住宅地產 (EQR) 2007 Q4 法說會逐字稿

Good morning. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential fourth quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press star and the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Mr. McKenna, you may begin your conference.

Thanks, Rebecca. Good morning and thank you for joining us to discuss Equity Residential's fourth quarter 2007 results and outlook for 2008. Our featured speakers today are David Neithercut, our President and CEO, and Mark Parrell, our Chief Financial 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 to David.

Thank you, Marty. Good morning, everyone. Thanks for joining us for our conference call today. Mark Parrell and I are pleased to be joined today by Fred Tuomi, our President of Property Management Company, and David Santee, our Executive Vice President of Property Operations, who will participate with Mark and me in the question-and-answer session after Mark and I completed our prepared remarks.

Well, certainly, it is an interesting economic environment that we find ourselves having to navigate today, isn't it? The single family housing continues to collapse across most of the country. Credit markets continue to be seized up. But fortunately, the Fed has acted over the last several weeks to provide the much needed lubricant to get credit flowing again. And we hope they're successful in that endeavor. And expectations are that the economic fixer for 2008 will certainly be extremely weak. Yesterday's service sector report was just one more indication that the economy is certainly struggling. So, of course, we continue to be concerned about the impact. All of this will have on the job growth across the markets that are so important to our business and so important to our ability to maintain occupancy, and so important to our ability to raise our rents.

Meanwhile, our portfolio is 94.5% occupied, and we have a left to lease of 7.8%, which is very good for us at this point in a seasonal context. And by left to lease, I mean, that's the true inventory of available units in our portfolio today. That is comprised of our current vacant units, plus our the notices to vacate, minus those currently vacant and notice unit better lease but have not yet become occupied. That is our true measure of our inventory, and we are very pleased about where we sit today, [February] at 7.8% left to lease. Outside of a few select markets, we are seeing very little new supply and we expect very little new product to get started for the foreseeable future.

The homeownership rate in the country continues to fall, down about 150 basis points over the last several years, and this has brought 1.5 million households back into rental housing. And as opposed to what's expected to decrease another 100 basis points again this year alone. So, obviously, our residents are moving out to buy homes at a significantly reduced rate than our historical averages. And finally, not withstanding the reductions we value to single family homes that we read so much about and nearly every day, it is a simple fact that the premium and the cost to own a home versus the cost to rent is bigger today in nearly all of our markets than it was five years ago. So it is no surprise that we continue to like our business, the markets in which we operate. They delivered for us in '07 and we expect them to deliver for us in '08 and beyond. And now, I will ask Mark to take you through our financial results for the quarter.

Good morning, everyone, and thank you for joining us on today's call. We are pleased to report solid results for the quarter and to share our optimism for a good 2008 despite the stress in the economy that David mentioned. I will summarize some of the important points regarding our FFO results and our same store operating results, describe our capital markets activities in the quarter including share repurchase activity, and review our balance sheet and liquidity. I will also talk about our same store and FFO guidance for 2008. As you saw in our release for the fourth quarter of 2007, Equity Residential's funds from operations were $0.67 per share compared to $0.49 per share in the same period in '06. We have listed the drivers of this $0.18 difference in our release.

As for our quarterly guidance, our operations were overall in line with our expectations for the quarter. Our actual FFO did come in higher than the guidance range we gave you in October. As we said in the release, this difference was due to three factors primarily.

First, our same-store NOI increased slightly more than we had forecast, 6% versus 5.6%. Second, our non-same store NOI came in slightly below our expectations but that was offset by the positive impact that the insurance recoveries and reserve adjustments of about $11.4 million. And finally in the fourth quarter, we had two one time items that were not in our guidance. They were an insurance settlement payment to the company of $4.1 million and income tax refunds of $6.1 million.

Now, I want to describe our same-store operating results. On a same-store quarter-over- quarter basis, revenues increased 3.9%, operating expenses increased just 0.3% and net income increased 6%. On a sequential basis from the third quarter to fourth quarter, same-store revenues increased 0.7%, operating expenses decreased 1.2% and NOI increased 1.8%. Markets with strong employment growth and limited supply led the pack in terms of revenue growth. As in the third quarter, the quarter-over-quarter increase was driven by results in New York, up 6.4%, Seattle, up 8.6%, and San Francisco, up 7.4% with Denver, up 8%, also performing particularly well. This markets account for approximately 28% of our total NOI. In addition to these very strong markets, we had markets that provided solid quarter-over-quarter growth in the 3% to 4.5% range such as Los Angeles, Boston, Atlanta, San Diego, and Orange County.

Finally, we have South Florida and the Orlando markets, which have been impacted the most by single family home and condo supply issues, and the only top markets with negative quarter-over-quarter revenue. Orlando, which is 4.4% of our total NOI, is especially challenged. We have not yet found bottom in this market and believe full year 2008 revenue could decline 2% or more. We are still concerned about South Florida, 6.9% of our NOI, which faces both the rate and occupancy issues, but see signs that that market may be stabilizing. We see primarily a demand reduction, not supply pressure on our properties in South Florida, which are mostly located outside the coastal areas that have been hit hard by condo reversions to the rental pool. Our average price point in this market is $1,300 a month also tends to insulate us from some of the luxury condo and single family home supply pressure.

Our expense growth in the quarter was minimal and in line with our expectations. I also want to point out that, as we said in the press release, the $11.5 million in insurance recoveries and reserve adjustments do not flow through same-store expenses or same-store revenues. The $11.5 million is included though in our total operating income. While our quarterly results also benefited from comparatively high expense growth in the fourth quarter of '06, I note that the company's expense controls have been sound, leading to annual average expense growth of only 3% over the last two years. For the year, expense growth was low due to better expense controls at the property and management company levels, our focus on controlling expenses, and improving operating efficiency especially in the leasing and advertising category, down 6% year-over-year and down $4 million over two years and turnover costs, down 6% year-over-year and down $2.5 million over two years, led to tight expense growth of 2.1% for the year.

Importantly, while we have focused on expense controls, our tenants satisfaction scores the percentage of residents that renew and the rental rate increases that we hope to receive upon renewal are all higher. This is what we hope to achieve when we set out several years ago to modernize and invest in our operating platform. More revenue, less cost, and more loyal customers. Property taxes did grow at an annual rate of 5.6% due to increasingly aggressive reassessments by locality and our changed property mix. Remember, we have more same-store properties in higher tax jurisdiction like New Jersey versus lower tax jurisdiction like Texas. We expect same-store real estate tax expense to grow at about about 4% rate in 2008. Payroll expenses were up 4.7% for 2007 due to higher staffing levels at the properties and increased health care costs. Utility costs were kept in check at 2 .1% because of lower natural gas costs than expected, which was partially offset by inflationary increases in some of our other utility costs and aggressive energy cost management efforts on our part.

