住宅地產 (EQR) 2009 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there been it there will be a question-and-answer session. (Operator Instructions). Mr. Marty McKenna, you may begin your conference.

Thank you for joining us to discuss Equity Residential second quarter 2009 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 the call over to David.

Thank you, Marty, and good morning everyone and thanks for joining us for second quarter earnings call. As noted in last night's Press Release, we delivered quarterly operating results that were at the high-end of the range that we provide you in our first quarter earnings release in early February. Excluding the $0.04 impairment charge for writing down the carrying values in vacant land we were actually well in excess of our prior guidance and Mark will provide a bit more color regarding the explanations in just a moment. But the primary factor was better than expected property level operations. We're very pleased about that, because it's no surprise it's a very, very challenging environment out there that we're working in each and every day. Now it's not something we might have thought possible at the beginning of the year but we think it's certainly worse than what the mid-point of our original guidance might have suggested.

We think we have managed pretty well for the first half of the 2009 and we expect the second half of the year to be pretty much close to our original plan as well. We have reduced our same store revenue guidance midpoint for the year by 25 basis point from minus 3% to minus 3.25%, and this based primarily on continued concerns about California and Seattle. Our expenses have been kept very much under control and we're now confident that we'll beat our original expense numbers by quite a bit. So we reduced our guidance range for same-store expenses.

David Santee and Fred Tuomi, they are here to help answer questions and they run all aspects of our property operations. I'm going to tell you, their teams have done a fantastic job on expenses so far this year and for the balance of the year we know they will. This is particularly off a very tough comp year in 2008 when expenses were up only 2.2%.

Where this team has really excelled this year is on our renewals. We're renewing existing tenants at rents that on average are 1% below their expiring rental rate. We think that is a very, very strong level, given the state of the economy today. And to put that minus 1% renewal rate in perspective, our net effective new lease rate and this is something that we talked about on our last call and defined as the rates that we are achieving on our new leases on a nest effective basis. That number is down about 9% from the rates that vacating residents were paying. We're doing 8 percentage points better on our renewals than on our new leases and I congratulate the team out there in the field for that.

The other point to mention about our net effective new lease rate is that though down 9% this year, this average rate has been relatively stable for the last six months, bout the same levels that we first mentioned about this concept on earnings call in late April. It means a couple of things.

First, our average rents rolled down a lot in the for the fourth quarter of last year and that our average rents have not eroded further from there. I need to emphasize the word, Average because in some markets our net effective new lease rates have continued to deteriorate since the beginning of the year. Those would include Los Angeles, Orange County, San Francisco, Seattle and Phoenix. In some markets the net effective new lease rate has stayed pretty much the same since the beginning of the year and those markets will include New York City, the Inland Empire and South Florida. In other markets the new net effective lease rate has actually increased since the beginning of the year and those markets would be Boston, D.C. and San Diego.

So while same-store revenues have decreased quarter-over-quarter, and they will certainly continue to do so throughout the year, it's not because the markets continue to get worse on average, but because we still have above-market releases that will need to roll down to this new lower level. Now obviously we continue to be concerned about the job picture and it can certainly worsen, which could negatively impact the rental rates, but that is the picture we're seeing across the market as we sit here today and David and Fred can certainly go into more detail about that during the Q&A.

On th transaction side, we have continued to sell assets in the second quarter and as I have said over the past several calls our strategy continues to be to sell our older non-core assets while there continues to be a bid. Frankly, as long as the GSEs are providing financing, because that is certainly is positively impacting the bids these assets we want to sell. Another thing that is possibly impacting the bid is the size of the (inaudible) we're selling. Through the first half of this year the average price of our assets was $15 million.

Now much of the information about the sales that we have done this past quarter are in the supplemental, but I do want to add a couple of things. Of the of the twelve assets that were sold, five were in Dallas. So this continues our previously-announced decision to exit the Texas markets. We sold three assets in the state of Washington, two in what we call non--Boston/New England, one in Georgia and one California/Central Valley. We had sold those twelve assets the underleveraged IRR of 9.7%. And I will tell you that the 5 Dallas deals were below 9.7 and the rest of the deals were all double digits above that 9.7 so that IRR was negatively impacted by that Dallas portfolio. The overall sales prices came in about 80% of what we might have considered high-water mark valuations back in 2007.

Now we acknowledge that these are highly dilutive sales when the proceeds are temporarily reinvested at less than 1% per annum. But these are all noncore assets or they're in noncore markets and we're frankly not confident that we'll see better pricing on these assets or better pricing in these markets if we wait. So we want to take advantage of the opportunity while we can and as I noted on our last call, we think the cash from these sales is far more valuable to us in our pockets than in these assets.

You will note on page 24 of our earnings release that we've increased our guidance for dispositions for the year by $100 million to $800 million now. And as you know through the first half of the year we sold $350 million of assets through today we have sold nearly $450 million. We have about $300 million under contract today, not all of which will close, of course. And another $250 million under letters of intent. So certainly those all won't close and a lot of them won't close this year, but we continue to see very good bids for the assets we want to sell. We have actually seen an increase in the number of potential bidders as of late. They are mostly local and regional players as we discussed on calls and primarily driven by Fannie and Freddie. I think Fannie and Freddie have about 100% market share financing the deals we have sold year-to-date.

