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Equity Residential (NYSE:EQR)

Q3 2007 Earnings Conference Call

October 31, 2007, 11:00 am ET

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

Operator

Good morning, ladies and gentlemen. Thank you very much forstanding by. And welcome to the Equity Residential Third Quarter EarningsConference Call. During today’s presentation all parties will be in alisten-only mode. And following the presentation, the conference will be openfor questions. And instructions will be given at that time.

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

Marty McKenna

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

Certain matters discussed during this conference call mayconstitute forward-looking statements, within the meaning of the FederalSecurities law. These forward-looking statements are subject to certaineconomic risks, and uncertainties.

The company assumes no obligation to update, or supplementthese 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 usfor our third quarter conference all. As noted in last night's earnings releaseproperty operation were very much in line with our previous expectations. Weare experiencing strong occupancy across the portfolio and we continue to seerising rental rates in most of our markets, offset by continued weakness inthose markets that are experiencing high inventories condominium reversions insingle family homes primarily Orlando and South Florida.

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

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

I am please to introduce Mark Parrell to many of you for thefirst time. Mark is a very capable and long-time member of our senior team hereat 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, becausewhile, 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 youthat it’s a very difficult thing to do. And something, I’ll address a littlebit later in the call as well.

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

Mark Parrell

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

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

First to our FFO results. For the third quarter of '07Equity 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 pressrelease, the $0.58 was $0.04 below third quarter last year due to primarily thelower condo gains and lower gains on land sales than we have last year. Andhigher interest expense primarily as a result of higher debt balances.

We had lower interest and other income because of rent.comproceeds and forfeited deposits that we received in the third quarter of lastyear. 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 wasabout $0.2.5 in the quarter.

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

Despite dilutions from dispositions such as Lexford and allthe other properties we have sold over the past few years. We are achievingstrong 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 $0.54to$0.58 that we had given on our last call.

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

This savings were somewhat offset by interest expenseincurred in connection with the share buyback, which I will discuss a littlelater 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 thanwe had budgeted.

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

Our same store quarter-over-quarter revenue increase wasdriven primarily by good results in the New York metro area where we were up5.9%. Seattle were up 8.8% and San Francisco where we were up 6 7%. Thesemarkets collectively represent 23% of total NOI.

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

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

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

Demonstrated by 0.4% sequential decline in occupancy and8.8% sequential revenue decline. The Washington DC market is also beginning tofeel stress from condominium reversions and we expect that market to bechallenging in early '08.

As I mentioned earlier, same store operating expensesincreased 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 occurin the first half of '07.

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

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 theshare repurchase.

During the third quarter, we spent approximately $271million 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 millionof our shares at an average price of about $45.30 per share.

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

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

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

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

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

For the full year our expectation is that we will produceFFO of $2.32 to $2.35 per share and therefore we have raised the low end ofguidance 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 atabout state of the multifamily investment market and what's happening to caprate, property values et cetera. And I am going to take a minute to discussthat with you all today. I want to start by saying that there's a limitedamount of transactional activity at the present time.

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

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

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

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

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

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

And we're seeing decreasing in home ownership rates asperspective buyers witness the realities of the market plate and learn thatowning 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 assetqualities. Which means the cap rates for high quality assets in the bettermarkets have moved little if at all. The cap rates on lesser quality assets inless desirable markets have probably moved 50 to 100 basis points or so.

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

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

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

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

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

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

And I tell you, I am fairly certain that the assets we havesold would not have experienced the growth we released from the asset thatwe’ve acquired. Our 2004 portfolio of acquisitions that contribute to our thirdquarter same store net operating income in this quarter just ending was 6.3%our 2005 acquisitions in the third quarter just ending contributed NOI growthof 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 andnet operating income and our 2005 acquisitions contributed 8.2% in year-to-datesame store net operating income growth. So we are very pleased with theperformance of assets we've acquired and again are really confident that theyretained value relative to the assets that we've sold.

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

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

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

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

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

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

We have had two new properties to our condo inventory bothin California, 104-unit property in Los Angeles where we're very successfulwith the specific core conversion where we have just one unit available and108-unit property in San Jose, California.

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

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

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

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

Will currently own the land for about half of these projectsthat are in the pipeline. The balance of which are either under contract orletter of intent. During the third quarter we commenced construction on twoproject, the first a reserve at town center. Which is a second phase of anexisting 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 high6% call it 7% expected yield on that transaction.

