住宅地產 (EQR) 2002 Q2 法說會逐字稿

Good day everyone and welcome to the Equity Residential second quarter earnings 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 McKuen. Please go ahead, Ma'am.

Thank you. Good afternoon everyone. 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.

This afternoon we will begin with an overview of our financial results, presented by David Neithercut, out Chief Financial Officer followed by a company and multi-family market overview by Doug Croker, our CEO. Bruce Duncan, our President, will give an update on his first months with us and Gerry Spector, our Chief Operating Officer, is present and available to answer questions. This point, I'll turn it right over to David.

Thank you Cindy, good afternoon everyone. Today I'll first quickly review the key earning measures for the second quarter that are outlined in the press release. Then I'd like to spend a little more time to provide additional detail on Same-Store operating performance and I'll breifly summarize the key capital events for the quarter and finally address our revised guidance for the balance of 2002.

For the second quarter of 2002 Equity Residential earned 32 cents per fully diluted share. And that's compared to the 27 cents per share for the second quarter of 2001. Earnings before gains or losses on property sales were 24 cents per share compared to 26 cents per share in the first quarter of '01. Adjusted earnings per share for the quarter just ended were 58 cents compared to 57 cents in the second quarter last year. And for the second quarter 2002 funds from operations were 63 cents per share versus 65 cents per share that we reported for the same period 2001.

Turning now to the Same-Store performance for 196,211 units owned for the second quarters of both 2002 and 2001. And again, that's 196,211 units. Same-Store revenues decreased 2.1%. Operating expenses increased 1.6%, and net operating income decreased 4.2%. Second quarter Same-Store performance reflects not only the sluggish economy and it's impact on the company, but also the strong second quarter analysed performace of a year ago, which was up 5.9% over the second quarter 2000. Our Same-Store revenue decrease was the result of a 2.3% decrease in rental revenues resulting from reductions in both occupancy and rental rates and an increase in rental concessions for the quarter. Increases in utility collections were offset by decreases in other income areas.

On a sequential basis from first to second quarter 2002, Same-Store revenues decreased .6%. Our operating increases increased 3.6% and NOI decreased 2.9%.

Last year on a sequential basis second quarter revenue increased 1.2%, operating expenses decreased .4% and NOI increased 2.1%. And again, reflecting a very strong second quarter 2001.

For the quarter just ended, our rental rate decreased .6% over the same period last year. The average rent per unit for our properties for the quarter, excluding Lexford properties was $857. Including Lexford the average was $807 per unit. Lexford average was $496. Last year on a sequential basis from first quarter to second quarter in place rental rate increased .9%.

Average Same-Store occupancy decreased 5.6% in the second quarter from 94.6% to 94% for the second quarter of '02. On a sequential basis our occupancy remained essentially unchanged from the first quarter of 2002. Reflecting the very tough rental markets, concessions increased nearly $4 million quarter-over-quarter, an increase of 55%.

On a sequential basis concessions increased $2.2 million or 25% from the first quarter '02 to the quarter just ended. Last year on a sequential basis from first quarter to second quarter, concessions increased $1.1 million or 18%.

On a Same-Store basis, bad debt expense in the second quarter '02 decreased just $120,000 over second quarter '01. and as a percentage of revenue, bad debt expense remained unchanged quarter over quarter at .7% total revenues. However on a sequential basis, bad debt decreased $819,000 from .86% of total revenue for the first quarter '02. Turnover decreased on a quarter-over-quarter basis from 18% for the second quarter '01 to 17% for the second quarter '02. We expect turnover to increase from the first to second quarter and on a sequential basis, it did by 2.3 points. This compares favorably to last year's sequential increase of 4.4 points first quarter '01 to second quarter '01.

Regarding expenses, as I mentioned earlier, Same-Store operating expenses increased 1.6% quarter-over-quarter. This increase included a 1% increase in payroll, a 4.1% increase in property taxes and a 41% increase in insurance expense. But these increases were more than offset by reductions in other line items including a 4.4 % decrease in utility expenses. Now, to put that in perspective. Insurance expense is about 3.6% of our total expenses for the quarter and utilities represented 15%, and that's before tenant reimbursements.

With this release, we provided some expanded Same-Store disclosure which summarizes the quarter-over-quarter performance of the Same-Store properties in the 20 markets that comprise the most NOI for us during the quarter. These 20 markets total, comprise 73% of the quarter Same-Store net operating income.

Turning now to our Equity Corporate Housing business, that business continues to improve bottom line results. We are pleased to report that it achieved profitability for the second quarter. Before the eliminations that occurred during consolidation, Equity Corporate Housing had an operating profit for the quarter of $442,000.

This is a significant improvement over the $630,000 operating loss in the first quarter of '02 and a substantial gain over the $911,000 loss in the fourth quarter of last year. Sales in the second quarter climbed 4.7% over the first quarter of this year. Occupancy increased from 88% at year-end to a current level of 94.5% and a gross profit margin increased from 16% to 20.6% in the quarter just ended.

Equity Corporate Housing currently has almost 3,300 units today, down from a high of 4,700 units when we purchased the business in mid-2000. The Company's continued to lease our own units wherever possible, and when we have been able to increase the percentage of their units back to our units, from 5% in mid-2000 to about a third today. And the rent paid to EQR totalled nearly $6.3 million for the first half of this year.

