住宅地產 (EQR) 2008 Q2 法說會逐字稿

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

Thanks, Whitney. Good morning, and thank you for joining us to discuss Equity Residential's second quarter 2008 results. Our featured speakers today are David Neithercut, our President and CEO, and Mark Parrell, our Chief Financial Officer. Fred Tuomi, our EVP of Property Management, and David Santee, our EVP of Property Operations, are also here with us for the Q&A.

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 will turn it over the David.

Thank you, Marty. Good morning, everyone. Thanks for joining us today. We are extremely pleased with our operating results for the second quarter for the first half of 2008. Our occupancy has remained solidly in the high 94% to 95% range. Our same store net operating income growth for the second quarter was 4.9%; for the first half of the year was 4.8%. These levels were both at the high end of our expectations.

We are clearly benefiting from the changes we made in our portfolio over the last few years as for the first half of the year, the same store net operating income growth for assets acquired over the last several years exceeded 8%. We are also benefiting from much publicized problems in the single family home market. Problems which do not appear to be improving any time soon and problems that while helping us in our fundamental rental business, are negatively impacting our condominium conversion business which we'll discuss in just a moment. We are happy with operating results thus far in the year and we are just extremely proud, I know Fred and David are too, very proud of the people that are hard working out there that are delivering this for us every single day on our assets across the country.

Looking forward in almost all of our markets, we expect to continue to see steady increases in rent levels from existing residents that renew their leases with us. However in many markets, our new prospects are beginning to resist the current and increasing levels of market rents we've enjoyed over the past quarter. This has caused us to bring down the top end of our full-year same store revenue expectations. While we currently expect that every one of our markets outside of Florida to deliver positive same store revenue growth for the year, that growth will now be just modestly below our original expectations.

Now that combined with extremely strong expense controls that we are experiencing from our new platform could still produce full-year same store net operating income growth generally in line with our original expectations, and we are very pleased with that. We've also brought down the top end of our FFO range, but it's not due to operations, because as I said, same store NOI growth is expected to be in line for the year, or rather due to larger than budgeted losses in our condominium conversion business and the dilution from a pending debt transaction that will refinance our 2009 debt maturity.

And Mark will address both of these matters in his remarks. Mark?

Good morning, everyone, and thank you for joining us on today's conference call. We are pleased to report strong results for the quarter. I want to talk about or great same store operating results, our second quarter 2008 FFO results, and describe our capital markets activities in the quarter, as well as review our outstanding balance sheet and ample liquidity. I will also talk about our same store and FFO guidance for the remainder of 2008.

We are very pleased to report same store NOI growth of 4.9% for the quarter and 4.8% year-to-date. Both of which exceeded expectations in the high end of our guidance range. For the quarter, our same store revenues increased 4% over second quarter 2007, driven by a 3.7% increase in average rental rate, solid occupancy at 95% and an increase in other income.

We will see moderation in these growth rates in the second half of the year in many of our markets. With the moderation more pronounced in the markets that continue to feel the pains of the single family housing market slowdown, specifically Florida, southern California and Phoenix. We are especially pleased with the continued success we have had through our cost control initiatives in keeping our operating expense growth low.

Same store expenses were up 2.4% for the quarter, and 2% year-to-date. Important categories like payroll grew at inflationary or lower levels, and insurance costs, grounds and maintenance, all declined. Other less controllable expenses, predominately higher utility costs, up 10% quarter-over-quarter or $2.4 million. And higher property taxes up 5% quarter-over-quarter or $2.1 million, offset some of these expense savings.

We are also pleased with the 13% quarter-over-quarter decrease in our property management expenses while G&A only increased 2 -- pardon me, 2.9%. The combination of our technology driven initiatives, improved staffing practices, and a more concentrated portfolio has allowed us to harvest these expense reductions and we believe we can continue to generate additional efficiencies with our technology and platform mature. But importantly, while we have focused on expense controls, our overall resident satisfaction scores and a percentage of our residents satisfied with the condition of their home upon move in, are both higher. This what we hoped to achieve when we set out several years ago to modernize and invest in our operating portfolio -- or platform. More revenue, less cost and more loyal customers.

Given the current conditions in the economy and credit pressures on the consumer, we thought it appropriate to update you on bad debt. Our bad debt was 0.6% of revenues in the quarter, which is very much in line with historical standards. Delinquencies were about 2.3% of rental income the the second quarter which is very much in the historical range and actually lower than the second quarter of 2007.

Before I move on to our second quarter 2008 FFO results, I want to take a minute to highlight the performance of our acquisitions from 2005 and 2006. All of these units are already in our same store numbers. These almost 19,000 units performed incredibly well in the quarter with over 6% revenue growth, sub 2% expense growth and NOI of almost 9%. As you saw in our press release, our second quarter 2008 FFO results were in line with expectations. The release contains an explanation of the quarter-over-quarter variance, so I will not repeat it here.

But I would like to provide some color on a couple of items. We had a negative impact to FFO of $0.04 per share from our condo business. We did not meet our sales expectation for the quarter. We also took a charge of approximately $3.2 million in response to changes in the status of litigation relating to condo conversion business. We believe that the adjusted reserve provides a closer approximation of the Company's aggregate exposure as we see it today.

Overall, interest expense down $5.5 million quarter-over-quarter. There is a bit of complexity in analyzing this variance as interest expense, a share count reduction due to our debt finance share buy back, and our lower rate of preferred distributions are all linked. Taking the interest expense line item in isolation, the $5.5 million decrease was driven by a $11 million increase in interest expense in the quarter due to the 2007 buy back, which was offset by lower flowing rates of interest in the quarter of about $5 million, lower prepayment penalties of about $3 million, and about $4 million lower due to increases in capitalized interest.

