住宅地產 (EQR) 2003 Q4 法說會逐字稿

Good morning. My name is Miles and I will be your conference facilitator today. At this time I would like to welcome everyone to the Equity Residential fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS) Thank you. Mr. McKenna, you may begin your conference.

Thank you, Miles. Good morning and thank you for joining us to discuss Equity Residential's fourth quarter and full year 2003 results (technical difficulty) and David Neithercut, our Executive VP of Corporate Strategy and CFO.

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 will turn the call over to David.

Thank very much, Marty. Good morning, everyone. Thank you for joining us. Let me add that Gerry Spector, who normally joins us all these calls, is out of the country and unable to join us today.

For the fourth quarter of 2003, Equity Residential earned 33 cents per fully diluted share compared to 35 cents per share for the fourth quarter of 2002. Funds from operations were 45 cents per share for the quarter, compared to 59 cents per share for the same period last year. Both the EPS and FFO for the fourth quarter of 2003 include a seven cent per share charge taken in connection with the December 26, 2003 redemption of our Series G convertible shares.

For the twelve months ended December 31, 2003, Equity Residential earned $1.55 per share compared to $1.18 per share in 2002. The twelve month increase is primarily attributable to higher gains on property sales in 2003. FFO for the full year 2003 were $2.15 cents per share compared to $2.39 reported for 2002. Again these full year results include a seven cent per share charge for the convertible preferred share redemption.

Last November we gave guidance for fourth quarter '03 for FFO of 45 to 46 cents per share, net of the charge for the convertible preferred share redemption. At that time the one penny range was for the chance that we could see monthly revenues taper off somewhat in November and December, which would be a typical seasonal event.

For the fourth quarter revenues held up reasonably well and came in at the high end of our expectations, with November showing an increase over October and December down only $500,000 from October levels. Our FFO of 45 rather than 46 cents per share was the result of higher than expected expenses, due primarily to an increase in insurance costs for the quarter as a result of several fires that occurred on our properties between Thanksgiving and New Year's Eve.

Turning now to same-store performance, for the fourth quarter of 2003, revenues decreased 0.7 percent, our operating expenses increased 4.1 percent, and net operating income decreased 3.6 percent. Our slight decrease in same-store quarter-over-quarter revenue was attributable to a 1.5 percent decrease in rental rates, offset by a slight increase in occupancy and a 9 percent -- 0.9 percent (ph) or $1 million decrease in concessions.

On a sequential basis from third quarter 2003 to fourth quarter '03 same-store revenues decreased very modestly, down $1.3 million or three-tenths of one percent. Our operating expenses decreased 2.4 percent, and our net operating income increased 1.1 percent.

On a quarter-over-quarter comparison bad debt decreased 4.8 percent, or $185,000, to 3.7 million. As a percentage of revenue bad debt expense decreased from 0.9 percent in fourth quarter '02 to 0.87 percent of total revenues in the fourth quarter of '03. On a sequential basis bad debt decreased $331,000 from 0.96 percent of total revenue in the third quarter of '03. This level of bad debt is within historically acceptable ranges, and you can rest assured we're keeping a close eye on this number.

As we are mentioned earlier, same-store operating expenses increased 4.1 percent, or 6.6 million, in the fourth quarter '03 from fourth quarter '02. The three line items contributing most to this variance were utilities, payroll, and insurance. Utilities were up 5.3 percent, and represented 19 percent of the increase. And payroll increased 7.5 percent, and represented 45 percent of the overall increase. Both of these increases were as expected. Insurance, which I mentioned earlier as being higher than expected, was up nearly 13 percent and represented 11 percent of the increase.

Regarding the payroll increase, I want to remind everyone that at the beginning of the year we indicated that our on-site staffing levels would likely increase, along with our maintenance costs as a result of our initiative to improve the product presentation and increase the quality and quantity of units available for occupancy.

Like the rest of our business, the corporate housing industry has not yet seen much benefit of an improved economy and will need to sustain the job growth and the relocations that go with it to really get back on its feet. Equity Corporate Housing had an operating loss of $2 million in 2003 while paying Equity Properties over $11 million in rent. ECH currently has a approximately 2,800 units, down from a high of 4,700 units when we purchased the business in mid-2000. ECH has approximately 36 percent of its units at Equity owned properties today. And we're currently budgeting for ECH to operate at a break-even level in 2004 and to pay Equity Residential 12 to $13 million in rent for the year.

I would like to now address guidance before turning the call over to Bruce. At this time last year we talked on our fourth quarter 2002 earnings call about the downturn in revenues that we had experienced throughout 2002 that 2003 quarterly same store performance would be dreadful early in the year and would moderate as the year went on. We also said that there were indications that in December of 2002 we had finally reached the bottom in monthly revenue collections, and we said that we had expectations that monthly collections for '03 would be higher than that collected in December of 2002. And while the year played out pretty much as we thought with first quarter same-store revenues down -3.5 percent and ending with fourth quarter same-store revenues down just 0.7 percent, and monthly revenues were higher in each month of 2003 than in December of 2002, except for December '03 which was (technical difficulty) just $100,000 or eight-one-hundredths of one percent, so pretty much on top of the December '02 levels.

