艾芙隆海灣社區公司 (AVB) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities first quarter 2003 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will follow at that time. If anyone should require assistance during the conference, please press star, then 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, Matthew. Good afternoon, and welcome to AvalonBay Communities first quarter 2003 earnings conference call. On the call today are Bryce Blair, Chief Executive Officer and President. Tim Naughton, Chief Operating Officer, and Tom Sargent, Chief Financial Officer. We'll begin in just a minute.

But first if you did not receive the press release from last night's fax or e-mail distribution, please call us at 703-317-4636 and we will be happy to send you a copy.

As always, I'd like to remind you that forward-looking statements may be made during this discussion. There are 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 yesterday's press release as well as in our form 10-K filed with the SEC. Finally, I'd like to highlight some additional disclosures that we've added to our Safe-Harbor package that conforms to new SEC regulations that became effective March 28th, 2003.

Several non GAAP financial measures and other terms are included in yesterday's earnings release and may also be included in today's discussion. We have provided a summary on Attachment 13 of the financial measures and terms. Including their definitions, a reconciliation to the most comparable GAAP measure and statements regarding why management finds them useful.

This summary is also available on our web site at www.AvalonBay.com/earnings. We encourage you to refer to this new attachment during your review of our operating results and financial performance. With that, I would like to turn the call over to Bryce Blair for his opening remarks.

Thank you, Alaine. And again, good afternoon and welcome to our first quarter conference call.

Last evening in our earnings release, we reported quarterly EPS of 49-cents and FFO per share of 83-cents. Our FFO per share of 83-cents was at the high end of the outlook that we gave in DEcember of last year.

If I were to summarize the quarter, I would characterize it as one where our operating fundamentals remain weak as expected, the capital market activity provided meaningful, accretive opportunities. I'll touch on each of these two points briefly, and then Tim and Tom will get into greater detail during their comments.

Let me begin by talking about our operating fundamentals. In our December outlook, we assumed a continued weak economy for 2003 which we expected would lead to further downward revisions in third party job growth estimates.

Unfortunately, this has proven to be the case as 2003 job forecasts for the nation as a whole and certainly for Avalon based markets in particular have continually been revised downward over the past four months.

As you also may remember, in December of last year despite the positive third party job growth projections at that time, our outlook assumed no material job growth for the year so our conservatism last year has proven to be directionally correct. Now the magnitude of the job losses over the last two months with almost half a million jobs lost nationally in February and March alone is a concern.

And like all of you, we will be carefully watching the job data particularly as we move into the second and third quarters which as you know are high turnover in leasing periods for our leasing industry. The April job rate is not out but the unemployment claim numbers are running quite high so it is a concern.

The weak fundamentals continue to result in negative year-over-year as well as sequential quarterly revenue comparisons. Although importantly the rate of decline is diminishing. Yet until we see material positive job growth, the demand/supply fundamentals will remain unfavorable and will continue to impact our operating results.

Let me turn and speak to the capital markets and investment activity briefly. And then Tim and Tom will both get into greater detail during their comments.

During the first quarter we were very active with regard to our capital markets activity while some of our projected disposition activity was delayed. And both of these contributed positively to earnings during the quarter meaning both the capital markets activity as well as the delay in the projected disposition activity.

Let me touch first on the disposition. We indicated on our January earnings call that we had approximately $135 million of communities that we expected to close during the first quarter. And if they did close would put us at the low end of our guidance range.

In actuality, we closed on only about a third of this volume during the quarter and the balance is pushed into the second quarter. The dispositions as you know are initially very dilutive and thus the deferral impacted our first quarter results.

During the quarter we are able to act opportunistically with regard to a variety of capital markets activities. In total, we retired, redeemed, or repurchased about $170 million of our debt, deferred or common stock during the quarter.

And over the last few quarters we have been able to utilize the strength of the balance sheet and the attractiveness of the sales environment to capitalize on the low interest rate environment as well as the arbitrage opportunity or the value gap between public and private real estate valuation.

Capitalizing on the value gap, as I'm calling it, we were an agressive buyer of our stock this quarter where we saw at least a 200 basis point spread between the unleveraged yield or implicit cap rate on our stock when compared to the private market cap rate that we're selling assets at.

These valuation gaps present us with the opportunity to enhance EPS, FFO per share and certainly our NAV. We were already planning on being an aggressive seller during '03 and we plan on expanding our our sales program as long as the sales environment and the use of proceeds remain attractive. Tim will comment more on this.

Let me pass to it Tim who will provide additional comments both on our operating as well as our investment activity.

Thanks, Bryce.

As Bryce mentioned, operations were generally in line with expectations in Q1. And are reflective of a market environment where fundamentals remain weak. Revenues are still declining sequentially although at a lesser rate.

Development is progressing in accordance with plan that yields below historical averages but at levels where we continue to create value for shareholders. And finally, a strong transaction market is allowing us to sell assets per our plan at attractive cap rates. In fact, at rates that are unprecedented during this past real estate cycle.

However, we were surprised this past quarter by something that is difficult to predict, much less control, that being severe weather conditions in February and part of March in the Northeast and mid-Atlantic which negatively impacted expenses in Q1.

I can't site the exact snowfall we experienced across the Northeast and mid-Atlantic. But I do know that when my kids start complaining of too much snow and missing too much school we have had a pretty tough winter.

As Bryce mentioned, I'll discuss in greater detail for the quarter property operations, development activity, and finally dispositions.

Starting with property operations, year-over-year same store revenues were down 5.8% from Q1 o f '02 with Northern California and Seattle still experiencing the greatest declines at around 9%. Southern California continues to be the only major region with year-over-year increases.

Sequentially from Q4, same store revenues were down 1.3%, 08% from rental rate and .5% from economic occupancy. While the sequential change in total same store revenues is similar to that experienced between Q3 and Q4 of '02, the rental rate decline moderated by 50 basis points reflecting a more modest decline in leased rents versus prior quarters.

Northern California and Seattle posted the largest declines in same store revenues sequentially across regions at 2%, although specific markets in the Northeast also experienced declines of more than 2% as well. As I said earlier, economic occupancy declined by half a percent from last quarter largely as a result of declines in Southern California, Boston and New Jersey.