Interest expense was also driven down by $6 million due to our use of excess sale proceeds to pay down debt. To really understand the change in interest expense, you also need to take into account the $0.04 increase in FFO per share due to the reduced share count. When you net the share count reduction against the incremental $11 million in interest expense to finance the buy back, the result is neutral to FFO.

I am very pleased to talk about our outstanding balance sheet. We currently have approximately $145million in cash, and approximately $1.4 billion available on our line of credit. In our release, we announced that we have locked rate on a new $550 million Fannie Mae 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 effective interest rate is about 6%. We expect to receive the funds in late August. We were very pleased given the state of the credit markets to add this liquidity to our balance sheet. The interest rate on this new Fannie Mae loan is lower than the rate prevailing on our 2009 fixed rate maturities. And the loan will be accretive long-term.

During 2008 however, the cost of prefunding 2009 maturities will reduce FFO by $0.02 per share. We believe that having ample liquidity to meet all of our 2008 and 2009 funding obligations, as well as having the financial flexibility to take advantage of opportunities in the marketplace, make the short-term costs worth it. Based on our revised transactional guidance, we anticipate line availability of $1.4 billion at December 31, 2008 and unrestricted cash of about $340 million.

For 2009, we have $985 million in debt maturities. We expect to meet all of these maturities, plus our 2009 development fundings of approximately $300 million out of cash-on-hand after receipt of the Fannie loan proceeds and through the use of our existing line of credit. If we undertook no other capital markets activities, we would finish 2009 with approximately $400 million of availability on our line. Taking this all into account, we think our balance sheet is in excellent shape.

Consistent with our strong operating performance and conservative balance sheet, fixed charges, interest expense plus preferred distribution were down on a quarter-over-quarter basis by $9.5 million or 7%, and our already strong credit metrics improved across the board. I like to wrap up my remarks by addressing guidance for the third quarter and full-year 2008.

In the press release, we provided third quarter 2008 FFO guidance of $0.61 to $0.65 per share. While operating performance will be good, our third quarter FFO results will be negatively impacted from our continued losses in the condo business, some dilution from our new Fannie loan, and slightly lower property NOI due to the timing of dispositions. We have lowered the top end of our full-year FFO guidance to $2.55 from $2.60 for a new revised range of $2.45 to $2.55 per share, reconciling to our new guidance mid-point of $2.50.

On the positive side of the ledger, we have better property operating results than we initially expected, primarily due to strong expense controls. This positive is offset by the negative impact of $0.02 per share from the cost of prefunding our 2009 debt maturities and $0.04 of negative impact due to condominium conversion related losses. David will speak in more detail about the outlook for the conversion business in his remarks.

The main driver of our FFO number however, will continue to be the positive performance of our same store portfolio, expected to contribute an incremental $40 million to $50 million in FFO this year and a lease up of our development and other non-same store properties which are on track to contribute $25 million to $30 million in FFO this year. We expect 2008 FFO to be in the solid middle of our guidance range.

On page 25 of our release, we have listed the assumptions driving our 2008 guidance, and I want to highlight a few of them. We have revised our revenue guidance range for the year to 3% to 3.5%, from 3% to 4% to reflect moderating overall growth as well as more softening in Florida, southern California and Phoenix. We have revised our same store expense guidance to 2.25% to 2.5% for 2008 to reflect our terrific expense performance to-date and our expectations that this performance will continue.

We have revised our NOI growth range for the year to 3.5% to 4%. While second half revenue growth will be below first half, we will still produce good NOI results due to our excellent expense controls and good while moderating revenue growth in Seattle, San Francisco, Denver, Portland Oregon, New York City, and Washington DC, offset by continued weakness in Florida, southern California, and Phoenix.

As I mentioned before, G&A expenses were up a modest 2.9% quarter-over-quarter. We have spoken before about our commitment to having an operating structure that is appropriate in size to our transformed portfolio. We have lowered our G&A guidance range for the year to $46 million to $48 million from $48 million to $50 million. We are hoping to come in below $47 million for the year.

Overall, we continue to feel good about trends 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, and to take advantage of any compelling opportunities that may present themselves. I will now turn the call back over to David.

Thanks, Mark. I'd like to talk a little bit about transaction activity. As we have been noting for sometime now, that activity remains very slow across our core markets. The investment brokers are telling us that they're actually have as many listings today as they've ever had. But a lot of buyers are on the sidelines, so there remains a fairly sizeable bid (inaudible) spread out there today, and the brokers are therefore closing far fewer deals than they have in a long, long time.

And Cap rates have certainly backed up. The high quality assets in the better markets, they've increased maybe 25 to 50 basis points. And Cap rates on lesser quality assets in less desirable markets moved probably up 50 to 100 basis points. As I mentioned several times, due to increasing bottom lines and extremely reduced deal volume, it's very difficult to determine exactly how much rising Cap rates have actually impacted absolute prices.

Consistent with what we've told you over the last several calls, we continue to be a seller of assets as we execute our strategy of moving out of slower growth in noncore markets and assets. And we continued that in the second quarter when we sold eight assets, nearly 2000 units. These had an average age of 21 years old. We sold them for 5.6% weighted average Cap rate and realized a 10.9% IRR during our holding period.

We sold three properties in Dallas, two in Denver, and one each in Portland, Maine, Atlanta and Seattle. I'll tell you that the Denver and Seattle sales represented opportunities for us to take advantage of a very strong market to sell older assets in less desirable sub markets at attractive Cap rates. As a point of reference on change in Cap rates and how that's impacted property values, I tell you that the assets that we sold in the second quarter, traded for 108% of how we valued them back in early 2007. And of the $448 million of assets sold in the first half of the year, in total traded for 106% how we valued them in early 2007.