We continue to find ourselves in an operating environment in which, although we do not expect any further material deterioration, we're not yet seeing or experiencing any strengthening in our business fundamentals. In fact, our same-store operating budgets call for first quarter '04 revenues to decline nearly $3 million or six-tenths of one percent sequentially from fourth quarter '03. This risk of a modest sequential decline in revenue, combined with the vagaries of the initial lease-up at our development properties, produces FFO guidance for first quarter '04 of 50 to 52 cents per share.

At this time we maintain our first quarter '04 -- I'm sorry, our 2004 FFO guidance of $2.15 to $2.29 cents per share. I wish to note, however, that if we come in at the low end of the first quarter guidance, unless our outlook changes for the balance of the year we may have to reconsider our expectations for the full year.

Bruce?

Thanks, David, and good morning.

Given the magnitude of job losses across our country over the past three years and the resulting impact on the apartment industry, we're encouraged that our revenues remained relatively stable in 2003. As David discussed, monthly same-store revenues remained essentially flat, since December 2002 and we did not experience the continuing steep declines in monthly revenues that we saw throughout 2002.

Although we remain cautious about 2004, we are confident that we are at the bottom and it's only up from here. The question is how quickly are we going to go up. The economy is expanding at a significant pace, and although we haven't seen much job growth, it is coming over the course of this year and we're well positioned to take advantage of it. We're 93 percent occupied and the new supply of apartments in most of our market is being absorbed.

As a result of our "Rise and Shine" initiative this year our properties are looking better. Additionally, we've repositioned our portfolio, disposing of older product in less desirable areas and reinvesting into better located, newer assets. And most importantly, we have great people. By any measure -- be it employee engagement scores, low turnover, or their overall enthusiasm -- our people are at the top of the chart. So we're ready to pounce and we're not going to miss the opportunity to capitalize on the new demand which will be created by this coming job growth and the echo-boomers.

Let me expand on our progress upgrading our portfolio. Last year at this time, I said that one of the most important things we needed to do was to be more proactive in recycling our capital. I said we wanted to reduce the number of markets we operate in from 44 to around 30 within the next three years and have an even greater presence in our major markets.

I'm not going to recite all the numbers in the press release, but in 2003 we made excellent progress toward achieving these objectives. We sold $1.2 billion worth of property. We were a net seller to the tune of $534 million.

We reduced our markets from 44 to 38, excluding the Lexford market. We have sold out of Greensboro, North Carolina; Greenville, South Carolina; and Salt Lake City. We have sold all our conventional properties in Birmingham, Lexington and Louisville. We have sold all but one conventional property in Memphis, one in Richmond, and three in Las Vegas and we will be out of these markets within twelve months. We're selling out of these markets, as well as selling older assets at attractive pricing. The average cap rate on all these dispositions for the year was 7.4 percent.

We redeployed much of the proceeds from dispositions into acquisitions in markets in which we want to increase our concentration. We bought $684 million worth of property at an average cap rate of 6.5 percent. And we acquired properties in high barrier to entry markets such as Boston, Washington D.C., the San Francisco Bay area, and Southern California.

In 2004 we will continue with our strategic repositioning of the portfolio and intend to sell $800 million of properties. With respect acquisitions, as we have said, we believe we're at the bottom of this cycle and are conditioned and poised for a good rebound in property fundamentals beginning in 2004 and in full swing by 2005. Hence, we intend to acquire at least $800 million of property in 2004.

In order to bring greater intensity and focus on our investment decisions, in December we formed our corporate strategy group, which is (technical difficulty). This group includes acquisitions, dispositions, development and asset management.

Asset management, which previously was organized within the divisional property management organizations, has at times been too close to the day-to-day property operating activity and hasn't always been able to focus or spend the time making sure that we are invested in the right markets, the right sub-markets, and the right assets. By bringing these functions together, we're bringing more discipline to the capital allocation process. We want to approach our portfolio management activities in the same way many of you approach your own portfolio management activities.

We're currently conducting a search for David's replacement as CFO and hope to have that position filled by the end of the second quarter.

Now let me spend a minute on the trends we're seeing in the transaction market.

In the fourth quarter of 2003, demand for apartment properties continued to be very strong due to interest rates holding relatively steady and the relative attractiveness of real estate over alternative investments. Most investors seem to believe that many of the major markets have bottomed or will bottom in the first half of 2004 with a rebound of minor proportions in the second half of the year and 2005 being a year of significant growth. The underwriting for most deals reflects this recovery scenario. There are, of course, several markets which investors do not expect this scenario to play out, such as Denver and Houston, for example.

The most pronounced change in the transaction environment has been the increasing number of sales to condominium converters and the amount of new, multi-family property development built as condominiums. This trend is particularly pronounced in South Florida, Washington D.C., the New York metro area, and California. In South Florida in particular almost no new rental units are being built. Developers who used to build exclusively rental apartments are now focused on building condos or apartment product which can be sold to converters upon completion. Most apartment assets are sold with condominium value as a primary focus.

Although there are definitely more assets on the market today than early in 2003, the strong demand, aided by generationally low interest rates, has kept pricing high.

In terms of development, we currently have seven projects under construction totaling $482 million. The majority of these projects are in Washington D.C. and Southern California. Four of these projects will be completed in the first quarter of 2004 and we have funded 100 percent of our equity. When these projects are completed and stabilized they should produce a yield of approximately 7.7 percent, which is about 105 basis points lower than our pro forma of 8.75 percent. Our development properties which are completed and stabilized for more than a year should generate a 7.4 percent return on cost in 2004. At the present time we're projecting approximately $300 million of development starts for 2004 which will not be completed until late '05 or '06 and our are focusing our efforts on Southern California, Boston, and Washington D.C.

