住宅地產 (EQR) 2008 Q4 法說會逐字稿

Good morning, I will be your conference operator today. At this time, I would like it to welcome everyone to the Equity Residential fourth 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.

I would now like to turn the call over to Mr. Martin McKenna of Investor Relations. Sir you may begin your call.

Thank you. Good morning and thank you for joining us for Equity Residential's fourth quarter 2008 results and outlook for 2009. 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 obligations to update or supplement these statements that become untrue because of subsequent events. I will now turn the call over to David.

Thank you, Marty. Good morning, everyone. Thanks for joining us for our fourth quarter conference call. As noted in last night's press release we delivered full year and quarterly operating results that we're pretty much right in line with the expectations that we provided to you on our earnings call in October. Same store net operating income growth was 2.8% for the quarter on revenue growth of 2.4%. And NOI growth of 3.8% for the full year on revenue growth of 3.2%.

We're very pleased with these results and I want to congratulate our teams across the country for their hard work last year. And I will tell you we continue to benefit from the changes we made in our portfolio over the last few years. For the full year 2008, our same store net operating income growth for the assets we acquired in 2006 was 7.8% on revenue growth of 5.5%. And assets acquired in 2005 produced 5.7% NOI growth for the full year '08 on a 4.7% increase in revenue.

But our performance for the year belies what is going on in the economy today. The first nine months of the year really carried the day for us and the fourth quarter saw a dramatic fall-off in pricing power. We are clearly experiencing one of the worst economic climates in anyone's memory. According to some, unemployment could climb as high as 9 to 10%. These would be levels we've not seen since the late '70s or early '80s and there is no question that we in unchartered waters regarding the economy. No one knows what impact the government's attempt to jump start the economy will actually have. Nor how long it could take to actually have any impact. But we do know that it is jobs. It is jobs that are the single most important determinant to the health of the multifamily industry and today's jobless claim data is further evidence of just how bad the job picture currently is.

So 2009 will undoubtedly be a challenging year. Most likely, one of the most difficult we've experienced in quite some time. And so we've given same store revenue guidance for 2009 of negative 1.5%, to negative 4.5% which in this economy might not sound like much of a problem to many businesses, because those businesses are dealing with massive decreases in revenues as their customers drastically cut spending but we benefit from the fact that housing remains a basic need, and we've got a great portfolio of well-built, well-located assets that, notwithstanding all of the bad news that is out there today, remains 94% occupied, due to very positive demographics in our core market. Yet there is no denying we expect to have very little if any pricing power across our markets in 2009.

Now, this has been an equal opportunity recession. It appears that no industry, no SMSA, no market, no sub-market has been spared. It is possible that even our best markets could experience no better than flat revenue growth in 2009 and it is likely that most of our markets will be negative year-over-year. That's the bad news. The good news is, we've been through this before. We have a seasoned group of professionals across the country that I assure you will deliver the absolute best performance possible. I'm extremely confident that the experience we've gained both in the field and at corporate from running our revenue management tool the last couple of years will serve us well.

And I'm also very confident that the multi-family space will have the swiftest and strongest recovery ever. This will be due to the complete lack of new construction expected for some time across the country. And due to a very, very favorable demographic picture for many years to come. These factors suggest a very strong rebound in the fundamentals of our business when the economy begins to recover and produce jobs once again.

Now, at Equity Residential, we benefited from taking a defensive stance early. In just a minute, Mark will take you through our balance sheet which is in very good shape, thanks to the $1.6 billion we borrowed from both Fannie Mae and Freddie Mac last year, and due to having been a net seller of assets in 2008 to the tune of nearly $500 million. In fact, we only bought one asset in the entire second half of 2008 when we closed on a recently built property in Phoenix, Arizona, which we had put under contract in 2006, in a pre-sale arrangement. Meanwhile, we continue to sell assets by taking advantage of the strong bid for properties with smaller price points and slower growth or in our noncore markets and we expect to be -- to continue to be an active seller in 2009, because there continues to be a bid for the assets we're selling. And the GSE's continue to assure us that they stand ready to finance our buyers at attractive rates. We will be subject to tougher underwriting, but they stand ready to refund our buyers.

Now, I will also tell that you cap rates have certainly increased and values have definitely decreased. In 2008, we sold 41 properties at a weighted average cap rate of 5.9%, and realized gross proceeds of nearly $900 million. This was 101% of the value that we had attributed to these assets in the first quarter of 2007. In the fourth quarter of '08, we sold seven assets at a 6.7% weighted average cap rate, with gross proceeds of $90 million, and that represented 85% of the valuation that we had given those assets in the first quarter of '07. So obviously, this is not an apples-to-apples comparison. But it is just clear that cap rates have increased and have increased considerably in the last 90 days. Now, I want everyone to know that we are very mindful of the dilution that results from being a net seller of assets. Not just at current cap rates but at any cap rate. And we believe that in the current economic climate, turning noncore assets into cash at the right price is a good decision.

Before I turn the call over to Mark, I will just address development really quickly and you all know we have significantly reduced our development business in response to the current economic climate. We started only two projects in 2008, both of which were started in the first half of the year, one in Pasadena, California, and one in Redmond, Washington. And as we announced in December, we significantly reduced expectations for the immediate future, our development starts expectations, which led to the $116 million impairment charge. We do not expect to start any new developments in 2009 because they are very difficult to underwrite today and it is simply impossible to justify the use of precious capital to funding. We still have nearly $2 billion of projects under construction or in lease-up. So our energy will be spent completing those deals completely underway and getting everything leased up and stabilized as quickly as possible. I will now ask Mark to give a little it more color on our operating performance for '08, our '09 guidance and our liquidity position.

