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Executives

Marty McKenna - Investor Relations

David Neithercut - President, CEO

Mark Parrell - Chief Financial Officer

Gerry Spector - Chief Operating Officer

Analysts

Dustin Pizzo - Banc of America Securities

Craig Meltzer - Citigroup

Alex Goldfarb - UBS

Rich Anderson - BMO Capital Market

Christeen Kim - Deutsche Bank

Mark Biffert - Goldman Sachs

Christine O'Connor - Morgan Stanley

David Harris - Lehman Brothers

Bill Crow - Raymond James

Paul Morgan - Friedman Billings Ramsey

Craig - Green Street Advisors

Equity Residential (EQR) Q3 2007 Earnings Conference Call October 31, 2007 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you very much for standing by. And welcome to the Equity Residential Third Quarter Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. And following the presentation, the conference will be open for questions. And instructions will be given at that time.

As a reminder, today's conference is being recorded Wednesday, October 31, 2007. (Operator Instructions). At this time I'd like to turn the call over to Marty McKenna. Please go ahead, sir.

Marty McKenna

Thanks, Mike. Good morning and thank you for joining us to discuss Equity Residential's third quarter results and outlook for the remainder of 2007. Our featured speakers today are Dave Neithercut our President and CEO, Mark Parrell our Chief Financial Officer and Gerry Spector our Chief Operating Officer. Our release is available in PDF format, in the Investor section of our corporate website, equityresidential.com

Certain matters discussed during this conference call may constitute forward-looking statements, within the meaning of the Federal Securities 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. And now, I'll turn it over to David.

David Neithercut

Thanks, Marty. Good morning, everyone. Thanks for joining us for our third quarter conference all. As noted in last night's earnings release property operation were very much in line with our previous expectations. We are experiencing strong occupancy across the portfolio and we continue to see rising rental rates in most of our markets, offset by continued weakness in those markets that are experiencing high inventories condominium reversions in single family homes primarily Orlando and South Florida.

Yet our diversified portfolio has generated plus 5% in NOI growth in the third quarter and year-to-date. Although, not as strong as last year these are very good levels when looked at in a longer-term historical context.

And we'll get into more detail on operating performance during the call, but I first want to talk about the important organizational changes that have occurred for the company over the past couple of months.

I am please to introduce Mark Parrell to many of you for the first time. Mark is a very capable and long-time member of our senior team here at Equity. He's doing a terrific job as our New CFO and showing us everyday, why we thought he was the right guy for the job.

But it’s also little bitter sweep call for me, because while, I'm happy to introduce Mark to you and delighted he is our new CFO. We're also saying goodbye to our good friend Gerry Spector. And I’ll tell you that it’s a very difficult thing to do. And something, I’ll address a little bit later in the call as well.

Before, we do that Mark will you take us everyone through the financial results for the quarter, please.

Mark Parrell

Thank you for that kind introduction, David. Good morning everyone and thank you for joining us on today's conference call. I'm delighted to serve as Equity Residential's CFO and to lead our very strong financial team. I look forward to working with all of you and meeting many of you at the NAREIT event next month.

I will summarize some of the important points regarding our FFO results and our same store operating results. Describe our capital markets activities in the quarter including share repurchase activity and then review our balance sheet and liquidity.

First to our FFO results. For the third quarter of '07 Equity Residential's funds from operations were $0.58 per share compared to $0.62 per share for the same period last year. As we stated in the press release, the $0.58 was $0.04 below third quarter last year due to primarily the lower condo gains and lower gains on land sales than we have last year. And higher interest expense primarily as a result of higher debt balances.

We had lower interest and other income because of rent.com proceeds and forfeited deposits that we received in the third quarter of last year. Debt balance and dust interest are up primarily due to the share buyback. We also had lower property NOI primarily because of Lexford dilution that was about $0.2.5 in the quarter.

You might recall that the Lexford portfolio was sold on October 5th of '06, while going forward Lexford dilution will no longer impact our quarter-over-quarter comparison the $0.10 were sold of annual dilution from the sale, will continue to be a factor for us.

Despite dilutions from dispositions such as Lexford and all the other properties we have sold over the past few years. We are achieving strong NOI results on our same store properties and on our new acquisitions. The $0.58 for the quarter was at the top end of the guidance range of $0.54 to$0.58 that we had given on our last call.

We had slightly higher NOI than we had budgeted, about a million six. And lower interest expense by about a million two than we had anticipated. The favorable interest expense variants was caused by our use of property sale proceeds, which were greater than expected due to disposition timing to pay down the revolving line of credit.

This savings were somewhat offset by interest expense incurred in connection with the share buyback, which I will discuss a little later in my remarks. We also sold some vacant land for a gain of approximately $700,000 and had approximately 1.2 million more in condo sale net income than we had budgeted.

Now, I want to describe our same store operating results. On a quarter -- same store quarter-over-quarter basis revenues increased 3.7%. Operating expenses increases just 1.1% and NOI increased 5.3%. On a sequential basis from the second quarter to the third quarter, same store revenues increase 1.3% operating expense increased 1.8%. And NOI increased 1%.

Our same store quarter-over-quarter revenue increase was driven primarily by good results in the New York metro area where we were up 5.9%. Seattle were up 8.8% and San Francisco where we were up 6 7%. These markets collectively represent 23% of total NOI.

All of our top 20 markets were up except for the two large Florida markets. South Florida down 0.2% and Orlando down 1.6, lower revenue growth and sequential revenue declines have occurred primarily in markets with single family home on condo stress those are predominantly Phoenix, Florida, and the Inland Empire.

This markets represent about 20% of our total NOI. South Florida with the 1.6 sequential occupancy drop and a 1.9% sequential revenue decline is especially weak. The Inland Empire continues to weaken 1.1% sequential occupancy decline. And 8.6% sequential revenue increase but Los Angeles, Orange County, and San Diego remain sound.

We do not anticipate a material negative effect on our operations from the Southern California fires. As our properties to this point have been spared direct fire damage, but we will have soot and related clean up cost to deal with. Phoenix is also suffering from a single family-housing hangover.