I would now like to get to detail on the share repurchase. During the fourth quarter, we spent approximately $90 million to repurchase 2.4 million shares of our stock at an average price of $37.44 per share. For the full year 2007, we spent approximately $1.2 billion to repurchase 27.5 million shares of our stock at an average price of $44.62 per share. In 2008, we have repurchased and retired 100,000 of our common shares at an average price of $35.74 for an aggregate purchase of approximately $3.6 million. Over the last 13 months, we have purchased about 9.5% of our outstanding common stock. We have authorization to repurchase another $472 million under our share repurchase program but I've not included any repurchases in our guidance for 2008.

Now on to the balance sheet. The company had a decrease in debt for the quarter of $18 million and the company's credit ratios remain strong. Also, the company's liquidity position is ample. We have approximately $1.3 billion available on the revolver. The company's rock solid liquidity position is the result of excellent debt planning and execution in 2007. In February, 2007, we upsized and updated our revolver. Increasing capacity by $500 million to $1.5 billion, while decreasing pricing, liberal [item] covenants and importantly, extending the term of the deal to 2012. We did a terrific $1 billion unsecured bond deal in June of 2007 just before the credit markets started to become unhinged and got pricing unattainable on today's unsecured debt market. In the fourth quarter, we closed on the a new $500 million term loan, which in a difficult credit market garnered $1 billion of interest from 30 banks and priced at the same level as the new revolver we did in 2007, February. This loan matures in 2010 or can be extended at our option to 2012. Finally, we obtained a $300 million secured mortgage loan in July of 2007 at an all in rate of 6%.

Our primary cash requirements for 2008 will be development fundings of approximately $250 million and debt maturity of about $550 million. Additional development funding in 2008 of approximately $350 million will come from project level joint venture financing, the vast majority of which is already in place. Although not included in our guidance, we anticipate that any additional share buy backs will be funded primarily with asset sale proceeds. To further enhance our substantial liquidity and be ready for the opportunities that we think way ahead, we expect to close in March on a $500 million, fixed rate, secure debt issuance at a rate of about 5.2% and with an all in rate after the effect of certain swap terminations of about 5.4%. We think that is substantially less than alternative forms of financing. This will be a 10.5 year fixed rate loan with the one year optional floating period. Proceeds will be utilized to prefund the repayment of 2008 debt maturities which primarily consist of secured debt obligations caring substantially higher coupons.. We will carry large cash balances in the middle of the year as the result of the prefunding. Both the added interest expense and interest income are included in our guidance.

We are very pleased with the terms of the financing and the liquidity it will provide the company during these challenging times in the credit markets. Because these funds will be used to repay mostly secured debt, the company will actually have more unencumbered NOI at December 31, 2008 than we did at December 31, 2007. Based on our current projections, we anticipate year end revolver availability, and I stress availability, to be over a billion dollars.

I would like to wrap up my remarks by addressing guidance for the first quarter and full year 2008. In the press release, we provided first quarter FFO guidance of $0.56 to $0.60 per share. For the full year, our expectation is that we will produce FFO of $2.45 to $2.60 per share. In our release, we listed the items driving differences in the respective periods. I just want to take a minute to discuss some of these items and to give you a little color.

We expect same-store revenue to increase 3% to 4% in 2008. We will also have substantial NOI from the lease up in 2008 of 27 non-same-store properties that are either developments or former condo properties. This incremental NOI comes primarily from Washington DC, Northern Virginia, Los Angeles, both downtown and the suburbs, and downtown Boston. We gave same-store expense guidance of 2.5% to 3.25% for 2008. Our largest operating expenses, which as you know, are payroll, property taxes and utilities, are expected to increase in an approximate 4% to 4.5% rate. We expect to meet our 2008 expense guidance range because we anticipate that our other operating expense categories will be flat to marginally down. In sum, 2008 certainly presents challenges but we believe we are poised to deliver solid results. I now will turn the call back over to David.

Thank you very much, Mark. I want to address a little on investment activity first. We continue to be a seller of assets in market place. We sold $173 million of assets in the fourth quarter. And due to the disparity between Main Street asset pricing and our share price, we've essentially shut our acquisition business down, acquiring only two assets in the fourth quarter for $67 million. We do continue to see transactions taking place out there, though limited, and limited number compared to past years. I'll tell you that our guys are underwriting deals, they're keeping their noses in their markets, and it is clear that there continues to be a vast demand for multi family assets, and there continues to be availability of financing for assets in all markets with Freddie and Fannie very much open for business and looking to both once. What does it all mean? Not all that much different from our third quarter call when I said that higher quality assets in better markets have retained much of their value, and lesser quality assets in other markets probably have not.

Direct investors continue to differentiate between asset quality which means that cap rates for high quality assets in better markets have increased maybe 10 to [50] basis points and cap rates on lesser quality assets in desirable markets have probably moved up 50 to 100 basis points. But I want to give you a little bit of color on our disposition activity and how values have held up within our portfolio. In the first quarter of each year, in our March Board meeting, we review our disposition plans for the year with our trustees and at that meeting, we go property by property all the assets we intend to sell and our expected valuations for each one of those assets. So for the year as disclosed in the supplemental information in press release, we sold 73 assets for $1.9 billion. And at $1.9 billion represented a 4% premium to the gross value as provided to our Board last March for those very same assets. So, those 73 assets received 44% greater sales price than what we had told the Board they might when we met last March.

To look at it a little differently, let's look at just those assets we sold in the second half of the year, around the time the financial markets really began to employ. We sold 35 assets in the second half of 2007. Those were sold for 7.6% premium to the gross value presented to the Board. Primarily because we sold assets in Charlotte, North Carolina at numbers significantly above our expectations. But of the 35 assets we sold, only four were sold for less than we had indicated to the Board and that was an average of 4.2% less. So, again, asset values are holding up very well in the multifamily space. Because of the big NAD discount at which our shares have been trading, we have not been aggressively pursuing acquisitions for some time but chosen instead to maintain liquidity, current availability, as Mark noted on our credit facility of $1.3 billion, and we will continue to closely watch the market for opportunities, be they acquisition, be they development or expanded share repurchases. Now that being said, our guidance did include a billion dollars of acquisitions in 2008, and if we do get to that level of acquisitions, it will most likely be in the second half of the year.

A little bit about the condo business which performed just a bit below the low end of expectations for the full year with profits of $14.7 million and that compares to guidance we gave in the third quarter call for the full year of $16 to $18 million. That miss was primarily due to having closed 30 fewer units in the fourth quarter than we had budgeted. That was due to a combination of two things. One, timing, but also slower sales velocity. Timing occurred in Arizona where we closed 11 fewer units than we had budgeted. All of those units are sold, seven closed in January. It is just a timing matter in Arizona but certainly lower sales velocity in both Chicago and Florida. We are happy to say that our profits preclose unit were generally in line with expectations. And as I noted on our last call, profit margins have eroded some from the low 20s to high-teens down to low to mid-teens. But what we are realizing today are in line with these reduced expectations.

