Equity Residential. Q1 2008 Earnings Call Transcript

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 |  About: Equity Residential (EQR)
by: SA Transcripts

Equity Residential (NYSE:EQR)

Q1 2008 Earnings Call

May 1, 2008 11:00 am ET

Executives

Marty McKenna - Investor Relations

David Neithercut - President and Chief Executive Officer

Mark Parrell - Chief Financial Officer

Fred Tuomi - Property Management President

David Santee - Executive Vice President of Property Operations

Analysts

Lou Taylor - Deutsche Bank

Michael Billerman - Citigroup

Dustin Pizzo - Banc of America Securities

Steve Swett - KBW

Jonathan Habermann - Goldman Sachs

Alex Goldfarb - UBS

David Harris - Lehman Brothers

Michael Salinsky - RBC Capital Markets

David Cohen - Morgan Stanley

Operator

Good morning, my name is Laquita and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions). Thank you.

Mr. McKenna, you may begin your conference.

Marty McKenna - Investor Relations

Thank you. Good morning and thank for joining us to discuss Equity Residential’s first quarter 2008 results. Our featured speakers today are David Neithercut, our President and CEO; and Mark Parrell, our Chief Financial 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 Federal Securities Law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

Now I’ll turn it over to David.

David Neithercut - President and Chief Executive Officer

Thank you, Marty and good morning, everyone and thanks for joining us for our first quarter conference call. Mark Parrell and I are joined today by Fred Tuomi, our Property Management President; and David Santee, our Executive Vice President of Property Operations, they will both be available to help me answer any questions you all may have at the end of the call.

My remarks today will sound very similar to those on our fourth quarter 2007 call, which took place in early February. Because today like in February we are obviously will be getting a very interesting economic environment.

Depending on what we talked to about the economy some say it feels like we are even in a depression, some say it feels that we are not even in a recession. But the facts are that the economy has certainly slowed and slowed considerably and it doesn’t look like that’s going to change at any time soon.

Single-family housing market continues to struggle across most of the country, credit markets continued to be ceased up and the consumer certainly continues to feel pitched. And we continue to be concerned about the impact that all of this is going to have on the job situation in our market that are so important to our business and so important to our ability to maintain occupancy and our ability to raise rents. But just like in February, today our portfolio is 95% occupied. We have left a lease of 7.7% and we can tell you that is very, very strong level of left lease going to our primary leasing season.

Outside of the few select markets we are seeing very little new apartment supply being delivered and we expect very good new product to get started in the foreseeable future. The homeownership rate in the country continues to fall and our residents are moving out to buy homes at a significantly reduced rate than our historical averages. So, we are pleased to be on plan through the first quarter and through April. We expect May to be on plan as well. But as it does each and every year our primary leasing season that which peaks in June and July will have much to say about our performance for the full year. We are confident that we will meet our original expectations for 2008.

And with that Mark will be happy to take you through the financial results for the quarter.

Mark Parrell - Chief Financial Officer

Good morning everyone and thank you for joining us on today’s conference call. We are pleased to report solid results for the quarter. I will summarize some of the important points regarding our funds from operations results and our same-store operating results, describe our capital markets activities in the quarter, and review our balance sheet and liquidity. I will also talk about our same-store and FFO guidance for remainder of the year.

Our first quarter of 2008 FFO results were inline with our expectations of $0.59 per share, compared to $0.55 per share for the same period in 2007. In our press release, we have listed the reasons for the $0.04 per share increase in the first quarter of 2008.

I will now provide a little color on those items. Our total NOI was up about $6 million or $0.02 per share despite the fact that we were net seller of assets in both 2007 and so far in 2008. We had good same-store NOI growth of 4.7% or $12.5 million and excellent NOI growth of about $8 million from the lease-up of development and other non-same store properties. These amounts were partially offset by the dilution created by our 2007 and 2008 transaction activity.

Next, let me review what’s happening with interest expense. Overall, interest expense was up $5.3 million quarter-over-quarter. There is a bit of complexity in analyzing this variance, as interest expense, the share count reduction due to our debt finance share buyback and our lower rate of preferred distributions are all linked. Taking the interest expense line item in isolation the $5.3 million increase was driven by $16.4 million increase and interest expense in the quarter due to the ’07 share buyback. This was offset by lower floating rates of interest in the quarter of a little over 6 million and about $4 million in capitalized interest.

To really understand the change in interest expense you also need to take into account the $0.05 increase in FFO per share due to the reduced share count. When you net the share count reduction against the incremental 16.4 million in interest expense, the finance for the 2007 buyback result this neutral to FFO.

Over the last three years we have redeemed $415 million of our preferred shares. As a result our new annual run rate for preferred distributions is $14.5 million. Our preferred distributions were down approximately $4 million or about a penny per share quarter-over-quarter. We have not included in our guidance redemption of our $150 million, 6.48% series and non-convertible preferred that opens up to par call in June 2008, as we have no current intention of calling this security.