Demonstrated by 0.4% sequential decline in occupancy and 8.8% sequential revenue decline. The Washington DC market is also beginning to feel stress from condominium reversions and we expect that market to be challenging in early '08.

As I mentioned earlier, same store operating expenses increased just 1.1% in the third quarter of '07compared to the third quarter of '06. Most of our '07 expense growth was expected to occur and did in fact occur in the first half of '07.

You might recall, we had a 5.2% increase in the first quarter and a 2.6 in the second quarter. We are also seeing the benefits of our efforts to create operating efficiencies, which we expect to continue into the future.

On a quarter-over-quarter basis same store NOI was up 5.3% and was at the top end of our range. I would now like to give detail on the share repurchase.

During the third quarter, we spent approximately $271 million to purchase about 6.6 million of our shares at an average price of $40.82. For the year, we have spent $1.1 billion to repurchase about 25 million of our shares at an average price of about $45.30 per share.

Now on to the balance sheet. In spite of recent capital markets turbulence, the company access to secured and unsecured debt markets during the quarter very successfully. In July, we issued $300 million of mortgage notes with a maturity in 2019 and effective all end rates of 6%.

Some of the debt proceeds along with net cash provided from transaction activity of $446 million were primarily used to buyback the $271 million common stock that I just mentioned to redeem 8.6% preferred stock issuance and we used $175 million for that use and to fund development and we used $164 million in that quarter for that.

After the close of the quarter and a difficult credit market in early October, we closed on a new $500 million term loan, which was used to pay down the revolver. The term loan guaranteed about $1 billion in interest from approximately 30 banks. The loan priced at about 50 basis points less than similar public debt or secured debt alternatives.

The company's liquidity position is ample. We currently have substantial availability of approximately $1.35 billion on our revolver. This level of availability is more than sufficient to fund remaining '07 debt maturities as well as 2008 debt maturities. We are to take advantage of other investment opportunities that may present themselves.

I'd like to wrap up my remarks by addressing guidance for the fourth quarter and the remained of the year. In the press release, we provided fourth quarter FFO guidance of $0.59 to $0.62 for the fourth quarter.

For the full year our expectation is that we will produce FFO of $2.32 to $2.35 per share and therefore we have raised the low end of guidance range for the full year to $2.32 from the prior $2.25.

I will now turn the call back over to David.

David Neithercut

Thanks, Mark. Many people are asking a lot of questions at about state of the multifamily investment market and what's happening to cap rate, property values et cetera. And I am going to take a minute to discuss that with you all today. I want to start by saying that there's a limited amount of transactional activity at the present time.

We talked about this in last call. We'd expect that it would be a much more limited amount of activity taking place and we're not seeing a lot of deals, we're not seeing lot of deals in any market today in any class of the multifamily assets, be they A, B, or C quality assets. And that makes it a little hard to say there's a trend of any kind really taking place at the present time.

And of the deals that are getting done, many were priced or finance prior to the dislocation that has affected the capital markets. So keeping that in mind, I'd sort of share with you what we are seeing out there recognizing it's somewhat of a limited sort of sample size.

It does seem to us that there continues to be investor demand for high quality assets in the better markets. We're told that institution allocations for direct real estate are in fact increasing. And this is resulting in a very strong bid for good assets in the best markets and again I want to emphasize this is for the good assets in the best markets.

There continues to be availability of financing for assets really in all markets with Freddy and Fanny very much open for business and looking to book loans. These may be at lower loan to values then conduit lending, but they are certainly open for business.

And the GSAs do provide a great deal of consistent liquidity into our space that minimizes evaluation volatility that one might expect to see in other sectors that don't have a source of reliable financing.

And certainly the demographics continue to be very compelling, as echo boomers with high propensity to rent come of age. And we see limited new supply in most of our markets. Limited supplies, certainly when compared to past history but also limited when compared to the expected demand from this echo boomer segment going forward.

And we're seeing decreasing in home ownership rates as perspective buyers witness the realities of the market plate and learn that owning a home is not risk free. So higher quality assets and better markets, which have retained value and lesser quality assets in other markets have not.

The direct investor is differentiating between asset qualities. Which means the cap rates for high quality assets in the better markets have moved little if at all. The cap rates on lesser quality assets in less desirable markets have probably moved 50 to 100 basis points or so.

Over the past few years with unlimited excess to cheap money and loan values this distinction became blurred. Cap rates between different quality assets and markets narrowed significantly and we at Equity Residential we’ve exploited this lack of differentiation.

We undertook a material transformation of our portfolio. We exited our slower growth non-core markets and re-allocated that capital to markets of higher growth prospects at again historically narrow spreads.

So the market has certainly changed and the work we have done over the past several years are reconfiguring our portfolio has resulted in a very much-improved overall portfolio quality. The large concentration to the most desirable markets that are experiencing little if any reduction in asset values in superior future growth rates.

We've continued to take advantage of this opportunity in the third quarter when we sold 29 assets for nearly $1 billion dollars. We sold 11 assets in Texas, seven in Charlotte, four in Nashville, to just to name a few.

We realized an overall internal rate of return on investments on those assets of 11.2%. And the gain we realized on those sales, 53% of that was economic and 47% was a recapture of depreciation. And in 2007, we were completely exit five markets. We'll exit Chicago and for us that means the suburban markets in the far western and northwestern suburbs

We'll have exited Minneapolis, Nashville, Charlotte, and Houston. And in the last five years we will have exited 20 non-core markets and increased our investments in core markets. And this has positioned the company extraordinary well for continued revenue growth and asset appreciation.

And I tell you, I am fairly certain that the assets we have sold would not have experienced the growth we released from the asset that we’ve acquired. Our 2004 portfolio of acquisitions that contribute to our third quarter same store net operating income in this quarter just ending was 6.3% our 2005 acquisitions in the third quarter just ending contributed NOI growth of 7.6%.

Our 2006 acquisitions for the third quarter contributed 5.5%. And on a year-to-date basis our 2004 acquisitions contributed 6.2% growth and net operating income and our 2005 acquisitions contributed 8.2% in year-to-date same store net operating income growth. So we are very pleased with the performance of assets we've acquired and again are really confident that they retained value relative to the assets that we've sold.