We did add one new property with the condo units during the fourth quarter, that being a 67-unit property in Bellevue, Washington. We have been very successful in this market with our BelleArts property which sold out in 13 months at better than expected profit margins and a positive variants towards expected FFO. Fortunately, the greater Seattle condo market was never over supply, never overly impacted by investor buying and as a result, it stayed very steady and we continue to sell unit there at a reasonable velocity with very little competition. So, we are essentially out of Florida and out of Phoenix and going forward our conversion activities will be directed towards completing our last deals in Chicago, continuing activities in Seattle, and continuing approvals for our conversion in California and getting those deals launched.

We gave guidance for the condo business for 2008 from break even to $7.5 million profit, recognizing the high end of that guidance range is half of what we did in 2007, so clearly, we'll be doing less business in 2008 than we did last year and the success of 2008 really depends on three deals not yet launched. So, these are really wild cards for our condominium business. One property in Los Angeles, 104 units, and property in San Jose, 108 units, both of these will be launched in the next few weeks and again the property in Bellevue, Washington, 67 units, which we hope to launch later in the year.

On the development side, in addition to the $1.6 billion of assets currently under construction, we have a development pipeline of opportunities of about $2.5 billion in various stages of planning and diligence. We currently own the land for about half of these projects. The balance is either under contract or letter of intent. I will tell you we are constantly monitoring these development opportunities. Our current expectation is that we will pursue some deals as planned. We are likely to elect to not go forward with construction on some deals. We will consider selling some land sites and we'll also consider bringing in third party equity in a joint venture arrangement. Again, we look at all these development opportunities compared to other investment opportunities including acquisitions and continued share repurchases. Therefore, our current expectations for starts in 2008, approximately $350 to $500 million, down from $573 million which we started in 2007.

We did stabilize three developments in 2007 with 7% average stabilize yield and we did add two new deals to page 23 of the disclosure materials of the first red road commons, which will be build on land purchased from the the University of Miami and located across the street from their campus in Coral Gables, Florida. Development is a key part of their growth plan. Our partners are working directly with the university president, Machen's Office. This is an under supplied submarket relative to the demand created by the students and faculty and the staff of the growing university. So, we're excited about that deal. And we expect that to stabilize somewhere in the low to mid [6%]. We have also started construction with a partner on a property located in Brooklyn MetroTech area, that's an area of 5 million square feet, a very high quality office space, minutes from 11 different subway lines which are one stop out of Manhattan, and we are excited about that deal. We, again, would expect a mid 6% stabilized yield on that transaction.

During the quarter we also acquired several contiguous parcels of land in San Jose for $64 million. This land is fully entitled for as many as a thousand units right in the heart of Silicon Valley. This property is directly adjacent to Cisco's headquarters. A close proximity to the Google, Sony, across from a full interchange on the 237 freeway and within walking distance to the light train system. We have been working on entitlements for this parcel for several years. We believed we've already created a considerable value simply through the endowment process. It is a multiyear build out and a mid six development yield.

I know a lot of people are having questions about land pricing out there, so let me say that we continue to see an increased level of development opportunities as condo projects are cancelled. We are seeing some reductions in land costs primarily from those levels paid by condo developers, yet competition from rental developers has kept land prices high from the income builders perspective. However, with construction financing, extremely, and I do mean extremely hard to come by, I expect to see softening of land pricing in many markets. And then with respect to construction costs, overall costs continued to increase during 2007 but at a lower rate than prior years. Obviously costs are a function of construction time in the market in which we are building. Most of that [inaudible] and even some reductions will be found in wood frame construction and in markets where there has been a significant slow down in construction. But in many markets, high-rise costs continue to increase especially in markets like New York City which continue to experience very strong demand. So, with that, Rebecca, if you'll open the call to questions. Mark and Fred and David and I will be happy to hear from the floor.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Dustin Pizzo.

Good morning, guys.

Good morning, Dustin.

David, I know it was not, at the time, considered to be official guidance but could you maybe walk us through a little bit more detail what has changed since the third quarter where you discussed essential for fourth quarter percent revenue growth?

Clearly, economy has weakened since then, Dustin, and what I indicated at that time is we thought that we could do 4.25%, and I am not telling you 4.25% is off the table but the economy has certainly weakened. And as we look at it today, as we build our budgets from the ground up, looking at what is going on in our markets with expected job growth and new supply and what's going on with respect to occupancy and retention of our existing residents, we think that 3% to 4% is a pretty good revenue growth expectation for next year.

Okay. So then with that in mind what type of macro outlook are you expecting as relates to job growth in '08?

Again, we are not calling the economy from top level. We are looking at it the from a ground level up. Fred and David and their teams start at each individual property and look at the comp set and understand what is going on in each individual market and submarket with respect to new supply and who the major employers are and what their expectations are, and we build it from the grown up. I guess we are looking at the economy as we see it today and based upon that, we are comfortable with out 3% to 4% revenue growth projection.

Okay. And looking at the '08 guidance, the fact that you guys aren't including any share repurchases in there, should we just take that, you know, to mean that you're going to continue to be opportunistic rather than your appetite for repurchases is weaning somewhat?

I think that is a fair characterization and for purposes of your model. It's not going to make a big difference at about, I call it $38 a share and down, just minimally accretive as you go down and above, it's minimally dilutive as you buy stock at that price. So, again, assuming we finance this with the sale of assets at cap rates that are kind of at the 5.75 are just minimal. There is no real impact under '08 numbers.

The stock we acquired in 2007 doesn't came essentially with debt proceeds. And with the economy where it is at today, we think it is prudent to move forward with our line of credit unfunded and to try and acquire more stock back with proceeds from property dispositions. We're going to have to navigate some tax issues as we do that. And we're hopeful that we'll be able to do that because I think the [NAV] of the company is significantly more than where the stock is trading at today and I think in long-term, that will be a great opportunity for us and we will try to do that. We provided none of that as far as the guidance.

And last question. The ramp up in FFO throughout the year to get to the midpoint of the guidance from the first quarter, is that largely dependent on the lease up of the development assets or is there something else driving that?

There is a couple of things going on. You certainly hit it with that. The lease up of the assets is sort of back end loaded. So, the lease up will occur throughout the year and the incremental NOI contribution is more in the third and fourth quarter than it is in the first and second. Also, just the NOI build on itself as you grow quarter-over-quarter. It just builds to the course of the quarter to get to that sort of $0.14 incremental number. Those are the two biggest drivers.

Okay. Thank you.

Thank you, Dustin

Your next question comes from the line of Jonathan Litt.

