住宅地產 (EQR) 2003 Q1 法說會逐字稿

Good morning and thank you for joining us to discuss Equity Residential's first quarter earnings. This call is being recorded. And now I would like to turn the conference over to Mr. Marty McKenna, please go ahead, Sir.

Good morning and thanks for joining us to discuss Equity Residential's first quarter results. Our featured speakers today are Bruce Duncan, our President and CEO, David Neithercut, our Financial Officer, and Gerry Spector, our Chief Operating Officer. Certain matters discussed during this conference call may constitute forward-looking statements within the 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'll turn the call over to David.

Thank you, Marty. Good morning everyone. Thanks for joining us today. As announced in today's press release for the first quarter of 2003, Equity Residential earned 41 cents per fully diluted share compared to 28 cents per share for the first quarter of 2002. This increase was driven by a $68 million increase in gains on property sales. Funds from operations were 57 cents per share, versus the 64 cents per share we reported for the same period of 2002.

On a same store basis, same store revenues decreased 3.5% operating expenses increased 7.7%, and net operating income decreased 9.6%. On a sequential basis, from fourth quarter 2002 to first quarter 2003, same store revenues decreased only .3% operating expenses increased 2%, and NOI decreased 1.8%. This slight .3% sequential decline in total revenue was a result of relative strength in October of last year. When compared to December levels, revenues have actually increased, though extremely modestly in each month of the first quarter, and April appears to be at March levels.

Our 3.5% same-store quarter over quarter revenue decrease was due to a 4.1% decrease in rental revenues resulting from reductions in occupancy and rental rates and from an increase in rental concessions over the first quarter 2002. Sequentially, rental revenue decreased .6% from fourth quarter '02. In the first quarter, our rental rate decreased almost 1% over the first quarter '02, and on sequential basis, rental rate decreased .3%. Last year on a sequential basis, our rental rate decreased .7%. Average same-store occupancy decreased 1.5 percentage points from 94% for the first quarter of '02, to 92.5% for the first quarter '03. There was no change in occupancy on a sequential comparison.

Reflecting the very tough rental markets, concessions increased $3.7 million, quarter over quarter, an increase of 42%. On a sequential basis, concessions increased $580,000 or 4.8%. And for comparison, last year on a sequential basis, concessions increased $1 million, or 13%. Bad debt expense increased $450,000 quarter over quarter, to $4.2 million. As a percentage of revenue, bad debt expense increased .13 percentage points from .82% to .95% of total revenue.

On a sequential basis, bad debt decreased $91,000 from .96% of total revenue, in fourth quarter '02. Last year on a sequential basis, bad debt expense also decreased but it was $458,000. Turnover in the first quarter this year was virtually the same as in the first quarter last year at 15.1%. On a sequential basis, turnover decreased by two tenths of a percentage point, compared to last year's sequential basis, where turnover decreased 1.2 points.

Regarding expenses, as I mentioned earlier, our same-store operating expenses increased 7.7% first quarter '03 over first quarter '02 and these increases were a function of three primary factors: First, in the first quarter of 2002, that was the first full quarter of operations following steps the company took in response to the slowdown in traffic in leasing following September 11. We reduced our work force in the field by 163 people, about 3% of the total work force, and slowed down the process of turning vacant units because there was no traffic or demand. As a result, our first quarter '02 same store expenses were down .11% from first quarter '01 and .7% sequentially, also down, but .7% sequentially. And from that reduced base, we would expect higher first quarter quarter '03 operating expenses.

Secondly, we experienced increased utility and snow removal costs as a result of the weather. Our natural gas and electricity costs increased 1.3 million or 13% quarter over quarter and our snow removal costs doubled. Combined, these line items increased our operating costs 2.2 million, and although not meaningful in absolute dollars, that did represent 18% of the total quarter over quarter increase.

And lastly, same-store expenses were impacted by increases in leasing and advertising expenses, as well as a company-wide initiative to improve our overall property appearance and product presentation to gain a competitive advantage in a challenging market. And Bruce will discuss this in more detail in his remarks.

Our corporate housing operation continues to feel the impact of the sagging economy. Sales for the first quarter were approximately 14.5 million, down 18% from Q1 '02 and down 6.3% on a sequential basis from Q4 '02.

Net operating income for the quarter net of apartment rent paid to EQR was a loss of $1.35 million, approximately $500,000 worse than budgeted for the quarter. As a result, with no surety of any improvement in corporate demand we've reduced our full-year expectations for equity housing from break even, to a loss of $2.2 million. ECH currently has just over 2400 units, that's down from a high of 4700 units when we acquired the business in 2000. And approximately 36% of their units are equity owned properties and with that results in anticipated revenues in '03 of over $12 million payable to equity residential from that business.

In addition to the equity corporate housing units, EQR currently has about 1300 units leased to third party corporate housing providers, and that's down from a high water mark of about 4,000 units. In the quarter just ending our G&A came in at $11.2 million and that is not the run rate for the year. As you know, we began to expense stock options beginning this year under the prospective method, and we expect that each stock option grant will represent an expense of about $3 million or 1 cents per share, which will be amortized over a three-year vesting period.

However, in the first quarter, we recognized 100% of a stock option grant for Doug Crocker, that due to his retirement vested immediately and, therefore, couldn't be amortized over a normal vesting period. We continue to budget our G&A at about $38.5 million for the full year, about $8 million or 17% less than 2002.

Turning now to our balance sheet, our existing indebtedness as of the end of the quarter is listed in the press release, and the supplemental material also discloses EQR's share of nonrecourse debt from unconsolidated joint ventures totalling $927 million.

And again, I'll point out, on our consolidated balance sheet, we have debt that could be allocated to third-party partners and that totals $215 million and that further adjustment would sort of net out the amount of our share of unconsolidated debt down to $712 million. And lastly, in March we issued $400 million of unsecured 10-year notes. The notes were priced at 143 basis points over the 10-year treasury with a face rate of 5.2%, and were issued at a slight discount to yield 5.238%. Half the proceeds were used to repay our line of credit and the balance remains on the balance sheet which, based on scheduled debt maturities and non 1031 exchange purchases should be fully used by the end of August. I'll turn now over to Bruce Duncan.