During the quarter we also completed a lease up and have nowstabilized our asset of 2400 M Street in Washington, DC, which is a fantasticasset, 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 willyield in the sixes in that transaction

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

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

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

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

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

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

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

Gerald Spector

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

I've worked with so many good people. The age and the termof the employees here is astounding. We just have a lot of long-term employeeshere, committed to this company since the beginning of time like I had. Theonly 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, thethird 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 justgoing to have a wonderful result here.

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

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

Also David Santee who assumed the role of Executive VicePresident of property operations, somebody who has been here for pretty closeto 14 years as well. David was intimately involved all through 2006 with theimplementation and the creation of our new platform, moved to Chicago beginningof 2007, in place to start maximizing the value of all the things that we'vedone, just high levels of respect and confidence in these individuals to carryon. 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'vebeen done up to now has been right on and I'll miss my involvement with theanalysts in the community, our investors and well as the employees but as Davidsaid my ghost will be there. Happy Halloween.

Marty McKenna

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

Questions and AnswersSession

Operator

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

Dustin Pizzo - Bancof America Securities

Hi. Good morning, guys.

David Neithercut

Hi, Dustin.

Dustin Pizzo - Bancof America Securities

David can your just comment a bit on the 4.25% revenuegrowth outlook or I guess up to 4.25% outlook for '08 that you talked about inthe 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 - Bancof America Securities

Sure.

Gerry Spector

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

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

Dustin Pizzo - Bancof America Securities

So is it more a function of some of the markets that arestruggling now getting less worse or is it like the Florida markets improvingor?

Gerry Spector

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

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

Another area Southern California is slowing a little bit butprimarily driven by the inland empire. I think the other areas we've see someslight slowing. Inland empire is a wild card there's a significant amount ofreversions in that market literally that it did not -- that came back in themarket, I think there were 45 properties bought for conversion, 26 of thosereverted 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 overallmarkets the way there kind of trending today. You know, there always could be awild card surprise in New York City, I mean, if New York City encounters somereal stress as a result of layoffs in the investment banking world thencertainly that could impact that 4.25% we're talking about.

Dustin Pizzo - Bancof America Securities

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

Gerry Spector

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

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

Dustin Pizzo - Bancof America Securities

Okay. And then just lastly real quick, just looking at thebalance sheet at what leverage ratios you guys comfortable operating at longerterm there?

Mark Parrell

Hi, Dustin. Its Mark Parrell.

Dustin Pizzo - Bancof America Securities

Yes.

Mark Parrell

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

Dustin Pizzo - Bancof America Securities

I'm assuming the rating agencies have no issues thereeither?

Mark Parrell

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

Dustin Pizzo - Bancof America Securities

Yes.

Mark Parrell

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

Dustin Pizzo - Bancof America Securities

Okay. Thanks, guys.

Operator

Thank you, sir. The next question comes from the line ofJonathan 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 plansgoing forward. Activity seems like it's going to be low in the fourth quarterbut what should we expect going forward? Is there widening in cap rates in thelow quality assets is that going to impact the repositioning in sales plansnext year?

David Neithercut

Well, we continue to have a plan to execute our strategycontinue to sell our lesser quality assets and reallocate that. And we'recontinuing to sell assets we're still marketing assets Craig and if we continueto 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 seewhat we think is the right thing to do with those proceeds be it newacquisitions be it development or be it share repurchase.

Craig Meltzer -Citigroup

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

David Neithercut

Well, I think today our shares continue to look be verycompelling investment opportunity particularly given the fact at least at thepresent time we've not seen the change we believe in net asset value at changeour 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 activityand but we just have to see. We've been a big acquirer over the past few yearsand I think what we're doing is we're waiting to see how things settle out andcertainly 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 ofAlex 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 couldjust give us your thoughts on tapping the term loan market versus the unsecuredmarket and what the tradeoffs are in terms of rates versus presumably theremight be some more restrictions or what have you or perhaps the rating agenciestake a different view of the unsecured term loans versus just regular straightunsecured debt?

Mark Parrell

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

The term loan covenants are actually more liberal than thecovenants contained in our bonds or again our public notes. So from ourperspective 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 thatas another source of funds and used judiciously like preferred stock and otherthings is just fine in the company's debt mix.

Alex Goldfarb - UBS

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

Mark Parrell

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

Alex Goldfarb - UBS

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

David Neithercut

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

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

Alex Goldfarb - UBS

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

David Neithercut

There's been no discussion with the rating agencies, noinclinations, no conversations with anyone about expanding that repurchaseactivity.

