住宅地產 (EQR) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Equity Residential first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Mr. McKenna, you may begin your conference.

Good morning, and thank you for joining us to discuss Equity Residential's first-quarter results. Our featured speakers today are Bruce Duncan, our President and CEO, David Neithercut, our Executive Vice President of Corporate Strategy and CFO, and Gerry Spector, our Chief Operating Officer.

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. 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 you, Marty. Good morning, everyone, and thank you for joining us on today's this conference call. For the first quarter of 2004, Equity Residential earned 35 cents per fully diluted share compared to 41 cents per share for the first quarter of 2003. Funds from operations were 52 cents per share for the quarter compared to 57 cents per share for the same period last year. On a same-store basis, our revenues decreased 0.2 percent, operating expenses increased 3 percent and our net operating income decreased 2.3 percent. On a sequential basis, from fourth quarter 2003 to first quarter 2004, our same-store revenues remained flat, our operating expenses increased 1.3 percent and our net operating income decreased 0.9 percent. As expected, our same-store quarter-over-quarter revenue decrease was the result of a 1.3 percent decrease in rental rates, which was partially offset by a 0.3 percent increase in occupancy and a 20 percent reduction in our concessions. On a quarter-over-quarter comparison, our bad debt decreased 9.6 percent or $349,000 to 3.3 million. As a percentage of revenue, our bad debt expense decreased from 0.87 percent in the first quarter of '03 to 0.79 percent of total revenues in first quarter of '04. On a sequential basis, bad debt decreased $229,000 from 0.84 percent of total revenue in the fourth quarter of '03 to 0.79 percent in the first quarter of '04. And this level of bad debt is within an historically acceptable range for the Company.

As I mentioned earlier, same-store operating expenses increased 3 percent or $4.9 million in the first quarter of '04 over the first quarter of '03. The two line items contributing most to this variance were utilities, which were up 5 percent, representing 27 percent of this increase and payroll, which increased 6.2 percent, representing 50.5 percent of this increase. As we mentioned beginning early in the year, our on-site staffing costs would increase as a result of our initiative to improve product presentation, as well as increase the quality and number of units available for occupancy. Sequentially, operating expenses were up 1.3 percent in the first quarter with the increase coming from higher utilities and real estate taxes. Higher utilities expense was not expected given the severe winter, especially that on the East Coast this past winter.

Our Equity Corporate Housing business showed a modest positive variance to its first-quarter budget on better than expected total sales and expenses that came in under budget. We are encouraged by these results and we anticipate that ECH will pay approximately $13 million to Equity Residential rents this year and that the Company will produce slightly positive EBITDA in 2004.

I would like to now turn to the balance sheet and address the first-quarter purchase of our partners' interests in certain of our joint-venture developments, as well as the balance sheet impact of FIN 46. This will take a little time and I know that there will certainly be a lot of questions afterwards, but let me see if I can't answer some of these first by getting into a little more detail at this time. So as most of you now, it's always been our intent to own 100 percent of the development projects that we build with our joint venture partners. So we started conversations with these partners about six months ago to acquire their interest in many of these developments, thereby giving Equity Residential 100 percent ownership. As a result of these negotiations, in the first quarter, we acquired our partners' interests in 4,500 completed units, 315 units that will be completed this quarter and two land parcels. The first transaction in early February was when we acquired Legacy Partners' interests in four assets, comprising 1,286 units in Southern California, Seattle and Denver. These assets were valued at approximately $230 million or $179,000 per unit on a weighted average stabilized cap rate of about 6 percent. Legacy's interests in these assets and the phase three land at Warner Center were acquired for $3.15 million in cash. On March 31, we acquired Lincoln Property Company's interests in 11 assets, comprising 3,529 units in Atlanta, Chicago, Northern Virginia, Jersey City, Boston, Kansas City and Southern California. These assets were valued at $758 million or $215,000 per unit, that would be 168,000 per unit without the Water Terrace property, and on a weighted average stabilized cap rate of 5.6 percent. Lincoln's interest in these assets and the phase two land at Water Terrace were acquired for 48.5 million in cash. So as we noted in today's press release, acquiring these interests caused these assets to be consolidated on our balance sheet by increasing our real estate assets by $948 million, increasing our mortgage debt by $265 million, all nonrecourse, and reducing our investments in unconsolidated assets by $269 million. Excess cash to acquire the partners' interests for 51.7, and that's the combination of both Lincoln and Legacy, and repay mortgage debt of 340 million came from cash on hand or draws on our line of credit. The remaining $22.3 million is consolidated in other balance sheet line items, such as mortgage escrow deposits and accounts payable. I need everyone to understand that these assets moved into real estate assets on our balance sheet at their original basis plus what we paid our partners for their interests, not at what we valued them to determine the payout to our partners.

And lastly, since the end of the quarter, we've repaid an additional $69 million of the 265 million of originally assumed debt. The remaining 196 million of mortgage debt is all fixed at rates ranging from 4.5 to 7.75 percent and as a weighted average rate of 7 percent.