Thanks, David and good morning. As expected, our first quarter results show significant declines in total revenue and net operating income compared to first quarter 2002. The 3.5% decline in revenues and 9.6% decline in net operating income on a quarter over quarter basis were in line with our expectations. As this negative comparison is a function of the steep declines we saw in 2002. On a positive note, as David mentioned, total revenues actually increased from the December level in each month of the first quarter. As well as April. Albeit very slightly.

The economy remains fairly weak. And while everyone continues to watch all the various indicators for signs of a recovery, including data on employment, business capital spending, and personal spending, there's been no significant change in any of the numbers. This is evidenced Friday when the GDP growth for the first quarter was announced. It was a lackluster 1.6%, and up only slightly from the fourth quarter GDP growth of 1.4%. But subsequent to the end of the quarter, we had some very good news. The big news is that the first phase of the Iraqi situation has been resolved in a very favorable manner. This has had a positive impact on consumer confidence.

The University of Michigan consumer confidence index increased from 77.6 in March to 86 in April. Additionally, the price of oil has declined from $40 per barrel to $26 per barrel, and that, too, should help the economy. Economic growth should also be aided by a [inaudible] fiscal policy and [inaudible] Federal Reserve and hopefully significant tax reductions. That being said, we don't expect a significant increase in job growth until much later this year or early 2004. And hence, we don't envision receiving the benefit of this growth in increased demand for our apartments until sometime in 2004.

New supply continues to be a problem. Multi-family construction is continuing at roughly the same levels that we have seen over the past year. Which in the normal economy would be more in balance with demand. However, we're not in a normal economy, and certain markets, such as Atlanta, Denver, Houston, and Austin, are being particularly impacted.

Now, given this difficult environment, what are we doing about it? First, we have a major focus on improving our product presentation and increasing the number of units ready for occupancy. We're spending more on maintenance related to inventory turnover. We're upgrading and renovating more interiors, we're improving the landscaping and overall appearance of our properties and upgrading offices and amenities on older assets. As we do each year, but more important in this economy, we're in the midst of a new nationwide marketing campaign.

We are focusing on achieving more effective media distribution, better penetration at lower cost. We have been increasing the use of locators and being more aggressive in our print media advertising in terms of the number of publications and the level of money spent. We have continued to upgrade our Internet advertising, for example, upgrading our web pages for virtual property tours. We have implemented our focused leasing incentive programs, to drive more aggressive leasing, and implemented incentives to other staff to heighten the presentation of our properties. We have implemented strong customer service initiatives, including increased training and incentives directed at our continued emphasis on our customer satisfaction guarantee that was rolled out last summer.

Although this renewed focus on improving our product presentation and customer service in generating more traffic has led to increased spending at the property level, we are in the process of reducing overhead at the nonfield level to help offset some of these increases.

Now, turning to our portfolio management activities, we continue to be a net seller. In terms of dispositions, we are making progress toward our goal of selling $700 million worth of properties in 2003.

In the first quarter, we sold 17 properties consisting of 4,000 units for a total sales price of $195 million. The average cap rate was 7.6%. We have an additional $261 million under contract or letter of intent. The market for the assets we are selling remains strong. With demand being driven by a combination of low interest rates and investors looking for alternative investments. Regarding our acquisition activity, in the first quarter, we bought three properties consisting of 920 units for a total purchase price of $111.5 million. And an average cap rate of 7%.

Hence, in the first quarter, we were net sellers to the tune of approximately $85 million. As expected, on the acquisition side, we have experienced an increase in the number of submissions. But due to continued investor demand, we are not seeing as many opportunistic transactions as we would have hoped. At the current time, we have $159 million in acquisitions under contract or letter of intent. Now, with respect to our development activity, we currently have 12 projects with 3,223 units under construction and a total development cost of $661 million. For this development, we have funded 97% of our total equity funding obligations of $178 million.

The 12 projects currently under construction are 66% complete and 64% of them, represents about $424 million of that total amount, will be complete in 2003. The remainder will be finalized by the second quarter of 2004 and ready for occupancy. As we mentioned in our last call, we anticipate our development starts to be down this year. At the present time, we anticipate starting approximately 200 to $250 million of new construction. Down significantly from the $570 million number in 2001. These new starts anticipated in 2003 will include 473 units in Washington, D.C., at a total development cost of $142 million.

Now let me review our top five best markets and worst markets in terms of revenue growth for the first quarter in our largest 20 markets. I'll start with our worst market. My prediction last November that Denver was going to be the worst market in 2003 is unfortunately continuing to prove out. In the first quarter, it was our worst market with a 10.7% quarter over quarter decline in same-store revenue. Denver lost 25,000 jobs last year as a result of the collapse of the high tech telecom and financial service sector. And that is still having an impact on the overall economy and the apartment sector. It looks as though job losses are reaching the bottom with projections of losing only another 5,000 jobs this year.

United Airlines is working its way through bankruptcy court, and although the 9,000 Denver-based employees are not anticipated to be laid off, they will be taking large pay cuts and the financial impact will trickle through the local economy over the next 12 to 18 months. On a more positive note, the defense industry is growing with the presence of Northrup, Lockheed and Raytheon. The overbuilding of apartments in Denver continues. 8,000 units were delivered in 2002, and unfortunately 7,000 units are expected to be delivered this year. The toughest sub markets will be in the northwest corridor, the Denver Tech Center corridor. Multifamily permitting is declining quickly, though this will not help until 2004. Concessions in rent discounting continued in virtually every sub market. The decline in permits will help a recovery, but how quickly this happens will be a factor of new job growth.