While we continue to believe that the sluggish economy will have a negative impact on the corporate housing industry as a whole whole, Equity Corporate Housing is stabilized and should show improved results for the second half of the year. Our goal for 2002 was and continues to be break-even operations for this business while contributing $12 million of rental revenue to EQR, and we believe both goals will be met.

In addition to the Equity Corporate Housing, the company has approximately 2,700 units leased to third party corporate housing providers. That's up about 600 units from the first quarter of this year. Still down from the 4,000 units at the beginning of 2001.

Turning now to the balance sheet. Our outstanding debt balances as of June 30 are listed in the press release. I will point out, at the end of the first quarter, and as disclosed in the press release, we recognize our share of debt from unconsolidated join ventures at about $718 million. This represents debt not only on completed properties, but the construction financing drawn to date on development ventures. Through these development ventures, we also have an additional unfunded $357 million of construction financing available. We have funded, ourselves, $55 million at additional collateral from some of the loans, but, other than that, we have not guaranteed any of this debt and it is all nonrecourse to EQR.

I also wish to remind everyone we have debt on our own balance sheet that though consolidated can be attributable to third parties, this debt is the result of properties that we don't own in its entirety. This is about $215 million worth of debt which would reduce our share of unconsolidated debt down to about $500 million. May 30, the company closed on a new three-year, $700 million unsecured line of credit which is the same amount as the facility that we retired, which was due to expire in several weeks.

With the help of Bank of America and J.P. Morgan as lead arrangers, as well as Bank One, Homer's Bank and Wachovia Bank as co-managers we were able to get this deal done at reduced fees, better pricing across all rating levels and a more flexible covenant. We are extremely pleased at this show of support from our commercial bank group. I want to note we have $40 million outstanding on this line today and there was nothing drawn at the quarter just ended.

With today's press release we provided some detail regarding our expenditures for property maintenance expense and capitalized improvement. Included is a schedule for the full year 2001 and year-to-date 2002. In 2001 we expensed $831 per unit and capitalized $632 per unit for replacement items and building improvements on established properties and have a year-to-date run rate of a like amount for 2002. With respect to revenue enhancing capital and recurring capital items, our experience is that, on average, about 20% of our expenditures can be considered discretionary, revenue enhancing, expense savings or simply incremental to the recurring amounts necessary to maintain existing revenue levels.

I also want to note that at our next regularly scheduled meeting of our Board of Trustees in September, recommendation will be made to begin expensing stock option grants effective January 2003. If the Board approves this recommendation, it will impact our reported results by approximately 1 to 1.5 cents per grant which will be recognized over a three-year vesting period. One-third of that amount per grant will be recognized over a three-year period.

Then, with today's press release we provided some updated guidance for the balance of this year. We've reduced our full year's FFO from $2.47 to $2.50 per share. We've also revised our assumptions and projections related to Same-Store operating performance. These changes reflect our expectation for little improvement in job growth and continued low interest rates facilitating first-time home buy. Dougs' comments on the economy and the state of the apartment market will shed further light on our expectations for the balance of the year.

Thank you, David. The apartment industry continues to show serious signs of stress from the anaemic economic conditions throughout most of our country. As well as continued strength in the single family housing market. To further aggravate an already weakened condition, multi-family starts and completions continue at relatively high levels, given the overall lack of demand in most of our markets. The multi-family starts have average run rate this year of approximately 295,000 units. This is at least 50,000 more units than I had hoped for.

Considering the weak state of demand for apartments and the continued uncertain economic outlook, the current level of new multi-family construction will prolong absorption of existing product and the eventual return to equilibrium. I believe there are two contributing factors to this continued strength in the multi-family construction. Low interest rates and attractive yields on a relative basis. With short-term interest rates hovering around 2%, the cost of construction financing is averaging approximately 3.5% to 4.5% depending on the amount of equity invested in the property.

These historically low interest rates create yields on invested capital at double digit levels, even with economic occupancies on properties hovering in the mid 80s. The conventional wisdom also assumes when there's an economic recovery with resulting increases in interest rates, there should also be an increase in occupancies as well as rental rates that would theoretically offset the higher interest cost. The yields that people are receiving on multi-family construction are also very high. You take the economic cash flow on a newly constructed property, it will range between 7.5% and 8.5% on a free and clear basis at today's rents. Lower that economic occupancy another 5%, so you are now in the mid-80s. The free and clear yield falls for the range of 6.9% to 7.8%. If we finance 70% of the cost at a 4% interest rate, the yields on equity are still 13% to 17%. Which is why you are seeing the great surge of multi-family construction.

Considering the current yields in the bond markets and predictions in the stock market will struggle to produce a 7% return. The returns of multi-family product look pretty appealing despite the generally weak markets. Thus, I think we're gonna continue to see excessive levels of multi-family starts.

As I noted last year, and during the first quarter, I continue to remain highly skeptical of the predictions of a robust economy later this year. I believe unemployment will continue to inch upward, interest rates will continue to remain low with a 10-year treasury yield moving between 4.5% and 5%. The dollar will continue to weaken, which will help manufacturing, however offsetting this is a volatile stock market coupled with corporate malfesance that will continue to sap consumer confidence, thereby dampening any recovery.

Unfortunately these factors do not bode well for the multi-family sector. Low interest rates and the availability of low down payment mortgages will continue to fuel the single family housing market impacting demand for rental housing. Low interest rates will also spur new multi-family development that will add product to an already oversupplied industry. Without job creation and a healthy economy, the influx of new renters will be sluggish, at best. Therefore, I believe this is a year which we should forget.