So as the GSE's commitment to multi-family goes, so goes our ability to sell our non-core seats and we're here to tell you that both Fannie and Freddie remain extremely eager to lend and that's enabled us to increase our disposition guidance for the year. On the development side as I noted on the last several calls we have no plans to start any new projects at the present time. Our total focus is on completing, leasing and stabilizing our existing deals. And that is a fair number of projects in 2009, because this year we will complete the greatest volume of new development product in our history. Very high-quality assets in core markets across the country that we believe will experience strong demand and growing rents for years to come that. That represents about 1800 units and nearly $800 million of construction costs.

During the quarter we had a total of ten properties in various stages of lease up, today of those ten, eight remain in lease up and not yet stabilized. Like everywhere rents are below our original expectations, down 10 to 12% on average and consistent with the rent levels we're seeing on existing product in their respective markets, but begin, we have got great product and leasing velocity is very good. We're right on average pro forma absorption at about 20 units a month and our leasing teams are doing a fantastic jobs on these leaseups across the country.

From a return perspective, our developmental deals will initially underperform our original expectations and stabilize at mid-5 yields rather than the previously underwritten yields of the mid 6s. This is, again, for all the obvious reasons that we talked about, but they are all great assets, we're deleted we own them and they will do very well for us over teem. By the end of the year the development pipeline will be reduced to five projects with about $250 million yet to fund.

Lastly on development, as noted in the press release last night, we did take a $0.04 per share impairment charge on a land parcel. That is a parcel in the D.C. area, on which our joint venture partner had put a non-recourse loan that is maturing soon. There is some question today as to the value of that land and therefore, whether the loan will be repaid or the property given back to the lender, now, I'll tell you, no final decision has yet been made, but the impairment charge was appropriate to take at this time. And lastly, a note on the dividend, as we noted in the last night's release we expect to reduce our annual dividend to $1.35 per share when dividends are declared later this quarter for payment in early October. That is a 30% reduction or $0.58 per share on an annualized basis.

Now first, we feel that a reduction in our payout is warranted and prudent, due to the extremely challenging operating environment that we're experiencing today. And we think this level of payout is supported not only by our 2009 operations, but also by what we expect in 2010 when we'll likely experience another year of negative same store net operating income. Second, we think we will now establish a base level from which we will be able to deliver to our investors a safe, consistent and regularly increasing payout from improving operations. Third and Mark will go into a little bit more detail about this by retaining $170 million per year we'll improve our credit leverage which we think is the right thing to do at this time. Lastly and very importantly we expect there to be acquisition opportunities somewhere down the road and this will help Equity Residential take advantage of them when they become available. I will now turn the call over to Mark.

Thanks, David, good morning, everyone, and thank you for joining us on today's call. As David said we had a good quarter in terms of meeting our expectations for operation, especially in light of business conditions being more challenging than we had expected. This morning I will focus on three topics, I'm going to review our second quarter results. I will provide color on our third quarter and more importantly full-year guidance and I will give a brief recap on our liquidity position and strong balance sheet.

On the same store NOI declined 3.4% in a quarter compared to the second quarter last year. Revenue was in line with our expectations and expenses were better than expectations. For the quarter, our same store total revenues decreased 2.4% over the second quarter of 2008 due to a 1.2% decrease in average rental rate, and a 1.2% rate in occupancy to 93.7%. And while our occupancy decreased from just under 95% to just under 94%, we think these are good numbers, considering everything that is going on in the economy today.

We are delighted with the terrific work off our colleagues in the field and our corporate operations team in driving same-store expenses down 0.6% or 60 basis points on a quarter-over-quarter basis. I want to give a little color on expenses by focusing on real estate taxes, payroll and utilities, which together make up two-thirds of our same-store expenses.

Property taxes were up 3.6%, which is less than what we expected as assessors were quicker to reflect declines in value than we had originally anticipated. Payroll was down 0.8% or 80 basis points as we continued to reap the benefits of our high tech operating platform, which allowed us to do more with fewer personnel. Utilities were down 2.8% as we benefited from lower than expected prices for gas and heating oil. We also had decreases in leases and advertising and in turnover expenses. I also note that in all but a few markets concessions have been virtually eliminated as our focus is on net effective rents.

We also had a good contribution in the quarter from our leaseup properties. David has spoken about the great work of our field and development personnel in leasing up our development in other non same store property in a difficult environment. We anticipate these properties will contribute an incremental $22 million which is $0.01 more than we had bought in April to our FFO results this year. We continued to show good discipline on the non-property expense side as our G&A spend for the quarter was down approximately 13% or $1.6 million from the second quarter of 2008. Mostly this was due to lower payroll costs.

Now I'm going to chat a little bit about guidance and I'm going to go through, as you saw in our release, our guidance for the third quarter and our revised guidance for the full year 2009. On page 24 of the release you will find the assumptions underlying our annual FFO guidance There are three main assumptions to get you to the $0.51 per share mid point of our third quarter FFO guidance range from our actual preimpairment second quarter FFO of $0.62 per share.

