住宅地產 (EQR) 2008 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the first quarter earnings conference call. (OPERATOR INSTRUCTIONS) Thank you. Mr. McKenna, you may begin your conference.

Thank you. Good morning, and thank you for joining us to discuss Equity Residential's first quarter 2008 results. 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 laws. These forward-looking statements are subject so 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 will turn it over to David.

Thank you, Marty. Good morning, everyone, and thanks for joining us for our first quarter conference call. Mark Parrell and I are joined today by Fred Tuomi, our Property Management President; and David Santee, Executive Vice President for Operations. They'll both be available to help answer any questions you may have at the end of the call.

I will tell you my remarks today will sound very similar to those on our fourth quarter 2007 call which took place in early February because today like in February we're obviously navigating a very interesting economic environment. Depending on who you talk to about the economy, some say it feels like we're even in a depression, some say we're not even in a recession. The facts are that the economy has certainly slowed and slowed considerably, and it doesn't look like that is going to change any time soon. The single-family housing market continues to struggle across most of the country. Credit markets continue to be seized up, and the consumer certainly continues to feel pinched. We continue to be concerned about the impact that all of this is going to have on the job situation in our markets that are so important to our business and so important to our ability to maintain occupancy and our ability to raise rents.

But just like in February today our portfolio is 95% occupied. We have left to lease of 7.7%, and we can tell you that is very, very strong level of left to lease going into our primary leasing season. Outside of a few select markets we're seeing very little new apartment supply being delivered, and we expect very little new product to get started in the foreseeable future. The homeownership rate in the country continues to fall. Our residents are moving out to buy homes at a significantly reduced rate than our historical averages.

We're pleased to be on plan through the first quarter and through April. We expect May to be on plan as well. As it does each and every year, our primary leasing season, that which peaks in June and July, will have much to say about our performance for the full year, but we're confident that we'll meet our original expectations for 2008. With that, Mark will be happy to take you through the financial results for the quarter.

Good morning, everyone, and thank you for joining us on today's conference call. We're pleased to report solid results for the quarter. I will summarize some of the important points regarding our funds from operations results and our same store operating results, describe our capital markets activities in the quarter, and review our balance sheet and liquidity. I will also talk about our same store and FFO guidance for the remainder of the year. Our first quarter of 2008 FFO results were in line with our expectations of $0.59 per share compared to $0.55 per share for the same period in 2007. In our press release we listed the reasons for the $0.04 per share increase in the first quarter of 2008.

I want to provide a little color on those items. Our total NOI was up about $6 million or $0.02 per share despite the fact that we are a net seller of assets in both 2007 and so far in 2008. We had good same store NOI growth of 4.7% or $12.5 million, and excellent NOI growth of about $8 million from the leaseup of development and other non-same store properties. These amounts were partially offset by the dilution created by our 2007 and 2008 transaction activity.

Next let me review what's happening with interest expense. Overall interest expense was up $5.3 million quarter over quarter. There is a bit of complexity in analyzing this variance as interest expense, the share count reduction due to our debt finance share buyback and our lower rate of preferred distributions are all linked. Taking the interest expense line item in isolation, the $5.3 million increase was driven by $16.4 million increase in interest expense in the quarter due to the '07 share buyback, this was offset by lower floating rates of interest in the quarter of a little over $6 million about a $4 million increase in capitalized interest.

To really understand the change in interest expense, you also need to take into account the $0.05 increase in FFO per share due to the reduced share count. When you net the share count reduction against the incremental $16.4 million in interest expense, to finance the 2007 buyback, the result is neutral to FFO. Over the last three years we have redeemed $415 million of our preferred shares. As a result, our new annual run rate for preferred distributions is $14.5 million. Our preferred distributions were down approximately $4 million or about $0.01 per share quarter over quarter. We have not included in our guidance redemption of our $150 million 6.48% series N non-convertible preferred that opens up to par call in June 2008 as we have no current intention of calling this security. We also changed our income statement to add a new line item, income and other taxes and reclassify for comparability our prior quarter's numbers. We added this line item to give fuller disclosure of our more volatile tax expense numbers and to make our G&A line item less subject to noise.

In the first quarter income tax expense increased quarter over quarter by $2.3 million due to a change in the estimate for Texas State taxes. As we exit Texas, this tax will go away. We anticipate that our full year 2008 income tax and other expense line item will be about $5.4 million or an additional $2.5 million for the rest of 2008, finally we have noncomparable items listed on page 23 of the release. I won't go through these amounts, but combined with the income tax item they had a negative $0.02 per share impact on our results. With regards to sequential FFO we have listed the items creating the difference between our first quarter 2008 FFO and our fourth quarter 2007 FFO in the press release. I won't go through them with you now, but we'll be happy to answer questions in the Q&A session.