Economic occupancy averaged 93.4% for the quarter and was up slightly through the quarter. Concessions remain stubbornly high across many of our markets as cash concessions for the quarter averaged 2.2% of market rent, a bit lower than the 2.6% last quarter.

Same store expenses were up markedly posting a year-over-year increase of 9.2%. This increase was driven by two factors in particular which accounted for 5% of the 9.2% increase and are uncontrollable.

First, from unusually severe weather conditions mentioned earlier in the northeast and mid-Atlantic, which contributed about 3% of the 9.2% increase. Higher weather-related costs include snow removal, utilities and payroll. This is obviously nonrecurring and resulted in a one time impact to FFO of about 2 cents per share.

Secondly, we recently changed the way that we reflect the costs related to associates that live in AvalonBay housing. The impact of this change contributed an additional 2% to the reported increase in same store expenses, although this adjustment did not result in absolutely higher same store expenses in 2003 or impact FFO for 2003, but is merely the result of a prior year reclassification.

This adjustment will continue to impact comparable period expenses through August of this year, but, again, has no impact on total expenses or FFO for 2003. But for these two items, then, same store expenses would have increased by 4.2% year-over-year.

In addition, bad debt and insurance continued to contribute to expense pressures and together represented another 2.6% of the remaining 4.2 increase. Most other expense categories were relatively flat to marginally higher.

Shifting to development activity, we completed two communities in Q1, both in the northeast, totaling $100 million. Total development volume now stands at $550 million or about $300 million less than this time last year.

As suggested in our December outlook, we do expect to start additional communities in 2003 with the lion's share to occur in the latter half of the year when, hopefully, there is greater visibility with respect to the shape of the economic recovery.

You will note in a on Attachment 7 and 8 we have changed the projected yields on new development to include the effect of concessions which impacts the average projected yield of our development portfolio. Specifically for those communities in lease-up we are reflecting the average rents net of concessions experienced to date.

For communities not yet in lease-up, we have incorporated a one half month concession into the projected rents which is about twice our historical average, but a bit less than what we are currently experiencing. The overall impact of concessions for the projected yield for the development portfolio is about 60 basis points resulting in an average projected yield of 8.5% versus the 9.1% we reported last quarter, which yield was gross of concessions.

In other words, the projected economics for our development portfolio are in line with what we reported last quarter. We're simply now just incorporating the effect of concessions.

For communities in leaseup, average rents and absorption are generally in line with our annual plan while lagging original pro forma projections. More specifically, of the 2600 homes that are completed to date in the lease-up portfolio, just over 2,000 or about 78% are currently leased at net effective rents consistent with our annual plan.

I'd like to turn now to dispositions. In Q1, we closed on one disposition in Southern California of $47 million at a projected cap rate of just under 6%.

We expect to close an additional $150 million-plus in Q2, including most of our portfolio of Minneapolis, which is a market we intend to exit in 2003. The transaction market continues to be strong, as interest is broad across various types of investors, including institutions, private companies, and some REITs.

Clearly, private equity of all kind continues to flow into real estate. Across our markets, cap rates are generally below 7%. And in certain cases below 6%.

Given the continued strength of the transaction environment, we are prepared to expand our original disposition plan of approximately $300 million by about $100 million, plus or minus, in 2003. Any additional transactions would likely occur in Q4 and ultimately our decision to sell more assets will be a function of valuation, balance sheet considerations, and use of proceeds.

In summary, operations are performing in line with expectations through April and reflect a difficult environment for rental housing that is neither producing jobs as Bryce spoke to nor deterring home purchases.

As we stated in our early outlook, we expect that revenues will continue to decline on a sequential basis in Q2, although at a moderating rate relative to past quarters. Given that we were just entering the high leasing and turnover season, the next three to four months will be a very important period in determining our overall operating performance for 2003.

With that, I'd like to turn it over to Tom, who will discuss financial highlights for the quarter.

Thank you, Tim.

There are three topics I'd like to cover this afternoon. The first being additional details on the components of our earnings results for the quarter. Secondly, how these and other factors are impacting our financial outlook and our financial flexibility.

And finally, some of the disclosure changes and clarifications regarding Reg G, the new SEC regulation on financial disclosures.

In terms of earnings components, as Tim mentioned the $14 million gap gain on the sale of the Southern California community boosted EPS but was appropriately excluded from FFO. And again, other than weather, as Tim mentioned, our operating performance was largely as expected.

It's important to note that in 2002 we did our financial planning was pretty intense and we have -- which has led to improved predictability over near term operating performance. With additional data, we were able to refine our ability to correlate projected revenue to third party employment forecasts. And we are pleased with the enhanced predictability that these correlations provide.

Capital activity during the first quarter was important to reported earnings. Common stock totaling of $40 million was repurchased at an average price of about $36.24 with more purchased and at a lower price than we had expected to achieve.

$81 million of preferred stock was redeemed and $50 million of unsecured was also retired -- unsecured debt. Floating rate for preferred security that we issued during the quarter to facilitate the preferred redemption has now been called.

It is important to note through all these capital transaction that common stock preferred debt redemptions are being funded through asset sales and a balance sheet neutral to positive way. And we do have a very large pool of assets to select from, which many are largely unencumbered.

These unencumbered assets are more marketable and we are able to achieve better pricing from them. So executing this strategy as Bryce mentioned of selling assets, redeeming public securities allows us to benefit from this misalignment and the market valuation of our assets. And as Bryce noted, this contributed meaningfully to earnings in the first quarter.

As far as the outlook, we did achieve better than expected results in several below the line areas, including interest costs and the positive effect of retiring more shares at a lower cost. Some of these items impacted just first quarter, but some do carry over and benefit future periods.

These benefits are likely to be offset later in the year from additional asset sales and possibly a continued challenging revenue environment that historically follows job losses. Specifically, the additional common shares retired over our expectations during the first quarter will benefit earnings for the rest of the year.

Note that the 8% preferred redemption of $81 million and the repayment of the $50 million at 6.5% notes were completed as planned. Interest savings may also carry into future quarters. Our budget did not anticipate that the short-term rates would fall lower than the historical levels present in December.