First we'll have lower property NOI in the third quarter from our same-store portfolio due primarily to a continued roll down of new leases, to a lower net effective rental rate and dilution from to our 2009 transaction activity. We expect this decline in quarterly property NOI to total approximately $21 million or about $0.07 per share from the second quarter versus the third quarter. Second, interest experience will be higher by about $0.02 per share in the third quarter due to higher debt balance as a result of our recent $500 million loan from Freddie Mac and lower capitalized interest due to reduced development activity.

Just to be clear interest experience will be higher in the third quarter than in the fourth quarter because our remaining 2009 loan payoffs occur mostly late in the year. But for the entire year, interest experience is tracking approximately the same as our original guidance, because the cost of carrying the new secured loan, when you net that against the lower than anticipated floating rate debt rates that we have, leaves our expected annual interest experience essentially unchanged.

The last reconciling item I have for you is that we expect lower interest and other income of $0.02 per share in the third quarter I don't expect that we'll have the same gain as in the second quarter from sale of an investment security.

For the full year we have revised our guidance range for the same store revenues expenses in NOI as well as our FFO per share. We narrowed the same store revenue range because as we sit here today, more than halfway through the year as well as through most our primary leasing season. Our new range for revenues has a mid-point, negative 3.25% that is in line with our original projections and we see this as positive as we have operated our assets well in a rapidly deteriorating economic climate. Quarter-over-quarter revenue declines for the third and fourth quarters are expected to average around 5%.

We are very pleased to revise our expense growth guidance to a range of 1.25% to 1.75% for the year, because of the trends in the expense items I described previously. We are mindful of the importance of the condition of our properties and will not sacrifice our property's long-term value by scrimping on needed maintenance or on capital improvements. Our state-of-the-art central purchasing system and other operating improvements along with general deflation in material and outside labor costs have allowed us to spend less while keeping our properties looking good. The high quality of our properties is reflected in your customer loyalty scores. We survey our residents several times in each lease year and their happiness with their homes and dedicated employees in the field is high and improving.

Based primarily on these revisions to our operating guidance we have also tightened the guidance range for FFO per share to $2.10 to $2.20 per share from the original $2.00 to $2.30 per share. The midpoint of the guidance range remains the same. The revised guidance includes $0.03 per share for the net positive from better than expected NOI from our same-store portfolio and leaseup activity less transaction dilution. $0.01 per share to the positive from higher interest and other income and $0.04 per share to the negative from the impairment charge. Also as David mentioned we had decreased our acquisition guidance from $250 million to $150 million and increased our disposition guidance from $700 million to $800 million. The additional dilution is included in our revised guidance.

Our increased net sales guidance combined with our new lower dividend will pressure our retaxable income distribution requirement. At this time we to not believe a special dividend will be required. In 2010 at our new dividend rate we can be a net seller of approximately $300 million of properties without impacting our distribution requirements.

Now I want to discuss our liquidity. As you know, we have been focused on having a conservative balance sheet by maintaining ample liquidity and prefunding our debt maturities. With that in mind on June 29, we closed on a $500 million secured loan from Freddie Mac. One that is interest only, matures in eleven years, has an all in effective rate for the first ten year of approximately 5.6% and is collateralized by 13 properties. I commend our excellent treasury team and our partners in our legal team and in the field on completing this loan which was in process for several months.

We now have cash on hand sufficient to fund our maturities and development funding obligations for all of 2009 and all of 2010. Using proceeds from expected 2009 disposition, and our undrawn line of credit and without any other debt transactions, we can fund all our maturities through 2011, though the Company would expect to renegotiate its line of credit, which matures February 2012 during 2011. Please recall that our $500 million term loan initially comes due October 2010 and is included in our maturity schedule as a 2010 maturity. It has an extension option, which we can use to make the effective final maturity date October 2012 and it's not included in our refinancing needs in 2010 or in the discussion I just went through. A quick note on the health of two or of our main debt capitol sources.The unsecured bond market and the GSE

The unsecured market is wide open to EQR in large size and rates at approximately 7% for ten years. We note that nearly all of our short-term unsecured paper is trading at a premiere to par, which while demonstrative of the unsecured market's recovery has not given us much of a chance to repurchase our debt opportunistically as we have done in prior quarters. In fact, we did not purchase any of our debt in the second quarter. The two GSEs continue to be excellent partners to EQR and provide abundant reasonably priced debt capital to our sector. Recent statements by the HUD Secretary and GSE's Conservator have been supportive of the GSEs multi family mission. Of particular note is the substantial recent utilization by Freddie and Fannie of the securitization market to avoid overburdening their balance sheet. The GSEs respective securitization product vary in several important (inaudible) and have advantages and disadvantages to borrowers versus on balance sheet execution. But on the whole are a huge positive to our sector. As an additional inexpensive liquidity sourcing alternative to the GSEs own balance sheet.

Overall, total from our friends at the GSEs is positive, but political risk to the multi-family mission remains difficult to quantify. GSE underwriting standards have continued to grind tighter and it's not uncommon that property income trended down by the lender. It continues to take longer to complete a loan transaction now than one year ago as the underwriting process is more involved, that said, in many markets you can readily borrow ten-year amortizing money at about 6% and a 70% loan to value. Both GSEs favor acquisition financing over cash out refinancing as the value of the collateral is more readily estimable.

