住宅地產 (EQR) 2001 Q1 法說會逐字稿

Good day, everyone and welcome to Equity Residential's first quarter earning release teleconference. Just a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Cindy McHugh. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us today to discuss our first quarter results. During today's call, there will be forward looking statements made including earnings projections under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties as detailed in the press release related to the operation of the company. Equity Residential assumes no obligation to update or supplement these forward-looking statements that may become untrue because of subsequent events. Joining us this morning is David Neithercut, our Chief Financial Officer, who'll begin with a financial review; pass on to Doug Crocker, our CEO, who'll provide a company and market overview; and we also have joining us this morning Gerry Spector, our Chief Operating Officer, available for comments. David.

Thank you, Cindy. Good morning, everyone. Thanks for joining us this morning. We're pleased to announce funds from operations or FFO for the first quarter this year of $192.2 million. This represents fully diluted FFO of $1.30 per share for the first quarter, a 9.2% increase of 11 cents per share over the $1.19 that we reported for the first quarter of the year 2000. These results are in line with our expectations and guidance for the first quarter. The FFO growth was driven by a strong operating performance of our core portfolio on a same store comparison for 188,220 units owned for the first quarters of both years 2000 and 2001. Revenues increased 5.5%, our operating expenses increased 6.0%, and net operating income increased 5.2%. Our same store revenue increase was the result of a 4.9% increase in rental revenues with the balance coming from increases in utility collections and other income areas. Our revenue growth for the quarter was slightly greater than expected due to continued strong demand in most of our markets, despite the slowing economy. Average occupancy for these same store units decreased slightly from 94.9% in the first quarter of year 2000 to 94.6% for the same period '01. The 6% increase in operating expenses was due largely to significant increases in utilities and payroll. On our same store basis, utilities increased 14.8% and payroll 5.7. Utilities increased due to rising rates as well as higher usage due to the colder winter in many of our markets. The electricity increased 10.3%, which actually came in slightly under our budget for the quarter. Natural gas represented the lion's share of our increase in utility costs, which went up 106% quarter over quarter. We had budgeted a 34.5% increase for the quarter. Just to put this in perspective, we budgeted same store natural gas for the quarter to be about $3.6 million and it came in at $5.5, representing a negative variance of 1.9 million or above 1.2 cents per share. Turning to the balance sheet, at the end of the quarter we had $5.5 billion of outstanding debt. Of this amount, 56% was secured and 44% unsecured. Floating rent to debt totaled 468 million or 8% of our total indebtedness. We had no outstandings on our line of credit at the end of the quarter and that remains consistent today, nothing outstanding. For the quarter, interest coverage was 3.36 times and our fixed charge coverage was 2.59 times. Capital events notable for the quarter: On February 27th we issued 300 million of unsecured notes. The notes were priced at 203 basis points over the ten-year treasury with a face rate of 6.95 and issued at a discount to yield 6.98%. We were extremely pleased with this issuance since it had been quite some time since a public real estate company had priced ten-year public debt inside 7%. As we mentioned at our last conference call, we closed in late February on our fourth joint venture portfolio with our institutional investor partner. In that transaction we contributed 11 properties totaling 3,011 units with a portfolio value of roughly $202.5 million. The transaction was leveraged 71% loan to value with $143.8 million first mortgage at 6.95% interest only. That closing increased the total real estate value of our ventures to $676 million, comprising 44 properties and 10,846 units. And in late March we issued $35 million in preferred preference units in two transactions at a weighted average dividend yield of 7.8% per annum. Douglas.