Now I want to describe our same store operating results. On a same store, quarter over quarter basis revenues were up 3.5%, operating expenses increased 1.6%, and net operating income increased 4.7%. Overall, the primary driver of the revenue growth was a 3.9% increase in average rental rates offset by a slight decline in occupancy. Operating expense growth in the quarter was minimal and in line with our expectations. Our expense control initiatives continued to pay dividends in the quarter resulting in very limited expense growth. Our results also benefited from comparatively high 5.2% quarterly expense growth in the first quarter of 2007. We would expect second quarter expense growth to trend to the high-end of our range and annual expense growth we feel will comfortably be within our range of 2.5 to 3.25%. While utilities expenses were up 8% in the quarter, we expected a 7% increase for the whole of 2008. We saw a reduction, a 13% reduction in our insurance expense and saw payroll come in at about a 2.2% increase.

Our G&A expenses were up in the quarter due primarily to severance costs we incurred as part of our reduction in force. We have spoken before about our commitment to having an operating structure that is appropriate in size to our transformed portfolio. In addition, in the first quarter of last year we reversed most of the litigation accrual as the matter had been concluded with minimal payment by the Company. We remain comfortable with our guidance of 48 million to $50 million for G&A in 2008.

Given the recent slowdown in the economy, and credit pressures on the consumer, we thought it appropriate to update you on bad debt. Our bad debt was 0.7% or 70 basis points of revenue flat from a year ago. It was very much if line with our historical standards. Delinquencies were about 2.4% of rental income in the first quarter which is also very much in historical range and actually down from the first quarter of 2007. As to share repurchases, we were not active repurchasers of our shares during the first quarter and do not have any share repurchases included in our guidance.

I am now very pleased to talk to you about our rock solid balance sheet. We currently have approximately $325 million in cash and approximately $1.4 billion available on our line of credit. In March we announced a new $500 million Wachovia Freddie Mac secured loan. The loan has an 11.5 year term, of which 10.5 years is at a fixed rate and the final year is floating. The all-in effect active interest rate is 5.48%. We were very pleased given the state of the credit markets to add this liquidity to our balance sheet. As a result of the loan, the Company had an increase in debt for the quarter of $355 million. The $500 million increase in secured debt from this loan was offset by a decrease in unsecured debt resulting from the paydown of outstanding $139 million on the line of credit. Our current liquidity is sufficient to retire all of the Company's 2008 loan maturities as they come due.

I want to take a moment to comment on liquidity in the marketplace. Both Freddie and Fannie continue to be active and eager lenders. While the GSE's spreads have gradually widened since we closed our loan in March, they have recently come back in to probably around 2.15% over the ten-year Treasury for a borrower like us it would be more like 2%. We have recently spent time with the senior management of Fannie Mae and Freddie Mac and understand they have seen no material defaults in their enormous books of multi-family loans, and that they continue to see the sector as a profitable and affordable goal's friendly place to do business. In addition, the unsecured bond market has shown signs of life as two recent bond deals were well received and are trading tighter than their original issuance spreads. Based on current projections and assuming $1 billion each of acquisitions and dispositions for the year and $300 million of development fundings from the line of credit, we anticipate line availability of a $1 billion at December 31, 2008. The Company has approximately $900 million in debt maturing in 2009, and we intend to be proactive in addressing these maturities.

I would like to wrap up my remarks by addressing guidance for the second quarter of 2008. In the press release we provided second quarter 2008 FFO guidance of $0.61 to $0.65 per share. The difference between the Company's actual first quarter 2008 FFO of $0.59 per share and the midpoint of the second quarter 2008 guidance range is primarily a result of higher NOI from the same store properties as well as continuing positive impact from the leaseup of development and other non-same store properties. All of this will be partially offset by some transaction dilution in the second quarter of 2008.

We have left our full year guidance unchanged and it continues to be our expectation that we will produce FFO of 2.45 to $2.60 per share. On page 24 of our release we have listed the assumptions driving this guidance which are unchanged from those listed in our fourth quarter 2007 press release. As we said in our fourth quarter press release, we expect higher same store NOI to have a positive impact this year of between 30 million to $50 million. We expect the leaseups of both development and other non-same store properties to have a positive impact of 25 million to $30 million. These leaseups contributed more than we expected in Q1 but much of the activity here will occur later in the year.

