住宅地產 (EQR) 2002 Q3 法說會逐字稿

Good day, everyone. And welcome to Equity Residential’s third 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 Miss Cindy [McCue.] Please go ahead, ma’am.

Thank you. Good morning, 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 our press release, related to the operation of our company. Equity Residential assumes no obligation to update or supplement these forward-looking statements that may become untrue because of subsequent events.

This morning we will begin with an overview of our financial results presented by David Neithercut, our Chief Financial Officer, followed by comments on the multifamily industry by Doug Crocker, our CEO. Then Bruce Duncan, our President, will give a company and market update. Gerald Spector, our Chief Operating Officer, is present and available to answer questions.

At this point, I’ll turn it over to David.

Thank you, Cindy. Good morning, everyone. Thanks for joining us today.

First, I’ll quickly review the key earning measures for the third quarter that are outlined in our press release. Then I’d like to spend a little more time providing additional detail on same store operating performance. Then I’ll briefly summarize the key capital events for the quarter. And finally, we’ll review our revised guidance for the balance of this year, and introduce our guidance for 2003.

For the third quarter 2002 Equity Residential earned 23 cents per fully diluted share, compared to 26 cents per share for the third quarter of 2001. These earnings were reduced six cents per share to account for a $17.1 million reduction in the carrying value of our corporate housing business. Based on the current state of the economy and our short-term outlook for this business we thought it appropriate to reduce this asset to $30 million, and I’ll get into more detail on this charge in a moment.

Our earnings before gains or losses on property sales were 14 cents per share after the corporate housing charge, compared to 27 cents in the third quarter of 2001. Adjusted earnings per share for the quarter just ended were 50 cents per share after the corporate housing charge, compared to 54 cents, again in the third quarter of last year. And for third quarter 2002 our funds from operations were 60 cents per share, versus the 67 cents per share we reported for the same period of 2001, and our FFO result is not impacted by the corporate housing charge.

Turning now to same store performance, and this includes 197,852 units which the company owned for the third quarters of both 2002 and 2001. Our same store revenues decreased 3.7 percent. Our operating expenses increased 1.95 percent. And our net operating income decreased 7.0 percent. Our same store revenue decrease was the result of a 3.9 percent decrease in rental revenues which resulted from reductions in occupancy, rental rates, and an increase in our rental concessions. And this was offset slightly by increases in utility collections, and laundry, cable, and telephone income.

On a sequential basis from the second to third quarter 2002 same store revenues decreased 1.1 percent, our operating expenses increased 4.5 percent, and NOI decreased 4.3 percent. Last year on a sequential basis third quarter revenue increased .3 percent, operating expenses increased 3.8 percent, and NOI decreased 1.7 percent.

For the quarter just ended our rental rate decreased 1.7 percent over the same period last year. Average rent per unit for EQR’s properties for the quarter and this is excluding our Lexford portfolio was $864 per unit per month. Lexford was $500 per unit per month. And the aggregate including Lexford and EQR portfolio is $815 per unit per month.

On a sequential basis in-place rental rate decreased .2 percent from the second quarter this year. Last year on a sequential basis from the second to third quarter in-place rental rate increased .8 percent.

Average same store occupancy decreased by .9 percent in the third quarter from 94.5 in the third quarter of ’01 to 93.7 percent for the third quarter of ’02. On a sequential basis occupancy declined .3 percent from the second quarter of 2002.

Reflecting the very difficult rental markets in which we’re operating today our concession increased $4 million quarter-over-quarter, and that’s an increase of 44 percent. On a sequential basis, concessions increased 1.9 million or 17.1 percent in the second quarter of ’02. Last year on a sequential basis from second to third quarter concessions also increased 1.9 million.

On a same store basis bad debt expense in the third quarter increased $287,000 over the third quarter of ’01. As a percentage of revenue bad debt expense increased slightly quarter-over-quarter from .8 percent to .9 percent of total revenues. On a sequential basis our bad debt increased $1.2 million from .7 percent of total revenue in the second quarter of ’02. In 2001 on a sequential basis bad debt expense increased $718,000 from second to third quarter, also going from .7 percent to .9 percent of total revenue.

Turnover decreased on a quarter-over-quarter basis from 19.8 percent for the third quarter ’01 to 17.9 percent for the third quarter of ’02. On a sequential basis from the second to third quarter turnover increased only .9 percentage points. This compares favorably to last year’s sequential increase of 1.8 percentage points from the second quarter of ’01 to third quarter of ’01.

Regarding expenses, as I mentioned earlier, same store operating expenses increased 1.95 percent in the third quarter. And this increase included the 1.7 percent increase in payroll, a three percent increase in property taxes, and a 44.2 percent increase in insurance expense. And insurance expense represents just 3.5 percent of our total expenses for the quarter.

Turning now to equity corporate housing. That operation continued to improve results, despite the sluggish economy. It was once again profitable this quarter, producing operating profit of $588,000. This continues the positive trend established last quarter, and brings ECH to positive NOI for the year. Seasonality of this business will create negative NOI for the fourth quarter, however, and we expect the business to achieve our goals for 2002 of having slightly negative to break-even operations, while contributing over [12 million] in rental revenues for the parent company.

Equity corporate housing currently has just over 2,800 units, down from a high of 4,700 units when we purchased the business in mid-2000. Sales in the third quarter declined 7.1 percent quarter-over-quarter. Occupancy increased from 88 percent at year-end to a current level of 94 percent, which matches our expectations. And the gross profit margin remain constant at approximately 20 percent for the quarter.

ECH has continued to lease equity residential owned apartment units wherever possible, and we’ve been able to increase the percentage of these units from five percent in mid-2000 to 34 percent today, or about 950 units. Rent paid to equity residential totals over $9.8 million for the first nine months of the year.