Alex Goldfarb - UBS

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

Mark Parrell

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

The effect of those is to drive in part the provision forincome taxes. You see a positive 1.18 number in the quarter. So what happenedis these depreciation deductions from operating rental property shield some ofthe 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 RichAnderson with BMO Capital Management. Please go ahead sir.

Rich Anderson - BMOCapital Market

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

David Neithercut

Very little. There are hardly any today. What remains in ourportfolio 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 qualitymarkets 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 hasbeen very much at values that have been consistent with our expectationsearlier in the year.

Rich Anderson - BMOCapital Market

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

David Neithercut

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

Rich Anderson - BMOCapital Market

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

David Neithercut

Yes.

Rich Anderson - BMOCapital Market

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

David Neithercut

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

Rich Anderson - BMOCapital Market

$1 million gain.

David Neithercut

Correct.

Rich Anderson - BMOCapital Market

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

David Neithercut

Sure. Absolutely, the 1031 that was driven by income in our1031 account. As we drained that account and used those proceeds to pay downthe revolving line of credit. You might have noted that we are at purelysubstantially availability on the line and that is going to reduced debt.That's why you are essentially going to see interest expense sort of declineand other income go down.

Rich Anderson - BMOCapital Market

Fair enough. As far as condominium conversions you mentioneda few markets where you'll be focused next year. Would you say that we'll be ona steady pace of deemphasizing condominium gains in the future? Or is it sortof 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 seewhat the opportunity presents in 2008. Again, as I've said on many calls and wesaid for quite some time, we believe that our price point and given thedemographics in markets in which we operate that this is very attractivestarter home pricing and when that market returns in some of these markets, webelieve we'll continue to sell condos and make money.

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

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

Rich Anderson - BMOCapital Market

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

Gerry Spector

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

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

Rich Anderson - BMOCapital Market

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

Gerry Spector

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

Rich Anderson - BMOCapital Market

I know this is a single asset. The asset I drive by, prettymuch every day in west New York, New Jersey. It's currently shrouded in a bigblack net. I was wondering is that Halloween decoration? Or is there somethinggoing on there?

Gerry Spector

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

David Neithercut

Is that the 70 Hudson?

Rich Anderson - BMOCapital 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 thesupporting work was burned. And I'm sure that's shrouded just from a safetyreasons we're in the process of having removing a floor there and we'll getthat going soon after insurance and after liabilities to the generalcontractors and the subs it's going to cost about a million dollars. That mightguess, that would explain that shroud.

Rich Anderson - BMOCapital Market

Okay, thanks, guys.

Operator

Thank you, sir. Our next question comes from Christeen Kimwith 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 ratechange. Is that over the period of time, I mean the past three months or sofrom when the credit market started to destabilize?

David Neithercut

Yes, I would attribute that to the change in the financingmarkets, 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 salecontinues to be pretty much in line with our expectations. If we don't getthose expectations we won't sell and we don't think we're operating any markettoday in which we have to sell. We're just going to continuing to cleanup andreduce the overall number of markets but we don't see the pricing in ourmarkets, we'll keep operating and happily do so.

Christeen Kim -Deutsche Bank

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

Gerry Spector

Yes, it's in decline. I wouldn't say it's significant. We'venever really as a company seen a lot of volatility in that number. It tends tobe 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 thinkI'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 forexample, for whatever reason, there's a lot of available homes but people arenot 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. Iwould say they are both pretty much trending the same.

In Florida, we've seen our turnover go up a little bit. Upin Orlando but down in southern Florida. So it's a little bit spotty all overthe 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 ofMark 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 thatyou did in Dallas. I'm just wondering reasons why you'd move out of that. We'vebeen hearing a lot of good growth has been going in that market

David Neithercut

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

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

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

Mark Biffert -Goldman Sachs

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

What do you expect in terms of asset sales in the lastquarter 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'llprobably sell far more than we'll buy. The spread was narrower than we wouldhave expected in the third quarter because we sold some assets with some fourhandles.

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

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

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

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

Mark Biffert -Goldman Sachs

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

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

David Neithercut

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

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

But, I tell you across with the some market which we orderand operate several other properties and if we have detained own and operateseveral 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 lineChristine 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 waswondering, if you could clarify where you're seeing the competition fromsingle-family housing.

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

Gerry Spector

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

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

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

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

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

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

David Neithercut

Biggest impact that we have and we mentioned this in thelast quarter was also is in our three bedroom units. Where we’re seeingchallenging marketing renting those units when larger occupants also hasability to run single family homes.

