住宅地產 (EQR) 2009 Q3 法說會逐字稿

I will be your conference operator today. At this time, I would like to welcome everyone to the Equity Residential third 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).

I would like to turn the call over to Martin McKenna, Vice President, Investor Relations.

Good morning and thank you four joining us to discuss Equity Residential's third quarter 2009 results. Our featured speakers today are David Neithercut, our President and CEO, and Mark Parrell, our Chief Financial Officer. David Santee, our VP of Property Operations is also here for us in the Q&A. 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 assume no obligation to update or supplement these statements because of subsequent events.

Now, I will turn the call over to David.

Thank you for joining us for our third quarter conference call .

Fred Tuomi ordinarily joins us for these calls, and as you know, he's a property management president responsible for our day to day on site operations of all our assets, and he really is our market expert, but he is under the weather today. He is unable to join us, but lucky for us, though, we've got David Santee, here, and with his help, and Mark Parrell, we'll do the best we can in Fred's absence.

While it was noted in last night's press release, we delivered quarterly operating results that were at the high end of the range that we provided you in our second quarter earnings release in late July. The primary factor was better than expected property level operations which are being delivered by our property management teams across the country. They are really doing an outstanding job. A very, very good job in a difficult marketplace, and we appreciate all their efforts.

So for the quarter we had revenue of negative 3.9%. That was just a tick better than the midpoint of negative 4% that we had given you last quarter. Expenses were negative for the quarter at minus .6% which compared to our guidance which was a midpoint which was flat. NOI was down 5.8% and that level was at the better end of our previous expectations.

Now, during the quarter, we continued to renew our existing residence on average across the country at flat to down 1%, which is very consistent level for most of the year. We wrote new leases to our new residents on a net effective basis down 9% to 10%. That too is a very consistent level for much of the year. We now expect same store performance for the full year to be down 3% for revenue which is right at the midpoint of our February 2009 guidance. Expense is up just a .5%, which is significantly better than our expectations for most of the year. NOI down 5% which is toward the better end of our expectations.

I noted earlier that our net effective new lease rates have stayed consistently down 9% to 10% since the beginning of the year on a weighted average basis across all of our markets. It is very important to note that this is a weighted average. Since January some markets have begun to show improvement in their net effective lease rates, some have remained flat, and some have continued to deteriorate. Markets that have seen continue to deteriorate are all out west, LA, Orange County, San Francisco, Seattle, and Phoenix. Markets that have seen a net effective new lease rates stay pretty much flat since the beginning of the year, include New York City, the Inland Empire, San Diego and our non-Boston New England portfolio. And, lastly, markets that have shown some increase in net effective new lease rates since the beginning of the year include Boston, the DC markets, South Florida and Orlando.

So, while same store revenues have decreased quarter-over-quarter and will continue to do so this year into the next, it's not because net effective new lease rates continue to get worse on average, but because we still have above market leases that will roll down to newer lower levels. As a result, we will continue to see sequential revenue decreases into next year as well. Obviously, there remains a great deal of uncertainty in the marketplace today. We watch, along with everyone else, for reports for economic growth.

We were pleased to see today's report on third quarter GDP growth; let's just hope that expansion can continue without the continued intervention provided by programs like cash for clunkers and the home buyers tax credits. We need jobs for our business to really grow and that may take some time. Yet, I'm extremely confident that the work we've done to reposition the portfolio, the demographic picture in the country today, and the limited new supply that will be delivered over the next 24 to 36 months when that job growth does appear we will deliver some of the best performance in our history.

The market remained open for the assets we have targeted for sale and we have continued to hit that bid in the third quarter. As a result, we did sell a lot of product in the quarter because our strategy has not changed for quite some time now. We want to continue to sell our older non-core assets and complete our market assets. We are very mindful of the dilution that occurs in the short-term from these sales, particularly when the cash proceeds sit on our balance sheet. We are also mindful of the longer term benefits that could be realized by having $900 million cash on hand at this point in the cycle. Because of the strong demand we are seeing from the buyers of the non-core that we have been selling, we have increased our guidance for dispositions for the year from $100 million to $900 million. We expect to acquire $150 million of assets by year end, and we currently have assets under contract that will get us to that level.

There has been a lot of chatter about some acquisitions we may or may not be working on and I'm sure many of you are wondering what might be going on. I can tell you that we have several things in contract. They are all in various stages of due diligence. As a result, there is only so much that I can say at this time. What I can say, however, is that these are all excellent assets in our core markets. They are exactly the kind of assets we want to own going forward. They are under contract at prices that are discounts, replacement costs averaging 15% to 20% or so. They are well occupied assets. They are currently or will soon be stabilized with rent rolls that have been marking, expiring leases to market over the next 12 months, and are expected to continue to do so over the next 12 months.