Now let me review our five best and worst markets in terms of revenue growth for the fourth quarter '03 versus fourth quarter '02 in our largest 20 markets. I'll start with the worst markets.

Atlanta was our worst market in the fourth quarter with a 5.4 percent decline in same-store total revenue compared to the fourth quarter of 2002. Despite the estimated 60,000 new jobs added to the economy in 2003, our business in Atlanta is still suffering from previous job (technical difficulty) multi-family construction and low interest rates fueling home buying. Latest estimates are that nearly 10,000 new apartments were delivered in 2003, and there are an estimated 8 to 10,000 new units projected for 2004. Employment estimates for 2004 range from 40 to 60,000 new jobs, which is very promising. But it's going to take a while for that to have a meaningful impact on our business.

Our second worst market in terms of same-store total revenue decline was Denver, down 4.5 percent on a quarter-over-quarter basis. Current estimates are that the economy lost approximately 22,000 jobs in 2003. Annualized employment projections for 2004 have been revised downward from 31,000 new jobs to 8,000 new jobs expected to be created this year. New multi-family construction continues to be a problem. It is estimated that 8,000 units were delivered in 2003 and an additional 3,000 units are expected to be delivered in the first half of this year. The apartment market here will remain weak throughout the year as a result of the weak economy and overbuilding.

The New York metro area was our third worst market in the fourth quarter based upon same-store total revenue which declined 4.2 percent compared to the fourth quarter of 2002. The weakness in the New York economy appears to be lessening somewhat. Job cuts appear to have slowed to a great degree. Employment for 2003 was down only seven-tenths of one percent versus down two percent in 2002. And 2004 is forecasted to show job growth of approximately one percent. The impact of the recession was not as severe in New Jersey as in New York City. Most of the Northern New Jersey MSAs are recording stable and improving conditions and are projecting positive employment growth in 2004. In Stanford, Connecticut -- that's about the weakest of the markets in the area with a two percent decline in employment. A recovery across the New York metro area depend heavily on a rebound in the New York City economy, particularly in the financial services sector. A meaningful pickup in our business is not expected to start until later this year.

Our fourth worst market was the San Francisco Bay Area, with same-store revenues declining 3.3 percent in the fourth quarter last year versus the same period in 2002. Job cuts throughout the Bay Area appear to have slowed down considerably in the past couple of months and there is evidence that the economic slump is nearing the bottom. However, recent downward revisions of job growth forecasts point to a very slow recovery in the Bay Area. The San Jose market will continue to see a healthy amount of new multi-family construction which will place additional downward pressure on rents for 2004. Revenues in the East Bay, although stronger than San Francisco and San Jose, are still flat but we anticipate this sub-market to show signs of a recovery due to its more diversified economic base.

Again, Dallas was our fifth worst market in the fourth quarter, based on same-store total revenue which declined 3.2 percent compared to the fourth quarter of 2002. The Dallas-Fort Worth economy lost an estimated 16,000 jobs in 2003, but the loss has slowed recently and a few employers such Lockheed Martin have added jobs. However, meaningful levels of job growth are not expected until the second half of 2004 and into 2005. Construction in new multi-family units continued in 2003 with an estimated 11,400 units completed after approximately 10,000 units were completed in each of the previous two years. But the supply of new apartments may begin to slow in 2004. Estimates are for 8,300 units this year. We believe that the Dallas economy is nearing bottom, but will not start to recover much until 2005.

Now let's turn to our best markets within our largest 20.

The D.C. suburban Maryland market was our best market in the fourth quarter with same-store revenues increasing 3.7 percent over the fourth quarter of 2002. The D.C. area economy slowed slightly, but remained stable through the fourth quarter. The federal government has proven, again, to be the stabilizing factor. Federal spending has fueled growth in the professional and business services sector, as well as the retail sector. Defense spending is a significant contributor to the economy, with most of the major defense contractors located in the area and virtually all of them benefiting from the increased spending. During the recession the Washington D.C. economy did not experience the same decline in employment as the rest of the country. unemployment in the area remains around 3.5 percent, down slightly from 2002. Job growth is projected to increase from three-tenths of one percent in 2003 to 1.9 percent in 2004. There continues to be a steady amount of multi-family construction in the D.C. area. Approximately 13,000 units were under construction in the fourth quarter of 2003, with much of the deliveries expected in the first and second quarters of this year. The Montgomery County sub-market has over 4,000 of these units under construction. The D.C. economy will continue to outperform the nation as a whole due to continued federal spending and occupancies are expected to remain stable at 94 to 95 percent.

We had a tie for second best market in the fourth quarter between Boston and Orange County. Both posted a 3.4 percent increase in same-store revenues quarter-over-quarter.

The Boston area economy remains in recession, having lost over 40,000 jobs in 2003. While employment has not yet picked up significantly, most economists are forecasting growth in 2004 in the range of 20 to 40,000. Health care and education sectors are performing well, while financial services and construction remain weak. Supply constraints remain key to this market stabilizing. The limited new supplies prevented a significant downturn in the multi-family market. There were only about 3,000 market rate multi-family rental units delivered in 2003. Forecasts for 2004 are for approximately 4,200 new units, primarily in the suburbs. Single-family home prices remain high, with the median price having increased over the past few years to $407,000. However, the Boston area remains weak and a recovery is not anticipated until 2005.