This incremental NOI comes primarily from Washington, D.C. and 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 an approximate 4 to 4.5% rate. We expect to meet our 2008 guidance range because we anticipate that our other operating expense categories will be flat to marginally down. Overall we feel good about the trends in our business and operating expenses G&A, bad debt and delinquencies, and are working hard to produce good operating results in 2008. We have a strong balance sheet and ample liquidity to weather the uncertainties in the credit markets markets and to take advantage of any compelling opportunities that may present themselves. I will now turn the call back over to David.

Thank you very much, Mark. I will start talking a little about transaction activity which has continued to slow across our core markets. It is down even further from what was a pretty low level in the second half of 2007. There are actually more deals being offered today than in the recent past. Our acquisition guys will tell you they're seeing more product, but actual closings are down, but deals are certainly getting done. As Mark said, Freddie and Fannie are very much open for business. They're looking to book loans, and in fact they're financing most everything that we're selling today.

Bid ask spreads have certainly widened, and this has led to a reduction in sales very velocity. Deals are being pulled by sellers when their pricing expectations are not being met. Cap rates have certainly increased. For high quality assets in the better markets they've increased maybe 10 to 50 basis points, and cap rates on lesser quality assets and less desirable markets have probably moved up 50 to 100 basis points. Due to increasing NOIs and extremely reduced deal volume, it is difficult to determine exactly how much rising cap rates have actually impacted absolute prices. We do have some interesting intel from what's going on in our own portfolio and our own dispositions.

Consistent with what we've told you over the last several calls, we continue to be a seller of assets as we continue to execute our strategy of moving out of slower growth in non-core markets and non-core assets. In the first quarter 2008 we sold 15 properties for $272 million, and those were done at a weighted average cap rate of 5.8%. The average age of the assets we sold were 23 years old. We had some concentrations of those sales, four deals in Raleigh, four in Portland, Maine, two in Atlanta, and two in Dallas Forth Worth and then some one-off deals, and the total sales price for these assets, 4% more than how we valued them in March of 2007. On average were cap rates up on these sales year-over-year, yes, they were, but absolute values increased on average due to increasing bottom lines.

On the acquisition front we remained relatively inactive. We're still challenged to acquire core assets at current pricing when share prices are trading at such significant discounts of the NAVs these prices would imply. In the quarter we acquired one rental income asset, and we did that. We traded out of a property in Albuquerque for one in Phoenix, and that was done in a partnership in which our ownership interest is less than 50%, and we were contractually obligated to do a trade on that. We also acquired a property in Beverly Hills, California, and are working on converting this asset to condominiums. These are all two bedroom units averaging 1500 square feet per unit so great size for a conversion, the purchase price on this deal was $478 a square foot, so almost $700,000 a door. I know that sounds expensive and like all the other markets in which we've done conversions this asset will be the lowest priced single family housing in the marketplace and really does represent entry level housing in Beverly Hills as incredible as that may seem.

As I noted earlier, we continue to execute or strategy in sell some of older assets and exit a few remaining non-core markets, and we've identified about $2 billion of assets that we'd still like to sell. Sometime this summer if all goes according to plan, we will have sold around $500 million of assets, and that will bring to us a point where one of three courses of action will need to be taken. The first is just stop selling. The second is to start buying, in which we do 1031 trades and begin to reacquire markets and assets in our core markets where we do want to continue to grow and continue to leverage our platform, or we'll have to continue selling assets with the understanding this would likely require a special dividend at some point. Now, far too early to get into more detail on this because it is subject to way too many variables. The first variable frankly being we don't have to sell any of these assets and we're only going to continue to do so if we can realize pricing that makes sense for us.

Onto the condo business, which was budgeted to operate at a loss of slightly more than $1.2 million for the quarter. The forecast was driven primarily due to an expectation of closing just 47 units for the quarter and in fact we only closed 41. Those fewer sales and other operating costs that came in higher than projected contributed to a loss for the quarter of $1.6 million. You'll note on the earnings release that we have not changed our original 2008 guidance for our condo business net of overhead of break even to $7.5 million. I do want to note that the 2008 success is dependent on closing units at three assets, two of which are currently taking contracts but have not yet begun to actually close units The first is Cleo, which is our property in Los Angeles at 104 units, and the second being Verde, our property in San Jose of 108 units. We have one property that's not yet begun taking contracts, and that's the Martine property in Bellevue, Washington, totaling 67 units.