I don't foresee any major turn until the Spring of 2003, with 2004, hopefully, producing strong results with the multi-family sector.

Moving on to acquisitions and dispositions. While the acquisitions continue to be very competitive, these lower cap rates and low first year yields are starting to bring out the sellers. We have started to see a marked increase in new listings over the last 30 days.

Since we are only allocating the amount of dollars we receive on dispositions to acquisitions, this is welcome news to us. While the yields in new acquisitions are low, so are they on dispositions. So during the second quarter, we acquired six properties with a total of 1,615 units for a total of $141 million at an average cap rate of approximately 7.9%. Since the end of the second quarter, we acquired one additional property with 466 units for approximately $37 million at a cap rate of slightly more than 8%.

Our acquisitions are finally in sync with our dispositions program. During the second quarter we sold 18 properties containing 2,897 units, including 40 condominium units for a total consideration of $153.5 million and an average cap rate of slightly more than 8%. At the present time, we have 4,835 units under contractor letter of intent for a total consideration of an additional 279 million at cap rates ranging from 7% to close to 12% for certain Lexford properties.

Now I would like to go through the revenues of our top markets and bottom markets for the second quarter. We are comparing 196,211 units. The top market category. the Washington, D.C. In close, Maryland market produced a 6% rise in revenues. The New England market, exclusive of Boston, produced the 6% increase in revenues, Houston, 3.5%, The Boston market place 3.3% and the inland empire in California at 3.2%.

The bottom markets, as I said earlier, the worst without a question of doubt is Austin, Texas leading the pack with a negative 14% decrease in revenues. San Francisco is a negative 12.8%, but that's expected. The New York area, which is primarily the New Jersey coast along the Hudson is a minus 8.4%, Phoenix a negative 8.3%, and Atlanta, Georgia taking up the last spot at negative 7.1%.

Equally important to top line growth is the increase in net operating level. The following is a summary of our top five and bottom five markets on the NOI for the second quarter. The best market was New England, exclusive of Boston with a 8.9% increase in net operating income followed by the DC, Maryland market with 7.8, the Boston market with 6.6, the San Diego, California market with 6.1% and finally the Inland Empire with 3.9%. All of those increases are very impressive considering the economic conditions today.

The worst markets, once again, lead by Austin, Texas, of course, with a 14% decrease in revenues, one would expect nothing worse than a 23.2% decrease in net operating income. San Francisco with a 17.4% decrease, the Charlotte market and why they continue to build there is a mystery to everybody at a 15.2%. Phoenix, also a mystery why anybody is building in that market, a negative 13.9%. If someone is building in Atlanta, Georgia today, they also ought to take a look at the numbers at a negative 13.1% NOI.

The development front, the only transaction that we have entered into this past quarter was the completion of a joint venture with JBG Development that we have been working on for in excess of 9 months. The initial venture is comprised of four properties located in the Washington, D.C. Assuming that all the initial properties get built, the venture will develop approximately 785 units at an estimated cost of approximately $214 million at a stabilized yield approximating 9%.

We have commenced construction of the first property totalling 170 units for a total estimated cost of $36 million. The yield 8.3%. We expect to commence construction on the additional 615 units for a total cost of $178 million over the next several months.

At this point, I would like to give you my insights in some of the markets that have continued their downward slide from the beginning of the year, and those that are slowing in certain areas, and those that are showing serious signs of stress that I believe will take a really extended period of time to correct. The bottom markets, the much heralded Austin, Texas continues to lead the pack as the absolutely worst market in our portfolio, and I believe in this country. As stated earlier, it has the greatest decrease in revenues and NOI in the EQR portfolio. And while economic occupancies are mostly in the high 80s, this market will still produce over 5,000 units this year which will result in negative absorption of 4,500 units. Rents have been discounted approximately 15% and one-half month's move-in concessions are common. So much for a high varied entry market. Traffic is down 12% for us this year. And our turnover of approximately 80% remains constant with last year. Look for this market to continue to slide until the second quarter of next year.

San Francisco. While this market continues to be in the top five worst performing markets for EQR, this is really a result of the tremendous rental decreases that we took last year which have to run through as our leases expire. In actuality, this market has shown signs of stabilization and certain submarkets are actually getting $25 to $40 rental increases. While there is still 4,000 to 4,500 new units coming on line, a substantial portion of those are down in the San Jose market. So I believe you'll see improving results in the San Francisco area this year.

Phoenix, however, will take second place in the worst market contest just edging out Atlanta. While new multi-family construction completions have fallen in the 6,000 to 7,000 unit level, that's still way too many. Couple of new multi-family completions with a estimated new single family home construction level approximating 30,000 homes. This market will be under stress for at least another 12 to 18 more months.

In Atlanta, the estimates of job growth for this market range from an optimistic 20,000 increase to a slightly negative level. Couple the lack of jobs with strong single family market and a robust multi-family market that is estimated to add 11,000 new units or approximately 3.5% of existing inventory, and you have a very soft market. While our occupancies are around 94%, the overall market is running about 90%. However, our economic occupancies are running in the 86% range and rents have been discounted an average of 10% and half-month concessions are still prevalent. Traffic continues to hold up and our 70% turnover is in line with past year's results. Don't look for any meaningful recovery in this market until at least 2004.

