住宅地產 (EQR) 2002 Q4 法說會逐字稿

Good afternoon and thank you for joining us to discuss Equity Residential's fourth-quarter and year 2002 results.

Today's call is being recorded. Our speakers today are Bruce Duncan, Equity Residential's President and CEO, David Neithercut our CFO and Gerry Spector, our Chief Operating Officer.

Certain matters discussed during this conference call may constitute forward-looking statements within meaning of the Federal Securities Law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

And now I would like to turn the proceedings over to Mr. David Neithercut, please go ahead, sir.

Thank you very much. Good afternoon, everyone. Thanks for joining us today.

As announced in today's press release for the fourth quarter of 2002, Equity Residential earned 35 cents per fully diluted share compared to 43 cents per share for the fourth quarter of 2001. For the fourth quarter '02, funds from operation were 59 cents per share versus the 66 cents per share we reported for the same period of 2001. For the full-year 2002, the company earned $1.18 per fully diluted share compared to $1.36 per share for 2001. Funds from operation were $2.46 per share in 2002 versus the $2.63 per share we reported for 2001.

Turning now to same-store performance for the 194,579 units owned for the fourth quarters of both 2002 and 2001, same store revenues decreased 4%, operating expenses increased 2.9%, and net operating income decreased 7.9%. Our same-store revenue decrease was the result of a 4.5% decrease in rental revenues, resulting from reductions in both occupancy and rental rates and an increase in rental concessions. Increases in utility collections were offset by decreases in other income areas.

On a sequential basis, from third to fourth-quarter 2002, same-store revenues decreased 1.5%, operating expenses decreased 1.9%, and net operating income decreased 1.3%. In 2001, on a sequential basis, fourth quarter revenue decreased 1.3%, operating expenses decreased 3.4%, and NOI decreased .1%. Sequentially, rental revenue decreased 1.3% versus a .7% decrease from third quarter to fourth quarter 2001.

For the quarter just ended, our rental rate decreased 1.4% over the fourth quarter of 2001. On a sequential basis, our in place rental rates increased .1% for the third quarter to the fourth quarter of 2002. In '01 on a sequential basis from third to fourth quarter, in place rental rate decreased .3%.

Average same-store occupancy decreased by 1.5% in the fourth quarter from 94% for the fourth-quarter '01 to 92.5% for the fourth-quarter of 2002. On a sequential basis, occupancy declined 1.2% from the third-quarter '02. Reflecting the very difficult rental markets, concessions increased $4.2 million quarter over quarter, an increase of 53%.

On a sequential basis, concessions decreased $916,000 or 7% from third-quarter '02 to fourth-quarter '02. And for comparative purposes, last year on a sequential basis, concessions decreased $1.2 million or 13%.

On a same-store basis, our bad debt expense in the fourth-quarter 2002 was virtually unchanged from that in 2001 increasing only $51,000. As a percentage of revenue, bad debt expense increased very slightly quarter over quarter from .91% to .96% of total revenues. On a sequential basis, bad debt increased $96,000 from .92% of total revenue in third-quarter '02. In 2001 on a sequential basis, bad debt expense increased $107,000 from third to fourth quarters going from .88 to .92% of total revenue, and again, that was in 2001.

Turnover decreased on a quarter over quarter basis from 16% for the fourth quarter of '01 to 15.4% for the fourth quarter of '02. On a sequential basis from the third to fourth quarter, turnover decreased by 4.1 points in 2001 on a sequential basis, turnover decreased 4.3 points.

Regarding expenses, as I mentioned previously, same-store operating expenses increased 2.9% fourth quarter '02 over fourth quarter '01. This increase included a 2.2% increase in payroll, a 2.3% of increase in property taxes, and a 45% increase in insurance expense. But to put that in perspective, please know that insurance expense represents 3.6% of total expenses for the quarter.

For the full-year 2002, and this is now for 188,027 units, owned for the entire 12 months of both 2002 and 2001, same-store revenues decreased 2.6%, operating expenses increased .8%, and net operating income decreased 4.6%. Our same-store revenue decreased a little as the result of a 3% decrease in rental revenues resulting from reductions in both occupancy and rental rates and an increase in rental concessions. Increases in utility collections were offset by decreases in other income areas. For the year, our rental rate decreased .7% over the full-year 2001. Average same-store occupancy for this portfolio decreased by 1% from 94.5 in '01 to 93.5 in '02. Concessions increased $15.3 million dollars, an increase of 53% over the full-year 2001.

On a same-store basis, bad debt expense in 2002 increased $611,000 over '01 and as a percentage of revenue, bad debt expense increased just slightly from .81% to .86% of total revenues. Overall, turnover decreased from 69.6 in 2001 to 68.2% in 2002. The full-year same-store operating expense increase of .8% included a .7% increase in payroll, a 2.3% increase in property taxes, and a 42% increase in insurance expense, again, just representing 33.6% of total expenses for the year.

Our Equity Corporate Housing operation achieved its goals for 2002 of break-even net operating income while contributing nearly $13 million in rent to Equity Properties. On an annual bases, the division had total sales of $71.6 million, and this was down an expected 21% for the 2001 results, as this industry continues to struggle during the economic downturn. Gross profit and expenses were in line with our expectations. ECH currently has almost 2500 units, of which approximately 35% are Equity owned properties.

As we noted on the last call, we do not expect this division to produce meaningful profits until the economy turns around and as a result, we expect 2003 to be more of the same for Equity Corporate Housing with break-even operations and $13 million dollars of rent paid to the parent company. In addition to our own Equity Corporate Housing, EQR currently has about 1,400 units leased to third-party corporate housing providers.

Turning now just quickly to our balance sheet, our outstanding debt balances as of the end of the year are listed in the press release and I will point out also as part of the press release we have noted that our share of debt from unconsolidated joint ventures was $864 million. This represents our share of this unconsolidated mortgage debt on completed properties and construction financing drawn to date on projects still under development. Through our development joint ventures, we have an additional available construction financing of $318 million which is unfunded as of the end of the year. In addition, we have $51 million of additional collateral for some of these loans, otherwise, we have not guaranteed any of this debts and all nonrecourse to EQR.

