艾芙隆海灣社區公司 (AVB) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the AvalonBay Communities second quarter 2002 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press the star and 0 on your touch tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Alaine Walsh, Manager of Investor Relations. Miss Walsh, you may begin your conference.

Thank you Elizabeth. Good morning and welcome to the AvalonBay Communities 2nd quarter 2002 earnings conference call. On the call today are Bryce Blair, Chief Executive Officer and President, Tim Naughton, Chief Operating Officer, and Tom Sargeant, Chief Financial Officer. We'll begin in just a minute, but first, for those of you who didn't receive the press release and last night's fax, [INAUDIBLE] distribution, please call us at 703-317-4636 and we will happy to send you a copy. As always, I would like to remind you that forward-looking statements may be made during this discussion. There a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in last night's press release, as well as in our form 10-K filed with the SEC.

Now I would like to turn over to Bryce Blair for his opening remarks. Bryce?

Thank you, Alaine. Good morning and welcome to our second quarter conference call.

First off I would like to again thank so many of you for attending our investor analyst bay in D.C. last month, as we continue to evolve in many important areas such as product development, customer knowledge, market analysis and capital allocations. It also provided a great opportunity to give you a better understanding of how we think about our business and importantly for you to meet and hear from a board across cross sections of associates and officers. This will give you a better understanding and appreciation for the depth and experience of our management team. We also have the opportunity at that time to update you on our current business and the expectations for the full year, so as we go from that [INAUDIBLE] update, Our comments will be briefer than in past calls, hopefully allowing more time for your questions.

Our call today, I will briefly summarize our quarterly results and economic outlook for the balance of the year. Tim will follow with an update on our operating performance and investment activity. And finally,Tom will close by discussing some financial highlights for the quarter and also discuss our enhanced disclosure regarding capitalized expenditures. To briefly summarize earnings, we reported last season ETS for the 2nd quarter of 46 cents. SFO per share of 95 cents. These were in line with ranges we provided in 1st quarter projections and they're also consistent with the first call consensus. Also last evening we announced the stock repurchase program that authorizes the repurchase up to $100 million of outstanding stock.

Turning to the business outlook, in order to describe the current operating environment, I would characterize it as one where the markets remain weak although there were clear signs of stabilization. So we have weak markets today, but clear signs of stabilization. I want to address both points briefly. Our markets remain weak and stable supply is met with anemic, or in many markets negative demands. Target demand continues to be negatively impacted by the absence of any job growth combined with historically high single family purchases and continued weak corporate apartment demands. As a result we continue to see declines in market rents and certainly high concessions. Over all we saw total same store sales revenue or the quarter decline by just over 6% on a year over year basis and 1% on a sequential quarterly basis. Now while our markets remain weak, there signs of stabilization. The [INAUDIBLE] data was essentially flat.

And our economic occupancy increased from a low of 92.4 in December of last year to 94% for the month of June. While the market rents on sequential quarterly basis declined for the first and the second quarter, the rate of decline was only .8% compared to a sequential quarterly decline of 2.6 percent per for the 1st quarter. But perhaps the best over all indicator of our market performance is to look at our same store sales revenue trends. Our same store sales revenue peaked in the second quarter of last year at an average monthly rate of $42.5 million per month and has declined every quarter since. Yet the rate of decline varied significantly. The rate of decline in our same store sales revenue peaked actually in the fourth quarter of last year, when it declined from the prior quarter by approximately 1.2 million dollars per month. As I'm sure you remember the 4th quarter of last year was a period of nominal job losses throughout the country as a whole and certainly in our markets. These job losses were immediately translated into weak over all market conditions throughout the apartment segment. Now the rate of decline in revenues continued in the 1st quarter, but at a lesser rate. Declining by $900,000 per month. Again continues to decline in the 2nd quarter, but also at a lesser rate of $400,000 per month. The rate of decline is slowing dramatically and we expect the 3rd quarter to be roughly flat with that of the second. While we see clear signs of stabilization, we do not expect any significant growth until the middle of next year.

Our outlook as you would expect is driven by our [INAUDIBLE] demand supply fundamentals in our market, and with supplies relatively stable, the key variable is of course jobs. So let me restate our job growth assumptions which I mentioned on our 1st quarter call. We expected to see on a sequential basis flat job growth in the third and modest job growth by late in the fourth. And this is still our expectation. We also stated that based upon our experience and significant impact on revenue lags by a couple of quarters. Thus we don't expect the effect of material job growth to benefit the same store sales revenue until the middle of next year.

So to summarize the expectancy in the markets are largely stabilized in the 3rd quarter and to move sideways with no appreciable deterioration, yet no significant improvement either until the middle of next year.

With that I will announce Tim Naughton who will provide further details on the operating performance and on our investment activities.

Thanks, Bryce. I will address the results of the operations for the 2nd quarter and provide a review of development of acquisition activities. In addition, I will discuss our outlook for operations for the balance of the year.