We also changed our income statement to add a new line item, income and other taxes and reclassified for comparability our prior quarter’s numbers. We added this line item to give fuller disclosure of our more volatile tax expense numbers and to make our G&A line item less subject to noise.

In the first quarter income tax expense increased quarter-over-quarter by $2.3 million due to a change in the estimate for Texas State taxes. As we exit Texas, this tax will go away. We anticipate that our full year 2008 income tax and other expense line item will be about 5.4 million or an additional 2.5 million for the rest of 2008.

Finally, we have the non-comparable items listed on page 23 of the release. I won’t go through these amounts, but combined with the income tax item they had a negative $0.02 per share impact on our results. With regards to sequential FFO we have listed the items creating the difference between our first quarter 2008 FFO and our fourth quarter 2007 FFO in the press release. And so, I won’t go through them with you now, but we’ll be happy to answer questions in the Q&A session.

Now I want to describe our same-store operating results. On a same-store, quarter-over-quarter basis revenues were up 3.5%, operating expenses increased 1.6%, and net operating income increased 4.7%. Overall, the primary driver of the revenue growth was a 3.9% increase in average rental rates offset by a slight decline in occupancy.

Operating expense growth in the quarter was minimal and inline with our expectations. Our expense control initiatives continue to pay dividends in the quarter resulting in very limited expense growth. Our results also benefited from comparatively high 5.2% quarterly expense growth in the first quarter of 2007. We would expect second quarter expense growth to trend to the high-end of our range and annual expense growth we feel will comfortably be within our range of 2.5% to 3.25%.

While utilities expenses were up 8 % in the quarter, we expected a 7% increase for the whole of 2008. We saw a reduction of 13% reduction in our insurance expense and saw payroll come in at about a 2.2% increase. Our G&A expenses were up in the quarter due primarily to severance costs we incurred as part of our reduction in force. We have spoken before about our commitment to having an operating structure that is appropriate in size to our transformed portfolio.

In addition, in the first quarter of last year we reversed most of the litigation accrual as the matter had been concluded with minimal payment by the Company. We remain comfortable with our guidance of $48 to $50 million for G&A in 2008. Given the recent slowdown in the economy, and credit pressures on the consumer, we thought it is appropriate to update you on bad debt.

Our bad debt was 0.7% or 70 basis points of revenue flat from a year ago, since very much in line with our historical standards. Delinquencies were about 2.4% of rental income in the first quarter, which is also very much in the historical range and actually down from the first quarter of 2007. As to share repurchases, we were not active re-purchasers of our shares during the first quarter and do not have any share repurchases included in our guidance.

I am now very pleased to talk to you about our rock solid balance sheet. We currently have approximately $325 million in cash and approximately $1.4 billion available on our line of credit.

In March we announced a new $500 million Wachovia Freddie Mac secured loan. The loan has an 11.5 year term of which 10.5 years is at a fixed rate and the final year is floating. The all in effective interest rate is 5.48%. We were very pleased given the state of the credit markets to add this liquidity to our balance sheet.

As a result of the loan, the Company had an increase in debt for the quarter of $355 million. The $500 million increase in secured debt from this loan was offset by a decrease in unsecured debt resulting from the pay down of outstanding $139 million on the line of credit. Our current liquidity is sufficient to retire all of the Company’s 2008 loan maturities as they come due.

I want to take a moment to comment on liquidity in the marketplace. Both Freddie and Fannie continue to be active and eager lenders. While the GSE spreads have gradually widened since we closed our loan in March, they have recently come back into probably around 2.15% over the ten-year treasury for a borrower like us it would be more like 2%.

We have recently spent time with the senior management of both Fannie Mae and Freddie Mac and understand they have seen no material defaults in their enormous books of multi-family loans, and that they continue to see the sector as a profitable and affordable goals friendly place to do business.

In addition, the unsecured bond market has shown signs of life as two recent bond deals were well received and are trading tighter than their original issuance spreads. Based on current projections and assuming a billion dollars each of acquisitions and dispositions for the year and 300 million of development fundings from the line of credit, we anticipate line availability of a billion dollar at December 31, 2008. The Company has approximately 900 million in debt maturing in 2009, and we intend to be proactive in addressing these maturities.

I would like to wrap up my remarks by addressing guidance for the second quarter of 2008. In the press release, we provided second quarter 2008 FFO guidance of $0.61to $0.65 per share. The difference between the company’s actual first quarter of 2008 FFO was $0.59 per share and the mid point of the second quarter 2008 guidance range is primarily a result of higher NOIs from the same store property, as well as continuing positive impact from the lease-up of development and other non-same store properties. All of this will be partially offset by some transaction dilution in the second quarter of 2008. We have left our full year guidance unchanged and it continues to be our expectation that we will produce FFO of 2.45 to $2.60 per share.