Because of the uncertainty in the marketplace today during the third quarter, we slowed our acquisition activity. We acquired only six assets in the quarter, many of which of those had been kicked up much earlier in the years. We acquired assets, one asset in Tampa Florida, a couple in Denver, one in New York City and a couple in California.

We continue to watch the market very closely. We are currently underwriting new deals but are actively pursuing very few. And our current expectation for the fourth quarter acquisition is less than $50 million. We are choosing instead to maintain liquidity with current availability in our credit facility as Mark mentioned of $1.4 billion.

We are closely watch the market to look for opportunities to beat the acquisition, development, or expanded share repurchases. On the condo businesses as Mark mentioned met our expectation in our pre tax basis for the quarter although we closed a 169 units versus a budget of 180 units.

We were able to meet budget due to the mix of units that were closed unless broker participation than we had originally budgeted. Profit margins have eroded some, from the low 20s and high teens when many of this deals were first put into service to low to mid-teens today, but they are in line with our current expectations.

The third quarter closing of 169 units was down from the second quarter when we closed 226 units due. This is due to primarily the sellout of our specific core property and played all the way California and the wind down of our last deal in Florida and one of deal in oil conversions.

In the fourth quarter we're projecting to close even fewer units approximately 100 total units, that will give us a total FFO contribution for this business for the year of $16 to $18 million. And again, it’s after taxes and overhead.

We have had two new properties to our condo inventory both in California, 104-unit property in Los Angeles where we're very successful with the specific core conversion where we have just one unit available and 108-unit property in San Jose, California.

Also on our second quarter call, I told you about a property we acquired in South Florida that was a halted conversion and it was 50% leased and occupied upon our purchase. We under eroded to acquire the property as an apartment, but considered a conversion and after spending several months determining we should attempt to complete the conversion have decided not to do so.

We canceled those efforts and we are now leasing the asset and thing we will see a second year return of that asset of more than 6%. So we're essentially out of Florida where we have only three unsold units today done with our last project in Phoenix where we have 16 unsold units today.

Going forward our conversion efforts will be directed towards completing our last deals in Chicago while continuing our activities in Seattle and continuing approval for our conversions in California.

On the development front, we have $1.2 billion of development currently underway. We've a pipeline development opportunities of another $2.5 billion in various stages of planning and diligence.

Will currently own the land for about half of these projects that are in the pipeline. The balance of which are either under contract or letter of intent. During the third quarter we commenced construction on two project, the first a reserve at town center. Which is a second phase of an existing property we currently own in the Seattle area.

Building 100 units there approximately cost $23.5 million, we hope to achieve a mid-6% yield on that transaction. The second in Montclair, New Jersey a joint venture deal, a 163 units, $49million total cost, and a high 6% call it 7% expected yield on that transaction.

During the quarter we also completed a lease up and have now stabilized our asset of 2400 M Street in Washington, DC, which is a fantastic asset, and our expectations for stabilized yields are now in the nines.

We also delivered excited about. That building is 104 units, its 65% leased today at rent in excess our original pro formas and we will yield in the sixes in that transaction

We also added two new land parcels during the quarter, the first being a three phase property near the Dulles airport which we done in a joint venture for 1159 units and that was a $60 million land purchase, a large transaction, one that was right outside the front door to Dulles airport.

The second thing, a four acre sight for transit oriented development in the Bay Area also in a joint venture for 309 units, an $18 million land purchase. I'll tell you we continue to see an increased level of development opportunities, as condominium projects are canceled.

We are seeing some reductions in land costs on those level paid by condominium developers but I'll tell you that competition for other rental developers is keeping land prices high from an income builder's perspective. So I don't think we'll see a whole lot of bargains out there.

On the construction cost side, overall costs of increased modestly in 2007 I think we talked on earlier calls about how the rate of growth was easing and we have certainly seen easing and actually limited charges in certain markets where construction activity has slowed dramatically.

And most of the reductions would of been found in more in wood frame construction because high-rise costs continue to increase, particularly in markets like New York City which have continued to experience very strong demand.

So let me close that by just saying how much we're going to miss my dear friend Gerry Spector when he retires at the end of the year. Gerry started working for Sam as a 25-year-old accountant, 35 years ago. During that time, he built our property management company from scratch and he has overseen the significant changes that have been implemented over the last couple of years.

Gerry really is the heart and soul of the culture here at equity that makes terrific place to come to work everyday. He's a great friend and a guy whose helped me so much during my 17 years with the Equity family of companies. But all good things must come to an end I guess. And I'll tell you that today there are 5000 people in the EQR family across the country that are sad to see Gerry go but are pleased to know that he will not being going far as he will continue to serve as Vice Chairman as Board of Trustees. Gerry, want to say a few words?

Gerald Spector

Thank you David. As David says I will continue to play a significant role in the company although not day-to-day overseen but certainly protecting my investment and everybody else's investment. I'm highly invested in this company. I think it is a place where I want to be and I continue to want to be. I've been a part of Equity Residential for 14 years, longest stint I've ever had in any of the other organizations and it's been a wonderful joy to do it.

I've worked with so many good people. The age and the term of the employees here is astounding. We just have a lot of long-term employees here, committed to this company since the beginning of time like I had. The only thing that get you out of here is they just wear you out.

But at this stage, I've outlived so far outlived, outsurvived the first two CEOs and I really thought may be I had the shy, the third one but this guy is just way too young, way too fit and way too driven. So he needs just to go at it and keep things going the way it is and we're just going to have a wonderful result here.

I think we got a fabulous job of relooking at our business and reconfiguring our portfolio in the markets that we are in. I think we've done the right thing through a maximize value in the long term and we're real excited about what the end result of this whole thing is going to be.

I've had great, great relationships with my successors. Fred Tuomi who has been with this company for 14 years and actually moved to Chicago beginning of 2005 in anticipation of this event. I wanted to make sure that we had our key top management guy leading the team out there in place so that we could work together for pretty close to three years to get this done.