While traffic has remained reasonably strong, I will tell you sales have slowed at nearly every one of our condominium conversion assets. It is very possible that we could have an operating loss for the year in this business, and we'll be able to provide a little better clarity on the conversion business prospects for the full year on our second quarter call in late July. This business is certainly been tough lately, and we expect it to continue to be tough in the near term. We have definitely taken steps to dramatically reduce cost in the business and we'll continue to monitor it very closely. That said, we continue to believe the conversion business is good long-term prospects for us.

Along with acquisitions the development business continues to be a very important way for us to allocate capital as we move into higher barrier markets in search of total returns. In addition to the 1.7 billion of assets currently under construction, we have a pipeline of development opportunities of approximately 2.2 billion all in various stages of planning and diligence. We currently own the land for about half of those projects. The balance of that land is either under contract or letter of intent. We're still looking at 2008 starts in the 350 million $500 million range, but I want to make it very clear we're mindful of the importance of liquidity in this uncertain time, and that will be a major consideration as we look at new starts going forward.

We have started one new deal so far this year. That was our Westgate property in Pasadena, California, that's being done in a joint venture with Terris Regis with whom we have had numerous, very highly successful development projects, was originally projected as a fourth quarter start that slipped into the first quarter of '08, and as noted in the release, it is financed primarily with tax exempt bonds which have a current rate of about 3.5%. That deal today is expected to provide an unleveraged stabilized yield in the high fives. I would be surprised if we didn't exceed that. And a higher than 20% leveraged IRR thanks in part to the tax exempt bonds.

In closing, just a few brief comments on development costs which I know a lot of people have questions about. Bank financing for construction is extremely difficult to come by today. As a result we've seen an increased level of development opportunities, not just from canceled condo projects but also from income developer that is are having difficulty getting financing for their deals. As a result, we're beginning to see some reductions in land pricing, but there seems to be sufficient competition from other rental developers who either have or believe they'll have access to capital to keep any reduction in land pricing from being anything but modest, at least at the present time.

With respect to construction costs, overall costs increased during 2007 but at a far slower rated than prior years. Thus far in 2008 we've seen the rate of increase in construction costs continuing to ease and perhaps even modestly reducing year-over-year in some markets. The costs are very much a function of construction type and much of the easing and certainly of the reductions would be found in wood frame construction. We are also seeing reduction in labor costs for other trades as well, but commodity prices are up, concrete, steel, oil, and certainly the delivery costs. Overall our feeling is that cost for the year will range from down a few percentage points to up a few percentage points depending on your market and construction type. The implication of all of that is while we're underwriting higher required returns in our development deals, we're not getting enough assistance in achieving these returns from modest reductions in land and construction costs to make deals really pencil today. With that, we'll be happy to hope the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Lou Taylor of Deutsche Bank.

Thanks. Good morning, guys.

Good morning, Lou.

Mark or David, can you talk just a little bit about the labor cost savings in terms of head count reduction? Is it coming from efficiencies, is it coming from just you have fewer regions as the portfolio gets concentrated, just what are the drivers there?

Lou, it is more the latter, as the Company gets more concentrated in fewer markets, the need here in Chicago and in the field for the level of G&A we had when we had say 200,000 units and 1100 properties just less, so it is really the right sizing of the whole portfolio.

Okay. Second question for David, in terms of the dispositions you made so far this year, what's the buyer profile?

It is an interesting question, Lou, and I have asked that question of our disposition team as we've gone throughout the quarter, and I guess they described it as the reemergence of the regional player, that player who had sort of been squeezed out by larger people that have come in and bought assets for value-add plays, that have just did their business has slowed considerably and allowed the regional guy, and I will say that is someone who might own 2,000 or 4,000 or 6,000 units to step up, they might have access to family capital, maybe some institutional capital, and by using Freddie and Fannie they're able to close on deals.

Okay. Last question, just is the slowing economy, is it doing much to your traffic levels?

Actually, we've seen minimal change in our walk-in traffic. That's our definition. Actually, it is much less than we expected. Last year we completed a major -- we call it a marketing efficiency exercise, and we were really looking for about a 10% drop in walk-in traffic this year, but what we've seen is actually an increase in our (inaudible) that show up directly in the properties operating system, and those have increased 10% over the same quarter last year, so we're very excited about the continued activity and interest in the community.