Well after having been fairly quiet on the acquisition front for the last year or so, we did acquired four assets in the second quarter 2008. We acquired a portfolio of three assets, totaling 1200 units in suburban DC from a single seller, is $189,000 per unit on average, about $200 per square foot. We believe we've underwritten those at a 6% Cap rate and have underwritten a 9% unleveraged internal rate-of-return on that investment.

We also did buy a single asset in Pembroke Pines, Florida in Broward County outside of Fort Lauderdale, a transaction that we think represented a very interesting opportunity for us. We bought two separate and distinct phases of a failed condominium conversion. This is class-A product that we underwrote and we acquired, and intend to rent -- operate as a rental property. Bought that for $147,000 a unit at $146 a square foot. This location class-A product, we are pleased with that and also believe that we bought -- we had a inbound Cap rate of 6% and have underwritten a plus 9% unleveraged internal rate-of-return.

In the press release information, we've updated our guidance on transaction activity for the year. We continue to expect to sell $1 billion of assets this year. We now expect to acquire $750 million of assets for the year. We were about half -- about 50% towards those goals in the first half of the year.

We currently have $300 million of properties under contract to sell. Significant money at risk and hard with all contingencies waived, and expect to close those over the next 30 or so days. We currently have only one asset under contract to acquire at this time. But as I said earlier, there are a lot of properties being offered in the market today. We continue to underwrite deals in all of our core markets and we expect to the see more opportunities as the year winds down to buy assets of pricing that make sense for us.

At the present time due to the acquisitions we made in the second quarter, we are not yet at a point where we've had to make that decision I talked about in the last call of having to stop selling or to start buying or to consider a special dividend. In fact, our expectation at the present time is that it would be highly unlikely that we would have to consider a special dividend this year.

Turning now to our condo business as we noted in the press release, we materially changed our outlook on our condo business for the year. You may recall that on our first quarter call in early May, I noted that it was very possible that we would have a loss for the year in this business. That will indeed be the case.

This loss is a result of several primary factors. The first, certainly fewer closings than we had previously forecasted. We're closing fewer units because buyers concerns about catching the falling knife with respect to prices, and frankly, more stringent financing requirements which is making it difficult for our prospects to qualify for financing. The loss will also be a function of the reserves that Mark mentioned during his remarks, as well as ongoing legal expenses and the write-offs that we will experience from marketing costs on suspended conversions.

What steps are we taking for the business for the balance of the year? We will continue with the conversions of assets in process. Those are four deals that have today unsold inventory of only 249 units, and that's as of this past Monday. One deal in Chicago, one in Seattle, one in San Jose and one in Las Angeles. As I noted in the past, traffic at these properties remains reasonably strong. In fact last week, we averaged 21 pieces of traffic at these four deals. We just got a lot of lookers that we need to turn into buyers, and I'm confident we will.

Also as noted in the press release materials, we will suspend the conversion of our two most recent assets that one being Martine in Bellevue, Washington and the other being the Hamilton in Beverly Hills, California. We'll put them in the rental pool where we expect them to perform very well for us.

Lastly as we have for the last year or so, we will closely watch our costs to ensure that they remain in line with this level of activity. With that said, I want to tell you we continue to believe that the conversion business has good long-term prospects for us and we expect to be in the business for quite sometime.

Along with acquisitions, development continues to be a very important way for us to allocate capital as we move out of low barrier markets and into high barrier markets in search of higher total returns. At the end of the quarter, we had projects under development totaling $1.5 billion. Now this down from $1.7 billion at the end of the first quarter, because we completed four assets totaling $353 million. First being the West End apartment deal in Boston, our Crown Tree Lakes deal in Orlando, our Reunion in Redmond Ridge in Seattle, and our City Lofts in here in Chicago.

We also did add a couple of projects to our deals under construction. The first, a property that we bought 60% complete of the construction process, and that's the Mosaic and Metro, within Hyattsville, Maryland; 260 units, a deal we have been working on since mid 2007. And we have been very much a part of the construction process up to this point. We expect to stabilize yield on that deal in the mid 6s. It comes with very attractive 30-year financing at 5.14%.

Frankly, we believe we are getting a development yield by taking only lease-up risk which we are very comfortable with. This is a classic transit-oriented development. It's a great location, immediately adjacent to a metro stop and just a couple of miles from the University of Maryland. We are very excited about that transaction.

We are also excited to have started our Redmond Way project in downtown Redmond, Washington. This is the 250-unit project that's within walking distance to the Redmond Town Center and near Microsoft's new billion-dollar campus that is currently under construction and is expected to house 12,000 new employees very shortly. We're expecting a stabilized yield in the mid 6s on that transaction as well.

We also continue to have a pipeline of development opportunities in excess of $2 billion in various stages in planning and diligence. We currently own the land again for about half of those projects with the balance being under contract or letter of intent. Through the second quarter, we've started $255 million of development that does not include the Mosaic transaction that we recently acquired that was 60% compete.

We have several projects that could start in the second half of this year which would increase our starts for the year by $100 million to $200 million. But I will tell you, we will consider these additional starts very carefully, because we are mindful of the importance of liquidity in this very uncertain time.

That being said, I will tell you that we very much believe that in our core markets, well located, well conceived assets delivered in 2010 and beyond, will perform very well. This is due to very favorable demographic trends, as well as the likelihood of very little new product being built in the near future, with the construction loan market all but shut down, and I do mean all but shut down.