First with respect to the property operations for the 2nd quarter of 2002, same store revenue decreased by 9.1% compared to the 2nd quarter of 2001. The result same store revenue declines of 6.2% expects growth f 1.8%. Same store revenue was driven by declines in both economic occupancy and average rental rates from the same period of last year. As Bryce mentioned in his remarks, we have seen signs of stabilization on a sequential basis. As the rate of decline in revenues and market rents moderated recently.

Economic occupancy increased. In fact, same store rental revenues declined by about 1% since [INAUDIBLE] and decelerated from a rate of about 2% last quarter. This trend continues through the quarter as same store June revenues were essentially flat when compared to May. As continued increases in economic occupancy offset any decline in our rental rates. Average market rents declined by an average of .8% sequentially from Q1 or about one third the rate that we reported last quarter. And market rents continued to decelerate through the quarter. As May and June were effectively flat relative to the prior month. In addition, economic occupancy increased .8% sequentially from Q1. This was driven primarily by a substantial increase in northern California.

Looking across the country, the New York metro area continues to be the region of greatest concern for us. Northern New Jersey and Fairfield performed the weakest, driven by results in Jersey City and Stanford. In Northern New Jersey both economic occupancy and market rents fell by 3.5% sequentially from Q1. In addition, lease breaks and turn over were up sharply for the same period last year. These results are driven by the Jersey City market which continues to feel the effects of job losses and lower Manhattan and the introduction of new supply for that market and finally, the disruption and transportation infrastructure. In Fairfield, the trends are similar, but not as severe as weakness in Stanford has been offset by continued strength in northern Fairfield county. During the quarter, annualized turn over was 67%. Up from 61% last year. Turn over increased most significantly in northern New Jersey, Fairfield, Washington, D.C., and northern California. Increases in seasonal turn over were offset by higher traffic as traffic increased by 5-10% across the portfolio. Same store expected an increase by 1.8% for the quarter, over the same period last year, excluding insurance, same store expenses actually declined by just over 1% from the same period last year. We continue to scrutinize and manage aggressively throughout the portfolio.

Over all, our markets continued to be weak as Bryce mentioned, but the level has decelerated noticeably. On a sequential basis, most key metrics we analyzed to assess portfolio performance have leveled off or they have declined and been offset by improvements in other metrics. For example, flat or modest declines in market rents have been offset by improved occupancies. In addition, higher turnovers have been offset by higher traffic and also mitigated by declined lease breaks. Over the next couple of quarters, we expect sequential revenue growth to remain essentially flat as a result of decelerating average rental rates as leases begin to roll and rest close to the prior year combined with modest increases in economic offsetting. Over all for 2002, we expect the year over year decline in same store [INAUDIBLE] to be in the upper end of our guidance range of negative 5 to negative 8% issued last quarter. With Q3 projected to decline by approximately 9%. Weaker year over year performance will occur in northern California, Seattle, Chicago, and northern New Jersey with the strongest performance occurring in southern California. As we discussed in our [INAUDIBLE] in mid-June, we will continue to focus on the items we can control, including scrutinizing expenses, lease renewals, property merchandising and marketing our communities and finally. actively monitoring our portfolio and our markets.

Let me now turn to development activities for the quarter. During the 2nd quarter we completed four development communities and one redevelopment. And started one new community. The four development completions represented approximately $200 million in capitalization and stabilized yield of 9%. And while market conditions remain challenging, execution remains strong.

Collectively, these four communities were completed within one quarter of 1% of their original budget. The new starts, our current development community portfolios declined by about $140 million since last quarter and stands at just over $700 million with a projected yield of 9.1%,which is equivalent to the yield we reported last quarter. In fact, we reduced the budgeted cost for Avalon River View in New York by $5 million this quarter, from $102 to $97 million. This community is still under construction, but with the major risk of a job now behind us, we are comfortable recognizing much of the projected savings in capital budget. The cost savings for this community is really the result of a number of factors including a great execution on the riskiest part of the job, that being the bridging of the subway tunnels and a very favorable buy out with the subcontractor community and then saving virtually all of the budget [INAUDIBLE]. Given that this is our first development community in New York City proper, we are certainly pleased with the construction performance on this community.

For the over all development portfolio, yields are at levels lower than years past for Avalonbay. [INAUDIBLE] significant increases, risk increases, in our market that just didn't yield to the 11% range. Even at the lower yields today at around 9%, new development remains [INAUDIBLE] to both earnings and net asset value, particularly as cap rates continue to decline. Finally, execution remains strong in terms of budget, schedule, and quality. These new development communities will provide a meaningful source of growth in the economy [INAUDIBLE]. For the balance of the year we expect total completion with the [INAUDIBLE] communitiy to approximate $470 million. The average yield for this community completed in 2002 is projected to be within the 9-9.5% range that we stated in our previous guidance. We will continue to assess potential starts on a case by case basis where it makes sense in our judgment to abandon or defer new development opportunities, We will do so.