Great. Thank you.

Your next question comes from the line of Michael Bilerman from Citigroup.

Good morning, Craig Melcher is on the line with me as well. David, you talked a little about your portfolio valuation March of last year and talked about cap rates assets going up 10 to 50 basis points and more the tertiary secondary going up 50 to 100. As you went through your portfolio review process this past March, what came out of that?

What came out of it was an average very little change. I will tell you we certainly did have market and assets in which values decreased, but we had assets in markets in which values increased, and again that's based upon activity we were seeing in the market at the present time, and so it was very little change in the absolute valuation of the portfolio.

That was probably increasing cap rate but the increase in NOI sort of offset it?

Yes. We're looking at just what our prices per unit, prices per door as well as and making sure on an absolute value paces we felt the portfolio valuation had changed very little.

Can you talk a little bit about you mentioned in your opening comments that the bid spread had widened and that sellers were pulling back, and you haven't bought really anything. When you're sort of going out there in the market, where is your spread to where you think the right value is to buy relative to where someone is willing to sell?

Well, again, that's a property by property submarket by submarket sort of question, but I will tell you we have remained very active in the market in looking at opportunities, in underwriting opportunities. Our guys are in the field regularly walking properties and underwriting transactions, and we do come up with values that we think we might be willing to pay, and I will just tell you they often get done at prices that are well in excess of where we would be willing to pay today.

And can you talk about the New York performance recently and the sequential results are a little soft, with occupancy down 180 basis points, but what's going on there and if you could comment on how it is done since quarter end as well?

Sure. Fred here. New York remains rock solid in terms of demand and occupancy. I know that may shock some of us out there, but we had a very good quarter in the Manhattan area. The problem with the sequential is really on the Jersey side of the equation. We had 1,000 units come into the market, highly concentrated, very aggressive leaseups that discounted to a great extent, and it disrupted the Jersey market for most of the first quarter. It is pretty much all there on the Jersey side and not Manhattan side. Manhattan we had a little reduction in occupancy only due to national rotation of nurses and corporate clients, but those deals have all come back quite strongly, and in terms of the New York versus Manhattan we were up 7.3% Manhattan and only 3.7 on income for the quarter as you can see the difference, so really it was a short-term issue in New Jersey and Manhattan continues to do fine and Jersey is recovering.

On the '09 (inaudible) how aggressive do you plan to be and what route would you go? Would you go the route of more Fannie and Freddie debt or would you look to do a non (inaudible) offering?

Craig, we're having a little trouble hearing you. You're breaking up a bit. Would you repeat the question?

How aggressive do you plan on being for the '09 debt maturities and what route would you look to go, whether it be the GSE route or unsecured debt?

At this point what I would say is as conditions evolve, spreads have come in on the unsecured side quite sharply, spreads have come out a bit on the Freddie/Fannie side, so I am just going to let that evolve over time and make that decision a little later. It is easier on the investment side of the house to do unsecured debt than it is to do secured, so we do have a prejudice towards that or a bias, but we're going to look at both of those, and I don't want to commit either way at this point.

Thank you.

You bet.

Your next question comes from the line of Dustin Pizzo of Banc of America Securities.

Thank you. Good morning, guys. Just to follow-up on Michael's question first on the transaction market and the spread, how confident are you guys given the volume of the deals that you've completed during the first quarter that you can reach that $1 billion target on both sides of the equation and I guess more importantly on the acquisition side given the volume there?

I guess I can't see out that far, Dustin, but I can tell you we've got product in the marketplace and are having conversations with perspective buyers, and we certainly think that we can get to that 500 level, so the product we're working on today we believe they are serious enough and quality enough bids for what we're trying to sell. As you get into late second quarter, third quarter, I am assuming that we'll be able to continue as we have in the first half of the year, but things have been pretty volatile, and I would be hard pressed to goal you I have got absolute visibility to later in the year. As it relates to the acquisition side, as I noted, if we are able to sell what we want to sell in 2Q, then we'll have to either start buying or start thinking about doing some other things, and again we'll let the market decide at that time whether or not we want to continue to sell and whether or not we want to start buying or whether or not we'll start thinking about a essential dividend.

I guess related to that, I am sure you chat with Sam quite a bit and from recent comments he made in various public forums on the prospects for the U.S. real estate market, how does that influence your decisions that you make when trying to figure out how you will allocate capital and maybe if you can just talk a bit about how you view the various opportunities that are currently in the marketplace on the various sides of the capital structure?