Now a bit of detail on the impact of the Company's expected new dividend policy. We have said in the past that we run a small shortfall on our dividend in 2009 and a slightly larger shortfall in 2010. The reduced dividend we announced today eliminates those shortfalls and our projections indicate that operating cash flow after CapEx will be sufficient to cover both the 2009 and 2010 dividend. Additionally as many of you have heard us say, it's our intention to continue to pay all of our regular dividends in cash, not stock. We're in an excellent position when it comes to our liquidity and balance sheet. We have the ability to access many sources of capital and will continue to be opportunistic in doing so. Now, I'll turn the call back over to David.

Thanks, Mark. We will be happy to open the call to Q&A at this time.

(Operator Instructions). Your first question comes from the line of David Toti with Citigroup.

Good morning, everyone. A couple of questions about the dividend cut and it makes sense relative to positioning, but the language around, Opportunity. Are you seeing any opportunity yet and where do you think that will appear?

Well, the answer to the first question is no, and to the second question, is I don't know. We have not seen what we would consider to be opportunity out there yet. We would expect there to be some opportunity somewhere down the road. Frankly, I'm into the quite sure, David, it will be the size of our opportunity, meaning the sort of discounts that we might have seen back in the late '80s and the early '90s in the RTC debacle, but we do believe there will be some opportunity down the road we just haven't seen any of it yet.

What about the dividend cut relative to upcoming debt maturities? Will that take precedence perhaps?

I would say on the debt maturities side that the dividend was not so underfunded. That it's such a substantial source of cash to us, David. So it's not really a key driver here is not to aggravate the debt maturity schedule, but cutting the dividend doesn't really satisfy many of our forward debt maturities.

Along the lines of debt maturities you opted to hold cash on the balance sheet at dilutive levels and why not be more proactive at retiring some of that debt forward or personalities that are holding you back?

We have certainly been proactive. We did $300 million on the debt tender back in January. We bought a good portion of the convert back as well and made $19 million on that. You should expect us to be out there and be active just because the debt is trading at a premiere doesn't mean we won't buy it, David. That's the implication, absolutely, we realize that having money on our balance sheet at 40 or 50 basis points versus refining some of our forward debt we'll do that when it makes sense and we're looking at it actively right now.

Just touching upon the expense, the operating expenses, the reductions in the quarter were pretty dramatic and I'm just wondering how you were able to roll it out so quickly and so broadly across the portfolio and is that the sort of framework we can expect going forward in terms of the competition?

This is David Santee. First, let me say that all of our expensing initiatives are more long-term focused and we have no desire to create any short-term, knee-jerk reaction. So a lot of the payroll really is part of a bigger picture work

flow transition that utilizes our web tools and engages the residents and transfers a lot of the work to the resident. When you put prices online and you have that transparency, you kind of cut down your call traffic about 50%, because people know what your prices are. Though don't have to call. So I think what you are seeing is really just the beginning stages of a longer term focus that we have a fairly detailed plan that will take us probably the next three years to fully implement.

Great. One last question and I will yield the floor. Can you just provide a little bit of detail on what you are seeing in some of your more challenging California markets? Is the weakness being driven by unemployment or the chaos in the housing market? What is impacting those markets?

This is Fred Tuomi. California markets I would start with Los Angeles. That has been the biggest disappointment so far this year and it started with the broad based general economy and shipping traffics through the ports is down 30, 35% and just a widespread kind of across every sector the substantial job losses. So the job losses in L.A. were in excess of 100,000 for 2008 and about 180,000 this year. So that took a big toll on the local economy. And in a year when we had relatively large set of supply coming in the market, compared to recent years. So Los Angeles is under a lot of pressure. Entertainment that is really a good support during a recession has been not there although recently we have seen a little bit of improvement in entertainment leasing. Really it's a situation based on the job loss.

The risk going forward is there are going to be more local government cuts as a result of California budget crisis, and that remains to be seen. Orange County is under the same situation. Two years in a row of large job cuts and has been a lot of pressure on that market along with some supply coming at the wrong time. San Diego has been good really on the upside. San Diego has been a good, favorable situation. The numbers are positive. Good leasing summer season this year. Occupancies are up, rents are up. So San Diego is kind of an anomaly in California.

And San Francisco is as expected we knew it was going to be tough with job loss related to real estate construction, especially Oakland and far Northeast Bay. So it's kind of expected, but it's tough. A lot of job loss in San Francisco. Tech has been okay, but not a source of growth and it's kind of as expected.

Great. Thank you for all the detail.

Your next question comes from the line of [Michelle Koe] with BAS-ML.

Hi, good quarter. I was just wondering in terms of your guidance increase for NOI, I understand that you have these expense reductions that are due to some longer term initiatives. I was just wondering if you could talk a little bit more about what specifically changed this quarter versus last quarter for why you are implementing the change in the forecast now?