Further, several fixed rate financings did not close as scheduled in the first quarter. We expect these financings to close later in the second quarter. For the benefit of these -- of short-term floating rate debt will persist through much of the second quarter.

While these positive events went our way, the job picture for 2003 remains weak. Correlating February and March employment data and revised job forecasts to revenue later in the year, suggests that some of the benefits we expect to see in these nonoperating categories, these capital transaction categories, could be offset by a continued weak revenue environment.

Also, if we were to expand the disposition position program, it would adversely impact FFO later in the year as sales proceeds will be initially used to reduce outstanding balances under the credit facility. As Tim mentioned we are coming into the peek leasing period custom will allow us to better gauge near term results but we can't affirm today the FFO range of $3.15 to $3.35 provided in December.

We did provide initial outlook for the second quarter with an FFO range of 79 to 84 cents per share. Sequentially, we expect FFO per share to decline in the second quarter before flattening out.

For sequential NOI, we expect a decline in the second quarter and the third quarter with fourth quarter NOI flat compared to the third quarter. A short-term diluted impact of expanded asset sales and facility paydowns is included in our revised projections.

Looking through the credit facility reduction from these sales to how we ultimately apply the proceeds from the expanded dispositions, depends on real estate and capital conditions at the time of the sale. Possible uses include debt repayment, funding previously planned redevelopment activity and possibly additional common repurchases.

Increased dispositions and additional liquidity will enhance our financial flexibility, give us additional options and will ultimately be balance sheet neutral to positive. This position to demonstrate how we can self fund our capital needs while optimizing the capital structure.

Finally, let me turn to the new Reg G, which was effective in March. And I would refer you to Attachment 13, which supplements our disclosures and supports our compliance with this new regulation.

Reg G requires any oral or written disclosure of a non GAAP measure to be accompanied by, first, a presentation of the most comparable GAAP measure. Secondly, a reconciliation of the non GAAP measure to the comparable GAAP measure. And finally a statement about why management believes that that non GAAP measure is useful. This enhancement does add additionally clarity to our previous financial disclosures and we're pleased to provide it in the Attachment 13.

In summary we are encouraged with the enhanced predictability of our operating results. This was a busy quarter for capital markets activity which facilitated our efforts to reduce the gap in the value of our public securities compared to private market valuations.

This was enabled by a strong balance sheet that offers broad financial and operational flexibility to respond to market conditions both in the real estate and the capital markets environment. And we enhanced and clarified our financial disclosures pursuant to Reg G.

While the economic uncertainty persists, better than expected first quarter results combined with the carryover effect of our capital transactions and improved confidence in the predictability of operating trends, allows us to affirm the overall range of 315 to 335 provided in December.

With that I would like to turn the presentation back to Bryce.

Thanks, Tom.

So despite continued weak market fundamentals there were a few surprises on the operating, there were very few surprises on the operating side. With the exception of the extremely difficult winter, our portfolio performed as expected. And while we are not yet showing signs of improvement, the rate of revenue decline continues to diminish.

Certainly, our portfolio operating performance is a principal driver of our results. Yet particularly during times like these we are always looking for ways to create value beyond just our core operations.

The quality of the assets, the strength and the cleanliness of our balance sheet provide us with considerable flexibility. And you saw us utilize this flexibility this quarter.

On our conference call in January, I outlined in my comments five key areas of focus for AvalonBay this year. I want to briefly recap and update you on these.

First, I indicated a keen focus on our portfolio performance. Really aggressively manage the portfolio with a key focus on maintaining occupancy and controlling expenses. I can assure you we remain committed in this area.

Secondly, I talked about being cautious in new development starts. And we certainly have acted that way. We completed two communities this quarter and started none. As Tim mentioned we'll selectively begin a number of new communities this year, we do expect our volume of new starts to be about half of what it was last year.

Thirdly, I indicated we would be aggressive on the disposition front. As we mentioned we closed on $50 million so far, expect to close another $150 million in the second quarter, and we are prepared to expand as conditions warrants.

Fourth I indicated our commitment to maintaining a strong balance sheet. And we certainly are committed to both the strength and the flexibility of the balance sheet. As Tom mentioned the share repurchases to date have and any future repurchases would be executed in a balance sheet neutral manner.

And fifth and importantly, I indicated that we wanted to ensure that we were agile and we were prepared to capitalize on opportunities that would present themselves that you couldn't necessarily always plan for.

Our 2003 outlook that we provided in December has so far correctly anticipated the difficult market conditions that will likely persist throughout the year. And yet it is only a plan. And we have already and will continue to adjust that plan as opportunities present themselves.

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, then the number 1 on your touch tone phone. If your question has been answered or you wish to remove yourself from the queue, please press star then the number 2. If you are using a speaker phone, please lift the handset before asking your question. Again, if you do have a question, press star then the number 1 on your touch tone phone. One moment please for the first question. And your first question comes from Brian Legg with Merrill Lynch.

Hi. Can you all separate out the discontinued operations, separate out the West Side Terrace from the assets you have held for sale? And I guess the expected gross proceeds from those assets held for sale. It's going to be $150 million, but can you give us a sense for the timing of those sales?

Brian, this is Tim Naughton. I can speak to the timing. And I'll let Tom speak to the total impact. The timing of that would be in the latter half of the quarter. Virtually all that $150 million. So from May 15th through the end of the quarter.

And how much of the NOI that you reported in the quarter from the discontinued operations represent West Side?

Brian, what we provided was just the net income. I'd have to get back with you on how much of that relates to just operating income.

What might make that easy, Brian is that that transaction did close at the end of the quarter.

Okay.

Okay, and I think we disclosed the cap rate in one of the attachments to get a sense of what the NOI is.

In fact it closed on March 31st.

Okay. That's helpful. And looking at your sequential declines, how much of the 80 basis points sequential drop in rental rates and 50 basis points sequential drop in economic occupancy would you attribute to seasonality and how much of it would you say is just the weakening markets?

Just by virtue of the fact that there is less turnover, if that's what you mean by seasonality, Brian, the 80 basis points would be less than it otherwise might be say in the second or third quarter when you've got higher turnover because you still obviously have rents that are rolling over at lower rents. For your calculations, generally you can figure in the first quarter and fourth quarter you get about 20% of your move-ins in each one of those quarters and in the second and third about 30%.