However as we discussed in June, we will be careful to balance near term market pressures against our longer term growth objectives. In the 2nd quarter, we completed two new acquisitions, totaling $140 million. Avalon Gray Rock is a high-rise community in Stanford, Connecticut adjacent to our outlying growth community. This asset was purchased subject to a previous pre-sales agreement negotiated at 1997 with a third party and currently 63% leased. In addition, we closed on an asset in the L.A. market known as the Promenade. This community is located in Southtown Burbank. [INAUDIBLE] has experienced significant revitalization and is a target submarket for Avalonbay. This community benefits from first, attractive financing with over $33 million in low floater tax exempt bonds, and provides the kind of value added investment opportunities that we like to target. We can reposition the community through remerchandising and through redevelopment. The purchase of this asset is consistent with Avalonbay strategy; view the acquisition as a means of gaining greater market presence. In those markets, in which we believe we cannot meet our capital allocation objective through development alone. We expect total acquisitions for the year will be toward the lower end of guidance range as a result of a couple factors. First, our recent decision to initiate a stock repurchase program and secondly, through our continued narrow market focus which is currently L.A. and Chicago markets. L.A. continues to be a very competitive transaction market and the Chicago market is still under stress which is discouraging many owners in marketing their communities.

In summary, our market continued to demonstrate weakness, but are showing signs of stabilization. We continue to remain focused on the things we can control to optimize portfolio performance. We will assess future capital commitments judiciously, whether they be new developments, strategic acquisitions, or stock buy backs.

And finally, we will do this within the context of balancing short-term taxes with the longer term strategic objectives.

I would now like to turn it over to Tom, who will discuss our financial position.

Thanks, Tom, this morning I will cover the following topics, first, we will highlight several financial and accounting matters. I will then address the operating and earnings outlook for the next quarter. Capitalization policy and intense act on expense recognition is largely in the news today and we want to highlight our policies and speak a little to the expanded disclosure we provided this quarter in the that area. I will then conclude with comments about the completion of our implementation of the on site operating system.

The nonoperating financial highlights this is quarter include the final settlement of the Edgewater insurance claim. We announced the redemption of another preferred series and it's important to note that lower than expected interest rates have helped us compensate for some of the weaker than planned market conditions that we saw during the year. Our financial results do include the recognition of 2.1 million of income pertaining to the Edgewater insurance claim; this represents the final settlement of that claim and the income recognized in the 2nd quarter combined with the 6.2 million we recorded in prior quarters brings the total and final amount of the business interruption proceeds to about 8.3 million. Which was within the range we provided last quarter. Turning to the preferred redemption, we did redeem another preferred this quarter. The redemption was for a series C, The total is 57.5 million and had a coupon of 8.5%. This obviously did eliminate a relatively expensive element of our capital structure. We are pleased to have that redemption behind us.

Other balance sheet noteworthy news, we now invested all of our cash on hand that had been a somewhat of a drag on earnings in the past and we expect to use a credit facility for future short-term funding needs now that we've invested all of that cash. Balance sheet management and liquidity continue to be a prime focus of the company. As we manage through the difficult market conditions underway today, our financial strength is intact.

To go over a few statistics, debt to real estate value is now 42%. Our fixed charge coverage is 3.1 times. And our debt maturities are pretty evenly spaced. It's 150 million per year over the next five years. The average maturity for all of our debt is about 8 years and permanent floating rate debt is only 2% of our total capitalization. So that covers the financial highlights.

Let's move to the outlook for the next quarter and the remainder of the year. Our SFO this quarter was within the range of our forecast. As expected same store revenue and NOI declined sequentially from the prior quarter and the prior year. That rate of decline, however, was slightly higher than projected. And this was compensated for through savings and overhead and also lower interest expense. As Bryce noted, we continue to believe that the 3rd quarter will be a flat quarter with respect to NOI compared to the second quarter. The consensus forecast for job growth, as Bryce noted, has not really changed meaningfully since the last quarter. And we again don't expect any material job growth until late 2002 or early 2003. Anticipated reported qrowth will not translate meaningfully and a sequential revenue growth until mid-2003. So this flat sequential trend during the year will result in a decline in year over year NOI from the established communities during the 3rd quarter of about 9% which will result in an SFO range of 93-97 cents per share for the 3rd quarter.

And as we noted in our press release last evening, we are comfortable with the consensus estimates on the first call for 2002. We do have more control over operating expenses and GNA, and intend to speak to the steps we are taking to control the cost. We did intensely focus this quarter and that did result in sequential quarterly and yearly declines in virtually every overhead category. Capitalized and expense GNA declined as well as central property operating expenses. A couple of statistics; GNA declined about 7% compared to last year and about 5.7% between the quarters, between the 1st and the 2nd quarter. Capitalized overhead also declined with an over all reduction of about 8% from last year, and 17% from the 1st quarter.