Thanks, David. As David noted, Equity posted its 30th quarterly increase and earnings on strong same store net operating income growth of over 5% for the first, over the first quarter of last year. Total same store revenues increased 5.5%, while expenses rose 6%, or approximately $8.9 million with a substantial portion of the increase resulting from the skyrocketing utility expenses, which were up 3.6 million. At the beginning of the year we increased our budget for utility expenses by approximately $10 million. However, an exceptionally cold winter in the Midwest and New England caused consumption at our properties to increase dramatically, causing our gas prices to increase over budget by approximately 2.4 million, and the ultimate utility expenses exceeding budget by approximately 1.5 million for the first quarter. Despite this variance, we believe our utility budget for the remainder of the year will be off approximately an additional $2 million, barring any of the unusual hot summer or cold fall events. The Globe Corporate Housing Division, now known as Equity Corporate Housing, produced a $1.5 million loss for the quarter. These poor results are reflective of the deteriorating economy and the resultant cutback in corporate relocations. We have separated the businesses into two distinct business units to, one, promote the Equity name and brand in selling the housing component and to facilitate cross marketing of conventional equity units, and finally to promote and expand the Globe furniture brand in the rental business. As a result of adding EQR properties to its platform, Globe furniture results continue to grow despite a slowdown in corporate housing. The first quarter EQR provided 942 rentals at an average monthly rent of approximately $160. Assuming there is no further deterioration in the economy and the utility expenses remain on the revised budget, the 1031 exchange funds are deployed without further delay, and occupancy remains in the 95 to 94% range, we're still very confident that our FFO range will be in the $5.35 to $5.40 range. Our estimated FFO for the second quarter is $1.31 per fully diluted share, reflecting an anticipated delay in redeployment of the 1031 proceeds, which currently amount to $175 million earning approximately 4.5%. We're very pleased with the progress we've made on the portfolio reconfiguration, having sold $106 million in properties and contributing, as David noted, an additional $202 million in properties to a joint venture. As a result of these transactions, we reported first quarter profits in excess of approximately $41 million, and the average cap rate on property sold this year has been 9.1%. While these sales and redeployment of capital have substantial near [term] dilutive effects on earnings, we believe such asset reconfiguration is beneficial for the long-term outlook of EQR. We currently have an additional 3,730 units under contract for a total consideration of $160 million and an additional 1,890 units under letter of intent for a total consideration of approximately $105 million. We are also in various stages of marketing additional properties as we configure and reconfigure our portfolio, and based on the current pace, we should end up the year surpassing our disposition goal of approximately $600 million. On the acquisition front, we acquired seven properties containing 1,720 units for a total purchase price of approximately $189 million. Four properties were purchased in California, the others were in Connecticut, Minneapolis, and Raleigh, North Carolina. The average cap rates ranged from a low of 7.2% to a high of 9.1%, and the average cap rate for these acquisitions was 8.2%. During the first quarter we sold ten Lexford properties in our continuing effort to reconfigure that portfolio. All assets that were sold or contributed to the joint venture were in low barrier to entry markets with the exception of a few properties in Seattle. On the development front, we presently have 19 properties representing 6,335 units committed for development totaling approximately $1.1 billion. We have another five properties with 1,742 units under review for development with an estimated cost of $361 million. At this point I am going to review the operating results of some of our markets beginning with the strongest performing market. We're now comparing 188,220 units first quarter of 2001 over first quarter of 2002. In the top markets on the total revenue basis, Boston led the pack with a 16.6% increase in revenues; the San Francisco Bay area was 16.6%; Connecticut and New Jersey area with 11.7; the northern Virginia/ Washington, DC, area with 11.1; and the LA/Riverside, California, area with 8.4. The bottom markets on revenues was led by Charlotte, North Carolina, with a negative 1.5; San Antonio with a negative 0.4; Kansas City with a negative 0.3; Richmond, Virginia, with a slightly positive 0.7; and Greensboro, North Carolina, with a positive 1.8%. It's interesting to note that this is the first time we've had few markets with negative growth in the first quarter and very strong in overall total growth, which speaks to the health of the apartment sector. As we've noted in the past, it's equally important to follow the net operating income level and not just the top line. The following is the summary of our top five and bottom five markets for NOI growth for the first quarter of the year. The best market was San Francisco with 23.4% increase in net operating income, followed very closely by Boston with an 18.9%, the Connecticut and New Jersey markets with 12.4, northern Virginia with a 10% increase, and the inland empire in California with a 9.4%. Our worst performing markets for NOI increases were San Antonio with a minus 7.4%, Memphis with a minus 5.6%, Kansas City with a minus 0.5, Chicago with a minus 3.7, Charlotte with a minus 3.5. Taking a look at the multifamily industry in general, I'd like to review certain issues that are going on right now. While the economy continues to slow, to show areas of weakness, the multifamily industry continues to post strong results. Well, I believe this is due to a number of factors. Most of the markets throughout the country are in balance without excessive new supply. The banking industry has continued to tighten lending standards, making it more difficult for developers to build new product. While certain sectors of the economy are in a depression such as the telecommunication, technology, and dot com industries, many other sectors remain healthy. Therefore, we are seeing weakness in certain markets, such as San Francisco, which are impacted by technology and dot com layoffs, but strength in recovering markets such as Dallas, Houston, Las Vegas, and Phoenix. Lower interest rates are enabling renters to purchase houses, which is a negative for our industry. However, as David noted, it is also providing us with 10-year financing rates in the high 6 to low 7% rate. And while the recently released permit numbers of 340,000 units appears to be slightly inn excess of supply, I believe we should really look below the surface to get the true sense of what is happening in various submarkets. First, on a global basis, I believe one of the causes for the increase of permits is an absolute increase in the for sale townhouse production, which is imbedded in these permit numbers. Furthermore, we have continued to see a decline in permit activity in those markets that were overbuilt or have seen substantial levels of supply over the past few years. Those markets include Phoenix, Raleigh, Durham, and Seattle. Increased permit activity in Dallas and Houston is misleading because of the lower permit activity last year due to the oversupply condition of those markets. I believe we will continue to see strong results in Dallas, and to a lesser degree in Houston, despite the increased level of permits. The markets that have seen an increase in permitting and are giving me concern are Orlando, Tampa, and in particular Las Vegas, despite its strong job growth. Atlanta is also on the watch list, given the high level of deliveries this year with an easing employment picture. Moving to some high profile markets, some of which have received a lot of press recently, San Francisco. While all of us own properties in the Bay area, we report very strong double digit revenue growth and NOI growth this year. The bad news will really show up next year as our large loss to lease burns off. Market rents in this market have decreased approximately 5%; however, effective rents when you include concessions are down over 10%. And I believe you'll see a deterioration in this market of 10 to 15% this year in effective rent that could grow to a decrease of 25% from its peak levels. Therefore, while 2001 will be another good year, I believe we will be reporting flat revenue and NOI decreases in this market next year. The remainder of California, however, remains strong. LA, Orange County, and San Diego should continue to show strength with revenue increases in the 6 to 8% range. Dallas in our portfolio posted same store growth of 4.2% as this market continues to recover. Houston has lagged in its recovery, but we expect stronger results in the second half of same store revenue increases in excess of 4%. Kansas City, with negative growth, will continue to be challenged throughout the year. And while Atlanta showed strength in our portfolio in the first quarter with a 4.4% increase in revenues, I would expect deterioration of this market over the remainder of the year as new units are delivered. And assuming no further deterioration in the economy, Charlotte, which produced negative results, should show gradual improvement as the year progresses. Raleigh, on the other hand, simply has too many units being delivered, which will cause this market to deteriorate over the next three to four quarters. We will continue to see deteriorating results in the northern Virginia market as a result of technology layoffs and new production. The Connecticut and New Jersey markets should remain vibrant with revenue increases in the 8 to 10% range. And Boston, I believe, will remain the best market as supply is far short of demand and the cost of housing outstrips the affordability of many. In conclusion, I believe the apartment industry will produce strong results despite a weak economy. At EQR, we have positioned the company to absorb downturns while maintaining our liquidity to take advantage of opportunities should they became available. And I believe we are in a stronger position from a human resource and capital position than we have been since inception. At this point in time we'll open it up to questions from the audience.