Thanks, David. Good morning, everyone. And thank you for joining us on today's call. I will first spend some time on our 2008 results, and how we believe some of those numbers will trend in 2009. I will give some color on our 2009 guidance, and I will end with a brief recap of the Company's cash position, funding need, and our plans to meet nose needs over the next few years. As for our 2008 results, we are pleased to report same store NOI growth of 2.8% for the quarter and 3.8% for the year. For the quarter, our same store revenues increased 2.4% over the fourth quarter of 2007. Driven by a 2.5% increase in average rental rates, solid occupancy at 94.3% and an increase in other income. As we said in our last call, our growth rates moderated in the second half of the year in virtually all of our markets. We anticipated this trend, and this pattern of weakness carries forward into our '09 guidance numbers. We continue to demonstrate strong expense controls with same store expenses up 1.8% for the quarter, and 2.2% for the year.

In the fourth quarter, insurance costs declined, and we saw relatively minor increases in payroll and maintenance. The majority of our expense increase came from uncontrollables. Predominantly higher utility costs, up 5.5% quarter over quarter, or $1.3 million, and higher property taxes, up 7% quarter over quarter, or $3 million. Unfavorable expense trends and property taxes and utilities will continue into 2009. Our G&A spend came in within guidance and was approximately 4% lower than 2007. We are working hard to drive this number down further in 2009. We expect a $4 million or 9% reduction in 2009 G&A, driven by lower personnel costs. We continue to look hard at every dollar we spend here and feel that we have institutionalized in EQR, a frugal spirit that will serve us well in 2009 and beyond.

We also had a good contribution in the quarter from our lease-up properties. As we told you in our original guidance for 2008, we expected our lease-up properties, which are not yet in same store, to make a positive impact of 25 million to $30 million for the year, and those assets met those expectations. Despite the current conditions in the economy, and credit pressures on the consumer, our bad debt was 0.9%, or 90 basis points of revenue in the fourth quarter, which is very much in line with our historical standards. Delinquencies were about 3.1% of rental income in the fourth quarter, which is also very much in the historical range and actually a little bit lower than the fourth quarter of 2007.

As you saw in our press release, our decision to take an impairment in our development business resulted in a fourth quarter 2008 FFO charge of about $0.40 per share. Looking at our fourth quarter 2008 FFO before the impairment charge, we actually came in about $0.07 per share higher than the midpoint of the guidance we had provided. We have listed the reasons for this difference in the release, but are happy to discuss further any details. I would like to address guidance for the first quarter and the full-year 2009.

On page 26 of the release, you will find the assumptions underlying our annual FFO guidance. We have also listed in the release the primary drivers of the difference between 2008 and 2009. Let me give some added color on a few items. Our revenue forecast calls for a reduction in same store full-year revenue in all of our major results. Though flat results are possible in some of our best markets like Washington, D.C. This is the inevitable result of the deteriorating national job situation. Assuming the economy continues to shed jobs, our operating numbers will be hit harder in the later quarters of the year, because of the typical lag in job losses impacting our results, and the cumulative effect of these job losses.

We also see the potential for some pressure on our occupancy numbers as the year wears on. Our preliminary same store revenue numbers for January and February 2009 imply approximately a negative 2.5% full-year same store revenue number. The midpoint of our revenue guidance is slightly lower than this number, reflecting our view that the rental housing market will likely continue to deteriorate further throughout 2009. The better end of our revenue range can only be obtained if employment markets stabilize, and we get some minimal improvement towards the end of the year.

On expenses, we set a same store guidance range of 2.5, of up 2.5 to up 3.5%. Expected utility increases of approximately 9%, and real estate tax increases of approximately 5% will pressure us in 2009. As these two large expense line items, together comprise 40% of our operating costs. Also, we are victims of our own success. We produced excellent same store expense growth of only 2.2% in 2008, and 2.1% in 2007. Making for a very tough comparison period in 2009. Our FFO guidance of $2.00 to $2.30 is based on four main assumptions to get to the midpoint of our range.

First, rent and occupancy declines along with more normalized expense growth will combine the reduced same store net operating income by an estimated $0.27 per share. Second, dilution from planned 2009 transaction activity will total about $0.06 per share. We have budgeted for property sales to occur roughly evenly throughout the year, while we have assumed no acquisitions occur until late in 2009. We are mindful of the impact of this dilution, but as David noted, we believe that converting noncore assets into cash is a good trade.

Third, the $0.08 in lower interest and other income mentioned in the press release takes into account that we have not budgeted any gains from debt repurchases which in the fourth quarter of 2008 added $0.06 per share to our FFO coverage. We will continue to be opportunistic here but as capital markets have begun a tentative recovery, these opportunities have become fewer.

Fourth, we will be carrying higher debt balances into 2009 than we otherwise would because of the December Fannie Mae loan that I will describe in more detail later. This cash will be gone by mid year.