As a result, we are going to continue to pursue and underwrite new development opportunities and hope to consistently start $500 million or so of new deals annually. With that, Whitney will be happy to open the call to questions.

At this time I would like to remind everyone in order tore ask a question, press star and the number one on your telephone key pad. We will pause to compile and roster. Your first question comes from Michael Bilerman with Citigroup.

Hi, this is David with Michael. Couple of questions with regard to the development pipeline. Can you talk about at what point the margins will begin to compress when contingency budget have been eaten up by cost increases and declining rental assumptions?

I will tell you that all of our projects that are under construction are well on budget. In fact, the deals we've completed have been completed in generally, under budget. The deals that we are working on we are not seeing increasing costs.

In fact I'll tell you, stuff we are working on today, we are frankly seeing our costs moderate somewhat. As it relates to the rents upside -- rental side, certainly our projects today are probably not renting up with the same velocity or the same rates that we had expected and we're probably -- what had started with expectations of mid-six yields will be more low-six yields. But we are satisfied with how they are progressing in the marketplace. We are very confident that in every single one of them, they are worth far more than what it cost to build.

In terms of the [ushadow] pipeline and the projects that you're looking at, how would you characterize any change in your underwriting assumptions there?

We certainly have higher expectations for yields. And those deals that we currently do not -- as of not yet bought the land, I can assure you that we'll be having conversations with lands sellers as to changes in purchase price.

This is Michael speaking.

Yes, Michael.

You talked in your opening comments about new tenants resisting some of the increases that you're trying to push through, but existing tenants taking increases as you give them. Can you talk about the dynamics of whether there is any regional differences in terms of the ability to push rents? How do you think that trends given your turnover that's occurring?

David you want to answer that?

Sure. This the David Santee. As we continue to implement LRO, we have complete visibility into the ebb and flow of rents within a particular market. Even while south Florida, as an example, was in decline you still had a lot of gain/loss built in to the overall lease structure of a given property or a sub market.

Even though the existing current market rents were at a level, you still have existing residents that are below those levels. We have the ability to bring those rents up even 1%, 2%, 3%. Last year and even this year while south Florida was in decline, we achieved well above plus 2% over new increases.

Thank you. That's helpful.

Your next question comes from William Atkinson with Benchmark.

Thank you. Morning, gentlemen.

Welcome back.

Thank you very much. It's great to be back. Looking at your average second quarter market sequential revenue growth rates, and I get these from public sources, and comparing them to what you reported in our top five markets, you beat by an average 175 basis points sequentially. I'm confused or really interested in the decrease in revenue and NOI guidance. To get to the new mid point of your range for revenue and NOI, you would have to report an average for the second half of 2.75% growth in revenue and NOI. That's an awfully large drop from the 4% and 4.9% figures in in the second quarter. Do I have this right?

Yes. You have the right implication. We certainly hope to do better than that. Again as we discussed, the weight of southern California and Phoenix and Florida are not insubstantial and that's what numbers are reflected. Plus just general caution about the way this year is playing out in terms of the economy and the employment picture.

Okay. I would assume that since the third quarter is the prime leasing quarter that -- this infers that the fourth quarter could be weak indeed

Yes. The third quarter numbers we have are in our minds better than what we would expect the fourth quarter number to be.

You guys are not probably going to want to talk about '09, if you have a weak fourth quarter, says the first quarter is going to be down there as well.

You're right, we don't want to talk about '09. All right. Let's see, looking at the acquisition disposition, Cap rate spread in your guidance page, the spread's down 50 basis points. Can you tell us which moved more? Did acquisition Cap rates go up more? Or did disposition Cap rates move more? What was the -- ? I guess I'd tell you a little bit of both, Bill. We were able to sell some of the deals I mentioned, in Seattle -- Denver very attractive Cap rates. And we were able to buy product, the Florida deal and Washington DC portfolio at what we -- are very attractive in-bound Cap rates. I think we were able to narrow that delta by working

Okay. Last question on condos. The estimated number of sales down by 50%, but maybe I'm looking at the wrong number here. But the pretax estimated losses works out to a swing of minus $10 million to minus $15 million from the Q1. That really infers some really big negative changes in pricing.

Let's just give you a little bit of color there so that you all start with the same number, because the litigation adjustment that we discussed, the $3.2 million has to be factored into those numbers. That's were you've got to start, because that number -- entire difference there, part of it is operations and part is just litigation related stuff.

Okay. Thank you very much, guys.

You bet, Bill. Thank you.

Your next question comes from Christine Kim with Deutsche Bank.

Could you speak a little bit more about some of the moderation in Florida, the [calsie] mix. Is it more single family home supply, you're seeing competing in the rental pool? Is it job losses on the construction front or is it something else entirely?

This is Frederick Tuomi. In general, I would say it's the job loss situation. Job losses drive a weakening demand and conversely, job growth is our best friend in terms of demand and increases on the upside. We're still not seeing direct verifiable competitive impact from the single family overhang in these markets, but I do believe it's the softening from the job losses. And most of that job loss if from the real estate sector which I think is pretty much at the bottom.

Is the move out to home purchase ratio continuing to drop in those markets or has it somewhat dropped at this point?

We seen another significant drop in the move outs for home purchasing overall with a couple of exceptions being the central valley California and northern Virginia; were the only two markets that increased.

My second question is in terms of the buyer pool, has anything changed in terms of the buyer mix or their ability to get financing?

Are you talking about our disposition of our income producing property?

Yes.