Generally, accounting for these marked down rent rolls, stabilized cap rates will be in the low to mid 6% range with the expectation that they will become 7% yields in a couple of years. That compares to the mid-7 cap rates which we have been selling our non-core least desirable assets, mostly in exit markets. One deal was significantly farther along than the rest and could close as early on as tomorrow.That is a 360 unit high rise property built in 2004 located in the Pentagon City area of Arlington, Virginia. We have that property under contract for $99 million. That is about $305,000 a door. About $350 per square foot.

We think replacement cost is well in excess of that level. Call it $400 per foot, if not more today. To replace that asset today would require 10% load moderate set asides and all of the units we have under the contract in this particular asset are all market rate. We have an expectation of a 6.1% yield in our first year; again with an expectation that we will see 7% in short order and a double digit 10 year un-leveraged IRR. There have been a lot of questions asked lately about "distressed assets" available for purchase or how much "opportunity" we are seeing. I want to tell you, I don't suggest for a moment that this is a distressed deal, even though we think we are buying it for 30% or so less than it might have traded for several years ago. But this is a great opportunity to add a terrific asset to our portfolio and a fabulous trade with the assets we have been selling.

Under the development side, as I have noted on several of our last 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 we are very pleased with how these deals are leasing. 453 of these units were leased in the third quarter alone. 754 units were newly occupied in the third quarter. Only 6 projects were under construction at September 30, two of which were 97% complete at that time. Only $208 million remain to be funded to complete construction of those deals.

Now, we started the third quarter with a total of eight properties in various stages of lease up. Today, of those eight projects, seven remain in lease up and not yet stabilized and we have added two additional properties to those in lease up, the first being our reserve account center deal in Seattle and the other our Mont Claire metro deal, in Mont Claire, New Jersey. Like everywhere rents are below our original expectations. They are down 15% or so on average on a net effective average. That is very consistent with the rent levels on existing products in their respective markets. We have great product, leasing velocity is very good; right on our expectations of about 20 units per month. Our leasing teams are doing a fantastic job getting these deals leased up. From a return perspective, our development deals will initially under perform original expectations. They will stabilize in yields at the 5s rather than the originally under written 6s. For all the obvious reasons we have talked about, they are phenomenal assets, we are delighted we own them, and they will do well for us over time.

With that, I will turn it over to

Thanks David. Good morning and thank you all for joining us for today's conference call.

This morning I will focus primarily on three topic, our third quarter performance and fourth quarter expectation, enhancements we have made to our repairs and maintenance expense, and capital expenditure disclosures, and adjustments to guidance for the full year. Same store rental-wide declined 5.8% in the quarter compared to the third quarter of last year. Revenue was pretty much consistent with our expectations and expenses were much better than our expectations.

For the quarter our same store total revenues decreased 3.9% over the third quarter of 2008 due to a 3.2% decrease in average rental rate and a 70 basis point decrease in occupancy to 93.7%. Same store expenses were down 0.6% or 60 basis points on a quarter-over-quarter basis driven by lower pay roll, property management and repairs and maintenance costs and a smaller increase in real estate taxes and utilities than we had forecast. We had a 7.6% increase in repairs and maintenance costs in the third quarter of 2008 when compared with the third quarter of 2007, so that helps to explain some of the decline in that category. I also note that we had some real good work internally to reduce contract painting and so a lot of work in house to push that line item down as well.

Over the last year, many of you have asked for more detail on our operating expenses and capital spending. In our earnings release, we have tried to deliver more information and more clarity on this important topic. We have introduced new disclosure on our same store operating expenses and revamped the disclosure of our repairs and maintenance expenses and capital expenditures. I want to spend a few minutes going through what we did here. I appreciate you bearing with me on this. My suggestion to the group is to have you take out pages fourteen and twenty-two of the earnings release and put them side by side. I will go back and forth between them explaining our new disclosure.

I think you will see that we have delivered excellent cost discipline, without sacrificing the condition or the long-term value of our properties. While we have changed our disclosure here, I want to emphasize that our accounting capitalization policies remain unchanged. So now going to page fourteen of the release, you will find new line by line disclosure of our same store operating expenses for the third quarter and year-to-date. We have revamped our repairs and maintenance expenses and capital expenses on page twenty-two of the release to show repairs and maintenance costs on a same store basis, improving comparability. Pages fourteen and twenty-two work together to help you see what we are spending on asset maintenance improvement whether expensed or capitalized. For example, on page fourteen the year-to-date and the year-to-date number is on the bottom of page fourteen, 2009 repairs and maintenance expenses of $73.134 million is the same expense number that appears on page twenty-two in the repairs and maintenance expense column for our same store properties on page twenty-two. Page twenty-two shows you what we are spending on our assets for repairs and maintenance which are expensed and for replacements and building improvements which are capitalized; the repairs and maintenance expenses on this page include on-site pay roll associated with repairs and maintenance. The total on-site pay roll number of $119.963 million year-to-date on page fourteen is approximately twice as much as the on-site pay roll that relates to repairs and maintenance on page twenty-two, the $59.057 million in the same store column there.