Now onto the impact of FIN 46, which has caused us to consolidate, as of March 31, all of our existing development joint ventures that were not acquired during the quarter. So we have consolidated 548.3 million of real estate assets and 294.7 million of nonrecourse mortgage debt. At the same time, we reduced our investment in unconsolidated entities by $235 million. The $18.6 million difference is consolidated primarily in accounts payable and accrued expenses. So now consolidated, solely through FIN 46, are 13 projects owned in joint ventures, and they are broken down as follows -- we have five completed assets totaling 1,360 units, and that was -- represented about $250 million of the pick-up in the real estate assets line item; that includes our Highlands at Lombard project, our Marina Bay II, Ballpark Lofts, Bella Terra I and the Legacy Park Central project. And all information about these assets can be found on some of the prior press releases. There were six deals under construction, totaling 1,592 units, representing about $261 million, that's our Watermarke project in Southern California, Indiana Ridge in the Boston area and our four deals in Downtown D.C. -- in addition, two vacant land parcels, representing about $57 million of that pick-up, and that's on a property in downtown L.A. and another property in Pasadena.

Now just so there's no confusion, on the development page included in our release we list deals. The Bella Vista project represents the 315-unit project under construction in which we bought Legacy's interests. City View at the Highlands is one of the five completed deals, which was just completed and so we keep it on that development list and it will be removed from that page next quarter. And the remaining six projects represent the six deals under construction, which are now consolidated under FIN 46. And I hope that all adds a little bit of clarification. Again, I'll be happy to answer some more questions about that after Bruce's remarks.

And I'd like to wrap up my remarks by addressing guidance for the second quarter and for the balance of the year. Today we provided guidance for the second quarter of 51 to 53 cents per share with the high end of that range up just one penny from the 52 cents earned for the first quarter. As Bruce commented in today's press release, we feel better about our business and its prospects today than we did 90 days ago but we continue to be cautious for the remainder of the year. Therefore, we've maintained our full-year guidance of 2.15 to 2.29; but our knowledge at this time that our current expectation are towards the low end of that range. And that expectation of FFO performance toward the low end is primarily the result of two factors. First is the operating performance of our development projects. On a our call in February, in which we announced earnings for 2003, I noted that our performance could be impacted by the vagaries of lease-up of our development deals. And in general, these projects continue to lease units at a less than optimal pace and/or continue to require rental discounts or increased leasing concessions in order to facilitate occupancy. And as a result, our current expectation is that we will fall short of our budgets for these deals by a few cents per share this year. And lastly, as Bruce will discuss in just a moment, we expect an increase in some third-party costs, which will flow through our G&A this year, but which should provide a meaningful return in future years. So notwithstanding more optimism today than 90 days ago, these factors are forcing us to look towards the low end of the range for 2004, and with that, I will turn it over to Bruce.

Thanks, David, and good morning. The good news since our last call in early February, the economy has continued to improve. Business has added 308,000 new jobs in March and a half a million new jobs in the first quarter, the biggest increase in four years. Job growth appears to be widespread across all industries. First-quarter GDP grew an estimated 4.5 to 5 percent on top of 4.1 percent in the fourth quarter '03. And the March durable goods number, which was released Friday, of up 3.4 percent, blew through expectations, giving further confirmation to a continuing robust expansion. With the improving economy, we are beginning to see interest rates rise. These are all very positive trends for our business. However, we still have approximately 2 million fewer jobs today than at the peak three years ago. We need sustained job growth in order to achieve meaningful improvement in our business. But we continue to believe that the table is being set for a very good 2005.

Let me start off talking a little bit about property operations and what we are working on. As I stated last year, we want to focus on execution and on maximizing the tremendous potential of our large national operating platform. To that end, we believe there are a number of areas that we can improve upon. These areas include increasing retention, improving pricing and optimizing procurement. We will quantify these improvement opportunities and develop ongoing metrics by which to measure our performance. To accelerate our efforts, we've engaged Bain & Co. to assist us, which will, as David mentioned, increase our overhead for 2004. In terms of retention, we will be conducting a large-scale renter survey. We will use results from this survey to re-focus both our marketing efforts and operations as warranted.

In terms of pricing, we are studying various revenue management tools and comparing them to our current pricing model. To select the best approach, we will be performing tests in a number of markets over the next three to four months. In terms of procurement, we will build on the success of our national product purchasing program, which has delivered millions of dollars in annual savings through product standardization and vendor consolidation. Expanding this program will allow us to leverage our scale in the marketplace to reduce prices paid for contract services at the property level. Initiatives are currently underway in property replacement, landscaping and janitorial services. The run rate expense and benefits for these initiatives has yet to be fully determined. We are in the get-the-answer mode. If we elect to proceed on all fronts with these initiatives, the 2004 third-party fees will be approximately $13 million. We fully expect this investment to pay for itself many times over in the years to come and we'll keep you posted on our progress.

Now let me turn to the investment side of our business. From the perspective of our dispositions program through the first quarter, we have continued to see very strong demand for virtually all multi-family assets. Cap rates for Class A assets have continued to drop from their already low levels in the fourth quarter of 2003, and are currently in the 5 to 6 percent range. Demand for these Class A properties has continued to be driven by low interest rates and significant amounts of capital. We also continue to see great demand for assets in secondary markets, mostly from private buyers who expect to place significant leverage on the asset. These buyers are not brand names but tend to be strong regional or local players. With the recent run-up in interest rates, we have seen some attempts at re-trading price. To date, our many backup bids have kept them from being successful. However, if rates continue to rise, our pricing may be impacted, especially on our Class B products in tertiary markets.