We continue to sell assets to small local regional investors. Generally, they continue to be financed by Freddie and Fanny. I will tell you that the deals that we have -- the $300 million of deals that we have currently under contract with money at risk there, both being financed by Fannie May and rates are locked.

Do you have a sense of whether their appetite for multi family lending has changed given their current circumstances?

No. Our view is that -- and we've had discussions with them and we've seen the evidence. Based on our rate lock, their interest and their excellent pricing of the sale, the buyer financings we have seen, and Fannie and Freddie are alive and kicking. We have had conversations with them over the last week, they continue to be very efficient and well-priced suppliers of debt capital to the multi family sector. Certainly some of the news around those names was disconcerting, but what we have seen and what we have observed leads us to believe they are very strong in terms of their support of a multi-market at this point.

That's helpful. Thank you.

You're welcome.

Your next question is from Dustin Pizzo with BOA Securities.

On the decision to slow down on the acquisition front a little bit. Is it a function of the disposition outlook slowing? It sounds like that's not it. Or are you more taking the stance now that pricing is probably going to improve six to nine months from now as you see some of that distress that you talked about, so why put money to work today?

What I'd tell you is it's the slow down. The acquisition started 12 months ago. The second quarter represented the first acquisitions that we made in nearly a year. We did find some opportunities to buy what we thought were some discounted deals. We continue to be out there looking and I wouldn't be surprised if as the year progressed, we didn't continue to see some opportunities. I think what we're saying on the acquisition side is we don't need to be in a hurry. Patience will prove profitable for us.

And then, it looked like you saw a couple of busted condo deals this quarter. Do you envision more of those hitting the market? Have you seen any of that recently?

Yes. Our condo guys are going to spend a lot of time going forward, looking at opportunities to play in that market. I think that we are uniquely positioned, not only because of our ability to operate and manage, but the knowledge and experience set that we've got in our condo group, to take these things on. I believe there will be opportunities for us to buy units and operate them at premium yields as apartments for some time, and then perhaps realize some profitable exit on a retail conversion exit somewhere down the road.

Okay. As you think about the potential pricing on types of deals like that or just more generally even on the rental side on the acquisitions, it sounds like yourselves and and a number of other large players who have plenty of available capital are all sitting there saying, hey we are waiting, we think there is going to be this distress. Do you think because of that, we may not ever actually see that distress just because the second pricing comes in? You see the money, jump in and take advantage.

That's the question, how much distress will there really be. I'll suggest to you that there has not -- we have not seen a lot of distress today. Mark and his team speak to lenders on a regular basis to find out what distress they may be seeing in multi family assets in their portfolio. They have none.

Freddie and Fanny have extremely low default rates and a very short to-watch list. We have not seen any real opportunities and your point is well taken. There may not be the discounts available that people are hoping to see.

Thank you.

And if that is in fact the case, on the NAV that we have been talking about are only that much more solid. Whitney?

Your next question comes from Jay Habermann with Goldman Sachs.

Good morning. Question here, you mentioned obviously the decelerating revenue growth environment. Can you talk a bit more, you mentioned G&A potentially coming in $2 million lower this year. What other cost controls do you have? Clearly, the internet has been a benefit. Any other additional cost measures you can take?

This is David Santee, currently we are very focused on our energy costs. We have -- we are in the beginning throws of implementing and application called Energy Cap that will give us tremendous visibility into energy costs, rates, as well as focusing more on bulk purchasing strategies. As well as entering in to the green initiatives as far as incorporating our residents into energy conservation. At the same time, we continue to rely more and more on the internet. Hopefully, at sometime next year, we can exit print all together.

What impact do you anticipate those measures taking?

Keep in mind that utility costs are only 16% of our overall expense formula. 50% of those utility costs are water, sewer and trash. Those utility costs we already recoup 80% of those costs. What is left is to focus on our gas costs and our oil costs, primarily in Northeast at our larger master meter buildings.

David, you mentioned there's a lot of product on the market today. Can you give us sense of which markets? In the sense of pricing, how much do Cap rates still need to adjust? You mentioned the 25 to 50 basis points with the A-assets, and 50 to 100 for the lesser quality. You you think Cap rates need do adjust much more?

It goes back to the point Dustin made. We are seeing -- the brokers are telling us they are handling as much product as they ever have. There's not a lot of investor appetite. A lot of deals are not trading. Either sellers have to see their Cap rates go up or buyers are going to have to be willing to see expectations go down.

This is a classic situation whenever there is some potential inflection point with the bid-ask spread widening. There is is a lot of capital and I would not expect Cap rates too terribly much from these points. I tell you that's because I don't think construction costs and replacement costs are going to change all that much. That has to be a very important starting point for people when thinking about values and Cap rate. Is what is replacement costs in these core markets in which we have been investing. Cap rates and transaction pricing will often be a function of that.

Just last question, can you give updates in terms of New York City. Layoffs have been a big concern. And broadly on concessions in the market? Beyond New York City? But in your other markets?

This is Fred. New York, the Manhattan market downtown still continues to be rock solid. Our occupancies are 97%. The pricing is moderated a little bit in terms of being able to exercise pricing power, but our renewal increases are still strong in the 5% plus range. We are not seeing a lot of competitive situations on concessions.

In the downtown market near our 71 Broadway asset, we did see some concessions over the last couple of months pop up. There's' a -- 200 units being leased up there. They're doing -- maybe a month free, maybe less. They're also doing what we call OPs which are owner pay of the broker fees which is common in Manhattan. We have some spot price wars on that type of issue. Overall, there is -- I would not say there is a down fall in pricing or concession, coming in to the Manhattan market.