Finally central office overhead pertaining to property operations declined 5.5% from last year and about 15% from the 1st quarter. Turning to operating expenses, growth, and how that relates to capitalization policy, they are linked. And are now under more scrutiny than ever before. We've added a supplemental schedule, I believe it's exhibit 7 in the press release this quarter that shows the various categories of capitalized cost between 2000 and 2001. We plan to publish the schedule each year in January for the year just ending as well expand our quarterly and annual statements of cash flow all towards achieving enhanced transperancy. It's important to note that our capitalization policies were established prior to our IPO and haven't changed since. These policies are strictly applied and generally result in a relatively stable level of nonrevenue generating Cap-X [INAUDIBLE[ that's consistent with lower than the industry averages. So Intense focus operating expense growth has resulted in declines and controllable expenses and we will continue to work to contain those expenses that are left controllable such as insurance and property tabs.

Let me conclude by noting that we completed the implementation of the new property operating system this quarter and it's now in use at all of our communities. I think many of you saw a demonstration of that system at the investor day. We expect better, more accurate and timely data. And these are immediate benefits that we are seeing. We can now monitor the financial impact of changes in occupancies and rent each week so that weekly revenue can be evaluated against forecast and actions can be taken to optimize our results. We also have better insights to the reasons for move outs and a platform for future customer focused initiatives. The ability to more aggressively manage renewals as well as nonresedential sources of revenue, which are garages and store spaces, are additional benefits we expect to see going forward. The system has been challenging, a challenging change for on site associates at a time when they were challenged to dealing with extraordinary market conditions. We will keep you posted as we identify and quantify incremental benefits from using the new system.

So in summary, before I turn it back over to Bryce, there were a number of important milestone this quarter. First, we sold the outstanding insurance claims and we are pleased to have that behind us. We redeemed preferred stock, we overcame lower than expected revenues through expense containment and lower interest costs. And finally, we completed the implementation of an innovative new operating system for the community that is should optimize on site operations and help facilitate many of our customer-focused initiatives.

And with that Bryce, I'll turn the presentation back.

Thanks, Tom I just want to make a few additional comments before we open it up for questions.

The current operating environment is indeed difficult as we commented in our prior comments. Employment and real estate markets remain fragile and the impact of the recent volatility in the stock market has created even additional uncertainty. From the middle of last year to the middle of next year, it has been and will likely continue to be a difficult period for the national economy, for the industry and for Avalonbay. Although few would wish this weak job in financial market environment, this does serve as an important test for the industry. And I think we will serve to further differentiate certain companies in our sector. The further we emerge in this weak period of fundamentals, certain companies as a result of I think their strategic commitment and their financial strength, will be better positioned than the others to capitalize on the opportunities. I believe Avalonbay has demonstrated our ability to respond to the near term challenges while maintaining our financial strength and, importantly, remaining focused on our strategic goals.

I would like to highlight four areas which I think demonstrate our commitment to balancing these three adjustments. First, I think we've demonstrated a focus and proven results in the area of expense controls. Property level expenses excluding insurance, Tim mentioned has declined on a quarter over quarter basis. When you look at the average rate of decline over the past three quarters, t's approximately an annualized rate of 3%. Tom talked about GNA in general and on a year over year basis both expense and capitalized overhead has declined by 7% or greater.

Secondly, we do continue to create value to develop expertise. Over the past nine years it's a yield of almost 11% and almost $2 billion in new development . And as Tim discussed earlier, even this year, a year where we have seen market rents on a year to year basis decline by over 20% in the market, we are still delivering average yields greater than 9% creating both positive earnings and an [INAUDIBLE] growth.

Third, I think we've demonstrated discipline in our capital allocation. We have shown discipline in our development activity, where we were willing to delay and in some cases stop, where development is not supported by current economics, and we have been selective in acquisitions and in fact have committed to only one new community in the last year and-a-half. I think our recent decision to initiate a stock purchase program is further evident of our disciplined approach to capital allocation and balance sheet management.

Fourth, I think we have been smart, yet conservative in the use of our balance sheet. I think it's quite noteworthy that even with the relatively large size of our development program, elimination of the dividend reinvestment program last year, the fact that our last acquisition was over 4 years ago, and we still have one of if not the strongest overall strongest balance sheet in the sector, for the debt to [INAUDIBLE] in the low 40's. We have and we will continue to use our strong financial position to facilitate our growth and our strategic goals. So we do remain keenly focused in optimizing our current performance in these challenging times but will not compromise our strong financial positions or longer-term strategic goals. We remain very confident in the long-term health of our markets and in the soundness of core strategy.

With that, operator, we would be pleased to take any questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star followed by the number 1 on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the star, followed by the number two.. If if you are using a speaker phone, please lift the hand set before asking your question. Again, if you have a question at this time, please press the star followed by the number 1 on your touch tone telephone. One moment for the first question. The first question comes from Lee Shallop, of Bank of America Securities. Please proceed with your question sir.