Now let's turn to our Orange County. Including start-ups and self-employed, it's estimated that Orange County actually added about 29,000 jobs in 2003. Unemployment is among the lowest in the country at 3.5 percent. Orange County is expected to add between 18 and 24,000 new jobs in 2004, primarily in tourism and defense-related manufacturing. New multi-family construction is increasing. Approximately 1,200 units were delivered in 2003 and over 4,000 units are expected in 2004, including 3,000 in Irvine. Despite the pick up in multi-family construction, the outlook for 2004 is positive. With the national economy in recovery we expect good growth in 2004 in this market.

The Inland Empire was our third best market in the fourth quarter with same-store revenues increasing 3.3 percent over the fourth quarter of 2002. This market continues to create new jobs, with over 15,000 jobs created over the last 12 months. Unemployment is at the lowest point since May 2002 at 5.2 percent. Estimates are for the creation of approximate 25,000 new jobs in 2004 and occupancies are expected to remain in the 94 to 95 percent range.

New England -- excluding Boston -- was our fourth best market. Total same-store revenues increased 2.9 percent on a quarter-over-quarter basis. Included in this market are assets located primarily in Hartford, with additional properties located in Providence and Western Massachusetts up to Manchester and Portland, Maine. The Hartford story -- and that of many of these New England markets -- does not change. The lack of new multi-family supply and the high prices of single-family homes in all these market have contributed to the overall performance of these assets.

Our South Florida market was our fifth best market in the fourth quarter, with same-store revenues increasing 2.6 percent over fourth quarter of 2002. Due to population growth almost twice the national rate, South Florida has experienced positive employment growth. Job growth in South Florida increased 1.7 percent in 2003 and is projected to increase 1.9 percent in 2004. Consumer spending generated by the high proportion of higher net worth retirees help insulate South Florida from major economic downturns and a weaker US dollar has continued to increase foreign tourism. The so-called "Internet Coast", consisting of Palm Beach, Broward and Miami Dade, ranked fourth in the country in the number of high-tech companies. Regarding new multi-family constructions, estimates are that approximately 9,500 units were completed in 2003, up from 7,400 in 2002. Projections for 2004 are that an additional 9,500 units will be added to this market. However, as I mentioned earlier, we believe that many of these units are either pre-sold as condominium or will be sold to condo converters upon completion, and are therefore not significantly increasing the supply of rental units in this market. Occupancies have been holding relatively stable at around 93 percent and are projected to increase to 94 percent in 2004.

Finally, I would like to close by saying that although it's been a very difficult operating environment for all of us in the apartment industry over the last several years, we're coming out of it and the future looks bright. The economy is recovering quite strongly and job growth, although anemic to date, is coming. 2004 will be a year of transition and will set the table for a very good year in 2005.

Within the apartment space I like our position. We're national in scope, which gives us greater diversification. We have the size and the scale which allows us to drive down our operating costs. It also enables us to invest more into the training and development of our people, which long-term is in the key to any company's success. We have great people and they have shown time and time again that they're up to the challenge.

I also like our diversified product and overall price points. With an average monthly rent of $838, our product is very affordable and will be very competitive for the majority of the renter market and to for sale housing.

From an operating standpoint, we have significantly upgraded our product presentation over the past 12 months (technical difficulty) this has cost us some money, but is well worth it as it puts us in a much better position to attract and retain our residents vis-a-vis our competitors who have cut back in these difficult times to conserve cash.

From a portfolio management standpoint, we've been opportunistic in taking advantage of what the market has given us. We've sold 1.2 billion of older property, as well as exited secondary markets at attractive pricing. We're redeploying these dollars into newer products located in larger markets with more upside. While we continue to feel the effects of the dilution associated with this repositioning, it will pay dividends in the years to come.

Our balance sheet is rock solid, our debt levels remain low and our coverage strong, and our dividends is (technical difficulty)

(OPERATOR INSTRUCTIONS) Jordan Sadler, Smith Barney.

I just had a question on development. You expect to start $300 million of developments during this year and you talked about yields on the ones that are being completed this year of about 7.7 percent. What are these new developments being underwritten at? What is the pro forma yield on those?

Pro forma yields for the new developments are around 7.5 to 8 in a quarter.

I guess that's sufficient return. I guess previously you had talked about 200 basis points of the spread not really being enough of a return to justify the risk of development. Have you changed your views on that little bit?

I think if you look at where we are focusing our efforts on -- for instance, Southern California -- if you can build something there for the 7.5 percent to date, in terms of selling those assets we're selling those assets for 5.5 or better. So we think that's pretty good in terms of some of these markets we're looking at 200 basis point spread today. We think it is a decent spread.

When you talked about the selling that you guys did during the year, the 1.2 billion, you said older assets. Do you have any idea what is the average age of the portfolio maybe before and after the sales? Or what is it today and what was the average age of the assets sold, however you can answer that?

The average age of the assets sold was about twenty years. And in terms of the properties we bought had an average age of about eight years.

Lastly, looking at your first quarter guidance of 50 to 52 cents, I understand revenues are coming down a little bit, but there's some savings from the redemption that you guys had going through and you have some lease-ups coming on line. Maybe could you bridge that for me, what the difference is there and why you expect it to be down at the bottom end by two cent, what would cause that?