And, again, I wish to remind everyone that we have on our balance sheet consolidated debt that belongs to some third-party partners of ours, and this is the result of -- of consolidating properties we do not own in its -- in their entirety. And of this debt, approximately $210 million should be allocated to these third-party partners, bringing our total amount of unconsolidated debt down to $654 million.

And lastly, as we announced on our last conference call in early November, early in the fourth quarter, the company had acquired 5.1 million shares of stock at an average price of $22.58 per share. We have acquired no additional stock since that time, and have $85 million available under the $200 million buyback program our Board approved early in 2002 and now would like to turn it over to our new CEO, Bruce Duncan.

Thanks, David.

2002 was a difficult year for Equity Residential. For the first time since we went public in 1993, we had a down year, with our FFO per share off 6.5%. We were not unique in the multifamily sector. All of us are being hurt by the perfect storm, reduced demand due to job losses and record home sales, combined with increase supply due to low interest rates. As bad as 2002 was, 2003 will be even worse as we start the year with monthly revenues at the lowest point in the last 12 months.

The good news, all things being relative, of course, is that we only see modest declines in these current levels. That is, we believe we are getting close to a bottom. The economy is growing, but not at the steady pace. After a surprisingly strong third quarter, the economy grew only slightly in the fourth quarter, about 7/10 of 1%. Unfortunately, this growth is coming from increased productivity and has not yet led to any job growth. Investor, business, and consumer confidence is very fragile.

The January, University of Michigan consumer sentiment survey that came out Friday fell to 82.4, down 4.3 points from last month. The Michigan index is now close to its October low of 80.6. December's employment numbers did not help confidence levels. Nonagricultural employment fell by 101,000 jobs.

For the full year 2002, as in 2001, the Nation as a whole once again experienced negative job growth. In 2001, the economy lost 1.1 million jobs, a decrease of 8/10 of 1%. The current estimate for 2002 is the loss of approximately 200,000 jobs or 2/10 of 1%.

Current forecasts are that 2003 will have positive job growth of 1.2%, but the majority of this growth is not expected until the second half of the year. I believe that the economy is currently on hold and will not start to recover until we get a resolution to the current Iraqi conflict and business confidence is restored. This recovery will be aided by very low inventory levels that will have to be replenished. A friendly Federal Reserve and a very stimulative fiscal policy. This economic recovery could provide some incremental boost to the multifamily industry in 2003, but it will have a much more impact in 2004.

On the supply side, we continue to be surprised by the number and amounts of new starts given the softness that exists in so many markets. Although we have heard from countless construction lenders and developers that almost everyone's book of business will be down this year, the numbers have not reflected it. Therefore, the supply side remains an issue that will make 2003 a challenging year.

Now let me talk about what's happening in the acquisition and disposition market. For the fourth quarter, we were net sellers of assets to the extent of $162.5 million. We sold 4,667 units for an aggregate sales price of $207.3 million, an average cap rate of 7.6%. This compares to the acquisition of 581 units for an aggregate purchase price of $44.5 million and an average cap rate of 7.8%. For the year, we sold 10,713 units for an aggregate sales price of $546.2 million and an average cap rate of 8.1%, and we acquired 3,634 units for an aggregate purchase price of $289.9 million and an average cap rate of 7.8%.

The trend we noted last quarter of the increase in acquisition submissions has definitely become a fact. Major real estate brokerage houses report strong upticks in both actual listings and inquiries from prospective sellers. We have seen a significant increase in the number of high-quality, well-located assets, compared to both last quarter and a year ago. We are also seeing a slight backing off by pension funds in their appetite for class-A well-located apartments. A number of these investors have switched their strategy from buying or building class-A assets to investing in "B" and "C" asset types with rehab potential. This suggests that pricing of the high-quality "A" assets might be coming down a little and may present an opportunity.

On a disposition side, we continue to see strong demand for the typical "B" and "C" class assets in secondary markets that we are selling. We have yet to see any moderation of this trend. The 1031 buyer wins the buyer of the year award for aggressive behavior, excelling both in surety of close and price. The syndicators and high networth investors finished a strong second as buyers of the assets we are selling. As long as interest rates remain low, these buyers have every reason to remain competitive and active. We intend to be more active recyclers of capital into our primary markets over the next few years. In 2003, our goal for dispositions is $700 million and we will utilize these proceeds to either make acquisitions, invest in new development or repurchase our own stock. To that end, we have approximately $400 million of dispositions under contract or letter of intent, at an average cap rate of 8.1%. And approximately $337 million of acquisitions under contract or letter of intent at an average cap rate of 7%.

On the development side of our business, we currently have 3,961 units under construction at a cost of $930.4 million dollars. Of that total development cost, we have funded 99% of our total obligation of $305.6 million. We anticipate that based on today's market rents, our development yields will be approximately 120 basis points behind our original pro forma returns bringing our yield down from approximately 8.8% to 7.6%. We anticipate the 1044 units representing a cost of $350 million will be completed in the first quarter of 2003. These projects are located in Marina Del Rey, Jersey City, Los Angeles, and Kansas City. In 2002, we started six projects with 1413 units at a cost of $265 million. These projects are located in Boston, Washington, D.C., Texas, and southern California.

At the present time, we are working on a number of potential new projects, and anticipate that we will start in 2003 about the same amount of development we started in 2002, $250 to $300 million. In most of the high area markets, we were able to build at a higher yield than we can acquire. We anticipated starting most of these projects in the latter half of this year with the expected completions in late '04 and into '05.

Now let me review our top five and worst five markets in terms of revenue growth for the fourth quarter of our top -- of our largest 20 markets. We have dropped out our perennial favorite, Austin, which would have been the leader as our worst market because it ranks 29th in importance to us in net operating income. But we would be happy to answer questions about this market or others in the Q & A.

Our leader in terms of our worst performance of our top 20 markets is San Francisco Bay Area for the quarter which revenue declines 11.9%. The Bay Area lost 48,000 jobs in 2002, and it is expected to lose another 6,600 in 2003. This market, with the exception of San Jose, had been showing some signs of stabilization, but has been hurt recently by the bankruptcy filing and announced layoffs by United Airlines as United is San Francisco's private employer with 18,000 employees.