On page 24 of our release, we have listed the assumptions driving this guidance, which are unchanged from those listed on our fourth quarter 2007 press release. As we said in our fourth quarter press release, we expect higher same store NOI to have a positive impact this year of between 30 million to $50 million. We expect the lease ups of both development and other non same store properties to have a positive impact of 25 to 30 million. These lease ups contributed more than we expected in Q1, but much of the activity here will occur later in the year. This incremental NOI comes primarily from Washington DC and Northern Virginia, Los Angeles both Downtown and the Suburbs and Downtown Boston. We gave same store expense guidance of two and half to three and a quarter percent for 2008. Our largest operating expenses, which as you know are payroll, property taxes and utilities are expected to be increased on approximate 4 to 4.5% rate. We expect to meet our 2008 guidance range because we anticipate that our other operating expense categories will be flat to marginally down.

Overall, we feel good about the trends in our business and operating expenses, G&A, bad debt and delinquencies and are working hard to produce good operating results in 2008. We have a strong balance sheet and ample liquidity to weather the uncertainties in the credit markets and to take advantage of any compelling opportunities that may present themselves.

I will now turn the call back over to David.

David Neithercut - President and Chief Executive Officer

Thank you, very much Mark. We will start talking little bit about transaction activity, which is continued to slow across our core markets. It’s down even further from what was a pretty low level in the second of 2007. There are actually more deals being offered today than in the recent past. Our acquisition guys will tell you that we are seeing more products, but actual closings are down. But deals are certainly getting done because as Mark said Freddie and Fannie are very much open for business, they are looking to book loans and in fact they are financing most everything that we are selling today. But Bid ask spreads have certainly wide, and this has led to a reduction in sales velocity. And deals are being closed by sellers where the pricing expectations are not being met.

Cap rates have certainly increased. For high quality assets in the better markets they’ve increased maybe 10 to 50 basis points and Cap rates of lesser quality assets in less desirable markets have probability moved up 50 to 100 basis points. But due to increasing NOI’s and extremely reduced deal volume, it’s difficult to determine exactly how much rise in Cap rates have actually impacted absolute prices. Although, we do have some interesting Intel from what’s going on in our own portfolio and in our own dispositions.

We are consistent with what we told you over the last several calls, we’ve continued to be a seller of assets as we continue to execute our strategy moving out of slower growth for non-core markets and non-core assets. And in the first quarter of 2008, we sold 15 properties for $272 million and those were done at a weighted average Cap rate of 5.8%. The average age of the assets we sold were 23 years old. We had some concentrations in those sales four deals in Raleigh, four in Portland Maine, two in Atlanta and two in Dallas, Fort Worth and then some one-off deals. And the total sales price for these assets 4% more than how we valued them in March of 2007. So, on average where Cap rates up and these sales year-over-year, yes they were. But absolute values increased on average due to increasing bottom line.

On the acquisition front, we remained relatively inactive. We are still challenged to acquire core assets at current pricing when share prices are trading at such significant discounts at the NAV’s that these price would imply. In a quarter we acquired one rental income asset and we did that and we traded out of a property in Albuquerque, one in Phoenix that was done in a partnership in which our ownership interests is less than 50% and we were contractually obligated to do a trade on that.

We are also acquired a property in Beverly Hills, California and are working on converting this assets to condominiums. Now, these are all two bedroom units averaging 1,500 square feet per unit so great size for a conversion. The purchase price on these deal was $478 a square foot or almost $700,000 a door. I know that sounds expensive, but like all the other markets in which we’ve done conversions this asset will be the lowest priced single-family housing in the marketplace and really does represent entry level housing in Beverly Hills as credible as that may seem.

As I noted earlier, we continue to execute our strategy in self (inaudible) assets and exit a few remaining non-core markets. We’ve identified about $2 billion of assets that we still like to sell. Sometime this summer, if all goes according to plan, we have sold around $500 million of assets and that will bring us to a point where one of three courses of action will need to be taken. The first is just to stop selling. The second is to start buying in which we do 1031 trades and begin to reacquire markets and assets in our core markets where we do want to continue to grow and continue to leverage our platform.

While we will have to continue selling assets with the understanding that this would likely to require a special dividend at some point. Now, far too early to get into more detail on this because it is subjected way too many variables. And the first variable frankly being that we don’t have to sell any of these assets and we are only going to continue to do if we can realize pricing that makes sense for us.

On the condo business, which was budgeted to operate at a loss of slightly more than $1.2 million for the quarter. The forecast was driven primarily due to an expectation of closing just 47 units for the quarter and in fact, we only closed 41. So, those fewer sales and other operating cost that came in higher than projected contributed to a loss for the quarter of $1.6 million.

Now you will note on the earnings release that we have not changed our original 2008 guidance for our condo business, net of overhead of breakeven to $7.5 million. But, I do want to note that the 2008 success is dependent on closing units of three assets. Two of which are currently taking contracts, but they have not yet begun to actually close units. The first being Cleo, which is a property in Los Angeles of 104 units and the second being Verde our property in San Jose of 108 units. We have one property that not yet begun taking contracts and that’s the Martin property in Bellevue, Washington, totaling 67 units.

And well, traffic has remained reasonably strong I will tell you that sales have slowed it nearly everyone of our condominium conversion assets. So, its very possible that we could have an operating loss for the year in this business and we will be able to provide a little better clarity on the conversion business prospects for the full year on our second quarter in late July.