Right. Michele, it's Mark Parrell. When we think about guidance for the year, we think hardest about it now. We did not revise substantially any of our guidance back in April. We thought about the leasing season coming up and really wanted that input. So what has really changed from January, that's the point of comparison, is that same-store is better than we thought, because of the expense improvements that we all discussed by a couple of pennies. We are getting a little momentum on leaseups that we weren't expecting. Those are very hard to forecast and that is about $0.03 and with the increased dilution from dispositions, frankly, that kind of moved us down a couple of pennies. So why you net that all out and run that through, you are a few cents better there. So that $0.03 or $0.04 in operations is offset frankly by the impairment charge we took this quarter. As we made our guidance adjustments that is what was going through our heads. And interest expense is basically constant through the calendar year and is about what we expected in January it still is at this point.

Do you have a follow-up question, Michelle? Let's's go to your net question, please.

Yes, sir, your next question from the line of Jay Habermann with Goldman Sachs.

Your comments about rents being down as much as they are and obviously the turnover that is just inherent to the business can you comment about when you think NOI bottoms? Is that a mid 2010 timeframe?

That is anybody's guess right now, but yes,if we're able to hold this net effective new lease rate, this sort of down 9 from a year-ago, that would imply that we still have some leases to roll down, particularly those that were renewed during this year at the higher renewal rate. So we'll still have some pressure through 2010, but we ought to be able to find some kind of bottom sometime in 2010, I hope.

In the cases where you mentioned renewals down 1% versus new leases down closer to 10, obviously maintaining that delta is going to be a challenge, but are you going away two year leases to the renewals where you basically say flat rents for two years?

We are not going that--.

Are you giving any concessions away for the future or not at all the?

This is Fred Tuomi, we're giving no other concessions on renewals, the idea of giving some sort of upfront incentive or a gift card or a free rent or anything to entice a renewal rate is not in your equation at all.

So it's not flat lined for two years or anything like that?

No, New York/Manhattan, you have some obligation to offer two-year leases which we have a small number taking advantage of, but thats really about it.

Interesting comments on the asset sales you are targeting $300 million next year. David, at this point are we looking at that is going to wind down, your asset-sale program?

Mark said we could sell $300 million next year without having impact dividend policy. We could sell and the gain that we could take at $1.35 run rate dividend going forward. That doesn't mean we won't sell more. We would have 1031 anything implicationally above that or we have to start to think about some kind of special dividend.

Do you think that the sales program is beginning to reach the end after several years of obviously --?

I guess, we are beginning, I think, to reach the end of those assets we had identified several years ago as those non-core assets in no one core markets, but I will tell you that we will every year for our history, I think, be sellers of seats that we believe no longer fit or require capital requirements that we don't think will give us an appropriate return. So I think you could sort of expect us to be active sellers for really forever. I don't think our portfolio will ever be constant.

Can you give us a idea of spreads between A and B assets at this point?

We talked about 125 basis points spread as that spread between the yields we expect to be selling and the yields we expect to be buying. So we're selling lesser-quality product and when we buy, we'll be buying better-quality products. So I think you could look at that 125 basis point spread as an appropriate one.

Could you give some specifics on New York City? Obviously it fell in your market where you're seeing trends stabilize but any sort of insight there in terms of what you are seeing?

This is Fred again. New York, with everything going on there, you would expect a worse report, but I have to tell you I am very satisfied how New York has performed so far through this cycle. This summer has been particularly encouraging. We have very strong June demand. Leasing was up. Occupancy was up and our rents recovered. Net effective asking rents recovered dramatically during the month of June. So our penthouses are full. Our occupancy is 95.7. Our exposure is less than 8% right now. The rents are holding, as David mentioned from the beginning of this year. Sure they are down big time year-over-year and from the peak, but where we sit now, we see steady demand. We're not seeing a lot of job losses and people leaving the city. People are still moving around a lot. Negotiations are tough. It's taken our people on the ground a lot longer to complete every renewal and to secure every transaction as people are moving around the city a lot and negotiating and swapping deeps. So a lot of that is going on, but that hard work is paying dividends because we're pretty stable in New York right now.

Thanks, guys.

Your next question comes the line of Rob Stevenson with Fox-Pitt Kelton.

When you take a look at the down 1 on renewals which is great in this type of environment and down 9 on turns, what is the trend as you continue in July? Is it fairly consistent with that?

Yes. July is very consistent. The renewals that we achieved in July, 12 months versus 12 months was down 0.7%.

Mark, you stalked about when you were giving your guidance on a sequential basis looking into third quarter with the sort of down on the revenues or NOI, however you want to put it. Does that assume at this point that the sort of midpoint of your range assumes that you see a decent sized weakening in that as we continue to go forward or is there something else that's coming into play there?

No, there is more sequential expenses in the third quarter than the fourth. Part of that drop just makes it -- it looks like a larger drop. The revenue decline in each quarter, the third and fourth is approximately constant. Expenses in the fourth quarter are just by seasonality less than expenses in the third.

Okay. Then within the portfolio right now, when a unit becomes vacant (inaudible) between leases?

No, we have a well-defined process, a checklist that our maintenance teams go through to get the units turned. We haven't changed that at all and all of the metrics that we measure on our proficiency and efficiency are the term of process are in the sweet spot.

So the fact is that you are not seeing, because of the leasing environment any sort of material uptick there?