And notwithstanding the intrinsic value that the business obviously has to us in driving $12 million of rental revenue to our properties across the country, GAAP requires us to look at the asset from a purely market basis. And with the business not expected to produce meaningful profits until the economy turns around, and current market scrutiny of non-core assets, we felt it would be appropriate to reduce the carrying value of equity corporate housing to $30 million which has resulted in a $17.1 million charge.

In addition to ECH units, EQR currently has about 2,700 units leased to third-party corporate housing providers across the country, and that’s unchanged from the second quarter of ’02.

Turning now to the balance sheet, in addition to the outstanding debt balances as of the end of the third quarter which we’ve listed in the press release, we’ve also noted that EQR’s share of debt from unconsolidated joint ventures was approximately $790 million, all of which is non-recourse to the company. Also, approximately $211 million of unconsolidated secured debt on our balance sheet should be allocated to third party partners in these properties, and this further adjustment would net the amount of our share of unconsolidated debt down to $579 million.

And also, as noted in the press release, at the end of the third quarter the company had $35 million outstanding on our $700 million revolving line of credit. As of today that balance stands at $322 million. And this increase is due to secured and unsecured debt repayments, as well as having acquired nearly $115 million of stock under the $200 million stock buyback program we announced on our July 31st earnings call. To date, we have acquired nearly 5.1 million shares at an average price of $22.58.

With today’s press release we provided detail regarding our expenditures for property maintenance expense and capitalized improvements. Included is a schedule for year-to-date 2002 and a revised schedule for the full-year 2001. With this release we’ve made some changes from these schedules that we have provided at the end of the second quarter, and we’ve now included in the column or category maintenance payroll all landscaping, cleaning, and housekeeping payroll costs which had not been included previously. With these additions this schedule now contains all costs associated with operating our properties except those that we incur in the business or leasing office. And this has added $140 per unit to the average per unit maintenance expense for the full-year 2001 for our established properties.

For the first nine months of 2002 we expensed $730 per established unit and capitalized $511 per established unit for replacement items for business and building improvements.

And I’d also like to note that at our Board of Trustees’ meeting in September the Board has approved our recommendation to begin expensing stock option grants effective January 2003, and this will impact our reported results by approximately one to one-and-a-half cents per share per grant. And that charge will be recognized over a three-year vesting period for each grant.

And then with today’s press release we’ve provided updated guidance for 2002, and we currently expect full-year FFO to be in a range of $2.46 to $2.47 per share. We’ve also revised our assumptions and projections relating to same store operating performance for 2002. These changes reflect our expectation for little improvement in job growth and continued low interest rates which will continue to facilitate first time home buying.

Finally, we have introduced FFO guidance for 2003 of $2.25 to $2.40 per share. And Doug and Bruce Duncan, their comments on the economy and the state of the apartment markets, will shed further light on our expectations for the balance of the year and for next year.

I’d like to now turn it over to Doug.

Thank you, David.

For quite some time you’ve heard me talk about the importance of the affordability index, relating single family home ownership costs to apartment rental levels. I believe this index is probably one of the single, largest influences over the rental rates apartment owners can charge.

During the early 1990’s rent from the apartment sector increased quickly due to a total lack of supply and a required closing of the gap between depressed rental levels and those rents needed to justify new construction. By 1995 the apartment sector was charging rents that would now justify new construction. However, between 1995 and 2001 our rents rose greater than the rate of inflation and the cost of new construction. The answer lies ahead, I believe.

Our sector was the beneficiary of rapidly escalating house prices. As the cost of a new home increased five to six percent annually we were able to increase rents 3.5 to five percent while maintaining the house/apartment affordability index differential. In addition, supply of new units remained in check, due in part to the new transparency provided by the [Reeds].

In early 2001 there were signs of an economic slow-down that caused rents to compress. However, the real rent compression did not occur until this year well after the shock of 9/11, and after the economy had actually showed signs of a recovery. And while the decline in rents can be partially explained by lack of job formation and excess supply in various markets I believe the major force causing the downward pressure on rents was the 20 percent drop in interest rates which seriously compressed the housing affordability index. The cost of owning a house was equal to renting a smaller apartment in late 2001 and early 2002 as a result of these historically low interest rates. This phenomenon was compounded by the government’s policy of promoting home ownership, and the advent of low or no down payment mortgages. And for a period landlords saw their occupancies fall.

In response, we lowered net effective rents. First, with up front concessions, and now with absolute lower rental levels. In most markets net effective rental levels are now 10 to 20 percent below those of the pre 9/11 period. And for the first time in over a year the affordability index between owning and renting has been restored. And while it will take the next nine months for these lower effective rents to cycle through the rent rolls of the multifamily sector causing downward pressure and property NOIs we should see a continuation of the increased occupancies we’ve seen recently.

In addition, I believe the base has now been set for a significant increase in property level NOIs once the economy improves with job formation and increases in interest rates. And for the first time in over 15 months I believe our industry is now well-positioned for a recovery once we’ve cycled through these lower effective rentals that now make us competitive for the single family home.

And now, I’ll turn the meeting over to Bruce Duncan.

Thanks, Doug.

I would like to start by reviewing the state of the economy and how it relates to our business, and then review the market as to acquisitions and dispositions. This will be followed by a review of our top and bottom performing markets, and will conclude with our thoughts for the balance of the year in 2003.

It was interesting to hear last week that third quarter GDP growth was 3.1 percent. It just doesn’t feel that good. Much of the growth in the economy is coming from increased productivity, not job growth. To me this recovery looks more and more like the job recovery in the 1990, 1991 recession. The current view is that fourth quarter GDP growth will be closer to two percent. The lockout of the dock workers on the West Coast will be one of the drags on the economy in the fourth quarter. Auto sales continue to soften. The economists are calling for only 16 million sales this year, down from a pace of 17 million at the beginning of the year. The zero percent financing sales have taken all the purchases they can at this time. Look for the big three to start slowing production slightly in the fourth quarter.