Now, this business has certainly been tough lately, and we expect it to continue to be tough in the near term, we have definitely taken steps to dramatically reduce cost in the business and we will continue to monitor it very closely. That said, we continue to believe that the conversion business is good long-term prospects for us.

Along with acquisitions the development business continues to be very important way for us to allocate capital as we move into higher barrier markets in search of higher total returns. In addition to the 1.7 billion of assets currently under construction we have pipeline of development opportunities of approximately 2.2 billion all in various stages of planning and diligence. We currently own the land for about half of those projects, the balance of that land is either on the contract or letter of intent.

We are still looking at 2008 starts in the $350 million or $500 million range, but I want to make it very clear that we are mindful of the importance of liquidity in this uncertain time and that will be a major consideration as we look at new starts going forward.

We have started one new deal so far this year that was our That was our Westgate property in Pasadena, California is being done in a joint venture with Sares Regis with whom we had numerous hot, very highly successful development project. Was originally projected as a fourth quarter start, but slipped into the first quarter of '08, and is noted in the release, it is financed primarily with tax exempt bonds which have a current rate of about 3.5%.

That deal today is expected to provide an un-leveraged stabilized yield in the high fives. I would be surprised if we didn't exceed that. And a higher than 20% leveraged IRR. Thanks in part to the tax exempt bonds.

In closing, just a few brief comments on development costs, which I know a lot of people have questions about. Bank financing for construction is extremely difficult to come by today. As a result we've seen an increased level of development opportunities, not just from canceled condo projects but also from income developer that are having difficulty getting financing for their deals. As a result, we're beginning to see some reductions in land pricing, but there seems to be sufficient competition from other rental developers who either have or believe they'll have access to capital to keep any reduction in land pricing from being anything but modest, at least at the present time.

With respect to construction costs, overall costs increased during 2007 but at a far slower rated than prior years. Thus far in 2008 we've seen the rate of increase in construction costs continuing to ease and perhaps even modestly reducing year-over-year in some markets. The costs are very much a function of construction type and much of the easing and certainly of the reductions would be found in wood frame construction.

We are also seeing reduction in labor costs for other trades as well, but commodity prices are up, concrete, steel, oil, and certainly the delivery costs. So overall, our feeling is cost for the year will range from down a few percentage points to up a few percentage points depending on your market and construction type.

And the implication of all of that is while we're underwriting higher required returns in our development deals, we're not getting enough assistance in achieving these return from modest reductions in land and construction costs to make deals really pencil today.

So with that, Laquita we'll be happy to hope call for questions.

Question-and-Answer Session

Operator

(Operator Instruction). Your first question comes from the line of Lou Taylor of Deutsche Bank.

Lou Taylor

Thanks. Good morning guys.

David Neithercut

Good morning Lou.

Lou Taylor

Mark or David, can you talk just a little bit about the labor cost savings in terms of headcount reduction? Is it coming from efficiencies, is it coming from just, you have fewer regions as the portfolio gets concentrated, just what are the drivers there?

David Neithercut

Lou, it is more the latter, I mean as the Company gets more concentrated in fewer markets, the need here in Chicago and in the field for the level of G&A we had when we had when we had say 200,000 units in 1100 properties is just less. So it's really the right sizing of the whole portfolio.

Lou Taylor

Okay. Second question for David, in terms of the dispositions you made so far this year, what's the buyer profile?

Mark Parrell

It is an interesting question, Lou, I have asked that question of our disposition team as we've gone throughout the quarter. And I guess they described it as the reemergence of the regional player, that player who had sort of been squeezed out by larger people that come in and bought assets for value-add plays, that are just doing business has slowed considerably and has allowed the regional guy, and I am going to say that is someone who might own 2 or 4 or 6,000 units as the step up. They might have access to family capital, maybe some institutional capital, and by using Fred and Fannie they're able to close on deals.

Lou Taylor

Okay. And then last question, just is the slowing economy, is it doing much to your traffic levels?

David Neithercut

Okay. Actually, we've seen minimal change in our walk-in traffic, that's our definition. Actually, it is much less than we expected. Last year we completed a major, we call it a marketing efficiency exercise, and we were really looking for about a 10% drop in walk-in traffic this year. But what we’ve seen is actually increase in our [in-lease] that show up directly in the property operating system. And those have increased 10% over same quarter last year. So we're very excited about the continued activity and interest in the community.

Lou Taylor

Thank you.

Operator

Your next question comes from the line of Michael Billerman from Citigroup.

Michael Billerman

Good morning Craig Mel Cheer is on the line with me as well. David, you talked a little about your portfolio evaluation back of March of last year and talked about cap rates assets going up 10 to 50 basis points and more of the treasury, secondary going up 50 to 100. As you went through your portfolio review process this past March, what sort came out of that?

David Neithercut

What came out of it was an average very little change. I will tell you we certainly did have market and assets in which values decreased, but we had assets in markets in which values increased. And again that's based upon activity we were seeing in the market at the present time. And so it was very little change in the absolute evaluation of the portfolio.