On the acquisition side, the very low cap rates have brought an increasing number of assets to the market, and sellers believe now is the time to take advantage of the current favorable pricing before interest rates rise. There's concern of the effect of higher interest rates as further evidenced by the fact that some sellers are marketing their properties in a limited way through a broker to four or five players, or marketing the asset directly to principals, as they want a quick execution.

Finally, the demand from condo converters for product continues to be very strong, particularly in Washington D.C., South Florida and Southern California. Some product is trading at a record low cap rates. We have also seen conversion demand driving values in some of the secondary markets, an example of which is the property we're selling and Charlottesville, Virginia at a 5 percent cap rate.

In terms of our portfolio management goals, we continue to make progress in the first quarter. We sold 301 million worth of properties at an average cap rate of 6.6 percent. For the most part, these assets are very locationally and physically challenged, and were located in Kansas City, San Antonio, Virginia Beach, Charlotte, Tampa and Atlanta, and were on average 22 years old. We deployed $224 million of the proceeds from dispositions into acquisitions in the markets in which we want to increase our concentration, such as Southern California and Florida. The cap rates on these acquisitions is 5.8 percent. For 2004, our goal remains to sell $800 million worth of properties and to acquire at least a similar amount.

In terms of development, we currently have seven projects under construction totaling $462 million. The majority of these projects are in Washington D.C. and Southern California. If these projects would stabilize at today's market rents, our yield would be 7.9 percent, compared to original pro forma, which anticipated the yield at future stabilization at 8.8 percent. At the present time, we are projecting approximately $300 million in new development starts for 2004 and are focusing our efforts on Southern California, the Northeast and Washington D.C.

Now let me review our three best and worst markets, in terms of revenue growth for the first quarter this year versus first quarter last year in our largest 20 markets. I will start with the worst market. Houston was our worst market in the first quarter, based on same-store total revenue, which declined 5 percent compared to the first quarter of 2003. Let me sum up Houston. Very little job growth and way, way too much supply. There are over 13,000 new multi-family units started in 2003 and nearly 10,000 additional units projected for this year. This is a time when market occupancy is approximately 86 percent, which is 5 points lower than in 2001. With this weak economy and high levels of new construction, we do not expect this market to improve anytime soon.

Atlanta was our second-worst market in the first quarter with a 4 percent reduction in same-store total revenue compared to the first quarter of '03. After declaring that Atlanta had gained over 60,000 jobs last year, the Georgia Labor Department reversed itself and stated that Atlanta actually lost 15,800 jobs. The market is still impacted by too much multi-family construction. Approximately 9,000 new apartment units were delivered in 2003 on top of 12,000 units delivered in '02, and there are an estimated 8,000 units delivered for '04 -- expect to be. Employment estimates for 2004 range from 40 to 60,000 new jobs, which is very encouraging. We think you will start seeing sequential growth in Atlanta over the next second and third quarter, but it won't be until '05 you see same-store year-over-year growth.

Our third worst market was the San Francisco Bay Area, with same-store revenues declining 3 percent in the first quarter this year versus the same period in '03. It's been over three years and this market continues to decline; it just can't get any traction. The market is continuing to experience job loss in the technology sector and it is still unknown what portion of the announced 12,000 job cuts at Bank of America will hit the Bay Area. Job recovery in the Santa Clara Silicon Valley area will lag the rest of the Bay Area and full employment will not return to this area for several years. The Oakland East Bay Area has held up well during the recession but may be showing signs of strength as the weak economic conditions in Santa Clara are spreading to the East Bay. We believe that we will not see a meaningful improvement in the Bay Area until sometime in 2005.

Now let's turn to our best markets within our largest 20. The Inland Empire was our best market in the first quarter with same-store revenues increasing 7.8 percent over the first quarter 2003. It continues to be one of the bright spots in the California economy, creating 15,000 new jobs in '03 on top of 28,000 jobs in '02. Job growth continues to be driven by construction and financial services, both related to the housing boom. And estimates are the creation of approximately 25,000 new jobs in 2004.

Our South Florida market was our second-best market in the first quarter with same-store revenues increasing 3.2 percent over first quarter last year. Population growth in South Florida continues at almost twice the national average. Job growth increased 1.7 percent in 2003 and is projected to increase at over 2 percent in 2004. Business services, education, health care and tourism are fueling this expansion. Fort Lauderdale had its highest level of tourism last year with over 8 million tourists, with an additional 5 percent growth expected this year. Fort Lauderdale International was the only airport in the country to experience an increase in the number of seats and available flights over the last three years. Regarding new multi-family construction, approximately 7700 units were completed in '03, up from 7400 in 2002. Projections for 2004 are that an additional 9200 units will be added to this market. However, as I've discussed previously, we believe that many of these units were either pre-sold as condominiums or sold to condominium converters upon completion, and are therefore not an accretion (ph) the supply of rental units in this market. Our occupancies increased 1 percent in the first quarter to 94.7 percent.

Orange County was our third-best market in the first quarter with same-store revenues increasing 2.9 percent over the same period last year. Orange County added about 22,000 jobs in 2003 with much of the growth driven by construction and financial services. Unemployment is among the lowest in the country at 3.6 percent. It is expected to add between 18,000 and 24,000 new jobs in 2004, primarily in tourism and defense-related manufacturing. New multi-family construction is increasing. Approximately 1200 units were delivered in '03 and over 4,000 units are expected to be delivered in 2004, including 3,000 in Irvine. Despite the pick-up in multi-family construction, the outlook for 2004 is positive. With continuing job growth, increasing single-family home prices, as well as increasing interest rates, this market has continued to show improvement in 2004.