October unemployment numbers released this past Friday increased to 5.7 percent from 5.6 percent in September. And will likely stay at this rate, or be slightly higher, for the rest of 2002. Airlines and telecom continue to be the weakest industries right now. Lucent just announced 10,000 more job cuts, while American Airlines will lay-off another 7,000, Delta 8,000, and another 1,300 from United. American Airlines and Delta also announced they would not take delivery of any new jets in 2004 or 2005. These cuts will hurt Boeing’s commercial aircraft division. Boeing has already announced that deliveries in 2004 may be less than 2003. Given these delivery numbers it would not be surprising to see more job cuts in Seattle over the next 12 months.

Now, all of these items add uncertainty in the minds of our customers. And makes them less likely to spend. This is worrisome as it is the consumer who has been keeping this economy afloat. This uncertainty is confirmed by the University of Michigan index of consumer sentiments which came-out last week. It was 80.6 in October, down from 86.1 in September, and 96.9 in May. The October loss was the fifth consecutive monthly decline, and it is now at the lowest level recorded since 1993.

Inflation remains in check at this time, but look for higher natural gas and heating oil prices this winter, due to low inventories. Mortgage rates continue to hit new lows, keeping single family construction and home sales as one of the bright spots in the economy, much to our chagrin. There was softness in construction starts in August, but unfortunately September’s numbers were very strong.

On a positive note for the apartment industry the number of single family foreclosures is increasing dramatically as are personal bankruptcies. At some point lenders will have to rein-in their aggressive lending practices, which will keep more people in apartments.

Multifamily construction permit data changed little in September. 309,000 permits for five-plus units were pulled in September, which is up from August’s 296,000 revised number. Multifamily starts declined from 344,000 in August to 329,000 in September. This is up 20 percent from a year ago. I believe that this number will decline to a range of 250,000 to 275,000 in 2003 as developers and their equity partners and lenders acknowledge the softness that exists in many markets around the country.

Now let me focus on what’s happening in the acquisition and disposition markets. Cap rates continue to be historically low nationwide. However, in many markets the sales prices are actually the same as they would have been 24 months ago due to declining revenues. Deteriorating fundamentals have been offset by a combination of low cap rates and a historically low interest rate to provide the illusion of stronger pricing. There are certain markets, including southern California, Houston, Washington D.C., and parts of the Northeast that have seen actual increases in value, where investor expectations for stronger revenue growth and market stability exist.

There is certainly in the real estate investment community an argument that a paradigm shift in investor expectation for yields is taking place with respect to these initial low yields. We don’t believe this argument holds much water, and that as the economy recovers fundamentals will improve and interest rates will rise, as will cap rates. This being said, we have continued to see a very high demand for assets we are marketing for sale. And on the buying side a very competitive acquisition environment for high quality, well located assets.

On a positive note from a buyer’s perspective we are receiving an increasing number of submissions. Additionally, just within the last few weeks there have been sellers seeking surety of close and speed as more important elements in price. This would represent a major change in the psychology of sellers compared to the recent past, and the strongly capitalized companies like Equity Residential is well-positioned to take advantage of this change if it continues.

Buyers of high-end properties have been for the most part pension funds and their advisors, with the occasional 1031 buyer. The 1031 buyer has been a major presence this year, more so than in previous years, and we expect to see this continue in the future. Most of the B and C property buyers have been driven by low interest rates. These buyers tend to be syndicaters, high net worth individuals, and smaller opportunity funds.

In terms of acquisitions, for the first nine months we have acquired 3,053 units, for a total of $245.4 million, and an average cap rate of 7.8 percent. Subsequent to the third quarter we have under contract or letter of intent another 581 units for a total of $44.5 million at an average cap rate of 7.8 percent.

On the disposition front for the first nine months we have sold 6,046 units for a total of $338.9 million at an average cap rate of 8.4 percent. Subsequent to the third quarter we have 4,360 units under contract or letter of intent for a total consideration of $189.6 million, and cap rates ranging from 7.6 percent to 11.9 percent, and averaging 8.7 percent. We project that by the end of the year we will have closed between 400 and $450 million worth of dispositions.

Now, let me give you some color on some of our worst and best performing markets. At the bottom of the barrel it continues to be Austin, Texas. This market has been the worst for the past year, and continues to lead our portfolio with the greatest decrease in revenues and net operating income. Economic occupancy is around 85 percent, and 6,400 units are being delivered this year which has resulted in our net operating income declining by 26.9 percent. Over 3,300 units are scheduled to be completed in 2003, hence, this market will continue to be very, very weak throughout next year.

San Francisco, while this market continues to rank as our second worst market in terms of revenue decline to negative 12.7 percent it is starting to show some positive signs. The Oakland East Bay area is the strongest sub market and has even shown some very, very modest increases in rates. Net absorption terms are marginally positive in the second quarter of 2002 after five quarters of negative net absorption. The worst part of this market by far continues to be San Jose, which is getting 3,500 to 4,000 new units this year, and another 2,500 units in 2003. This sub market will take a number of years to stabilize.

Northern New Jersey, this market continues to be hurt by new supplies coupled with the lack of easy accessibility to lower Manhattan. As it will be at least two years before the [pass train] is open to the World Trade Center site, this new supply being delivered between now and the end of 2003 will be difficult to absorb. Concessions on a new lease of one to two months and getting worse. Rental revenues for the year will be down 13 percent, and this market will continue to be weak throughout 2003.