Thank you. To ask a question, you may do so by touching your star key followed by the digit 1 on you touch-tone telephone. Once again, that's star 1 on your touch-tone telephone. We'll pause for a movement to assemble the roster. We'll take our first question from Paul Penney with Robertson Stephens.

Good morning, Doug.

Good morning, Paul.

In light of the fact that one of your competitors included their technology right down to the calculation of FFO, can you give us your rationale for adding back the write downs?

Yes. First, as we all know, FFO is a fragile measuring point which I have take great exception to. But pushing that aside, if we make an investment in the technology and we make an investment in real estate, I don't see that either one of them should be counted differently, and since the gains on the real estate are excluded from FFO, as are the losses, I believe that the gains that you make in technology or if you go out and buy other companies, conversely should not be included. So it's a personal decision that, you know, I take exception with __(inaudible) definition, and I've had conversations with the people at and they say it's an investment decision, and you're making an investment and you are either going to include all investments in gain and loss in FFO or not include all investments in the gain or loss of FFO, you cannot selectively put them in or take them out. So, since the majority of the gains this company will always produce, will be in the asset sale side of the coin and they're not included in FFO, we decided not to include the technology. And furthermore, they are really non-recurrent to start off with anyway.

Can you list your four companies that you writ off?

Yes. David, have you got the . . . ?

Yes. It was our investment in Broadband, our investment in viva.com, investments in the Constellation consortium, the investment in OPS exchange.

Great.

Now let me just overlay a different point, which I think everybody has missed and something that we as an industry have to get our arms around. When we make a capital investment, there are two places we make a return on that capital investment. One, in the recurring piece of the puzzle, and two, in the ultimate sale of that asset. When a manufacturing company makes a capital investment, they make it on the recurring because the investment that they make in the plant and equipment truly does depreciate. Real estate has not historically included the gains or the losses that it has made on its investment, which everybody knows is part and parcel of the overall rate of return in its earnings. And I happen to be a very large proponent that this should be included in the ultimate earnings and the ultimate FFO of real estate companies because it's an important component of how you measure how these companies are doing over an extended period of time.

Okay, great. Switching gears back to real estate. On asset sales, can you give us a feel for the major geographical locations on the sales?

Actually, yes, David will. But this quarter, believe it or not, they were spread all over the place. I mean, there is no major concentration except for the three assets, for instance, that we contributed into the joint venture up in Seattle. Everything else is literally everywhere from Indianapolis to Kansas City to Dallas, Texas. I don't think you'll see, other than, there were all other than the three assets in Seattle in low barrier to entry markets, there's really no concentrations.

Going forward, are you considering any other joint venture arrangements where you could maintain management rent?

Yes. That is on our radar screen.

We've had some preliminary conversations but there's nothing solid at this time. And just getting back to dispositions. We sold a fair number of properties in the Lexford portfolio in the first quarter, almost a dozen in Indianapolis, in Ohio, and in Georgia. The more conventional EQR properties were sold were in Kansas, in Utah, in Arizona specifically in Tucson, sold a property in Austin, Texas, and a property in Des Moines, Iowa.

Okay, great. Switching gears to acquisitions. In your Q1 acquisitions, I'm assuming that your 7.2% cap rate was associated with one of your northern California acquisitions?

Correct.

Giving the loosening demand in the area, are you at all concerned in your abilities to move this yield north, and what is your approximate loss to lease on the properties, and where can you get these yields in 12 to 18 months?

Well, the assets that we purchased are really in the markets that are continuing to grow, which is the LA, Orange County, and San Diego markets. Okay? So we have not purchased an asset in San Francisco because we couldn't figure out where the market was going. I don't believe we will purchase an asset in San Francisco unless we get what I would call a phenomenal price on it which bakes into the analysis all of the downturns that we see coming, which may or may not come. But we're just not a buyer or a developer in San Francisco because the picture's too cloudy. In Orange County, we believe that the rents will continue to rise, you know, north of 5%. In our underwriting we use 5% of the first year, 4-1/2 to 5% in the second year, but I think we're probably being too conservative down there. So you move those yields very quickly into the lower 8's in the first, the second year and then after four years they're up into the 9% range.

