住宅地產 (EQR) 2003 Q3 法說會逐字稿

Good afternoon. My name is Teresa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Equity Residential third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer session. If you would like to ask a question during this time, simply press "*", then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "pound" key. I will now turn the call over to Mr. McKenna. Sir, you may begin your conference.

Thank you. Good afternoon and thank you for joining us to discuss Equity Residential third quarter results. Our featured speakers today are Bruce Duncan, our President and CEO, David Neithercut, our CFO and Jerry Spector, our COO.

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. Now I'll turn it over to David.

Thank you Marty, good afternoon, everyone and thank you for joining us on today's conference call. For the third quarter of 2003, Equity Residential earned 41 cents per fully diluted share compared to 23 cents per share for the third quarter of 2002. This increase was driven by $45.2 million increase in gains on property sales. Funds from operations were 56 cents per share for the quarter compared to 54 cents per share for the same period last year. It is important to note that FFO for the third quarter of 2002 of 54 cents per share includes an impairment charge for corporate housing business of $17 million or 6 cents a share. Last year, when we reported third quarter FFO, we did not include that charge in our calculation of FFO and we reported 60 cents per share. In accordance with Reg-G and therefore instructed inherence to definition of FFO, our FFO will include all impairment charges going forward and retrospectively for comparison purposes.

On a same store basis revenues decreased 1.9%, operating expenses increased 4.3% and net operating income decreased 5.7% for the third quarter. On a sequential basis, from second quarter 2003 to third quarter 2003, same store revenues increased very modestly up one tenth of one percent. Operating expenses increased 3.1% and our net operating income decreased 1.9%. As expected, our same store quarter over quarter revenue decrease was the result of negative variances in each of the three primary drivers. A reduction in occupancy of 4 tenths the 1 percent, a 1.2% decrease in rental rates and a 20% or $2.5 million increase in rental concessions over the third quarter of 2002.

On a quarter over quarter comparison, bad debt increased 4.8% or $190,000 to $4.2 million. As a percentage of revenue, bad debt expense increased from 0.9% in the third quarter 2002 to 0.96% of total revenues in the third quarter of 2003. On a sequential basis, bad debt increased $425,000 dollars from 0.86% percent of total revenue in the second quarter of this year. While higher than we would like, this level of bad debt is within a historically acceptable range. Our property management team is focused on this number and we don't expect to see it increase much from these levels. As I noted on our second quarter call, our typical tenant today does not make as much as our typical tenant a couple of years ago, but they still qualify for the rent on the same standards applied previously just at a lower effective rental level.

As I mentioned earlier, our same store operating expenses increased 4.3% or $7.2 million in the third quarter 2003 over the third quarter of a last year. The 3 line items contributing most to this variance were utilities which were up 4.2% and representing 15% of the total increase. Payroll which increased 5.1% representing 29% of the increase and finally, maintenance expenses which were up 11.7% representing 27% of the increase. As we mentioned beginning early in the year, our onsite staffing and maintenance costs would increase as a result of our initiative to improve product presentation and increase the quality and number of units available for occupancy.

Sequentially, operating expenses were up 3.1% in the third quarter but the increase coming from higher maintenance, utilities and leasing and advertising expenses which are not unexpected given the seasonality of our business. While there are numerous signs of an improving economy, the corporate housing industry has yet to see any benefit and like our core business, we'll need sustained job growth in the re-locations that go with it do to really get back on its feet. Therefore, we expect Equity corporate housing to lose about $1.5 million in 2003 but their loss will be more than offset by the rent they'll pay to Equity properties of about $12 million. Equity corporate housing currently has approximately 2800 units down from a high of 4700 when we purchased the business in mid 2000. The company currently has about 36% of its units at Equity owned properties today.

Turning now to the balance sheet, as reported at the end of the third quarter, the company had $373 million in unrestricted cash and 169 million in 1031 balances. As of today, unrestricted cash stands at 168 million and we have cash in 1031 accounts of $110 million. In addition to potential acquisitions identified uses include repayment of the $121 million of debt maturing in the fourth quarter of this year as well as up to $96 million of debt for the 2004 file maturity that can be repaid in 2003 without penalty.

In this morning's press release, we've provided FFO guidance for the fourth quarter of 52 to 53 cents per share. For the full year, we expect FFO of 2.22 to $2.23 per share or 2 to 3 cents below the low end of our previous guidance that we've been pointing the street towards since the beginning of the year. This reduction is not a result of lower than expected property level operations because our same store numbers should come in where we expected them to be, to produce FFO towards the low end of our previously provided guidance of $2.25 to $2.40 per share.

