just be guessing at this point.

Okay. Getting to the land on the upper East Side, from what-- reading in the paper, it looks like your basis was about $100 a foot, and it looks like sold at around $400, if we look at a comparable deal at Archstone did there, buying the existing, you know, I think they paid little over 6, 650, something in that neighborhood. Should we take the sale, to mean that likely in Manhattan, you would be more apt to buy existing assets, given that where land values are today, it's just too valuable to a condo guy, relative to what you would build as rental?

I guess the answer to the question is, you got to evaluate what you can buy at, versus what you can develop at, and account for the construction risk, and all of the risk embedded in that development, make sure there's an appropriate spread between the two.

In many markets in which we operate, we're doing both, Alex. In New York, we have not been a developer, not just on the one instance in which we were involved, it made more sense to go ahead and be a seller. So, we'll look at what the relative opportunity is, on the yields to build, versus the yields to buy, and some markets we'll only be doing one, in other markets we might even be doing both.

I can't tell you that there's any specific decision, one way or another, as it relates to what we do in that market it's only what the decision was as it relates to that specific asset.

Okay. At NAREIT I think you made the comment, that if you can't buy in a market, you would develop, but it sounds like obviously, then the economic decision supersedes that.

Yes.

Okay. Then the next question on the upper West Side portfolio, my understanding is it's a sort of older portfolio, probably a lot of deferred maintenance. Do you have an idea of what your CapEx spend will be on that, to upgrade it to something that's more in the caliber, of the quality of your portfolio.

I'm not sure we'll get to this the caliber of the quality of the portfolio that we have at Trump and other assets, that we have acquired there that were much newer. We do have significant capital needs, for this product, and we will be putting in thousands of dollars per door. I don't have-- right here what the absolute amount will be, but clearly there has been some deferred maintenance there, and we will be putting money in there, and some of that money be also enable us to, get the rents above the threshold, that will allow them to go to market rent.

Okay. That's good. And the final question is, did you reference the -- on the first quarter call you talked about $6 million in debt prepay for this year. Is that still in the guidance or has that now been changed?

In terms of debt extinguishment costs, that's -- we are talking about 3 -- approximately 3 -- about $0.03 for both prepayment penalties, as well as amortization of -- write-off of amortization of costs, so somewhere around $0.03. That excludes, the $6.2 million associated with the preferred stock redemption, where we're going to have the Q3 write-off on the amortized issuance costs.

Right, so the $0.03 is spread evenly over Q3 and Q4, or is that in one, or the other quarters.

Basically you had a little bit in Q1. You had the biggest chunk in Q2, which was about $0.02. You have a little bit coming through in Q3, which is maybe a half a penny, and Q4 is pretty much not that significant. So for the full year, we're still around that $0.03 range.

Okay. Thank you very much for your time.

You're welcome, Alex.

And your last question comes from Craig Leupold, with Green Street Advisors.

Good morning. Two questions, I guess. David, on the asset sales in the quarter, the 25 properties sold, where they were predominantly located?

Big portfolio in Houston. We sold -- we sold nine assets in Texas, eight of those were in Houston, and one in Austin. We sold three properties in Illinois, and three properties in Milwaukee. And I tell you the IRR on those trades were about 11.8%.

Okay. And then just in terms of your revenue guidance for the year, and maybe NOI guidance, it strikes me as much lower, than many of your apartment REIT peers -- I shouldn't say much lower, but certainly, on the low end of what your apartment REIT peers are. Which is I guess somewhat surprising, given you guys rolled out a revenue management system last year, you had spent a lot of money in prior years, to sort of, I guess make your portfolios on properties more presentable, you've also had this transition to high bury, or market, is it just the exposure that you guys have to these condo markets, that you think is primarily driving this? Or does it speak to submarket locations or anything else?

I think it's absolutely that. I think if not for those particular markets, Phoenix, and Florida, and Washington DC, where we're seeing that impact a lot differently, we would be faring extremely well, but those things have definitely impacted us more, and longer than we anticipated. Really, it had nothing do with revenue management at all.

Where we have stabilized property in good markets, we're getting very good results, so we're feeling definitely handicapped a bit, by having a 30% of our exposure in those particular markets, and that will create a fairly significant drag, on the overall effort.

How -- expect those markets to maybe be in the second half of the year? And how -- what kinds of, you know, quarter-over-quarter comparisons might we see out of those markets in the second half?

Well, they are certainly going to continue to be less, but I would tell you this, that the Phoenix, and the Florida markets, had sequential negative growth for April, May, June, July. So what you really saw there, as opposed to flat, actually going down, were the-- let's say, we were forecasting, you know, a while ago, early late last year and early this year, the fact that those markets would have positive trends up, but slowing compared to the previous year, but in fact what has happened, is they have gone significantly negative sequentially.

We expect that to turn around, and we're getting strong indications that in August, we -- we are seeing pick-ups in occupancy. I wouldn't call it bottoming yet, but certainly a change is now taking place. So I think if we have any kind of winter recovery, that we would see typically in that Phoenix cycle, or in the Florida cycle, that will help to deter, a decline in the second half. But right now we're anticipating a decline in the second half to continue, not sequentially, but in terms of what our original budget was, and against last year.

So against last year we'll actually see negative revenue and NOI growth in the those markets in third quarter and fourth quarter versus the prior year periods?

The -- in the second half, yes. Orlando actually did go negative. It's the only market we've had at all, that went negative to same-store, in the current -- in July for example. But at the end of the year we still expect that to be positive, because the first half of the year is stronger than the second half. The second half is very much dependent on whether we see a snow bird impact, or not. If we don't see it, then, it may be next year, before we really get these markets in a positive, good form.

Okay. Thanks, Gerry.

Yeah.

There are no further questions. Are there any closing remarks?

Well thank you all for joining us today. We appreciate your time, and if anyone has any further questions, we would be happy to talk with you off line. Have a great day. Thanks.

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