Hi. This is Craig Meltzer here for Jon.

Hi, Craig.

Question on floating rate debt exposure, after you do this $500 million secure deal in March, I think it will put you at 15% floating rate debt. Is that the level you are comfortable with or do you plan on any other modifications of that during '08?

I would say we are comfortable between 15% and 20%. The rating range gets a bit [twitchy] as you get over 20, so I would suggest to you that that is the range we generally have operated in and that has been in our history. So, when we swap a bunch of stuff to floating, I am not sure but we're comfortable operating within the 15% to 20% floating rate range.

Okay. On the development fund, you mentioned that some you might wait or bring in third party deals or sell land. Is that more driven by just uncertainty in the economy or just from a liquidity standpoint, where do you think your best use of capital is?

I think it is more of the latter, Craig. I think it is difficult to justify construction when you are looking at that relative to our stock price. I'll tell you that I think in a market place today, a new development is going be extremely difficult to get done. And that with what is going on in the demographic picture and with very little new supply, I think people that are able to deliver product in 2010, 2011 will be rewarded handsomely. There are development deals we would like to do. We are challenged to justify that capital commitment when the stock is trading where it is at.

Thank you.

You bet.

Your next question comes from the line of Lou Taylor.

Thanks. Mark, can you expand a little bit in terms of share repurchase program. Just hypothetically, if you did a billion dollars of asset sales given tax constraints, debt covenant constraints, how much of that could be available for share repurchase program?

We can do about - First, let's attack the tax part of that question. We can sell between $400 and $500 million in gross proceeds worth of assets before we will sort of need to manage that with [1031s] or commit ourselves to paying a special dividend. So, that's the beginning of the answer. That is dependent, that little bit of a fair size range is dependent on the margin of those assets so some assets have a lot of tax gain and some have relatively little. That is the beginning point. As it relates to the rating agencies, I certainly think that if we were to buy back with a debt finance structure, you would have ratings pressure. With more of this asset finance structure, I don't see quite as much pressure on the rating, though, as you get up to a billion, we will have to continue the conversations with the agencies. They rate the company. We just run it as best as we can. I do not have any visibility into what exactly they would do. We have not had discussions of that nature with them.

All right. As a follow up, in terms of the financing you referenced in March or that is coming down in March, who is source of that financing?

Sure. That is a Freddie Mac deal. We did bid that out. There was intense interest from both of the GSEs. We did talk to life companies. We even talked to the CMBS World The CMBS Worlds, I could tell you, seems effectively shutdown. The life companies, I think, are trying to get back into business. The GSEs have a terrific source of funding, a great source of liquidity to our business, our supporting asset values and in this case giving us a lot of dry powder. We've bid it out for the two of them, had a great auction and went with Freddie Mac.

Great. Thank you.

Your next question comes from the line of Christine O'Connor.

Good morning. Can you comment on your outlook for the DC market in 2008 and if you are still concerned about the impact of condo reversions here?

Let Fred Tuomi to do that.

This is Fred. DC is going be -- it is still a good, solid market. I am little concerned about it going into 2008 for a couple of reasons. First of all, with respect to the condo reversions, I think those are done. We had a couple ourselves. Those are stabilized. The one in Alexandria leased up quite ramply. We're stabilized there at 94% to 95% occupancy. We had another condo reversion of our own in Centerville, a little bit further out, took a little bit longer but we're stabilized now. The reversions that we track in the market, pretty much the same story across the market there. That is pretty much done. The issue is not reversions but reprogrammed condo deals. And by reprogrammed deals, what I mean, are those under construction, in development, committed to underway that before they come to market, they capitulate and convert to apartment deals straight from the get-go. The reprogrammed deals are adding to an already full pipeline of supply. So my issue with DC coming in to '08 is really a supply issue. So it is going take some time to work through that. I think the next couple years in DC are going be a little bit out of balance in terms of supply and demand. Job growth will be strong, not a stellar as it was but still fairly consistent as it always is and that maybe aided by the change in the politics there. So, DC is a great place to own apartments, slightly disrupted right now because of the single family condo issue, but I think that will be absorbed and we'll do fine there. As evidenced by not only those reversions that we stop but we had a ground up development last year that you may be aware $2400 M in the district and that was one of the most successful lease ups we have had in our entire company history with very few concessions. And there are lots of units right there next to Georgetown and it was a fantastic deal.

What are concessions running in the DC market right now?

Concessions are not really an issue in the DC market. We see a couple of spots on a spot market basis on a lease up maybe in the district or in the Alexandria-Arlington area where we seeing a flurry of new product coming online but not a concessionary market. Typically is not. Most people like us have gone to net effective pricing and our pricing is holding up fairly well. Our renewal increases in DC have been very aggressive. We are getting 6%, 7%, 8% increases on inplace leases, so we feel good pricing power is still there in DC. It is really a supply issue and that's really about it.

Last question. Can you discuss the economics involved with transferring the five properties that were previously going be converted back to the rental pool?

Sure. This is Mark Parrell. We transferred four of the five properties back. The one that was not transfer, Dania Beach has to stay because the company has an intention to sell so that needs to stay. The other four were transferred. What we do is we go and get broker opinion of values and other things to back up the values and transfer those assets back to the reit at that number.

Okay and they are not added back to the same-store pool in 2008? They would be in a non-same store pool?

Correct. They are one, they are four of those 27 assets I referred to in my remarks. That constitute non-same store development lease ups or condo reversion lease up.

Thank you.

Your next question is from Mark Biffert.

Hi, guys. First is I want to talk about some of the market performance. You had big occupancy in Suburban Maryland during the quarter, and then also what's driving the growth in Denver, Raleigh, Dallas and Phoenix and some of the secondary markets?

This is Fred, again. With Suburban Maryland you did see growth in occupancy and income there. You can see for the fourth quarter we are up 8% and finished the full year at 3% and on sequential 5% to 7% So, what is driving Maryland is predominantly the rehabs. In previous quarters, we'vwe told you that we had properties under renovation, rehabilitation kind of repositioning there in Maryland. Those are now coming home to roost. They've been accepted in the market place and when that happens you see a nice pop in occupancy and income following. The Maryland market, we saw a good -- very good leasing in the fourth quarter. Occupancies came up not only on the rehab deals but on the stabilized as well.

What about Denver and Raleigh? Where Denver seems to be an out performing market as well.

I love Denver. Denver is a fantastic market for us. We have a couple of things going on there. First is no supply. It was over supplied coming into the last recession. The develops there learned a lesson which is kind of unusual and a lot of restraint there. In the last few years we've seen virtually no new development of apartments coming in to Denver, just like a thousand units here and there and most those are tax credit deals. Denver has been blessed with very good job growth, a well diversified economy. A lot of good things going on. People want to locate businesses there and at the same time very little supply. Not really subject to a housing bubble situation. So, and also we refined our portfolio. There was some very good strategic eyes and very good opportunistic dispositions here recently. So, Denver is screaming right along and we expect to that to continue. Maybe a little less of a pace next year but still excellent results.