Finally, I would like to close by saying that although our same-store rental revenues are ever-so-slightly behind last year's numbers, business feels much better today than it did a year ago. It feels better today than three months ago. The economy continues to expand and we are starting to see real job growth. Given the strong economy, we're seeing interest rates starting to rise, which for us in the apartment business isn't a bad thing. Remember we are the only sector in the real estate industry that will benefit from higher interest rates. This is because it makes the monthly cost of owning a home more expensive and tilts the buy/rent decision towards renting. It also should help reduce the new construction of multi-family units, as developers interest costs are going up and as profit margin is being reduced. We are ready. We aggressively repositioned our portfolio over the last 16 months, executing -- exiting -- at very attractive pricing, not only secondary markets but also very undesirable assets in our core markets, which were locationally or physically challenged. We are re-investing these dollars into newer product, located in larger markets with more upside potential. From an operational perspective, we're focusing on the basics, our customer retention, pricing, and getting the full economies of scale out of our large national operating platform. We have great people and we are making sure they have the training and tools they need to execute our game plan. They are ready. The tide is starting to turn and we are excited about the opportunity we have to get back those lost revenues over the past two years. With that, David, Gerry and I would be happy to answer your questions. Miles, can you open the call up?

(OPERATOR INSTRUCTIONS). Jordan Sadler, Smith Barney.

First, I just had a question regarding this quarter's FFO of 52 cents and your expectation of another 52 cents in Q2 and then bridging that $1.04 for the first year, which would annualize to 2.08 with your guidance. Could you just talk about what you think will happen sequentially in terms of same-store revenues? And then what the timing impact would be from the acquisitions that were made during the first quarter, including the acquisition of the JV interests?

I'll let Gerry talk about sort of same-store expectations for the balance of the year. But let me just tell you, Jordan, that the consolidation of these transactions and the purchase of these transactions, won't really have any impact one way or the other. Even when they were previously unconsolidated, we were picking up most of the operations of those assets. So the fact that they are being consolidated now or that they were acquired really, really doesn't matter. And as it relates to the other acquisitions in the first quarter, we budget dilution for those. Our expectation is that there'll be modest dilution for this year for the trade-off that we made from the sales from the first quarter to the purchases for the first quarter.

In terms of the revenue sequential increases that we're anticipating, we are looking at about a 1.1 percent sequential increase in revenue in the second quarter, maybe 7/10 of a point in the third quarter and 4/10 in the fourth quarter, in terms of where we see total revenues going sequentially.

Where were occupancies at the end of the quarter?

The occupancy at the end of the quarter was 93 percent, 92.9 percent.

92.9 percent. And you only started one development during the quarter. How will future developments be executed? Will that be on-balance sheet from now on, because it seems like you're buying in the partners' interests?

We're not -- you guys have got to understand that this is really just sort of an accounting treatment and nothing else. We are going to continue to do developments we believe in the manner in which -- that we have been doing them, continue to do developments with joint venture partners and are looking at opportunities in both the D.C. area as well as in Southern California today. And those will now be consolidated, just so there'll be a difference in the balance sheet treatment of those, but it really doesn't change our business approach to those.

And then just lastly, could you maybe give us an update on the CFO search?

We are progressing, as we said last time, we anticipated completing that by the end of the second quarter. We are still on track for that and hope to be able to announce it by the end of the second quarter.

Andrew Rosivach, CSFB.

Just as kind of, David, as the other side of the coin of Jordan's question, can you walk through some of the non-core operating factors that helped you pickup in the second half potentially? Because if I've got my math right, you guys would have to go from around 52 to about 55, 56 cents pretty fast in the third quarter. So stuff like are the condos going to pick up? Are the refis? Is there some math in the development delivery that you've got some properties that are off the capped interest clock that are going to pick up in the second half? Anything like that that kind of contributes to the uptick?

Yes, all of the above.

I would say we anticipate the condos sales will pick up from the first quarter. We were about $3.5 million of FFO. We think that that will be a little bit higher in terms of the balance of the year. We think in terms of the interest rate savings, if you will, in terms of taking on the acquisition of the Lincoln and Legacy, we took a little bit of some hits this quarter in terms of some breakage (ph) fees on interest rates to pay off that debt. The good news from that is we will get the benefit of lower interest rates on our line in terms of what they were paying, a couple hundred basis points. So that is a positive. It's a multitude of factors, it' not one thing.

And sorry, I'm guessing (indiscernible) next question for David -- you have some unsecured that's rolling reasonably soon and do you plan to just let that go to floating rate or are you going to keep that -- are you going to refinance that?

My expectation -- we have $455 million outstanding on our line today, Andrew. We have some more maturities coming at us and my expectation is we will term some of that out (ph).

Got it, okay. And then, you mentioned in your comments on G&A that that would be ticking up. What do you think is a good full-year run rate?

We've added essentially 13 or so million dollars, potentially, to what that number could be, because that number could come in at about 49 or so. We've said on the calls over the past several quarters that we thought our G&A kind of run rate was at 36, 37 or so million dollar number, so you're adding 13 to that. That $13 million is essentially what we could spend if we go down every path that we could this year with Bain on these initiatives that Bruce mentioned. There are lots of points along the way at which we can cut that off. That is the maximum we think that we could spend this year.