I'm sorry, I thought you were referring to the mechanical process of getting the back ready. In terms of getting them reoccupied? Occupancy is down almost a point year-over-year, so there is going to be slippage there, but it's not dramatic. I would say it's still pretty much a month total.

Okay. And then lastly, what are you guys seeing in terms of the second quarter, in terms ever bad debt and how does that compare to the last couple of quarters?

This is David Santee. Pretty much our bad debt continues to bounce between 90 basis points and 110 basis points and we really haven't seen any change from January through June. July we saw an uptick of 30 basis points, but that is attributable to one of our initiative/programs as far as a more consistent approach to assess charges once people move out. So that increase amounted to $400,000 of which all of that is associated with just the increased move-outs from June and how we account for that in July.

Okay. Thanks, guys.

You are welcome, Rob

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

Good morning.

Good morning.

Just want to go first to the cost-control. I think if memory serves, you guys a number of years ago hired a firm to come in and do an efficiency analysis and over the past number of years you guys seem to be pretty good at eking out cost-savings. Can you just walk us through where was -- I don't want to - well, I use the word "Fat," but where was all of this extra stuff that was not needed to run the business today? Was it more corporate? Was it property level? Was it layers in between? If you can just walk us through this?

It was all of the above. This is David Santee. Let me give you one example. Let's take leasing and advertising, for example. We made as the world turns more towards Internet use, we made the decision last year to really just walk away from print.

So a big part of our savings this year is really being absent from the apartment guides, the for-rent magazines and now what we have done, if you have gone online, you have seen that we have released our new website back in April. And this website is really a Ferrari, so to speak as far as the infrastructure. And we've been able to move from page 9 on a Google search as far as organic all the way up to page 1 and we have taken more central control of a lot of the IOS spend, the rent.com, the apartment.coms, and you see significant optimization year-to-date on that expense.

So if it wasn't for our broker fees in New York, we would be down 20% year to date on L&A costs while still increasing our traffic by 5% and our Internet leads by 23%. So a lot of what we're doing is really taking advantage of technology and as I said before, reengineering work flows throughout the Company.

And you're also seeing the benefit of working in 50 markets, however long ago and now really having most of our effort concentrated in what might be 15 oar 16 markets today.

So do you think there is a lot more to go or do you feel you have targeted as much stuff now and you are basically at muscle?

I think the world continues to change, and I try to instill in people here that expenses are like painting a bridge. Once you've worked through all of these account groups, technology has changed, the world has changed, start all over again. So as an example, we completely transitioned all of our DSL service, at all of our properties this year over the past three or four months with an annual savings of almost $700,000. We transitioned a lot of our telecom, because there is moment between AT&T and what have you there. So we have tremendous visibility today and we have a lot of great, very focused professionals here that do a great job. I think there is a lot more to come.

Okay. And then my second question is just on the capital side. With the new Freddie loan, is there concern from the rating agencies about the unencumbered pool and then thinking about alternative ways to raise capital if the unsecured debt market may not be where you want it, maybe it is, but what other options? Like a term-loan? And then you spoke about equity issuance and just wanted to get your updated thoughts there.

This is Mark Parrell and I'll take the first half of that. Talking about the debt markets the unencumbered pool for EQR unencumbered NOI is just going to end up to be $705 million so it's very substantial. Our metrics, as you can see reported in supplement are very strong. I think the concern that rating agencies have about all real estate companies is really focused on income and it's focused on income because their concern relates to the fixed-charge coverage. So I don't have as much pressure or concern or question frankly about the unencumbered pool from the rating agencies. It's just the rating agencies like all of us are trying to figure out where the bottom is on NOIs. So they can understand where their credit metrics will end up. As for access to different markets, for debt, EQR has always been very flexible.

We are mindful of what is going on in all the different debt baskets. We have borrowed before in the preferred market and I think, Alex, you should expect us to look at the unsecured market, to look at the preferred market. In terms of the banks, I don't know that we need to be in the bank market right now. That's a very difficult market there are some big revolver renewals going on now that will help us understand where that markets is going. EQR is in an enviable position of not really having to deal with the banks for a couple of years and I guess probably at this point I would leave it that way and I'd defer on the equity to David.

I guess I mentioned on the last call, Alex, we are aware of what was going on and why companies were raising equity, I guess I would tell you we were aware of that and the Board is aware of it, Sam's aware of that and when it makes sense, if it makes sense to raise equity, we won't hesitate to do it. But we don't feel we have an immediate need to do so.

Okay. Thank you.

You are welcome

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

Thanks, good morning guys.

Good morning, Rich.

A couple quick questions. You mentioned early on that the second half of the year you expect to come pretty close to the original deployed , you are talking operationally that while you have some moving parts from disposition and impairment in your new guidance the second half of the year is going to be roughly what you thought it was going to be from the same-store perspective; is

Generally is on the operational side. Revenue, we changed our revenue targets mid-point by 25 bips and obviously improved on expenses and I guess my comment was more the way we're looking at the top-line across the marketplace.

Okay so your full-year guidance for same-store improved, but I was wondering if that is a function of what you already accomplished in the first half or that what you've accomplished will filter into the second half?