Now, I want to highlight some of our recent capital markets activities and discuss our liquidity and sources of uses of capital for the next few years. In late December, we closed on a $543 million secured loan from Fannie Mae. It is interest only. Matures in eight years. And carries an all in effective interest rate of about 6%. All told we borrowed about $1.6 billion, Freddie Mac and Fannie Mae during 2008 at an average rate of 5.7%, and an average fixed rate term of nine years. Being proactive and addressing our debt maturities and development funding needs has been the priority and we are very pleased with what we were able to accomplish in 2008.

With the Fannie money, we had more than $1 billion of cash on hand at 12/31/2008. We took some of that money and launched a very successful tender for two of our outstanding unsecured note issuances. We purchased at part $105.2 million of the $227.4 million outstanding of our 4.7 5% notes, due 2009. And we also bought $185.2 million of the $300 million outstanding of our 6.95% notes due 2011. The goal here was twofold. Cash management and debt maturity management.

On the cash management side, our cash on hand was earning 1%. These debt issuances were paying 4.75 and 6.95%. The tender enabled us to pick up the spread. On the debt maturity side, the very reason we accumulated this cash in our balance sheet was to discharge these debt obligations and other debt maturing over the next few years. If we could do that on an NPD positive basis and extend the duration of our liabilities at the same time, all the better. We have also opportunistically purchased our convertible notes in private transactions. Our convertible debt is putable in 2011 and repurchasing this debt at an attractive yield to put of about 11% is both a good investment and sound liability management.

As we said in the release, since we started repurchasing our straight unsecured notes and our convertible, in the third quarter of 2008, through today, we have spent about $446 million purchasing $464 million of these convertible and straight debt notes. We are especially pleased to have purchased $101 million of our convertible debt for a cost of only $83 million, resulting in $18 million of economic gain to our Company.

A quick comment on the state of Freddie Mac and Fannie Mae. The two GSE's continue to be active lenders in the multifamily space and there is plentiful debt capital available from them at attractive 10 year rates of about 6%. However underwriting standards continue to be tightened. Especially on refinancing transactions. Some cap rate floors have been instituted and lengthy interest only periods are less common.

Now I want to speak a bit about liquidity. Let's start with our sources and uses of capital in 2009. Begin at 1/1/2009, we had $1.02 billion in cash. We had line availability of $1.3 billion. Therefore, had total liquidity of $2.320 billion. As for uses, we expect to spend in 2009 approximately $1.178 billion. Of that, $863 million will be used on debt payoffs. Including development loan payoffs.

Now, I note we have already spent $185 million to repurchase our 2011 bonds, through our recently completed tender. The $105 million in 2009 bonds purchased in the tender are already included in the $863 million debt payoff number I gave you above. Also in this discussion, I am assuming no additional debt repurchases in 2009. We will also spend about $130 million this year on existing development projects and other developments. So again, a total spend of $1.178 billion. As a result, at 12/31/09, we will have $50 million in cash and line availability of approximately $1.1 billion, and total liquidity of approximately $1.15 billion. And that $1.15 billion of availability is very conservatively estimated as it is before any additional financing activities. Also, while we are planning to have net sale proceeds of $450 million in 2009, for purposes of this liquidity analysis, I have not included any net sale proceeds.

Now, on the 2010, in the use of category, we expect to spend about $600 million. $500 million in debt payoff, including development loans yet to be fully drawn and $100 million in development funding and other investment spending. Our $500 million term loan that initially comes due in 2011 has an extension option which we can use to make the effective final maturity October 2012. We intend to exercise that option. And therefore it is not included in our refinancing needs for 2010. Therefore, at December 31, 2010, we will have cash on hand of about $50 million and line availability of about $500 million. Again, this is before any disposition proceeds in 2009 or 2010, and before any financing activity in either of those years.

In summary, we believe our cash on hand and line availability will allow us to meet all of our funding obligations through 2010 with no refinancings required and still have approximately $500 million of availability on our line at the end of 2010. Also, our 2009 and 2010 projections are before any proceeds from asset sales. Going beyond 2010, we would expect to finance ourselves in the agency debt market, through life insurers and other traditional lenders to our sector, through our disposition activities, and through capital markets that have recently shown some light and that we hope will reopen soon. I will also -- I also want to remind everyone that our recent tender and convertible bond repurchase activity, that through those, we have reduced our 2011 maturities by approximately $287 million.

Let me finish by emphasizing again that we believe we have a strong balance sheet, and sufficient liquidity to weather the uncertainties in the credit markets and that management is committed to being aggressive in maintaining the Company's liquidity and credit strength. Now I will turn the call back over to David.

Thank you, Mark. Before we open the call to questions, I would like to make a couple more comments. For 2009, we will have two primary areas of focus. Number one, maximize our property operations. Just like we did in 2008. We're going to collect as much rent as we can, we're going to be diligent on our spend, and we are going to take care of our residents so they will happily renew with us. Secondly, we are going to continue to be focused on liquidity. We will be a net seller of noncore assets, that is if we can realize prices that make sense, we will continue to turn these assets into cash. We will not likely be much of a buyer. Just like in the second half of 2008. And we will not likely start any new development projects in the year. But we will get what we have underway, completed, leased, and stabilized. And we will continue to be opportunistic in accessing the debt markets just as we were also in 2008. This is what will drive the EQR team in 2009.