Well, I could go on for awhile on that. Certainly, Sam, we have a lot of influence here and we spent a lot of time talking about what's going on, but Sam is thinking much longer term in a lot of his comments. When he talks about we're not in a recession, the economy is in much better shape than people think, I think he is not suggesting that it is not soft now, he's not suggesting it is not weak now, it's just not as bad as people think and he believes that it will recover much more quickly than many people think. I share with Sam what we see going on in the ground day-to-day, and I welcome every opportunity I have, his views on longer term, and we put those two things together and try and act accordingly.

And then just lastly, as we think about your same store NOI guidance, assuming the revenue growth stays fairly constant around the 3.5% range or even moves a bit higher, is it simply just the more difficult expense comps that potentially bring you down towards the midpoint of that range?

We think -- our guidance assumes that we get to the midpoint of the rev number and the expense number essentially. By doing that math we get into the middle of our FFO range. We don't assume that expenses get substantially worse. We do have comparable as I mentioned in my remarks, the second quarter as a comparison for the second quarter, as a comparison for the second quarter of '07 we'll have quarter over quarter higher expenses. That's not uncommon.

Thank you.

Does that help.

Yes.

Next question comes from the line of Steve Swett from KBW.

Thanks. David, just a little bit of a follow-up on the comment about continuing selling and then the choices you have. Would it be fair to assume that if cap rates sort of remain where they are today without changing towards the upside, that you're just not intrigued with pricing today to increase your acquisitions?

I guess it is a function of stock price, it's a function of capital markets, it is a -- there are a lot of things beyond cap rates and absolute value that we will consider as we go forward, Steve.

Okay. All right. That's fair. Just I guess kind of a related question, you obviously were very active repurchasing your shares last year, not active as much this year. Is that due to the price, is it due to just wait and see how some of these other things shake out as well?

I think it has more to do with anything of a desire to retain liquidity in a very uncertain time.

Last question, a couple of your developments seem to be slower in the leasing pace. I think one of them got pushed back in its delivery. Does that make you a little bit more cautious on the starts that you expect for this year?

No. I will tell you that in general leasing on a lot of the development deals is behind what we might have underwritten when we underwrote these deals in '04 or '05, certainly it is not the same market that they're being delivered into today as it was when we underwrote them. The deals that are sort of slower leaseup are both age restricted deals and we certainly did expect those to take slower leaseups, but we've had a very good April across most of the portfolio, and I will tell you notwithstanding perhaps not performing as well as what we might have underwritten several years ago as Mark noted we're on plan for the way we underwrote those in 2008.

Thanks a lot.

You bet.

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

Good morning.

Good morning.

David, you mentioned the future pipeline of $2.2 billion you're just following up on the development theme. You talked about starts of sort of 350 to 500 this year.

Right.

Do you see that pace continuing into 2009 and as well can you remind us of your capital commitment for the funding starts this year?

Well, for starts this year I think we funded all of our absolute commitments before this year, is that right, Mark?

Right.

We're going to spend just to be clear, we'll spend $600 million this year we expect on development, 300 coming off the line of credit which as you know is committed, and 300 JV development loans and all of those loans are done and committed as well, so we are fully funded on the development side, and the total spend is 600 of which 540 is yet to go in the second, third and fourth quarters. That's spends, not starts.

Just from a starts standpoint, we have started the one deal in Pasadena, California, and there are several others that we could start this year, and we'll take a long look at those and what the opportunities are and where construction costs are and if we believe it is appropriate, appropriate to go.

Okay. And second question, you mentioned land prices obviously coming down. Can you speak to which markets you're beginning to see that trend and are you seeing it more in the lower barrier entry markets or higher barrier entry markets.

We're not really looking much at land in the lower barrier markets, so it would be in most of the higher barrier markets. You're seeing land come down, but I will tell you they're coming down from prices that were awfully high and prices that didn't make sense for apartment construction in the first place and frankly I am not so sure many instances even if they come down 5% or so they still don't make sense for apartment construction.

Okay. Just one other point. In terms of Freddie and Fannie, I guess in terms of seeing increasing debt service coverage, are you seeing them pull back in terms of deploying capital? No, but they have made their underwriting requirements more rigorous. They're still interested in lending. It is just on these more cautious terms.

You said spreads have actually come in a bit.

They have, and I think it covers David's remarks very well, very consistent with that. They were underwriting, we understand, this information isn't that direct, but misunderstanding they had a lot of deals they were underwriting but frankly not every deal was closing, and I think they over estimated their close ratio and now are trying to make up for volume a little bit by adjusting price a bit.