The reduction guidance is explained primarily by two factors. First is the incremental dilution we expect from dispositions from the year, that will likely exceed $1 billion, an increase of $300 million or more from the 700 million levels we had targeted earlier in the year. This additional dilution will result in a negative impact of 3 to 4 cents per share for the year.

Secondly, the increase in our stock price over the last half of the year has resulted in more shares outstanding from option exercising and is also negatively impacted the calculation of the number of fully diluted shares arising from unexercised option. So a higher than average stock price originally budgeted results in a nearly 2 cent per share decline in full year FFO.

With respect to guidance for 2004, we have provided a range of 2.12 to $2.26 cents per share. Driving that range are same-store operating expectations and dispositions for the goals --disposition goals for the year. Those assumptions are laid out in the press release so I won't go over them in detail now. However I will say notwithstanding the improvement in the economy we keep reading about in the newspaper, we are simply not yet seeing the translate into any improvement in our overall business. As a result, our guidance is based on the business as we see it today without trying to predict when if at all, the economy will produce the sustained job growth we need to see improvement in our core operations.

Lastly, I would like to briefly address the lawsuit we were currently involved in Florida. Some of you may have seen a press release a couple of weeks ago sensationalizing the fact that the judge has authorized the class action certification on behalf of certain of our former Florida tenants who claimed we charged them illegal fees for breaching their leases. All this ruling did was allow the case to go forward as a class action and we will, of course, appeal that ruling. This ruling is not a decision on the merits of the case and does not in any way either state that we have done anything wrong or establish any liability on our part. We continue to believe we have operated within the law with respect to the lease termination fees we have charged.

I would also like to add that the $14.5 million noted in the (inaudible) press release as the amount in dispute reflect the amount allegedly charged those former tenant. We actually collected only a fraction of that amount. So we believe our ultimate liability would be considerably less and at this point we've not yet established any reserve for these possible costs. This is all we are allowed to say at this time regarding this case, so we will not take any questions on this matter when we open the call up for questions following Bruce's remarks. Bruce?

Thanks, David. Good afternoon. First I would like to make a few remarks about the economy and then talk about the current trends in the transactions market. As well as our thinking, as it relates to our portfolio and our development efforts.

Finally, I will view our top and bottom by market. The last Thursday GDP number of 7.2% was truly extraordinary, far outstripping even the most optimistic forecast. It was the strongest quarterly growth since the first quarter of 1984 and it comes on top of second quarter growth of 3.3% and shows that the economy has turned the corner. Consumer spending continues, thank goodness and was up by 6.6%. The consumer has until recently been the driver of this economy and there are continued concerns that they are close to being tapped out. So probably the most significant encouraging aspect of this quarterly growth is its investment by businesses grew at an annual rate of 11% which is the fastest rate since early 2000. It is also important to note that this growth was not the result of government spending. Defense spending was flat after rising 46% in the second quarter and over federal spending was up only 1.4%. The question now is how sustainable is this growth? That is the third quarter results were greatly aided by the recent tax cuts and rebates and it is unclear what level of growth we will see in 2004. The consensus estimate today is around 3.9% but only time will tell.

As for as in the multi family space, the real question continues to be, when will we see job growth? Although this quarter's GDP was as good as it gets, we still lost 41,000 jobs during the period. On a positive note, the labor department last week released a report showing that first times claims for unemployment insurance fell slightly last week by 5,000 to 386,000. That being said, while I believe the economy is in recovery, until we experience sustained job growth, I did not anticipate much improvement in our business and this is reflected in our 2004 guidance.

Let me now turn to discuss the current trends in the transactions market. Our dispositions activities have continued to track the interest rate environment. When interest rates increase during the third quarter, there was a slight pullback on inquiries and pricing from the B and C level property buyers. As interest rates have dropped again, we have seen demand return to its previously strong level at attractive cap rates. We continue to believe that the interest rate environment is the primary governor for buyers of the properties we are selling.

Turning to acquisitions, we see little change in the demand or makeup of buyers for a product. Even when interest rates increased in the third quarter, A quality property pricing remained stable due to the significant amount of capital chasing deals and the low leveraged or unleveraged nature of the buyers. The one change is that there is more A product for sale today in attractive markets compared to the last four or five quarters. In several of our major markets, another driving factor in pricing and supply of acquisition products has been the condo conversion trend. For example, in Washington, D.C. South Florida and to a lesser extent, Southern California, pricing has been driven by condo converters, not apartment buyers.