Well, the (inaudible) will also filter through the second half. But I will say the topline has to date been pretty much what we expected and we're thinking it will be the same in the back half as well.

Expenses were better and lease ups were better, and so those are the real reconciling items and we couldn't have known that back in January when we put the forecast together.

On the spreads between renewals and new leases, I think the mark of a healthy environment is when new lease rents are well above renewals. I think you would agree with that. So if that is sort of the litmus test for a return to a healthy environment, how long can you see a spread of 8 percentage points being sort of wiped out? Does it take a full-year of running through? So if we get stabilization in the middle of 2010, that that sort of situation will take another year to come to fruition? Is that a quire way to look at it?

Again if this net effect of new lease rate, as we mentioned was down 9, stays flat through the next 12 months, and assuming -- it's really a function of the number of 2010 renewals, and whether or not they renew at their older renewing rate or mark down to the down 9. The renewals that occur, in '09, when those leases expire. As I mentioned earlier we would expect 2010 to find at some point in 2010 to find some level of stabilization.

And another part of the equation there is when the economy does stabilize and we get job growth back in this country, we're going to be positioned in some of our markets for a quick recovery based on supply. Supply is coming down in most cases right now. We have some markets with zero-starts for the rest of this year and if you look at the pipeline for development in 2010 and 2011 it's very favorable.

With this level of occupancy across the portfolio too, we would expect when things destabilize and I don't know that hopefully 2011, the back half of 2010, we think there will be a two or three-year period be some of the best fundamentals this business has seen once things begin to stabilize.

What would you say is a natural spread in good times of new leases over renewal rent? Is it 4 or 5% or is it greater than that?

Rich, this is David Santee. Basically what you are referring to is the gain/loss. The gain/loss concept really goes away in the yield management environment, but historically, that has kind of been the number. Somewhere between 4 to 5%.

Great, thank you.

And your nest question comes from the line ever Michael Salinsky with RBC.

David, first question for you. Can you talk about traffic patterns throughout the quarter and what you have seen in July? And also in terms of moveouts, we have seen housing starting to clear in certain markets. Are you seeing any kind of pick up and move outs to home ownership or home rental.

Well, David Santee, what I would tell you is that our second quarter moveouts to buy homes is lower than the second quarter of 2008. We see the typical Q1 to Q2 seasonal uptick, and when you look at that percentage change from Q1 to Q2, it's been the exact same percentage for the last three years. So in some markets we show, as an example, Orlando, we show 40 basis points increase from Q2 '08 to Q2 '09, but our turnover in Orlando is significantly down. So the raw count is actually negative. So we just don't see -- I think if you look at a lot of the articles that have been in the Wall Street the last week or so, I think the people that really dissect what is going on understand a lot of this is seasonal and every year there are more home sales in June than May. So we just don't see any significant moment as far as moving out to buy homes.

What about traffic across the portfolio?

Well, traffic, the traditional definition of Traffic in the industry is People that actually walk into the door. So that number is up 6% year-to-date. July has been very favorable to us. Our applications are tracking ahead of last year, but when you step back and look the at how the world is changing with the Internet, we kind of look at initial contact. So people contact initially either by email, they are calling us because they saw us online or they are walking in the door. And when you add all of those things up, we have seen a 16% increase in those three types of activity.

I would also add that the traffic through the front door is a much better piece of traffic today than it was. Because today that piece of traffic comes in very well-informed and prequalified compared to traffic that used to come through the front door not too long ago, not knowing what the price point was nor what we had available to offer.

And the summer leasing season this year, we were anxiously awaiting for it and now that we're basically at the tail-end, we're very satisfied. Some of our markets have had a very good surge of traffic and demand and leasing through the summer leasing season. Especially Boston, D.C. and as I mentioned New York, CBD of Seattle had a nice recovery and then Orlando. So we're seeing the seasonal uptick just as we were hoping for.

Secondly, I know you guys aren't planning to start any new developments in the near-term here. With the impairment during the quarter, I was just wondering what the pre-development pipeline looked like in terms of size and maybe markets that you have got an elevated exposure to?

Well, I think our land inventory is a couple hundred million dollars, $200 million or so and that is in San Francisco, L.A., Seattle, I guess we're finishing one in Seattle. So it's not a huge pipeline, particularly for our balance sheet.

Okay. That is helpful. And finally a bigger-picture question for David. If you look at -- and it's kind of building on Jay's question as well. If you look ahead to 2010 as you cycle through the lower-lease rates and renewals possibly move out and you also face tougher expense comparisons. I'm not asking for 2010 guidance, but is it likely that we're going to see greater NOI erosion than we saw in 2010 than we saw in 2009?

I guess I'm not sure how we can give that without giving guidance. I guess we would expect there to be negative NOI growth in 2010 as those leases that renew in 2009, down one, expire in 2010.

Okay. Thank you.

You have a follow-up question from the line of David Toti.

Michael Bilerman speaking. David, I just want to come back to the lease spread between the new and the renewals and I think you talked about one of the expense-savings you have had is a lot more people going to work the web. They are looking at rate, they understand rate and they are doing their leases on line. I am just wondering why those same tenants take a look at where the new rents are, they know they are down ten, why aren't they battling back a little bit more given increased vacancy fees and move within the asset? I can understand moving costs away outside of the building, but I would have thought that you would feel more pressure as the consumer becomes more educated as to what rents are in the market?