On page twenty-two, we have disclosed what we have spent year-to-date on major unit rehabs that we believe will be revenue enhancing. In footnote four you will see we have spent $21.3 million in the first nine months on 2009 on unit rehabs. In 2009, we are completing unit rehabs on about 2,700 units and expect to spend about $30 million for the full year. This compares to about $34 million that we spent in 2008 on about 2,300 units.

Also on page twenty-two, we continue giving disclosure in footnote nine of capital spend towers per unit. In other words, what we expect to spend maintaining the current earning power of our assets. We estimate that same store routine replacements will run about $380 per unit in 2009 and that building improvements will run about $420 in 2009. So we expect total capitalized expenditures to be about $800 per same store units without rehabs and $1,050 per same store unit per same store unit with rehabs.

We are spending the same on routine replacement this year as last year about $385 per unit. And now just a quick note on comparability. The replacement number we disclosed in the 2008 disclosure materials did not include rehab spending. That was footnoted below and put into the other category. Our 2009 rehab number does include rehab spending. In both time periods, we gave you all the information you need to assemble and disassemble those numbers.

On building improvements (so now I'm on the building improvements category), we are making tremendous progress reducing costs while improving asset quality. Last year we spent about $598 on building improvements; this year we expect to spend about 30% less. Getting this sort of improvement took a lot of effort. We bid every contract we do. We narrowed scopes where possible, without sacrificing asset quality, and took advantage of lower material prices. Another big contributor to the change here was the overall improvement in asset quality from our portfolio repositioning. We have sold many of our biggest capital hogs.

We didn't neglect the basics; our residents are very pleased with the appearance of their homes as proven by our high and improving customer loyalty scores. We pass on a big, "Well Done," to our capable investments and facilities team, their hard work and excellent results here. Let me finish on this topic by saying that while all our capital spending is scrutinized, our rehabs go through an extensive internal review for the potential for increased rental income before they proceed. We consider the assets competition, resident profile and many other factors. In the end, we commence only those rehabs that we believe can deliver targeted rental increases and we discontinue those that do not meet our expectations. Because our portfolio is increasingly invested in assets that we intend to stay in for the long haul rehab will become a more important part of the process of keeping our assets fresh and competitive.

Now, back to the big picture, FFO. We had a good incremental contribution about $6 million in the quarter from our lease up properties. We anticipate that these properties will contribute an incremental $23 million to our FFO results this year. Our FFO was $0.53 per share for the quarter down from $0.64 per share from the third quarter of 2008, primarily due to a decrease in same store NOI of $0.06 per share and $0.05 per share of dilution from our 2008 and 2009 net disposition activity. And that's a little bit somewhat offset by higher non-same store results.

Now, moving onto our expectations for the rest of the year. As you saw in our release, we provided guidance for the fourth quarter and revised guidance for the full year 2009. On page twenty-five of the release, you will find the assumptions underlying our annual FFO guidance. The primary driver of the difference between the $0.51 per share midpoint of our fourth quarter FFO guidance from our actual third quarter FFO number of $0.53 per share is a negative impact from lower total property NOI from our same store portfolio and dilution from 2009 transaction activity.

We have increased the midpoint of our annual FFO guidance range from $2.15 per share to $2.20 per share. Substantial expense savings off set by lower FFO due to earlier and higher dispo activity than we had budgeted drove this change. For the full year, we have revised our guidance ranges for same store revenues, expenses and NOI. We are improving our revenue guidance slightly to negative 3% for the full year, but do want to remind everyone that our expectation is that on a quarter-over-quarter basis, fourth quarter same store revenues will be the worse quarter of the year for us as we continue to feel the impact of rents rolling down to market.

We are very pleased to revise our expense growth guidance to 0.5% in the year, primarily due to better property tax and utility expenses than originally anticipated, as well as good overall cost controls. As a result of our revised guidance revenue and expense guidance we have improved our NOI guidance number to negative 5%. The prior midpoint was negative 6%. We have increased our disposition guidance from $800 million to $900 million and left our acquisition guidance at $150 million. The additional dilution is included in revised guidance and can be managed on the tax side without triggering a special dividend. 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 briefly touch on liquidity. As you know, we have been focused on having a conservative balance sheet by maintaining ample liquidity and pre-funding our debt maturities. Our cash position is strong. We have about $540 million in unrestricted cash today and $370 million in a 1031 account. We can also rely on a revolving line of credit that does not mature until 2012 and has about $1.36 billion in borrowing capacity. The Company is in outstanding shape in terms of managing its debt maturity. Tomorrow, we will be pre-paying at par $164 million of secured loans due in 2010. This has been in our guidance. After those pay offs we will have only $150 million of debt, less than 1% of our total capitalization coming due in the rest of 2009 and in all of 2010.