As we have said before, we continue to believe that the generationally low interest rate environment that exists today presents a great opportunity for us to recycle capital out of our older properties and smaller, slower growing markets or locationally challenged areas into newer properties and better locations in larger markets. As we stated at the beginning of the year, we want to reduce the number of markets we operated in, from 44 to around 30 within the next three years and have an even larger presence in our major markets. I'm not going to rehash the press release, but the key take away is that through the first nine months, we have been a net sellers to the extent of $413 million. That is, we have sold $803 million and acquired $390 million. The average cap rates on our sales is 7.5% and the cap rate on our buyers is 6.6%. We think this is a very good execution because although it has caused more dilution than originally budgeted, it has enabled us to strategically fully exit or reduce our positions in markets such as Birmingham, Louisville, Lexington, Memphis, Albuquerque and Salt Lake City and redeploy some of those dollars into markets such as Boston, Washington, D.C. and northern and southern California.

As David mentioned, we are anticipating selling an additional 200 to $400 million in the fourth quarter and buying the similar amount. As we look out to 2004, we anticipate continuing with our strategic repositioning of the portfolio and anticipate selling $800 million of property. On the acquisition front, given that we feel we are at or near the bottom of the cycle and the conditions are poised for a good rebound and property fundamentals in 2005. We anticipate acquiring at least $800 million of property in 2004. With respect to our development activity, we currently have nine projects with 2356 units under construction with a total development cost of $475 million. For these developments we have fund 100% of our total Equity funding obligation. These projects are 74% complete and for them will be completed by year-end. As we said on our last call, our development yields are expected to stabilize at around 7.50% which is 120 basis points less than our original underwriting. Our development starts to shore down to less than a $150 million. Given where we are in the cycle and believe me that the worst behind us we anticipate increasing starts in 2004 to 300 to $400 million primarily through the use of joint ventures.

These projects would not come on stream until the latter part of 2005 or early 2006 which we believe will be an opportune time to take advantage of the upswing in the cycle. These projects will be located primarily in high barrier gentry markets such as Washington, D.C. Boston and Southern California and should have projected yields of 7.5 to 8% which compares very favorably to the current cap rates on existing properties in these markets. Now let me review our five best and worst markets in terms of revenue growth for the third quarter in our largest 20 markets.

I'll start with the worst markets. As it was in the second quarter, Minneapolis St. Paul was our worst market in the third quarter with an 8.5% decline in same store total revenue compared to the third quarter last year. The Minneapolis economy remains stagnant; the weakness in the apartment markets is spread across the entire metro area. New multi family construction has continued with 3,000 units being delivered this year and 3,000 units expected next year.

On a positive note, sequentially same store revenues are up one half of one percent, which suggests we may have stopped the bleeding. However, we don't anticipate much improvement in this problem market until late 2004. Our second worst market was the San Francisco bay area with same store revenues declining 6.4% in the third quarter this year versus the same period last year. We have talked repeatedly about how if you have the San Francisco bay area has been, but the bay area lost 288,000 jobs in 2001 and 2002 with the San Jose area being hardest hit losing 162,000 of nose jobs. The rate of job loss has decreased sharply, but layoffs are continued throughout the year. The San Jose apartment market remains extremely weak not only as a result of job loss, but also as a result of the 2500 units currently leased up and equal number of deliveries anticipated for the remainder of 2003 and into 2004. Concessions in the two month range are not uncommon for that sub-market an we believe there will be continued pressure, continue to be downward pressure on rents for the remainder of 2003 and 2004.

Atlanta was our third worst market in terms of same store revenue decline, which is down 6.4% on a quarter over quarter basis. Atlanta is starting to see some job growth, but it still has to contend with the oversupply of multi family products and low interest rates fueling the home buying. The latest projection, a full year 2003 multi family deliveries is 10,500 units, which is down from the original projection of 13,000 units. However, there is still too much supply, this is still a too much supply for Atlanta. Although the rate of decline has slowed, that is sequentially same store revenues were down 1.1% compared to 2.7% sequentially a year ago. We do not anticipate a meaningful improvement in this market until the latter part of 2004 or 2005.

Our fourth worst market in terms of same store total revenue decline was Denver, down 6% on a quarter over quarter basis. Denver lost approximately 60,000 jobs in 2001 and 2002 or 5% of its employment base. The latest projection for this year is for the Denver economy to lose another 10,000 jobs. On the supply side, new multi-family construction continues to come online. Overall, there will be an estimated 8100 new units added to the apartment market 2003, with an additional 4,000 units expected during 2004. The Denver apartment market remains tough and we'll experience gradual decline for the rest of the year. Although the rate of decline is slowing, this market will not show a meaningful pickup until 2005.