The Oakland East Bay Area continues to be the best submarket as Oakland is much more diversified than the rest of the Bay area. The San Jose market continues to be the most difficult. It lost 10,000 jobs in 2002, while experiencing a significant number of new units being delivered. In 2003, we expect an additional 3,000 units to come on-line. With this new supply, coupled with the weak economic trends, will make it difficult for this market to stabilize any time soon.

Second, Denver. This is my pick on our last call as what I think will be our worst market in 2003. For this quarter, it was our second worst market out of our top 20, with a 10.9% revenue decline. Denver lost 25,000 jobs last year as a result of the collapse in the high-tech, telecom, and financial services sector. It is anticipated that Denver will lose another 6800 jobs in 2003. This estimate does not take into account the anticipated layoffs at United Airlines and QWest. Now that United has filed for bankruptcy, their 9,000 Denver-based employees are at risk and pay cuts for those who remain have been ordered by the courts.

The over building of apartments in Denver continues, 8,000 units were delivered in 2002 and 6200 units are scheduled to be added this year. These new developments are offering up to three months free rent on a new lease which have put downward pressure on rents. This market will not recover for a while.

Northern New Jersey. This area continues to suffer the effects of 9/11 and the recession. The market has lost nearly 20,000 jobs in the last two years. The delivery of new product along the Hudson water front continues from Fort Lee to Jersey City. 1500 units were added in 2002 and another 1500 units will be delivered in 2003. Revenues were down 10.1% for the quarter and 9.6% for the year and we expect this market to remain very soft throughout 2003.

Number four was Atlanta. This market continues to be under considerable stress. With revenues declining 8.7% in the fourth quarter and 7.7% for the year. In 2002, 43,000 jobs were lost. Recently, several large companies announced layoffs including 4,000 at Delta, 1500 at K-Mart, 1500 at Macy's, 1400 at Penny's and even 500 at Coca-Cola. None the less, a number of experts are predicting 25,000 to 40,000 new jobs in 2003. We expect about half that amount.

In terms of new supply, 14,000 apartments were added in 2002 bringing market occupancy to 88%, 89%. Approximately 13,000 units will be delivered in 2003. And some of this new product is offering as much as four months free on a new lease. This market will be weak throughout 2003.

Minneapolis. This is a newcomer to our list with revenue declines for the quarter of 8% and 4.9% for the year. This is a tale of two cities, the east side has firmed up quite well with occupancy in the 94%, 95% range but there has been significant deterioration in the west side as a result of new construction, and occupancies are in the low 90s. Approximately 35,000 jobs were lost over the past two years, including recently announce laid offs at Northwest Airlines, [INAUDIBLE] telecom, Target and Best Buy. Job growth is projected at 10,000 this year. Approximately 3,000 units were delivered in 2002, and another 3,000 units will come on stream this year. We think this market will improve throughout the year.

In terms of our best markets, we were led once again by New England, excluding Boston. They were the winner for the quarter and the year. With revenue growth for the quarter 4.4% and NOI growth, net operating income growth, for the year of 9.9%. Included in this market area are assets we purchased in the Grove transaction and individual markets such as Hartford.

Number two on our list of best markets was the Inland Empire. It continues to prosper with revenue growth for the quarter of 3.3% and NOI for the year of 2.7%. This market has added 30,000 jobs in 2002 and is expected to add an additional 26,000 jobs in 2003 which continue to lead the nation in terms of job growth. Only 2500 units are scheduled to be delivered this year. This apartment market is in its fifth year of growth and has shown no signs of slowing in 2003.

Los Angeles. This market had revenue growth for the fourth quarter of 2.2% and 1.6% for the year. Although last year Los Angeles lost 26,000 jobs, it is projected to gain 25,000 jobs this year. Part of this growth will come from defense spending as $34 billion of contracts have been awarded to local contractors. The major obstacle for significant growth is the current state budget crisis with California's deficit at $30 billion. This crisis will slow down government spending and layoffs are probable and the cost of doing business will increase.

In terms of the real estate markets, north L.A., including Ventura County, had a great year with vacancies below 4% and rent growth of 2% to 5% with similar expectations for 2003. West L.A. is having a more difficult time with high-priced units. One month of concessions and rent decreases are the norm. Long Beach and San Pedro are struggling a little with new product and home purchases.

Overall, we expect this market to slow down a little bit, but still to show total revenue increases of 1% to 2% for 2003. D.C., Suburban Maryland. This market was fourth best with revenue growth of 1.4% for the quarter and 4.5% for the year. The Maryland side could stay strong for the next year. In the District, there are a lot of new construction which should put some pressure on rents in the latter half of the year.

Finally San Diego, which ranks fifth in the quarter with rental revenue growth of 1.3%. San Diego added 23,000 jobs in 2002 and it is estimated that 14,000 jobs will be added in 2003. Occupancy for the market averaged above 95% for most of the year. This has been a very good market over the last few years. Unfortunately, just recently, over 20,000 troops, both Marines from Camp Pendleton to the north and Sailors from the Navy base to the south have been deployed and that is having a very negative short-term effect on net rent.

New residents are receiving up to six weeks' free rent and we have lost tenants for over 200 of our units as a result of this deployment. Although our initial outlook for the year was very positive, we now think growth could be negative for 2003, depending on the length of the crisis in Iraq.

Now let me turn to our outlook for 2003. As we mentioned in our last call, we were concerned we had seen a decrease in October's rental income after a couple of positive months in August and September. We were also concerned that our left-to-lease is quite high for that time of year and that traffic was down compared to a year ago. Business has continued to soften a little more than we expected, and we are also less optimistic about a pickup in the economy in the short term. Additionally, as I have mentioned, we have seen some deterioration in the number of markets, most notably San Diego.

In a normal operating environment, we would expect today to have a better understanding of how the company will perform in 2003 than we did in early November when we first gave guidance for the year. However, these are not normal times, and there is unfortunately much more uncertainty about our economy today than there was in November due to the threat of war in Iraq. We have gone from U.N. inspections in Iraq to a massive build-up of troops and materials in the mideast that certainly suggests that one way or the other, there will be changes in the region. It is our guess that whether it is through a diplomatic solution or a war, changes will occur in the next few months.