Michael Billerman

And that was probably increasing cap rate, but the increase in NOI sort of offset it?

David Neithercut

Yeah. I mean looking at just what our prices per unit, prices per door as well as and making sure on an absolute value basis we felt that the portfolio evaluation had changed very well.

Michael Billerman

You talked a little bit about, you mentioned in your opening comments that the bid asset spread had widen and that sellers were pulling back, and you haven't bought really anything. When you're sort of going out there in the market, where is your spread or where you think the right value is to buy relative to where someone is willing to sell?

Mark Parrell

Well, again, that's a property by property submarket by submarket sort of question. But I will tell you we have remained very active in the market in looking at opportunities, in underwriting opportunities. Our guys are in the field regularly walking properties and underwriting transactions. And we do come up with values that we think we might be willing to pay, and I will just tell you that they often get done at prices that are well in excess of where we would be willing to pay today.

Michael Billerman

And can you talk about the New York performance recently and the sequential results are a little soft, with occupancy down 180 basis points, but what's going on there and if you could comment on how it is done since quarter end as well?

Mark Parrell

Sure Fred, okay.

Fred Tuomi

Yeah Fred Tuomi here. New York remains rock solid in terms of demand and occupancy. I know that may shock some of us out there, but we had a very good quarter in the Manhattan area. The problem with the sequential was really on New Jersey side of the equation. We had 1,000 units come into the market, highly concentrated, very aggressive lease ups that discounted to a great extent, and it disrupted the Jersey market for most of the first quarter. So it's pretty much all there on the Jersey side and not on Manhattan side. Manhattan, we had a little bit of a reduction in occupancy only due to national seasonal rotation of nurses and corporate clients, but those deals have all come back quite strongly. And in terms of the New York versus Manhattan, we were up 7.3% Manhattan and only 3.7 on income for the quarter as you can see the difference, so really it was the short-term issue in New Jersey and Manhattan continues to do fine and Jersey is recovering..

Michael Billerman

And on debt maturities, how aggressive do you plan to be and what route would you go? Would you go the route of Fannie and Freddie debt or would you look to do a non-secured offering?

David J. Neithercut

Craig, we had a little trouble hearing you. You're breaking up a little bit. So would you repeat the question?

Michael Billerman

What type of -- how aggressive do you plan on being for the '09 debt maturities and what route would you look to go, whether it be the GSE route or unsecured debt?

David Neithercut

At this point what I would say is as conditions evolve, spreads have come in on the unsecured side quite sharply, spreads have come out a bit on the Freddie/Fannie side. So I am just going to let that evolve over time and then make that decision later. I mean it is easier on the investment side of the house to do unsecured debt than it is to do secured, so we do have a prejudice towards that or a bias, but we are going to look at both of those, and I don't want to commit either way at this point.

Michael Billerman

Thank you.

David Neithercut

You bet.

Operator

Your next question comes from the line of Dustin Pizzo of Banc of America Securities.

Dustin Pizzo

Thank you. Good morning, guys.

David Neithercut

Hi Dustin.

Dustin Pizzo

Just to follow up on Michael's question first on the transaction markets and the bid asset spread, how confident are you guys given the volume of the deals that you’ve completed during the first quarter that you can reach that $1 billion target on both sides of the equation and I guess more importantly on the acquisition side given the volume there?

David Neithercut

I guess I can't see out that far, Dustin, but I can tell you that we've got product in the marketplace and are having conversations with prospective buyers, and we certainly think that we can get to that 500 level. So the product we're working on today we believe that they are serious enough and quality enough bids for what we're trying to sell. As you get into late second quarter, third quarter, I am assuming that we'll be able to continue as we have in the first half of the year, but things have been pretty volatile, I would be hard pressed if I have got absolute visibility of what's going to happen later in the year. As it relate to the acquisition side, as I noted, if we are able to sell what we want to sell in 2Q, then we'll have to either start buying or start thinking about doing some other things, and again we'll let the market decide at that time whether or not we want to continue to sell and whether or not we want to start buying or whether we'll start thinking about a special dividend.

Dustin Pizzo

Okay. And then I guess related to that, I am sure you chatted with Sam quite a bit and from recent comments he has made in various public forums on the kind of prospects for the US real estate market. I mean how does that influence your decisions that you make when trying to figure out how you are going to allocate capital and maybe if you can just talk a bit about how you view the various opportunities that are currently in the marketplace on the various sides of the capital structure?

David Neithercut

Well, if you go on for a while on that. Certainly, Sam, we have a lot of influence here and we have spent a lot of time talking with Sam about what's going on, but I tell you that you know Sam is thinking I think much longer term in a lot of his comments. When he talks about we're not in the recession, the economy is in much better shape than people think, I think he is really not suggesting that it's not soft now, he's not suggesting it's not weak now, it's just not perhaps as bad as people thinks and he believes that it will recover much quickly, much more quickly than many people think. So I share with Sam what we see going on the ground day-to-day and I welcome every opportunity I have, his views sort of on a longer term, and we put those two things together and try to act accordingly.