As it was in our first two quarters this year, Dallas was our fifth worst market in the third quarter based upon same store total revenue which declined 5.7% compared to the same quarter last year. The Dallas-Ft. Worth economy lost an estimated 105,000 jobs over the past three years with 30 to 40% of these jobs in the technology and telecommunications industry. Job losses slowed recently and a few employers such as Lockheed Martin have add job, but meaningful levels of job growth are not expected until the second half of 2004 and into 2005. Construction new multi family units projected to drop slightly to approximately 8900 units from 2003 down from approximately 10,000 units in each of the past two years. We believe that the Dallas economy is nearly bottom and will start recovering later in 2004. Now let's turn to our best markets within our largest 20.

In the third quarter, we had a tie for best performing market between New England excluding Boston and North Florida. Both markets hit a 3.50% increase in same store total revenue on a quarter over quarter basis. Included in our New England market are assets we purchased in the growth transaction and individual markets such as Hart Ford. The Hart Ford story and that of many of these New England markets doesn't change. The economy in the New England area remains weak but the lack of new multi family supply and high prices of the single family homes in these markets combine with the excellent location of our properties have contributed to its overall performance of assets in these markets.

Our North Florida market consisting primarily of Jacksonville has been the least effective of our Florida market by the fall-off in tourism. With less reliance on tourism and the heavy military presence of non-deployable forces, the economy has not contracted the last several years. Jacksonville is a strong military presence with over 35,000 employed at the Jacksonville naval air station and May Port naval station the increase in defense spending will help the area as the Navy retrofits many of its aircraft.

As a result rental rates have been increasing modestly and we're been able to back off on discounts and concessions during 2003. Jacksonville will be a steady performer with growth projected to remain stable throughout the reminder of 2003 and into 2004. Orange County was our third best market in the quarter just ended experiencing a 2.9% increase in same store total revenues compared to the third quarter last year. The orange county economy is very diverse and has not experienced a job loss that most of the country has seen. We are projecting that orange county will outpace the national recovery. Estimates for job growth next year are approximately 37,000. Approximately 2400 units are being delivered in 2003 with additional 3500 units expected in 2004. With relatively limited new supply and a strong economic recovery we expect good growth in 2004 in this market.

Los Angeles was our fourth best market in the third quarter with a 2.5% increase in same store revenue quarter over quarter. This market has performed reasonably well in 2003 but is beginning to show signs of stress. We're experiencing a slowdown in demand just when we're getting new supply. Original estimates for job growth in L.A. ranged from 18,000 to 56,000 but as recently been revised downward to 7,000. Construction of new multi family product is on the rise with 9600 units under construction. Approximately 6,000 of these units are being delivered in 2003, which represents a 15% increase over 2002 deliveries. We also had a tie for fifth best market between San Diego and the Inland Empire. Both with a 1.5 % increase in same store revenues quarter over quarter. San Diego, as you may recall, experienced a significant shock earlier in the year with deployment of troops to the war in Iraq.

The return of approximately 15,000 service personnel has helped stabilize the market and more personnel are expected to return by the end of the year. There has been an increase in multi family construction over the past couple of years to 4700 units being delivered in 2002 and 4,000 units being delivered this year with a majority of these -- this new supply coming in the downtown, mission valley and University town center areas. But single-family housing remains expensive and with positive job growth expected next year, San Diego should continue to experience good job growth in 2004. The Inland Empire continues to create new jobs with 12,000 added since September of last year and continues to post positive results. But relative to our expectation the market is actually weaker than projected. Less than expected job growth coupled with continued single-family home purchase and new multi family construction has resulted in lower occupancies and higher concessions. Sequentially, same store revenues declined 1.3% compared to sequentially a year ago increase in 2%.

Now let me conclude my remarks by returning our outlook for the fourth quarter of this year and guidance for 2004, which David provided you. We will be hurt for the balance of this year and next year as a result of the dilution associated with our strategic repositioning of our portfolio. That being said, the market today has allowed us the opportunity to sell older products and exit secondary markets at very attractive cap rates and asset prices. We are redeploying these dollars at a slower pace into newer products located in larger markets with more (inaudible). High numbers are based on further disposition in 2004 of $800 million, but we anticipate being more acid in the acquisition arena. Finally, our numbers are not based on a meaningful rebound in job growth. To the extent this happens, we could be pleasantly surprised with that, I would be pleased to open it up for questions. Operator.

Thank you sir, at this time I would like to remind everyone if you would like to ask a question, please press "*1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jonathan Wood of Smith Barney.

Hello. It's Jordan Sadler here with John. Just had a question regarding, does your acquisitions, does your 2004 guidance include the acquisition assumptions of $800 million?