Again, it starts with the notion that we're probably getting off to a little slower start than what we had originally expected for the first quarter. I mentioned that that would be down $3 million or so on a sequential basis. And we've got a lot of properties in various stages of lease-up. That's a very tough business, a sort of handicapped as to the absorption of those units on a weekly or monthly basis and the actual levels that you'll be able to obtain on those levels. So when you put all those things together, we're bringing more development properties on line -- that is what gets you the 50 to 52.

Can you quantify the incremental FFO contribution from the developments in '04?

You've got a situation where you've got development properties that will go through different stages of stabilization so that their FFO contributions will change from one year over another, as well as properties being put in-service off of being on a capitalized interest on your investment. My guess is that overall the developments contribution to FFO, because of putting things in-service, could be down a couple of pennies on a year-over-year basis.

Thanks. That's it.

Lee Schalop, Banc of America Securities.

It's Karen Ford here with Lee. I noticed that you tweaked your guidance up three cents, but you left your operating assumptions intact. Can you just talk about what changed in your outlook to cause the change in guidance?

A whole lot of people missed the addendum that went with the December, late November press release in which we disclose that we were redeeming the Series G. In that press release we stated that we believe that that redemption -- in addition to the seven cent charge for 2003 -- would be three cents accretive for 2004. So as part of that press release we did amend both the low and high side of our guidance by that three cents.

Got you. Secondly, I know SG&A ticked up slightly. You had given us last quarter an estimate of $36 million for G&A for 2004. Is that number still good?

No, it's more in the $38 million range -- 37, $38 million range. If you look at the fourth quarter and sort of annualize that, that's a pretty good run rate. But that's still in the ballpark that we had talked about for '04.

I think Lee has a question as well.

Two questions. The first, there's been a lot of talk from other companies about ramping up development, given expectations that in '05 and 06 the market will be a lot better. Could you share your thoughts on that?

As you know, last year we started about less than $150 million worth of new starts and this year we anticipate we're going to go to $300 million.

We think it's easy to set a goal out there; the hard thing is to be able to define the opportunities that you think make sense to do it. So of that $300 million, we probably have $100 million that we feel pretty confident that we're going to be able to start. We still have to find -- we're working a lot of other opportunities. So who knows if we are going to hit that number. Again, our focus is on certain (technical difficulty) the high barrier to entry markets -- really Southern California, D.C., and Boston right now. But I think everyone has increased how much new construction they're going to do, but we're going up modestly.

Can you just give us a little more color on how you get from 50 to 52 to maintaining the 2.15 to 2.29? That seems like it's going to be challenging.

That's why I stated in my remarks that if we do come in on the low end of that 50 to 52 that we will have to reassess that guidance.

Thanks very much.

Jay Leupp, RBC Capital Markets.

(indiscernible) here with Dave Ronco. First thing, David, I wonder if you could elaborate on the anticipated 800 million of asset sales you would like to do this year -- what you thoughts on the range of cap rates would be, and also maybe some indication if there's any geographic specificity to where you're going to be selling assets this year?

As we have talked about in terms of -- we have some markets we have not fully exited, like Vegas we have some properties and some of the others, But you can anticipate that we're going to be selling, again, older properties and in some of the smaller markets, i.e. we have reducing our exposure (technical difficulty) in the Midwest. I would say that there are couple markets there we will continue to reduce our exposure in. But we will have to come back to your after we execute the plan to show you what we've done. But we anticipate doing the $800 million and we've got a pretty good start on it right now. We will be able to identify those in the first quarter.

In terms of the Southern California market in particular, can you give us some indication for what you believe true going-in cap rates are in Los Angeles and Orange County at this point and if you're seeing any signs that rent growth and occupancy growth in those markets are slowing down?

I would say that in Southern California we're pretty bullish in terms of our rent growth for the next 12 to 18 months, except for San Diego. We worry a little bit about San Diego because we think there will be more deployment of troops in the next few months. So that's the one market we're a little cautious on.

In terms of cap rates in those markets, for existing properties you're seeing cap rates that will range from -- it could even be some five, depending on whether you're selling it to a converter or not. So if you could buy a property there in the sixes you're going to feel pretty good about yourself if it is a new property and well located.

Thank you.

Rob Stevenson, Morgan Stanley.

Bruce, what dollar volume of acquisitions do you currently have either closed or under contract thus far in '04?

We're not going to comment on that.

David, you guys got a little over $500 million of debt coming due this year. What in your assumptions are you sort of implicitly assuming on the interest rate spread?

We think that we can get that done at about a 200 basis point pick up, which is about a $10 million run rate, and budget about half of that in '04.

And what was unit turnover during the quarter?

For the quarter we turned 14.9 percent, and that compares to 15.2 for fourth quarter '02. And then for the entire year turnover was down about 70 basis points from 67.6 percent to 66.9 percent.

And then I missed when you were talking about the bad debt. Did I understand you right that it went from 0.9 a year ago to 0.87?

Yes.

Okay. Thanks.

Dennis Maloney, Deutsche Bank.

Just a couple of quick questions on your markets. I'm just wondering why in D.C./suburban Virginia sequentially you saw about 200 basis points of occupancy slippage there. Anything in particular behind that?

No, nothing in particular. You've gotten some new supply on, but we feel pretty good about that overall market in terms of both the Virginia market, the Maryland side and into the district too.

And then in Phoenix you had nice revenue growth sequentially, you had some occupancy pick up. Why were expenses off 6.2 percent there?