This uncertainty is sharply reduced consumer confidence and contributed to a sagging stock market and paralyzed decision making as it relates to new capital spending. Everyone is just waiting around to see what happens. As a result, we fully expect that by the time we announce our first-quarter earnings in late April, we will have much more clarity with respect to the Iraq situation and how long it might weigh on our economy, as well as a better view of how traffic, rent levels and concessions are shaping up as we approach our primary leasing season.

Therefore, for the time being, we are maintaining our previous guidance of 2003 FFO of $2.25 to $2.40 a share, but acknowledge that based on our best information today, we are at the bottom of that range. These continue to be difficult times for apartment industry, but we cannot forget that we have been hit by the perfect storm, and we are weathering it. From here, given our low net effect of rent and occupancy levels we are much more upside than downside. Hence once we get past the Iraq situation and the cloud of uncertainty is removed, given the amount of monetary and fiscal stimulation, the economy should recover fairly quickly.

On top of that, we cannot forget that we do have the demographics in our favor. The combination of the increasing number of echo boomers, the 18 to 25 years olds, coming into the system and continued strong immigration will push average household formations over the next five years to 1.2 million households per year. This will help our industry significantly as these groups have a much higher propensity to rent than to own.

I would like to close by addressing a question that has been asked by a number of you. Where do I want to take the company? In order to answer the question, where are we going, we need to step back and look at where we've been. Equity Residential has grown from 22,000 units to over 220,000 units in less than ten years. Now that is quite an accomplishment. But what is more extraordinary is that we have been able to assimilate so many different cultures into one. One that is fun and entrepreneurial and filled with smart, energetic and engaged people.

The next natural step in our evolution as a company and where I want to take us, is to marry our entrepreneurial spirit with the culture of discipline and a focus on execution. We need to change our thinking that bigger is better. We are big enough. Now we need to take this large operating platform and execute.

Our focus has to be on creating shareholder value. To that end, specifically what we need to do is, be more proactive in recycling our capital. We have large, diverse portfolio and we need to be more proactive property management -- portfolio management. We operate in 44 markets, and we need to whittle this down to approximately 30 markets within the next three years. We need to sharpen our focus.

What we have seen is that where we have a good conversation of assets, we are able to lower operating costs, provide more cost effective marketing, and have better information as to the market. And as we all know whoever has the best information has an edge. Operationally, we have so many good ideas and initiatives. But what we need to do is pick a few big ones and execute. We have done a great job of using our large operating platforms to drive down operating costs. But we do have an opportunity to make ourselves a better sales organization. This will enhance our efforts at leasing, marketing, and customer service, both externally and internally.

We also have an opportunity to focus on product presentation. I believe in maintaining a strong balance sheet as it is important to have access to the capital markets. I think the value of this will be shown over the next few years. I also believe in the importance not only maintaining our dividends but increasing the distribution as we grow. I believe in good corporate governance as does our Board. After all, it is our personal reputations and we will be a leader in this area. And finally, by executing this strategy, we should achieve our goal of providing good risk-adjusted total returns to our shareholders. With that, I would like to open it up for questions

Thank you.

The question and answer section will be conducted electronically today. If you would like to ask a question, please press the star key followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is Star 1 to ask a question and we will pause for just a moment.

Our first question today comes from Kevin O'Shea, UBS Warburg.

Good afternoon. First question relates to your capital plan for 2003. You have identified $700 million of dispositions. I just want to get a sense about how you evaluate the redeployment of that capital, especially given that in 2002 your dispositions were roughly twice your acquisitions.

Well, how we look at it, Kevin, is, you know, we have different alternatives what to do with the money. We can buy back stock, we can make acquisitions, pay down debt, or we can invest in some development transactions.

As you noted we had did not buy -- we only bought about $300 million, only $330 million worth of acquisitions last year and that's because as we looked at the market in terms of the recurrence, we didn't think it was the best use of our capital. But we continue to look at the alternative and from our standpoint, pick out the best ones. We don't have a set acquisition dollar amount for 2003.

Okay, well, as you evaluate new starts for development, what kind of yield advantage are you looking at for new developments versus acquisitions?

Typically what we have looked at in the past is 75 to 100 basis points over the -- over the -- what we can buy the assets at, and I think as we look at these markets today, we are going to be moving that up so we will probably be looking for a return of 150 to 200 basis points over the yield we can buy those assets in that market.

Okay. And so when I look at -- I think in the last call, you indicated that some of the developments that were coming in were coming in at around an 8% yield. And I think looking at the acquisitions, we are just a little bit west of that.

Right. And so if you look at -- if you look at in terms of -- your point was -- ask the question again.

I guess I am just trying to get a sense that when you look at new developments, do you think you can get a 9% yield on new development?

I think it depends on which markets you are in. For instance, we just sold a property, one of our dispositions was a property in southern California that we sold at a 5.5% cap rate. It was one of the properties we developed and our share of the profits was about $5.5 million.

Again, Southern California, you can sell properties at a very attractive pricing and you may start one in Southern California for 7.5% or 8% yield, thinking you could sell it at 6% today. Again, other markets, a market like Atlanta, you need a higher return.

Okay, can you tell me what your economic occupancy was in the fourth quarter?

We can, but remember economic occupancy we think is sort of a manufactured number. It depends on how we think the SRT - our rental rates, how accurate they are. But based upon our SRTs our economic occupancy is 87%.

Where was it in the third quarter?

I think it was 88 point something.

89%, 88.8, something like that.

Okay. David, you may have mentioned this but in the G&A increase for the fourth quarter sequentially, what were some of the drivers there?

I talked a lot about G&A over the last few earnings call and did give, sort of, notice to everyone earlier in the year that as a result of Bruce joining us while Doug was still with us, as well as some retirement plans that had been put into place for Sam and Doug, that G&A was going to be extraordinary high this year on a relative basis. In fact it did come in at plus $10 million or so from the prior year. With the acceleration of some vesting of some long-term performance and shares for Doug upon his retirement at the end of the year, we won't have that going forward. And we are expecting that the -- the '03 G&A run rate will be more in the $34 - $35 million range. So it will be back down to what had been a normal run rate.

Okay. Thanks.