Dustin Pizzo

Okay. And then just lastly, as we think about your same store NOI guidance. Assuming the revenue growth stays fairly constant around kind of the 3.5% range or even moves a bit higher, I mean is it simply just a more difficult expense comp that could potentially bring it down towards the midpoint of that range?

David Neithercut

No, I mean, we think that -- our guidance assumes that we get to the midpoint of the rev number and the expense number essentially. By doing that math, we get into the middle of our FFO range. We don't assume that expenses get substantially worse. We do have comparable as I mentioned in my remarks, the second quarter as a comparison for the second quarter of '07 we'll have quarter over quarter higher expenses. That's not uncommon.

Dustin Pizzo

Thank you.

David Neithercut

Does that help?

Dustin Pizzo

Yeah, that does.

Operator

Our next question comes from the line of Steve Swett from KBW.

Steve Swett

Thanks. David, just a little bit of a follow-up on the comment about continuing selling and then the choices you have. Would it be fair to assume that if cap rates sort of remain where they are today without changing towards the upside that you're just not intrigued with pricing today to increase your acquisitions?

David Neithercut

I guess it is a function of stock price, it's a function of capital markets, there are a lot of things beyond just cap rates and absolute value that we will consider as we go forward, Steve.

Steve Swett

Okay, alright, that's fair. And then just I guess kind of a related question, you obviously were very active repurchasing your shares last year, not active as much this year. Is that due to the price, is it due to sort of just waiting to see how some of these other things shake out as well?

David Neithercut

I think it has more to do with anything of a desire to retain liquidity in a very uncertain time.

Steve Swett

And then last question, a couple of your developments seem to be slower in the leasing pace and I think one of them got pushed back in delivery. Does that make you more cautious on the starts that you expect for this year?

David Neithercut

No. I will tell you that in general, leasing on a lot of the development deals is behind what we might have underwritten when we underwrote these deals in '04 or '05. Certainly it's not the same market that they're being delivered into today as it was when we underwrote them. The deals that are sort of slower lease up are both age restricted deals and we certainly did expect those to take slower lease ups but we've had a very good April across most of the portfolio, and I will tell you notwithstanding perhaps not performing as well as what we might have underwritten several years ago as Mark noted we're on plan for the way we underwrote those in 2008.

Steve Swett

Okay. Thanks a lot.

David Neithercut

You bet.

Operator

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

Jonathan Habermann

Hi good morning.

David J. Neithercut

Good morning.

Jonathan Habermann

David, you mentioned the future pipeline of 2.2 billion, you are just following up on the development theme. You talked about starts of sort of 350 to 500 this year.

David J. Neithercut

Right.

Jonathan Habermann

Do you see that pace continuing into 2009, and as well can just you remind us of your capital commitment for the funding starts this year?

David J. Neithercut

Well, for starts this year I think we funded all of our absolute commitments before this year, is that right, Mark?

Mark J. Parrell

Right. We're going to spend just to be clear, that we start some spend, we'll spend 600 million this year we expect on development, 300 coming off the line of credit which as you know is committed, and 300 JV development loans and all of those are done and committed as well. So, we are fully funded on the development side and the total spend is 600 of which 540 is yet to go in the second, third and fourth quarters. That spends, not starts.

David J. Neithercut

So just from a starts standpoint, we have started the one deal in Pasadena, California, and there are several others that we could start this year, and we'll take a long look at those and what the opportunities are and where construction costs are and if we believe it is appropriate, appropriate to go.

Jonathan Habermann

Okay. And second question, you had mentioned land prices obviously coming down. Can you speak to which markets you're beginning to see that trend and are you seeing it more in the lower barrier entry markets or is that higher entry markets?

David J. Neithercut

We're not really been looking very much at land in the lower barrier markets, so it would be in most of the higher barrier markets. You're seeing land come down, but I will tell you, they're coming down from prices that were awfully high prices that didn't make sense for apartment construction in the first place and frankly I am not so sure that many instances even if they come down 5 or so percent they still don't make sense for apartment construction.

Jonathan Habermann

Okay. And just one other point. In terms of Freddie and Fannie, I guess in terms of seeing increasing debt service coverage, are you seeing them pull back in terms of deploying capital?

Mark J. Parrell

No, but they have made their underwriting requirements more rigorous. So they're still interested in lending. It is just on these more cautious terms.

Jonathan Habermann

Okay. But you said spreads have actually come in a bit?

Mark J. Parrell

Yeah. They have, and I think it covers David's remarks very well, very consistent with that. They were underwriting, we understand, so this information isn't that direct, but my understanding is they had a lot of deals they were underwriting but frankly not every deal was closing, and I think they overestimated their close ratio and now are trying to make up for volume a little bit by adjusting price a bit.

Jonathan Habermann

Okay, great. Thanks.

Operator

Your next question comes from the line of Alex Goldfarb of UBS.

Alex Goldfarb

Good morning.

David J. Neithercut

Good morning.