Are you seeing any trends that you're nearing a bottom? You said that you expect NOI to turn up in the fourth quarter. Is there anything that's telling you that that might occur or is it just general forecasting? In other words are you seeing any trends in traffic or turnover that might give you some hope that we are nearing a bottom?

Brian, this is Bryce. Let me comment briefly on trends in the sequential revenue. And then Tim may want to comment on trends in traffic.

But to your prior point when you asked about sequential revenue and how much of that trend and how much of that may be seasonal. Just as a point of reference, the reduction in revenues from the fourth to the first quarter was 1.3%, as you identified. That's made up of both rental rate and occupancy.

A year ago, the trend from the fourth quarter to the first quarter was at 2.1% sequential revenue decline. So over the same period in order to adjust out seasonality, you can see, as we've stated and throughout our script that the rate of decline is diminishing when you compare either same calendar periods or just sequentially quarter to quarter. We see that declining. That's important and positive, and yet it's still declining.

And that's one thing we want to make sure is being heard clearly is that, you know, negative revenue growth is not a good thing, and we are still experiencing it. The fact that it is diminishing is a sign that the markets are beginning to stabilize, but until we see positive job growth, until we see a material letup in the strength of the single family marketplace, or until we see a material reduction in the new supply of apartment homes, the demand/supply will continue to be out of balance and will continue to result in revenue pressure.

Brian, this is Tim. I'll just add a little bit of color there. In terms of portfolio performance on the market rent side, I think we quoted that the market rents were down about .7% sequentially which is a lower rate than we've been seeing. So they are only down about 2% year-over-year. Obviously, concessions are up year-over-year. But then when you look at concessions on a sequentially basis I think I mentioned they have gone from 2.6 to 2.2. We've got less move-ins in the first quarter but concessions per move-in actually declined somewhat. So there are a lot of signs that would suggest it's moderating.

With respect to traffic and turnover. Traffic actually was down year-over-year. Part of that was weather-related, on the order of 10%. Turnover was actually down from 51% to 47% year-over-year but was in line with what we expected. With turnover going down from 51 to 47%, that's about a 6 or 7% decline in move-outs. That actually bodes well a bit given the high level of turnover that we saw last year.

And last question. With your stock price over $40, does that change your analysis of what you do with the use of proceeds from asset sales?

Brian, this is Tom. You know, clearly, there is always tension between the stock repurchase versus other uses of capital. In a period where our stock price is rising versus languishing it becomes less compelling to buy back the stock and more compelling to consider other uses of capital.

We're going to continue to look at the stock price and continue to apply capital in a way that gives us the highest risk adjusted return. But I think it would be fair to say that we will probably be buying less at 40, and certainly during the quarter demonstrated that we were more aggressive in the 35, 36 range. But we've bought stock back in a range throughout the stock buyback program of roughly 36 to 43. So, you know, we've been buyers over a wide spectrum of our stock price.

Great. Thank you.

Your next question comes from Rob Stevenson with Morgan Stanley.

Good afternoon, guys. Bryce, can you talk about what the overhead savings is going to wind up being from the exit from Minneapolis and what that sort of bodes for Chicago, where you only have about 1300 units?

Well, let me back up a little bit, Rob, just to maybe amplify a little bit on our decision to exit Minneapolis. And then Tom may want to talk a little bit about the overhead, which is not a material issue. But let me deal with it strategically, first.

As you know, and many on the call know, we were a number of years ago in as many as 30 markets throughout country. As a result of our really thorough strategic review concluded that that was too many markets for us to gain the scale that we wanted to to drive the results that we choose to in those markets.

So over the past frankly four years, we've been exiting a number of markets. And Minneapolis was one that we identified based upon its long term supply/demand fundamentals combined with our relative small concentration in there was a candidate for exit. In terms of when we choose to exit markets or when we choose to sell assets, I think we have shown pretty good discipline on that. We don't need to sell assets but when the time is right, and we think the time is right in Minneapolis to execute on a good transaction, we are choosing this as a time to do that. That's really what is driving the decision.

In terms of overhead, I'll touch on that. We don't have a large regional office in Minneapolis. It was not what we might call a full service market. It was five assets being run without a development presence or construction presence in that market area. So you wouldn't except to see any material change in terms of overhead from that.

In terms of your question about Chicago, they are unrelated, meaning our decision in Minneapolis is based upon the fundamentals of Minneapolis. Chicago is a fundamentally different market with different drivers to it. It is a market as you alluded to that we have a small concentration in and will be looking to either increase that concentration, or if we can't do that in a prudent way, you know, we will consider other actions at a different time. But we have no intention or no plan at this time to exit Chicago.

Okay. Tim, what are you guys looking for in terms of second quarter turnover here?

Rob, I don't have the number off the top of my head. I can tell you what we budgeted for the year. We budgeted 58% turnover for the year and we had 47% in the first quarter. And generally it runs, like I said earlier, it runs at about a 1.5 multiplier from first quarter to second quarter. So you are probably looking at something in the mid 60s.

Okay. And then what has been doing on in D.C.? Can you give us a little bit more color on the operations in that market? We've heard a bunch of your competitors say that things are really weakening there due to construction. You guys operate in a variety of submarkets. Is there any particular region holding up better than another, especially given where you guys went with the concessions during the quarter?

Yeah. I would say generally it's softer, the overall D.C. area, which you implied in your remarks. You know, rents are down. Market rents are down. Concessions are up in that market. It's actually one of our higher concession markets. You are seeing one-month prevalent on leaseups. Oftentimes on stabilized properties as well.

We are just starting to see the beginning of some job growth in D.C. The last couple of quarters we have actually lost jobs on a sequential basis in D.C. But it appears that we're starting to gain jobs with some of the increased defense spending that we've heard about is probably starting to work its way into the job markets. And we have seen from an occupancy standpoint, at least it's starting to stabilize here in the last couple of months, albeit with higher concessions.