Also David Santee who assumed the role of Executive Vice President of property operations, somebody who has been here for pretty close to 14 years as well. David was intimately involved all through 2006 with the implementation and the creation of our new platform, moved to Chicago beginning of 2007, in place to start maximizing the value of all the things that we've done, just high levels of respect and confidence in these individuals to carry on. I don't think we're going to miss a heartbeat here.

And all I can say is make me proud. I think everything we've been done up to now has been right on and I'll miss my involvement with the analysts in the community, our investors and well as the employees but as David said my ghost will be there. Happy Halloween.

Marty McKenna

All right. Good night. Mike we'll be happy to open up for questions.

Questions and Answers Session

Operator

(Operator Instructions) Our first question comes from the line of Dustin Pizzo with Banc of America Securities. Go ahead with your question please.

Dustin Pizzo - Banc of America Securities

Hi. Good morning, guys.

David Neithercut

Hi, Dustin.

Dustin Pizzo - Banc of America Securities

David can your just comment a bit on the 4.25% revenue growth outlook or I guess up to 4.25% outlook for '08 that you talked about in the press release and where that acceleration is going to come from?

David Neithercut

I'll let Gerry take that if that's all right, Dustin.

Dustin Pizzo - Banc of America Securities

Sure.

Gerry Spector

We're assuming that the overall markets aren't going to change dramatically. There's been a decline in household formation and job growth throughout 2007. Really based on the trends that we see and where we're at plus all the efforts that we've put forth we think that's a reasonable number assuming the economy does not change dramatically.

If you're going to see a significant decline in the economy next year that number is going to erode. And like as well, if we see some levels of recovery where we're not anticipating for example Florida starts to move a little bit more positive or aggressive or gets better job growth and surprises, we could have a surprise to that but we think it's a midpoint based on where the economy is today within the range of that expectation.

Dustin Pizzo - Banc of America Securities

So is it more a function of some of the markets that are struggling now getting less worse or is it like the Florida markets improving or?

Gerry Spector

I think we're seeing Phoenix I think we -- it looks or it appears that we've seen the bottom in Phoenix and we're actually kind of in an upward movement. We've seen a positive impact on the snowbird side.

We see a little bit of that in Florida not as much as you would like but the wild card is still Miami, we got a lot of supply coming in there. That could drop you down a little bit. So, we're not really seeing significant recoveries in these reversion markets including Washington DC I might add.

Another area Southern California is slowing a little bit but primarily driven by the inland empire. I think the other areas we've see some slight slowing. Inland empire is a wild card there's a significant amount of reversions in that market literally that it did not -- that came back in the market, I think there were 45 properties bought for conversion, 26 of those reverted back to the supply and that's why we're seeing a softness there.

So I think, there really isn't any change in the overall markets the way there kind of trending today. You know, there always could be a wild card surprise in New York City, I mean, if New York City encounters some real stress as a result of layoffs in the investment banking world then certainly that could impact that 4.25% we're talking about.

Dustin Pizzo - Banc of America Securities

Okay. And I guess also how much of that is related to the shift in mix in the same store pool, I mean, can you remind us which assets given the changes you've made over the past 12 months are going to start moving into that pool?

Gerry Spector

Yes. Well, I would tell you that yes that has a positive market but there are periods of time where the secondary markets, you know, the Dallas, the Atlantas, the Charlottes, they've had some decent recovery right now and those are markets that we've exited.

But we're looking more term and I think if the results of the new acquisitions we made over the three years are any indication that should continue to move our revenue numbers up over periods of time more aggressively.

Dustin Pizzo - Banc of America Securities

Okay. And then just lastly real quick, just looking at the balance sheet at what leverage ratios you guys comfortable operating at longer term there?

Mark Parrell

Hi, Dustin. Its Mark Parrell.

Dustin Pizzo - Banc of America Securities

Yes.

Mark Parrell

We have been communicating for awhile for about a year that we're comfortable in the 50% debt to undepreciated book level sort of 50% to call it 55% in that range and we continue to be very comfortable at that level.

Dustin Pizzo - Banc of America Securities

I'm assuming the rating agencies have no issues there either?

Mark Parrell

We had activity with the rating agencies as you might recall in May.

Dustin Pizzo - Banc of America Securities

Yes.

Mark Parrell

So I would expect that if we continued along this course we'd be fine, of course, if we take another course there could be a different outcome.

Dustin Pizzo - Banc of America Securities

Okay. Thanks, guys.

Operator

Thank you, sir. The next question comes from the line of Jonathan Litt with Citigroup. Please go ahead with your question sir.

Craig Meltzer - Citigroup

Hi. It’s Craig Meltzer her with Jon.

David Neithercut

Okay.

Craig Meltzer - Citigroup

I just wanted to get some color on the repositioning plans going forward. Activity seems like it's going to be low in the fourth quarter but what should we expect going forward? Is there widening in cap rates in the low quality assets is that going to impact the repositioning in sales plans next year?

David Neithercut

Well, we continue to have a plan to execute our strategy continue to sell our lesser quality assets and reallocate that. And we're continuing to sell assets we're still marketing assets Craig and if we continue to see prices that make sense pull the trigger in on those sales.

And a I said kind of in my opening remarks we'll look to see what we think is the right thing to do with those proceeds be it new acquisitions be it development or be it share repurchase.

Craig Meltzer - Citigroup

What's your preference today between the acquisitions share repurchase or development?

David Neithercut

Well, I think today our shares continue to look be very compelling investment opportunity particularly given the fact at least at the present time we've not seen the change we believe in net asset value at change our stock price would reflect.

Craig Meltzer - Citigroup

So we should continue to see moderate acquisition activity?

David Neithercut

I would expect you’ll still see modest acquisition activity and but we just have to see. We've been a big acquirer over the past few years and I think what we're doing is we're waiting to see how things settle out and certainly have more color when we have our call in early February.

Craig Meltzer - Citigroup

Thank you.

Operator

Thank you, sir. The next question comes from the line of Alex Goldfarb with UBS. Please go ahead with your question.

Alex Goldfarb - UBS

Thank you. Good morning.

David Neithercut

Good morning, Alex.