Great. Thanks.

Your next question comes from the line of Alex Goldfarb of UBS.

Good morning.

Good morning.

Just going to the general trends across your markets, just some occupancy slippage, just want to get a better sense of what you're seeing across demand for studios ones, twos, and also how you think LRO will react to some of the decrease in occupancy?

This is David. Starting probably mid last year we really took an aggressive posture utilizing LRO to drive rates, and we really took a bias more towards rate, and that's why you see a little bit of softness in the occupancy in the first quarter. Also remember that as we drive renewals, the rates that we send renewing residents we're working probably 90 days in advance, so renewals that we're putting out in November, December, January, we were 90 days in front of that when all of the turmoil hit, so we still will take an aggressive stance. We don't see any deterioration in traffic. Activity looks good. Our occupancy is very strong today, as we enter the leasing season, and we really don't see any material change in the basic fundamentals of what we do every day.

Then as far as the studios ones and twos?

There is no -- we see no difference in the ones and twos. We did see a little softness in the three bedrooms in the Orlando market.

Okay. And in New York on the studios?

New York studios always fly off the shelf. Any one we have available whether vacant or on notice is committed.

Going to the unsecured debt, it seems like a few of your peers have gotten into buying some of it back. Sounds like you guys are thinking maybe it is time to start issuing again. Can you give us your thoughts on buying back your unsecured debt?

It is a great question. We thought about that. The issue is that the debt presented to us for purchase, first of all, there isn't much of it because most of it wasn't trading when it was trading very wide was really way out there. It was 2015, 2016 maturities, and it was also at a pretty low rate as an absolute matter, so in the middle 5s to lower 5s. The idea on our end of essentially moving our maturities forward and funding on our line things that we termed out to 2015 and 2016 they just didn't make a lot of sense to us. Also again I would have bought, I think, if we could have gotten some stuff in 2009 and 2010, but to buy the stuff later dated just from our point of view wasn't enough of a discounted involved and wasn't enough volume involved for us to do that, and I am not going to suggest that we're going to issue debt any time soon in a secured or unsecured market. That's just something to be very mindful of in this credit climate. We're not going to wait and accumulate maturities as we usually do.

Thank you.

You're welcome.

Your next question comes from the line of David Harris of Lehman Brothers.

Good morning.

Good morning, David.

What are you looking at today if you're looking at development projects by way of return? Has it changed very much in the last three, six months?

Sure. We certainly widened our expectations. A lot of the product that we started maybe in last year might have been low six kind of yields, and I am sure we haven't taken any land down recently, but we certainly would be more high six and maybe even 7% on products today.

Okay. The $2 billion of potential property sales that you talked about? I wonder if you could elaborate a little bit more on that in the sense that would that embrace potentially exiting more markets or are we talking about fitting on markets where we should still maintain a presence?

It is both, David. It is completing market exits as well as doing some pruning of older assets in some of the markets in which we intend to have a presence for quite some time.

Would you just remind me, I know this is a sort of a long-term question that sort of we go back to every once in awhile. You were 45 markets or whatever. Are we on track to get to 30? Am I remembering the numbers broadly correctly?

It all depends on how one defines market. We talk about even close to 15 or so markets. Again, it depends whether you consider Southern California four markets or one market. Being the primary major metropolitan areas on the Coasts and in Florida and Atlanta and Phoenix.

Where are we today, just remind me.

The percentage?

In terms of the market here, 15 ultimately is the goal--?

20 markets I'd say we're in today and on our way to 15.

Finally, Mark, for you, what's the annual overhead related to the condo business?

It is about $3.2 million is what we budgeted for that for 2008.

Thanks, guys.

Your next question comes from the line of Michael Salinsky of RBC Capital Market.

David, can you talk to -- you had a very large sequential increase in occupancy in southeast Florida, Jacksonville, just given what we're hearing from the condo and single-family markets now, can you talk about what you're seeing specifically in the markets and what was the big driver there?