Northern Virginia and downtown D.C. are certainly weaker than suburban Maryland. Largely as a result of the supply side. One positive thing that's going on in the market, you are starting to see some condo conversion. Two or three deals in northern Virginia and couple of deals, one of which I know of that's been announced downtown. But I know of five, six, seven other deals downtown where developers are seriously considering converting. And I would be surprised if at least two or three of them didn't convert. That's helping a bit on the supply side.

Have you guys looked at any of that for your portfolio in the region?

No, we haven't for our own portfolio.

Okay. And then lastly, Tom, what are you guys looking at in terms of economic impact from Sarbanes-Oxley and the 404 and all that other implementation for the year?

Rob, there is pain from it, but in terms of economic impact to the company -- I mean in terms of additional corporate governance costs?

Yeah, some companies have added new personnel to deal with some of the reporting stuff from the Sarbanes-Oxley and the 404. Some have put in new systems to help them deal with it.

Well, I understand your question better now. We have a pretty good infrastructure. We have our -- we have a legal department. We have a large staff of CPAs that do a lot of our accounting.

But we are having to expand and enhance our internal audit department. So there are some additional costs there. It could be a couple, $300,000. That is already included in our projections. But I think that the single largest item there would be related to internal audit. We have an international audit group now -- or a function now. It's not a staff the way we think we need it to be under Sarbanes-Oxley, and also to make the certifications we need to [INAUDIBLE] 404.

Okay. Thanks, guys.

Your next question comes from Dan Oppenheim with Banc of America Securities.

Thanks. Just wanted to ask about the disposition program with the potential to sell more assets. Are you targeting other markets other than Minneapolis not necessarily for exit, but to reduce your exposure as you expand the disposition program?

Dan, this is Tim. It's really a mixed bag. Kind of one off dispositions. But we are looking at them on an asset by asset basis based upon where we think we can get a good execution [INAUDIBLE].

And then wondering about the development starts for the year. With the comments that -- about the sluggish economy, wondering if there is a potential that starts could be even lower than 50% of last year's level if the economy remains weak through much of this year.

Well, Dan, until we begin a deal, we are always going to be evaluating the viability of it and our decision to move forward. But as we sit here today, based upon the outlook, we would expect that we would begin that volume. So we're just going to wait and see until we are actually -- you know, one of the reasons we planned it the way we did which is most of the starts being in the second half of the year was to give us a better insight into how the year was shaping up.

As I indicated and Tom indicated in his comments, the last couple months from a job point of view have certainly not been pretty. GDP coming in lower than expected. Job losses being higher than expected, unemployment claims being higher than expected. There is not a lot of positive signs on the economic front. But it also was a very weird quarter, certainly with the international situation. Though I think next quarter is going to be important for us to see both how the economy is doing, and also how it's translating into operating fundamentals.

Great, thanks very much.

Your next question comes from John Litt of Smith Barney.

Hi, it's Jordan Sadler here with John. Just trying to get my hands around the total sources and uses of capital throughout the year. Obviously, you have plans to step up your disposition program. Just, Tom, could you tell me the rate on maturing debt coming due? And did you mention if the preferred J have been redeemed and what the new rate would be on that? Would it be a fixed rate?

Let me answer the last question first. The preferred J has been called, and it will be redeemed in May. The replacement capital for that ultimately would be asset sales. But it would immediately be funded under the line.

In terms of overall sources and uses of capital for the year, we have essentially asset sales of about $400 million -- 350 to $400 million. We have committed debt that will fund another $75 million. And those uses would be development and redevelopment of between 300 and $350 million and securities redemptions of about $130 million. That's kind of a broad outline of our sources and uses of capital for the year.

In terms of that debt deal that's due. I guess it's a July debt deal. It's in the 6.5% range. That's what I recollect.

Okay. And that's roughly $100 million or so?

It's $100 million exactly, yeah.

Okay. I guess -- and what are your, Tim, your cap rate assumptions for the dispositions? You mentioned in most of your markets better than 7%, and some 6% or better. Is 6.5 a good number to use?

It's probably as good as any, Jordan. Most of the things we are marketing today are kind of mid 6 range.

So I guess from a capital transaction sources and uses, Tom, going back to -- I guess, what is the -- are you expecting any total dilution associated with these transactions or will it continuing to accretive?

Well, whenever you sell an asset at 6.5 and you repay a line at less than 2, it's going hurt for a period of time until you redeploy that capital permanently. So yeah short-term dilution absolutely, and it's material.

I guess from an operational prospective, I noticed a blip in the Midwest. Was that related to the snow removal and the cold winter or is something else going on there?

I think some of it was, Jordan, utilities, certainly with gas prices going up. But the other thing to keep in mind, the Midwest has four assets in Chicago. So it could just be a single asset that is an outlier for a quarter that can drive that.

Okay. And I know you guys don't provide loss to lease or gain to lease, but could you give me a sense for maybe how that has changed? I think you used to provide it at year-end. I don't remember you providing it this year obviously the gain to lease. Has that changed at all? Can you give me some color on that?

Jordan, this is Tim. It's pretty close to zero and really hasn't changed much in the last couple of quarters.

Okay. Thanks.

Next question comes from David Kostin with Goldman Sachs.

Question for you, Tom. Given the current environment where municipal governments are seeking additional tax revenues. Are you able to go back and contest the tax bills for some of your assets? Interesting thing your revenues have been coming down but the argument on the asset value has been rising. Is that an area that you have been pursuing in terms of reducing your expenses on the portfolio?

David, it is. And your question is a good one. We did budget about 5 to 6% increase in property taxes for the year. What we are finding is that it could come through property tax assessments, it could come through on a new gross receipts tax. There is a lot of different levers the local governments can pull to tax a REIT or a property and we've seen all those tactics used. And we fight them aggressively both individually and through trade associations like [INAUDIBLE].

In terms of going back and getting relief under existing assessments, we have done that. We filed a Prop 8 in California on about 13 communities, which is a way to reduce your property taxes based on lower operating income. We haven't gotten an answer yet on those Prop 13 filings. But we have been aggressive on 13 communities to go in and try and get relief.

Thank you. And a question for Tim. The genesis of the asset sales, are these buyer driven? Are they coming to you looking to purchase a community? Are you hiring a third party broker to sell your assets? How is that process working?