We are expecting a 7 to 8% decrease in income and a decrease of 10 to 12% in net operating income this year out of this market.

Moving on to Denver. This market has been rocked by the collapses in the high-tech, telecom and financial services sector. This market has moved from good to very bad in the last 12 months. Economic occupancies for us are in the 85% range. With 7,000 to 8,000 units expected to be delivered this year and no turn around insight on the job front, expect the two to three-month concessions to continue. We expect revenues to be down 7 to 8% this year. And NOIs to slip 10 to 12%. While this market may stablize next year, don't look for any major uptick until 2004.

Along the New Jersey coast, the Hudson. New construction and lack of good accessibility to lower Manhattan by subway are really hurting the Jersey markets along the Hudson river. Rental discounts of 14 to 16% are common with some submarkets offering up to three months free rent. Unfortunately, it will be at least two years before the path and subway are open to the World Trade Center site and only 12 months before new units are delivered. Couple that with a weak employment market on Wall Street, and it will be at least 2004 before this market shows any signs of strength. At EQR we are projecting revenue decreases of 11 to 12% and NOI slides of 15 to 18% in this market.

While there are plenty of other markets showing signs of stress such as Raleigh, Charlotte, Dallas, Jacksonville and Chicago, to name a few, we do have a few markets with positive growth. The Inland Empire continues to have good job growth and strong population growth estimated at 70,000 this year. While there's been a spurt of new development by Fairfield, JBI and Lewis homes, the leaseups are going well on the approximately 2,500 new unit deliveries. Occupancies remain strong and we continue to get rental increases. We expect our revenue increases this year will be in the 2 to 3% range and NOI growth of 3 to 4%.

San Diego continues to hold its own. Despite a very strong single family market and delivery of approximately 3,500 units this year, starts continue to decline and this market is getting revenue gains of 2% and we expect our NOI to increase 3 to 4%.

Houston continues to show strength and discipline with an estimated 5,500 to 7,000 new completions and approximately 20,000 new single family homes for this year. At these levels of construction, both markets will be undersupplied. We expect revenue growth in the 3 to 4% range and NOI increases in the 5 to 7% range. Based on current information, this market could continue strong well into next year. This market remains my pick for second best of this year.

The Washington, D.C. Area, the in close markets continue to post impressive results. We expect our in close Maryland portfolio to produce revenue growth of 5 to 7% with NOI increases in the 7 to 8% range. However, this could be short-lived as there are approximately 2500 units in the Maryland sub market already under construction with heavy permitting activity. The entire D.C. area could have 8 to 10,000 new units started over the next 12 months. While this area will take top honors for best multi-family market this year, I think the honors will be short-lived.

In southern Florida the markets of Broward, Palm Beach and Dade continue to both strong results. Revenues will be up in most sub markets with an average of 2 to 3% with resulting NOI growth in the 2 to 4% range. Boston, while this would be the 6th best market, it deserves at least a honorable mention. EQR is projecting a 1 to 2% revenue growth and NOI growth of 2% in the suburbs.

At this point I would like to note that Bruce Duncan has seen almost half of the EQR properties, a feat for any mortal. I would like to turn the conference call over to him and have him give us his perspectives. Bruce?

Thanks, Doug. Over the last four months, since I joined the company, I've had the opportunity to visit over 100,000 of our apartment units which represents almost 60% of our net operating income. The properties are, for the most part, very well maintained.

What has impressed me most about the portfolio, is that we are so well diversified. Not only geographically, but also in type of units. We are truly America's choice for apartment living.

When I came here, I heard that was our mission statement, but this looking at them, we are. We represent everybody. When you look at the importance of our mutual fund strategy, that was evidenced by my first week on the job when I went my first city to visit was Austin, Texas which, as Doug pointed out is truly a mess right now. Fortunately, for me I went on the next day to San Antonio where our portfolio was showing nice growth. Also, our product ranges from A plus to B minus. I think that's a big strength for the company.

It's in time like these the A units are harder hit than the B properties. I like our position in the market place. Equally important, I have been very impressed with our people. They are a talented group who are very engaged. When markets deteriorate, I think one of the things you have to worry about is the morale of your people in those markets and how they are dealing with this adversity. I think our people are rising to the challenge.

From an operations standpoint, what we need to do is close the back door. That is, keep the tenants with us. To that end, we continue to focus on our programs to improve customer service and build customer loyalty.

We have always felt that behavior follows compensation and to that end we are rolling out a new paper performance program which should bring additional focus on customer service and tenant retention.

So in summary, I would say four months on the job that I am given our strong balance sheet, our diversified portfolio, and our very talented engaged people, I think we are in very good shape to not only deal with this downturn, but capitalize on it.

Thank you, Bruce. I would like to open it up to the floor for questions.

Thank you. The question & answer session today will be conducted electronically. If you would like to ask a question, please press star one on your touch-tone keypad. We'll take as many questions as time permits and proceed in the order that you signal us. Once again, that is star one if you would like to ask a question. Looks like we'll take our first question from Dan Oppenheim him from Banc of America Securities.

Hi. I just wanted to ask about the current conditions. Certainly in what you said in the guidance, and also talking about the market. It seems that the weakest markets are getting weaker and the stronger markets are remaining relatively strong. Is that what you have seen in July? Is that what you would say overall is true?