On the Upper West Side, we have some new acquisitions we are bringing to market there. On renovations, there still leasing very robustly at prices higher than we even underwrote last year when we bought those assets. And our Trump deal continues to do extremely well. Little bit different story across the river in Jersey City.

There, as I told you in the first quarter, we saw some new units come in. There's about 1000 units that we had to combat with a lease up. Those units are leased up and stable on occupancy, but pricing has stayed lower than we expected on the Jersey side of the river. There you are seeing some concessions. You're seeing some rent reductions, and we're not able to get the premiums we had on some of our view units. But still occupancies have recovered back to the 96% range. Renewal increases are strong, just not the robust pricing on the Jersey side.

How about markets like northern Virginia or Boston?

Those are two great markets. Boston is a fantastic market for us right now, exceeding our expectations and I expect to continue through the year. Rock solid occupancies there, we are 96%. We're getting 4% plus rent increases there.

Our lease ups there just went in a stellar fashion. We are under budget on concessions and our lease ups at the west end, and overall Boston is a good story. The job situation there has not gone negative. And I think Boston's poised for a strong finish this year.

Virginia and DC, the same thing. I was expecting some trouble there because of the supply issue and the condo issue there which is staggering. But you know what, the economy is producing jobs. It's positive job growth this year. It's surprised even economy.com folks that we talk to on a regular basis. Again, occupancy is 96.4% today. We're getting 5% plus rent renewal increases.

Virginia, I don't see anything slowing us down there. Next year might be a little bit softening, because of the supply that's coming in and condo reprograms that are going to hit us there. But again Virginia and DC, all the indicators are good. Again, we expect a slight moderation in the new lease pricing, but certainly not a problem market.

Thank you.

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

Back to the condo reserve, can you tell me why you need to take out a reserve for units that were sold before or -- in 2007 and back? Why do you have to do that?

There is a pending litigation as I said in my remarks. What happens in the condo convergence, Rich, is after you sell the final units and you transfer the control of the association to the homeowners association, there is some period of time in which everything gets worked out.

We try and proceed towards -- releases from them as quickly as we can. We've got some situations where we are going back and forth with some homeowners associations. We felt it appropriate to take -- to increase that reserve. Generally those discussions are about construction, warranties, roofs, siding, things like that. We do have some ongoing discussions and we thought it appropriate to increase that reserve.

That's my next question. There are structural issues as well that you're dealing with?

Yes. There are assertions by the folks that we sold units to that some of the structural issues -- that there were structural issues at the assets.

Okay. Turning to the same store, you guys are -- sound very very upbeat about the first half obviously. You're beating your expectations and everything is so great, but then you turn around in the next breath and dial down the second half. I'm curious what is the inflection point? What created the change in body language from the same store perspective?

This is Fred. This is a tricky time. We're at the middle of the year, we're looking back, we're very satisfied and pleased with performance to date. I won't take anything away from that. But looking ahead, given the situation that the economy is in, the fact we are losing jobs, that GDP growth is slowing, job disclaims are increasing, I think it's prudent to expect some moderation in the rate of growth of our new lease pricing.

We have softened some of our markets. But the trouble markets on the single family, I think are going to be more troubled because of the job loss and the lack of demand there. The more competitive issue on pricing. The pressure on the consumer of the cost of living. All that mixed in there, we're looking where we are today, we are happy, but starting to see that this economy is going to have to wear on the consumer and on the demand side of our business at some point.

South Florida -- really all of Florida is going to be continued as flat and bouncing at the bottom where it's at. Some areas are declining. Some areas are stabilized. We hit a positive year-over-year growth for the month in south Florida as we predicted. But it's going to stay there and bounce between zero and slightly negative for the rest.

Southern California, as we mentioned, still an area where the demand softening concerns me. The job losses in Orange County are well known, over 25,000 last year, some more this year. We are seeing a slowing of demand in more price competition and price resistance, as there is some rotation going on in Orange County. And inland, people -- once they lose their job, they've got to figure out the next stage of their life.

But then counter balanced with markets such as Boston, DC area, Denver, San Francisco, Seattle, all still very solid. Our original expectations was continued growth of the rate of change there, and we just saying that that growth rate is moderating with the national economy as to be expected I think.

We also tell you our July and August numbers were not -- and our August stuff is preliminary, were not as strong as we had hoped. Besides the macroeconomic picture because you ask a great question, we're certainly very aware of that. Our own internal numbers aren't signaling the strength we had in the first half.

I want to reiterate the point, too, that -- as David mentioned, we had this built into -- our existing residents still -- they are staying with us longer, because our turnover is down. They are taking renewal increases. Our average renewal increase for July was 4.5%. It might be 2% in Florida, but we're getting 8% in some of our good markets, and many in the 4%, 4.5% range. We are able to maintain the core business well. It's just the new lease pricing -- on the new leases we are doing, we expect to moderate going forward.

Like the preliminary August numbers since we are in July, but I will leave that one alone.

I can't hear you.

I said, I like the preliminary August numbers, since we are still in the month of July, but I'll leave that one alone.

You know what your leases are.

I'm just being an idiot.

You will be alone on that one.

David maybe you can talk bigger picture. When you think about where you are now and the cycle that you've been through in the past, obviously this downturn in the fundamentals of multi families, call it that -- aren't really in comparison to what we've seen in past down cycles, say in the 2002 to 2003 time frame. Do you have the sense that we are nearing a bottom in terms of the internal growth prospect of the business? Or do you foresee things getting worse before they get better?

I'm not talking about downturn in our business. We've delivered very strong results and expect to deliver very strong results for the year. Far from a downturn.

A downturn from previous years, we could say that.