Looking at the Boston market, that was one of your top markets in the past year and you still seem pretty favorable toward it, but at the same time, there was some occupancy deterioration over the last quarter and year-over-year as well. I just wanted to get your sense as to whether you see any kind of deterioration in that market for you going forward especially since it is one of your top markets in terms of the portfolio waiting.

I believe that the Boston market is -- the downtown area is clearly softening a bit, we're running significantly lower occupancies in the downtown and the closer in submarkets. A lot of the outlying markets and clearly our more affordable-priced activity we got with Grove is running extremely well and holds tight occupancy with good rent growth. But the higher rent level properties are the ones that are taking the biggest hit, we're offering more concessions and that occupancy is running today around 92%.

So we expect Boston to -- by the time you blend the surrounding suburbs and the downtown units, we are expecting a little bit down this year compared to last year but still positive. Slightly positive.

Okay. Thank you. That's all I've got

Thank you.

Lee Schalop, Bank of America Securities has our next question.

Thank you, everyone. Dave Oppenheim is here too.

First looking at the dispositions and acquisitions. You mentioned you have some acquisitions that you are ready to close on with a 7% initial yield, and I was wondering if you could share with us your thoughts on buying things at a seven cap when you can buy the stock price -- you can buy the stock at a implied cap rate that is significantly higher than that.

First off let me point out, those are pending acquisitions and we debate internally whether or not we should put pending acquisitions and dispositions on the schedule because pending means either -- yeah, it's either contract or of letter of intent and the letter of intent is very weak and even contract today, there's not a lot of money down. So I would not -- it is unclear whether all these transactions are going to get done. In terms of looking at it, it depends on what the story is of the assets. Again, what we are trying to do is -- is move -- increase our allocation, if you will into high-barrier Gentry markets. And some of these acquisitions have a story. Some of them were buying in lease up, some of them -- I wouldn't say distressed, but they have a story in terms of not buying them fully stabilized. That's one answer.

And from our standpoint again I think what we should wait to do is when we close on the transactions we can talk about it. In terms of buying back the stock. We look at buying back our stock. You saw in November we bought back $110 million of our stock. At certain prices you can wait -- we will be aggressive buyers of our stock and we'll continue to look at that.

Specifically on the acquisitions, do you think the market is at a point now where you are starting to see some cracks in cap rate pricing so that you may have opportunities to buy things at more attractive returns in 2003, or is that still a hope and not something that we can see?

I would say it is a hope -- it is a little bit more than a hope. That is we are seeing much -- we have seen many or transactions today of high-quality assets that we are close -- you know, we are in the hunt in terms of buying where a year ago, we were not competitive to other buyers. Other people were paying a lot higher prices for us that we were willing to pay. But we have been disciplined in terms of buying, as you can see by how much we bought last year. Today, a lot of the buyers have gone by the wayside so pricing is coming down a little bit we think. But again time will tell and we will know more the next few quarters.

Okay, this is Dan. I'll come in with a quick question. Wondering about individual markets, are there any like San Diego where you are having sort of different thoughts than did you three months ago whether they are getting stronger or weaker? And also if you have seen anything in terms of the January results that are different from the fourth quarter. Just how would you characterize those relative to the fourth-quarter levels?

Gerry, do you want to take that.

Pretty broad question because we are in so many markets. We can go into a lot of depth here. But I would say in general, there hasn't been a lot of surprises. Certainly San Diego because of the military deployment is a big surprise for us. And it is limited to just a few specific properties where we had exposure there. The rest of the properties in that market appear to be operating under the normal environment. We believe we'll recover from that. We'll be able to lease. We have high-quality properties that we'll be able to lease them up, but we're gonna incur some concessions in the early part of year that we wouldn't have anticipated last year. So that will be in more of a declining area.

I also believe that South Florida is weakening, I think, there continues to be more supply there, loss of jobs, and I think South Florida is gonna be moving on a downward trend. Not significant, not like you see Atlanta or Dallas, some of those markets. But South Florida, I think, is softening a bit more than what last year demonstrated.

I also would say that Houston has been in the last quarter a market that has bounced a little bit more for us. There is a couple of areas where there is some pretty big supply where we happen to have some assets located in, and we are going to see Houston that last year was a good market for us coming into this year that could go, in my opinion, I am hoping for flat, but we may end up there slightly negative. Beyond that, I think, you know, the rest of Southern California is holding up pretty much on the same trend.

The Midwest continues to be soft in almost all markets with no great excitement there. We are even a little bit on our Lexford assets, which is our lower price point assets, I would tell you that we are in some slight decline for that, but we hope to be positive NOI in that portfolio again this year. Considering that the majority of that is in the -- in the Midwest, as well as in the Southeast, that's a remarkable statement to make considering everything in those areas is in pretty significant declines. The Carolinas, there doesn't appear to be any change on the trends there. Atlanta is on the same trend.

And I think Denver, I agree with Bruce. Right now I would say going into the first quarter, Denver seems to be stabilized and at 93% occupancy and our left-to-lease seems to be okay there, but there's a whole lot of new units coming in that market. No good prospects for added jobs and a lot bigger prospects of decline in jobs between QWest and United. So I think Denver will meet unfortunately our expectations and take a bigger slide starting in the second quarter as more units get delivered there.

Any other specific markets you wanted to focus on?

That's it. Thanks.

Okay.

Our next question today will come from George Sadler, Salomon Smith Barney.

Hi, it's John Litt and George Sadler. Bruce, It sounds like you are tempted to take the numbers down, and I guess I am curious what you think will change between now and the first-quarter conference call. Obviously it will be something -- have to be something positive not to take them down. Am I reading what you are saying right?

I wouldn't say we look out where we are, we feel like, you know, we are down at the bottom of the range. We feel that there is a lot of uncertainty going on. We think that with the Iraq situation, we are going to see whether or not we get, you know -- it gets worse or it gets better because, again, we think people are just freezing and we haven't - we are not seeing a lot of traction, if you will, in the economy and in our business. So we feel -- we feel good about where we are in terms of we are still in our range. But again we feel that -- you know, we are down at the bottom.

So if the war is protracted or gets some unexpected events, you can see going below that. Is that what you are suggest something in.