And lastly, I would like to address the topic of dividend policy and the composition of our dividend, because at the present time, we plan on paying an all cash dividend in 2009. As Mark noted, we're comfortable with our liquidity position. And our ability to address our debt maturities as they come due. And we're comfortable with the outlook for our sector. Particularly in a recovering economy with virtually no new supply being added and the demographic picture ahead of us. Well, that's how we see it today. Going forward, as we have done each and every quarter for the last 16 years, the Board will review all necessary factors regarding dividend policy and will act appropriately. But again, we see no change or a need for change in our dividend at the present time. And we expect to pay it completely in cash. So with that, we will be happy to open the call to questions.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Michael Bilerman with Citigroup.

Good morning. One question about your refinancing goals. Can you indicate if there is any maximum level of agency financing to one entity?

It is Mark Parrell. There is, I'm sure, inside of each agency, a process of determining that number. We have spoken to both Fannie and Mac very recently and we're assured that frankly we're nowhere near that goal or that limitation.

And along the lines of something you discussed relative to other sources, you mentioned life insurance companies. What are some other potential sources, assuming the capital markets remain where they are?

Well, I want to address both parts of that. Certainly the life insurance companies maybe in the mid 7s are a source. I certainly see some progress in the unsecured debt markets. Our notes have traded better. Our CDS has come in. That has occurred across a lot of different sectors. A lot of issuers with similar ratings as ours or even lower ratings have access to markets.

So I don't want to put aside the unsecured debt market. I remain hopeful and tentatively optimistic that that market may open to us soon. Other options again are the convertible debt market which was a very good place to finance ourselves but I think is very sick for now and will take some time to sort itself out. And beyond that, I would suggest again the disposition activity the Company has undertaken is an indirect way for us to borrow from the GSEs and has been a good source of funding as well.

Thanks. I just had a couple of questions around guidance. Can you just indicate maybe a couple of markets that you think are going to be better performers. You mentioned DC but also highlight which markets you think may fare the worse in the next 12 months?

This is Fred Tuomi here. On the upside, Boston continues to be very stable. And I think Boston will have a good year this year. Everything depends on the job situation. But all the indicators right now Boston should be a good solid year. We have a couple of lease ups going extremely well, including our new one in Cambridge.

The DC, Maryland, Virginia markets should be stable. There is good job growth there. The last couple of years. It is predicted to be slightly negative next year. But I think with the government rallying and creating a lot of jobs right there in their own backyard, we will be pretty stable. We have absorbed a lot of new units there extremely well. The last two years. And I think that should continue into 2009. So DC, Virginia, I think will be a good performer.

And then I think Southern California never really goes far, as far down as the national economy. I think there is some pressure in the Inland Empire clearly but Orange County should be bottoming out, San Diego has been stable, L.A, very diverse, entertainment sector is doing well, so L.As got a little bit of supply issues but they've been almost close to finishing up the lease-ups there and may take a little bit longer but Southern California could be better. San Francisco I expect to be better than the national average. It has been very stable through 2007, 2008. Some risk for tech jobs but so far we're doing well there. We're well occupied. Still getting good strong rent increases in the Bay area.

Seattle, it was the one of the few markets that had positive job growth in 2008, and the only market with predicted job growth in 2009. So Seattle, notwithstanding all the press about Microsoft going, et cetera, it should be pretty well. The markets we're most concerned about are the shop markets, New York, due to the shock of the jobs and the financial market and then the traditional housing boom shocks that continue in Florida and Phoenix.

Great. Then another question relative to the guidance. You note 125 basis points cap rate spread. I assume that is the spread between where you're buying and selling and it seems to be wider than historically average. Can you just provide a little color on that expectation?

Well, it is wider, Michael, than what we have seen most recently but if you go back further, I think you would see what would be sort of a generally -- generally has been historically a normalized delta. Certainly, in '06 and '07, that did narrow, as we were able to significant -- sell an awful lot of assets very strong bids, on the stuff that we were selling because of the amount of financing that was available. And I think that that spread, if you look back historically, David, would be very consistent with what we would have seen prior to 2005, 2006.

Okay. Great. I will get back in the queue. Thank you.

Your next question comes from the line of [David Brag].

Hi, good morning.

Good morning, David.

Just broadly speaking, on guidance, could you talk about the level of job losses nationally, that the range that is assumed in your revenue growth guidance?

We don't think about jobs in that manner. We think about jobs in our sub-markets and down in our properties. So we don't think about it from a national perspective. We think about it by a market by market perspective. And Fred has given you a little bit of color and we can screw that down more if you need it in terms of the job situation in the markets in which we operate.

We'll look at the major employers in each individual market and each individual sub-market and understand what is going on there as well as understanding the supply situation in each of those individual markets as well as the family situation and we'll do that more of a ground-up. We don't announce to our people all across the country that they ought to work from a certain job loss starting point. It really is done at the grass roots level.

Okay. Then as we think about the pace of the decline throughout the year, could you provide the same store assumptions for 1Q?

The same store assumptions? I would expect same store NOI in the first quarter to be down. I would expect it to be down for two reasons. First, sequential revenue will be down. Okay? And I would expect that to be minimal, though. So when you look at a quarter over quarter, first quarter '09, first quarter '08, the revenue decline won't be that substantial. It will accelerate as the year goes on. What we do have in the first quarter is the beginning of higher expenses for us that we alluded to on the call. So that is where we get that. And then as the year goes on, that quarter over quarter revenue number will deteriorate. But in the first quarter, I wouldn't expect that number to be too terribly negative on the same store revenue side. It is just from that point on, this stuff will leak through the system.