Conversely, are there any of your 23 San Francisco properties that you're intending to sell?

No, because of the balancing of the portfolio. You know, we're underweighted in San Francisco right now from an NOI standpoint, and long term, obviously we believe San Francisco is a place to be, so we're not selling any of the assets but rather not buying any to underweight that marketplace.

Last question. Given today's weak economy, have you revised any of your underwriting criteria on your development projects? And taking a step further, are there any projects that you're considering shelving?

Well actually, we walk away from a number of properties every day of the week and I... We have, we've... If you recall, when we say that our developmental yields on a property are anywhere from 8% to 8-3/4 and then our competitors come out say that they are anywhere from 9-1/2 to 10-1/4, you have to scratch your head and say, what's the difference? The difference is the trending of the rents. We have never trended rents and we won't trend rents, and so the development piece of our puzzle is really geared to acquiring, since they're so difficult to acquire properties in high barrier to entry markets in locations that we want at prices that are below retail.

Great. Thanks, Doug and David.

We'll take our next question from Rich Anderson, Salomon Smith Barney.

Hi, it's actually Jon Litt instead of Rich Anderson.

Hi, Jonathan.

I have a couple of questions. First, on the profit on the assets sold you said was 41 million, was that on depreciated book or undepreciated book?

That's on depreciated.

For '02, consensus estimates are 5.75. Could you state your comfort level with that?

No, we won't do that, Jonathan, until we get closer to the end of the year because it's going to depend on where the economy is and where we see starts and stuff like that going.

We started giving guidance, Jon, in '01 at our third quarter 2000 conference call, and I'd expect to do the same thing this year.

You had said that next year you'd spec the NOIs to the client, let's say the northern California market, as they have tough comps and rents will be off. This year you're looking for NOI growth across your whole portfolio of 4 to 5%. Do you think that would end up being at the lower end of that range and that range may come down as a result of what happened in northern California?

First, remember our portfolio. No market has any major impact in this portfolio, which is the whole reason why we built the portfolio the way we built it, okay. So, if northern California goes to flat to negative and for argument's sake we'll pick on a market that's been crappy forever, Memphis, Tennessee, turns around from a negative to a positive and Charlotte turns from a negative to a positive, it'll offset what happened in San Francisco.

On your development pipeline, can you comment on how the lease ups are going? Are they coming in as expected or is it taking a little longer, given the current environment?

So far, no, because, remember, the places that we are building primarily are in the high barrier to entry markets. We have had one property, excuse me, two properties in Florida which were mid rise assets that leased up at a speed which was okay but they were not obtaining the rent levels that we had originally pro formed. But conversely, the properties, for instance, that we built in New Jersey has blown the, you know, roof off the pro forma. The property we did in Massachusetts is in the same range. So when you take everything together, the numbers are right on where we originally pro formed them to be, and this year's budget should show somewhere, on the stuff that's finished, around a 9.5% yield after cap ex.

In the Florida market, would you attribute that to overbuilding or would you attribute that to the economy?

Overbuilding. This property under performed when it opened, which was about a year and half ago.

Can you comment on your bad debt expense and any change you seen in that?

Yes. Remember, we about a year ago set up the first phases of an internal bad debt collection department and have grown that bad debt collection department over the year, meaning last year, so that it now handles all of our bad debts. And as a result of that, you're seeing our bad debts go down. Okay?

On a same store basis, Jonathan, for quarter over quarter, our bad debts are down $117,000.

It's running at what percent of revenues?

Well, it was about $3.6 million and on revenues of about $440 million, so less than, about 0.8%.

But watch out when you talk bad debts, because if you're a resident and you move out and you didn't give us the proper notice and so you owe us two months' rent and you trashed your apartment so there's another $500 in there and say you're renting for $600, so you add $12000 and $500 and get $1700 worth of bad debt, and yet you might have paid your rent right straight through to the end of the month. So, included in our bad debt is anything that is not tied down that we charge for when a resident vacates.

You guys have preferred tax stocks, I was wondering what the status is of converting to TRSs and how those are being valued?

We made the elections.

Was there any consideration paid for the voting stock?

We haven't finalized it yet, but where the voting...

There is deminimus economic value there anyway. I'm not sure if you heard that, that's our Chief Accounting Officer. We're waiting for some changes in some state laws that will be consistent with the federal laws, for some of those things to occur in certain states.

But to value it for the buy the voting stock is going to be deminimus?

Yes.

Totally deminimus.

Regarding the furniture business, generated a net income of 2.8 million this quarter, down from 5.2 last quarter, can you just comment on the trends there, if this is a seasonally slow quarter for some reason?

Yes. It is definitely seasonal. When you've lost corporate housing business, okay, and they provide a significant amount of furniture to corporate housing providers, so whatever we've seen on the corporate housing side affects that business as well. The upside, though, is that they're working hard within the EQR system dealing directly with our residents and they're backfilling a lot of that business. But we've lost a lot of corporate housing leases at the beginning of the New Year and that also affected the furniture business.

What do you see as a full year number for furniture income?