Raleigh, North Carolina, this was an honorable mention on our last call as one of the worst markets in the country, and this quarter it has cracked the top five with revenues declining 11.2 percent. Raleigh has shed 5,800 non-government jobs since the beginning of the year, the result of continued lay-offs of its large technology companies. IBM alone accounted for 1,100 of these cuts. Additionally, 4,000 government jobs have been slashed since January, most notably by the University of North Carolina. Single family permitting activity remains high, as over 13,000 permits were issued over the last two years, giving Raleigh the third highest level of permits per capita in the nation. Vacancies for multifamilies are the third highest in the nation. The apartment stock increased by 6,000 units in the past 12 months and 2,200 are currently under construction. Concessions are 1.5 to two months in a 12-month lease, and the local economic growth for 2003 is expected to remain sub par which does not bode well for any meaningful rebound in this market until 2004.

Denver, Colorado, this market has been badly hurt by the class, the high tech, telecom, and financial services sector. Economic occupancy for us is around 83 percent, and our total revenues in the third quarter declined by 10.9 percent. This deteriorating employment picture combined with the delivery of 8,000 units in 2002 and 6,200 units under construction to be delivered in 2003 makes Denver as my pick for what will be the worst performing market in 2003.

But there are plenty of other markets continuing to show stress, such as Atlanta, Charlotte, and Phoenix, we do have a number of markets with positive growth. Our leader in the clubhouse is New England, excluding Boston. This region continues to benefit from little new supply, and we are seeing revenue gains of 5.2 percent and expect net operating income growth of 7.5 percent for 2002.

Washington D.C., Maryland, just like last quarter this market continues to show strength with revenue growth in the four to five percent range, and net operating income increases of seven percent. While this market should stay strong for the next year there are a lot of new units being proposed to both Maryland and the District of Columbia which should dampen growth in late 2003 and in 2004.

The Empire, this market continues to have good population growth and job growth. In fact, the Riverside San Bernardino area is the fastest growing metropolitan area among the 50 largest in the United States on a year-over-year basis. We are 96.6 percent occupied. That being said, rental growth is moderated to 2.1 percent, but with only a modest level of new units being delivered, about 2,500 units between now and the end of 2003, we think rental rate increases next year will be in the three to four percent range. We like this market, and believe it will continue to do well.

Los Angeles, this market continues, it seems to have bottomed out, and has added 6,000 jobs over the last two months. Apartment demand is improved, and permitting activity is down 48 percent. We look for this market to continue to strengthen.

San Diego, this city continues to prosper, increase in employment by 1.8 percent over the last 12 months. Our economic occupancy for this market is around 94 percent, with a physical occupancy of 97 percent. New construction will add only 3,400 units in 2002, and 4,200 units are expected to be delivered in 2003. Hence, we continue to be positive on San Diego.

Now, let me turn to our outlook for the balance of 2002 and 2003. In our last earnings call Doug said that 2002 would be a year for the apartment industry to forget. Unfortunately, that continues to be the case, as evidenced by weak job growth, competition from homebuilders, and a continuing supply of new apartments. These factors do not seem to be subsiding in any material way.

I was encouraged that our September rental income was slightly positive compared to August. But unfortunately, our October rental income was slightly less than both September and August. I am also concerned that our [lets] to lease for 60 days out has continued to rise, and with 8.2 percent in August, 8.8 percent in September, and 90.2 percent in October, which is high for this time of the year. At the same time traffic has continued to drop-off as it always does at this time of the year, but traffic for the last three months is about 11 percent less than it was this time last year. This means it is going to be tough sledding in the short-term.

As we outlined in our press release our guidance for the fourth quarter is 59 to 60 cents, which is put [into] $2.46, and $2.47 for 2002. For 2003 our guidance is $2.25 to $2.40. The low side assumes the following economic conditions. Interest rates continue to stay at current levels, and continue to fuel new housing starts and excess multifamily inventory. Unemployment stays in the 5.6 to 6 percent range. And the economy does not have a double-dip, but continues to limp along at a one to two percent range from now through the first nine months of 2003, and then starts to pick-up steam.

The high side assumes a stronger economy and that short-term rates rise 1.5 to two percent, and the 10-year Treasury returns to the 5.5 percent level. This increase in rates should dampen single family demand, but it won’t have any impact on the supply of new multifamily product that is already in the pipeline. In either of these scenarios we believe the worst is mostly behind us and that we are bumping along near the bottom.

These are difficult times for the apartment industry. But I believe we are well-poisoned to take advantage of the stress. We are going to build upon the national operating platform that Sam and Doug have put together. Equity Residential is much more than a large diversified portfolio of apartments. It is a real estate operating company with over 6,450 energetic and engaged teammates. We will continue our policy of maintaining a strong balance sheet that will allow us to take advantage of opportunistic acquisitions, including our own stock. We intend to be more active in recycling our capital with a goal of completing $700 million of dispositions in 2003. Our strong balance sheet and modest use of leverage will ensure that our dividend continues to be paid. Our conservative approach to development also holds us in good stead during times like today.

We want to continually mine the value of our large operating platform by implementing leading edge initiatives such as our rent with equity program, our coast-to-coast relocation program, and our newly minted renter’s insurance program. These initiatives are not only profitable for Equity Residential, but equally important they help keep our customers in our communities.

Finally, the scope and scale of our operation allows us to be a low cost producer, and gives us the opportunity to continually invest in the training and development of our people who are the lifeblood of our business.

With that, I’d like to open it up for questions. Operator.

Thank you, sir. (Caller Instructions.)

We’ll take our first question from Lee Schalop with Banc of America Securities.

Hello, everyone. A couple of questions. The first on the development level. In the past, Doug, you’ve always talked about development coming down from the three to 320 level, and now in your press release and your comments you seem sort of resigned to that level continuing. Could you talk a little bit about that?

Well, I’ll let Bruce talk to that.

Our feeling in terms of – our view of the development business is that we’re going to use the development business to get into the high barrier to entry markets. We think, and the way we’ve done it in the past is through joint ventures, and we think that’s a very conservative way to be in the development business. It helps us out in times like today where people are already cutting back and scaling back their development capability.