Please also recall that next year, we will exercise the automatic extension option that we built in into our term loan and we will push that term's loan from 2010 to 2012. Cash on hand at year end is expected to be $580 million. Using this cash and the line of credit, the Company can repay all of its obligations through 2011. The Company plans to continue its strategy of maintaining excellent liquidity and addressing funding obligations well before loan maturities. Besides playing defense with our balance sheet we have also played a bit of offense by using our resources to opportunistically retire some development debt for a $2.4 million gain to the Company.

In the past, we took advantage of opportunities to repurchase our public debt at attractive prices and now see some opportunity to do the same in the bank market. As we said in the stock release, we did roll out an ATM stock offering vehicle in late September. As we said at the time with our large cash balances as well as our untouched $1.36 billion revolving line of credit we currently do not see a need to sell shares and have had no activity under the ATM. The debt capital markets do continue their healing process. Unsecured ten year debt is available to EQR in size and at attractive rates of 6% or so. Other types of unsecured debts, such as convertible debt and retail executed debt, have also made a come back and are available to us as well. Suffice it to say the unsecured markets functioning well for strong borrowers like EQR.

The GFCs continue in their mission to provide reliable, reasonably priced capital for the multi-family housing business. This quarter we sold almost $400 million in assets and the two GFCs funded essentially all of the debt financing needs of our buyers efficiently and relatively cheaply. As we have said in the past, the big wild card the future of the GFCs continues to be the political resolution of their long-term status. In summary, we are in an excellent position when it comes to our liquidity or balance sheet. Should we want or need to we have the ability to access many sources of capital and will continue to be opportunistic in doing so.

And now, I'll turn the call back over to David.

Thanks, Mark. Ashley will be happy to open the call to questions now.

(Operator Instructions). We do have a question from [Swa Rupiella] with Morgan Stanley.

Great quarter.

Thank you.

I have a question on the submarkets specifically. This quarter we saw New York metro area rents showing a 7% decline year-over-year. When do you see rents eventually bottoming out there? Is it fair to characterize places like San Diego and South Florida are close to the bottom and are seeing some sort of recovery in the process?

This is David. Let me say that we are getting very close to where our current market rents are intersecting our declining rents from last year. So every day, especially in Manhattan, we become less upside down and will reach parity in December or January. The other markets, the story is pretty much the same aside from the western markets.

The western markets seem to lag the rest of the United States as far as rent declines by anywhere from three to five months. Those have been more volatile lately. Pretty much every other market we are starting to see a leveling off here in the next 60 to 90 days.

The western markets were late to the party and will take longer to recover.

The homeowners tax credit, we're hearing that it's going to be extended to April of next year. This may not have an impact in higher priced markets like New York or San Francisco. Is there any anecdotal evidence of move outs to home purchases in some other markets you are seeing?

This is David again. Let me say that Q3 did show some -- I will use the word -- significant changes in move out to buy homes, but I would also caution you to not get too caught up in the percentages as well. As an example, Boston increased to 15.8% of move outs, but because the turn over is so low that 15.8% amounted to only 89 move outs for the quarter to buy homes.

Other markets, more notably Inland Empire, Denver, Phoenix, showed signs of returning to normal historical home buying levels for Q3. Portfolio wide, we saw 14.2%, which was an increase over Q3 of ' 08 but still below Q3 of ' 07. You did see more of the commodity markets increase in Q3 but more of the constrained markets continued to show declines.

I see. Thank you.

Our next question from David Tawney of Citigroup.

Good morning, everyone. Michael Bilerman is here with me as well. Can you expand a little bit on the issue of home buying and our understanding is that there is very aggressive tactics being taken by the home builders with respect to target large housing complexes. Are you combating that in any way or have you addressed that directly?

Over the years, we have had a rent with equity program and we partner with a lot of home builders. I would say a lot of them are much more interested today in speaking and working with us than they were two years ago, but I would also say that we are being a little more cautious with that.

Typically they want to come to the properties. They want to do home buying seminars and what have you and we are not as amenable to that as we once were.

With respect to the ATM did you mention what conditions you would like to see for you to exercise that plan?

Well, we talked about the fact that we have a lot of cash on the balance sheet. We have an unfunded line of credit. We put that in place to be there to take advantage of what might be net buying opportunities. In the present time, what little bit of acquisition we are doing is more trading dollars and 1031. We will go into 2010 with our eyes wide open.

With respect to the kitchen and bath upgrades, I understand you have changed the disclosure around a little bit, so it may not be entirely comparable, but it does look like net to net there is an increase. Are you getting a little bit more aggressive overall to tenant retention? Is that something that was more seasonal in nature? If you could just expand on the kitchen and bath program better, that would be helpful.