I'll pull that out and come back to you on that, Rich.

Okay. Last question would be, you mentioned underweighting, or you're underweighted in San Francisco right now. What markets do you see yourself increasing your weighting end over the next year or so?

Well, we will hopefully increase our weighting in the New England to Washington, DC, corridor markets; hopefully pick up something in the Chicago area, it's very difficult, we seem to be second and third place; we'll pick up some concentration in California, not San Francisco but LA to San Diego; we're finding opportunities, for instance, we bought a property, as we noted, in Raleigh, North Carolina, the cap rate was right around 9% and the occupancy level that we bought the property at was around 88, so we'll take advantage of situations like that every day of the week. But, you know, the goal as stated is to slowly shift the income into the higher barrier to entry markets with our goal being at around 55%, you know, within the next year an a half. So slight shifts into those markets and the continual, we have one asset left, for instance, in Utah, so we'll sell, hopefully get out of there. We're looking at some of the properties in Carolinas, the decreased waiting in those marketplaces.

To answer your question, Rich, without getting into too much specificity. We're budgeting plus $50 million on the furniture side for '01.

That's income?

Yes.

Revenues.

Or is that revenues?

Revenues.

Okay. Thank you.

We'll take our next question from Rob Stevenson with Morgan Stanley.

Good morning, guys. A question on the development pipeline. If I'm looking through the schedule that you guys provided, it looks as though the Waltham Terrace property has been pushed, the completion date there has been pushed down an entire year; is that right?

Well, because we've been having problems getting the zoning finished in that property.

Okay, I mean, but there isn't anything that would cause you to sort of push back other than the zoning there?

No.

Okay. And then, second, could you talk about what you've been seeing in terms of the sort of softening economy, have you started to really see the what people commonly think of, you know, the doubling up, you know, sort of weakness in one bedrooms and studio type of things, or people looking for the larger apartments for more roommates and things like that?

This is Gerry Spector. We're really seeing, the only change we're really seeing as a result of the economy is a fall off in the re-renting of corporate units in this first quarter. We had probably a little higher unusual amount of give backs in the last quarter, and typically business starts to pick up in February and March, and there has been no real change there, but we haven't really seen any real change in demands of various types of units. Everything seems to be operating as it was a year ago and two years ago, we see very little difference other than the corporate side.

Have you seen a pickup in the days vacant on terms of units?

I would say that's... You definitely have seen that in San Francisco where we had no supply and we have absolutely minimal down time on the re-rents, but in many of the other markets we've actually tightened that time down as demand has come back and inventories have shrunk. And it really is very dependent on the supply side of the equation, and so I would say, you know, all in, I would say that we have a shortened time span on hold times on units.

Okay.

Let me just do a 50,000-foot overlay. Most of the guys across the country have already come out with their same store revenues and if you look at their same store revenues, they're up substantially over last year. And they're up substantially over last year because a number of the weaker markets last year are no longer as weak. And so while the upward pressure in the phenomenal markets like the historic San Franciscos and Bostons, where you're not going to see 15% and 20% rent increases, hold up the underperformances of the Houstons and the Dallases and the Carolinas and those marketplaces that were generating negative to 1 and 2% revenue growth. Those markets are now producing revenue growth in the 3 and 4% range, and the top producing markets are producing revenue growth that are in the low double digit range, okay. So the overall health of the apartment industry is significantly better in spite of a weakening economy than it was last year. That's because you just don't have the building going on in these low barrier to entry markets.

In addition, our turnover is down for the first quarter, 1.7%, which is also indicative of what Doug is saying.

What was turnover? What is the 1.7% decline relate to?

Last year the turnover in the first quarter was on a same store 15.3% and this year is 14%.

Okay. And then, last question. In what market did you see, other than probably San Francisco, the sort of biggest year over year decline in occupancy first quarter?

That's the only market really that we've seen, again, decline in occupancy. We're a little bit, we're on 94-1/2% right now. So that's the only market right now that...

There was an inter-winter decline in Boston, okay. We had one property in Boston that had a bunch of corporates. And Boston, if you lived in Boston, it was a pretty bad winter. No one was moving around, and so for a couple of months we had a decrease in occupancy from almost 100% full to around 97% full, but the rest of the portfolio... I mean, Phoenix has done substantially better this year than it did last year. That's a big market for us. Dallas has done substantially better than last year, Houston's done substantially better, I mean.

The majority of the markets and the anomalies will present. San Diego for us was down a bit, all due to corporate. We have the one property that's heavy corporate and they did not refill in the spring, and that's the only drag we have in San Diego. All the rest of the assets are in the 98% range of occupancy. Very selective.

Could you remind me what's the number of corporates in the the portfolio on a rough?

Roughly it's about 6,000 units.

Okay. Alright, thanks, guys, I appreciate it.

Okay.

We'll take our next question from David Harris with Lehman Brothers.

Good morning. I think this is probably a question for either David or Gerry. Is there a loss to lease number this quarter?

Yes, there's a loss to lease, David, on the quarterly basis but I will certainly give it to you with the same sort of caveat that Doug has overlaid every single time we've given loss to lease, and I think what you're really sort of seeing in San Francisco is why loss to lease is such a potentially soft number. But we had about a, for the quarter, about $26-some-odd million which you could extrapolate into a run rate of, you know, $104 or so million. But that number, you know, again, we have caveated a great deal about why not to read too much into that.