But still an upward trend. Still on a very positive upward trend. People are not -- we are 95% occupied generally across the portfolio. Very limited supply. Homeownership coming down.

Single family home financing extremely difficult to get. We like a great deal about our business today.

Okay. That's good. What about the future? Do you think that things -- if you look at all the pieces of the puzzle that there is more bias for a upside move next year and the year after versus a downside move?

It's hard to tell, but I think demographics are very solidly in our favor. Unlike previous economic downturns, when we either had am extreme oversupply situation or most recently in 2002, when we were getting killed by people having the ability to buy single family homes with essentially no money down and ridiculously low teaser rates. None of those things are happening today.

We're not oversupplied. People are not moving out to buy single family homes. In fact, many of them are coming back from single family homes. We're 95% occupied and demographics are very favorable. We like the prospects for the next few years. I'm not suggesting that a challenging economy and job loss is not problematic for us, but I think that you'll see in this multi family space operate far better than you have in the past.

Last quick one. Anything tempting about the passage of the [Ridea] legislation?

No. Not particularly.

Thank you.

Your next question comes from Michael Salinsky with RBC.

Good morning. We talked in great detail about operating from the revenue side. Looking at the expense side for the second quarter of the year, how have taxes come in versus your expectations?

I'm sorry your question was as to property tax?

Proper taxes, yes. W've seen some municipalities running big debts this year. You've also been very active on the acquisition front over the past couple of year here. How are those coming in? The reassessment position?

This is David Santee. Our original assumptions were -- come in at the 4% to 5% range on property taxes. It looks like closer to the 5%, mainly from valuation pressures in Georgia and Texas. Everything else is pretty much meeting our original expectations.

Second, looking -- going back to the second quarter results and also in light of your commentary on July and August trends, how quickly did trends decelerate through the second quarter? Maybe from April to May to June?

This is David again. What I would say is through the first -- really up through June, everything was very strong. All the fundamentals were very strong. We did start to see some -- I like to look at other external metrics. We saw a pretty significant fall offs in June from our IOSs. That's rent.com, apartments.com. Our commissions that we paid to rent.com were 30% below last June.Then we started looking at our -- this is the critical period of getting settled for the fourth quarter.

We start to look at actually our day-to-day, week to week leasing velocity. Towards the end of June and even into July, we didn't see things materializing in a way that they materialized last year. Just less robust activity. Markets like Phoenix are not coming back as quickly as they have historically. South Florida is snot coming back as quickly as it has historically. Orlando the same thing. There is just a sluggishness, if you will, to coming out of the summer dip.

That's mostly in the single family pressure markets, like we mentioned Florida, Phoenix and areas of southern California. The other markets that are not under the single family pressure and not seeing the extreme job losses related to that -- we didn't see that fall off and continuing on.

David in your comments, you talked about the commitment remaining to the condo business. You also about buying property down in Florida, but there was a busted condo deal. Given the commitments you have, would it be possible that you would look to buy a couple of busted condo deals to take a advantage of the next upturn in the cycle?

Yes. I mentioned that previously in the answer to another question, But yes, we are going to have our condominium conversion team begin to look at exactly those opportunities.

Okay. That's helpful. Finally, just given that you mentioned taking down some land opportunities and renegotiating some terms, what's your spend target for development this year?

The absolute capital spend? Starts were $255 million year-to-date. It remains to be seen whether we will start another 100 to 200 which we could if we wanted to, but we have to review those as the year progress.

Absolute dollars out the door though?

About $450 million. It's about $450 million.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). Your next question comes from Rob Stevenson with FPK.

David, do you expect the halting of the down payment assistant programs to have any material impact on resident turnover?

That's a good question, Rob. If those programs as well as the tax credit programs. My guess is that it could have an impact in some of our markets, but I do not expect it to impact us in any material way.

Were you using that in the condo business?

Were we using?

The down payment assistant programs?

We did have some transactions in which we were using that, yes.

You guys also talked about lowering the G&A assumption for the year. Is that directly correlated with halting some of the condo conversions?: Is that where some of that money is coming from?

From G&A?

Yes.

From G&A savings. No.

Okay. What are the general areas that you guys are doing better at on the G&A side then?

Sure. Generally some of those reductions have been payroll related as we've right-sized up here in Chicago to the platform more concentrated in a lower number of units. Some of that is comparability related items because it's not a very large line item relatively. You have things like adjustments when you get litigation settlements and other things that create some noise in there.

We expect a run rate that will be around $47 million. A loft that is payroll and consulting fees and things that are one-time. Some of those other things are one-time items.

Next question comes from Alex Goldfarb with UBS.

Thank you. Just wanted to go to the three assets that you bought -- the portfolio sale in Maryland. The 6% Cap rate, is that a current in place Cap rate with management fee in CapEx?

Yes.

Can you give color on where that Cap rate started in the negotiations?

I guess -- hopefully started at 7. I don't know exactly where the conversation started with this particular seller, Alex, but that's where we agreed.

You don't know where where they were originally asking?

Oh, what they were asking? I don't know, but I'm sure they were below that and I'm sure we offered above that.

Just trying to get color. Next question is going to the debt side, how much more room do you have to issue secured debt and stay within your current ratings?

A substantial amount and that's a good question. Because we do it just as a matter of practice, putting aside covenant compliance. We did talk to all three rating agencies before we did the Fannie Mae loan. They have comfort with this.

I think the ability of our company to refinance itself in advance and get rid of any risk of refinance is very valuable to our creditors, secured or unsecured. I think they value that quite highly, Alex, when we spoke to them. Second, I'd say we have a great amount of distance. The covenant is at 40% and we are at 20%. We could incur a substantial amount more of unsecured debt, on the order of several billion dollars worth, where we would actually trigger the covenant.