Sure. This is Mark Parrell, David. Part of the difference in the years is that last year we did about 2,300 units for about $34 million. Last year a lot of those units were Park Colosseum and other upper west side New York City deals where the costs are much higher on a per unit basis. Those turned out very well for us, but they do skew the spend for us.

This year we will spend around $30 million. It is not all that different give or take 2,700 units. I guess I wouldn't read much into it. We have been pretty careful of keeping scale of those kitchen and bath upgrades relatively small and not spending too much on any one of them.

Thank you.

Our next question comes from the line of Jay Haberman.

Hi, it's actually Jehan; I'm here with Jay as well. Given occupancy was down about 70 basis points year on year and occupancy lower in the core versus your non-core markets, are you seeing pricing as being less effective as tenants might be affected more by job losses, downsizing. and even move from class A to class B here?

I would say that the key driver no matter what market you are in is simply jobs. That is the gasoline for our engine and that's what makes the difference. As far as all the other components that impact occupancy, we continue to see a high level of transfers, people that move from one apartment to another, whether they are doubling up with roommates or what have you and beyond that, there are different dynamics depending upon which market you are speaking about.

In terms of occupancy we hit today our lowest lease that we have had in the entire year. Occupancy is strong and left the lease is the best it has been in the entire year.

Going back to the special dividend for a second and the potential of you having to pay out a dividend based on the assets sales you have done this year. Would this decision change at all if you end up investing below the $150 million that you currently anticipate?

No, we have enough flexibility in the number. The gain is -- even if the reinvestment number is $150, I don't anticipate that we would have to pay a special dividend

Just lastly on the converts, are you considering at all prepaying or would you leave them outstanding until August 2011?

We did repurchase opportunistically during the height of the difficulties in the financial market, about $120 million and the price of that converted to $110. We did have a substantial gain back a while ago. We continue to monitor that market and we will take advantage of that if there is distress and buy some of that back. At this point, it is accruing at a 3.85% rate and I'm not in any great hurry to redeem those securities. We'll just continue to be mindful of opportunities as time goes on and we will just kind of play it that way. What is the discount on average?

We bought it at about a 15% to 18% discount.

That's helpful. Thanks.

Our next question comes from the line of Michelle Ko with Merrill Lynch.

I was wondering if you can tell me what you are seeing so far now in October in terms of the markets? Is it still consistent with what you have been seeing all year or are there any particular markets that are deteriorating or recovery faster than you had anticipated?

This is David again. As David mentioned, as of yesterday we have achieved the lowest exposure we have seen all year at 7.9%. Our occupancy appears to be trending up. I would say we feel good with what we see occurring in many of the markets and I feel positive about where we are headed through the end of the year.

Also in terms of your 24 assets sales that you sold in the quarter at an average cap rate of 7.7%. I was wondering if you can tell me, give us more details on which markets those assets were in and if you can give us a sense of what the cap rates were on various markets?

They were all high handle 6 cap rates. There were some out here in there. We sold assets in our rural New England, non Boston assets. Six assets. We sold a couple in suburban Denver, a couple in Texas as we continue to leave Texas. I think we have one or so assets left there.

We sold a couple assets in North Carolina and we will soon have exited North Carolina totally. Four deals in suburban Atlanta. These are older assets, 25 years of age, average purchase price $15 million, $16 million, they have been small assets and continued to executing the strategy to exit non-core assets and exit the markets that we have said for quite some time that we intend to exit.

Our next question from Rob Stevenson with .

Good morning. Mark, you guys have surprised both us on the street on the expense side year-to-date. When you take a look where you are today in rolling forward, other than the taxes, the utility and insurance that are largely out of your control, do you think at this point that you have gotten the systems and everything in place that you need to be able to maintain this level of expense run going forward or is there likely to be some leakage up as we run into stronger employment markets, et cetera?

Great question. I'm going to start, Mark Parrell, and then I'm going to kick this to David Santee who has a great grasp of this. You can't forget the big three expenses when you start. We are looking towards next year and seeing utility costs. Some of which we have already locked in and prepaid and locked in for next year as being a positive variance to 2009 or not up much.

We feel pretty good about property taxes being up not nearly as much as we thought they would be up this year. Not a 4% or 5% increase but a 2% to 3% increase. We feel like we have pay roll in hand. Those two-thirds of our costs, we feel pretty optimistic about but we have a lot of work to do yet before giving you any guidance to you. We feel good about the items.

The only thing I would add is we do have several key initiatives that involve leveraging technology to optimize our day-to-day operations and I think in going forward -- the future of our expenses at least for the next two years is not invisible. It is very visible to us. We have complete control over our destiny. I think next year we will show some very good results.