Sure, I think we're all aware of that. Any comment specifically with regard to the loss to lease in San Fran?

Yes. We started the year with what we thought was, you know, $8 to $9 million potential loss to lease, and that number, you know, was down to 3-1/2 or so million today.

Okay.

And that's going to be a function of leasing units closer to markets than those that are coming off lease as well as the potential market coming down. I mean, as market rates drop, your loss to lease disappears.

Right, right, okay. And David Schulman would like to ask?

Yes, I have a question. It's David Schulman here. I have a question on your Lincoln property joint venture. The Regatta Apartments in Marina del Rey. And my questions are, what are your pro forma rents for that?

They're very high, but they're lower than actually what Don Brend's getting in the rehab deal up the street.

Do you have a number?

I can't give it to you.

Up the street is way up the street.

Do you know which property I'm talking about, that Brend has?

Is that the one in Santa Monica?

Yes.

Okay. That's way up the street from Marina del Rey. Now is this leased land or fee land?

Fee.

This is fee land. So you're in the City of Los Angeles?

Yes.

Okay. And you're below Don Brend's number but probably not by a whole lot?

Yes, we're probably by quite a lot.

By quite a lot. Okay. Thank you.

We'll take our next question from Dan Oppenheim with Bank of America.

Most everything's been answered now, but just wondering what you're seeing as you're looking forward in terms of the occupancy; any changes on a month to month basis now that you're seeing with the economy slowing?

The answer is right now, our May billings and our trend for May is continuing at a strong pace and we see no indication right now of any issues with our loss to lease, so I would say through June things are looking like it's going to stay at the same level. After that no one can predict.

Thanks.

We'll take our next question from Stuart Seely, UBS Warburg.

Good morning. Are you effectively raising your guidance on the core business? If you have a couple pennies of unexpected dilution in the second quarter, are you getting to the same place by the end of the year?

Well, since we can't do finites because we've got to tell the rest of the world about it, if you look at where the property portfolio is producing and then you say, well you had some problems with Globe and you got some money that's not invested, and you're coming out at the same spot, your deductive logic I have to say is 100% correct. It means that the apartment industry is in phenomenal shape irrespective of where the economy's going. We are producing terrific top line revenue growth and expenses if you take out the utilities, which you can't, obviously, but if you take out the utilities, everybody is also doing a good job in controlling expenses. So we've got very strong NOI growth in the portfolio.

Okay. And can you break out the amount of revenues and expenses that were in the numbers from the corporate housing business from the 6,000 units and compare it sequentially from the fourth quarter to the first quarter?

No, other than we know on certain properties that have a lot of corporate housing such as our La Mirage down in San Diego, that they gave back a lot of corporate housing units so our vacancies increased and, you know, we've got to go lease them to non-corporate housing.

Can we use the trends in the furniture business as a rough proxy for the percentage change?

Do you mean from fourth quarter to first quarter?

Yes.

No, because your fourth quarter is a much bigger quarter than the first quarter.

The furniture business this year is 15% ahead in the same store basis as it was last quarter. That's after reflecting a downturn in the corporate housing side, so the furniture business is cyclical and right now in its past first quarter performance, indications are we expect to do well in that business this year.

And can you give us some sense as to what the remaining book value is on the technology investments that you have not written down?

Yes. Hold on a second.

Well, I'm going to tell you, we will write down, I think we mentioned this on our last call, about $8 million this year. And that reflects full write off of certain investments and partial write offs of investments that we're going to take over a two- or three-year period. So I'm going to do a little arithmetic here and I'll come back to you as to what the book will be at the end of this year.

Okay, but if you're going to write off 8 and you've done 3, so another 5 million this year?

Yes, this year, yes.

Okay.

Did I misunderstand your question?

No, that's exact. And after you're done with the 8, if we could know what will be remaining after it, that would be very helpful as well. And one final question from me on the $750 million that you plan to sell including joint ventures, is that, does that include the pro rata interest in the joint venture or the total value?

It will be total value. In other words, the 202 million that went into the joint venture, we own 25% of that.

Okay, very well. And would like to ask a question.

) Could you elaborate a little bit on what you're seeing, and your 1031 balances have gone up from, I guess, what you reported at the end of the fourth quarter to the current period, but yet your acquisition volume outpaced your sales volume. So is there something specific that's holding up the 1031 activity?

It was the first quarter joint venture transaction. The disposition numbers we've given you have been outright property sales. So there was a $202 million disposition, if you will, for which we would have received $180 or so million that would have been in addition to the numbers you've already seen in addition to the disposition numbers.

Okay. I got you. And then a final thought, which is sort of similar to Stuart's. You increased your, at least what I perceive, your reallocation dollars I'll call it, from 500 million in your fourth quarter press release to 750. Is that an all-out increase or is there something different because this quarter it seemed like the text changed slightly and it said including JVs?

Well in the past it was always JVs. We have included, we break it into two different things. Profi-level, what we call profi-level sales, which would have been in the $600 million range, and then last year we did three joint ventures which pushed that over a billion dollars. This year we expected to sell somewhere between right around $500 million worth of assets exclusive of the joint ventures, and then you throw the JVs into it and we believe it'll be up to the 750. So single assets in the 500 range, the JV, one of which is already done for 200, so obviously we're pretty close to the 750 if we do no more JVs.