Our second worst market in terms of same-store revenue decline was the San Francisco bay area with a 9.1% decline in revenues first quarter this year over first quarter last year. The bay area lost 47,000 job in 2002. Projections for 2003 are for positive job growth of 14,000, but those estimates may be optimistic. Wage concessions going into effect for 18,000 United Airline workers in this area will begin to have a negative impact on the local economy. Layoffs and consolidation of office space is still occurring in the tech sector. Apartment fundamentals vary by sub market.

The Northeast Bay has continuing slight declines but some evidence of stabilizing. Marin County is still declining and a bit softer than Northeast Bay but it's declining at a slower pace than it has been. Southeast Bay and San Jose continue to decline because of significant softness in the job market with continued layoffs and in the case of San Jose, a substantial number of new units being delivered.

Atlanta is our third worst market. And continues to remain very weak with same store revenue declining 7.6% quarter over quarter. The Atlanta economy is at best stagnant. There have been continued layoffs in the construction, retail, and communication sectors which have been offset to some extent by increases in health care and government services. New construction continues to be a significant problem with another 12,000 units expected to be delivered in 2003. Single-family home building remains strong and affordable single-family housing with a median price of about $150,000 continues to put pressure on the multifamily sector. This market will continue to remain weak during 2003, although we believe that the rate of decline is slowing.

Our fourth worst market is the New York metropolitan area. This market continues to remain very soft. Total same-store revenue was down 7.6% in the first quarter versus the same period last year. New York's economy continues to struggle. With the exceptionally harsh winter, combined with the Iraqi conflict and continued concerns about terrorism, the economy is showing signs of further deterioration. New York City unemployment is up to nearly 8%. Northern New Jersey is still suffering also. Being impacted by, impacted by weakness in the financial service industry, and to an even greater degree, in the manufacturing industry.

In northern New Jersey, continued new product delivery will blunt the impact of any job growth in the area. Approximately 2500 units are expected to be delivered in 2003. In Stamford and Westchester counties, new product delivery continues, but at a slower pace.

Overall, the strength of the New York metropolitan area depends on the rebound in the Manhattan economy. In northern New Jersey, any recovery in the telecom markets would be a benefit, as would the stabilization of the manufacturing sector. We expect this market to continue to remain very soft throughout 2003.

Dallas was our fifth worst market in the first quarter based on same-store revenue. It lost approximately 31,000 jobs in 2002. Including heavy job losses in the technology and telecommunications industries, as well as the airline industry industry. This has impacted the economy in all results in the first quarter. Total same-store revenues for the first quarter were down 7.4%, over the same period last year. American Airlines is expected to cut another three to 4,000 jobs in 2003. On a bright note, it is projected that the worst of the job losses occurred in 2002 and that Dallas will actually have positive job growth of 40,000 new jobs in 2003. With respect to new multifamily construction, there are approximately 7500 units expected to be added during the first half of 2003. With an additional 1,000 in the second half.

The Dallas markets experienced a decline in occupancy throughout 2002. Assuming improved absorption levels in 2003, occupancies are expected to improve during the second half of the year as construction activity slows to more manageable levels. We believe this economy will remain soft in the first half of this year, perhaps with slight improvement in the second half.

Now let's turn to our best market. As it was last year, our New England market, excluding Boston, was the best performing area with total same-store revenue growth of 3.9% in the first quarter, over the same period last year. Included in this market are assets we purchased in the growth transaction in individual markets such as Hartford. These properties continue to perform very well despite the relatively weak economic condition. There's little new multifamily supply in home building in these markets and occupancy rates remain at the 96% level.

The DC suburban Maryland market was our second best market in the first quarter with a 3.4% increase in total same-store revenues versus first quarter of 2002. The Washington, D.C. metro sub-market has begun to stabilize, although employment denies to decline in the overall metropolitan area. Employment should improve in 2003. The federal government has been adding jobs mostly related to defense and security. New supply continues to have some negative impact on the DC metro market but not as much in the Maryland suburban market. New construction on the Maryland side is roughly half that in Virginia.

Los Angeles was our third best market, with a 2.6% increase in same-store revenue quarter over quarter. Although job growth was off in 2002, there's a slight pick up already in 2003 as a result of increases in the defense, movie, and high-tech industries. The manufacturing industry is still a concern, with continued cuts at Boeing, and small manufacturers closing shop. (indiscernible)Empire was our fourth best market in terms of same-store revenue growth with a 2% increase in the first quarter versus first quarter last year.

Construction continues to be the primary driver of job growth with 6.8% growth in 2002. Job growth in 2002 was revised downward to about 20,000 new jobs, and estimates are down for 2003 also, to about 14,000 new jobs. New multifamily supply has been moderate, but it's slowly starting to increase with approximately 3600 new units expected for 2003 up from about 1300 in 2002. The north Florida market, which for us consists primarily of Jacksonville, has been a very positive surprise this year. And was our fifth best market with same store revenue growth of 1.9% over the first quarter 2002.

Compared to other Florida markets, Jacksonville has been the least affected by the falloff in tourism. This is the primary reason it's weathering the current environment better than many of the other markets in Florida. Jacksonville has a strong military presence with over 35,000 workers in Jacksonville Naval Air Station, and Mayport Naval Station.

Fortunately, much of the military personnel in Jacksonville are not deployable forces. Only 2,000 Navy personnel and a few hundred marine reservists have been shipped out to the Middle East. Now let me turn to our outlook for the second quarter and the balance of the year. In our last earnings call we said that we expected the same-store revenues for 2003 to operate in a fairly tight band of between 1% up to 1% down from our December 2002 revenues annualized. We're encouraged that our revenues for each month of January, February, March and now Apri,l were slightly higher than the month of December.

However, these are historically slow leasing months and it is still too early to make a call of a recovery. We are waiting to see how we do in our peak leasing months of May, June or July to see if we get some traction. Hence our guidance for our second quarter funds from operations is 56 to 57 cents per share.