Gerry Specter here. The answer is, that is correct. There are a couple of markets that we have a little hope in that maybe we have seen a little bit of bottom. That could be disrupted by additional deliveries coming later in the fall.

What we are really seeing is the strong markets are remaining strong, no sign of any further deterioration. Surely Atlanta and Phoenix are continuing to slide. Dallas is also on the list of a market that, you know, six months ago was looking okay and you are starting to see the impact happen in Dallas. That's a market you will see sliding a bit more as well.

Is that guiding acquisition decisions, or are you starting to look to those markets for some values?

No. We have done both. We have looked to continue to expand our portfolio in the higher varied entry markets, as well as take advantage of markets that have serious dislocation. Because in my books, if you can buy a property in a 8% capitalization rate that shows economic occupancies in the mid-80s, I don't know how you lose money. So we are -- where we are able to take advantage of it, that's what we are doing. It's not easy, though.

Thanks very much.

Raul Batacharji from Merrill Lynch has our next question.

Hi, question for you, Doug. In light of your comments about, sort of, what's happening to development returns, generally. I was wondering how you felt about development returns from your own pipeline?

Well, if you follow what I said, there is a speculative hook in there. And that is that while the yields today on a card cash-on-cash basis are intoxicating, and theoretically, if the economy improves and the interest rates go up, you end up with higher rents which offset the higher interest rates. What happened to the cap rates? Did they rise, or did they stay the same?

We believe -- we are what I will call a net sum trader. So if dispositions yield 8.5, and acquisitions can be bought at 7.5, or a 100 basis point spread, which is what we have historically done them at, we will trade. If dispositions trade at 9.5 and acquisitions are at 7.5, or whatever seems reasonable -- we won't trade. We see the new development business which we are doing very, very cautiously. The cap rates are still in the 8.5% range on adjusted stabilized numbers assuming little to no increases in the rents. Occupancy is moving back up into the 90 to 92% area.

We are not willing to bet the company at a rate of $700 million a year that that's a prudent move. We will continue to push somewhere in the vicinity of $350 to $400 million of new product out there at those levels because I don't think that there's much of a down side.

And a quick follow-up with regard to Bruce's comments about instituting a new pay for performance system. What effect is this new compensation system likely to have on margins going forward?

[INAUDIBLE] Margins going forward? It's really more a pay for performance in terms of being fair than it is increasing dollar value. In other words, what we are trying to do is pay those people whose performance is at a higher level more than the people that don't. And right now, it isn't totally at equity for all the employees. I don't - We don't anticipate any real increase in the cost of pay roll here. It's just a reallocation where, the better performance gets more and the weaker performance get less.

All right. Thank you.

We'll take our next question from Lou Taylor with Deutsche Banc.

[Silence] Paying for performance before, what led you to tweak the program?

Well, Lou, when you looked at -- when you went through, and this is down, truly at the property level and at the RM level. And you saw a very narrow band of differential between the bonuses, I had to scratch my head and I said they can't all be performing at the same level. So let's take a look at it.

And so what we have done is we have tweaked the program to get what we want out of our employees. And if the person performs, they gonna get paid more money than they would've gotten paid under the old system. And the person who doesn't perform is going to get paid less money.

Okay. The second question just pertains to the acquisitions and dispositions. As you sell some of your older and smaller assets and go into, you know, larger properties, newer assets, presumably. When is that going to have a meaningful impact on operating efficiencies, if any?

Well, it takes -- what we are trying to do over an extended period of time, is truly reduce, one, the age of the portfolio which will increase the operating margin. Two, move the portfolio into the higher varied entry markets, which will increase the operating margins. If we continue to execute our plan, it will be over the next two years, and we should be in the high varied entry markets at the level we want to be in.

I believe it's going to take, because of the -- put it a different way.

The program of dispositions didn't move at a speed that it should have moved at in 2001 because we couldn't handle the -- we couldn't match it to the acquisitions. So we are short about $250 million because this company should sell $700 million worth of product a year. Conversely, invest that $700 million in new product. So we are short last year $250 and this year I believe we will be short $300 to $350. So we are short almost $500 million on dispositions. And the program had originally anticipated that it would be approximately 2005 before -- between the new developments that would be in place, and the sales that you would then have a portfolio that had finally shrunk in age so it was around 10 years. My guess is you will be looking at -- you should look at, assuming there's no deterioration in rental revenue, you should be looking at a continued increase in operating margins, which you have seen every single year, over the next three to four years while we get to that, hopefully having a portfolio of 10 years or younger, and the high varied entry level attained.

Okay. And then just as a follow-up to that. What do you think that will do to that price point mix that Bruce had mentioned? Do you think you'll have somewhat similar mix, or will you be leaning more towards A assets?

No. What will happen is - I have always said from the beginning of time Lexford was a spectacular acquisition. So, assuming that we don't do anything with Lexford, that will take care of our lower piece of the portfolio. You probably will knock off about 20% to 30% of the C's in this. When you have a portfolio whose average age is 10 years, by definition you'll have a certain number of properties that are gonna be 15 years.

And so the 10 to 15-year-olds will be those properties which, you know, if you want to be nice, they are sort of B minuses to Bs. In reality they probably are C plusses. So we'll still have a pretty good good diversification in asset quality and asset mix. If you sell off the Lexford portfolio, you'll lose a substantial number of properties and about $650 to $700 million worth of asset base which would obviously accelerate that.

Okay. Last question with regards to development pipeline. Are there any assets there which you have the right not to buy or not to take full title of?