Thank you. Good morning, everyone. A couple of questions. The first on the buy back. Could you talk about two things related to it. One, your view on where NAV is today and if the cap rates moved recently one way or the other?

You want to take that, Tom?

Lee, our NAV today is in the $46-47 range. And you know, those calculations were still finalizing, but that's the range you expect to see [INAUDIBLE] to come out in in terms of the way we calculate NAV.

Then the cap rates. Have you seen anything move one way or the other in terms of using a cap rate to calculate that on NAV?

No, we have in terms of the NAV Calculations , we are using it about 7.8% cap rate, which is a cap rate that we determined asset by asset. So that is the cap rate we are using to calculate our NAV's in the 46-47 range.

Lee, it would be fair to see the reduction in range that Tom is referencing is the result of reduction in NOI and not reduction of cap rate used in the calculation.

Got it. And then, have you seen anything trend-wise in the first couple weeks of the 3rd quarter that affects your thinking going forward?

I will handle the first part and maybe addressing it from an economic point of view and Tim may talk about some performance metrics. And then as I mentioned, the job forecast we are using represent what we believe to be consensus estimates and we haven't changed those in the last quarter. Having said that, you know, there clearly continues to be more and more negative news and certainly concern about the recent turbulence in the financial market, and as recently as yesterday, additional job layoffs from a variety of companies. Clearly a concern in terms of whether there will be revisions to job forecast. In terms of the operating performance that we have seen in the first three weeks, Tim, do you have anything?

This is Tim. In terms of how that translated into portfolio performance, it's really kind of more of the same from June and May. You know, occupancies and leasing tends to be relatively flat from June, although we saw an increase in occupancy in June across the portfolio. And rents in the level of concessions are relatively the same as we saw in June. So really nothing material to speak of in the first two or three weeks in July.

Thanks, Tim. Last question on stock options. The [INAUDIBLE] discussion about expensing stock options. Could you share your view on that?

Lee, this is Tom. We do provide a disclosure under FAS 123 in our financials that speaks to the financial impact of expensing options. The re world is not as dramatic as in other industries. And in our case I recall the amount of impact to us would be 5 cents per share. We are still studying that issue and I don't have a position on it today, but we do believe that the disclosures would give the investment community information that they need to evaluate, you know, our SSO or ASSO considering a stock option expensing.

Thanks very much.

Your next question is from Andrew Rosenbach, with Piper Jaffray. Please proceed with your question, sir.

Good morning. I have a question on the operating side for Tim. You touched on this briefly in you remarks, but where are your in place rents as of June 30 relative to market?

Andrew, for the quarter, the loss of leases is essentially zero, it's just--and slightly positive. In the month June it was probably closer to 1%. So it's basically been flat the last couple of months. As market represents have been flat.

So going forward market rents and your rental revenues will track each other closely?

More or less. As we talked about in our remarks, we see residential revenues continue to decline, average rental rates have continued to decline, even if you look at the additional schedule that we attached that showed sequential changes in average rental rates. You'll see last quarter was down, I think it was 1.7% and that would suggest about half a percent decline per month. That is continuing to decelerate while the entire portfolio is relative with showing basically no loss or no gain to lease. The leases that are rolling over today have [INAUDIBLE] in them, and that will--so you'll see average rental rates continue with the level of deceleration will continue to moderate, but it's not yet zero.

Right. Okay. And Tom, one quick question on the NAV calculation. How do you value CIP?

We value CIP at 110% of the value of current guidance.

Great. Thanks, guys.

Your next question comes from David Harris with Lehman Brothers.

Good morning, everyone. Tom, I have a couple of questions for you. If we look at the mid-point of your prior guidance moving down 6.5 cents or so, what's the big dynamic there? The weaker same store performance than you would have used to get to the mid-point previously?

I'm confused. We didn't -- it's our policy not to update guidance every quarter for the year. We update guidance looking out one quarter. The prior guidance we issued in April is still in effect with respect to the range. What we did say that we were comfortable with the current consensus estimate at 388. Obviously that's within the range we provided. Other than that, we haven't provided additional up-tick or color on the range.

I see. I misunderstood your press release in that sense. What you are telling me now is the prior guidance range is still in existence.

Until we update it, it's absolutely still on track.

Okay. On the share of buy backs, am I right in thinking this is the first program that you guys have had or have you been active in buying the shares back in the past?

This is the initial and not only program we ever had.

And in your assumptions for this year's SFO guidance, are you assuming there is an impact in buying shares back before year's end?

The guidance we provided in April, which is the current outstanding published guidance, had attached to our guidance a list of assumptions, including capital assumptions. And stock buy back was not included on that schedule.

Okay.

This is Bryce. I just wanted to add one point , to the first part of the question. Tom's statements are obviously correct relative to our statement last May that confirmed the first call as well as the fact that we do not update guidance every quarter. Having said that, we think we've been very clear in our comments earlier today,that our performance in the 2nd quarter was at the high end of the range. We said 8-9% negative [INAUDIBLE], and it was actually 9.1, as well as Tim's comments saying that this year we expected to be at the higher end of the negative NOI performance. We have stated and it is fair for to you summarize the operating performance in markets is at the more negative end of the range than we expected when we first put out the guidance.