Yes. It includes $800 million of acquisitions, sort of matching up, but we have dilution of assuming of about 150 basis points on that $800 million pro-rata quarterly.

150 basis points negative spread. And I guess, could you just comment on the condo sale gains experienced this quarter? It seems condo sales gains are up three-fold from the second quarter of 2003 and this is becoming an increasing -- this business is growing. Can you comment on where it's going, going-forward and to the extent that you guys are doing this stuff yourself?

Sure. The condo gains you've talked about are gains from our own condo division. What we've anticipated this year in our budgeting is we would sell 400 units. To date, to the third quarter, I think we're about 320 units that we have closed. Again, these are the three principal markets we're at are in Chicago, Seattle and Phoenix.

And we anticipate you know hitting that 400 sales by the end of the year. And in terms of what we see it as next year, we continue to see it continuing to grow, we're going to be prudent about it but we anticipated sort of the number of sales this year, we do $400 million, the next year we think we can do in excess of 500, maybe 600.

500 to 600 units?

Units.

What's the average unit price?

The ones we sold in the third quarter, the average unit price was about $130,000.

OK. I guess you expect a similar level to come from the same properties?

Yes. But again what we're trying to is establish beachheads in these markets like for instance, Phoenix is a great example. We have a great portfolio in Phoenix, about 12,000 units and we have a lot of units in the Scottsdale area. Right now, as you know, rent also are difficult in Phoenix. But in terms of the demand for product in terms of by condos is pretty strong, so when we finish a project we can move to another project in the area, so we don't have to sort of rebuild the sales team.

It's John. I was wondering if you could comment on M&A. I guess a year or so ago, the prices on the stocks weren't necessarily at a level where it made a whole lot of sense, but with the stock price improving and your disposition proved program generating some excess cash, does M&A seem like something which is more doable today than a year ago?

I would say that we always look at different alternatives to invest, but right now, we really don't have any comment on that.

I mean has the environment changed at all? I mean a year ago, I think the answer was the valuations aren't there. And you're willing to invest the 150 basis points negative spread on $800 million?

It's all a function of relative value, John, regardless of where stock prices are. It's where other stock prices are relative to ours. We continue to look and see if there aren't opportunities there in addition to just being opportunities that you can question whether or not there are strategic opportunities out there, but we look at buying one off properties, we look at buying portfolios, we look at time from time to time and look at other companies, see if there's opportunity there, as well as, when our prices were low, we looked at buying back our own stock. So we look at all those options.

I only ask if there's one on sale today, so that would be worth taking a look at. Thank you.

Operator?

Your next question comes from Andrew from Piper Jaffray.

Good afternoon, it's Andrew Rosivach from Piper. I don't know if I ever asked this before. I don't recall. But could you comment, do you have a pro forma cash balance at the end of 2003 and 2004?

I can tell you that just based upon, Andrew, the debt that we've got maturing that I mentioned we've got uses for at least the cash on the balance sheet today. And if we're successful in matching up acquisition opportunities with the dispositions currently in the pipeline I would expect that is you know cash at the end of the year will pretty much just be offset by the dividends that are payable at the end of the year.

That actually leads to the second question, David, do you think that you won't have to really tap the unsecured markets for the foreseeable future because you'll be able to pay down any debt that's coming due with proceeds in your existing cash balance?

Well, we have been able to use debt maturity as a means of using the excess cash from the disposition. I mean that's not a desirable long-term plan. When acquisition opportunities present themselves, we'll continue to -- we would rather be taking that money and reinvesting. And when the opportunity comes to start going beyond just what we're selling, we'll be happy to go back into the markets and take a little bit more leverage. Because' we have paid down a significant amount of debt with the proceeds to date and will continue do so for the balance of the year, but that's really a short-term use of that cash.

Right. Let me put it this way. For your 2004 guidance, do you assume you'll be refinancing the debt coming due or does that just get paid down with disposition proceeds in the cash that you have?

Well, within that -- within next year, there's just an assumption of financing about $300 million worth of debt.

OK. And then, Bruce, can I have a big picture question, David touched on this a little bit, what are the conditions upon which you would be first of all, more inclined to be a buyer rather than a seller of assets? Second, to take an increased level of floating rate debt, which obviously net of your cash is very low right now? And third, at one point, and I know it may not be at levels here, but at what point since you've got the capacity to do it would you be interested in buying back shares?

All right. Well let's take them one at a time. In terms of if we look at the world, we think that we are at the bottom and that things should start getting better. We think in terms of looking at acquisitions, you know, if you note we've been pretty dormant this year in terms of our acquisition process. We anticipate right now we have, you know, deals that we're working on that are probably just slightly less than deals we have that we are going to sell.