It could, and could also get better. If you remember what happened, in 1991, you know, the economy picked up after the -- our business in terms of the apartment business, after the war. It picked up, and, you know, we had -- fairly quickly. So that could happen and we could have some good news to say.

Also, John, the first quarter, we are pretty comfortable that we know where the first quarter is going because we can look out 60, 90 days and have a pretty good sense of where the numbers are going. Based on that we feel like everything is okay. But Iraq is coming up quickly, and, you know, that could damage the second quarter pretty significantly. The further we get into the first quarter the better sense we're gonna have. If Iraq doesn't have any demonstrated effect, I think we're gonna be comfortably in that bottom of the range.

Bruce, maybe you can comment on what impact do you think interest rates is having on demand. I think you addressed the supply situation, but what impact is it having on demand at this point for your portfolio.

Well. it's interesting. When you judge in terms and look at see of what people get out of our properties, we always survey them, and the percentage of people moving out are going to buy houses is about 23.5%, which is consistent with what has been, you know, over the past, you know, four or five years. So it really -- we have not seen the impact there. It is pretty consistent --

Do you have a sense that people are skipping the renting experience and going directly to buying homes and maybe that is reflected in lower traffic counts. What are some of your thoughts on that?

Not really. We think that -- we don't see that it is changing. We think it's the same- the same --

I think we can directly go to the fact that our traffic in general is down a lot, and bigger than that is we have an increase in skips. And, you know, people losing their jobs, and creating, let's say, more vacancy and you have a little less traffic coming in because, you know, there is not job growth in the markets, there is not household formation. What you have is a slowdown in traffic.

And I don't think that's generated by new people coming in the market or automatically buy homes. I think they are still going to rent apartments. But I think the new people coming into the market now, the ones that we would normally get are still living at home because they can't find jobs to get out of school and they're doubling up and they are trying to make ends meet and that creates a slowdown in traffic. We haven't seen the trend in home buying significantly change for us. We would have hoped it would go down in this kind of economy but it was how fast because of that. But it hasn't increased.

Okay. I think Jordan has a question as well.

Yes, thanks.

Bruce, you stated you guys would look to reduce the portfolio's concentration from 44 markets to about 30 markets or so in the next few years. Is that consistent with the historical goal of, I guess, having 55% of the NOI coming from high barrier markets, or is that in some way different?

No, our goal has been to have 60% of our NOI coming from high-barrier markets. And this is part of that strategy but it's gonna be more active in terms of hitting that goal. That is, in the past, we have not -- we -- we moved out of some of these markets, but fairly slowly, and I think we are going to focus on that and make it a goal to move down in these markets and just focus our 34 markets, around 34 markets.

Have you identified the markets you looked to get out of? Could you share some of them with us?

We are not -- we really -- we will share them with you after we are sold.

Okay. And just I guess looking at some of the assets you did sell during the fourth quarter, I mean, you didn't identify them specifically but just going over your schedule, is it -- is it just across the portfolio where you dropped properties, and where did you add properties during the quarter?

We sold properties all over, except our major, you know, in terms of cap rates, you know, we said we sold it -- the properties at a 7.6% cap rate. We had one property that I alluded to earlier that we sold out of our development joint venture in Southern California at a 5.5% yield. so the rest of the properties the cap rate was about 8.2%. But the idea, in terms of what we are selling, is we are selling is again, we're selling our older properties in smaller towns, if you will. Smaller communities. And properties that we want to reposition in terms of some of the larger communities.

But again, it's the idea of recycling capital, moving out of assets we don't think have as good a future and moving into newer products in the areas we think have a better future. In terms of the acquisitions that we did, you know, they were all over in terms of --.

We had acquired properties in Southern Florida, Oregon, Washington, we traded out some -- sold some properties in Houston and acquired some properties in Houston.

During the quarter you did two acquisitions --.

I was saying for the year.

Okay.

You are looking specifically for what we acquired in a quarter, were in Houston. Those were matched up against the dispositions that we had done in Houston.

Would -- so I --.

The dispositions in Houston had been done previously.

Okay.

I am saying that did not really have a net increase in Houston. We have been sort of trading assets out there.

Okay. Thank you.

Our next question today will come from Andrew Rosivach with Piper Jaffray.

Hey, good afternoon.

Just to actually follow up on Kevin's question in terms of your use of proceeds, you guys are sitting on a great balance sheet right now and you don't have too much development that you have to fund. What do you think -- what do you think your balance sheet is gonna look like a quarter from now? Are you going to be able to put all the proceeds that you listed for the dispositions that are under contract to work pretty rapidly? Or are you expecting to have a cash balance in your guidance?

Well, we -- in our guidance, we do have dilutions in terms of the -- for the year. So we anticipate there is going to be, you know -- that it won't be deployed immediately, that will be a little bit of slippage there, about 3 cents. But, you know, from our standpoint, we think that having cash around is probably good right now. We think in terms of our balance sheet, we like the fact we have a strong balance sheet and then - we think there is gonna be, hold us in good stead over the next year for having that availability in terms of - incase there are some opportunities.

And I'll follow up with that and sort of -- also following up too to Lee Schalop's original question. In Bruces' comments, he had said that there continues to be a very strong bid for the leveraged buyer, for the properties we are selling, as well as, perhaps not as strong demand for the types of properties we are looking to acquire. So the relative relationship between those cap rates may be coming our way and that may enable us to actually sell assets and reinvest more quickly than we have been -- were able to do in the past year.

Gotcha. And one other question if I am reading the supplement right, you guys are booking gains to condo units in your FFO?

That's correct.

How much activity are you anticipating in '03 when looking at your guidance or is that a source of upside?

Well there's that's - we have a budget of a couple of cents, just maybe a penny and three quarters in 2003 as it relates to the sales of condos. Just so you understand the gain that Equity Residential has in the difference between its basis and its sort of valuation on an apartment basis is not part of that. That just continues to be typical gain on sale, which not part of FFO. It's only the incremental value that we realize after all of our expenses that we have set forth there as additional FFO and as the additional value that we think we are certainly realizing and creating as part of a condo endeavor.

Just to follow that, David, does that mean it is essentially a gain on undepreciated book that you are booking and --.

It's the incremental gain of condo value over apartment value.