Let me just ask you this because that's a pretty big number. If you do the full 49 million, do you think you can still make the bottom of your range?

If we do the full -- yes.

Yes, that's baked into my comments, into the low end of the range.

David Harris, Lehman Bros.

Good morning. Gerry, I wonder if you could just touch upon the concessions and give us some highlights as to the way you think Atlanta is going for the rest of the year?

Okay, well, concessions right now in the first quarter increased about 20 percent or $2.3 million. We are seeing many of our markets, certainly, the concessions, flattening out and decreasing, I would say seems to be a normal trend. On the other hand what you also have is rental rate decline too that kind of offsets that. So you know you almost got to mix that together to really come up with it. So I -- in terms of concessions as we know it, they are absolutely in decline; and we are optimistic that we are seeing a slowdown to that.

In terms of Atlanta, Atlanta, we are not seeing -- we are seeing a slowing of the decline, but it is still a decline. There's still a lot of deliveries there that are muddling up this market. It's going to use (ph) a lot of job growth to fill up a lot of the capacity there. I don't really see Atlanta on a same-store basis having a positive opportunity till 2005, personally. But I do see a slow in the decline. The decline level is not as serious as it was. But last year, what happened with Atlanta is Atlanta had a decent start to the first five months and then it fell off pretty dramatically. I hope as we turn the curve the other way this year when we get into the summer period, we actually are on an uptick. If that happens, I think Atlanta could come in much better this year, but still all-in negative. But next year, there's no reason to believe that Atlanta would not get some level of recovery on a same-store basis.

What were the typical concessions that you're offering in the Atlanta market? Are we still talking up to two months in certain situations (ph)?

Not as bad because what happened there is the Atlanta market had net effective rents, net effective rents were reduced in Atlanta approximately for us, 8 percent since last year. So with that reduction (technical difficulty) as much giveaway, you're seeing smaller concessions upfront, but there was an adjustment in the rent levels.

David, I've looked through the supplemental and maybe I missed this, but did you make any reference to economic gains as opposed to GAAP gains in your disclosures?

I did not. The economic gains were flat, they were zero, if you will. And the IRR was a tad under 9 percent on our dispositions. As I said in my comments, we were selling the dogs (ph) of our portfolio.

David Ronco, Royal Bank of Canada.

Bruce, a question for you, I know it's obviously very hard --

David, you are going to have to get on the phone, we cannot hear you.

Can you hear me now?

That's better.

Sorry about that. I know with a portfolio of your size, it's a very difficult question to answer. But historically on a portfolio average, where do you see your -- have you seen pricing power as far as portfolio occupancy goes?

It's in you know the 95 percent range. If you look -- seen what -- in terms of our markets that we are doing -- you know, Southern California, and our occupancies are up in the 95, South Florida. We have seen some in terms of -- I would say 95 percent.

I would say that when your assets get into the 96 -- unless the lease is really a primary factor there when your inventories are shrinking there, which is ultimately going to drive occupancy, you're going to see immediate decline in concessions, okay? So you have occupancy running -- in a California market for example, around 96 percent occupancy with 6 percent left to lease. You're seeing pricing momentum and power there. You see that in the whole portfolio now. Left to lease, in terms -- what that means -- they are vacant units and they are also units that have given notice to vacate. That's how you determine (inaudible) left to lease. So your total left to lease, which is not just vacant units but also notices -- when that starts to shrink, you're having pricing power; and the immediate effect of that is typically, occupancy 30 days later. But all-in, the portfolio needs to get to -- I would say close to 95 percent before you really see a pretty strong turn in that direction.

Right, and I know it's probably a little early but any projections or estimates as far as to when you guys might get to that 95 percent level for the portfolio?

If we knew, we would be rich. I would say that you know, if you look at where we are right now in terms of -- our occupancy has bumped up, we are bumping along the -- close to 94 percent right now. Again, (inaudible), it's early. So we will have to see what happens over the next few months in the peak season. We will know a lot more when we come to the call in August.

Okay. A follow-up question on David's question with regard to concessions. Down 20 percent in the first quarter; can you give us any idea what they have looked like so far in the second quarter?

There's no change. It seems to be you know running about the same level. But we really don't really have much information yet on that.

Moving onto a few questions I guess with regard to acquisitions. Bruce, I'm sorry if I missed it, but can you talk about where the five properties were that you acquired in the first quarter?

We had two properties in Southern California; one property in Raleigh; and two properties in Florida, one in Orlando and one in -- down near, in Broward (ph) county.

Okay. And I know you've obviously outlined very specifically which markets you guys would like to get out of over the next few years and where you'd like to increase exposure. As we get into this dynamic period where markets are starting to recover and national job growth is really starting to take hold, has that list of markets changed in any regard, Bruce?

(Inaudible) target market, the question is where we can find the best price, on a risk-adjusted basis, relative value.

Okay. And then final question I guess is with regard to the Phoenix market. It looks like the same-store (ph) owner (ph) growth was strong there, surprisingly I'm sure. But that's something that's been consistently expressed in apartment calls thus far this quarter. Any thoughts on that market?

Well, Phoenix would have -- if we went ahead in our top four markets, Phoenix would have been it. So we almost did four just to put it in there and they feel good about. But when you think about Phoenix, you know this has been the first time in the last couple of years we have not seen much of a pop early for the snow-birders and we're encouraged. But you know, (inaudible) wait and see. But Gerry, you might want to add some color to that.