We're going to probably have about $425 million worth of product under letter of kind a contract to sell and we have deals that we're working on to buy about just under $400 million because we think it's right, it's a good time to be buying better product in terms of better locations today that's available than we've seen in the past four or five quarters. In terms of using floating rate debt, right now the amount of floating rate debt that we have is diminutus, probably about 11% or something like that.

So I would anticipate in terms of, that could go up and we could use nor, we've been very conservative over the years in terms of that. I think where we are in the cycle, you have to think about this, probably higher probability that rates go up, you know, maybe short-term rates would stay low for the next 12 months, but after that, they could go up pretty significantly when you look at the deficit and all of that. We're pretty happy with our floating rate debt. It could go up tomorrow, maybe five points or so in percentages. In terms of buying back stock, we look at every time, in terms of our excess cash what to do with it, whether to make acquisition, pay down debt or buy back stocks, we're always looking at this.

OK. Thanks a lot, guys.

Your next question comes from Lee Schalop with Banc of America securities.

Hello, guys. Unidentified: Ford is here, too. Bruce, you touched on this, but at the upper end of your guidance range for 2004, what kind of assumptions are you thinking about in terms of the economy to get that 1.5% revenue growth?

I would say that, you know, what -- in terms of the upper end of the range, you know, our revenues are only up 1.5%. So we're not seeing a big hiccup in terms of what we see in terms of some of the markets will continue to be pretty strong, southern California, DC and some of those New England, but we don't see, we're not anticipating a major pickup, you know, 1.5% is not a major pickup on that. The driver, if you will we still see expenses continuing to go up and you know, on a down side we think expense may be up 4%. On the up side, expenses are up 3%. So it's not much of a differential there and that's dragging our returns. So we think things are just going to be bouncing along the bottom.

So then when we start to characterize event upper end of your 2004 guidance as a relatively conservative case?

Yes, in terms of revenue, but you have to remember that right now for the balance of the year, typically we could fall off in terms where we are. And so hence, seeing a pickup next year, we've got to have a pickup in the first part of the year for, you know, to get to our peak season to have some impact on it so you're not subjecting of an increase, but we are expecting some in terms of the upper end, we haven't seen revenues grow at 1.5%.

Karen Port has a question.

Could you just talk about what the change in concessions were sequentially and what your turnover was in the quarter?

You bet. Turnover second quarter 2003 was 17.86%. And turnover for the third quarter was 19.7%. Concessions on a sequential basis, concessions increased $878,000, increased second quarter 2003 to third quarter 2003 6.4%.

OK. Thanks very much.

And that's a lower increase than we saw the prior year. So the level of concessions.

OK. Thanks.

Your next question comes from David Harris of Lehman brothers.

Yes, good afternoon, everyone. I wonder if you could just give us a little bit of an update on the leasing progress together with rents and data on Marina Del Rey?

I believe if I understood the question. Because it's hard to hear you. The leasing profits on Marina Del Rey?

That's it, Bruce.

I was out there a few weeks ago and the project is looking very I was out there for looking at pennant house that is will lease for $16.50 thousand per month. But we're about the projects we are about 65% leased, right now. We're signing leases to the tune of 15 to 20 a week and may be 15 to 20 month. And in terms of where we are on revenues, we're renting units at about $3 and 26 cents a foot in terms of the rental rate and our proforma was about $3.35. So we're down a little bit on that about 3 or 4% and we're also giving a month and a half as concession. Leasing is a progressing, and progressing well, but you know, we're looking forward to the time we're 95%.

And at month and a half concession is that on a 12-month lease?

Yes.

Around we on schedule in terms of the original pro forma?

No, I would say that in terms of the original pro forma, we thought we would be at about on a stabilized basis about 8, 6 and we're about 7, 4.

Right and is it not the in-mark sale you would destabilize sore keep in the portfolio?

I think we'll wait and see what the market is like when we stabilize.

OK and then a question just on your sales program. Are these all-outright sales we're talking about this year and into next year? Or are you guys thinking about joint ventures?

We think about joint ventures. Right now the properties that we've sold to date have been outright sales. And next year, in terms of what we're budgeting; we're budgeting for 100 percent sale.

I think the other David has got a question. Just hang on

I've got two. First of all, Bruce, was it you that rented penthouse?

No, but I think about using our discount 20% discount there that.

Would have an EPS of significance.

Right.

My next question is what level of job growth on a sustained basis or a monthly basis would you consider sufficient enough to call a recovery on the way?

You know, I think that's a hard one.

Let me put the question differently.