Okay, so you are essentially booking what you think is an apartment value as a bogey, and then there is the value above and beyond that.

That's correct. There is essentially an internal transfer of that property to the condo group at an apartment value and it is only the incremental above that that's created as part of a condo process after expenses. And again, there is a significant amount of work that's done on those and there's a good team of people that are working on those. So net of all those costs and expenses is the net increment that we realize as the difference between apartment value and condo value.

Gotcha.

And we believe that could be a meaningful business for us and we believe there is imbedded in our company a great deal of such value.

Do you have any idea how much you have in that program and kind of what your inventory is and how much you think you can get off of a gain at this point or is it too early to come up with those kinds of numbers?

I think it is too early in terms of the overall portfolio, but by the end of this year, I think we will have a better understanding in terms of -- and have our systems in place in terms of the condo group. In terms of what the potential is in the next three to five years. I think if you look at what we're doing - what we did last year, we did 100 units, we sold 100 units of projects in Chicago. This year we are doing another phase of the project in Chicago and we are doing the project in -- in Phoenix and in Washington -- the State of Washington, Seattle. So we have three projects going. We anticipate selling about 400 units this year.

Great. Thanks, guys.

Our next question today will come from Rob Stevenson, Morgan Stanley.

Good afternoon, guys. Most of my questions have been answered. But, do you guys track the turnover levels between the Lexford and what you would probably call the bottom -- the rest of the bottom of the B sort of quality assets in your portfolio versus the average in the portfolio?

Yes, we track those separately. And the Lexford properties have a lower turnover rate. They turn over approximately 61% relative to our other portfolio which turns over probably closer to 71% and that blends down a 69% total. There is a lower turnover on the overall Lexford portfolio due to the price point and the lifestyle type of property that it is.

How many of the Lexford properties or Lexford type of properties do you guys still own?

We have about 26,00, a little over 26,000 units of that type right now.

Okay. And, I mean, is that still by and large -- I mean, is that still going to be expected to come down and are you still going to be selling?

We are going to sell marginally. That is, what we have been doing over the last couple of years is pruning the portfolio in terms of selling the outlyers, but we are getting it down to concentrations in certain cities and we are pretty happy with that. You may see us sell another 1,000 or 2,000 units but we are getting down to the end here.

Okay.

We have a good core portfolio.

Okay. And then -- I can't remember if you mentioned it previously, but the Bella Vista development project in the portfolio saw the budget increase about $6 million and the completion date that was listed as first-quarter is now listed as first-quarter '03/ first quarter of '04. Can you talk about what's going on there?

Sure. It's a project in Warner Center. What we have is really two phases. We have one phase that's 120-some units that finished the first quarter of this year and the next phase which is under construction will be completed I think first quarter of next year.

This project -- the cost overrun which is about $5.8 million, which we share 50/50 with the developer is a result of, you know, weather delays. But in terms of the first phase, you know, it's about 51% leased, 27% occupied and the rents are on budget. And the second phase, you know, is under construction, and, you know, so far so good.

Okay. And then lastly, getting back to the last question about condos. Have you guys looked at potentially doing this at the -- at the property in Marina Del Rey or the property on the Jersey waterfront?

There is no question that those were built with the anticipation of potentially -- in fact they are built as condos in terms of the one in Marina Del Rey. We are definitely will look at that. I think that, you know, again, we want to pick the right time to maximize value, but that product is made to do a condominium conversion.

Okay. And you've got to sort of at that time determine if you believe the price of condo converter may pay you, may make sense to take the risk or whether you can do it yourself.

Clearly there we believe there is extraordinary value above cost in those properties as condos.

Okay. Thanks, guys.

Thank you.

We will next hear from David Harris, Lehman Brothers.

Yeah, good afternoon, guys, it's David Schulman with David Harris here. Could you give us a status report on the Florida litigations with respect to early lease terminations?

Sure. If you -- in terms of -- the Florida litigation -- you know, the standard lease terms being used by apartment operators in Florida provide for charges and set fee for early termination. And from our standpoint, when this -- this litigation is -- doesn't have merit. We think it's really a dispute-- the claimant says we can't charge a set fee. We believe in terms of the lease, it provides that we can charge this and an additional amount for insufficient notification. And the current law allows for this and we think we are in good ground so we do not think it has merit.

Does this litigation rise to -- will rise to a footnote in your annual?

Absolutely not.

Thank you.

Our next question today will come from Christopher Pike, Wachovia Securities.

Yes, good afternoon. A couple of quick questions. First in terms of concessions, David, I know you gave us the sequential in year-over-year change into '04. What was the absolute dollar amount?

The absolute dollar amount year-over-year.

Just the absolute dollar amount concessions in Q4, '02.

In Q4, '02. About -- about $12 million.

Okay. Thank you. In terms of your disposition strategy going forward in your guidance, is it safe to assume about 100 basis point delta in acquisition and disposition cap rates in the $700 million in 2003?

Yes.

Okay. And then after 2003 is said and done, how many markets are you going to then look to -- to exit?

We anticipate -- you know, it depends on what we get done --

If you get rid of $700 million in '03, then how many markets are you going to be looking to exit at that point?

That number may not get us out of any market in it's entirety, but those will be steps along the way. Bruce had mentioned in his remarks it was about a three-year plan. So it may or may not get us out of markets entirely. There is a big portfolio that could achieve an objective of getting out of a handful of markets but will take a few years to actually get that number down to the goal of 30.

Okay, great, thanks. One last housekeeping question. In terms of the tech impairment in Q4, can you just add some color there?

I'ms sorry. What question again?

The tech impairment.

That has just been the normal runoff or write-off of the technology investments that we have made over the past couple of years and that has been the normal run rate.

Okay, thanks a lot.

Craig Loophole, Greenstreet Advisors has our next question.

Good morning, a follow-up on the development question. Bruce, I am just curious, that you mentioned that the cost overrun at Bella Vista, is relative to weather delays?

Yeah. We -- we had, you know, some -- some problems in terms of -- we were under construction and we slowed down the project in terms of to deal with the issues.

Okay. In terms of the increase in, I guess the -- your approval rate for development basically doubling it from 75 to 100 basis point spread up to 100 to 150 basis point spread. What is the rationale or what's your thought process behind requiring that significant of a spread versus acquisitions at this time?