We almost always hire a third party broker, David. It is a very expensive marketing process that generally goes through a number of rounds. And where we go through a couple of different iterations of sending out flyers and broker packages. It is a professional marketing process.

And could you characterize the buyer of the asset of 5.9% cap rate. Whether that's institutional or is that individual or family. And also, what kind of financing might have been used? Was it Fannie Mae financed on the acquisition side?

I don't recall the financing. It was a small private leveraged buyer that was looking at it as a 1031. It tended to be more of a smaller private equity guy.

Thank you very much.

Your next question comes from Andrew Rosivach of Piper Jaffray.

Andrew Rosivach, CFA: Good afternoon. A couple of questions for Tim on the outback side. First, how much will sequential expenses improve from the first to second quarter when you get out of the winter related costs? And secondly, I wondering, if turnover's going down is that going to help your outbacks because Avalon in particular expenses virtually all of its turn costs?

Let me deal with the first. On a sequential basis I normally don't look at it that way. Year-over-year I think you can expect it to be in the low to mid single digits, consistent with what the initial outlook we had given in December. So whatever that works out to be on a sequential basis is what it is. I'm sorry could you repeat the second part of your question, again?

Andrew Rosivach, CFA: The second one, I'm wondering, turnover is coming down, and that doesn't mean a lot for a lot of guys who frankly cap all of their turn costs. But since you don't, and you expense them, I'm wondering if you are going to get some savings on the outback side.

I wouldn't count on savings because we budgeted lower turnover this year than we actually experienced last year. I think I mentioned earlier, last year we had turnover of 62% which is the high end of what we have seen over the last several years. To give you a sense of the range, the low end has been 54%. We budgeted 58%. And right now it's running 4% less than it did last year. So I'll tell you right now, with respect to turnover related costs, we are more on less on budget year to date.

To the extent that we do get benefit from lower turnover than that, generally the variable costs are close to $600 a turn. There is certainly some additional fixed cost in terms of -- not additional staffing, but in terms of staffing that's needed to show apartments and you know, do some work on those particular units. But they are already on staff. So the variable cost tends to be more like $600 a unit.

Andrew Rosivach, CFA: Okay, also for Bryce or Tom. Just a follow-up on the debt question. I'm trying to figure out, are you going to refi the $100 million that's left with another piece of long term debt plus something else or are you willing to let some debt float considering only 6% of your capital structure right now is floating rate?

We're willing to let it float for a while. But ultimately, as I've gone through the capital plan on another question, we are self funding largely this year through dispositions. And that is the -- one of the uses of proceeds from these dispositions is to refinance the debt -- or is to redeem the debt and not necessarily refinance a debt that comes due in July.

So we don't necessarily need to go out and issue additional debt for it. Certainly it depends on the capital market conditions, but we feel comfortable that we've got that debt considered in our financial plan for the year and don't have a requirement to refinance it through a discrete offering.

Andrew Rosivach, CFA: Got it. Okay. And last just a technical. Do you guys pull out any assets are sitting in discontinued operations from your same store pool?

Absolutely, yeah.

Andrew Rosivach, CFA: Great. Thank you.

Your next question comes from David Harris with Lehman Brothers.

Hello, everyone. Tom, I may have missed this, but is the same store assumptions for '03 still of the order of minus 4 to minus 9, which is what I noted on your last call?

4 to 9 -- are you talking about NOI decline?

Yeah, that's right.

You know, it is in that range.

Okay. Just backing into this, and maybe I'm getting the math wrong, you did minus 11.3 in the first quarter. So that means for the average run rate for the remaining three quarters is of the order of minus 5?

Well, I think what I have said is that NOI in the second quarter will also decline. It will decline in the third quarter before turning flat in the fourth quarter. The rate of decline in NOI will diminish during that period, but it would average out you know, roughly for the year within the original range we gave you. At the high end of the range, but within the original range we gave you.

Okay. And this is a question for Tim or Bryce on the investment pricing. What makes you nervous, most nervous that the flow of capital into apartments will cease? I saw that history would suggest to us that a disconnect between income fundamentals and pricing at some point that the line that you went up would usually price reverting downwards.

David, this is Tim. Certainly when we were putting together our disposition plan for 2003 that was a concern for us. When we were sitting back in October and November as we saw a disconnect between fundamentals and asset valuations.

One of the reasons why with roughly a $300 million original plan we had indicated we were looking to close more than two-thirds of that in the first half of the year just because of concerns that frankly private flows might change, private capital flows might change. To date that hasn't happened. So we are sitting here at the end of April and we are still seeing an abundance of appetite for the product.

Just to add to that, while I agree with you intellectually that ultimately things tend to revert back, I think it's important to point out that cap rates are so driven by interest rates. And to the extent interest rates remain low, you can expect cap rates to remain low. In fact, the spread over the 10-year treasury to cap rates is close to its all time high.

Even if rates started to back up a little bit it doesn't necessarily mean cap rates are going to back up on a equal percentage basis. Implicit in your question is that the gap between private and public will be narrowed by private cap rates rising. It might be the public side where the valuations need to be adjusted.

Your sense though is that there is plenty of capital that enables you to be fairly comfortable that you can be achieving nicely priced sales right through this year?

Well, yes, that's our assumption but as we have stated, we have base plan for acquisitions which is $300 million and we have identified another $100 million that we are starting the planning process on. But to the extent the market conditions don't support it, we don't sell them.

What sort of time frame are we talking about from your decision to sell an asset to being able to close? Is it three to six months as a fair window?

It is, but oftentimes from contract to the time which you are legally obligated to sell the assets to closing is much less than that, oftentimes, two months or less.

Two months. Okay, great, thanks, guys.

Your next question comes from Chris Grimm with Lehman Brothers.

Lehman's got the 1-2 here. Tom, can you tell me what type of consideration you give to your fixed charge coverage when considering stock buybacks? You talked about the balance sheet neutral. We appreciate that but with coverage ratios declining on declined earnings, can you tell me how you balance those two?

First, Chris, let me mention that coverage ratios have been declining from historically high levels. They are still very strong. I would like to get that infomercial out first if I can.