We see ourselves bouncing along the bottom. Revenues are up slightly, but expenses are up as we improve the quality of our product presentation. For the full year 2003, we are maintaining our guidance of $2.25 to $2.40 per share and acknowledge that today we are at the bottom of that range.

Finally, as noted in the press release, Doug Crocker, our former CEO, has resigned from the board in order to pursue other interests. He is bound by a noncompetition agreement for the next 12 months. Doug remains a significant shareholder in this company and a friend, and we will continue to stay in close contact with him. As stated in our last call, we are going to be a leader in corporate governance. To that end, we began expensing stock options on January 1st of this year. As David mentioned.

Also, we have submitted a proposal to our shareholders to be considered at our annual meeting in May that would declassify the board and require annual elections of all trustees rather than staggered terms of three years. We've located a lead director and we have focussed on reducing the number of nonindependent directors we have on our board. Two very able and valuable directors, Jeff Lynnford and Ed Lowenthal, who joined the board in 1997, in connection with the [indescernible] merger, were not renominated as they were deemed not to be independent. Including Doug's departure, we have reduced the number of nonindependent directors this year by three and increased the independence of our board. Doug, Jeff and Ed have made an enormous contribution to Equity Residential's success and we thank them for all their efforts. And with that, I'd like to open up for questions for Gerry, David or myself.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. Also, if you are using a speaker phone, please make sure your mute function is turned off to allow the signal to reach our equipment. We will proceed in the order you signal us. and we will take as many questions as time permits. Once again, please press "star 1". Also if you find that your question has been answered you may remove yourself from the queue by pressing the pound key. Our first question will come from Jonathan Litt with Smith Barney.

Good morning, I'm here with Jordan Sadler as well. First question is how much do you think this marketing campaign that you're working on is going to cost?

In terms of -- the new campaign we have has fairly limited cost to it. It is predominately focused on incentives to employees. And it will probably average -- the average concession, or - incentive we offer our leasing people is $25 a lease. And we're probably going to move it up closer to $50 as a result of it. Printed materials are fairly nominal. It's also been integrated to our website for some other benefits and put on the Internet. But there isn't any real major increase in that piece of the puzzle. Most of our leasing increased costs are really through locators and media print. And actually the increased cost of the Internet leasing providers that are just normal increases as opposed to related to this particular marketing campaign.

So what would the aggregate dollars of these initiatives cost? Is it a $20 million bill or --

Is it a $29 bill?

20 million.

Oh, I'm sorry, nothing close to that actually. In terms of this quarter, our total leasing and advertising spent on our campaigns is less than $500,000. Literally. I mean, our biggest share of leasing and advertising costs still remains referral fees, apartment magazines and guides. A campaign like this will typically run less than an a half million dollars to execute throughout the country.

A similar question, Bruce, you mentioned that the capex, you're doing a little bit more to make the properties look better. Last year I think you ran around $1,600 a unit between maintenance and capital improvements. Do you think that's going to be higher and if so, by how much?

Between maintenance and capital expenditures last year, we were, I think you're right, about $1,600. My guess, John, is we're going to be up a tad from that. We are spending more money at the property level. Trying to again make the properties more competitive and get a better presentation. So I would anticipate that that would be up, you know, slightly.

But it's not like a four hundred dollar per unit increase?

No, we wouldn't anticipate that big a increase, but we do anticipate an increase from where we are today.

And then both of these initiatives are really just to get more market share in your markets?

Yes.

What's your full-year target for acquisitions?

Well, our target, you know, is $500 million. We've said that at the beginning of the year that we wanted to do $700 million worth of dispositions and we targeted $500 million for that.

Your revenues in the first quarter were down .3. your full year for '03 guidance is for revenues to be down 3 1/2 to 1.2, so clearly the first quarter is ahead of that pace. Is there something on the horizon that you suspect that might cause it to go down or is that revenue change a year-over-year or a sequential?

I think the whole thing is predicated really on what happens in July, in August and September. It's going to be what's going to be the end result here. We are on our budget right now for the first four, I expect through the first six months we should see little concern there. But July, August and September is a wild card. We have a lot of lease expirations coming up in that period, if we see declines in traffic, which we really don't anticipate now, then that would be helpful in terms of getting better numbers. But it all end up like it did last year, you could have pretty big deterioration towards the end of the year. So, it's too early to tell, I think.

Thank you, guys.

Thank you.

Moving on, we'll go to David Kostin with Goldman Sachs.

Thank you. I'm here with Michael Bilerman and my question involves Sam Zell. How active is he as a chairman, he is a nonexecutive chairman, is he taking an active role in the management of the company?

I would say Sam is very active, we see him weekly, if you will, and any big decision we're always getting his thoughts. He's very good on the strategic side of the business.

Okay, thank you.

Our next question will come from Kevin O'Shea with UBS Warburg.

Good morning. Just wanted to ask you your thoughts regarding future acquisition activity. Given that you're buying at cyclically low NOI's what sort of rent growth and agent cap rate assumptions do you think are appropriate today, and how do they differ from past underwriting?

I would say our underwriting if you compare it to where it was a couple years ago is much tougher because we've seen how these markets have deteriorated. So in terms of the growth rates that we're performing, they're much less than they were before. In terms of cap rates, it all depends on which market you're buying, in terms of the high (indiscernible) markets you're cap rates are pretty low today in, you know, probably the six to 7% range. But again you have to look at the price you're buying it, the asset price relative to reproduction cost. And if you're buying at a discount there, we think that's -- that makes good sense and you're looking for IRRs probably in the neighborhood of, you know, 10%.

Okay.

Unleveraged, right.

Unleveraged. So has your thoughts regarding your own long-term cost of capital changed in this environment given that arguably we're in a low-growth environment with even assuming moderate rate increases historically low cost of debt funding?

No.

Hurdle requirements?