Great question. This is David Santee. The fact of the market is that many residents do go online to check rents. One of the things that we have really been focused on is developing more of the brand customer loyalty, providing these value-added services and we learn all of these things from the customer through our automated survey process. But I think on average you have to look at this on a market by market basis. You go to Atlanta, you go to Dallas, Denver, your average rents are somewhere in the 800's. A 10%, 9% drop is $50 or $60. It doesn't take long to eat up that savings when you start moving and you have to change your automatic rent payments every month, and you lose your rent with equity points because you are saving up your points to buy your home some day. All of these programs are really creating value and that is what a brand does. A brand causes people to stay and say great things about you and pay more money.

Is is there anything, I guess, you talked about there was no sort of long-term leases being done or any sort of incentives being provided. Are you doing anything on the expense side in terms of maybe repainting the apartment or providing other upgraded units or anything else that may be coming through to entice that renter to stay put at a flat rent?

This is Fred Tuomi. We do have a well-defined process how we approach our customer loyalty and that includes the renewal process as they come up on each terminal lease. Our site personnel know to negotiate, they know the position that the resident is in and I do have the option of offering what we call non-price assistance on that, but it's limited to touch-up paint job, a carpet clean and things such s that and there is very little take on that.

That would be running through your experiences?

Yes.

Payroll pretty much.

And our maintenance expense.

Yes.

And then was there any -- you talked a lot about the expense-savings that you have been able is to push through. Was there any specific lever, because it does sound like a lot of these programs have been worked on. They weren't short term programs. They are long-term programs. Is there any specific lever you pulled during the quarter that really narrowed that expenses down? I don't know if it's full-time equivalent hours in terms of people at the sites that were able to reduce substantially. Whether there was any transfer from corporate versus at property level? It was a pretty big sequential. I know there was seasonality going on, but it was really across all markets. So it really seems like a change rather than one specific thing that happened.

I think the two key drivers are, one, the payroll, and I would say that that's not limited to properties. I think it's more, again, using technology to create efficiencies across the enterprise; and then secondly, the big contributor is the natural gas expense. Obviously if you look at NYMEX gas went and dropped from January to April about 60% and if we were to lock today we could kind of lock in another 10% savings for next year. So like I said, there is always opportunities as the world changes.

And Michael, just to be clear, we told you on G&A that we actually are down $1.6 million, because you made a suggestion that maybe some of those costs might have been shifted to corporate and that is just not the case.

I didn't want to make a suggestion. I was just trying to see how those things were going.

Okay

Thank you.

You bet, Michael.

Your next question comes from the line of [Andrew McCollough] with Greenstreet Advisor..

In your operating guidance does your revenue growth guidance assume flat net effective market rents on average from now until the end of the year?

I'd say yes. That has been the trend so far and we don't see it changing. In fact, in a lot of markets it's improving and I think those lines will cross by the end of this year.

Great. Can you guys just expand and give a little bit more color on the South Florida markets and where you think a lot of those markets are on the cycle?

Yes. South Florida it's been tough to call over the last couple years as we discussed on this call. Remember June of last year we actually crossed the line and went positive for a couple of months? But then came the national recession. So first it was the real estate bubble that caused a lot of pain in Florida, particularly South Florida and Orlando. We did see some stabilization, but then with the national recession, we had more broad-based job loss and not just the real estate and construction sectors so that caused another wave of down, but because they were already down, you are not seeing the dramatic drops as we are seeing in some of the other markets. The trends just like pretty much across the country, this summer were pretty good. Orlando has pretty good leasing season, our student-oriented properties are filling up nicely. Occupancies are good. South Florida, we're 93% occupied right now, 8% exposure. The rents are just marginally down from the beginning of the year, only down 6% year-over-year.

The only thing that worries me about South Florida is the gateway to South America. It doesn't seem to be giving us a lot of growth and the household growth formation is actually negative. So that is a longer term concern, but South Florida is very resilient. When things come back, it seems to come back fast. Orlando, pretty stable. Rents are actually growing. Since the beginning of the year in Orlando we were able to move rents up with the good traffic we had this summer. We had a supply surge, but that is over with now. Pretty much all the '09 deliveries are behind us and next year there is only 400 proposed units for next year. Orlando is another market that can grow very quickly on the job base. It's done a good job in diversifying away from travel and leisure, so I think the longer term picture is favorable for Orlando.

That is helpful color. One last question on your development page. It looks like Redmond Ridge is leasing up pretty slowly, could you give us color on that asset?

That is an asset, Andy, that is a age-restricted asset 55 and over and that asset is certainly underperforming expectations. Just given the fact that not unlike around the country, many of these residents will need to sell their homes to rent with us and that is certainly a property that has been far more negatively impacted by what is going on in the economy today than any other project we have built.

Thanks, guys.

You bet.

And there are no further questions at this time.

Well, thank you all for joining us today. We're around, if anyone has any other questions. You know where to find us. Hope you everyone has a great summer and we'll see you all in September.

This concludes today's conference call. Thank you all for your participation. You may now disconnect