Okay. Tim, I have a couple of questions for you on the operational side. Could you just comment on what your feeling in terms of current and perspective for '03 in terms of [INAUDIBLE] tax pressure.

David, obviously we don't have--we really don't have the assessments in for 2003 first of all.

Generally, real estate tax assessments, as I'm sure you know, lag property performance and so as we have actually seen, you know, increases continued in real estate taxes while property performances have gone negative in 2002. It's our expectation, at least from a assessment standpoint. That will continue with real estate taxes. Notwithstanding the fact that obviously local jurisdictions are more under pressure.

Okay. And in terms of the sales and acquisition activity, is it your sense that the honor of the buyers in any way diminished in the last month or so are or are we seeing property as aggressively bid for as earlier in the summer?

Our focus is pretty narrow. First of all, and we really only have been active in the L.A. market which is continuing to be highly competitive. That's one of the healthiest markets right now and it's one of the markets where sellers are still willing to put their properties on the market. So I can't really--can't really speak to other markets. You know, other than what you hear like Washington is still very active as well as cap rates staying healthy. [INAUDIBLE]

What about the sitting side. They have a pipeline of properties that you are [INAUDIBLE] bids on.

David, we actually just released our first potential disposition for the year. It is in Boston. It's too early to tell.

All right. Thank you, gentlemen.

Your next question comes from Rob Stevenson with Morgan Stanley. Please proceed with your question, sir.

Good morning, guys. Can you talk about foot traffic and what you're seeing in terms of that over the past 90 days and as well as closure rates?

Sure, Rob. As I mentioned, we have seen traffic up 5-10% across the portfolio. Obviously uneven as you move across the country. The highest levels of traffic are base increases have actually been in the New York area. I think partly as a result of falling rents.

And, you know, lower traffic increases have actually been in California markets with northern and southern. In terms of conversion, they have been pretty consistent in the 28-31% range. And, you know, nothing material there.

Okay. And Bryce, can you talk about in terms of the share repurchase program, given your funding commitments for the development pipeline and the fact that the cash has been deployed off the balance sheet, is that how, you know, the stock gets at these levels? I mean, where the capital is going to come from. And basically, this [INAUDIBLE] asset, are you going to accelerate activities here?

Rob, the purpose of the stock buy back program is intended to be roughly balance sheet neutral. When I say roughly, whenever you take both sides of the balance sheet down, it's not really neutral, but it's intended to really be neutral with respect to the use of proceeds or the application of proceeds for the stock buy back.

What we do say in the press release is the source of funding that would be retain cash. it would be asset sales. And essentially a curtailment of some of the acquisition activity or a reduction of planned activities for unions that we had previously provided to the investment community in our financial outlook.

Okay. So, and At this point given the cash and disposition that nothing has been executed and given the cash balances, is it as if you guys were to go out and buy, you know, a million shares today, this would come in off the line? [INAUDIBLE]

On a short-term basis, it would. Because the credit facility is just a facility to use for liquidity purposes on the short-term basis. Obviously long-term is the way we worked it and how it would be funded long-term, would be how to retain cash, asset sales, and reduce activity.

Okay, and then one last question back to Tim. San Jose, I notice that the K hill [INAUDIBLE] got reduced. What are you seeing in that market and has the pressure from Santana Row begun to be felt there yet?

Rob, not really. The pressure from Santana Row is more frankly from North park which is a larger urban community that will be about 1200 apartments. Santana is looking to release or start occupancy in September or October. They started leasing and we are not feeling the pressure there much. It's a general market. Occupancies increased, but we have to work hard to keep them.

What is your average square footage there?

I think it's night around 1,000, Rob, and I think the average rents are in the neighborhood of about 90--85 to 90.

Your next question is from Steve Flax, with Wachovia securities. Please proceed with you question, sir.

Good morning. A couple of follow-up operating questions for you. Do you have an increase in the property tax component of the same store expenses?

There is an increase this year, year over year, Steven. I would have to look at it, but on the order of a couple percent.

Okay. The lease maturities that you guys typically have, how does it roll from second quarter to 3rd quarter?

Actually less terminations in the 3rd quarter.

I think we talked about the fact, we generally see a--and we try to schedule it this way because this is the way we see traffic patterns from Q1 to Q4. About 20-30, 30-20. The reality is it's probably more like 32-33 in the 2nd quarter. 27-28 in the 3rd quarter.

Okay, so there is a slight down tick in maturities this quarter?

Yes.

And what was the quarter end occupancy for the portfolio?

Quarter end occupancy was right around 94%.

Thanks a lot.

The next question comes from Rich Anderson with Solomon Smith Barney. Please proceed with your question, sir.