I would say the hurdle requirement of sort of the 10% IRR is sort of been where we've been at for the last year or so. But again what we're looking for in terms of the assets, the asset acquisitions is really we're looking for how they compare to our dispositions. Because again we're really recycling a lot of this capital. So as we said earlier, we're looking for some dilution in terms of do we trade out some of these older properties into newer properties of about 100 basis points. The first quarter we were doing better than that. But I would anticipate we have diversion of about, in that range.

Okay. Last quarter, Bruce, you had indicated your hope at least that for pricing on Class A assets that it might become a little bit more reasonable from a buyers' perspective. Is it fair to assume from your comments today that that really hasn't yet manifested itself?

That's correct. We were surprised. We thought that some of the pension funds being knocked out of the market is going to some other types of strategies, that there would be fewer dollars around to buy some of the these properties in high various [indescernible] markets, And unfortunately, there's a lot of money still around. So that we haven't seen the -- we've seen an increased number of submissions but we have not seen, you know, the pricing, you know, coming our way in terms of from the buy side.

Okay. Great. Last question: David, I don't know if you mentioned this, but could you share with me your portfolio-wide physical occupancy level at the end of the first quarter?

Physical occupancy was 92 1/2 for the quarter.

For the quarter, and then do you know what it was at the end of March or is that --

That's been pretty consistent throughout the quarter.

Okay. Great, thank you.

Moving on, our next question will come from Rod Petrik, with Legg Mason.

Good morning, guys. Let me follow up on the Sam Zell question. Your chairman gave a speech in New York a couple weeks ago, very negative on apartments. You know, stated that had the strong private pricing that's been seen in the market is unsustainable. Why you guys have been net sellers, you probably should have sold more. And finally thought there was a 15% correction on the horizon. Is there a different view internally?

No, I would say that in terms of we've been net sellers, as you know, from the -- over the last, you know, year or so and we continue to be net sellers in terms of -- we have a lot of financial flexibility to take advantage of opportunities if they come in terms of the acquisition side. But we have been slow to pull the trigger.

Last year you guys did a great job, you cleaned off your line of credit, you had over $700 million ready for opportunities, and, you know, 15 months later, they're still not there in the marketplace. I guess the concern is that there is a 15% correction, while it's great for acquisition opportunities, given the leverage of a REIT, theoretically, any of these could be down 30%?

I'm not sure based upon the performance that we've seen sort of year to date and the trend we're seeing from December, Rod that we have an outlook for 15% correction. Again, we're all dressed up and ready to go to the dance if pricing comes our way.

We're continuing to be on the acquisition side, as we said earlier, in our last call, we're -- the $700 million disposition number is our goal and we'll be disappointed if we don't exceed that goal. So we continue to be pretty good sellers, relative to buyers.

Okay, thanks.

Our next question will come from Steve Swett with Wachovia Securities.

Good morning. Could I just ask for a little bit of clarification on your comments about the sequential monthly performance in the first quarter? I think you said that each month was higher than December. Is that implying that each month is higher than the preceding one or has it just kind of been steady and above the December level?

No, what we said, Steve, is that each month is higher than December. There's no trend that everybody, you know, the first couple months we're doing fine, may be down a little bit in April. But it's not, they're higher again than December but don't --

Okay. That's what I thought I heard, I wanted to make sure. On the acquisition side with what you bought in the quarter, could you provide any more clarity on exactly what you purchased?

Sure. In terms of we bought three properties, one in LA, one in Washington, D.C., and one in Portland, Oregon.

You mentioned earlier in answer to another question that cap rates in these markets remain in the six to 7% range. Where do you see cap rates in the low barrier markets? and at this point, do you see any interest or do you have any interest in maybe cycling back into some of those markets where you can get a better initial return?

I would say that in the low barrier markets your cap rates are in the seven to eight, and we are looking at those, but we're looking both from our acquisition strategy that two things: Number 1, we are looking for a high barrier [indescernible] market to increase the percentage of our (indiscernible) on those markets, but we're also looking at some of the distress markets thinking that we can take advantage of, you know, some distressed sellers. To date, we have not seen the pricing there that we would anticipate seeing given how distressed the operations are in some of these markets. But again, we are looking in markets such as you know Atlanta and markets like that.

Okay. And then just a last question: David, you mentioned you expected to have the cash invested, I think by August. Given the fact that there's 260 million, I think, under contract for -- or letter of intent for sale, could you just help me understand how that, plus the cash on your balance sheet gets deployed in the next three months?

We've also got 1031 proceeds sitting in a restricted account, Steve, so some of those acquisitions will be funded from that. But it's just through one-off mortgage maturities as well as some maturities of some unsecured debt. We've got $100 million maturing in August, for instance. And that will -- so the money will be spent in that way. In my remarks, I said it was through the acquisitions of non-1031 property purchases. So we've got 50-plus million dollars sitting in 1031 accounts that will be involved in some of those other acquisitions.

Okay. Thanks.

John Shane with Shane and Company has our next question.

Yes, I wanted to be sure I understood the company's share of outstanding debt on the unconsolidated entities. I always found that a little puzzling. I guess let's see, it's what, 927 million is the total, I think as of this quarter. Does that sound about right?

Yes.

Okay. Is that all -- this is -- I'm being kind of ridiculous here, but just for the purpose of sort of a worst-case scenario analysis, if those entities ran into trouble, are you guys on the hook with recourse financing for 927 million, or is that a more theoretical number?

Well, I specifically said in my remarks that that debt is nonrecourse to Equity Residential. We do have equity capital that is at risk. That is subordinated to that debt as well as about $50 million of some additional capital that we've set aside to help provide some additional credit support. But that is the limit. There is no recourse directly to EQR for any of that $927 million.