But what about within your current investment grade ratings spans?

We are BBB plus, BAA1 and A-minus. I think there would be a good distance to fall. I think we could incur -- I think that number is again more than $1billion dollars for sure. I can't guess at the rating agency's exact break point. It's significant from where we are right now. I will tell you though we do have a preference to issue unsecured. And if the market gives us an opportunity, that's well -priced, we would consider it.

That is actually my next question, just wanted to go to that. What held you off from issuing earlier this year when the markets were open?

That's a terrific question. Part of that thought process was again, we were unsure of how much in excess sales proceeds we would receive. I wanted to understand how much I would get frankly, from the transaction side of the house before making some determination about how much we needed to borrow for 2009.

As that became a little clearer to us and I had better idea of where we stood, it became clear to us that if there was an opportunity to go and do an unsecured or secured deal now, that might make sense. That happened a little bit after that window you're speaking of, that the other peers took advantage of. Chronologically, that was our thought process.

If I understand you correctly, if that window reemerges, then even though you did this secured Fanny deal, there is a good chance that you may go out and get the unsecured -- ?

First of all, I'll say our guidance doesn't include doing any additional financings and carrying anything else. I'll further say, we are going to be very opportunistic about it. Right now, we don't need to do anything.

That's the comfort we wanted to give our shareholders is that we're sufficiently capitalized for the indefinite future. We wanted to let people know that. I would say, you got to look at the circumstances at the time, and if the opportunity was more compelling, we would certainly consider it.

Thanks a lot.

Thank you.

Your next question comes from Richard Paoli with ABP Investments.

Two questions. One on turnover. Is it safe to assume that residents are staying longer? And when was the turnover for this quarter? On an annualized basis.

Rich, on an annualized basis our turnover is 61% which is dead on compared to last year, actually about 80 basis points below. I will add additional color to that. Within that turnover range, about 10% of that turnover is people that transfer from one apartment to another in the same community. What we have seen through the first half of this year is a tremendous increase in people that take advantage of our coast-to-coast program, meaning moving from one equity property to another equity property.

That's up about 200% over last year. That affords them the ability to relocate whether it's a job loss, a job transfer without incurring lease break penalties. Our net turnover is about 54%, 53%.

Where is that versus historical norms?

Compared to last year, about 150 basis points lower.

Okay. One other questions. With respect to the number of leases that have been signed this year in terms of tastes, some of your competitors in the past have used -- especially now that they have got more sophisticated pricing models, to really load a lot of the expirations into the high traffic months. Maybe you could give us a breakdown, the even amount would be a 25% quarter. What would you say that mix is? Do you have fewer leases expiring in the December quarter and the first quarter '09 coming up?

I would say it's more pronounced as you move from north to south. In the south, it's fairly an even spread, although there are leases expiring in the summer months. As you go north, you have a greater percentage of leases expiring in the middle of the year versus the winter ends of the year. Currently, our top two months of lease expirations are August and September.

Okay. Last question, are you doing anything -- because you have greater flexibility with lRO, to entice residents to lease longer? What's the maximum leases that you're offering now? And it varies by community. Are you looking to see if you think things decelerate that you would want to lock residents in for a longer period of time and get more certainty?

Typically 90 -- 80% some of our leases are 12-month leases. It all comes down to how long you think this headwind will last. There are markets that require us to offer two-year leases like New York, but we don't see any -- we don't have any plans to offer leases beyond 12-months.

LRO does price the apartments based on the length of the lease term. Generally, the better pricing is at the longer end of the term cycle, so consumers will naturally select the longer terms.

Okay. Thank you.

You're very welcome, Rich.

Your next question comes from [Heno St. Just] with Greenstreet Advisors.

David, with all the work you've done with the balance sheet and what you're seeing in acquisition environment, can you give us a sense as to your current thoughts on Cap allocation today? Where you feel the best opportunities are?

If I felt that there were particular opportunities today, no doubt we would be hitting them. We have a lot of cash on hand and an unfunded line, and capacity to use it when we believe the opportunity presents itself. We are just at a point today, where we don't believe we need to be in a hurry. That we can be patient, and see what happens as time progresses.

As I mentioned in my prepared remarks, we would not be surprised to see more opportunities as the year progresses. And if we think they are right, we will not hesitate to jump on them. We just see how things unfold, but we are not seeing a great deal of opportunities today.

How about stock buy backs? How does that rank in terms of prioritizing your -- ?

We had been very aggressive, buying our stock back in 2007. Today with the capital markets the way they are, we felt the most prudent thing to do for our shareholders is to preserve liquidity. We continue to believe that the stock trades at a meaningful discount to NAV's. But today with the capital markets in the place they are and the incremental leverage that we took on in the stock buy back in '07, we think preserving capital is the appropriate way to go.

Can you give us additional color on the markets you're looking to sell out? Types of buyers? Source of funding if there is any sale financing for those apps that you have under -- ?

There would be no seller financing. I will tell you that we've sold $480 million of product this year. I think -- but for just a one exception or so, Fanny and Freddie have financed everything. Our buyers have been local and regional players who in '05, '06 and '07. were boxed out by the larger institutional guys. It's really been an opportunity for the local and regional players to get back in the ball game. Freddy and Fannie have been competing heavily to finance them.

Okay. Thank you.

You're very welcome.

There are no further questions at this time.

We appreciate very much everyone's time and interest in the Company. We look forward to seeing you all soon.

This concludes today's Equity Residential second quarter earnings conference call. You may now disconnect