Okay. And then last quarter, I believe that you talked about having pricing power on renewals, at least having flat rent rates in every key market. Where does that stand a few months later?

Let me just say you're right. What we talked about on the last call is in the first nine months of the year we did see pretty strong renewal levels, and we did start to see that weaken.

I can tell you this. As of January, our January renewals that are basically complete right now, every market is positive except for two, New York and Phoenix. New York is flat. And Phoenix is flat. All the other markets were still being able to achieve a net renewal gain on all of our leases expiring in January. The blended average is 2%.

Okay. That's interesting. And then just for Phoenix what is the magnitude of the decline that you're seeing there?

Like I said, they're flat. The renewals that we achieved in both those markets were flat, I think New York was down a tenth of a point and Phoenix was down a tenth of a point as well.

Got it. And then just lastly, what strategies might you be adopting to keep current tenants in place, at least at those rates? I read something recently about you removing some pricing from your website.

Good morning. This is David Neithercut. Regarding the website, if you go back to the last downturn, basically no one was doing realtime pricing via the Internet. We are using this opportunity it to tinker with some different strategies and kind of measure our customers' reaction and any interactions with our online website at the department. To date, we haven't seen any material change in how people use that. We've seen -- we continue to see increases in the number of guest cards that we receive online. And we will continue to modify and experiment with different strategies as we move throughout the year.

And as to our retention rate, our renewal rate, the amount that we achieve is up. The fourth quarter, is a very good performance in terms of our number of retained residents on our renewals.

Okay. So the thought is though that perhaps a little less visibility could assist in renewal rates?

Well, possibly. I mean basically, what we've seen with LRO is within our industry, there is a seasonality, if you will, to the flow of rent throughout the year. And typically, that season, that cross of that seasonality is in the winter months. And what we saw with the trough that occurred in call it October, November, we felt that, perhaps there was some over reaction to some of the rent changes that we saw in LRO. So we didn't want to market rents that we felt were not sustainable at those low levels. Already, as we begin to come out of this seasonal trough, we're seeing rents in many markets start to pick up as we would expect each and every year.

Okay. That's helpful. Thank you.

You're welcome.

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

Good morning, guys.

Good morning, Jay.

David, you mentioned Freddie, Fannie, and obviously more difficult underwriting and you clearly have some sales expectations for the current year, but could you provide a little bit more color there as to what you might see this year?

Sure, it is Mark Parrell. What we're seeing is an increased tightening really in agency underwriting standards. They're looking for coverages more like 1.3 times debt service, where in the past, that had gotten as low as 1.15, or 1.2 times debt service. I will also tell you that I think quite smartly the agencies have focused and prefer to do acquisition loans than refinancing. There is such a dearth of pricing data out there. If they're able to do an acquisition and get an arms length price, it really helps them determine their loan to value. So what I see is just a continuing increase, or stringent, increasing the stringency of the underwriting standards. I will say though as you switch away from your question, which is what our buyers do to what EQR does, I don't expect our terms to vary that much, because as we finance ourselves, we do it on such a large bulk basis with diversified pools that we get better prices and we have better terms.

This is not so much a change quarter over quarter. I mean the 1.3 times is pretty consistent with where we were maybe a few months ago?

Well, I think they have become more stringent in enforcing that standard. In fact one of the GSEs came out recently with explicit underwriting guidance on that point.

Okay. In terms of just I guess future use of proceed, I mean you didn't include those in your assumptions going forward, for debt paydown, but would you anticipate being more proactive in 2011, given that is the big maturity year?

Sure. I think we're going to continue look at that both secured and unsecured. We may be able to get some of that unsecured debt some of which is with life companies and we're working to do that. It is not just the unsecured debt market where there's opportunities, certainly some of our secured debt may be available for par or discounted repurchase. So we are looking at that. Both 2011, 2010, and anything else that we might have missed in '09.

And then also, did you mention in New York just how bad you expect NOI to get this year?

I don't think we did specifically. Fred?

It is going to be a function of the revenue side in New York and that one is hard to call. What's the job situation going to be. It is interesting, today what we're seeing is we're not having a mass exodus of people from New York. People are moving around and down, there's lots of rotation. They're moving to cheaper units. They're moving across neighborhoods, they're getting roommates but they're not leaving the town. If that trend continues, we get some stability, but I think this initial kind of writedown in rents and this fervor to offer concessions will stop so we can get some sort of stability in New York. But it is difficult to estimate what the situation is going to be. It could be down as little as 3 or 4% to as bad as maybe 6, 7%. We just don't know.

At a minimum though it is one month free.

Actually on the concession side, you hear a lot about those concessions and the owner paid brokers but not every unit gets a concession. What we're seeing in the portfolio is the smaller units, the studios, and those more geared towards maybe not the top end rents and we have a lot of those units in our portfolio and those are still doing extremely well. We're highly occupied on those buildings. We're renting them quickly. Especially after the turn of the year, we saw a little surge there. So we're not offering concessions on those type of floor plans. The ones you hear about the concessions and it really is a factor are the higher ticket bigger units, the two bedrooms with the higher floor, with the views and have been fully amenitized, and we got very good premium rents over the last few years, those are difficult right now to sell at the same rates so you have to have concessions there. So maybe about 40, 45, at the most 50% at leases in a given week are going to have a concession. The rest won't and about 30% carry the owner pay broker.