Raleigh is an exit market. We have announced our intentions to exit Raleigh. There's some great assets, great people there in Raleigh. We are doing well there right now. We are 95% to 96% occupied right now. Income growth was 4% this year. Raleigh is doing fine, but it is a low cost of housing market. It is easy to build there, subject to supply shocks and long term did not fit in our portfolio. So, we're exiting that market.

Phoenix is another great story. The worst of times, the best of times. Phoenix was the poster child for the housing bubble. It was one of the first one to really get overextended on condos and single family. It was fueled by subprime buying and a great population and household growth and job growth that was off the charts. We saw single family home pricing in Phoenix probably double in about three years and spread between rental and homeownership widened substantially. Then the wheels came off but for a very short period of time. Phoenix is the first market to implode but did exactly as we expected. It never really went negative and has come roaring back in a good, strong recovery. Even though job growth is decelerating but there is still a lot of people moving there maybe without jobs because they're retirees or just going there for the great lifestyle. Household and population growth are important factors to Phoenix. We have seen this stabilize and really an uptick in Phoenix. We are sitting there in a rate now-to-date at 95% to 96% occupancy and a left to lease in 7% range, extremely healthy and we are getting good rent increases.

There are also condo reversions with the big thing in '07. We've competed with a lot of them including [inaudible] ourselves. Those are all well stabilized right now including the part in North Scottsdale sub markets. And we're doing a really an excellent job, some bullish on Phoenix. It never went negative and we're expecting back to 3% to 3.5% growth for next year.

Okay. And lastly related to the maintenance expense and Capex during the quarter on newly acquired units. I noticed these were up significantly quarter-over-quarter versus the averages. I'm wondering what's driving the increase, were they older assets that you acquire and you had pull money into that?

We did acquire some older assets and also some in Manhattan where we had to indicate a plan to do some significant upgrading there in order to get some rental levels unlocked. So just a function with a mix. A lot of that was a function of a mix of the units that we've acquired, and what our ingoing, inbound capital expectations were. And as it relates to normalized Capex, our Capex spend out sort of stabilized portfolio was very consistent on a year-over-year basis from where was was it in 2006 in [inaudible] or so.

Okay. And the last -- I guess one other one, the land acquisition that you made during the quarter for $64 million, where was that?

That was a San Jose property that I've talked about in my opening remarks.

Okay. Thank you.

Your next question comes from Alex Goldfarb.

Good morning.

Good morning, Alex.

Just quickly, going back to the debt comments, the debt looks to be ticking up from where it closed on the fourth quarter. Can you just walk us through what takes you from that $9.5 billion up to the 9.7 to 10 .1 range.

Sure. As we go through the year, the development fundings that we are going to do plus the joint venture development debt that 600 is basically driving that number. So putting aside development, there would be no change in that debt.

And the $500 million Freddie loan that you're doing, that secured loan, it sounded like it was not a one for one swap for a secured loan. How much is taking out secured and how much is going to end up being additional capital?

During the course of the year, we have approximately $550 million of debt maturities, so the $500 will take out the entire debt load in '08 but we will do it earlier in the year. So, you're going to have cash on the balance sheet for mid March to about mid July.

Okay.

And the various pieces of debt come due and we pay them off in part. Everything is secured debt in 2008, except $130 million of unsecured note that matures in the third quarter.

Okay. Going to the asset sale in the press release, David, you made some good comments about the disconnect between Wall Street and Main Street pricing. And given than you are dialing back you're acquisitions, why not take advantage in the market and do the sales and then, maybe pay like a stock special dividend so you could buy back more stock, reward existing shareholders and really crystallize the arbitrage that exist currently in the market.

Nobody has taken more advantage of the market than we have on the disposition side given than we have sold $6 or $7 billion of assets over the pest three or four years. We will look at what our options are with our continued plan to sell out our 99 core markets and make the appropriate reinvestment decision at the time.

Okay. But as far as the billion -- there was the billion reference and something with the rating agencies. Can you review that?

Sure. This is Mark Parrell. As a relation to the rating agencies, as you decapitalize the company by paying special dividend that puts pressure on the ratings. And I think the ratings that we have that are at the higher level will be pressured more because we are split rated now. But again, these discussions have not occurred with the rating agencies and we do not know their mind set on that but, of course, we'll investigate that before we take any actions

Okay. Final question just relates to the asset sales. Are you seeing any change with the buyers' appetite, the desire for them to buy assets that are already sort of preencumbered, if you will? So, they don't have to worry about financing the assets.

I would say, no. The assets we have been selling have been unencumbered assets. We've not attempt to sell assets subject to existing encumberences.

Okay. Thank you.

Very welcome.

Your next question comes from William [Aikman].

Thank you. Going back to the condos that are coming back into the rate, on page 24, I assume we are talking about the bottom four properties Everett, Los Angeles, San Jose, and Bellevue?

On page 24?

Page 24, yes.

We are talking about the fifth footnote. Yes. Dania Beach, Azure, Alameda, Bella Vista. Yes those assets.

Okay. Those are pretty good locations. I mean, if you were able to lease those up over the course of the year, annualized you could be adding over a cent per share on that. I assume they are all unoccupied right now?

That is not the case. Deals that we have been working on for potential conversion that we have elected to not go forward were generally 50% to 70% or so occupied. In addition to that, we have acquired assets from third parties who had thought about a conversion and decided to not go forward and all the assets had been 50% or so occupied.

Okay. And turning to lease up in the development pipeline, you got the West End in Boston. The lease up at west end looks like less than four leases per week over the quarter and then Redmond Ridge in Washington. Does the lease up at West End, it looks like it's something like less than four leases per week over the quarter and then in Redmond the lease percentage only went from 5% to 8%. That also looks like a kind of low rate of lease up and availability issue, what precisely is going on?

This is Fred Tuomi. First of all in Boston at West End that is one of the best performing lease ups we have seen in a long time. But wouldn't you look up the numbers there, it's the entire project which maybe 300 units. We only had one building so far which is 104 units and that thing is already about 92% leased. That has been well received in that market and we have gotten rents. We are pushing rents up. Our existing properties nearby, never saw a flip. And now we are waiting for the rest of the product to be delivered which will coming here later in this year. Redmond Ridge is a 55 plus seniors community and Bellevue, Washington outside of Seattle and those do typically lease up slower. There's a long sales cycle. They have to come back several times to visit it. They bring the family. It is a bigger decision but it's a product in a community, a master planned community suited for seniors, community single family, medical, retail, etc. Just got the product about two weeks ago where we got the sales center. We've done a lot of preleasing and a lot of community outreach through the network. They're in seniors market and we opened the doors there with the ground running with about 30 units preleased. You will see that one have a nice a pot coming in as we get those people moved in but the lease up velocity will not be as fast as a traditional community which we included in our underwriting from the get-go.