Secondly we do consider fixed charge coverage. It's one of the principle drivers I look at every quarter. Fixed charge coverage was a principle consideration as to why we redeemed that preferred in the first quarter and did not buy back additional stock.

So I think we have done a pretty good job historically of balancing the needs of all of our constituents whether they be debt or equity. But we absolutely considered it and we would have been able to have more accretive earnings in the first quarter and the rest of the year had we redirected that $81 million to buy back common stock. But we didn't, we redeemed the preferred and I think that answers the question pretty well.

Okay. Also, if you could, Tom, if you could talk about your results in the first quarter relative to your guidance. It sounded like the operational side may have been a little bit of a shortfall where the capital structure side and the expense may have been a benefit.

No, Chris. We were remarkably close to our operating plan. That's one of the things we would like to communicate is that we really nailed it on the operating side. It is an ugly time to be operating apartments but we were pretty predictable in what we achieved.

Okay I wanted to get that clarification. Thanks.

Your next question comes from Lou Taylor with Deutsche Bank.

Hi, thanks. Bryce or Tim can you talk about occupancy levels in your markets vis-a-vis your public or private peers? Did you get the sense that the public companies were possibly getting occupancy share from the private operators?

Lou, it's -- this is Tim. I don't know that I would necessarily conclude that with respect to apartment communities. I think you can probably conclude that with respect to private rentals. By that I mean when you've got single-family homes and townhomes and condominiums out there where folks are renting. I think you can quite safely conclude we are getting some share from them. But with respect to some of our private operator brethren, I don't know that I would conclude that.

Okay. Thank you.

Your next question comes from Craig Leopold with Green Street Advisors.

Tim, could you just expand a little more on the accounting changes as it pertains to your employees living in units? You indicated that it had a negative impact on expenses. Is it safe to assume that it had a positive impact on revenues as the offset?

I think I will let Tom handle that as the CFO, actually.

I think I will let Bryce handle that as CEO.

Actually, Craig, every year we have some classifications on certain income statement line items. We did reclassify certain income statement categories for 2002 to conform with 2003 presentation. And again, while there is no impact on EPS or FFO or even the absolute level of expenses, it does impact comparisons, primarily the same store expense line.

There are some other places it affected. It spread in several categories, including other stabilized, leaseup, expense and revenue and G&A. So it's really a smorgasbord. I think the important thing is that this negative comparison will end in August at which time the classifications between years are consistent and the negative comparison will go away.

But the offset wasn't a positive impact on same store revenues?

There was some modest, but it wasn't material.

Okay. And one other question. In a market -- this is specifically Northern California, where we've seen an increasing disparity between rental rates and home prices. Have you guys started to see any change in terms of the level of move-outs for home buying activity in that market?

Craig, this is Tim. Truth of the matter, move-outs for home purchases have always been pretty low in Northern California where they might be on the order of 20% for the portfolio, they typically have been half or less than that in Northern California. And I think last quarter it was on the order of 8 or 9% for Northern California for the move-outs related to home purchases. I don't think there has been a material trend down. Maybe on the order of 1 or 2%. It is at the margin.

Okay. Thank you.

Your next question comes from Rich Henderson with Max Corp Financial.

Any buyback activity in April? I saw you had about $10 million left in your current allocation.

There was no buyback in April. We have to pretty much conform -- this is Tom Sargent by the way.

Hi, Tom.

We generally conform to trading windows. And there are certain windows where we can't trade as officers. We honor those same windows with respect to the company. And so in April there was no buyback activity.

Regarding second quarter results, what have you historically experienced in terms of the increase in traffic during the heavier leasing seasons? And what do you need do in terms of a hit rate during the second and third quarter in order for you to, you know, get comfortable and make your numbers for the year?

Rich, this is Tim Naughton. As I mentioned earlier, move-outs are structured in such a way for our lease expiration matrix to conform to what we believe is seasonal traffic patterns to be.

Okay.

Like I mentioned earlier, if move-outs are expected to be roughly 150% in the second quarter than they are in the first quarter. That's what we expect for traffic as well. In terms of closing ratios we generally operate in the 28 to 32% range. That's what we would need to be at in order to stay roughly level.

Can you say where you were in terms of a closing ratio this time last year, well second quarter '02?

Second quarter right around 30%. This quarter we are 30%. I think first quarter last year was actually 28%, and fourth quarter of 2002 was 32%. It generally trades right in that narrow range, 28, 32. And we generally adjust pricing to make that happen.

Once again ladies and gentlemen if you do have a question, please press star, then the number 1 on your telephone key pad. The next question is from Mark [INAUDIBLE] with Spectrum Advisory Services.

My question relates to the Pacific Northwest and a relatively small percentage of your operating income comes from there. Is that one of the markets that you may decide to exit? And second question is, which markets are you looking to add when you begin to get back into an acquisition mode?

Mark, this is Bryce. Seattle is a market that we have a relatively small presence in, but not insignificant. It is larger than our presence in Minneapolis or Chicago. In terms of Seattle, we are taking a wait and see attitude, if you will. It is a market that has had some pretty significant structural changes to it from an employment point of view. And we have not made a decision to exit that market. And we will just continue to monitor that.

In terms of additional markets, we have no plans to enter any additional markets. Our strategy of growth is based upon more deeply penetrating our existing markets to gain greater scale in them. Many of our markets, and we've talked about some of them already, whether it's Chicago or Seattle or Southern California, we have a relatively low concentration in today doesn't mean that all those markets we would necessarily want to be increasing our concentration in, but we have numerous opportunities within our existing markets. And that's where we would look to grow first. Tim, do you have something you might want to add?

Just in terms of portfolio allocation, Mark, I'm not sure if that's where you are headed.

I was actually asking where you were thinking of -- once you begin making acquisitions again, which markets that you are in would you consider?

Sorry, Mark, I thought you meant new markets. Okay, Tim, do you want to?

In terms of over time, not necessarily this year or next year depending on market conditions we would look to increase our concentration certainly in Southern California and over time decrease our concentration in San Jose and probably Fairfield as well.

That's helpful. Thank you.

You bet.

Your next question comes from David Ronco with RBC Capital Markets.