Alex Goldfarb

Just going to the general trends across your markets, just some occupancy slippage, I just want to get a better sense of what you're seeing across demand for studios ones, twos, and then also how you think LRO will react to some of the decrease in occupancy?

David J. Neithercut

This is David. Starting probably mid last year, we really took an aggressive posture utilizing LRO to drive rates, and we really took a bias more towards rate, and that's why you see a little bit of softness in the occupancy in the first quarter. Also remember that as we drive renewals, the rates that we send renewing residents we're working probably 90 days in advance, so renewals that we're putting out in November, December, January, we were 90 days in front of that when all of the turmoil hit. So, we still will take an aggressive stance. We don't see any deterioration in traffic. Activity looks good. Our occupancy is very strong today, as we enter the leasing season, and we really don't see any material change in the basic fundamentals of what we do every day.

Alex Goldfarb

And then as far as the studios ones and twos?

David J. Neithercut

There is no -- we see no difference in the ones and twos. We did see a little softness in the three bedrooms in the Orlando market.

Alex Goldfarb

Okay. And but in New York studios?

Mark J. Parrell

New York studios always fly off the shelf. Anyone that we have available whether it’s vacant or on notice is committed.

Alex Goldfarb

Okay, alright. I mean going to the unsecured debt, it seems like a few of your peers have gotten into buying some of it back. It sounds like you guys are thinking maybe it is time to start issuing again. Can you give us your thoughts on buying back your unsecured debt?

David J. Neithercut

It is a great question. We thought about that. The issue is that the debt presented to us were purchase, first of all, there isn't much of it because most of it wasn't trading when it was trading very wide was really way out there. It was 2015, 2016 maturities, and it was also at a pretty low rate as an absolute matter, so in the middle 5s to lower 5s. The idea on our end of essentially moving our maturities forward and funding on our line things that we have termed out to 2015 and 2016, it just didn't make a lot of sense to us. Also again I would have bought, I think, if we could have gotten some stuff in 2009 and 2010, but to buy the stuff that's later dated just from our point of view it wasn't enough of a discount involved and wasn't enough volume involved for us to do that. And I am not going to suggest that we're going to issue debt any time soon in a secured or unsecured market. That's just something we are going to be very mindful of in this credit climate. We're not going to wait and accumulate maturities as we usually do.

Alex Goldfarb

Thank you.

David J. Neithercut

Thank you. You are very welcome.

Operator

Your next question comes from the line of David Harris of Lehman Brothers.

David Harris

Hi good morning.

Mark J. Parrell

Good morning, David

David Harris

What are you looking at today if you're looking at development projects by way of returns? Has it changed very much in the last three, six months?

Mark J. Parrell

Sure. We certainly widened our expectations. A lot of the product that we started maybe in last year might have been low 6 kind of yields, and I am sure we haven't taken any land down recently, but we certainly would be more high 6 and maybe even 7% on products today.

David Harris

Okay. The $2 billion of potential property sales that you talked about? I wonder if you could just sort of elaborate a little bit more on that in the sense that, would that embrace potentially exiting more markets or are we talking about fitting out exactly on markets where we should still maintain a presence?

Mark J. Parrell

It is both, David. It is completing market exits as well as doing some pruning of older assets in some of the markets in which we intend to have a presence for quite some time.

David Harris

Just remind me, I know this is sort of a long-term question that sort of we go back to every once in a while. You were 45 markets or whatever. Are we on track to get to 30? I mean so you might sort of remember the numbers broadly correctly?

Mark J. Parrell

It all depends on how one defines market. But we talk about even close to 15 or so markets and again, it depends whether you consider Southern California four markets or one markets. But being the primary major metropolitan areas on the coasts and in Florida and Atlanta and Phoenix.

David Harris

And where are we today just remind me?

Mark J. Parrell

As a percentage?

David Harris

No, in terms of the market, if 15 ultimately is the goal and then obviously…

Mark J. Parrell

20 markets I guess I would say we are in today and are on way to 15.

David Harris

Okay. And then finally, Mark for you, what’s the annual overhead related to the condo business?

Mark J. Parrell

It’s about $3.2 million what we budgeted for that for 2008.

David Harris

Okay, great. Thanks guys.

Operator

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

Michael Salinsky

Good morning guys.

David J. Neithercut

Good morning.

Michael Salinsky

David, could you talk to the -- you had a very large sequential increase in occupancy in Southeast Florida, Jacksonville, just given what we're hearing from the condo and single-family markets right now. Can you talk about what you are seeing specifically in those markets and what was the big driver there?

David J. Neithercut

Fred?