And lastly for David, just in terms of the economic stimulus and focus on homeowners, and sort of that combined with prospects for perhaps a weaker recovery, as you look out to 2010, what are your general thoughts on the propensity to rent versus own in terms of the recovery?

We look very closely at anything that is included in those packages that single family home oriented and on one hand we certainly are in favor of stabilizing the single family home business because we think that that's -- the single family home market rater because we think that is important to helping stabilize the economy. I will tell you though that I think that until our residents have a better picture and more confidence about their job and about the overall economic outlook, we're not expecting people to be leaving our apartments to go buy single family homes regardless of what the mortgage rate is. I think that a lot of people did that in '04 and '05 and they learned the hard way that that is not for everyone. I'm not suggesting that we don't have some pent-up demand in our units for single family home ownership but I don't believe that that will take place until the economy is stronger, people feel better about their jobs, about the overall economic outlook and we will be producing new jobs to create the traffic to backfill those people that do leave.

Thanks. That's helpful.

Your next question comes from the line of Michelle Ko with UBS.

Hi. Just to delve a little bit on David Brag's question, I was wondering if you could talk about the renewals and how you're still able to get increases with some of your competitors who are giving concessions? And also are you trying to lengthen your leases to 14 to 16 months?

I will give you some color on that. We have a very well defined sales training program which includes a thing we call action renewing so there is a defined process we use which gives our managers market intelligence, pricing recommendations, and at a process of negotiations to go through with our customers and it is amazing how steady we have -- steady have been in the results of that. About 30% of the people will sign at the quoted rate. So the first part is to define the quoted rate accurately. And we continue to be confident in the value of the product that we provide. So we're quoting some in most markets, increases still, and then we have a negotiation time with those residents and we get to the final results. And that is still resulting in the ability to get net increases on many of our renewals. Not all of them but the vast majority of them.

And right now people are satisfied with the flat in the down market and very rarely are we reducing rents and I think that is pretty true with the industry, that we're not giving renewal concessions. Concessions you hear are on the new leases where have you spot, extra inventory on the vacant units or high priced units but I'm not aware of anyone giving concessions on a renewal. You read about this sometimes in the paper. There has been some press recently about the big negotiations. But I think that is isolated, and very few cases. So we don't see that in our portfolio, which is a good cross-section of the United States. We're still getting rent increases even in places like Atlanta and like I said the only places we are not are New York and Phoenix and they're flat.

Okay. And can you also talk about your assumptions for acquisitions and dispositions, 700 for disposition seems to be a bit of a high number. I was wondering, if you could comment on, as you could see who the buyers might be? And also, could you give us a sense of how large each asset you intend to sell is? Are most of these assets going to be $50 million or less, or $100 million or more? And what do you intend to use the asset proceeds for?

Michelle, I think what you will see in 2009, if we are successful in continuing the disposition process that we have been under, taken for the last few years, will continue to be smaller priced individual assets. Particularly, we've got a portfolio of assets that we expect to sell that came to us from our purchase of Grove Realty Trust back in the '90s, there are a lot of smaller properties, average unit size, 95 or so units, so what you will see us selling will continue to be smaller to lower priced assets probably sub $50 million.

We currently, as I mentioned the market, remains there, Fannie and Freddie continue to provide financing and so we do believe that there will be a bid for what it is that we want to sell. But of course, that could change. So I mean, I don't know if we will get to 700 or not but as we look at what we have out under letter of intent, what we have out under contract today, what we expect to be marketing soon, our expectation is that we can do that.

On the acquisition side, as Mark noted, if we acquire anything, it won't be toward the back half of the year. We have not really bought anything or put anything under contract for quite some time and I don't expect to for a while. As we continue to look at the marketplace, but also I think value more dearly the cash than any individual assets. So the use of proceeds really will be cash. We think that that is far more important than owning some of these noncore assets today.

And then if we're successful in continuing to buy back some of this debt that Mark talked about, continue to buy convert, continue to buy unsecured debt, and perhaps we are successful in buying back or repaying early at par or at a discount some mortgage, existing outstanding mortgage debt that is expected to -- that will mature the next several years, that will probably be a likely use of that excess cash.

And just, do you have any more acquisitions that are contractual obligations?

No.

Okay. Thank you.

Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Good morning.

Hi, Alexander.

Just going to the debt markets first, for a few questions, Mark, where were the -- what are you looking for as far as the attractiveness for the unsecured market? What sort of rate are you looking at? And are you looking at an all-in or are you looking at a spread?

First, welcome back.

Thank you. I enjoyed my sabbatical.

Well, what we look at on the unsecured side is the all-in rate. I'm not a spread market, we're an all-in rate finance shop here. So what we need to compare it to is our Fannie, Freddie cost of funds which call is in the 6% range. It is not uncommon, it has been true in the past that we have paid a premium to borrow unsecured, I would expect us to do the same here, it is just a matter how dear that premium needs to be. I think borrowing unsecured proves to the market that we are able to access multiple sources of capital. I think that is useful and appropriate. But we won't do that at some kind of ridiculous price. We have seen really quite tremendous progress there. This was -- on the last call I think someone asked a similar question, I think we said it was by appointment. There is really no ability by EQR and other good real estate credits to issue. I don't think that is true. I think we can issue now. I don't think that rate is a double digit rate. I think it is a single digit rate. But it is not yet in the strike zone.