That makes perfect sense, I'm sorry I missed it in your remarks. The other thing I was wondering about is what comments you all have on the level of dividends. Obviously this is a challenging environment. You know, I mean, certainly the analysis I use, I don't know whether it's the way you guys think, the real earnings that can be dividended out, you take all your rental income, take out all the expenses, you don't take out the depreciation, you have the ongoing capex and you're left with a certain number. How then does that number compare with the dividend, a little above? A little below?

Well, if you look at our AFFO, at the low end of our range, we cover our dividend by 105%.

Okay. If we dip below, if conditions really worsened, would the philosophy be, you know, well, we're -- so AFFO would be the number you guys really would use to sort of look at the dividend?

I would say, as we said before, we believe our, you know, our dividend is [indescernible] if you look at where we are in terms of we have zero outstanding on a line of credit, we have a couple hundred million dollars worth of cash on our balance sheet.

Is to if AFFO temporarily dipped a little below, you guys would say it's a blip and we can maintain the dividend, the only reason to cut it would be if you're seriously under it for a long period of time, which I agree is not really in the cards. Is that a fair --

Yes. I would think you can anticipate that the dividend will continue to be paid.

Al well, you guys run a good shop, it's fun being a shareholder.

Thank you.

Moving on, our next question will come from Dan Oppenheim with Bank of America.

Thanks, just a quick question, going back to the acquisitions and dispositions. I heard in another conference call that pricing hasn't been as high for portfolio transactions relative to individual asset sales. Just wondering if you've seen any opportunities with any larger portfolios or small companies out there?

Well, we've seen, in terms of -- we see a lot of different you know, I guess almost all the acquisitions are out there. Some portfolios are out there for sale at like out in California, it's a different type of asset, in terms of, we're not looking, when you go to acquire, you know, 20-year-old assets, we're really looking for newer product. But we have not seen, again, in terms -- of the opportunity in terms of pricing today that we thought we would see. Again what we're trying to do is get newer product when we're buying.

OK, Thanks.

David Ronco with RBC Capital Markets has our next question.

Hi guys, David Ronco here with Jay Leupp. Looking for a little more color on the 17 property dispositions. Wonder mainly what motivated those sales, whether it was individual asset qualities or desire to maybe exit certain markets?

In terms of the largest sales that we made during the quarter were three properties in Birmingham, which is the market that we're exiting, and San Antonio it was three properties in San Antonio. The others were a mix of properties, some in Florida, Fort Myers, and which is a market we're going to be getting out of, and Houston. And a bunch of, you know, odds and ends. The bulk, though, were Birmingham and San Antonio were about half the amount. Or a third of the amount.

Okay. A follow-up to that: Looks like expenses in Boston were up sharply, both year-over-year and sequentially. Is that snow removal or were there other factors involved there?

a lot of it was storm damage damage, which relates to snow as well as pipes bursting, a lot of maintenance costs being driven by that predominately.

So we should expect that to normalize a bit over the remainder of the year.

Yes.

Great, thanks.

Thank you.

Richard Paoli with ABP Investments has our next question.

Hey, gang. Most of my questions have been answered but if I could just get a clarification on the acceleration of the, I guess, the options vesting. Is that -- has that occurred because Doug has resigned from the board; is that right?

No, that was -- Rich that was because of his retirement.

Why did it hit this quarter and not last year? I thought he retired last year?

Because it was a grant that was part of the grant that was given this year.

Okay.

So I mean, we give grants in January and so because it was a January grant, it was accelerated and fully vested this January.

Okay.

Service last year.

Right, yeah, it was sort of backward looking, I guess.

The way you do this on a perspective basis, it's in the year of the grant.

So this was fully -- I mean you fully understood that this was going to be in the numbers this quarter; is that right?

Oh, yes, this wasn't a surprise. We had made reference to what overall G&A would be for the year in that 38 or so million dollars range and I wanted to make sure that everybody understood that because of this, the acceleration in this quarter, that 11 and change this quarter was not the appropriate run rate, but that we would be 38 1/2 for the full year.

Right. And your other comments to Mr. Crocker, I guess there's speculation that he might be looking to go run another apartment REIT, you would not let him out of that, I guess, noncompete if he did that?

I would say that he has an obligation not to compete for a year and we're going to hold him to what his obligation is.

You going to put his feet to the fire on that?

I would anticipate he's going to honor his commitment.

Okay. The other question I have is more related to the property operations. What is the availability rate looking at -- and I guess, you know, most companies have either like a 30 or a 60-day notice policy. What are you guys looking at? Now you said may, June, July are the peak months for you, you kind of taken a little look as to have you gotten a lot of notice from people if they're leaving or not?

We typically any markets where we can, obtain a 60-day notification policy. And some markets we really have to live with 30 days, depending on the local regulations. But for the most part, we work on a 60-day lead time that are looking forward in 60 days, would show nothing unusual from trends that we have looked at over normal years. More leases expire as we head into May, June, July and August where it peaks. And traffic in normal periods also increases. And we match our lease expirations to align with that.

I was looking more for say the feel versus last year. I mean, how does it feel, I think people were, you know, there's a rapid, you know, seat change in the second quarter versus the first for a lot of companies last year.

I think we really don't see any different perspective on that. We believe that the second quarter going into June, it looks reasonably okay relative to what indicators are out there. The real question mark is going to be what's going to happen, the big falloff was really the latter part of the year, the last quarter, which was a big surprise. Usually in the last quarter it kind of picks up a little bit and stabilizes.

That's really going to be the wild card as we look forward now, is really ultimately that last quarter, are we going to see some kind of a push for people moving out more aggressively than normal. I mean, you know, in these days, too, we're running across an increased amount of skips and evictions, too, that are pushing through as a result of the economy. That's a wild card that we don't see looking forward. It's just an estimate but I could tell you how many leases I've got expiring, and what our anticipated coverage is, but we've had increases in skips and which is what happened to us last quarter, skips and evictions hit pretty heavy. We're hoping that that's not the case this year, and that the labor market's stabilized and if we don't see that, we should finish off the year reasonably okay.