Alex Goldfarb - UBS

I just wanted to touch on the term loan market, if you could just give us your thoughts on tapping the term loan market versus the unsecured market and what the tradeoffs are in terms of rates versus presumably there might be some more restrictions or what have you or perhaps the rating agencies take a different view of the unsecured term loans versus just regular straight unsecured debt?

Mark Parrell

Sure. It's Mark Parrell. We look at the term loan market as another place to source capital it was -- as I said in my remarks, some pretty attractively source money relative to the unsecured sort of public notes market.

The term loan covenants are actually more liberal than the covenants contained in our bonds or again our public notes. So from our perspective and we did have extensive discussions with the ratings agencies, each of the three in advance.

You know, my perspective talking to them was they view that as another source of funds and used judiciously like preferred stock and other things is just fine in the company's debt mix.

Alex Goldfarb - UBS

Okay. So would you be inclined to do more unsecured term loans even if the unsecured debt market were to open up again?

Mark Parrell

I mean, that just depends on the differential rates and everything else just we'd have to look at that at that time and feel our way through it.

Alex Goldfarb - UBS

And then touching on the share buybacks, can your just give us your thoughts with the current 65 million remaining if you've had discussions with the board about or intend to reauthorize the program and also if you have those conversations with the rating agencies?

David Neithercut

Well, we have a board meeting scheduled in December and my guess is at that time we'll have a little better lay of the land and we'll have a discussion with the board as to what we might want to do or not with respect to a expanded program.

In the mean time, we'll just going to continue to watch but certainly think there could be a opportunity for us to spend remaining $65 million and has been within that context we have conversations with the rating agencies.

Alex Goldfarb - UBS

Okay but as far as your inclination to increase that forward discussions with the rating agencies?

David Neithercut

There's been no discussion with the rating agencies, no inclinations, no conversations with anyone about expanding that repurchase activity.

Alex Goldfarb - UBS

Okay. Final question is the halted condo projects that are listed in the supplemental packet? Do those stay within the TRS or are those transitioned back to REIT and what are the implications on doing that?

Mark Parrell

It's a great question. It’s Parrell again. Right now those properties in the taxable REIT subsidiary. We do expect to transfer those and we do have to transfer those at market prices back into the REIT to the extent those conversions are a long way off.

The effect of those is to drive in part the provision for income taxes. You see a positive 1.18 number in the quarter. So what happened is these depreciation deductions from operating rental property shield some of the conversion income and that was what was going on in that quarter.

Alex Goldfarb - UBS

Okay. So when would they move back?

Mark Parrell

Yes, could be, I would expect it to be in this quarter.

Alex Goldfarb - UBS

Okay. Thank you for your time.

Mark Parrell

You bet, Alex.

Operator

Thank you sir. Our next question comes from the line of Rich Anderson with BMO Capital Management. Please go ahead sir.

Rich Anderson - BMO Capital Market

Thank you. BMO Capital Markets and good morning everybody. David, you mentioned assets of lower quality in weaker markets seeing maybe 50 to 100 basis points up side in cap rates. What percentage of your portfolio are weak assets in crappy markets?

David Neithercut

Very little. There are hardly any today. What remains in our portfolio today are assets in markets that while we may be choosing to exit, they're currently and have for a long time been institutional for the quality markets and we believe we got institutional quality assets in those markets. I'll tell you the product that we've been selling over the past few months has been very much at values that have been consistent with our expectations earlier in the year.

Rich Anderson - BMO Capital Market

So if you were to look at your NAV, you would say no change on if you were to--.

David Neithercut

I wouldn't say no change. But there has been far less change than what the stock price might indicate. And that we've been selling our assets, we've been selling our assets on average at or in excess of our original valuations of those assets were earlier in the year.

Rich Anderson - BMO Capital Market

A couple of just quick housekeeping in terms of the preferred dividend quarterly run rate with factoring in mid-quarter timing of the redemption, I'm getting to like a $3.7 million quarterly preferred dividend number is that about right?

David Neithercut

Yes.

Rich Anderson - BMO Capital Market

Okay, land sales, do you have any expected for fourth quarter? I can't recall.

David Neithercut

We do have one, that's already closed, an average about a $1 million dollars coming to us.

Rich Anderson - BMO Capital Market

$1 million gain.

David Neithercut

Correct.

Rich Anderson - BMO Capital Market

Okay. I also took not that you have lower interest income expected versus last quarter and yet you sold a lot of assets and didn't buy a lot of assets. I know you bought back stock. But can you explain why the interest income in other is coming down so dramatically.

David Neithercut

Sure. Absolutely, the 1031 that was driven by income in our 1031 account. As we drained that account and used those proceeds to pay down the revolving line of credit. You might have noted that we are at purely substantially availability on the line and that is going to reduced debt. That's why you are essentially going to see interest expense sort of decline and other income go down.

Rich Anderson - BMO Capital Market

Fair enough. As far as condominium conversions you mentioned a few markets where you'll be focused next year. Would you say that we'll be on a steady pace of deemphasizing condominium gains in the future? Or is it sort of range something that you would expect to be able to achieve $16 million to $17 million a sort of a run rate basis?

David Neithercut

It's hard to say, Rich. You know we're going to look and see what the opportunity presents in 2008. Again, as I've said on many calls and we said for quite some time, we believe that our price point and given the demographics in markets in which we operate that this is very attractive starter home pricing and when that market returns in some of these markets, we believe we'll continue to sell condos and make money.

This may have to wind down a little bit for some period of time. I don't see any reason why it can't be scaled back up and continue to provide decent returns to us on an annual basis. It's going to be tough to call. But it certainly has been winding down this year and it's too soon to call what we think our expectations might be for 2008.

I think it would certainly not be at this level in 2008. It might even go lower than our run rate is here and then we'll see where it goes from there.

Rich Anderson - BMO Capital Market

You're looking at the top end of your same store NOI growth range for 2007. What do you think -- is it more a supply phenomenon or is it more of a demand phenomenon?

Gerry Spector

I think it's a balance of both. You're not really seeing other than its reversion markets, any supply coming to the market and frankly, even in those markets typical apartment supply is down dramatically. The hard to call factor is the shadow factor of how many renters will really move to renting some of these overbuilt product.