All of them.

All of them.

We have the ability in every of those joint venture developments, Lou, to pass on the acquisition of the property and allow our partner to take the property to market.

Right. Do you anticipate doing that with any of the current properties?

Yes.

I mean one or two of them?

No. What happens is we try to sit down with our partner and cut a deal before someone comes in and makes an offer on the property. So I would assume that we would be acquiring, at least 80% of the product that we are building. That's the whole reason for building. We are not a merchant builder.

The venture has sold one property outright. We have acquired their interest in another. We are having conversations about a handful of other, Lou. In fact, in one other we have gone ahead and told them they can take it to the market. So it's an ongoing process.

I guess where I was going is there a number of those properties, which given the current climate aren't hitting the leasing and rent objectives and you are better off saying let's let them sell it and we'll move on?

Yeah. I mean I would say, for instance, that, you know, if you looked at the properties in Atlanta, Georgia, okay? You would say, let's move one of those into the market place and keep the other two and sell off some of the stuff that's in the suburbs.

These properties that are built in Atlanta are mid-town properties which you have a much better location, a much better long-term position than something that's out in, you know, the boonies that may look terrific in a photograph, but long-term isn't going to make you as much money. What we'll do is keep those and sell off the ones in the suburbs.

The ones in Boston, for instance that didn't hit the pro formas but are still yielding in the 8s, no, we are not going to sell them. You turn around, someone would be willing to buy it at 6.25. I'm not interested in selling that.

Okay. Thank you.

You have to look at it on a relative value basis, Lou.

To the extent you have a property that may be underperforming original expectations the fact of the matter is that we own the majority of that property and there's little upside to our partner if it's not hit its objective. For us to decide to go ahead and allow them to take that property, is us, sort of saying, we may keep the other properties that we have in that market place and sell the development property or retain the development property, pay our partner a diminimous amount for their limited interest and we can sell other properties. So, it's not an asset by asset decision it's a portfolio management decision.

Thank you.

Morgan Stanley's Robert Stevenson has our next question.

Good afternoon, guys. With the D.C. development, [NAUDIBLE] is this suburban, northern Virginia / Maryland properties that you will be doing in this? Any sort of thing within the District itself?

It's all in the District.

Okay. So it's mid-rise and high rise?

Mid-rise and high-rise.

Then one other question here. Doug, given that you have historically increased the dividend in the third quarter, where are you guys versus your minimum payout and what's your preliminary recommendation to the Board this year?

Well, first we are still about 500 basis points above the minimum payout. I would say 5 to 600 basis points above the minimum payout levels. What we have always done is, as we finish our, you know, budgets for the year, we sit down with the Board and make a recommendation for next year. And the budget process doesn't even start until the middle of August around here. So, we'll discuss it on the -- in the final quarter.

Okay. Thanks.

Steven Sweat with Wachovia securities, please go ahead.

Good afternoon. A couple of questions. David, you commented on the comparison on a sequential basis Q2 versus Q1. Could you provide anymore information on the sequential monthly trends that you saw in the quarter? And was there any meaningful difference, say between the average occupancy in the quarter and the quarter end occupancy?

No. The occupancies really haven't significantly changed on a trend basis.

What has changed is the total revenues. When you look at total revenues, that's been the trend where there was a pretty good first quarter, it looked like revenues were actually recovering in the first quarter. And then when you got into April, May, June, time frame, in our particular portfolio, we started to see the depth there. On a sequential basis, you are seeing, you know, every month since March, move down slightly.

So June was down from May, too?

Yes.

Okay. And, Doug, just wanted to clarify on your comments that you are looking back into some of those markets that are more challenged. Have you had any success picking up acquisitions in those markets? Or are you just looking?

Good ask, but still a little bit too wide.

Okay. And then, one final -- I guess I have two more questions. The sales that you have under contract, do you expect to re-deploy that capital into acquisitions as you have in the past? And, what might be the time frame between the sale and the acquisition?

Well, if Alan George was here, he'd say instantaneously 'cause his bonus is directly tied to making sure we don't end up with a significant mismatch. It's called pay for performance.

So you have enough acquisitions teed up to get --

Last year we got terribly mismatched, and this year when are not. We don't plan to get mismatched again.

One final question on the disclosure on the capitalized improvement cost. Just want to clarify that the section that talks about the replacements in building improvements, does that include properties where there might be a major repositioning either unit upgrade or clubhouses, or things like that?

Yes.

Okay. All right. Thank you.

Moving on, we'll take a question from John Lit with Solomon Smith Barney.

Hi, it's John Lit, Richard Anderson. First I wanted to cover your thought process on the stock buy back and timing and price and any color on how aggressive you may or may not be on that?

I could tell you, Jonathan, if we had the authority last week, we probably would have filled the bucket. I have never seen a turkey shoot in my life like last week. So if they want to bomb the Ritz again, you can see EQR out there very aggressively buying in stock.

The inverse of that is if we don't, you probably won't be?

You got it.

David, I think it was last quarter you went through the development portfolio as it stands and what the yield was on it at that time which was below the yield you guys were quoteing and so you made an adjustment. Can you give us an update on where we stand on that?

On the development yields or projected development yields on the development portfolio?

Yes the development portfolio you were accruing a certain portion to get to the nine?

Those are two separate issues. As it relates to our investments in the development joint ventures, we do continue to accrue - essentially have a capitalized interest for the amounts we have invested in there.