That's going to depend on market by market, each individual situations each individual market and the amount of capacity and supply in each individual market, David. You can't just pull some national number out and talk about that reality comes on our market-by-market basis.

Let me throw out a national number 150,000 job a month, does that make you feel a lot better or a little bit better?

Better.

Better I don't know about little bit or a lot, but kind of in the middle. You thought see at least that come through that. Will get you back in the game a little bit more, because you really see things bottom out and stabilize with no job growth right now, so anything positive is certainly going to be a good sign or indicator.

All right. Thanks a lot, guys.

Your next question comes from Steve Swett of Wachovia securities.

Thanks, good afternoon just a couple of questions. The discontinued opts breakdown that you have in the release, does that include properties that were still in the balance sheet at the end of 2003 or is that just for the assets that were sold?

That was for the assets sold.

So anything to be sold in Q4 and forward would not come out of that, right?

Yes, it will at the end of Q4, but it's not in there now.

OK. In terms of the timings on the sales for the rest of this year, would you expect that to be the back end of the quarter or spread through the quarter?

I would say the sales are going to be spread through the quarter. The acquisitions would be probably more at the back end.

And then just again on your assumptions for next year, have you pro-rated your acquisition and sales assumptions through the year or have you stuck them towards the back end at all?

We've essentially got two cents of dilution from the disposition process which 150 basis points of dilution $200 million a quarter at mid point of each quarter. That adds up to $6 million in dilution for the year.

OK. Great. Thanks.

Your next question comes from Craig Leopold of Green Street Advisors.

Hello. Good afternoon, David, can you I'm just trying to understand, you know, going from the third quarter results to fourth quarter guidance, it looks to me like your assumption for sequential NOI would be roughly flat going from the third to fourth quarter. And I'm trying to understand how you get such a meaningful fall off, I understand some dilution from disposition and acquisition activity, is there anything else such as a meaningful change in G&A or condo sales other items that I'm missing?

We didn't pick up a little bit of benefit of condo sales in the third quarter that we had originally budgeted in the fourth quarter, Craig, that was just one thing. You know, we're looking at same store fourth quarter numbers of revenue still down 1% and expense up about 3,6 and NOI down about 3.9% for the fourth quarter and there's a chance that sequentially revenues could be down a little bit. It's not uncommon for top line to go from October, November and December to go down. In a normal environment, October has always been sort of a high point of a year. So there's a chance and I wouldn't be surprised to see a little bit of sequential decline fourth from third.

OK. And on a G&A front, what are you expecting for full year 2003 and full year 2004?

We're going to have a G&A annual run rate of about $38 or so million dollars for the year. And it will be a little higher for this year because of some carryover of some costs we incurred in the first quarter from some costs associated to Doug's retirement.

So 2004, $38 million and this is something higher than that?

Call is 36 for 2004 on G&A.

OK. And then on the operating expense assumption for next year for 2004, what are the primary drivers of, you know, an assumption that's well in excess of inflation?

Two real categories that drive it. Utilities we expect. We're at least anticipating approximately anywhere from a 4 to 6% increase. And payroll which is the biggest factor, frankly in dollars and cents is 6% we're anticipating due to a number of issues. There's some head count increases, cost of living increases and also some additional overhead, increases in workman's comp insurance, or so it's pretty hard to imagine payroll coming in anything under five to be honest with you unless we just have a lot of open positions, which isn't what our goal is.

OK. One last question, Dave. What's the average interest rate on a $600 million of debt maturing next year?

About 7.3%.

Great. Thank you.

Your next question comes from Jay Leupp of RBC Capital Markets.

Hello, good afternoon,. Jay Leupp here with David Ronco. On the $112m on acquisitions could you comment on the 6.2% cap rate and what is your NOI growth assumptions going forward annually and the locations of these acquisitions?

The locations of the acquisition, the one was in pleasant in California and one was in -- Santa Clarita, which is by 30 miles north of LA, it was a project that was built in 2000 and built to condo specs. In terms of what we spent in terms of those markets, I think it's different for each. On the one up in northern California, we would anticipate that it would be a very probably flat increase in 2004 and then we would probably grow it, probably a 3% growth for the next couple of years. The one in southern California, we anticipated you know, probably about 2 to 3% growth in 2004.

What are your expected gross yield acquisitions for your new development that you're expecting in 2003 and also your net return on Equity if they're in the joint venture structure and is it safe to assume that these locations are going to be primarily in these top five markets you're talking about?

It's safe to say that our developments -- again we use development to get access to high quality assets that we plan the spec for in markets that are high in terms of the markets will be those markets like the Washington D.C. and southern California. In terms of the return requirements this year, in terms of going forward, we think it will be in the 7.5 to 8% range in terms of building them on substantially higher yields than we can buy them on in today's world.