We haven't really noticed a huge amount of it. Our occupancies are real solid right now, lease looks solid. There's no indication in any area for us. No surprises that we can see at this point.

Rich Anderson - BMO Capital Market

It seems so much sort of feels better this time versus last time.

Gerry Spector

It really does. I mean I don't know why. I think I don't know that demand is really significantly going up. We're continuing to see lower turnover. People staying in longer, getting a little bit more conservative and how they approach it. Nobody is out rushing to buy homes these days.

Rich Anderson - BMO Capital Market

I know this is a single asset. The asset I drive by, pretty much every day in west New York, New Jersey. It's currently shrouded in a big black net. I was wondering is that Halloween decoration? Or is there something going on there?

Gerry Spector

You got me. I haven't seen a picture of it.

David Neithercut

Is that the 70 Hudson?

Rich Anderson - BMO Capital Market

Yes. Right on the water front.

David Neithercut

We had a fire there a couple of weeks ago. The upper level, there was a fire in the, all up to the lumber for the forms and all the supporting work was burned. And I'm sure that's shrouded just from a safety reasons we're in the process of having removing a floor there and we'll get that going soon after insurance and after liabilities to the general contractors and the subs it's going to cost about a million dollars. That might guess, that would explain that shroud.

Rich Anderson - BMO Capital Market

Okay, thanks, guys.

Operator

Thank you, sir. Our next question comes from Christeen Kim with Deutsche Bank. Please go ahead with your question.

Christeen Kim - Deutsche Bank

Very good morning.

David Neithercut

Good morning.

Christeen Kim - Deutsche Bank

Hey good morning. Back on the 50 to 100 basis cap rate change. Is that over the period of time, I mean the past three months or so from when the credit market started to destabilize?

David Neithercut

Yes, I would attribute that to the change in the financing markets, yes.

Christeen Kim - Deutsche Bank

In terms of pricing on assets that you have for sale now, how is the pricing coming in versus your internal expectations?

David Neithercut

Again, what we have sold and what we are offering for sale continues to be pretty much in line with our expectations. If we don't get those expectations we won't sell and we don't think we're operating any market today in which we have to sell. We're just going to continuing to cleanup and reduce the overall number of markets but we don't see the pricing in our markets, we'll keep operating and happily do so.

Christeen Kim - Deutsche Bank

Great. And you mentioned people are not rushing out to buy homes at this point. Have you seen a noticeable change in a move up to home per this ratio?

Gerry Spector

Yes, it's in decline. I wouldn't say it's significant. We've never really as a company seen a lot of volatility in that number. It tends to be in the lower 20% range and that we've seen three months sequential decline. But it's very nominal. It's down 2% to 3% but above the 20% mark. I don't think I've seen it go below 20% and not above 25. It's around 20 do 21 now.

Christeen Kim - Deutsche Bank

Are you seeing any noticeable differences by market?

Gerry Spector

Yes, we are seeing more actually, you know, Phoenix for example, for whatever reason, there's a lot of available homes but people are not moving out as much. I mean the decline in Phoenix is pretty strong, California is strong. You know many markets really haven't changed at all. I would say they are both pretty much trending the same.

In Florida, we've seen our turnover go up a little bit. Up in Orlando but down in southern Florida. So it's a little bit spotty all over the place but not a material impact on what's going on.

Christeen Kim - Deutsche Bank

Great. Thank you.

Operator

Thank you, madam. The next question comes from the line of Mark Biffert with Goldman Sachs. Please go ahead with your question.

Mark Biffert - Goldman Sachs

Good afternoon. I just wanted to ask you about the sale that you did in Dallas. I'm just wondering reasons why you'd move out of that. We've been hearing a lot of good growth has been going in that market

David Neithercut

Yes. There has been good revenue growth in Dallas because you've got very good job growth in Dallas. But we looked at Dallas that based on the ability to build new product, based upon the ability to build new single family homes and the single family home appreciation rate that that market has experienced over extended time period, for the long term investment perspective it makes sense for us to have our capital elsewhere.

And we have announced internally that we'll be exiting Dallas, and we do continue to sell Dallas assets. And I will tell you that Dallas is a market like I talked about earlier. Institutional quality market and we have institutional quality assets and there's demand for our product here, because the market is very strong.

But again we just look at other investment options and think that we'll realize better rates of return elsewhere.

Mark Biffert - Goldman Sachs

Okay. And then I noticed that your spreads during the quarter are little bit tighter than forecasted about a 100 basis points.

What do you expect in terms of asset sales in the last quarter that would make that spread widen out more than it has?

David Neithercut

I'm not sure we're going to buy enough. And again, we'll probably sell far more than we'll buy. The spread was narrower than we would have expected in the third quarter because we sold some assets with some four handles.

And I guess, I described these assets that we sold this assets that were being acquired who perceive there going to be a big value add opportunity. And we sold that assets in the bay area after contemplating a rehab we kind of, value add play ourselves.

We just determined that we could get strong price in the third party that it wasn't worth doing it ourselves and another property in the large property in suburban Boston, as the same thing.

So that number was a little narrowed because we sold three deals totaling 250 somewhat $1 million at very low cap rates.

I'd be surprised in the spread went to 100 for the full year.

Mark Biffert - Goldman Sachs

Okay. And then lastly, related to the LA condo project that you added to your pipeline.

What are you guys seeing in terms of demand for your condos a couple of other people have some narrow being sitting on the market for sometime?

David Neithercut

Well, we were very successful in applying the rate deal we did. And we bought another in LA in a market that we thought -- and again we were talking about 108 units here.

I think, a 100 plus units. So it's a small transaction one that based upon working with local people in the market, we think we can get in and get out fairly easily.

But, I tell you across with the some market which we order and operate several other properties and if we have detained own and operate several other properties rental happy to do that as well.

Mark Biffert - Goldman Sachs

Okay. Great, thanks, guys.

Operator

Thank you, sir. The next question comes from the line Christine O'Connor with Morgan Stanley. Please go ahead with your question.

Christine O'Connor - Morgan Stanley

Thank you, good morning.

David Neithercut

Good morning.