Okay. And then as far as incremental secured borrowing, how much more secured borrowing can you guys do and still maintain your existing rating?

Let's talk about covenants first. So we can borrow another $3 billion under our covenants, secured, without throwing the vehicle out of compliance. In terms of the ratings. The rating agencies, and we do visit them and speak with them constantly, their focus has been of late liquidity and maturity management. That is appropriately where I think their focus is at this time. And I won't pretend to speak for them but that's what they care about. They love the fact that we have cash in the balance sheet. They love the fact that we're very conscious. At some point certainly and the number is well before $3 billion, our rating will be pressured if we continue to be a secured debt borrower and all the better reason to maybe do a while unsecured debt even if it is at a premium to a Fannie, Freddie execution.

Okay. And then just the last question goes to your line of credit. How easy is it to replace one of the banks on the line of credit?

Well, to replace them at the same pricing, which is this L plus 50 pricing is effectively impossible. So the line of credit is something that is very valuable, that is going to reprice in 2012 and likely at a considerably higher number, based on today's market conditions and likely to be smaller.

Okay. So along those lines, are there any banks in your line that you're concerned about?

We did disclose that one of our lenders is insolvent. We have removed that lender from our calculations so all the liquidity information I gave you, excluded that particular lender. And I feel confident in the remainder of the bank group, it's 28 odd banks, it is very diversified, it includes the primary money center banks as well as some large regional, some foreign banks, so we feel good about the quality of the bank group at the time, at this time.

Okay. Thank you.

You're welcome.

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

David, I know you touched upon a dividend in terms of not paying any amount in stock. Given the projections for 2009, it looks like there may be a shortfall. Would you cover any bit of that with borrowings, from a line of credit?

Well, I guess I would hope, Mark mentioned that his analysis did include disposition proceeds, so I mean my guess is that we would have ample cash proceeds from dispositions to be able to cover any shortfall on that.

Okay. Second of all, in your prepared comments, you mentioned the cap rates over the past 90 days were up meaningfully. Could you put some numbers behind that?

Well, I guess what I would tell you is that thinking about the assets that we have acquired in the past and we would be acquiring if we were using our liquidity to acquire assets today, and again, I'm going to talk about some midpoints of some ranges here, but I also do want to say there has not been a lot of transaction activity out there. But our best guess is if deals were trading today, back, one year ago, most of the markets in which we were buying assets were probably at handle cap rates and today, many of those market does have 6 handle cap rates. So I would tell you that generally, in those better quality properties, in the markets in which we have been buying cap rates are up 100 to 175 basis points.

That is very helpful. Third, can you touch upon whether private equity still has the interest in multi-family or it has pretty much exited the space at this point.

We have not seen any -- are you talking about private equity and the EOP type private equity. That certainly is not out there. But there is I think -- everybody talks about funds having been raised to buy distressed debt or to buy assets. There are people who have cash on their -- having raised to do that, but we have not seen any of that play in our space as of yet.

Okay. Specifically, the amount of distressed assets in the market, when are you seeing that tick up meaningfully or when -- if not, when do you expect to see that tick up?

Sure, what I would say is talking to the GSEs they have pretty clean books, where I think there may be more opportunity and activity there as in the CMBS market where there are some very large well known deals that are under pressure. So those deals may be where there is a more meaningful opportunity for people to buy debt or buy assets at discounts in distressed situations. And that really hasn't manifested itself much. We have seen a couple of broken fractured condo deals here and there but we have not seen meaningful distressed asset sales yet in our space.

And finally, you talked about the prospects for a pretty strong recovery here in 2010, 2011, 2012. Just given the excess supply of a single family housing inventory that is on the market, do you think that eats into the recovery?

Well, certainly, that is inventory. And that is inventory of housing. So I can't imagine that that won't have some impact on the recovery but really you're talking about the Inland Empire, talking about Phoenix, and talking about Florida, and the other markets in which we operate, we don't look at single family housing as being oversupplied to the extent that it would have a negative impact on that recovery.

Thanks very much.

You're very welcome.

Your next question comes from the line of Lou Taylor with Deutsche Bank.

Hunter Keay on for Lou. Just had a quick question. It looks like estimated stabilization date on two Massachusetts properties was pushed back a quarter. I was wondering if you could provide color on that? And just the use of concessions in the leasing process?

Just the quarter, in many instance, pushing something back a quarter means instead of stabilizing in March, you might stabilize in April so I don't think there is anything to sort of read into that. With respect to concessions, we do underwrite up to one month free on our lease-ups on our development transactions that I will tell you that what we are leasing up today, that is averaging between a half a month and as much as two months free, just on average across that product that we are leasing up.

Perfect. Thank you.

You're welcome.

Your next question comes from the line of [Lee Christiansen] with Ismus Funds.

Good morning. I'm just curious about the gain on the buyback of the convert. Where is that showing up on the income statement?

Sure, so the gain shows up in the other income area.

Okay. And how much was that?

It was $18 million.

Okay. All right. And also, what do you think is the impact of the proposed changes in the New York rent controls? What do you think that impact will have on your portfolio?

Well, we haven't gone through that arithmetic yet. It looks like that is gaining some momentum, but nothing has happened there yet. I will tell you that we're involved in the Real Estate Board of New York, there is a meeting today that is taking place, and one of our senior people is at, and we are working very hard to try and combat that, so it is premature to tell you what impact we think that will have, because it is not quite clear what if anything is going to happen, but clearly, that is something that we're watching very carefully.