Fred Tuomi

This is Fred Tuomi, I will take that. First of all, in South Florida and I continue to love South Florida. In the phase of all of those condos that are coming in, our portfolio there is running 94.5 occupied rate now and we have had sequential growth in rents of 0.2 and you can see that rehab for the quarter were up 1.5. So, we actually are seeing upticks in rate and occupancy and revenue in South Florida. And I will tell it’s going to continue but the space that we are in right now had very stable and now upticking, slightly upticking performance in South Florida. There is a big clad of overhang, as everybody knows all these condos in Miami and that remains to be seen how that’s going to be reconciled and the impact that may have. But our suburban portfolio in South Florida, the garden suburban product has not been severely dislocated over the last year or so. Moving north, things aren’t as rosy, Orlando is still down and kind of just bouncing along the bottom. We saw a slight uptick here in last few weeks but I will say it's stable at a low level, and again then we have high delinquencies in terms of mortgages at 5.2%, the single-family inventory is vacant and that may get worse, but again Orlando is stable and very recently little uptick and we are 94.5 occupied, 8% left to lease right now there. Tampa is running very stable, and Jacksonville was running very stable until recently, and we're seeing a decline in Jacksonville due to foreclosures and troop rotations and softening of demand there.

Michael Salinsky

Okay. Outside of those markets, were there any markets that surprised you due to the upside or downside relative to expectations for the year?

David J. Neithercut

Yes, I would say on the upside. Manhattan continues to perform rock solid. Not as hot as it was last year, but it’s doing extremely well. Seattle, San Francisco, still surprising on the upside, very strong, very stable, and fundamentals growing instead of flattening. And on the downside, I would say Orange County would be the one that I would be surprised on the downside during first quarter, typically Orange County starts off slow. You have some corporate rotation out of there. The subprime demand from the jobs and that caused occupancy and rates to flatten out, and saw some concessions coming to market in Orange County Q1. The nice thing that's come out of it as we enter Q2 Orange County is recovering nicely, occupancies are up, demand is returning. And the other one is Inland Empire that kind of surprises me. I guess on the upside really Inland Empire is a huge single-family issue to be reconciled, but right now we're kind of in this limbo state. People are not flying out of apartments to buy homes, and on the contrary some of the foreclosures they are coming into rented apartments, and we have very stable occupancy and rent growth in Inland Empire. So, I guess that would be my list of -- everything else is going right on plan, and we're satisfied.

Michael Salinsky

Very helpful. Final question, your weighted average interest rate during the quarter came down partially due to LIBOR. I am just curious that you didn't adjust your interest cost expectations for the full year?

David J. Neithercut

Yeah, that's a good question. Interest cost expectations also depend on what we sell, and prepayment penalties and other things. So as we get into that second quarter, you can expect us to adjust that number more substantially, but again until we know what our kind of investment horizon, our sale and disposition paces and other things for sure, it just didn't make sense to try and slightly fine tune that number.

Michael Salinsky

Thanks guys.

Operator

Your next question comes from the line of David Cohen of Morgan Stanley.

David Cohen

Hi. Good morning.

Mark J. Parrell

Good morning.

David Cohen

I just want to get more granular on some of the markets. Phoenix looked like it had a nice uptick in occupancy during the quarter. Have we seen the bottom there or is that kind of just an anomaly?

Mark J. Parrell

Well, Phoenix, I am not going to call a bottom, but I have been very satisfied with Phoenix over the last couple of quarters in light of all the issues there. Two things that explain the quarterly change I think we are up 1.3% there. One is the comp period last and that was the beginning of the dislocation in Phoenix, we had some condo reversions hit the market. They were coming in at 50, 60, 70% occupied, heavily discounted, so we had some problems in the market last year. Those have all been stabilized now. We're not competing against one condo, busted condo now that’s not in the low to mid-90s. So that made it better this year. Also we had a very good winter season in Phoenix, and the winter visitors came, spring season for baseball. We were renting apartments, our occupancy is very high and we had a very good winter season in Phoenix and coming into the slower period of the natural cycle of Phoenix were higher than last year. So, Phoenix right now we're sitting at just under 95% occupancy, left the leases up at 10, which is totally natural for this point in the cycle.

David Cohen

Okay. And then New England, huge increase in expenses which drove the same store down, what drove that?

David J. Neithercut

Primarily that's being driven by utilities. Utilities make up 16% of our total expenses. And when I say utilities, it's usually think of it as water, sewer, trash and then there is energy, the gas and oil. And what you see on a sequential basis is that the heating season started very late last year, maybe November people started turning on their heat, then you have a 30 day lag in your billing. And so really, the heating season really ramped up in Q1 of this year causing the quarter over quarter increase.

David Cohen

And why would that not have impacted the other kind of markets in the region as much?

David J. Neithercut

The other markets in the Northeast?

David Cohen

I mean, yeah, just Northeast in general, yeah?

David J. Neithercut

They're up pretty big, too. Yeah, I think they are – most of them were up. And Boston is up 6.2 and New England excluding Boston is up 7.1 expenses.

Mark J. Parrell

In New England in general you have the product style of the buildings that were built that we own there rely more on that type of energy than you do when I say garden or other markets.

David Cohen

Okay, great. Thank you.

Operator

And at this time, there are no further questions.

David J. Neithercut

Well, great. Thanks everyone for joining us today and Mark and I and John Collins look forward to seeing many of you in New York next month. Thanks for joining us today.

Operator

This concludes today’s first quarter earnings conference call. You may now disconnect.

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