Well, I think you know when you have such terrible results for the three years running, it's a lot easier to get same-store growth, and that's just the bottom-line. Phoenix has been a disaster market. There still -- there's actually job growth going on in Phoenix too, which has kind of held up occupancy. So occupancy is a little stronger than we may have anticipated. But that's still a high turnover market. Your left to lease, as I mentioned before in the other markets -- this market has a propensity towards left to lease. And it's had a stronger winter because they had recovery of winter visitors. The summer is always a wild-card there, you always have some level of decline. And you know, at the end of the day, our average rents are pretty low there, so that's one of the biggest drivers you got.

So all in all, do you expect the improvement there to stick through the remainder of the year?

I really don't see much of a change. It will decline in the summer. The question is, will the decline be worse than last year's decline. That's really what you're asking. And I cannot predict that. But it seems to -- the job growth there seems to have helped a little bit. And actually, some of the supply issues, interesting in Phoenix, is that there is a lot of existing product being converted to condos and we are one of the groups doing that, actually. So some of the supply has actually shrunk a little bit which is going to help a bit.

Richard Ellis (ph), ABP Investments.

I have a couple questions I guess we will start off with David. I think I heard you say that you're going to pay down the line of credit along with I guess some other debt in the note offering. Is that right?

I said that I'd expect -- I said we are 455 on our line of credit, Rich, and we have got some maturities coming at us, so my expectation is to have to term some of that out, yes.

Okay, good. And then on -- I guess Bruce, onto you. You made I guess a comment about the -- you think the B-quality assets might widen a little bit in terms of cap rates. Do you have any expectations for your -- I guess your spread between acquisition cap rates and disposition cap rates to widen into the back end of the year? What's your current estimate of that?

I would say that to the extent that -- again we are trying to -- our goal for this year is $800 million of dispositions; the first quarter, we did a little over 300 million. If interest rates continue to rise, I think the B and C-assets are going to -- those cap rates will increase faster than what the Class A properties will. So I think that's (inaudible) surprise. That's why we're trying to get as much of our dispositions done in the first half of the year. But I think you could rise (ph) from where it is now at 0.8 (ph) or 8 -- I think it could rise to 1.25 to 1.5.

Which is exactly where we budgeted, by the way (multiple speakers).

Okay, that was my question.

That's been a historical spread, that 125 to 150 basis points, is because of that very strong bid from that leverage buyer, that we were able to see very surprisingly aggressive cap rates on the passes (ph) we've been selling. So again, we had -- we talked a lot about it here. Rising interest rates will have more of an impact, we believe, on the buyer of the properties we're selling than it will be on the stuff that we're competing to buy ourselves. And so it's very possible that that gap will spread back out. But we have budgeted that -- sort of that the historical gap, which has been that 125 to 150 range.

Okay, okay. And then one other question and perhaps a little bit of a comment on the development pipeline. Could you just give me a rough idea of the -- I guess the best way to qualify it would be the dollar value of projects that you expect to stabilize for each of the next couple quarters? And I guess my comment would be is perhaps on a go-forward basis, if you could include the things that are completed but still in that sort of grey zone that aren't fully stabilized, so we could get a better feel for where occupancies on those are? Because I am getting a sense that that's going to be a big swing factor, as you noted, and the cap rates are coming in a little lower than you expected. Just to get a gauge of where those are.

All right. And that's good. We could do that. I would say that the -- you know, the biggest one, if you want to talk being (ph) in the development pipeline as to (ph) what's (ph) slowly picking (ph) up -- last quarter, we talked about Water Terrace. It was like 58 percent leased. Today, three months later, we are at 60 percent leased. So you know we have not seen much of a pick-up there. You know, again, we think it's a great asset. We love the asset, but the lease up (ph), it's slowed down a little bit.

But that's not fully completed yet also, is that correct? I mean, you start adding units to that.

The Water Terrace project is fully completed. There is a vacant piece of land which we have under contract for sale. But the asset is completed and ready and all units are available for occupancy. I don't have for you what -- we have got assets that are stabilizing throughout the year and I cannot tell you specifically what's this quarter and what's next quarter. I guess what I will tell you is that the supplemental disclosure that we provide today is the direct result of the feedback that we get from you and others on a regular basis, the information you're looking for and we will happy to consider expanding this in any way that you all feel useful and necessary. And I would ask you to just talk to John Collins and we'll -- we recognize. We had provided supplementary information in a manner that reflected the fact that many of these assets were not consolidated. Now that they are consolidated, we are going to have to figure out the appropriate way to provide on a supplementary basis that information now in some other manner. And we will get better on that over the next couple of quarters.

Just so I have an idea because it could be kind of lumpy, obviously, when you have some big projects that were -- you know, you weren't able to capitalize any more of the overhead or the interest and they are at these low occupancies and then you get this huge pop. And that's sort of -- we are all trying to do the calculus here and saying well, you know the run rate is X and then you know if you don't have the data, you're kind of missing just (ph) part of the puzzle.

Let me just sort of put this in kind of perspective for you. We expect there to be nearly a $10 million difference in the operating income of the assets or the interests that we acquired from our partners at Lincoln between this year and next year. So that just sort of tells you how these things are still in the process of being stabilized. That's a pretty big increase.

Yes, okay. Well, that helps. And maybe I can follow up with John and get a little better detail on just the dollar volume for this year.