We feel compared three months ago to today, we have a bounce in our step, but we're feeling better about business today than we were three months ago.

Hey, Bruce, I have a question, probably for you, on the asset sales versus the acquisitions, one of the things that I've been kind of hearing out in the market is that encumbered assets are selling for, you know, less attractive price than, you know, unencumbered assets. Could you shed some light on the assets that you sold, were they highly encumbered or were they totally free and clear? I guess, you know, it's a portfolio stuff, but, you know, in general. And also, on the stuff that you acquired, was that free and clear or did they come with encumbrances?

Rich, clearly with what's happened to interest rates, most properties that are encumbered today are encumbered with above market debt. And whether you're buying or selling, your purchase price or disposition price would have to account for the fact that you'd have above-market debt. The properties we've sold, we have sold unencumbered. Much of the mortgage debt that we've got with primarily with the agencies, we have the ability to substitute properties, so we can move some collateral from one property to another. And be able to sell a property unencumbered. So the properties we've sold have been unencumbered so the purchase prices have been pure market prices.

On the disposition side, we have the ability to buy properties that are encumbered, we're an acceptable lender to an acceptable borrower or transferee to lenders, and we mark that debt to market and will discount from the purchase price the embedded liability of that above-market debt. And because we can own that property free and clear, we don't have to worry about the refinance risk or where rates will be when that debt matures. So we can just, we can discount from the purchase price that above-market debt and then just pay it off when I retires.

Of the three properties we bought in the first quarter, one had existing debt on it.

Okay. That answers it. Because I've heard that from a couple other guys of that, I guess, like a Fanny and Freddie line that has full rights of substitution.

Right.

Great, thanks.

Thank you.

Andrew Rosivach with Piper Jaffray has our next question.

Good morning. Bruce since your balance sheet remains as pristine as people talked about with very little floating rate debt, would you consider any creative capital markets activities, including preferred redemptions or even buybacks at 26 bucks since you're having difficulty finding good buys in the rally markets? I'd argue the public value of your portfolio is still at a discount to replacement cost.

We like you making that argument. From our standpoint, what we want to do is we like having the pristine balance sheet, we like having the availability of capital. In terms of buying back stocks at these prices, I don't think you should anticipate us buying back stocks at this price. I think having cash and capital and to be able to do this is -- we're going to wait, we're better off -- is a better opportunity to buy and would be aggressive like we were back when it was down at $22. Hopefully it doesn't go back there, but this price, you should not anticipate us buying much stock.

Okay. And do you currently have any preferred outstanding that's redeemable?

Yes, we do. We have a series L that is a 7 and 5/8% coupon which is redeemable at par today. And we have -- we've looked at that and frankly we look at that security, not as expensive debt but as cheap equity. And so the ability -- an interest in taking that down with indebtedness is not all that appealing to us right now and then as it relates to a refinancing, refunding with new preferred, we don't think that the levels that we can go out at with the transaction costs involved make that a good transaction either. So we're watching that but we've made no move on that security to date.

Got you. Thanks, guys.

Rob Stevenson with Morgan Stanley has our next question.

Good morning, guys. Just a couple of housekeeping items left. Gerry, what are you anticipating for second quarter turnover? Last year, I think it was in sort of the high teens. Is that what you're expecting this year or any differential.

No differential, pretty much on the same trend line.

And what are you guys -- what is it costing you guys in terms of all-in costs for unit turn today?

If you take out the vacancy costs, which is anybody's guess today, units are vacant so long, but the hard cost itself attributing internal labor because we do a tremendous amount of turns in-house with our existing maintenance people, so you got to factor their time and cost into it, the hard costs would be about $850, which would include replacements of appliances as well as carpet, etcetera, the whole ball of wax, including an allocation of labor is probably in the 800 to $850 range.

Okay. And then David, what are you guys looking at in terms of '03 costs for sort of full compliance with [indescernible] and all the little offshoots of that?

We budgeted about a half million dollars for the work we need to do to get ready for that 404 internal control measurement process. We've engaged an individual to come in and run that process for us. There's going to be incremental costs that we'll incur at Ernst & Young above and beyond the normal audit costs but that's about a half million dollars.

Okay. Is there anything out there that you guys are watching that would cause, you know, half a million or more of cost to you? On this sort of front?

On that particular front? On the securities--

Well, on anything sort of related that's been bandied around that you guys are aware of at this point?

No.

OK. All right guys, thanks.

Thank you.

Rich Anderson with MaxCorp Financial is in line for a question.

Thank you. With regard to the unconsolidated debt that you identified, I assume that that is not reflected in the debt ratios that you provide in the release?

That's correct. What we put in the release is actually per the covenants that are contained in the -- in those indentures and that unsecured indebtedness -- that unconsolidated indebtedness is not part of those calculations.

I don't suppose you could quantify what the impact would be.

Not off hand but just if you were to attempt to do that, you got to make sure you put the asset and any cash flow and its entirety back on the balance sheet and in the P&L as well.

Understood. A question for Bruce. Could you say specifically what of Doug's sort of previous operating strategy you identify as areas that you have altered or plan to alter? For instance I heard you mention looking at distressed markets, I don't know if that was something that was in his repertoire before you were brought on board, but what specifically are you doing differently that Doug didn't have, you know, on the table before you arrived?

I wouldn't say that we're doing that much different. I would say, what we're trying to do of, as I mentioned in the last call, we're going to prune our portfolio in terms of the number of markets that we're in. We're at 44 markets that we anticipate bringing that down to 30 markets over the next three years and we'll keep you posted on how we're doing with that. Some of the markets we sold in the last quarter, Birmingham, Fort Meyers, markets we're going to be exiting. In terms of on the -- we're going to be weeding that out.