Hi, guys. David Ronco here with Jay Leupp. I wanted to get an update on Avalon at Mission Bay, if we could. Wondered if leasing activity velocity has picked up there at all perhaps in April? Also wondered what concessions were looking like at that project and if there are concessions, obviously, have they affected your expected yield on the project?

Sure, David. This is Tim. In terms of leasing activity, I think we've been running at a rate of about 20 apartments per month at Avalon at Mission Bay. I can't -- off the top of my head I can't tell you how we did in April relative to prior months but I would imagine we did that or maybe just a slight bit better. Clearly there are concessions in that marketplace -- or concessions on that property. And market rents have fallen.

In the Attachment 7 we did the average rent that we show there is intended to be the average effective rent. So it is net of concessions. You will see that it dropped probably on the order of about 7 or 8% just this last quarter. That's largely the impact of concessions. But there was a decline in market rents there as well.

Okay. And then any changes as far as you expect to yield on the project?

Certainly. If concessions are going up and market rents are coming down, the yield unfortunately is going down as well. So it is a low yield.

Okay. Thanks.

Sure.

Your next question comes from Jessica Tolle with Real Estate Management.

Good afternoon. I was intrigued by some of the comments that you all made about your forecasting models. And one of the questions I wanted to ask was, one of the comments was that you mentioned the challenging environment that often follows job losses. So when you've back tested all your models are you starting to see that maybe job losses are more of a lagging than a coincident indicator?

This is Tom. Job losses are a leading indicator.

Okay.

So, you know, what we've found is that six months following a change and the rate of change of jobs there is a very high correlation to the change in the rate of change of our revenue. So the job losses that occurred in February and March, if history holds true, will affect us in the fourth quarter.

One has to question what happened in the first quarter in terms of job losses? Is that something that's going to be a trend or is that seasonal, weather or war related? So that's really the ambiguity that we find ourselves, or the problem that we find ourselves having is trying to gauge the impact of that job loss and is it a sustainable thing or is there going to be a recovery once -- now that the war is over and the weather issues are behind us

Thanks.

Yes.

Your next question comes from Rich Moore with McDonald Investments. Hi, guys, it's actually Dave Rogers here with Rich.

Two quick questions for you. First if you could give any thoughts on the equity from the joint ventures. The income on the equity from joint ventures. Last year it definitely trended downward. Just trying to get an idea of what to see there. And the second question I wanted to offer was, insurance and bad debt expenses relative to your expectations at the beginning of the year and what you expect to see for the remainder of the year.

Is it David or Rich?

It's both of us.

Oh, hi, guys. David and Rich. Well, guys, first question, on the income from joint ventures, that principally is technology company losses the we took through FFO last year which are gone. That will not be a continuing trend this year.

In terms of bad debt expense, it's running in the .75 to 1% of revenue range which is pretty high. That's been high for about a year to 18 months. And it's coming in pretty much as we expected. Your other question about insurances, the answer there is, we walked in on most of our renewals in August and in November. We don't see any changes from our forecast on insurance. We have noticed some recent softening in the insurance markets. Hopefully that's a leading indicator that we'll have a better renewal season this year than we did last year but expect it will come in on budget with regard to insurance.

Thanks a lot.

Your next question comes from Richard Fioli with ABT Investments.

Hey, guys, just a quick question on capitalized overhead from I guess Attachment 1. It seems like the trend has been trending down. But you speak to increasing your development activity this year. What -- I guess later on in the year. But what can we expect on this number going forward for the balance of the year?

Well, this is Tom. On the capitalized overhead, part of the reason that is down is we regrettably for everyone bonuses were lower this year than for prior year and for obvious reasons. And we did reverse some bonus accruals that drove that number down probably disproportionately this quarter. I would say if you were to add $300,000 to that number you would be at a fairly good run rate.

So about $3.3 million, 3.4 per Q?

$3.4 million per Q, not 33, right?

Okay. Thanks.

You have a follow-up question from David Kostin of Goldman Sachs.

One quick question. You had an 8% coupon preferred which you smartly -- you've refinanced. And you had the interim step where you had -- you issued for a brief period of time the floating rate preferred stock and then you finally refinanced that. Can you explain to me why you had to take that away and took that interim step?

Yes. David, it's I guess a long and a short story. Let me try to make it short. Under the charter a lot of these preferred deals that were done in the mid 90s had a provision that you would only redeem them from capital stock. To facilitate that redemption, we had to issue capital stock to take it out.

The terms under which you issue capital stock are not well defined and we elected to issue a floating rate preferred to an institutional buyer. And we could leave that out longer term if we would like, but it is a floating rate preferred. And if we are going to have floating rate in a capital structure we would like to do it in conventional ways, and that would be primarily through the credit facility. So it is our intent to take it out.

But it was part of the -- you know, the requirements to get the legal opinion to deem that preferred that we issued that floating rate preferred. It is capital stock. It meets all the definitions. And we could leave it outstanding if we elected to do so, but we think that we would rather take out and use our line. If we're going to have a floating rates at capital structure, we would just assume it at the end of the line.

Thanks for clarifying that.

Your final question comes from Ralph Bullock with [INAUDIBLE].

Are you seeing any anecdotal evidence that there is any kind of a slowdown at all in merchant building activity in some of your markets maybe within the last 30, 60, 90 days?

Tim?

Ralph, this is Tim Naughton. It depends on the market. I can tell you in D.C., no. We are still seeing starts on the order of 8 to 10,000 on an annualized rate in D.C., which represents probably about 2.5% of the existing stock. And a lot of that is coming from private builders. You know, largely merchant builders, not investment builders. You know, other markets, it's probably pretty commensurate with the public companies to be honest in terms of level of production. Bryce?

The only thing I would add to that is just to highlight something Tim mentioned earlier. That we are seeing -- it's not just anecdotal evidence. We are seeing developers who are planning to do things with apartments, convert them to condominiums. So the buildings are continuing to be built but they are not competing directly as a rental comp. We are seeing that in certain markets. D.C. is one where it's pretty prevalent but there are other markets throughout the country as well.

Okay. Thanks.

Operator, if there are no other questions.

There are no other questions at this time, sir.

Okay. Thank you all for participating in our call this afternoon. And we look forward to seeing you at May [REIT] in early June. Thank you for your time.

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