Thank you. Regarding the Cap-X disclosure, if I may focus on the corporate GNA line item, I want to confirm that the entire 4.3 million is associated with nonrevenue generating Cap-X.

Rich, this is Tom. Yes. I think we were pretty detailed with a footnote on that item. They basically capitalized corporate expenses and we do own the building that we occupy here in Alexandria.

So there are expenses that [INAUDIBLE] are capitalizable. That's a very small part of it. Northwest is capitalized systems implementation with the purchase of the system and/or the implementation of the system. For example, we implemented People Soft, we implemented Relium, and costs like that go in to that category. And we view that as all nonrevenue generating, and it's not specific to a community.

With regard to the revenue generating portion of the Cap-X, I see you have a footnote identifying what are cable installations as the components behind that number. Are there any other components?

No material other components. I have heard arguments from time to time ,if I can just editorialize for a second. If we redo a leasing office that's revenue generating, we find that's difficult to support and we don't include costs like as a revenue generating costs.

They have to be something that--you know, adding a carport or a garage, a freestanding garage, at a community that we can charge for or reduce cost. We say revenue generating is just a cost reducing item like water submetering, depending on how you account for that. Those will be the only items that we consider revenue generating. And as you can see, we have very little in that category.

Okay, I do see that, thank you. Turning now to a few other items. You mentioned Chicago as one of your focus acquisition markets.

Can you give some color as to what your thought process is there in Chicago.

Sure, Rich. The reality is there is not much deal flow there.

You know, ultimately, long-term we would like to get a bigger presence in Chicago just from capital allocations standpoint. We also feel like there are signs that Chicago will turn around here in the next few quarters. In the sense that there were products out there--we don't think it's really a bad time to be buying--we think they should get outside of Downtown Chicago. Our focus with the Northwestern suburbs.

Okay.

Okay. Any comment on the DC market, specifically the innerloop area or have you seen sort of significant weakness that you didn't anticipate this past quarter?

It's really been a little bit weaker than anticipated all year, Rich. It's really the result of job growth has not been strong the last 12 months in D.C. and

The supply has ramped up into the 8,000 range, so I think it's a simple case of demand and supply and us working against it.

And you're speaking specifically to the inner beltway area?

I am talking to the entire DC market.

Does that include northern Virginia?

Sure. It includes northern Virginia, includes suburban Maryland. The Dulles areas and we have a couple assets out there that have been hit harder than most other assets with the telecom implosion and a lot more supply out that way. The North Arlington assets have been impacted by initial supply marks as well.

Okay. Last question on the acquisition of the Promenade in Burbank. You mentioned a redevelopment opportunity there. Any comment on when it would be added to your redevelopment schedule and what the magnitude of the redevelopment project would be in terms of dollars?

We have an estimate in terms of what that would be if we do it as part of the acquisition. Obviously, we are looking at probably something in the 5-6 million range, Rich, but it's our objective and our intent and practice to really kind of live with the asset for 9-12 months before frankly even considering the starting of the planning process for redevelopment that we understand the market better. The opportunity better. That's our tent. You shouldn't expect that will be included three months from now, the redevelopment crew.

Your next question comes from Kevin O' Shea with UBS Warburg. Please proceed with your question sir.

Hi, this is Stuart Keely, in for Kevin O'Shea, UBS Warburg. On NAV, did you effectively run that as your current 93.6% occupancy and what do you think the long-term occupancy level is for a portfolio like yours?

Stuart, this is Tom. Couple of points, first, running a calculation assumes you have stabilized operations.

The environment we are in today is stabilizing, but we think we're at lower than normal occupancy levels. So to answer your question, yes, we did use the current occupancies and NOI's to calculate the $46-47 range. I think if you speak to normalized, a normalized NAV would be higher than the current calculation because of the depressed NOI's that we [INAUDIBLE] to calculate.

Okay, and I'm sorry if I missed this. Did you say where you were a buyer of your stock?

No. We didn't say that.

Okay.

I don't want to pile on to this Cap-X Jihad, but I have a related question. You guys have assembled and developed a very high quality, high cost basis per unit portfolio.

How should we think about the life cycle of the of the very high end portfolio and does the current Cap-X policy maintain the relative competitiveness of your unit over the long-term or should we still be contemplating that we need to take your unit out of service every 7 years or so, and the other way to ask that, is there an implicit reserve for high end portfolio, than for, say, a class A versus class B portfolio.

[INAUDIBLE] Stewart, I think it's interesting to note that the average age of communities is about seven years. It's also interesting to note that the average capitalized nonrevenue generating costs of our portfolios have remained competent over the last seven years. Since we went public, last nine years. So I think by constantly printing the portfolio and active asset management, that number does stay within a pretty close range year over year.

I think I can speak to our philosophy in terms of owning assets that are a class A institutional quality assets that are younger over all than our pier group portfolio does help keep that number in check.

The only thing, Stewart, I would add to that is I think a company capitalization--the amount that the company capitalized--is a function of a variety of things.