Okay. We are familiar with the slower lease up of those properties. Thank you.

You bet, Bill.

Your next question comes from David Harris.

Good morning. David, I wonder if I could go back to the question of the guide of macro contents. I heard what you say about the built from the bottom up. As the ceo you are signing off on your comfort level would be forecast over the year? What is in your head in terms of the performance of the economy? Are you assuming signing off on these numbers that there is no recession?

We are assuming that we are dealing with the economy as we see it today. And I will tell you that I spent a lot of time with Sam thinking about 2008 and our expectation for 2008. Sam believes very strongly that we will not go into recession and the back half this year will be significantly better than the early part of the year. As we sign off on these numbers, we sign off on the fact that we expect things to weaken, but not be as bad as people think. And based upon what we are seeing on our properties today. And I will tell you one of my biggest concerns right now is the fact that the people on sight are good, hard working people all across the country that run our properties are going to spend more time reading the paper and listening to the radio and seeing the news than they're reading their on dash boards. 'Cause their own insight dashboards have realtime information suggests that things are okay on sight.

Okay. But your forecast in the second half of the year, which a lot of people are assuming a recession and a lot of people are assuming a very, very weak job environment. Sounds like you are taking a rather more optimistic view than perhaps the consensus on the street?

No, I mean, i guess we are looking at the same economic picture today as they are and we are expecting job growth to not be as strong today as we might have 90 or so days ago. But you got other sort of factors that we still believe are going to help us fair reasonably well given that economic fix.

Okay. Mark, there is a point of detail and forgive me if you addressed this and I missed it. Is the payment in the fourth quarter with regard to insurance and taxes, which lines are they in your consolidated statements?

Sir, if you - -

Back up the modeling purposes.

No problem. If you to page 27, the [inaudible] schedule, we sort of parenthetically - - somehow I misplaced page 27. They parenthetically say G&A on it. So for the property insurance reserve adjustments, you see real state taxes and insurance expense. And then you see parenthetically to the right the worker's comp and medical reserve, those run through property management. So, those are all going to run through the operating income item ultimately. But they run through those specific line items on our [inaudible].

Okay. Now, it seems like it was about period for these insurance claims. Is there anything else you are working on with regard to insurance claims or are those mostly now history?

I mean, there is also some level of litigation and discussion on insurance claims but I do not foresee anything substantial and there is nothing in our guidance that relates to that.

Okay. Great. Thanks, guys.

Thank you, David.

Your next question comes from Ryan Watson.

Just top level, housing prices really have yet to crack existing home prices have really yet to crack and new home prices probably have a little ways to go. What is your outlook for how you will fare if housing prices are retreat another 20% to 25% more.

Well, as I noted earlier, there still is across most of our core markets is a very meaningful affordability gap, not withstanding the fact that we have seen home prices reduced so far over the last, 12 or maybe nine months or so. Home affordability gap still exists. In some markets, certainly if we saw another 25% maybe perhaps in Florida that would be far more painful. But in many markets we operate there is not an overhang of single family housing and we would never expect the single family home prices to ever adjust by that much outside of Florida and a handful of marks.

Do you think in most of your markets where there is an issue like in Florida that it is more a demand issue not a supply issue? Do you think that most of your markets, then, are pretty fairly supplied?

This is Fred Tuomi. I'll talk a little about that in --that is exactly the way I call it in South Florida in particular. We had tremendous demand built up over the last few years as people came there to build homes, to sell homes, to finance homes, the real estate industry construction and real estate related had a ton of jobs and demand in South Florida market. Those jobs are pretty much job or will soon be gone but you still end up with positive job growth. Even the downward revisions recently down by the [inaudible], They still have South Florida with positive job growth at or above the national average. Yes there is a short term decline in demand, but there is still a base level of demand that you had before this level that's going to carry South Florida through the day. Also you have a very strong, above national average levels of population and household growth as you have in migration the domestic and foreign. So it is a demand reduction but a stabilizing back to normal run rate and supply is seemingly starting to work through the system. The problems that we have are mostly suburban in South Florida are stabilized. We are running 94% occupancy, 7% left to lease, and pricing has stabilized in South Florida going back to last July. Now we are seeing a couple upticks, some inflection points up. I'm not ready to call it absolute bottom yet. But we feel very good about South Florida at the beginning of working through this correction phase. So, I think you are right on that aspect.

In terms of all the big hype about South Florida and the condos, it is highly concentrated at the high end of the market and one particular area, which is the coast Miami area, Miami beach, [inaudible], [Belle harbor] it is all there. Our portfolio is not there. We had two properties impacted marginally by that. Those two properties by the way are doing extremely well right now. But as you get out into the further reaches of the suburban area where normal people live, those reversions are pretty much stabilized in the low 90s, and the single family competition on the rental side, you still have a significant spread between our two large two bedrooms to three bedrooms to those.

Orlando is a little bit different story. Same picture on the demand side. Orlando had absolutely strong growth. 50,000 to 60,000 jobs down to 22,000 in '07. We expect it to go down the teens in '08 but it is still above national average job growth rate that will help us work through the recovery. But it's going to be more delayed. The issue in Orlando is supply, also. We have significant overhang of single family homes, existing homes that people cannot sell. New homes that are not being sold and to a lesser extent the condo piece there. The reversions that we compete against are in the low to mid 80s right now so we still have ways to go to equilibrium on that piece of it. And the single family piece that we are seeing, definite examples of where people are renting single family homes in Orlando. And by the way, a lot of people asked about that, It is true in Orlando, true in Tampa and true in the Central Valley. It is not true in the other markets. They get a lot to talk about the housing.

And your other major areas are fairly healthy from the supply standpoint like you mentioned, Denver, and Phoenix, I was a little intrigued by those comments. Phoenix, you said is coming back, but Phoenix has been a traditionally -- was very overbuilt. Don't you foresee maybe prices for single family homes dropping further if and that could compete a little bit more?

The single family homes may drop further in Phoenix but remember they ramp up, they almost doubled over before, the bubble deflated there. It is not as affordable in the single family piece in Phoenix as you may recall in prior years. I think the underwriting criteria from the lenders going forward can be a little bit tougher so you're not going to have people buying homes as rapidly in Phoenix. Again, our portfolio there is more insulated. We have great portfolio there, in Scottsdale, North Scottsdale, and little more closely in neighborhood. They are more stable in size, significant ramp up in single family pricing there. The only other market that come out as more problematic as Inland Empire. You've seen rapid deceleration in home prices as Inland empire. Big overhang there. We are not seeing competition directly from rental of homes but we are seeing now people buying homes in Inland empire. That is why you move to Inland empire primarily to own a home. So we have seen just recently an uptick in move outs for home buying in Inland empire. That is the only market that we have seen that out there.