For us we are looking to do probably this year $400 million worth of new development starts, in terms of total costs. Again, in a joint venture format. And our thinking on that is, again, we’ve announced this transaction in Washington, D.C., we’ll probably do about three more in Washington, D.C., and this is in the District not suburban Virginia. But we think that, you know, it helps us to get into that market.

We also look for other opportunities to get into high barrier to entry markets. We think that it is very cost effective. It’s cheaper to build than to buy existing today. So we’re going to continue to use the development arm, and I would anticipate about $400 million worth of starts this year. And again, we’ll probably start those in mid-year to the end of the year, which will come on-stream, to come on-stream at the end of 2004, the first part of 2005.

Lee, on a global basis ‘resign’ is probably the right word. I challenged Ron [Witten] and some people at ULI last week to go behind the numbers and find-out why they’re up at these levels. Is it a bi-product of the condos stepping up and closing the gap, because you’re starting to see in numerous markets that are overbuilt the type of product that we own, the permits and the starts falling dramatically, and the numbers just are an anomaly.

And so, you know, I'd think you’ve got a step-up in condo, which is imbedded in the 300,000 unit level. And I think you’ve had a step-up in the investment tax credit. And so, no one knows the answer, but I think those are the two areas that have taken up the slack where the multifamily has dropped. Clearly multifamily starts that we are dealing in are nowhere near the levels the preferable levels that they should be.

And we’ll take our next question from Rob Stevenson with Morgan Stanley.

Good morning, guys. Just a follow-up on the asset sales and the development starts. The gap there is about 300 million, is that what you’re expecting in acquisitions for next year, or do you expect not to re-deploy some of that capital into properties, and either buy-back stock or reduce debt, or something?

Dave Neithercut (?): In terms of the starts that we – let’s go through it. I would say we do $700 million worth of dispositions, our acquisitions my guess is that we’ll do, you know, it depends now what the market is, but I would say $500 million. And with the balance of the money we’re going to look to fund our development program, look for paying down debt, or buying back our stock at what’s the best opportunity at the time.

Okay. And what from – you guys historically have had some earnings dilution from the cap rate at which you sell and buy-back. What is imbedded in the 2003 guidance for dilution from the sort of redeployment of that 700 million?

Dave Neithercut (?): Two cents.

Okay. And then, you had given some economic occupancy numbers for some of the markets, what was the economic occupancy for the portfolio overall in the third quarter, and what is the sequential change?

Dave Neithercut (?): I think, and we’ll confirm it, I think it’s 88.8 percent which is down from two points from a year ago. And quarter-over-quarter was down from 89.9, and so it’s 88.8 percent for the third quarter. And on a sequential basis that’s down from 89.9 at the end of the second quarter ’02. And then also, compared to 90.8 percent economic occupancy for the third quarter of ’01.

Okay. And then, just one last question. I mean you had mentioned that the bad debt expense had risen in some, you know, sequentially. What has the credit quality of the applicants been? Have you seen any noticeable change, and more people coming in with, you know, bankruptcies, you know, foreclosures type of stuff? Is the credit quality of your average applicant down today versus six months ago?

This is Gerald Spector here. The – clearly, there’s a difference in the quality of the resident that’s walking in the doors and has been. It hasn’t really manifested itself significantly in our bad debt numbers or our delinquency numbers. We seem to be holding pretty strong there. But we are getting a lot more rejections on applications, which is one indication of the quality of the residents. We haven’t lowered our standards.

The thing that’s really held up the shift, so to speak, in that area is our collection emphasis that we’ve created an essential collection department about two years ago. And that keeps ramping up. And we have highly professional people really chasing down the delinquents and the bad debt issues which keeps us at a minimal change there. But the quality of the resident clearly has changed. It’s not our standards in terms of accepting a resident.

Well, is – when you hit a period where, like you’re going here into the fourth quarter, where occupancy is likely to slip just simply because of traffic levels, et cetera. Do you start accepting some of the people at the margin and jacking up security deposits, et cetera? Or is there some way to sort of fiddle with that a little bit? Or is it basically you have to basically hold to the credit quality standards as you’ve been doing?

No, I will tell you that even throughout prior periods where we have higher level of risks we increase the security deposit requirement, and so it depends on the market, as well. I mean if we’re in a stronger market we don’t have to lower any standards. We keep our standards there. Where there’s fewer pickings, in effect, we try different alternatives, including absolutely, increasing security deposits, as well as taking more rent up front depending on what the addition time period might be in certain markets. We want to make sure we’re covered if we take additional risks.

Okay. Thanks, guys. Appreciate it.

And then just to add to that, as noted, that the bad debt expense has changed really diminimously, and our delinquencies have not changed for the worst, they’ve been a pretty consistent run rate.

Okay. Thanks, guys.

We’ll take our next question from Jonathan Litt with Salomon Smith Barney.

Good morning. This is Jordan Sandler here with Jon. Question, just a clarification with regard to the write-down on ECH business. Why 30 million? What was the methodology used to value this?

We did an analysis that showed what we thought the value of that business could be back, if within a five-year time period we were able to build that business back up to the same number of units that it was operating when we acquired it in the year 2000. And we see no reason in a better economy that we couldn’t get that business back-up to the 4,500 or so unit count. And operating with the same sort of profit margins and expectation, and sort of capping that at a five multiple, and discounting that back. We thought $30 million was a reasonable amount, and we’ve gone through that with our auditors and with our audit committee, and everybody was comfortable with that level.

Again, notwithstanding the fact that we do believe very strongly that it has much higher intrinsic value to EQR. It really is driving significant amount of rent to our properties, and even at $30 million is a level that we wouldn’t even think about selling if it were close to that.

Okay. And I think you said something like break-even to a slight loss for ’02?