Okay. And the mix, let's take it from the 500 to 750 now. Is there more of one type versus the other or it is just an absolute increase in both?

In other words, are you increasing in JVs more now or is it...?

Of what we sort of sold in JV last year, there of a higher percentage of JVs represented in that number than there will be this number; I'm sorry, than there will be in this year's number.

Right.

Does that make sense?

Yes, absolutely.

Okay. And getting back to your original question. We'll have $4 million of carrying value on our technology investments at the end of this year.

Terrific. Thank you very much.

We'll take our next question from Lew Taylor, Deutsche Bank.

Thank you. I had to step out for a minute, so maybe you've covered some of this. Doug, how many total corporate housing units do you have in the portfolio?

Well, we believe that in EQR's portfolio that they are somewhere between 5,000 and 6,000 corporate housing units. Globe runs about 4,000 corporate housing units, very few of which are in EQR units. Now, one of the biggest problem that the corporate housing companies get into is called a mismatch. So they may execute a lease for a year and only backfill it for nine months, which is happening now; big, huge vacancies. Globe's average occupancy has dropped in the first quarter from the 87-1/2% to 85%, because obviously the corporation says not interested or, to make it even worse, if it's a big client they turn around and they say, "Well, you know, I may have obligated myself for 100 units with you, but I'm only going to deliver you 50," and so you're stuck with the other 50. If Globe has leased that unit from us, we can help mitigate the rent loss by putting the unit back into the market and re-leasing it to a non-corporate housing unit; okay. But right now we're getting hit from both sides. The R&Vs of the world, the Execu Stays of the world, which are having the same issues that Globe is having, their leases are coming up for renewal and they're saying not interested in renewing, like in La Mirage, okay. We're going to give you back 100 units. And, you know, when we come back four months from now, if we have that those backfilled, we'll re-lease them from you. Well, they may not be able to re-lease them from us because maybe we will have given them to someone else, but that's a different story. So we're getting hit by the people who are dropping the corporate units as a result of the bad economy, and Globe, which is suffering because they have a decrease in absolute occupancy.

What percentage of EQR's units do you anticipate going back into the market for just regular rental? 6,000 units?

Of the 6,000 units, yes.

I would say, it's hard to say, but I'd say 30 to 40% would be my guess. We're not going to, and we're going to shift a lot of those around. We don't know yet for sure what we're going to do. But we, for most of the properties they average maybe 5 to 6 corporate units and those get backfilled very easily to the open market. It's just a few properties we have, and there is one that's actually a full corporate housing building in downtown San Francisco where we saw a 20% dropoff just in that building alone, to give you some sense. We're looking at possibly putting in fewer corporate units in that building even though it's been 100%. So we are going to lower our exposure to a certain degree for that because we see the economy affecting that.

When you're putting the EQR units back into service, or back into the rental market, will that have a negative impact on Globe's furniture revenue?

No, because right now those aren't even tied to Globe Furniture.

Let me just make a little clarifying remark here. Of the units that they're talking about, the 5 to 6,000 units, those are primarily with corporate housing providers and are not Globe, or what we now call Equity Corporate Housing. Okay, less than 10% of the Equity Corporate Housing business units are today on EQR properties. So when those units are leaving, they may or may not be leaving with Globe Furniture. I mean, hopefully, we've got, you know, we have relationships on the furniture side with other corporate housing providers, but my expectation is that there's a small percentage of units that third party corporate housing providers are giving back to us that have Globe furniture in them.

Yes. That's where I was going with it. Thanks. Now the last question is, what kind of gross margin assumption should we be looking for on the furniture business with regards to, you know, going forward, $50 million in revenue? Are your margins the last couple of quarters, you know, representative of what we should look for going forward or would you see margins expanding or contracting?

Well there are going to be dynamics in there as we open new markets, Lew, which are going to cost us. You know, we're going to have to spend money opening markets as we follow the corporate housing business of the Equity Corporate Housing business and as we open more furniture rental locations in markets in which we have high concentrations. So the numbers are going to be weighted down, the bottom line is going to be weighted down by the cost of what we incurred at the lease stage to buy trucks, to staff those warehouses, to get salespeople, etc. But we said from the beginning that we think the furniture rental business, which is really kind of a consumer finance business, is sort of a 20% gross profit margin business.

And that's before factoring in the expansion costs, or does it include that? Does that include those expansion costs in there, David?

No.

Okay. And then, with those costs in there as you ramp up over the next four to eight quarters, where do you see the margins going?

Well, that's a stabilized margin.

Right.

So the margin's are going to be less than that initially. The margin should expand, as we get more locations, the margins should actually improve.

But from what level, like 15% margins or 13%?

I'm not going to get into that detail here, Lew.

Okay, thank you.

Once again, to ask a question press star 1 on your touch-tone telephone. Now we'll take our next question from Raoul with Merrill Lynch.

] Hi. To get back to your expectation of being able to sell assets at 150 bits higher than what you're going to reinvest the proceeds, how does that compare to your experience last year?