I don't have a particular explanation on the expenses on the sequential basis. I will just tell you that the occupancy was just seasonal. We do feel reasonably good about where we sit in Phoenix today. We do think much of the worst is behind us there. And we did see a nice seasonal pick up going into the fourth quarter.

To David's point, in the last few years we have not seen a seasonal pickup in Phoenix. This year we've gotten it and we are encouraged by it.

In terms of condo sale contributions to FFO in '04, what kind of dollar volume are you looking at there?

Condos delivered about $10 million of FFO in 2003. We're looking at about the same amount in 2004.

That's it. Thank you very much.

David Harris, Lehman Brothers.

Bruce, when you talk about job growth I wonder if you could give a little bit more specificity. Can you give us an idea of what the monthly job growth number you think is needed to kick start the business?

I would say that in terms of the numbers that people are looking at you are going t see a growth of about 1.2 percent, which is about 1.5 million jobs. I think in terms (technical difficulty) show much growth in terms of what we're seeing we are probably going to need closer to 2 million jobs.

Bruce, this David Harris here. In your release you reported sales during the quarter of roughly $415 million and you then also reported a GAAP gain of $91 million. Could you tell us what the economic gain or the gains before depreciation were on both of those transactions?

I don't have that number broken out. I'm sorry.

Could you supply that in the future because it is an important metric for the industry?

Sure.

Like next quarter?

Keith Mills, UBS.

I'm joined here by Chris Pike today. I had a few questions for you. The first is David, you had mentioned that part of the reason for the expense increase in the fourth quarter was fires. Was there a common denominator there in terms of similar types of properties or similar types of reasons or was it just kind of a fluke thing?

No, there's never a common denominator with some of those casualties. It was just more than what we would have expected. Some of those expenses can be lumpy throughout the year and it was particularly lumpy in the fourth quarter.

The insurance increase in the fourth quarter, do you anticipate that that will spill over into 2004?

Yes, we're not expecting insurance to move up all that much next year. We're budgeting that from two to four percent.

How about on the payroll side? What are you budgeting there for this year?

Payroll is 6 to 6.5 percent. That's meaningful because that represents 25 percent or so of our property operating expenses. Again, that just comes from headcount, as well as just the pressure that we're seeing to keep our people on side that have opportunities to go work at new properties and our maintenance guys who have got opportunities to go work in the construction trade.

The headcount increase, do you expect it to be concentrated in particular regions of your portfolio or is it really just across the board?

I think it would be across the board.

Can you give us an update -- and maybe you did so and maybe I missed this -- where you are or what you expect to achieve in terms of pruning back your market this year from the 44 to the 33?

I would envision that -- we are 38 now -- that we will be down to probably 33 by the end of the year.

Okay. The spread between your acquisitions and dispositions from a cap rate perspective was about 100 basis points last year.

Right at 90 (ph), right.

Are you comfortable with that for this year?

Yes. We have a little bit more than that budgeted, but I think right now we're feeling that is a pretty good spread.

We budgeted that at 150 basis points, which is consistent with the way that we have budgeted that in the past. And I think that we were pleasantly surprised at the 90 basis point spread that we've seen this past year, really driven by the very competitive sort of leveraged buyer bids for the stuff that we were selling in our secondary and tertiary markets.

Do you anticipate that the properties you will be selling this year or the acquisitions you're targeting will result in a change in that? Or are you still comfortable with 100 basis points?

We budgeted 150 basis points. I would love -- we would all be overjoyed if we could repeat 90 basis points, but we're not budgeting that.

Okay. Finally, if you can share with us -- may be you did and maybe I missed this -- the markets or regions in the country you're targeting for acquisitions at this point.

We really don't want to specify where we're targeting acquisitions, but we will when we close every quarter tell you where we bought.

Thanks. I appreciate it.

Craig Louphold (ph), Greenstreet Advisers.

David, following up on that last question a little bit, your expense forecast for next year of three to four percent, I'm kind of curious how much of that is related to this property enhancement program and how much of the added expenses are sort of permanent related to that program, as opposed to maybe more maintenance oriented, as opposed to higher staffing levels? I'm trying to think about going forward, looking through '05, '06, what kind of expense growth we might expect.

I think that we could get back to more inflation levels of expense growth, maybe half (ph) for this year. So we had a ramp up in '03, and we will see some of that continue in '04. And then I would expect to be back to the more normal growth levels.

So said differently, a lot of those costs related to the enhancement program are sort of permanent in nature?

Yes.

And also, on cap rates can you talk about trends that you're seeing in the markets over the last three or four months, whether you're seeing continued decline in cap rates and any kind of change in the mix of buyers of properties?

We continue to see that cap rates -- we've not seen cap rates go up. Some people talk about cap rates going up. We have not seen it. We do think that they have been pretty stable with the exception of some condo sales that are sold on a different basis. But I would save for the Class A property there's a still a lot of demand for those assets and the cap rates for those in the glamour markets will be in the 5.5 to 6.25 basis. And I would say that the tertiary cap rates will be probably in the range of 6.75 to 7.5 or 7.75.

So lower than even the cap rates that you sold properties at in the fourth quarter?

Yes. I would say that if you look at what's happened to cap rates and what we sold over the past year, the cap rates have continued, both on the Class A product and also the Class B product, have continued to ratchet down. And they've tightened in terms of the spread between the two of them.

Thank you.