There was a piece that I saw distributed around some investors today thinking about 2010 in light of an expense increase we had seen back in ' 02, ' 03. Back then, we will tell you that our expenses -- we did drop our expenses down. One way we did it was because we didn't have the traffic we needed. Vacancy had increased. We were able to let people go on-site. We no longer had to deliver ready-units at the same rate that we had previously. We recognized that we would have to hire those people back and that would lead to expense growth in the subsequent quarter.

We are fully occupied today -- fully staffed. Our occupancy is in the 94s. We are operating -- we have all of those costs are fully loaded. There is nothing -- we will not be hiring people back in 2010 that will spike that expense growth on a year-over-year basis.

Second question for you, David, how close are you to starting new development in a market that is performing relatively well, like a DC, and what at this point is the determining factor for you guys?

We are not close at all. I will tell you that we have continued to look at opportunities as well as we do continue to have some land on our balance sheet that might make sense to build some time soon. We don't expect to do anything this year. We do look at what we think expected yields would be on development relative to acquisition yields on product that we can buy existing stabilized streams of income and make a comparison. The time being, we are seeing assets and we have -- as long as we can buy existing streams of income at discount, I think you can see us doing that. We want to increase our exposure in our core markets, development will make sense at some point in time and you can count on us to go ahead and get after that. It may be a little later for us than others.

Our next question comes from the line of William Atkinson with Benchmark.

Good morning. One of the things we have been hearing that more and more institutional investors are entering the market and bidding on quality properties, but we have also been hearing that there is a pretty wide spread between the winning bids and the rest of the pack. If you use standard game theory there, if you will, that indicates that there is a lot more competition for available properties coming? Is that the way you see what is going on now?

I guess I would suggest you both on the assets we have been buying and selling, we are seeing more bidders and a pretty tight range of bidding. Certainly people always fall out after the first round. There is enough people remaining that it has been competitive.

If you look at the deals that have been traded -- there have been very few assets that have traded. There are bidders out there. I don't think there is a wide spread between the top 5 or so bidders. I think the bidding has been very tight.

Second question. The CMBS default rate in San Francisco has simply just gone through the roof lately; it's actually close to 22%. Most of that is due to one buying family that shall remain nameless. Do you see any opportunities there for loan to own or take over a property in that market? We know that is a target market for you.

It is Mark Parrell. We are obvious of that. We monitor the CMBS watch list of the we know about that portfolio and a lot of these other transactions. The one comment I will make before David talks about markets. We were interested in owning assets, not owning complex CMBS securities. We spent some time trying to educate ourselves on that and decided that was not the right way to go. I will say that at the beginning that the interest we would have to acquire the assets from the special servicers or from the creditors as a group somehow, but not to own some tranch of something and hope for the best. There is too much risk of maturity extension and bankruptcy and different complexities which we are not equipped to handle and don't want to underwrite.

The next question from Dave Bragg with ISI.

Just a question on acquisitions, you mentioned the double digit unlevered IRI on a pending acquisition. Is 10% an attainable rate that we should expect going forward as we move into next year?

Look, I will tell you there is a great deal of uncertainty out there, David. We are under writing low double digit IRIs, I would be happy if we can under write even higher IRI's going forward. I think it will have a lot to do with the supply of product that is brought to the market.

We can't help but think that banks will offer more product and from a typical classic supply and demand situation, there may be situations where we can see them modestly. What we are under writing right now are un-leveraged double digit IRIs.

In terms of the NOI can you give us a general sense as to the trajectory that you are expecting over the next couple years.

The traject in the core in the first 12 months is down and typically -- everything is different as you know -- we might expect to see a modest increase there after and depending on what market it is, I would say that a year or two after that, we would expect to see a really good single digit increase. We can't help but think with such little new supply with the current occupancy across the portfolio and the markets we are at when we have job growth, there will be some terrific spikes out there. It may not happen until year two or three, but we have that expectation.

Could you talk a bill more in detail about the Seattle market given the results there in the quarter?

Seattle has certainly been a tough market for us. It was extremely late to the party and has an severe downturn. For us, it is the tale of several markets. Our results in Seattle has been significantly negatively impacted with our Tacoma portfolio, which we got with Wellsford merger, which came from Holly. We were down 15% in Tacoma as a result of a significant amount of troop rotation out of Fort Lewis and not troops coming back to backfill. We think that's a temporary situation, but that has certainly negatively impacted our performance there.

We've also been negatively impacted in the CBD; we were negative 10 in the CBD of Seattle, and we are very excited that Northwestern Mutual is moving their Investment Management company to the Wamu Building which is right across the street from a significant asset we have there. so we think that is somewhat of a temporary uplift as well. Our other Seattle markets, not downtown, not Tacoma, our Bellview and Redmond and North Side have been negative 6. I think that was a better comparable against what others may be reporting for the Seattle-Tacoma.

Those numbers you are referring to are same store.

Same store third quarter growth.