Thank you.

Your next question comes from a Tony Paolone of J.P. Morgan.

Hi good, afternoon. In order to get down to those 30 markets that you targeted, how much more beyond the $800 million in dispositions next year do you think you would have to do?

I think by that time, we'll be done.

OK. So you don't see it carrying out into 2005, 2006.

We're hopeful that the market allows us the opportunity, we are hopeful to take advantage of that and to reposition the portfolio by the end of next year.

OK. My colleague has the a question as well. No, I'm sorry, we're done. Thanks

Thank you.

Your next question comes from a Rich Anderson of Maxcor Financial.

Thank you. If your plan for the development pipeline is to get into these so-called hybrid entry markets, why are you developing in Missouri, Texas and Colorado?

Well, two reasons. Number one again, I think we've refined our focus in terms of over the past year in terms of where we want to be, but secondly, in terms of some of these assets, what we will build and sell or again, we have products in these assets, we're recycling properties. For instance, Dallas, we have properties in Dallas and are continuing selling existing properties and buying new ones, you know refresh the portfolio. So again, we're constantly recycling our portfolio.

OK. And with regard to lexFord, Bruce, do you have any different feeling than your predecessor about holding onto the lexFord division? Or considering that you're looking more and more at higher quality stuff in these sort of core markets, is there a greater interest in lowering, if not eliminate, the lexFord division?

You know, over the last couple of year, lexFord has been a very successful division for us. It's done very well and it gives us good diversification if you will at the lower end of the food chain. So we constantly look at thing, but at the present time no plans to do anything with it in terms of Equity.

OK. Thank you.

Next question comes from Richard Paoli (ph) of ADT investments.

Just to touch on the acquisition and disposition goals for next year, I know you're planning to get everything wound up. How committed are you to your 800 million goal on each side? And I put that in the context of what Bruce is speaking to and probability that interest rates go higher before they go lower and, you know, I guess your thoughts to be in markets like Southern California or expand your exposure to those markets in New England is not an original one. I can envision a scenario where the gap between your cap rates on your acquisitions and dispositions could actually widen and how much pain do you have how much pain will you withstand if you're starting to see that spread wide into the 200 or 250?

I think what we think is the opportunity today is the spread between the different cap rates of these types of assets. So I think in terms of we'll slow down the process in terms of we said earlier this year, the market we avoid in raising that up it is the opportunity to continue our aggressive disposition program giving it the opportunity we think the spread in terms of what we're selling at and what we're buying at is pretty good about a point and so we're being aggressive, but we constantly looking at that. We're not doing this without take our eye off the ball about what the relative value is.

So would you be inclined at this point to I know you have something modeled to the extent of doing it evenly, etc, but is your inclination to sell while the market is still hot? We heard commentary earlier today from another executive from another read who said they've actually started to see cap rates inch back up and not necessarily calling it a trend yet, but in some of the quote unquote non-core markets which I imagine fall under the definition of your non-core markets, are you going to strike while the iron is hot?

If you look at our program in terms of the fourth quarter 200 to $400 million, we're work hard on that. But we're going to keep looking and trying to take advantage of our opportunity. But we think what we're seeing as I said earlier in the remarks we're starting to see, you know, better quality of product and more product available to buy in markets we want to buy in at pricing that is relative to what we can sell at is attractive. We're going to continue to go down that route as long as the market will give it to us.

OK. The other question I have is in a similar vein, how aggressive do you think your condo sale goal of I think you said 500 to 600 units next year is if, you know, you think rates might be going up and you know I think some of the desires is driven by the low mortgage rate environment, how aggressive do you think that goal is?

I think we can hit that goal. But in terms of, again, this is a group that, this is really their first full year, they've done a good job, got a great team. But again, we view the condo conversion business as another way to distribute our properties that. Is to sell our property,, the distribution channel. And to the extent that market closed down, we'll move somewhere else. But right now, we think that, especially in third markets, I gave you the example of Scottsdale, Phoenix, that market is very good right now and a much more attractive market to sell condos (ph) into the own the rental.

Right. So should we view that as more of a mid point with an equal probability of exceeding or being below that number?

No I'll be disappointed if we're below that number.

OK and thanks for discussing 2004 in detail here, I appreciate that.

You're welcome.

I'm showing no further questions at this time. Gentlemen, do you have any closing remarks?

No. We thank you for your interest. If you have any questions please call us and again, thank you for your time.

This concludes today's Equity Residential third quarter earnings conference call. You may now disconnect.