That’s correct.

What’s ’03 look like for that business?

Not expected, any improvement from that level for ’03. Given what both Doug and Bruce have said about the economy and our own sort of same store projections for next year, we wouldn’t expect that business to improve any.

And is that a function of – will you be adding units to that business? There could be some dilution? Or is that probably in ’04?

Well, I would not be expecting to be adding units to that business at all in 2003.

Okay. And then, with regard to the dispositions and the acquisitions, is it a low barrier sell, high barrier buy strategy, or just purely opportunistic?

I would say in terms of the sell we’re going to complete what we’ve started in terms of trying to sell-out at some of the smaller Southeastern markets. You know, Greensboro, Greenville, Richmond. We’re going to continue to, you know, prune some of our portfolios in the Midwest and some of the markets such as Memphis, and Louisville, and Lexington.

And so we’re going to get rid of those types of assets. In terms of the buy, we’re going to buy opportunistically with in our markets. That is, you know, we don’t think in terms of taking the acquisition and focusing on the markets such as D.C. where we have to pay an arm and a leg to get into that market, we think getting in there by development is a more cost effective way to get in there. So we’re going to look in our markets, and you know, the 30 markets we operate in around the country, and try to be opportunistic in terms of buy there.

Okay. And then just on development pipeline, the two quarter estimated completion delays at Bella Vista and City Place, could you speak to those?

Sure. At Bella Vista which is in Woodland Hills, California, we had some water related delays. And so we pushed it back a little bit. And in City Place in Kansas City we had waterproofing design issues that slowed-down the project for a quarter.

Okay. I think Jon has a question.

Yeah. I wanted to address your outlook for ’03. I hear you saying you think we’re bumping along bottom, but I also hear you saying that, you know, the market conditions are very difficult with affordability where it is and interest rates where they are, and I guess the prospects for more rate cuts here.

What leads you to believe we’ve even found the bottom? I mean if traffic is down, and you know, concessions are up, you know, why isn’t this thing just going to continue to slide?

Well, again, in our forecast we think we slide from now through the end of the year and the first part of 2003. But I think the best way to look at this is think about it, when you talk about San Francisco in terms of it was our second worst performing market this year. But if you look at San Francisco it already has, the rents haven’t declined much this year, they’re pretty stable. All right. But it just, the rents going through the system. And I think that’s going to happen to the company next year, that it’s, as some of these imbedded low rents go through the rest of our leases.

If you look at where our run rates, where we think we’re going to be at the end of the year, and you take that and, you know, we’re not projecting much of a decrease at our worst case scenario from that run rate at the end of the year for the balance of the year. I think it’s about, our revenues are going down about 1.7 percent from then on.

And then, our best case scenario, we take our run rates and where we think we’re going to be at the end of the year, and we’re projecting that our revenues are going to be up by about one percent.

And so in the worst case it sounds like, you know, you’re thinking that the pace of home buying is not going to continue to accelerate, or continue even at the current pace? Otherwise, you know, I guess you’re thinking traffic is going to either stabilize or pick-up.

It goes back to Doug’s point that he talked about which is the home affordability, the ratio, that you know, it’s a lot more competitive to own an apartment today than it was a year ago. Rents are down, you know, 20 percent in terms of effective rent.

What’s happened, Jon, is exactly what Bruce stated in San Francisco. You have across the multifamily sector probably an average of a 15 percent decrease in net effective rent, okay. And that decrease didn’t happen in October of last year, and didn’t happen in January of this year, it happened this Spring and this Summer, okay. In response to the continued bleeding at the multifamily sector had. But we’re now able to rent the apartments at these new lower levels. Okay. And so, what you have is you’ve got a new lower rental level that is going to cycle through everybody’s rent roll for next year, and I don’t believe there’s any chance in God’s creation that the single family home group will equal this year’s starts for next year.

And is San Francisco kind of a unique market given the absolute level of rents being above the national average? Everything that is going on with [Tec Rec]?

No, San Francisco was a bubble market, so you just have a massive decrease at one particular point in time.

So – but you still think that’s one you could draw a national conclusion from?

I don’t understand the question?

Well, you’re drawing a national conclusion about your whole portfolio based upon your experience in San Francisco.

No, I’m not. I’m drawing a national conclusion of the way the lower rent levels cycles through a rent roll.

Moving on, why do any acquisitions? If you’ve got dispositions going at the pace they’re going, [seller’s] market, and you’ve got development in the really key markets you’d like to build over time, why do any acquisitions?

Well, from our standpoint we have to continue to update and get new product into our system, so we’re doing that with development. And we’re also doing that with acquisitions. And again, it depends on pricing. But we think that, you know, in these markets we are recycling our capital. We are selling assets, and we’re buying assets, and we’re trying to get rid of, you know, get better locations and better products within the cities that we want to operate in. And that’s really our business.

I don’t know if I missed this, and this is the final question – did you say what the development yield expectations are now in your development pipeline versus a quarter or to ago?

Dave Neithercut (?): I’m sorry, can you repeat the question?

Did you talk about your development yield expectations on your pipeline as of today versus a quarter or two ago? Did you already go through that? If not, could you just give us an update on that?

All right. In our portfolio, in our development portfolio the pro forma was about a little under nine percent. And when you look at where we’re going to end-up right now with our current pro forma is a tad under eight percent, 7.9 to eight percent, so we’re down about a point, given what – where rates are going.

Great. Thank you.

We’ll take our next question from Richard [Paoli], ABC Investments.

Hi, guys. I have this question for, I think, it’s Dave Neithercut to answer. You were speaking about the capex changes, and I kind of got lost. You were going a little quick. Could you just repeat that for me? And just give me an idea of what you believe the per share adjustment to go from FFO to AFFO is this year, and for 2003?