Christine O'Connor - Morgan Stanley

Good. How are you?

David Neithercut

Good. Thank you,

Christine O'Connor - Morgan Stanley

Just following up on the single-family issue. I was wondering, if you could clarify where you're seeing the competition from single-family housing.

How much is from homes that are vacant and for rent? And how much is in the form of people just purchase homes as prices fall?

Gerry Spector

Well, we're not really seeing that many people -- again, I think we're seeing a decline on people moving to buy homes just because they're great deals doesn’t seem to be effecting most of our apartment dwellers.

We don't really have strong data that would tell us exactly what's happening in terms of how many single family homes are being rented that weren't already being rented historically.

There is always been a tremendous number of people who have rented homes and condos as opposed to the type of apartments that we provide and that's been historically true. There probably is some increase in a couple of these markets certainly in Florida that it does probably take away some of the demand from us.

But, and I think that does account for some of the softening of the numbers that we have. But it is in very specific pockets, it certainly not a nationwide issue that we can tell. We're not seeing it really demonstrated significantly in our numbers.

And there is not short way to track it, but what we do know is that there has been a number of investors buying units, probably more than normal and certainly a significant supply homes that are not moving. Another homes those are moving by the people living in them.

So they are just -- they are getting them for sale, but they are not necessarily vacant and there's no real data to tell you what's really vacant. So, it’s hard to say.

David Neithercut

Biggest impact that we have and we mentioned this in the last quarter was also is in our three bedroom units. Where we’re seeing challenging marketing renting those units when larger occupants also has ability to run single family homes.

Christine O'Connor - Morgan Stanley

This is a follow-up. If I were to say it was going to become a bigger issue going forward, especially based on your history what you have seen in the past.

Would you be more concerned about this, it’s a three bedroom I think a hint to it? But, would you be more concerned at a higher price point unit versus a lower price point unit?

David Neithercut

Well, I think it can affect you on both sides, frankly. I don’t think you can say one of the other. But, if you look at the supply coming out of the Miami that's going to happen over the next year or so.

These are really high priced in things and although, I don’t think any of our resident would be moving in necessarily rent, units are selling for 800,000 to a million.

It will have an effect on compression, it will compress bond to us. It will just add more supply all the way along and that will have some you know impact on our ability to raise rents.

Christine O'Connor - Morgan Stanley

Thank you.

Operator

Thank you, sir. Next question comes from David Harris with Lehman Brothers. Please go ahead with you question.

David Harris - Lehman Brothers

Good morning. First of all I want to say goodbye and farewell to Gerry and his ghost. I wish them both a very happy retirement.

David Neithercut

Yes. We don't want the ghost…

Gerry Spector

Respect.

David Harris - Lehman Brothers

Secondly, I just wanted to welcome Mark and his new position and we look forward to working with him, as I'm sure many of my contemporaries in other firms do as well.

Mark Parrell

Thank you, Dave.

David Harris - Lehman Brothers

Yes. Let me ask I'll start with a question to Gerry, as he's on his farewell. Obviously you've thrown out indications to what you think same-store revenue might look like and I know you're not getting detailed about this but if we were to think of same store NOI in '08 are we looking at a number inside your expectations for '07?

Gerry Spector

Well, we would hope so but you know, it's hard to say. I mean, we're hoping that expenses are always a wild card, there's going to be some real impact on utilities, it’s hard to determine but really can't say at this stage.

David Harris - Lehman Brothers

I mean you obviously extreme -- you're looking to do extremely well with expense control this year, I mean, it's going to be a tough act to follow in terms of comps?

Gerry Spector

I think we have uncontrollable items and that's really a big determining factor.

David Harris - Lehman Brothers

Okay. David, if I could just bounce it back to I know you've talked about this before and but you've referenced several times in that hour of so the portfolio repositions, could your just remind me where we are in terms of your timeframe round it?

Are we halfway through? Do we get there in a couple of years and where do we end up in terms of the number of markets you think you might have more concentrated in?

David Neithercut

Well, I think we're a year or so away from being in 15 or so primary markets where I believe we're going to be able to establish significant scale of good quality assets that will produce strong revenue growth on a year-over-year basis and significant capital appreciation.

Now also if we count Southern California as four markets someone counts it as one maybe that why were 15, if they count it as one maybe we're a little bit more. We're going to continue to sell assets in Dallas and other of the smaller markets and continue to concentrate our capital in what will be probably be 15 or so primary markets.

David Harris - Lehman Brothers

Okay. Thanks. And then probably the question still for you as well. On development you've been maintaining a similar volume over several quarters. Could your just address what you're looking at in terms of underwriting and return perspectives today, it looks like, I am assuming you might be looking at higher returns to give a green light to any project?

David Neithercut

Well, we're looking at yield as a function of what it costs to acquire assets in any market and we always look at we can build to a yield or we can buy to a yield and make money to make sure that we get appropriately compensated for the development risk.

As I mentioned and again it's a very small sample size we've not seen a significant amount of change in values or perhaps of cap rates for the better quality products in the better markets. So as long as we continue to build in those I'm not sure our development will change, we'll look very closely at that to make sure we're getting appropriately compensated for that risk.

David Harris - Lehman Brothers

And your spread, in terms of compensation for the development risk is what?

David Neithercut

It's been 100 or so basis points, maybe a little less in some of the tougher markets to build. May be 100, 150 or so basis points.

David Harris - Lehman Brothers

Okay. Thank you.

Operator

Thank you sir. Next question comes from the line of Bill Crow with Raymond James. Please go ahead with your question.

Bill Crow - Raymond James

Good morning. Most of our questions have been answered. But I do have one on the supply side. You say you see very little supply coming in. Are you actually seeing projects halted at this point given that their market dislocation? That part A and part B is what do you see on the cost side of things? You know we've certainly seen lumber prices come down but it doesn't seem like we've seen any other offsets to the increases.

David Neithercut

Your first question was seeing projects halted. Not seeing people walk away from development deals but you may be seeing people doing and probably seeing some of this in DC is people under construction electing to not sell assets that had been build for condominium sale but rather convert those into rental apartments. So I think ultimate end use of the property may be changed. We're not seeing people halt construction.