You also have to just account for the fact when we talk about cap rates it is just in general cap rates across the market, and then when you get down into what we've done in a specific quarter it will be a weighted average cap rate of what happened to take place in two or three markets during a fairly limited period of time.

David, just one last point on cap rates. Can you refresh my memory as to how in your supplement you're defining cap rates?

We're essentially looking at the FFO that we're selling versus the FFO that we're buying.

So a pre-CapEx number?

There are reserves in those. There are replacement type reserves, depending on the age of the property, 250 to $350 and so per unit. But it will be limited to that.

So not really an FFO yield, but an NOI yield less (multiple speakers)

That's correct. It is an NOI adjusted yield. When I sort of say FFO, I'm really saying we're looking forward and saying what do we think we're selling versus what do think we're buying and try to put those on a level playing field (multiple speakers)

With management fees and reserves.

That's an important point. We do have a management fee, a market level management fee, in those costs.

Kevin Lentove (ph), Edward Jones.

David, you made some comments; I just want to make sure I understand the nature of the business. A year ago you were talking about in 2002 the December month was kind of the bottom of the cycle that you were seeing and that 2003 you saw improvements over that month. Is that correct?

Yes. What we had talked about a year ago at this time was that we had had a very significant and meaningful roll down of our monthly revenues from January '02 down to what we saw in December of 2002. And on this call a year ago we told people that we thought that that December 2002 collection level was a bottom and that we were hoping that we would see in each month of 2003 collections that would exceed that level. Not collections that would sequentially exceed one another throughout the entire year, but the levels -- collections in each month that would exceed that which we collected in December 2002. And in fact, we did in every single month, except December '03 when we were off by eight-one-hundredths of one percent.

But looking then out into this first quarter, are you expecting then those numbers to remain at a low number so that on a year-over-year period we're seeing on a same property basis lower revenue?

No. In fact, we have talked about revenue guidance that could be negative on a year-over-year basis. And in fact, I've talked about starting first quarter '04 off somewhat from third quarter '03, so on a sequential basis sort of starting off a little bit. Again, we're not calling for any further material deterioration, but we're just letting people know that we were getting off to a little slower start relative to December '03 levels.

So not material deterioration, but slight deterioration?

Correct. We're just kind of bouncing along the bottom.

Thank you.

Carrie Callahan (ph), Goldman Sachs.

It's Nora Creedon here with Carrie. Just a question on the expenses that you expensed versus capitalized. It looks like the cost per unit that you expense was up about 9 percent in '03, but the capitalized costs were up 24 percent on a year-over-year basis. We're just wondering is that (technical difficulty) any change in capitalization policies that we should be aware of? Or is it just a case of putting some more money to upgrade the properties? And if it's the latter, can you give us some sense of what the returns might (technical difficulty)

It is the latter, not the former. So there has been no change to the capitalization policy of the Company. This increase in both the maintenance side and the CapEx side was expected and is consistent with the strategy that Bruce had laid out early in the year about addressing the overall look and quality feel of our properties. So these numbers are up and they're up significantly, but it was not a surprise.

As interrelates to returns on that, there are some of that that is necessary that is required to go into the properties just to maintain them as is. There are roof jobs and painting jobs and pavement jobs that you have to do to maintain the same level of income and to keep the properties looking properly. There are other expenditures that we will make from time to time that will be revenue enhancing capital. We have expectations of plus 10 percent returns on that incremental capital today.

Thanks.

Jordan Sadler, Smith Barney.

It's a follow-up on a previous question in terms of returns on sales. On the 1.2 billion of dispositions this year, did you calculate IRRs on a cash basis?

Yes, the IRRs were about 10.5 percent.

Is that consistent with historical levels of selling and with what you expect in '04?

It's probably down a little bit because your cash returns have been down over the past few years. We're probably selling these properties close to the same per unit per square foot levels that we had seen previously. But just on a cash on cash basis over the past few years have obviously trended down. My guess is that the IRRs are down a little bit. We still think it's reasonable at that 10.5. Understand that we're getting 10.5 of the stuff that we're selling in our (technical difficulty) we want out of. This is, as Bruce said, averaged 19 or 20 years old. So we think that 10.5 percent return on the stuff that -- our IRR and the stuff we want to sell is pretty good. It also does include a management expense charge.

The other point I think we should add is that we have held these assets for a while. So over long periods that IRR comes down.

You said it does include a management expense charge. So that's sort of what you expect in '04 in terms of IRRs as well on those (multiple speakers)

I don't know. I don't think we look at it that way. It is more a historical review in terms of what happens. (multiple speakers) look in terms of how much we can maximize the price of the asset, not look back and see how much we made on it.

(multiple speakers) expect the total returns from this point forward in making that sales decision relative to the full returns we think we can enjoy if we deploy that money elsewhere.

Thanks guys.

David Harris, Lehman Brothers.

Hi, it is David Shulman. In South Florida are you seeing condominiums being built by investors and coming back to you as rentals -- as rental competition? (multiple speakers)

There's no question, David, that there's a lot of buyers -- condominium-mania down in South Florida (technical difficulty) you hear the cab driver when you go down there talk about all the condos they own that they're buying. There's a lot across there. But we've not seen that to date because usually that is much more fragmented and we have not been hurt by that.

Do you have any idea of how many units are out there like that?

No, I don't have a number for you.

Thanks a lot.

Patrick Walsh, Prudential Equity Group.

David, what are you budgeting for capital expenditures in '04?