Christine O'Connor -Morgan Stanley

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

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

David Neithercut

Well, I think it can affect you on both sides, frankly. Idon’t think you can say one of the other. But, if you look at the supply comingout 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’tthink any of our resident would be moving in necessarily rent, units areselling for 800,000 to a million.

It will have an effect on compression, it will compress bondto us. It will just add more supply all the way along and that will have someyou 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 withLehman Brothers. Please go ahead with you question.

David Harris - LehmanBrothers

Good morning. First of all I want to say goodbye andfarewell 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 - LehmanBrothers

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

Mark Parrell

Thank you, Dave.

David Harris - LehmanBrothers

Yes. Let me ask I'llstart with a question to Gerry, as he's on his farewell. Obviously you'vethrown out indications to what you think same-store revenue might look like andI know you're not getting detailed about this but if we were to think of samestore 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. Imean, we're hoping that expenses are always a wild card, there's going to besome real impact on utilities, it’s hard to determine but really can't say atthis stage.

David Harris - LehmanBrothers

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

Gerry Spector

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

David Harris - LehmanBrothers

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

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

David Neithercut

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

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

David Harris - LehmanBrothers

Okay. Thanks. And then probably the question still for youas well. On development you've been maintaining a similar volume over severalquarters. Could your just address what you're looking at in terms ofunderwriting and return perspectives today, it looks like, I am assuming youmight 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 coststo acquire assets in any market and we always look at we can build to a yieldor we can buy to a yield and make money to make sure that we get appropriatelycompensated for the development risk.

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

David Harris - LehmanBrothers

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

David Neithercut

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

David Harris - LehmanBrothers

Okay. Thank you.

Operator

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

Bill Crow - RaymondJames

Good morning. Most of our questions have been answered. ButI 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 marketdislocation? That part A and part B is what do you see on the cost side ofthings? You know we've certainly seen lumber prices come down but it doesn'tseem like we've seen any other offsets to the increases.

David Neithercut

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

Bill Crow - RaymondJames

Do you think the pipeline may shrink out there? That youcannot get as ready financing for some of the these deals and maybe the supplygrowth 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 workwith our joint venture partners and speak to our banks constraints in financingby the banks, the commercial banks of development projects both rental andcertainly 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 andit's very apparent to us.

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

Bill Crow - RaymondJames

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

Mark Parrell

As I mentioned earlier, there's certainly some relief onmore 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. Buton the more complicated more high-rise and mid-rise type construction, not agreat deal of relief.

You've seen easing in the rate of growth. But we're buildingin 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 forconstruction is not limited to residential construction. So we've not seen agreat deal of relief in our more desirable markets.

Bill Crow - RaymondJames

So the pace on high-rise construction inflation goes from10% to 5% or something?

Mark Parrell

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

Bill Crow - Raymond James

Thank you very much.

Operator

Thank you, sir. Next question comes from the line of PaulMorgan 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 storerevenue growth for next year I just want to kind of contrast that with whatyou're seeing in terms of the de-acceleration in the market. You highlightedPhoenix, Florida, DC, Southern California and what you think it might take tostabilize that revenue deceleration? Is it going to take a stabilization in thehousing 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 ordown, it's going to be primarily driven by increased employment, the level ofthe 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'sgoing to parallel really job growth household formation and again if you seesome uptick there, you're going to see movement from that number.

And so I don't think single family home prices droppinganother 10% would necessarily materially affect that because you don't have alot of new ones coming in. That's back, you know you have may be 18 months or24 months supply in some markets. You know it's going to continue to narrow alittle bit every month.

Paul Morgan -Friedman Billings Ramsey

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

Mark Parrell

I don't know that I'd make that call. It was slowercertainly in 2007 than in 2006. You know, I think I hear a lot of differentthings 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 areright now.

Gerry Spector

Reasonably stable, nothing really significant up or downfrom 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 StreetAdvisors

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

David Neithercut

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

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

We have and we are successful in leasing those as well. Ithink those are exceeding our expectations. We have looked at a couple of dealsthat 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 thebalance of the units and operate those as apartments. We never got to thefinish line on those assets. They're extremely complicated to own and operateand extremely complicated for us to manage in the way that we would expect tomanage given the expectations of the retail owners as well as their mortgagelender's insurance requirements, et cetera.

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

Craig - Green StreetAdvisors

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

David Neithercut

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

Craig - Green StreetAdvisors

Great. Thank you.

David Neithercut

Welcome.

Operator

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

David Neithercut

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

Operator

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

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