Well, what we’ve added as part of this press release, Rich, and as we did in the press release for the second quarter, we’ve added a schedule of our maintenance expenses and of our capitalized expenditures. This past quarter we’ve expanded the, what we’ve included in what we’ve called our maintenance payroll to include now all the payroll related to cleaning, housekeeping, and landscaping, which we had not previously included.

As it relates to the capex, I think that the company continues to operate within the 600 to 650 or so dollar per unit, per year average of capital expenditures. In 2001 that number was $638, and we would expect to be within the same similar range for this year, as well. Imbedded in that number is some amount of what we would consider revenue enhancing, or expense saving sort of capex due to the sheer number of projects that a company of our size has got going at any one time, really 7, 000, 8,000 individual projects going on.

We’re just not in a position, and we don’t think it’s productive, it’s just sort of trying to break that out. We’ve suggested in the past, though, that our experience has been that about 20 percent of that one could suggest was either revenue enhancing or expense saving capex. And it might be duplicative to take a full $625 if you will charge against FFO.

Thanks. One other question. In your guidance for next year I think you’ve mentioned that you have, you know the potentiality to do some stock buybacks. Do you have that in your, you know, in your range at all? Or is there no additive, you know, accretion there?

We don’t have it in there.

We have no stock buy-backs in our numbers.

No incremental stock buy-backs.

Right, yeah. Okay.

We’ll go now to Lou Taylor with Deutsche Bank.

Thanks. Let’s see, David or Doug, can you just comment just in terms of your ’03 guidance, just conceptually do you see just current rents rolling down to market next year? Or implicit in there do you have market rents sliding further with some stabilization? I don’t know, pick it, quarter two, three, or at some point during the year, and then that roll-down just continuing to that point, but not getting any worse?

Well, within the range that we’ve given, Lou, there – the worst case is a continued roll-down. The best case is a small incremental increase from current levels. Imbedded in the rent roll is most of the same store revenue down-trend that we project for next year. It’s already imbedded in our rent roll. That is if you were just to take our December expected revenues, annualize that, that number, you’ve got about $42 million or so of revenue shortfall imbedded in the rent roll. Then what we’ve done is from that level we’ve run scenarios that suggest a continued down-turn and continued sort of incremental revenue reduction from that level.

Again, to the best case that Bruce mentioned, which again, if things turn towards the middle part of the year, or the end of the year, might actually be upward. But I would just caution you that given the negative that’s built in, for there to be up, any improvement year-over-year from our expected levels at December would take a pretty strong year improvement toward the end of the year.

Okay. Well, now how about with regard to the expenses? Where is pressure next year? To maybe that would push it to the high end of your expense growth range?

Gerald Spector here. We believe that we’re going to go aggressively at leasing and advertising to try to on the margin make a difference, and so we plan a little bit of an increase there. We believe utilities obviously will go up due to the fact that in 2002 you had first of all very little snow and the cold weather didn’t really impact utilities at all. So on an average year utilities will go up pretty significantly as a result.

Now, we’re going to also invest a little more money in our maintenance and payroll side to take our properties to a maximum level of competitiveness too. I think as the market gets tougher you’ve got to be on top of everything a little bit better, so we have a little bit more increase in the cost of the maintenance of the property. We lost a lot of landscaping last year due to the drought, is a big issue we have to address, and replacing a lot of planting material, and those kinds of issues that are all going to impact expenses.

And obviously, you have some real estate tax expense increase that you’re going to see come through as the cities need more revenue, they’re going to come after us. And as everybody knows, insurance continues to ramp-up at unbelievable levels. We’ve managed ours down pretty well, but it’s still a pretty significant percentage.

So every category we’re probably going to see a little more increase than we have historically. We’ve run our expenses very flat for many years, and I think now is the time we’re going to be put in a position that we have to increase our focus there.

We’re budgeting insurance to be up 17 percent next year, and real estate taxes about 3.25 percent.

Okay. And then the last question is with regards to third quarter performance, and different price points. Did you, did the behavior of the different price points change very much during the quarter, i.e., your newer AA stuff doing, you know, better or worse than you thought? Or, you know, the B or B- assets doing better or worse than our thought?

David Neithercut (?): I would say if you look at the third quarter our Lexford Division was our leader. It had a positive NOI growth of about 2.5 percent, of that revenues were up about a half a percent. So it was positive versus the other divisions. So, again, we think the B properties performed much better than the top tier properties in our portfolio.

Okay, given that performance, are you going to modify your disposition strategy, you know, given the performance of the older B price points?

David Neithercut (?): We continue to like the B price points, but we’re going to continue to recycle our capital in terms of exit markets that don’t fit. You know, we’ve had some markets that we’ve said a year or two ago that we wanted to get out of, and we were going to execute that strategy and get out of those markets in terms of even though, you know, they’re good assets that it’s just markets that, you know, we want to take-away management focus from some of these other markets that we’re in.

Okay, thank you.

We’ll take our next question from Craig [Lufold] of Greenstreet Advisors.

Good morning. I’m not sure if this is really for Dave, Doug, or Bruce, but I’m trying to reconcile the comment as you look towards ’03 with Doug’s comments that average rents are down 10 to 20 percent, yet your revenues year-to-date, or I’m sorry for the third quarter versus the third quarter last year are only down a little under four percent, why do we not see another say 10 percentage point drop in revenues if indeed rents are down 15 percent on average?

Bruce Duncan (?): Remember, we’re a national portfolio, Craig, where thank God, we also have markets that are going up. San Francisco, you won’t see it down. I’m not going to promote the West Coast region. You’re not going to see downward pressure in San Francisco, Los Angeles San Diego. Probably Boston, and the greater Washington D.C. area. And probably, you know, flat to maybe a little bit up in southern Florida.