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

Just covering back on the pending acquisitions, just want to -- are any of these 1031 related? Are any of these replacing any legacy tax protection deals that you may have sold?

Yes, I would expect every acquisition going forward will be a 1031 and we do have some legacy, obligations to third party OP unit holders to go ahead and provide that protection going forward.

So part of these acquisitions have part of that in there?

I'm not sure what you mean by in there. We are buying them under 1031s.

That helps. Second is -- appreciate the enhanced disclosure on the operating expenses. Year-over-year the leasing and advertising seems to be pretty much flat. Given your previous commentary on calls about going more to the internet less print I would have expected that to decline. Want to get a sense of have we reached the bottom for how much you can cut from leasing and advertising or would you expect that to go down next year if you don't have to pay leasing brokers in New York?

The quick answer is yes. Year-to-date we have spent $1.5 million in broker fees. You can figure out that we have reduced other costs. We are out of print. That has produced significant savings. We use a lot of toggling of key word purchasing. Once we can get away from the broker fees in New York, we will continue to see savings there.

On one of the office company calls yesterday, they spoke about more foreign capital taking a look in the US, especially in New York. Are you seeing that same capital coming in to look at apartment properties? Is your sense that they are looking at other asset types?

I'm not sure we are seeing that capital in multi-families. It is very possible. My guess is we have been looking in New York a little bit, but we haven't actually competed for anything in New York. I can't tell you what the capital is if it is there. It is possible we are seeing some of that. My guess is that it is highly discounted like the office space.

Thank you.

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

Good morning, you talked a lot about acquisitions. I'm curious in terms of dispositions. How much do you have left to complete to sell over the next couple years to try to hit where you are trying to get the portfolio at this point?

It is a good question and one that is tough to answer. Our portfolio giving our site every single year, we will be working our portfolio. I don't think we ever get to a steady state which you will not see us doing $600, $700, $800 million of dispositions a year. We have some dispositions to finally exit some markets. They are (inaudible) --we've got work to do on older suburban assets in our core markets and that will be a process that will be ongoing for some time. There is $1 billion plus of assets that we have already identified, maybe $1.5 billion of assets we have identified.

Once we get through that, that is not necessarily done; there are others that will come on the list. Mark mentioned in his remarks assets that become from time to time very big capital hogs that we may think we can get a better price and we ought to sell. Every single year you will see us doing a meaningful amount of dispositions.

You talked a lot a little bit about expectations in terms of a recovery, how that plays out. I'm curious among your markets which ones do you feel are best positioned for the earlier recovery and which ones will you say take some time.

Washington is happening and Boston is happening. We are beginning to see some stability in New York City and we mentioned earlier that the markets on the west coast, primarily California. Seattle, we are beginning to see some -- a reduction in the rate of decline in Seattle, but I think the California markets will continue to be challenge for some time. I would expect California to recover last.

Then finally with the -- you have proceeds coming in from the dispositions obviously. As you look out over the next couple years at acquisition opportunities, you have the controlled equity lease program in place. How do you feel with leverage at at this point? Would you like to take it up or down?

We need to define what leverage means. We have always kind of used the book metric. Debt is the numerator and book value, undepreciated book is the denominate tore. We talked about that number being 50 to 55%. We are at 51% right now. I think you will probably see us over time go more to a 45% to 50% metric.

I feel okay about our leverage right now. I think our commentary were the various rating agencies says they are generally okay with it. I think our net debt to EBIDTA ratio heading into the 8s is a touch higher. I don't feel there is a lot of work to be done here.

Our next from the line of Dustin Pizzo with UBS.

Given that jobs are really the driving force here behind fundamentals, what in your view is the probability that you may need to lower asking rents further in most markets in the next three to six months in response to the continuation of the weak labor markets?

We have reduced rents significantly at the end of last year and the beginning of this year and have again on average held them pretty flat throughout most of this year. I can't for a minute suggest that if things get worse we will be able to hold those. So far with the lowest lease we have experienced for the entire year and the occupancy we have got.

I'm not telling you overall we are on our way up yet, but as far as we look out four to six weeks we don't see anything to suggest we are going down. One never knows. If the job loss doesn't stop soon, if it doesn't begin to ebb, that could certainly be an issue. We have gone 9, 10 months at pretty consistent net effective new lease rates and we think our forecast lease for the balance of this year will stay there.

Just on some of our underwriting assumptions you had talked about earlier in regards to the NOI growth in the next couple of years, should we take it to mean that it looks like you are not expecting NOI to turn positive until 2011?

It depends on how you talk about positive. There is positive year-over-year and there is positive quarter-over-quarter and there is positive sequential. My guess is we will see some sequential positive growth next year and we could end next year with some quarters that are positive, but the year will not be positive.

Our next question comes from the line of Shane Buckner with Wells Capital Management.

I just wanted to ask a question about the property taxes. I realize California is a unique situation. How aggressively are you pursuing appeals of property taxes and do you expect any further on progress on that front?