In terms of the development business, we're going -- in terms of the development yields we're looking for, we're probably going to look for higher development yields than we have in the past just to justify the risk of new development. That's just, you know, probably increasing that up, you know, 50 to 75 basis points from where we've been in the past. But in terms of general, just how we're running the business, you know, and we're focusing in terms of we went around last year looking at the property, you know, we thought there was an opportunity to spend a little bit more money to make our product look better, compete better in the marketplace. And that's what Gerry is, you know, has got our team working on and that's why our expenses are going to be up this year.

Thank you very much.

You're welcome.

Moving on, we'll go to Kevin Lampo with Edward Jones.

Hi guys one of your peers yesterday was talking about the acquisition environment becoming a little bit more attractive, particularly for properties that aren't encumbered. I'm curious on your thoughts on that.

We do think that in terms of properties that are encumbered that there is an opportunity for people such as us to buy and take advantage of that. So we are looking at properties, we're trying to target properties that have debt because there's less competitive in terms of people willing to buy them. So we agree with that. We don't think, though, in terms of overall that the market in terms as we said earlier, the acquisition market is not as favorable as we would have hoped, especially, you know, given the fundamentals.

And then also, one other question. Gerald, I'm curious, if you've tracked -- I'm sure you do track move-outs to new homes or to purchasing a home. Have you seen a change in that number? Is it decelerating, accelerating?

Home purchasing continues at the same pace that it has historically. We've seen little to no change there.

Okay. Thank you.

Thank you.

Craig Leopold with Green Street Advisers has the next question.

Hi, Good morning. I guess, Bruce, judging from your comments, was there no share repurchase activity in the quarter?

There was no share repurchase activity in the quarter.

Okay. And can you provide -- I know you're sort of reluctant to talk bit, but any kind of update at all on the Florida lawsuit?

There's really nothing new to report. In terms of the -- there's been no date set for the, you know, class action sort of certification trial or whatever, so we really have nothing more to report on it than we did last quarter. We don't think it has any merit, but there's nothing new to report.

OK, and then a couple of quarters ago you and Doug had made the argument that rents in many markets had dropped to a level such that renting an apartment would be a more compelling alternative to buying a home. Yet, you know, based on Gerry's answer to the last question, it sounds like you haven't well really seen any change there. Can you give an update on that hypothesis?

Well, that's an interesting question. It's really, I think -- our business is going to really have more of a turnaround based on job formation and household formation. That's going to be a bigger driver. For whatever reason, we haven't seen a decrease in home purchasing which you would think that, you know, the market has pushed through a tremendous amount of that, I would have thought we'd see a decline by now. I'm surprised we didn't see it earlier. It seem like there's enough people moving forward in their lives making enough money where they can move up that ladder and grab that home and just as many to cover on the bottom end, moving back into the apartments get some jobs. So we haven't seen that dynamic occur yet much to our surprise and how deep is that home-buying market? It's anybody's guess, but at this stage, I think our hope isn't as much that we're going to see that as our savior, the fact that homes are going to keep going up, apartments keep going down, it's going to be more when is the job market going to turn around which is probably going to have a greater impact.

Okay, thank you.

David Shulman with Lehman Brothers has the next question.

Good afternoon. At least it's afternoon here. I have a question and David Harris will have a couple of follow ups. Do you have any update on your expected return on costs for the Marino Rigado (phonetic) project.

I would say there's really nothing new from what we reported last quarter. I would say in terms of where we are in leasing, we've leased about -- we're about a third leased right now. Rents are coming in about where we thought they were going to be but in terms of the concession package we're giving two months free rent. In terms of the return on costs of that number, I believe we're down into the -- let me just get that for one second. I think we're about 7 1/2% on a stabilized basis, down from, you know, about 8.6% when we did it.

One again one question from me. The real estate taxes, could you give us a flavor as to what you're budgeting there? Are we seeing above inflation for the year?

On real estate taxes in terms of what we anticipate for this year?

Yeah.

You know, we had budgeted real estate taxes, David, at about 3 1/2 or so%. My expectation with the recoveries and the success we've been having with some protests that that number will come in less than that number in the final analysis.

Okay, great. Thank you.

John Shane has a follow-up question.

A quick follow-up on to clarify one item on the income statement, you have net gain of -- well, actually two sort of related items. Net gain on sales to unconsolidated entities, 1.2 million this quarter and then a similar line, net gain on sales of discontinued operations. I was just trying to figure out how repeatable those are. Could you all comment on what those are and whether they should be viewed -- obviously it's up to us in the end as analysts but are those more on the line of one-time items or recurring?

Let me address the gains from sales of unconsolidate entities, that's what we realize on sales of properties in our development joint ventures sold at third parties. And that would be a difficult to suggest what that would be. We have no idea when we'll sell properties out of those partnerships. So that number is going to be very lumpy.

But the purpose is to -- I mean, those are -- the intent is to be able to sell them.

No, no, actually on the contrary. The intent of those relationships, those developments is that our intention is to acquire our partners' interest and bringing them on our own balance sheet. We have done that more than we've told to third parties. But from time to time, there will be a third party bid for a property that would be we will in excess of what we'd be willing to value the property at and we'll go ahead and sell to it that third party. It's a relates to the discontinued operations, the accounting literature requires us to treat any income from properties that we have sold to take them out of revenues and expenses and put them below the line in that net category. And I'm not sure how that helps anyone understand the financial statements, but if we sell a property on December 25th, then we have to recognize all of the revenue and all of the expenses from that property for that entire year, out of the revenue and expense line item and put into it that discontinued property operations net line item.

And that -- are you talking about discontinued operations, comma, net or the net gain on sales of discontinued operations?

Those are two different things.

Right.

One is the gain on the sale of that property. The other is the operations of that property during the term that we owned and operated it.

And the net gain on the sale is obviously just the proceeds minus what it was on where books.

That's correct. That's just a GAAP gain on the sales price minus transaction cost, minus your undepreciated basis in the property. property.

That all makes sense, I just wanted to be sure.

At this time, we have no further questions.

Great. Thanks for joining us.

That concludes today's conference, thank you for your participation.