We do not capitalize interest on a couple of the transactions, and I think in the last call we said that we would not capitalize about five or so million dollars or almost two cents worth of potentially capitalized - capitalizable interest on those investments. So we have -- we have actual capitalized interest for, I guess the first half of the year of almost $8 million.

And wasn't the other issue the actual yield, the portfolio was throwing off was lower be the yield that -- than your return?

Oh, God, no because I have a leverage on here, Jonathan. While the portfolio yields have depreciated 50 to 75 basis points, the financing rates that they assumed Lybore at 5 and 5%, you have 200 to 300 basis points below at 70 to 75% financing so the yield to the -- to us on our pref, is, you know, matched and exceeded. That's not the issue. It's what's the fair value of the asset?

Right. I'm trying to recall now. It was a quarter or two ago where there was an accrual that had to be reversed.

That's what David was --

It was related to the capitalized interest on the assets?

We hadn't reversed any accrual. We changed some presentation of the accounting of these investments and had moved it to capitalized interest presentation. And we also had said that we would stop capitalizing interest on several of the properties that we thought were getting a little thin.

Right. Any change on that at this point?

Nope. The hopeful change will be we'll sell one of the assets in the next 120 days and hopefully the other one in another four to six months.

So what would be the unleveraged yield on the developments at this point?

North of it's about a -- if you blend the whole thing it's about 840 to today's numbers. Mostly in the Boston, California areas is about 100 basis points. Actually it's more than that probably about 150 basis points positive spread to the cap rate sale. Most of these assets are 7% cap rated sales assets.

So they are yielding 840 and the partners start participating above a nine; is that correct?

This is free and clear.

I'm talking just unlevered cash.

Don't mix unlevered cash with profit participation, okay? What you should do is, once again, spend some time with David to understand the joint venture.

The joint venture is a return on equities capital which is after financing. Okay?

So if the portfolios are yielding a 8.5, and the financing rates are 6, and 5, and 4, and 3 in certain instances by definition, the yield to equity has to be substantially greater than 9, which means that our partner, if we were allowing distributions, would be getting distributions, and then when you go to sell the asset, the asset should sell at 100 basis points to 140 basis points inside of this cap rate which then you flush through a waterfall and we get our money back and a 9, a 10, a 11 and a 12 and once we get to 12 they split 50/50. There's plenty of money to the investor EQR. And plenty of money to the partner, Lincoln in these fields.

Yeah. There's the yields we have talked about and Doug mentioned the 840 yield is the cash return on cost.

Free and clear.

Unleveraged. When you do put the leverage in there, as Doug mentioned in his opening remarks, there's very strong leveraged return on equity capital in development transactions. Notwithstanding the fact they could be 85% economicoccupied.

Right. My point is what degree is it not hitting the target? Is 840 below the target?

Thats's correct. That's correct. That would be on a weighted average basis. 30 or 40 basis points or so inside what would have been the kind of weighted average yield expected at the time we committed to do these transactions.

And that continues to be the case, nothing's changed in the past quarter or two, materially?

No.

Second question is on building improvements. I think it was Rob Stevenson that started asking the question wouldn't there [INAUDIBLE] to be revenue enhancements? What amounts if any and what would it relate to?

As I mentioned, our experience tells us that about 20% of what we capitalize could be considered either revenue enhancing, discretionary, expense savings, so you name it. We would suggest that 80% or so of our capitalized amounts every year would be what we would expect to be the recurring amount that you need to maintain consistent levels of operations at the property.

And on that 20%, what examples would you have today that you are actually doing of what you would consider that wouldn't be nonrevenue enhancing?

Installing washers and dryers.

Car ports.

Putting in car ports. Things that have, you know, 15 to 40% total rates of return on them.

Also -- we also have a number of properties we are doing interior upgrades to move our pricing model. And we have -- we have retro fitted a number of properties mechanical systems that have reduced utility costs. We have a number of electrical and utility cost initiatives that get tossed in that number that end up being expense enhancement pieces.

Okay. I think Rich Anderson may have a question as well. Rich?

Thank you. With regard to the maintenance side of the schedule that you provided, you are running at a run rate of $850 a unit or something in that range. That sounds real high relative to what my expectation would be and relative to what some of your peers are expensing. Has there within a change in accounting? What is in that number over --

First of all I can assure you there's been absolutely no change in accounting. I have not compared our apples to the competition's oranges. I can tell you this is what our expenses, maintenance expenses, as well as our payroll. It's our third party contracts. We pay people to come out and do certain work on our properties. In fact, we have actually brought the number down somewhat as we have done more and more of the vacant unit turns with our own staff, been able to be much more efficient in maintaining the properties with our own staff and not having to bring in third parties. So I guess --

Let me speak to -- I don't know what numbers you are looking at, Rich. When we bought Wellesford we knocked the maintenance expenses down $350 a unit. When we bought Steve Evans' company we knocked the expenses down about $275 a unit. When we bought Mary Land we knocked the expenses down about $250 a unit.

When we buy a property from one of our competitors we find, we knock the expenses down $175 to $300 a unit. When we buy a property from a pension fund, and we are more than willing to show anybody who wants to see it, the books and records of what the asset cost to run before EQR took it over, versus what it cost after. So I don't know where you get the numbers from. But I would suggest you take your bag and come out to Chicago and we'll show you what it really costs to run one of these properties.