Bill Crow - Raymond James

Do you think the pipeline may shrink out there? That you cannot get as ready financing for some of the these deals and maybe the supply growth that we're seeing this year is a peak for a couple of years?

Mark Parrell

Hi, this is Mark Parrell. I do see and we see as we work with our joint venture partners and speak to our banks constraints in financing by the banks, the commercial banks of development projects both rental and certainly I'm sure exists in the for sale market in a much more dramatic way. We do see that even on good relatively easy deals we do see that constraint and it's very apparent to us.

The banks want more guarantees they want lower leverage, all of those things and I think that will be impactful to supply going forward.

Bill Crow - Raymond James

And then on the pricing side of things, as you're getting the bids back, are you seeing any relief at all at this point?

Mark Parrell

As I mentioned earlier, there's certainly some relief on more stick built as you commented on lumber, more stick build type deals, you've seen relief and maybe some decreases to costs of a year or so ago. But on the more complicated more high-rise and mid-rise type construction, not a great deal of relief.

You've seen easing in the rate of growth. But we're building in a lot of markets. There's a lot of offices being built, hotels being built. Seems every Airport, I travel though is having work done. The demand for construction is not limited to residential construction. So we've not seen a great deal of relief in our more desirable markets.

Bill Crow - Raymond James

So the pace on high-rise construction inflation goes from 10% to 5% or something?

Mark Parrell

I think what we would have made that call this year, we'd probably say 5% to 6% growth this year versus something that might have been 2x for the last couple of years.

Bill Crow - Raymond James

Thank you very much.

Operator

Thank you, sir. Next question comes from the line of Paul Morgan with Friedman Billings Ramsey. Please go ahead with the question.

Paul Morgan - Friedman Billings Ramsey

Hi, good morning. In terms of the 4.25% possible same store revenue growth for next year I just want to kind of contrast that with what you're seeing in terms of the de-acceleration in the market. You highlighted Phoenix, Florida, DC, Southern California and what you think it might take to stabilize that revenue deceleration? Is it going to take a stabilization in the housing prices or is it going to be some other catalyst that levels things out?

Mark Parrell

I think it is just relates most of the revenue growth up or down, it's going to be primarily driven by increased employment, the level of the increased employment household formation. That's really the biggest issue. I think on supply side even if slowdown dramatically single family homes, reversions are pretty much all in most markets to name a few. So really it's going to parallel really job growth household formation and again if you see some uptick there, you're going to see movement from that number.

And so I don't think single family home prices dropping another 10% would necessarily materially affect that because you don't have a lot of new ones coming in. That's back, you know you have may be 18 months or 24 months supply in some markets. You know it's going to continue to narrow a little bit every month.

Paul Morgan - Friedman Billings Ramsey

And then I take it that you're cautiously optimistic about the paces, dark creation in those markets?

Mark Parrell

I don't know that I'd make that call. It was slower certainly in 2007 than in 2006. You know, I think I hear a lot of different things about next year. It's anybody's call. You figure out and let me know.

Paul Morgan - Friedman Billings Ramsey

But 4.25% we would assume kind of a stable from where we are right now.

Gerry Spector

Reasonably stable, nothing really significant up or down from where we are right now.

Paul Morgan - Friedman Billings Ramsey

Okay. Thanks.

Operator

Thank you. The next question comes from the line of (inaudible) with Green Street Advisors. Please go ahead with your question.

Craig - Green Street Advisors

Good morning David, actually it's Craig. Just a quick question. It's been a long call. About a year ago you guys got out of condo sale projects in Arizona or decided to sort of abort the sales process. But you had some closed sales contracts. I was wondering what you guys ended up doing with those? And the thought behind the question is what do you see happening in the market as some of these busted condo deals occur where sales closed and maybe there being re-marketed now as apartment communities. Are you seeing a differentiation in price, given the complexity that's created by the situation and pretty good opportunity for EQR given your experience?

David Neithercut

The deal that we had actually closed a handful of units. I think it was may be a half a dozen or a dozen or so units was in Arizona. We were able to move all of those residents, all of those buyers to another property where we were continuing the sales program. And actually that was kind of upgrade for those people and they went along very happily with that.

And so we were able to pick that situation, go ahead and rent that up and now are successful in operating it as a private property. Over the past year, we have acquired in addition to discontinuing our conversion activities and de-converting something back to apartment and renting something up from 50% or 60% occupancy and getting it stable. We have acquired a couple of assets that were 50 or 60% occupied when the seller had decided to abort the condominium conversion process but they had not sold any individual units to a retail owner.

We have and we are successful in leasing those as well. I think those are exceeding our expectations. We have looked at a couple of deals that were fractured condominiums in which there were, lets just say 30 or 40% of the units were owned by retail owners and we were asked to acquire the balance of the units and operate those as apartments. We never got to the finish line on those assets. They're extremely complicated to own and operate and extremely complicated for us to manage in the way that we would expect to manage given the expectations of the retail owners as well as their mortgage lender's insurance requirements, et cetera.

We've not found any of those to be priced at a level to embark on that kind of ownership of a fractured deal. And my guess is the only way to get there is just got to be so incredibly cheap that we'll make enough money to offset that headache. Or if we believe that we have got the way of how to continue the conversion process and get to the finish line.

Craig - Green Street Advisors

Are you seeing any evidence that they are moving towards being that cheap or are there people who are stepping in and willing to take on that headache?

David Neithercut

I think lenders are stepping in other people are willing to step in. We just have to ask yourself whether or not we're equipped with our structure to go in and run these things which will be extremely different and we just decided that's not something that we want to do at this point.

Craig - Green Street Advisors

Great. Thank you.

David Neithercut

Welcome.

Operator

Thank you, sir. Gentlemen, at this time there are no further questions. Please go ahead.

David Neithercut

Well, thank you all for your time today. Mark Parrell and I look forward to seeing many of you in Las Vegas for the NAREIT meetings in a few weeks and until then all the best.

Operator

Thank you. Ladies and gentlemen, this does conclude the Equity Residential third quarter earnings conference call. You may now disconnect and thank you for using the conferencing center.

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