Good.

Rob Stevenson, Morgan Stanley.

Most of my questions have been answered, but just a couple left. David, did you give the unit turnover, during the quarter?

We did not give turnover for the quarter but I'll be happy to do that. (multiple speakers).

Turnover for the quarter was 14.8 percent.

And how does that compare with the fourth quarter and the first quarter a year ago?

The (multiple speakers) first quarter last year was 15.1.

Okay. All right. And a question, Bruce, on the development pipeline. You're saying that the 7.9 yield that you guys are currently looking at on current rent is disappointing to you guys. On the 300 that you would expect to start in the remainder of '04, where's -- what type of yield would get you comfortable green lighting project at this point?

I didn't say I was disappointed, I said the 7.9 in terms of where it is down in terms of our pro forma in terms of where (ph) we started, it's like 8.8; so it's down from that. In terms of -- because everything's down in terms of the rent (ph) (inaudible).

In terms of new development, Rob, I think what -- the yields that you're looking at in terms of our new yields are housing (ph) is at 7.5 to 8.25 percent range. And again (inaudible) projects the Southern California, Boston and D.C. that we're looking at.

Patrick Walsh, Prudential Equity Group.

(No response.)

Mr. Walsh, your line is open. He has rescinded his question. We will go to the next line of Lou Taylor, with Deutsche Bank.

Thanks. David, just a follow-up on Richard's question just a little bit. In terms of buying out your partners, was there anything particular about doing it now as opposed to six months ago or 12 months from now?

Only a desire to well, get 100 percent ownership. As you know on those venture transactions, there is a window that closes over a several-year period in which the partner has the ability to determine when to monetize their interest. And we've had conversation with them on a regular basis as to, would you be interested in doing it now and trying to negotiate? From time to time, we have come to a meeting of the minds and if we don't, then we wait another few months and have the conversation again. So there was nothing now that was not any FIN 46 issue or any sort of reason because it was just an opportunity to do so.

I mean, was the window getting to the point where it was going to close, or --?

(multiple speakers). No, no. They still had several years of optionality with respect to their interest in these deals.

The second question just pertains to the construction progress and more specifically the land that comes onto the balance sheet. Is there much dilution or carrying costs associated with that land? Or are those costs immaterial, or essentially all carrying costs and essentially all capitalized?

Primarily the carrying costs are capitalized on that.

Okay. And the last question is for Bruce. Bruce, can you just talk about the rationale for engaging Bain to do some work? I mean, EQR's got a long history as an operator, as a public company. What do you think Bain brings to the table that you don't think you could get yourselves, in terms of information about your customers and other things?

I think what they bring, Lou, is these -- they are very quantitative, they are very driven; and in terms of moving something forward, in terms of when we look at -- you know. in terms of our people, are fully engaged, in order to try and get this done and get focused, they are having some more bodies to help us do this, and also then -- and be able to measure it, and put up -- you know help us with the metrics and follow up with that and give us those tools, I think they will be very helpful with. The discipline that they have is very good. And again, you know, again, it's a new approach from someone outside. You know, we've looked at it, we've been here. We've got -- people have looked at our business; internally, we're constantly trying to improve and do new things and we've brought a lot of innovation to the business. But you know, there's nothing better than a fresh set of eyes. And these people are very smart, very talented and very driven. And they are focused, and they know that we are looking for a big return on our investments.

Okay. And I guess I missed it earlier. I mean, you guys are doing customer survey work. And what was the other set of tasks that you had them looking into?

They are working on lots of things. They are working on procurement in terms of -- how we can sweep more cost out of that. They are looking at pricing in terms of how we can price -- in terms of our pricing model versus other alternatives. And they are looking at a number of other ways we do business.

Lee Schalop, Banc of America Securities.

Hi, it's Karen Ford.

Is the good doctor with you, Karen?

Yes, he is.

All right. Well, before we get over (ph), we want to talk to him.

Okay. Last quarter, you expected, based on January's results, you said you expected a $3 million sequential revenue decline; and then rent revenue ended up coming in flat. You sort of talked about some of the things that you're seeing that's more positive. Was there anything in particular that turned around that $3 million gap that you can point to?

I think primarily, a number of things. We had a reduction in concessions, better than budget, as we mentioned before. We've had a slight uptick -- a little bit of a surprise in occupancy, not material, but if you add both of those items (ph) together, it's -- you know, 2.3 of it was concessions alone.

Secondly, Boston had a sequential occupancy drop. It looks like about 160 basis points. Can you talk about what happened in that market?

Yes, we're still seeing a lot of difficult problems in the downtown. I think we've stabilized there, but we have (inaudible) a lot of occupancy there. And certainly, in the close-in suburbs of downtown, we have continued to see seeing pressure on corporate housing opportunities that have reduced our occupancy, primarily. I would tell you we lost more corporate housing. So really the loss of jobs there has taken its toll on us in terms of the occupancy. We have a number of assets in the suburbs of Boston that are doing extremely well. But better (ph) price points haven't suffered at all, occupancy wise. When you get into the higher price points, that's where you've seen it.

Okay, I will turn it over to Lee.

Can we talk about Atlanta? I was surprised to see that one of -- it turns out to be one of the weaker markets, I think earlier in the year, there was a lot of optimism about recovery in that market. And I'm just curious as to maybe what happened there, and is there a risk that what's happening in Atlanta affects other markets down the road?