Thank you.

You're welcome.

Your next question comes from the line of [Scott Kirk] with TCAP.

Three questions. First, I wondered, do you all break out the end markets by industry exposure, like what percentage of your end market is financial services, versus other industry groups?

No, sir.

Is there any kind of way to ballpark that?

You mean if were you to look at -- at our resident, across all of our markets, who is -- what percentage is in financial services?

Exactly.

I mean we do know that by property, and individual regions but have not totaled that up to add up New York with San Francisco, with Seattle, with Orange County, for instance. But we are very much aware of who our core employers are in every market in which we operate.

If you looked at the biggest -- the biggest geographic exposure, can you kind of ballpark what that would be? Would financial services, for example, be one of the bigger employers in the big geographies?

Does anybody know at the top of their head.

The clear choice is New York on financial systems and to a lesser extent is Boston, maybe look at the Northeast Bay of San Francisco. But our systems do have down to the resident level all of the information about who they work for and the type of work et cetera and whenever we hear a news report of a certain employer who might be reducing size, we can know within a matter of minutes how many residents that we have under lease that work for that employer.

I would be just be interested in what, on a consolidated basis but maybe I will follow-up online.

Let me try one other way to think about. One of the banks that sort of disappeared in 2008 I recall that we thought we might have had, in New York, 50 residents maybe out of 150,000 that may have worked at that particular bank. So I know you're interested in industries, but it is a very diversified portfolio of employers that we cater to.

Okay. On delinquencies, can you give us a sense of what your thinking is? Do you think we've reached kind of a -- you're in a very good level, and historically, in a level that have you been, which isn't true of some of your peers. Do you expect delinquencies to rise from this level? Or what is your thinking about that on a forward basis?

This is David Santee. I would say that I'm more than pleased with what we see. I think one of the keys to our success was our implementation of a proprietary credit model about two years ago. And we have seen pretty tight ranges as far as our FICO score distributions and the overall credit worthiness of the people that are coming through our doors. And part of that model, depending upon your credit worthiness, requires you to pay additional deposits, all the way up to one to two months worth of deposits and those deposit levels have grown at a healthy rate over the past two years, so if someone begins to default, we have a lot of coverage on the back end. So personally, I don't see any reason why that should change over the next several months. I mean delinquency is a measure of people that currently live with us. I think what we see is a person that is reputable and concerned about their credit standing is not going to ride out an eviction process. They're going to come in, they're going to work with us, they're going to hand us back the key. And that cuts the bad debt.

So it would be fair to say that you don't see delinquencies going out of the historical range in the near term?

Not -- based on what I've seen today, no.

Okay. And thirdly, and thanks again for the time, on occupancy, can you give us a sense of how low that might get, how low it has been historically, and what the ramifications on pricing and FFO could be if that sinks much below the historical range?

With the yield management system, we're not really targeting occupancy, and we're not targeting rate. We're optimizing both of those to produce a consistent revenue stream. I would say tell me what the job situation is, and I can tell you possibly how low occupancy rates could go.

Well, you mentioned 9, 10% earlier. Let's just say a double digit level.

We did assume in our guidance a reduction of 100 basis points in occupancy. So from 94.5, which is sort of '08's number, to 93.5 So we do expect, and I mentioned in my remarks, some occupancy pressure, and have allowed for that in the guidance for sure.

If you go back into downturns that have occurred over an extended time period, let's just talk maybe late '80s where we saw occupancy go into the 88% or so that was at a time when there was massive oversupply, and I mean massive oversupply. We're in a situation today where we have a better demographic picture. We have declining single family home ownership and very little new apartments being delivered to our space. So we continue to think that pricing can remain reasonably healthy, we expect pressure on our rent levels, but we're looking at occupancy to not have to drop down to where it is some sort of low watermarks over previous downturns.

And what was the low watermark in previous downturns?

Again, 88% or so, I'm thinking back pre-RTC.

That is way back. And I think the last time we probably were hit maybe the worst case 92.8, or 92.9, and mostly in the 93 range. And the nice thing that I'm pleased with is the health of the occupancy and our exposure we measure left to lease of our entire portfolio. David mentioned we finished January at 94.0% occupancy rate, right on the button and we have markets like Inland Empire they're sitting there at 94.9 with 8% left to lease, 94.7 in Virginia, even Atlanta, 94% and New York, 94.5. Orange county, 94.2. It goes on and own.

It is encouraging. Would you all as a management team venture to share your thoughts on -- you talk about the supply constraint and how the economy turns, that will create a great opportunity. But what are your thoughts on the economy and when we could see some improvement. I know it is anyone's guess but what are you thinking about?

It is anyone's guess. I mean you just said it. And we gave a wide range for revenue guidance for this particular year because of the uncertainty that we have. And clearly '09 is going to be challenging. Many people expect 2010 to be challenging as well. But it we can start to get some traction based on some of this government stimulus, I think that you could start to see some improvement in 2010.

Thank you.

You're welcome.

At this time, you have a follow-up question from the line of Michael Bilerman with Citigroup.

All of our questions have been answered. Thank you.

All right. Well, thank you all for joining us today. If you have any other questions, you know where to find us. So thanks very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.