And then were you’ve taken the huge hits are in Atlanta. And Atlanta has been cycling now for the better part of six months, and so it’s got another, you know, six months to go. Austin, Texas, look at our numbers in Austin. They were, you know, pretty crappy about, you know, nine months ago. So you’re pretty well cycled through on the Austin, Texas’. Dallas was the same way.

So when you blend it all through the portfolio, which is what David focused on earlier, that the December rent roll versus the rents that we have in place, we have an imbedded 40 some odd million dollar depreciation.

Okay. So the 10 to 20 percent isn’t an average number, that is sort of in the worst markets?

Right.

Okay. And then, David, you’re alluding to sort of the December rent roll, how does the December rent role compare to the third quarter rent roll?

Down modestly.

Okay. And then, last question, what percentage of your NOI is now from the Lexford portfolio? And where do you expect that to go? Are you continuing to sell Lexford assets?

Well, my guess is we’re probably six or seven percent, and that number would – you know, we’ve been selling Lexford assets fairly aggressively. And that number would be down a larger percentage if the rest of the company’s revenue hadn’t come down the way that it has. But if the balance of the portfolio can gain some traction and actually have some upward movement then that number would come down considerably, and we continue to be aggressively selling those properties.

Okay. So, like I said differently, you’re not expecting – you’ve done most of your work in terms of disposing of Lexford assets at this point?

Yes, there will continue to be selective sales there, but most of that heavy lifting has been done.

Great. Thank you.

And we’ll take our next question from Raoul [Datgertine] with Merrill Lynch.

Hi. I’ve got a macro question on asset pricing that perhaps either Doug or Bruce, or perhaps both, could try to address. Which is assuming rates [don’t go] back-up which in turn would imply, you know, the cash flow growth next year remains pretty weak where is asset pricing headed?

Well, I would say that, you know, assuming interest rates don’t go up there continues to be great demand for this type of product, because you know, people are looking at alternatives. But in terms of – I think that ….

Well, here, I’ll give you my take on it. I think when you buy a piece of real estate today in reality what you’re getting are two instruments. You’re getting the real estate asset, and you’re getting the bond. The bond is the first mortgage. The real estate asset and because of the low interest rate, you have a higher cash flow than you would normally receive, which is why people on an alternative investment basis have migrated into the multifamily area, because there’s a lot more predictability and stability in that cash flow.

What will happen is because of the price that you’re paying for the asset you will have modest growth in the assets and substantial cash flow, and as time goes on and interest rates increase the bond will depreciate which is a liability. And if you know balance sheets that means that something has to happen to the other side of the ledger, which means that you’re getting a higher cash flow than you would normally be entitled to.

So when you put the two together at the end of the day while the pricing appears to be very, very high, okay. One, when you look at it on a bond equivalency, 10-year hold basis, it’s not. And two, on an absolute poundage basis which is what does it cost to reproduce, it’s also not that expensive. Which is why you have such activity in our sector.

Now, that being said, I think you will see a slight back-up in cap rates just because of the number of product that’s coming into the market.

So on a poundage basis is there any probability that the degradation in cash flows more than offsets the decline in rates?

I don’t think so. I mean if you ask me, any piece of real estate in today’s environment, what would I rather invest in, I would say multifamily at these levels. Because you can pretty closely predict where your cash flow is going to be. Because I believe you’ve really hit bottom in most of these marketplaces.

Okay. And then a micro question for David. What is the overhead assumption in dollar terms that you’ve got for next year?

We talked about this on several of the last calls. And that the G&A assumptions for next year was about a 42 or so million dollar run rate. And that was exaggerated slightly because of some accrual for some retirement plans for both Doug and Sam. But that we thought on a run rate basis kind of going forward that number would be more in the 38, 39 million range.

Okay. Thank you.

Our next question is a follow-up from Lee Shalop with Banc of America Securities.

It’s actually Dan [Austin]. I’m just --two quick questions. The first in terms of the guidance. When you were talking about the economic assumptions that go into the bottom end of the range and the top end, it seems as though what you’re describing is the assumptions for the bottom end are more the consensus out there for most economists, for the outlook for 2003. Is that fair?

Yeah, I would say that, you know, our view for 2003 is that we don’t see much happening in terms of, we just see it limping along at 1.5 to two percent GDP growth. And we are assuming that there’s not a double-dip in the economy.

Okay. And then the second question. Wondering about the interaction with the for sale market. I know with the rent to own program that you have, can you just walk us through in terms of how much activity you’ve seen with that? If there’s been any change over the past few quarters? And if people are just leaving the apartments to buy homes, is there any way of expanding the program to, you know, earn a little bit more in fees on them?

In terms of the rent with equity program, we’ve had in terms of the number of homes that have been involved with this, it’s like 897 homes. And to us what it helps in terms of the average length of stay, that is it keeps the residents in our programs. And we think that’s a big plus to us. It’s also been worth about a million dollars in profit to us. But, again, it keeps our tenants in our communities, and it’s been very good.

And the average length of stay for residents excluding homebuyers is about 16 months in our portfolio. With the homebuyers it’s 21 months. And the rent with equity homebuyers it’s 24 months. And so, again, we’re seeing an extra eight months in terms of with us as a result of this program. So we think that’s a very positive thing. And we are pushing it, and it’s given us a lot more traction in a lot of markets.

Right. And we had always suggested that just in addition to the potential revenue opportunity that this would provide us that there was a great deal of value, sort of that point of leasing. That this would be an incentive that EQR would have, because we were able to negotiate with the local builders. And that would be, would give us a real competitive advantage at point of lease, as well as at time of renewal. And the statistics that Bruce just gave you just shows you that we’ve got, you know, maybe eight months or so longer tenancy of residents who exercise this program, I think is demonstrative of the success that we’ve had with that program.

Great. Thanks very much.

Gentlemen, there are no further questions in the queue. That does conclude today’s conference. Thank you, everyone, for your participation. You may disconnect at this time.