We actively pursue appeals each and every year. I will say that this year is particularly busy. The pipeline is full. Things are taking probably a lot longer to resolve and will push a lot of our outcomes into 2010.

Our next question from Jeff Donnelly from Wells Fargo.

Question about Florida. It has been tough for so long. Can you talk about what is fueling the growth in South Florida and, Orlando? Is it just the local ecomony finding the bottom or is there a measurable improvement in economic activity there that you think is manifesting this turn?

This is David. I think in Florida, you have to go back a few years. I think the slow down started when we had the rash of hurricanes. One metric that we used was the number of drivers license applications from out of state folks that are moving to Florida. Those declined after the hurricane and then we had the housing -- the bottom fall out of the housing market down there.

We continue to see out migrations especially in South Florida, but I think that's good news. Housing got to a point where it was really unaffordable. Now, it is affordable again. We just had a gentlemen leave here to move down to south Florida to take a position. I think south Florida is becoming attractive again to folks, and it is definitely more affordable today than it was last year or even four or five years ago.

Orlando on the other hand, is -- it is just a matter of -- I think the wild card there is housing. There was some stats out last week that showed 26% of all first lien mortgages were delinquent or in foreclosure. We will have to see how that plays out from an apartment demand perspective and finish up these reversions in Orlando. Ultimately, I think, Orlando continues to diversify its employment base. There is some increased healthcare there. UCF continues to increase its enrollment and develop as a pretty dominant educational institution in the area and I think the long-term prospects for Orlando are good.

I'm curious how do you think about Tampa versus Orlando, I know it is a smaller market for you, as you think about the shape of recovery for South Florida Orlando, would you characterize it as fairly sluggish even though it might have hit a bottom or do you think it is healthy for South Florida?

I have been running Tampa for the last fourteen years and it seems sluggish for the last fourteen years. I said if you are examining to move to Florida, why would you move to the middle of the state? Tampa did show significant recovery in home buying this past quarter, but again, it has always been known as more of a back office kind of location, lot of call centers, lot of the mid-range type jobs. So unless Tampa reinvents itself, I think it will continue to be the same.

One last question, the west coast markets as you mentioned are seeing the brunt of the revenue hit, occupancy seems to be take ago dramatic impact given the relative cost of home ownership there, I'm wondering if you are losing folks to doubling up, or Class B, or mom's basement or folks relocating out of the metro areas moving to other states?

Look, I think it is all of the above. I think we are just seeing what is occurring in the west coast having happened a little later than what happened on the east coast. There has been a lot of significant job loss. I think, yes, doubling up, people moving home, leaving the area. but, occupancy remained reasonably strong there and there continues to be demand for housing. We have had to adjust pricing to capture that demand.

Thank you.

Our next question comes from the line of Andrew McCulloch with green street advisors.

I had one question, can you discuss what impact, if any, the Peter Cooper Skytown ruling has on your portfolio?

None whatsoever. That ruling was for a very specific type of rent control or regulation, J51. We don't have that. We are not subject to that specific regulation.

And then just follow-up on that, if and when that asset does come back to market, would you ever consider make ago run at it either in a wholly owned or JB structure?

I'm not sure we would. We did look at it for a nano second. I did spend time looking at it with our team. Price talk became available and we didn't spend another second on it. It is a beast, and I'm not quite sure it would be the right thing for us, but you know, one never says never.

That's all I had. Thank you.

We have a follow-up question from the line of Dave Bragg with ISI.

Just a quick follow-up on expenses and things for the comments earlier, I wanted to ask about the on-site pay roll line. Can you give us a sense as to of the head count change that you have seen over the past year?

This is David again. You know, we have not actively made any significant changes to our on-site pay roll as a result of the economy. We have implemented an application, called position management. It gives us tremendous visibility into the types of position that we have at communities as well as the overall head count. That's -- maneuvering the different positions and restructuring how we do business over the next two years and leveraging this technology is all part of our road map to 2011.

David, can you give us an idea of a perhaps a targeted head count per unit and how that might have changed recently or might change as you go out to 2011.

Well, in general -- in general our industry kind of runs if you talk about a garden community, call it 1 per hundred. If you have 300 units, you would typically have three people in the office and in our shop we have three people in maintenance and you kind of mix and match the head count with the level of contract services that you have.

But going forward, we have had a call center for almost fourteen years and our new platform allows us to consolidate a lot of the back of the house functions by February of next year we will have all of our leases and renewals and a lot of our resident notices so to speak on our resident portal in storage. We will continue to create tremendous efficiencies at the property. The outcome of that over the next two years is yet to be determined.

That helps. Thank you.

You are very welcome.

There are no further questions in queue at this time.

Thanks for joining us and we look forward to seeing many of you in Phoenix in a couple of weeks. Have a great day.