And immigration?

Immigration continues. Inland Empire still has a great population, household machine, job growth machine, but not to the levels we have seen in the past on the job site.

On the cap rate side, what is the base that you were starting from when you gave your reference point at 10 to 15 basis points and 50 to 100 basis points for less than a properties?

It would all depend on the market. So, California markets are still low four handles. And maybe that has drifted up slightly. New York City still have handles in the 3%, 3.5% or so range. Seattle is still low four to mid four cap rate handle on good quality product.

How about Denver and Phoenix?

I would say that Denver is a, mid five handle on good quality product. And phoenix, today, also probably a mid five handle.

Okay. And have you ever broken out the mix of your properties between a, b, and c?

No.

Is that something I can try and triangulate through your supplemental?

I suppose one could try.

Okay. I wonder if you give the relative age of your --

Oh yes -- not in supplemental. We do in the 10-K. I think their ages are listed on assets,

It is not primarily the age, it's more of the rent level. You look at average rents versus age. We have properties in Manhattan that are old but they're very expensive.

True.

That is why I say you can try.

And one final question. Thanks for answering the others. The commitment that you have from Freddie Mac, when exactly is the debt that is maturing due? What month?

It is due in a variety of months spread out basically from July through December. It is in the third and fourth quarter. They are multiple maturities. You have several secured debt pools and one large unsecured note for $130 million. So, it's spread throughout the back of six months of the year.

I would say that in any normal financial environment, we would be planning some debt offerings in the latter part of the year. We might be taking this debt down, these maturities, and putting them on the line of credit and aggregating them and doing some sort of debt offering in the third or fourth quarter, but given the uncertainty out there today and challenges on the credit side, Mark recommended to go ahead and get this done today. At the beginning of the year we knew that Freddie and Fannie would be very anxious, had appetites to book loans. The treasury is rallied. Their spreads stayed tight. We took advantage of the situation and decided to get the money while we could.

Are there any outs that Freddie Mac has, in their commitments, any Mac clause or --

They do not have a Mac clause. It is object to underwriting [inaudible] to specific assets and a general review of title and things of that nature. So there are no substantial outs.

And at this time, you do not foresee any issue of having that deal get done?

Not at all. We have borrowed billions of dollars over the years from both Fannie and Freddie and we have closed every single transaction with them as negotiated and committed upfront.

Long term relationship partners of the company. They are absolutely rock solid and I have complete confident.

Okay. It's just the credit markets [awful] right now? Okay. thank you very much.

Your next question comes from Michael Salinsky

Good morning, guys, with your fourth quarter transactions, can you talk about the buyer behind those kind of what growth they're underwriting and secondly, can you talk about what you're seeing under the institutional private capital front whether the demand has been up, down or where you're seeing that going right now?

I have no idea how our buyers, the buyers of our product have underwritten these assets but we have sold assets in the Carolinas, sold assets in Texas, those have been very strong markets, all seeing decent year-over-year revenue growth and I am sure they expect to see that continue, given how tight those markets are and how little the supply is expected going forward. What was the second question?

The second question is related to the demand from institutional buyers right now?

You know, we still believe that there is demand for core product. We have not been acquiring the types of assets that we've acquired over the last few years but continued to underwrite them and make sure we understand at what prices they are selling. And my conversation with our guys last week about a particular deal, they came in and said there were several offers well above where we would be willing to bid. And we're [inaudible] strong price. So we still believe there is demand like institutional investors for core product as well as product in the non-core markets.

Good. Second question, I think you mentioned $250 to $300 million to start this year. Can you touch on the size of the predevelopment pipeline right now and whether you see ramping activity up over the next six to 12 months?

I guess I would have you back and refer to my opening remarks when we talked about $350 to $500 million of potential starts this year but also said we would likely not start some things we're working on and consider some land sales of entitled properties as well.

Okay. Thanks, guys.

You're welcome.

Your next question comes from Rich Anderson.

Good morning. Just a couple quick ones. Seems like the tag team strategy to replace Gerry has worked out well and congratulations on that. Just to a question to look into inner workings of the larger equity organization. Did you know Gerry was going work for Sam when he resigned?

No. I will tell you -- I knew that the day he walked out the door but I will tell you there was no such discussion and there was no such discussion even of Sam having anything to do with the tribune at the time of the transition plan for Gerry's ultimate retirement and the elevation of both Fred and David and their moving here to Chicago happened. That was something that happened well after the transition plan had been put in place.

I understand. Okay. Thank you. And second question is it always catches my attention when you mention your Capex number of $1,100 per unit because it is so much different than what your peers say. So, I guess my question is when you think of the entire cost to run your portfolio including the expense component, how big is that number? $1,100 plus what? What is the total number?

If you look at page 25 of the supplemental, all that is embedded in there are the established property line up. Different people have different capitalization policies. So, you're right. It is very difficult at times to compare apples and apples but we do lay it out and its entirety on page 25 of our supplemental

I see that there. Thank you.

You're welcome, Rich

Your next question comes from [Heneil Fenduci]

Close enough. David, I wanted to ask you a question on earlier in your comments you laid out your thoughts for this year's acquisitions and you said that most of that would probably come in the second half of this year. Can you characterize your thoughts of the current bid-ask spread out there? If I am interpreting your comment correctly seems to imply that you expect that spread to narrow heading into the second half of the year?

I guess we have given a 125 basis point spread between the assets we expect to sell and those assets we think we might buy. You know, the bid-ask spread on good quality product is not as wide as one might think given the deals that are better that are taking place at very strong prices. I guess what I am suggesting is that our hope is to sell assets and buy stock back. But if the market changes and there are opportunities and we do end up buying properties it would likely be in the second half of the year because we are not working on anything today.

Okay. Thank you. And one minor question more for Mark. You mentioned the difficulty in obtaining construction financing out there. Do Freddie and Fannie provide construction financing?

By charter, they cannot.

They cannot. That is all I have. Thank you, guys.

All right. You are welcome.

Your next question is from Anthony Paolone.

Thanks. Just a follow up on that last point. Will Fannie and Freddie offer up take out financing once developments are stabilized?

Sure. They do a couple of things. Their rule is 90 for 90, so 90% occupied for 90 days before they finance generally. I'm not going to get into all their programs. I am not them. But they have programs that are fairly expensive on a forward basis that they will finance. As the borrower, you take the risk that your deal does not size right. You circle the rate, you circle loan proceeds and if your deal size is up to $25 million and you circle 30, then you're going to pay back that other $5 million with yield maintainance. It was program that has not been all that competitive up to this point in time. Maybe it will become more so.