We did better than that last year. We were selling assets last year just a shade under 9%, and the average reinvestment rate last year was right around 8, high 7's to low 8's, so about 100 basis points last year. And this year we moved it to 150 because we expect it will be selling substantially more Lexford assets this year, and Lexford assets trade at a 10-1/2 to an 11% cap rate.

] Okay. And then specifically with regard to markets, I've forgotten what the revenue growth numbers you gave for Atlanta, but it seemed like you had, you know, fairly healthy revenue growth in Atlanta during the first quarter. And I was just trying to figure out how that reconciles with some of the other numbers we've gotten from dealer vendors which seem to suggest, you know, that market's pretty much stalled, at least in terms of net effect of rent growth in the first quarter versus the fourth quarter of last year.

This year we did 4.4% revenue growth, okay. And last year we did not do very well, okay. So when you look at same store, there are two things that are happening to you in there. One, how did you do versus last year, and we had a lot of properties that were out in what we call the hinterlands, which are the result of the Maryland acquisition in County. And so those assets were challenged, and so a post that has assets that are closer in would have done better than we would have last year. This year, because there's more activity closer, there's less activity closer in from a leasing standpoint, more units coming on stream closer in, they're going to be more challenged than we are. But ultimately we believe that our number for the first quarter is on the high side because there are too many units being delivered into that marketplace and we have projected a constant decrease in our budget each quarter for same store revenue growth In Atlanta.

] Okay. And then finally, on the technology investment write downs, I guess since you have as estimable number in total for the entire year of 8 million bucks, you took 3 during the first quarter, I mean, what is going to precipitate the taking of the additional $5 million for the rest of the year?

Just writing them off on a quarterly basis. We just decided to take some of these things off now, some of them off on a quarterly basis going forward on an equally amortizing basis. I mean, they've not just been absolute write offs, but they've been amortizations.

] Okay.

We'll take our next question from Diane Wade of Clarion CRA.

Hi, good morning. A question on the Chicago market. I've noticed that it's been one of your worst performing on an NOI basis on your same store numbers. Can you just comment on that? Is that more expense related? And also, I wanted to know what your projection is for that market; I know you've been buying assets there.

Well, no, we haven't been buying assets. We built an asset, we bought assets a couple of years ago in what we call Neighborville to Aurora corridor, and that happens to be the corridor where they keep building and building and building and building and building and you never really get on top of yourself. The best place to have owned assets in Chicago were two locations, downtown and out in the northwest and suburbs. Since we were unable to buy assets in the northwestern suburbs as the cap rates were in the high 6's to low 7's, we decided to build. And the property we built out there called The Landings has been a phenomenal home run. We are also hoping to build another asset out there. Our properties and the properties in downtown Chicago, even we don't own any, have had phenomenal growth, but they're going to get a ticket that's going to get punched big time next year or the year after because there are too many condos under construction right now that will come on stream later this year and early 2002, and there's a number of apartments that are under construction that will also come in. And the market right now looks like it's going to have about 5,000 dwelling units delivered into it in the high rise sector in the next 12 months. And there is no way that Chicago can absorb 5,000 dwelling units, whether you want to call them rentals or condos, so downtown is going to get weak. With respect to our particular performance, we have a couple of mega properties, one is Four Lakes and another one is called Bourbon Square, okay, and if you don't do well on leasing on those properties, okay, during any particular period of time because you have a management issue, then it is going to cost you very substantial amounts of money. Gerry, why don't you elaborate on that? that? SPECTOR:) Right now the income side of Chicago is doing well for us the first quarter. It is pretty much all expenses and I would tell you, the predominate share that in dollars and in percentage is utilities. Our utilities are up 63.2% in Chicago, a total of $400,000 of a $575,000 operating expense variation. So the majority of it is utilities and predominantly gas in Chicago has really kicked us, and that's really the result of it.

Second question. The assets that you acquired, were they all from different buyers, I mean, different sellers, or were there any assets that had the same seller?

No, they were all different.

Okay. Thank you.

We'll take our next question from John with Reid Capital.

] Hey, Doug. I know you mentioned the loss on the equity housing, 1.4 million. I hate to beat a dead horse, it's only a penny, but you talk about, with respect to the 4,000 leases you guys have with outside vendors, how you guys are approaching those going forward; are you just letting them go away and then bringing all those leases in house, keeping some in place? I guess you guys can improve the margins there just by letting the expenses go away.

Our primary focus is really to expand the corporate housing for equity into areas where we don't have a lot of corporate units, frankly. We still plan to utilize a lot of the other third party corporate housing providers and continue to be aggressive at that, but we are going to get into other markets and expand where we have presence that Globe isn't in currently. So the answers is we're not going to move everything over to Equity Corporate Housing but it will be certainly a bigger share going in that direction.

] But Gerry, of the 4,000 leases you have with third parties, though, that aren't in EQR, is that a good run rate of leases you'll have with other people within the equity housing business, or is that going to become a smaller number and there'll be more inside EQR? Does that make sense?

Well, the answer is our goal is to grow the number of corporate housing units substantially and we believe we can do that with us, okay, as well as the overall universe of Globe. Globe right now has 4,000 corporate housing units now. I mean, we hope to grow that substantially and a lot of that growth will come in EQR units, yes.

] Okay, great. Thank you very much.