This is Fred Tuomi. I will take that one. First of all in south Florida, I continue to love south Florida. In the face of all of those condos coming in our portfolio there is running 94.5 occupied right now, and we've had sequential growth in rent of 0.2, and you can see that we have for the quarter up 1.5, so we actually are seeing upticks in rate and occupancy and revenue in south Florida. Not saying it is going to continue, but the space that we're in right now we've had very stable and now upticking slightly upticking performance in south Florida. There is a big cloud of overhang as everybody knows, all of those condos in remains to be seen how it will be reconciled but our suburban portfolio in portfolio, the Garden Suburban product has not been severely dislocated over the last year or so. We saw a slight uptick here in the last few weeks things aren't as rosy. Orlando is still down and kind of bouncing along the bottom. We saw slight uptick here in the last few weeks, but I would say it is stable at a low level, and again then we have high delinquencies in terms of mortgages at 5.2%, the single-family inventory is vacant and that may get worse, but again Orlando is stable and very recently could uptick and we're 94.5 occupied, 8% left to lease right now there. Tampa is running stable, and Jacksonville was running very stable until recently, and we're seeing a decline in Jacksonville due to foreclosures and troop rotations and softening of demand there.

Outside of those markets were there any markets that surprised you either to the upside or downside relative to expectations for the year?

I would say on the outside Manhattan continues to perform rock solid. Not as hot as it was last year, but it's doing extremely well, Seattle/San Francisco, all surprising upside, very strong, very stable, and fundamentals growing instead of flattening, and on the downside I would say Orange County would be the one that I would be surprised on the downside during first quarter, typically Orange County starts off slow. You have some corporate rotation out of there. The subprime demand from the jobs, and that caused the occupancy and rates to flatten out, saw concessions coming to market in Orange County Q1. Nice thing is it has come out of it as we enter Q2 Orange County is recovering nicely. Occupancy is up, demand is returning, and the other one is inland empire that kind of surprises me. I guess on the upside really. Inland empire is a huge single-family issue to be reconciled, but right now we're in this limbo state. People are not flying out of apartments to buy homes, and on the contrary some of the foreclosures are coming into rent apartments, and we have very stable occupancy and rent growth in inland empire. I guess that would be my list of everything else is going right on plan, and we're satisfied.

Very helpful. Final question, your weighted average interest rate during the quarter came down partially due to LIBOR. Just curious, you didn't adjust your interest cost expectations for the full year?

That's a good question. Interest cost expectations also depend on what we sell, and prepayment penalties and other things, so as we get into that second quarter, you can expect to us adjust that number more substantially, but again until he we know our investment horizon, sale and disposition and pace is and other things for sure, it just didn't make sense to try and just slightly fine tune that number.

Thanks, guys.

Your next question comes from the line of David Cohen of Morgan Stanley.

Good morning.

Good morning.

Just wanted to get more granular on some of the markets. Phoenix looked like it had a nice uptick in occupancy during the quarter. Have we seen the bottom there or is that just an anomaly?

Phoenix I am not going to call a bottom, but I have been very satisfied with Phoenix over the last couple of quarters in light of all the issues there. Two things that explain the quarterly change I think we're up 1.3% there. One is the comp period last, that was the beginning of the dislocation in Phoenix, so we had some condo reversions hit the market. They were coming in at 50, 60, 70% occupied, heavily discounted, so we had some problems in the market last year. Those have all been stabilized now. We're not competing against one condo, a busted condo now not that's not in the low to mid-90s. That made it better this year. We had a very good winter season in Phoenix, and the winter visitors came, spring season for baseball. We were renting apartments, our occupancy is very high, and we had a very good winter season in Phoenix and coming into the slower period of the natural cycle of Phoenix we're higher than last year, so Phoenix right now we're sitting at just under 95% occupancy, left to lease is up to 10 which is totally natural for this point in the cycle.

New England, huge increase in expenses which drove the same store down. Was that what drove that?

Primarily that's being driven by utilities. Utilities make up 16% of our total expenses, and when I say utilities, it is usually think of it as water, sewer, trash, and then there is energy, the gas and oil, and what you see on a sequential basis is that the heating season started very late last year, so maybe November people started turning on their heat, and then you have a 30-day lag in your billing, and so really the heating season really ramped up in Q1 of this year causing the quarter over quarter increase.

And why would that not have impacted the other kind of markets in the region as much?

The other markets in the Northeast?

I mean, yes, just in the Northeast in general, yes.

They're up pretty big, too.

I think most of them are up.

Boston is up 6.2, and New England excluding Boston is up 7.4 on expenses. New England in general have you the product style of the buildings we built and own there rely more on that energy than the Garden or other markets.

Great. Thank you.

At this time there are no further questions.

Great. Thanks, everyone, for joining us today, and Mark and I and John look forward to seeing many of you in New York next month. Thanks for joining us today.

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