That's a great question. We will be 750 to $800 going forward. If you look at the -- if you average what we've done over the last two years -- the 830 some odd for this past year and the 670 or whatever in 200 -- that averages about 750. I think that that's a pretty good run rate. There will still be some work that we're doing to get the properties sort of up to a more appropriate standard today so that we may exceed that number in 2004. But my expectation is that a good annual run rate is about $750.

Thank you.

Jay Habermann, CSFB.

David, could you repeat the change in concessions you mentioned in your opening comments?

It was about $1 million or so -- up $1 million, about 9 percent.

Up one million?

I'm sorry. That is decrease. Everybody's talking to me at one time. We're down $1 million, down 9 percent on a sequential quarter basis.

Where are you seeing the greatest changes in concessions or improvements by market?

I'll tell you, we look at money in the bank by market. And whether you get there through reduced rents and reduced concessions or increased rents and increased concessions, it doesn't really matter to us; it's how much money are you putting in the darn bank.

To give you a good example of that, Atlanta we're down -- concessions were down like 40 percent, but our rental rates were down too, so we just sort of moved it to down to lower effective rate. So again, our focus is on total revenue.

Question, going on to asset sales, as you complete -- or assuming you complete -- what you targeted for '04, how are you looking at asset sales in the future and what assets designate for sale?

Once we get down to the 30 some odd markets that we believe will sort of be our core markets, we will be assessing on a very regular basis what we think total future total returns will be on our asset. We're going to the valuing these things and understanding on a regular basis what we think our properties are worth, what they could trade for in the market, what we believe the future operating performance will be of these assets and whether or not we believe we could -- should sell properties and what we think the market will give us today and reinvest elsewhere, or whether or not we believe that we will hold at that price. It is going to be an asset by asset, sub-market by sub-market sort of decision in deploying our capital amongst the markets which will be our 30 primary markets.

Do you have a sort of percentage of the portfolio today?

I beg your pardon?

Do you have a percentage of the total portfolio today that would constitute potentially for sale?

I think we are going to get a mode where every single asset we've got is potentially for sale if we believe we could sell it expensively relative to the opportunities to reinvest that capital elsewhere.

Thank you.

Keith Mills, UBS.

First, just going back on to the CapEx number of 750 per unit, is that all maintenance CapEx? Or is that some revenue enhancing CapEx?

That would include some revenue enhancing CapEx.

How do you think that would be broken down?

We get asked that question all the time, and the only way for us determine that is ask the people in the field what they're spending, what they think is revenue enhancing and what's not. We're not about to have them arbitrate that. We believe that as much as 20 percent of that -- 10 to 20 percent of that -- could be revenue enhancing in CapEx, but we don't break down and don't try and specifically make that differentiation.

That would put your maintenance CapEx, for example, potentially in the neighborhood of 600 to 675?

I guess if you just did that math, yes.

What portion of that do you think is expensed versus capitalized?

All of that is capitalized.

All of that is capitalized?

Yes. If you look at the schedule in the supplemental on the press release, it does say what we expense and what we capitalize for a total expenditure on a per unit basis.

I just want to make sure I am doing that on the maintenance side excluding the revenue enhancement impact.

Next question for you is did you provide any kind of commentary anecdotal feedback about what you're seeing thus far as we start the new year in terms of operating trends, demands for your property and what you're seeing kind of across the different regions?

I would say just what David said, which is that in terms of December we were down a little bit from where it was. I would say that the regions that are doing well we like -- Southern California, D.C., South Florida. Florida in general is doing well. South Florida is doing better than the other parts of Florida, but it's all positive. I would say that on the negative side, Houston gives us a headache. That would probably be our worst market in terms of where it's going. Denver we're concerned about. And Portland is not a bed of roses right now.

So the trends you saw in the fourth quarter and you commented on are what you're seeing thus far this year, one month into the new year?

One month does not a year make. It is sort of like just our overall feeling of what markets are going to be good this year and what --

I'm just trying to get a sense of how the year has started, if there's been any change in what you've seen in the January, for example, relative to what you saw in the fourth quarter.

There hasn't been much change.

Thanks.

Asad Kazim (ph), Reef Securities.

Could you provide some commentary on public versus private market cap rates in context of where you guys -- what cap rates you guys are buying assets and what you're seeing in the public market?

I think there's been much written about the difference between market Main Street NAB real valuations and what properties are trading at and what many of the guys use for implied cap rates to determine their NABs. I think of the embedded sort of implied cap rates on many of the multi-family companies continue to be a little high, but I'm not sure that it's materially high.

Thanks.

Krishna Somma (ph), Northern Trust.

Could you please tell us what your cash flow from opps number was for the quarter?

Cash flow from operations?

That's correct.

I guess we take FFO and subtract one quarter of the CapEx -- 45 and 300 -- 120, $130 million or so.

Perfect. Thank you very much.

(OPERATOR INSTRUCTIONS) We have no further questions at this time.

Thank you operator. We appreciate your interest. Just to wrap up, when we look at where we are today we think that 2004 again is going to be a transition year. We're bullish as we look at the business going out to 2005 and 2006. We think we're positioned well in terms of our portfolio, we think we're positioned well in terms of our price points, and we think we're positioned well with our people. So we're confident in terms of we're at the bottom, things are going to look up and it's just a question of time. Thank you very much. We appreciate your support.

Ladies and gentlemen, this concludes today's Equity Residential fourth quarter earnings conference call. You may now all disconnect.