I think it is a question of when you are looking at the markets in terms of, you know, typically how soft they are in terms of the probability of getting to stabilization. I think that from our standpoint right now, with the way the markets are soft, we have an opportunity to buy -- buy existing properties or do developments, and I think that, as we noted, that we think the opportunity in the short-term for acquisitions is getting -- is getting better and hence we buy at a decent yield so that the spread again of 175 to 180 basis points, I am not sure is worth the risk of doing development. If you look at the -- at the risk of the construction cost overruns. Look at the risk, the interest rate risks and you look at the lease up risk, for us, it takes a higher rate of yield to do development. I think it is increasing the bar, if you will, for that sort of -- that sort of investment.

Is -- is that a permanent increase? Or does that have to do with kind of where we are in the markets today or said differently. Is your appetite for development maybe different than Doug's appetite for development?

I would say my experience in the development business is that you need to be compensated for that and 100 basis points, to me, is not enough to be compensated. I think we should have a higher rate of return.

Okay. And one last question. Probably I guess for Gerry. In terms of your in place leases versus market -- or in place rents versus market rents, I got the impression from some of the comments and just looking at some of the numbers in terms of sequential changes that those two might be approximating one another today.

Are you referring to what? Gain or loss to lease?

Yeah.

You know what's happened there is what kind of screwed that whole process up is the discount -- amortized discounts on leases. In effect what you have is an overall reduction in what I call "effective rent," okay. And that's moved up a bit as a result of just really -- really an effect of lowering of the rent roll is what occurred in the last year and a half. Also the concession driver that we use is if we give up front concessions we effectively separate that out and that's what we refer to as concessions and both of those items are probably generating about $50 to $60 million of loss value as a result of the slide in the economy, Craig. But part of that is imbedded in the rent roll and part of it is actually an increase in the base concessions.

But as you are -- upon renewals, what's your experience as leases renewed in the fourth quarter and as you look out into the first quarter. What's your expectation in terms of the impact from a revenue standpoint?

Yeah, what you are going to see -- that's one of the reasons we think we are coming closer to the bottom is we are seeing a slowing of that, okay? That a lot of the renewals have already been brought back down to what I call the real net market. So some of those concessions you have been passing on to the new guy walking in, a lot of those, a giant share of those have been pushed through this last year. There's still some flowing through in the first quarter but we expect most of that to finish through the second quarter. Unless you have some new surprise markets where that hasn't occurred. Houston might be an example of a market, but the percentage of revenue coming out of there is so small it wasn't impact our overall results.

Right, thank you.

Lou Taylor of Deutsche Banc has our next question.

Yes, thanks. Hi. Just one question. Bruce, in looking at your list of markets, it looks like Atlanta is currently your biggest single market. Do you expect that to be your biggest market a year from now and if not, what would say your top three markets are gonna be a year from now after some of your portfolio activity?

Well I would say that in looking at our markets, I would say the way Atlanta is going, it won't be our biggest. The NOI keeps going down every month. I would say Boston -- we have a number of things in Boston in terms of new projects that we are developing and looking at that we think that will be a big -- a big market for us. We think that, again, our focus in terms of acquisitions in the short term will probably spend, you know, 60% of our dollars in these high-barrier empty markets but we are looking at properties in -- you know, Seattle, about two or three in Boston, you know, California. So I would say southern California would continue to be a focus. Boston -- the East Coast will be a focus, D.C., probably those markets will all be increased over the next year or two.

Okay. Thank you.

Our next question today will come from Larry Raiman, CS First Boston.

Hi. My questions have been answered. Thank you.

We'll now hear from Rod Petrik, Legg Mason.

Follow up on that one. The Florida lawsuit issue, have you guys changed your leasing agreements since that suit was filed?

No, we haven't. We have a new lease that was put in place, but we have had probably three or four different leases in play in Florida. Because we thought every time we acquire something, we end up getting stuck on somebody else's lease. That's one of the confusions we have.

We have our own lease that we use pretty much all over the country we have a common lease that we use that's been reviewed by different legal groups and opinions, and we have what we believe to be a good solid lease that is our normal lease. But we do get stuck at times with leases that we assume from other owners.

Is this a Palm Beach issue or are there larger ramifications? Is this the mold issue of the year where plaintiff attorneys are gonna be attending conferences learning how to sue apartment companies?

If they think they have the opportunity.

We don't think it has merit and is not going to stand up so we don't think it will go anywhere.

Right. And you're gonna fight it to make sure it doesn't.

Absolutely. And the dollar amounts are diminimus.

Okay, thanks

And our next question today comes from Scott O'Shea, Deutsche Banc.

Yeah, a couple of questions. First one is the equity investments in un-- entities of $509 million. At what cap rate do you kind of break even on that book -- on that book number? In other words, have you valued the whole portfolio with a cap rate, it would get back to the $510 million. What's kind of the break point there for gain?

I guess I haven't thought about it in that way, Scott, but -- but we believe there is that the cap rate is less than the yield that we are getting and we have acknowledged that the yields we are getting or we expect to get on those development deals is maybe 100 or 120 basis points less than our original pro forma. Notwithstanding that decreased yield the cap rates are lower than that and overall there has been value creation. But, you know, going to be a function of how much the debt service we have on a lot of these transactions and we have interest rate swaps. I wouldn't have that off the top of my head.

Okay. Question two on just your various property types. If you looked across the portfolio, excluding regional differences between class A garden, class B garden, the Lexford portfolio and the high-rise portfolio. Can you draw distinction as to which subportfolios are performing better or worse than the others?

Sure, I think our best performers this past year have been the Lexford division and the Grove portfolio. Lower price point is less impacted. The newer -- brand-new, higher-end properties are in competition with all the new deliveries, the A-plus. They are driving through big concessions and the biggest hurt will be in the "A"-level product.

Okay, thank you.

And gentlemen, at this time, there are no further questions. I will turn the conference back over to you for any additional or closing remarks.

Well, thanks for joining us, all. And as always, we are available for any additional questions or comments that people may need. Thank you for joining us.

That does conclude today's conference, we would like to thank you all for your participation.