Switching gears, your New York Metro area performed really well again. In light of lay offs in Wall Street in financial services this year, have you seen any signs of push back on rents, pricing power there anything of that sort?

This is Fred. I will answer that one. The answer is, no, we have not. Frankly, I have expected it, but we have not seen not one resident of ours yet come to the national and say "I am leaving because I lost my job, here's my keys." And our occupancies are still very solid, left to lease exposure is very low. The deals are 96% to 97% occupied, 4% to 4.5% left to lease. We are still rocking and rolling. We saw a little bit of competitive pressure, down in 71 Broadway early this with these two deals leased up. They used concessions for a short period of time. Those are done now. A couple other concessions coming in Manhattan, and some other leased up in Clinton area, but you would expect it's really not an issue. So every unit we have avail at a lease there, we can pretty much get leased. We have a little bit of seasonal slow down due to corporate nurses leaving which is typical of December-January, but we have not seen a slow down in Manhattan yet.

And do I expect one?

Maybe. But it all depends on what you guys do with your own staffing.

Okay. And final question, maybe you mentioned this. I know it's pretty small, but a couple of acquisitions in the quarter, the 6.3% cap rate seemed distant to a little high. Any thoughts or color on that?

Just one of those acquisitions was the 67-unit property we mentioned and we bought in Bellevue for the condominium conversion and the other was a property in Jacksonville, Florida that we were able to buy. We put in a contract earlier in the year and we had to resume some indebtedness and it took a while but it's essentially a plus 6% yield on an asset we thought we bought at a terrific price per door and we're very pleased with that.

Okay. Thank you.

Your next question comes from Richard Paolone

No. It's Rich Paoli. Good morning.

We knew who it was, Paoli.

Hi. It's the second time this week, I am just having fun. Couple follow up questions and a couple new ones. On the Capex question, I was looking at that schedule on page 25. You have what is called established properties. Does that correlate to the same-store NOI? So, if I wanted to look at cash flow, so the real estate cash flow, forget GAAP and what have you. So, we have same store NOI and then I wanted to actually what cash flow and Capex was, can I get there with this or no? It does not look like the unit counts correlate to any of the same-store pools that you have listed.

They do not.

Is there a way to get that? Can we recalibrate this page 25 to do that so it gets the same-store.

We will note that constructive comment.

Just as a point of interest, both colonial and post, I believe, have that data and it is pretty telling when you look at actually same store NOI growth and then adjust for the growth in Capex year-on-year, what happens to post Capex NOI growth.

Maybe, we can talk just for a second globally about the number.

The Capex part is pretty flat and total expense is pretty flat. And there is variability in those bottom two, new acquisition and another that just relate again to David's remark, less purchasing in older assets in New York and having some Capex when you're doing best before you can get the numbers up. I'll tell you that you're right, you cannot triangulate perfectly or get perfectly to it but you can kind of triangulate because your expenses are not much and your Capex was essentially flat at 1,100. But We'll take that into account. Think about that for - -

It would be interesting to look at that. Two other quick questions. Bad debt expense? What is happening with that and I am curious because we are hearing and reading a lot in the papers, credit cards being pulled back and some other type of pressures. Are you seeing anything percolate through your portfolio with respect to people having harder time making everyday payments for rent?

Hey, Rich. It's David Santee. Our bad debt is within historical norms. When we factor in our collection efforts on top of that, money that are paid after move out, we see actually a 23% improvement over our 2006 number. We embarked on a program about two years ago where we instituted instant credit is what we call it. We have been able to increase our security deposit base upwards to 40% over the last two years. We feel very good about what our coverage on the backside. Our credit quality has remained constant. [Cycle] scores still in the range and we see no change there.

Great. Thank you.

You bet, Rich.

Your next question comes from Bill Crow.

Good morning, guys.

Hi, Bill.

Couple of questions. First of all on the left to lease, 7.8% you stated at the current time. How does that compare to a year ago? If you could give me couple of markets that have swung the most in either direction.

This is David again. I would say that pretty much we are on track right where we were last year in the 7% range. I would say historically, it's probably been closer to eight and I think this is where the benefit of the platform and LRO comes in, which gives us tremendous visibility into managing these occupancies and rates within our guardrails.

Okay. The second question was on the land with $400 million of land for development. We have seen the home builders have to write down a lot of land. I am wondering if your auditors are force you to look at the valuations, that you are seeing some downward pressure on land prices. What might we expect to see in that avenue?

There is an important accounting differentiation between builders. Home builders are buying land at inventory and selling it. They need to market, to market constantly. We buy land for investment. The impairments are different. We do go through with our auditors and with our audit committee on quarterly process that's pretty extensive. We go through the entire portfolio but with a lot more intention on the development side. We don't have any visibility or anything at point.

Have you done that this quarter?

Yes, sir.

Okay. Terrific. That's it

By this quarter, you mean the fourth quarter, yes.

Fourth quarter, yes.

Let me just add to that. Mark gave you the accounting definition of that. The actual true economic answer to that question is through the process we've gone through the land we own, the entitlements that we've been able to obtain in our properties. We created that.

Okay.

There's a difference between the true accounting in fact than what we've done. Home builders have been writing off land that they overpaid for that whether that is apple orchard or corn field that [inaudible]. We have been dealing with infill property that we believe has increased in value.

Terrific. Thank you.

You bet, Bill.

(OPERATOR INSTRUCTIONS) You do have a follow up question from Dustin Pizzo.

David, just to make sure I am not comparing apples and oranges, the cap rates that you quoted earlier, are those economic or nominal?

Economic cap rates.

They are economic. What assumptions are you using in there for Capex and --

It all depends on the asset that we are selling or the asset that we're buying.

On the sales.

Yes. On our sales, we are looking at our forward, particularly this time, we are forward 12 numbers and with a replacement Capex level number, it would be very consistent with that asset.

Perfect. Thank you.

You are very welcome.

Your next question comes from Kevin [Kim].

Could you just turn to developments with joint ventures and ere there any guarantee returns or minimum [inaudible] that you have arranged with your partner?

We do have and all different fields are slightly different. But we do have transactions in which we get a preferred return on our invested capital before there's any distribution or any participation with our joint venture partner.

Okay and what's your [right] ownership?

I beg your pardon?

What's your ownership percentage in your joint venture?

Well the pure legal ownership in most of those transaction is 50% or so and in many instances, after preferred returns at growth, they may participate in up to 50% of the up side, but we are certain thresholds and levels one has to clear before they would get to that level.

They are 100% consolidated. We take all of the debt and we take all the asset value at this point.

All right. Thanks.

Your welcome.

There are no questions at this time.

Thank you, Rebecca. Thank you for joining us. We appreciate your time today. We look forward to seeing many of you in Florida in March. Have a great day

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