One, we get a capitalization policy, which Tom has talked about previously, and the second would be the age of the assets, as Tom just mentioned, and think it is very important to recognize that it's a young age of portfolio. A third is operating practices in terms of how people choose to invest or reinvest in their assets.. And fourth, which I think was part of your question ,and how the mix of your portfolio may or may not be changing.

And we have changed the mix of our portfolio somewhat over the past three or four years as we've done more urban products, more high rise products. So we will continue to monitor that. We will continue to ensure we are adequately maintaining our properties. We don't believe that will have any material impact on the over all rate of capitalization. Because we think the greater driver is the age issue that Tom mentioned.

The cynical way to interpret that response is that you may need to sell a good chunk of your portfolio, you know, every seven years as it rolls.

Well, we are an active asset manager and began that process three or four years ago and has been frankly this year a little bit of a hiatus, but we have been selling at the rate of $250 million worth of assets each of the prior couple of years.

We have do have a commitment to keep our portfolio young and we are an active developer and we are an active recycler of capital and asset management is a key part of that.

Okay. Thank you very much.

Your next question comes from from Richard Paoley, with ADT Investments, please Proceed with your questions.

Good afternoon, gentlemen. I have a question regarding resident, I guess, employment. And are you now able to track through your, I guess your new software that you installed, I guess broad industry classification where your residents are employed. If you have that, can you share it with us, in terms of, you know, industry type.

Yes. We do have expanded demographic capabilities within the system. We have not implemented all of the demographic features of the system frankly because we didn't have all of the demographic features turned on in the old system or they didn't work. So part of that as new leases turn and we capture that demographic data,, we will be able to present better demographics without having to manually survey our residents.

Right. Okay. I would be interested to see that as you get a better population of information. And then secondly, I think you kind of touched on the issue, but I wanted to see if you can quantify it.

You're--I guess a bunch of people know your capitalization policies are a lot more conservative than the street. Implicitly, you're saying that [INAUDIBLE] the Hawaii growth numbers are suppressed, especially in a period where you have increased turn over.

Could you quantify that by any way as to how much your NOI numbers could be lower than, you know, say your peers because you don't capitalize certain turn costs that others do.

Well that's a--Rich, that's a tough question. I don't know everybody else's policy. I only know ours. I think that if you were to look at our sequential expense growth from the 1st quarter, it was a lot higher.

In the 2nd quarter and the 1st quarter, it's seasonal and we do incur a lot of calls and the same quarter over the first. To be able to speak to how much more expenses are in our system because we don't capitalize carpets, we don't capitalize other things, I really couldn't tell you. I'm sorry. I don't know if you have any other follow-up--.

How about this, do you know how much you are spending on carpets, you know, in related to turns?

Yes. In fact the schedule that we provided, schedule 7 does give a blended average of carpet replacement costs. Obviously that is cost incurred in a year for the entire portfolio. So it's almost like a yearly average. So that's included in schedule 7.

Okay. Does it show what the change was over last year versus this because, you know, implicitly there's a pick up and turn over. Some of the carpets are going to get replaced quicker.

You know, i's just the annual stuff. We didn't have that.

Okay. Thank you.

Again, if you have a question at this time, please press the star, followed by the number one on your touch tone telephone. Your next question comes from Craig Leopold, with Green Street Advisors. Please proceed with your question, sir.

Good morning--two quick ones. I got the first one--Tim, you had indicated that your NOI range of negative 5 to negative 8% you now expect to be at the upper end of that. I'm assuming by the upper end, you mean the minus 8?

You are correct.

Okay. And then could you just speak to -- I found it interesting when you've got some information on early lease termination, that those are actually declined year over year. Is that a reflection of the weakness that we saw in San Jose in the 2nd quarter of last year, or I'm surprised that they would be down.

Yeah, they're down year over year and sequentially, Craig. It's interesting when you actually see, but yet turn over is up year over year. So basically what's happening is people are waiting until the end of their lease term to move. If anything we are seeing is a reason for move outs that's increased. It's actually job relocation. So people haven't been breaking leases as much to change jobs, but they have been terminating their leases at the end of their normal term to relocate.

Is that a very material number? I mean, you just give us a change, 34%, but is it a material number within the [INAUDIBLE] ?

It's really not. It's probably on the order of 6-7% of all turn over and all move outs. And it's really more of a leading indicator, I think.

Great. Thanks.

At this time, there are no further questions.

Thank you, operator. Just a couple concluding comments. Our quarterly earnings performance was as expected. We did comment that we saw signs of stabilization and we view that as a positive.

And yet the real positive will be when we see positive job growth return to, throughout the country, and certainly to our market.. And during this challenging period, our focus remains very clear.

It is as we said numerous times throughout our comments today to focus on maximizing our current operating performance while being very focused on positioning ourselves for out performance as the market conditions perform. So we thank you for your time today, and we look forward to talking with you in the future.

Ladies and gentlemen, thank you for participation in today's conference. This concludes the program. You may now disconnect.