Lee, we've been negative on Atlanta. If you look at what we said over the last two or three calls, we have not said we're coming back. It's more competitive (inaudible) turn (ph). We've never (inaudible) turn.

We're not seeing -- I think what we are seeing there is still quite a bit of supply in Atlanta relative to what the demand is, not enough job recovery. We're still seeing some actual job losses. There's a question of whether there's any job recovery going on there or not. But we're not -- I would tell you that other markets that operate similar to Atlanta like a Dallas for example, we are not seeing the same dynamics in Dallas that you are seeing in Atlanta. Atlanta has continued, in our mind, to have some continued rate deterioration concessions going through there. We just haven't seen it move significantly in the right level (ph). The deterioration has slowed, and it's actually on a trend basis, improving, but not enough to really swing it to a-same store positive until next year. But I wouldn't say that's true of some of the other markets like Dallas (multiple speakers) --

So you would really characterize Atlanta as more of an exception rather than indicative of other markets in the country?

From what I can see matching it up to other markets like that, I'd say that's absolutely correct.

Hey, thank you. On behalf of all of us at Equity Residential, you've really done a wonderful job serving the industry. And we're going to miss you. We hope we'll get some good rates when you become a doctor. But we do -- we wish you all the best.

Well, thanks, very much.

(OPERATOR INSTRUCTIONS). Rich Anderson, Maxcor.

With potentially rising rates and your ongoing desire to reduce the number of markets that you're in and also with the fact that you're already almost halfway there from a disposition standpoint relative to your $800 million goal, what would you say your bias is, above or below the 800 number for the year?

It depends on pricing, and what the spread is. You know, we -- if the pricing continues and the spread is as narrow as it is, 8/10 (ph) of -- you know, we think it's a great opportunity to trade assets.

What do you have keyed (ph) up at this point that isn't closed yet?

You know, it's hard to say, we have got a lot keyed up. But remember (inaudible) up doesn't mean anything in terms of because there's really no -- not much money at risk. But you know, under contract, if you will, we probably have $120 million of the product. But under letter of intent, it's much more than that, but we will see what happens.

Okay. And my last question is on the decision process between that which you acquired -- development that you acquired -- and that which you just simply, maybe not simply, consolidate it, what was the decision process in choosing to do one or the other? Was it a market-driven decision? Or was it something different that made you want to acquire one and not acquire the other?

It's a two way street. And that question is equally fair to the seller. So it was just -- those portfolio of properties which we could come to a meeting of the minds with respect to valuation.

But --

And my expectation is that ultimately, we will acquire their interest in those other assets as well.

Patrick Walsh, Prudential Equity.

Hi, guys. I just wanted to follow up on the same store NOI question. I was surprised that you're keeping at the low end at negative 4 percent after the first quarter's results. Do you expect to get worse on a year-over-year basis, and --?

We are saying we want to wait -- you know, we are going to wait and see what happens in terms of the next three months. As Gerry said, you know, if we view -- (inaudible), you know, we are encouraged, we think business, you know, we in April here, we have got to wait until we get through you know, the summer and see what happens.

The last two years, our experience has been that the last half of the year, unlike history might have dictated back before the recession, we have had declines in the last half of the year, not increases, and so, you know who knows, really? It's what -- the summer is going to dictate what really happens this year. We've said that for the last three years, I mean you know, and kind of wait and see where the summer goes. And if things are starting to move in the upward direction like they did in normal trends, we are going to start feeling real good. But nobody can predict that now.

As of now, what quarter would you expect to have positive NOI growth on a year-over-year basis?

Well, I mean, you know, we're pretty close to positive now. I mean, we're not -- we're pretty close to flat. So you know, it could be a second-quarter, third-quarter event. I hope it's second-quarter event. I think it's possible it could be a second-quarter event and then in the third quarter, it could go down. Who the hell knows? We really don't know right now.

Bob Gadsden, Alpine Funds.

On the 4500 completed units in which you purchased your partners' interests, could you give us what the value or cost per unit you paid for those versus the cost of development per unit?

Yes, when you take the basis of those assets and add to it the purchase price that we paid versus what the fully-loaded sort of basis is, there was about an $85 million or so difference. (multiple speakers) essentially if you will, kind of the implied profit to Equity Residential. But as I noted in my comments, that number does not find its way onto our balance sheet.

Right. So what is that -- what are those numbers on a per-unit (multiple speakers) --?

Oh, on a per-unit basis?

Yes.

Well, we had -- I guess it's the 85 million on a per-unit basis?

No, no, no.

Or just what the valuations were on a per-unit basis?

Per unit, I think.

Okay, I have given those on my -- let me get that. We had valued the 3529 units that we acquired from Lincoln -- Lincoln Property Company -- at $215,000 per unit. And then we had valued the Legacy transaction, which was 1,286 units at about $179,000 per unit. And I did note in my original comments that the $215,000 per unit average on Lincoln was skewed by Water Terrace; and if you had backed that out, the average is $168,000 per unit. The Water Terrace is more than a half $1 million per unit average. Does that answer your question?

Yes, it does. Thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions at this time. Are there any closing remarks?

Sure. We appreciate your interest. We look forward to seeing you at NAREIT in June. And we are looking forward to a good summer. Bye.

Ladies and gentlemen, we appreciate your participation in today's conference call. This does conclude today's Equity Residential first-quarter earnings call. You may now disconnect.