This is not the total cost to run the property. This does not include office staff, leasing, manager, any of those sorts of things. So I'm not sure if you are comparing to total operating expenses or what, Rich. But we'll be happy to look at some of the other competitors that you are referring to and see what we may be doing differently. I want to reiterate there's been no change in any of the accounting policy. 9 years.

Understood. Maybe we can talk more in detail off line. One last question. Could you talk about how you calculate your cap rate on dispositions relative to acquisitions? Is there a backward looking methodology one way and a forward in the other?

No they are exactly the same. What we do is we take, on the disposition, we take the 12 months forward and adjust the real estate tax to what the guy is going to have to pay in new real estate taxes based on the closing, and then on the acquisition we do exactly the same thing. We use our own real estate tax adjustment as well as what we think the property will make over the next 12 months.

Thank you very much.

Moving on, we'll take a question from David Harris with Lehman Brothers.

Hello. This is David Schulman. Good afternoon. I have a few questions. One is accounting for rental concessions, are they pure expenses?

Yes. It's -- you don't collect it, and so it's not revenue. It's --

Reduction of revenue.

Thank you. Next question is on property taxes. Do you have any early indications as to how much you think property taxes will be going up next year?

Well, I misjudged what they were going to go up this year. So, I thought the local municipalities would basically be using the real estate taxes to balance their budgets.

So if you just want to throw something off the side of a cliff, I'd say you are probably looking at a number that's substantially in excess of inflation, and probably in the 3.5 to 4.5% range. They still have massive budget deficits they have to close.

Thank you. And one last question. The increase in GNA could you go over the $4 million increase in run rate in GNA? The $11 million versus the $7 million?

Yes. This goes back to conversations, I think that we had when we did the year-end call where it started to creep up a little bit in the fourth quarter. And this is primarily has a result to do with retirement programs that had been put in place for both Doug and Sam, as well as recognition of compensation from grants of restricted stock as we moved from primarily from restricted from options to more to restricted stock. As well as we have an increase in some state income taxes that we've had to pay.

But we have talked about the expectation for GNA for this year of being a 43 or so million dollar number. Then in a couple years we would expect that to get back down to a 37, $38 million number when we don't have a CEO and a President. And as we have kind of burned off some of the accruals we have done for the retirement packages for both Doug and Sam.

One of the biggest jumps we really hadn't anticipated was about a $2,800,000 jump for the six months this year over last year for income taxes.

That's state income taxes?

Yes. Both in Michigan and New Jersey there have been a change in the way some income taxes had been calculated. That was about a $2.8 million number - I'm sorry - increase variance for us this year over last year.

Okay. Thank you very much.

We'll take a question from Shane & Company's, John Shane.

Yes. My first -- my questions all revolve around different ways of figuring out economic earnings. You guys talk about like a 8%, just to take an example, yield unlevered on a property. Would there be any depreciation taken out of that number? Or is that just -- .

No that's cash flow.

So it's like property and maintenance expense, taxes, insurance. If you had to replace a roof somewhere, would that -- .

That would be after, depending on the age of the property, if it was brand-new it would be after 150 in CAP-X. If it was a five to six-year-old deal probably about 250. If it was in its later years, it would be 300 to 350 reoccurring CAP-X.

So what you don't have in there which we figure up front in the purchase price, is the $1,000 a unit to fix the thing up or $1500 a unit to fix it up. Or if you did it over an average 10-year period of time, would you have to deduct an additional $350 a unit to come up with a true cash flow cash flow each year. You need to capitalize the up front number or take the 350 of additional CAP-X for roofs and parking lots, et cetera.

For a bisider, like me, who is looking for sort of a methodology to figure out kind of economic earnings which I guess would be comparable if I owned a property what could I spend every year allowing for, you know, fixing, having reserve to fix the roof when I need to. Beer money is my -- money you can actually go out and spend.

Yeah. I'll tell you exactly. If it was a 8% cap rate which is after what we call reoccurring replacements knock off probably another 25 to 40 basis points a yield.

In terms -- that makes sense. In terms of doing it on the -- you know sort of the per share numbers, any thoughts there? You guys have sort of an ANI, adjusted that income, number. Is that an attempt -- .

That's the attempt to basically recognize the ongoing expenses we think these things really depreciate at.

That adjusted that income number has included in it only the depreciation that relates to the incremental additional CAP-X we have spent on properties since we acquired them. It doesn't depreciate the acquisition cost, but only the incremental dollars we have spent on a post acquisition basis. It also does have included in it - we included gains and sales on properties.

Right. I would probably strip that out. Although I guess as you are saying you have historically been able to add value.

But if you -- this will be just the last question. Just to be clear so I can get it through my own mind. If you replace a roof somewhere, you bought it, maybe you have held it 10 or 15 years, you have to replace the roof.

Is that going to be sort of a replacement type of item that will show up and be depreciated in future years? I take it that wouldn't be an acquisition type expense that would be more replacement type expense?

You are right. It would be expensed and depreciated.

Okay. Well, thanks and I'm also glad you guys are expensing stock options. I think it's great. I appreciate it. That's all.

Okay. Thanks.

We'll go to Peter Schriver with Bairt Associates.

Thank you. My questions have been answered.

Our final question today comes from Larry Raymond with C.S. First Boston.

Thanks. My questions have been answered.

Okay everyone. Thank you for joining us today. That does conclude today's presentation.