住宅地產 (EQR) 2004 Q2 法說會逐字稿

The Equity Residential conference call will begin shortly. Good morning. My name is Kristi and I'll be your conference facilitator today. At this time I would like to welcome everyone to the second quarter release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question, press star, then the number 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you, Mr. McKenna, you may begin.

Thank you, Kristi. Good morning. And thank you for joining us to discuss Equity Residential's second quarter 2004 results. Our featured speakers today are Bruce Duncan, our President and CEO, David Neithercut, our EVP of Corporate Strategy, and CFO and Gerry Spector, our COO. Today's release is available in pdf format in the investor section of our new corporate website, EquityResidential.com. Certain matters discussed during this conference call may constitute forward looking statements within the meaning of the federal securities law. These forward looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events and now I'll turn the call over to David.

Thank you Marty, good morning, everyone and thanks for joining us on today's conference call. For the second quarter of 2004, Equity Residential earned 39 cents per fully diluted share compared to 41 cents for the second quarter of 2003. Funds from operation were 56 cents per share for the quarter compared to 57 cents per share for the same period last year. As we stated in our press release, the FFO of 56 cents for the quarter was 3 cents above the high end of our guidance range of 51 to 53 cents. 2 cents of this positive variance was the result of the sale of a vacant land parcel associated with water tariffs, our project in Marina Del Re, California and one sign of the positive variance was the result of better than expected condominium sales and lower than budget short-term interest rates. On a same store basis we are pleased to report the revenue increased on all 3 metrics, quarter over quarter which were up 1.1%, year to date up .4%, and sequentially up 1.3%. This is the first time since the end of 2001 that we have reported positive same store revenue growth. Our revenue growth is attributable to the following: on a quarter over quarter basis we saw about a 1% roll down in our rates. But it was more than offset by a point .64% pick up in occupancy, 29% reduction in concessions, and a 10.4% increase in our utility collections. On a year to date basis we also experienced a 1.1% roll down in our rates, but then again was more than offset by a .42% occupancy gain, a 25% reduction in concessions, and an 8% increase in utility collections. And sequentially, primarily all that have positive revenue growth was occupancy driven, being up .78% on a quarter -- on a second quarter from first quarter 04. Second quarter 04 bad debt totaled 2.9 million versus .69% of total revenues. This is down 15% or $506,000 from second quarter 03 when bad debt was .82% of total revenue. On a sequential basis, bad debt decreased $364,000 from .7 9% of total revenue for the first quarter of 2004. Same store operating expenses increased 3.6% or $5.9 million in the second quarter 04 over the second quarter 03. The factor contributing most to this variance was payroll which increased 9.2% and represented 62% --. So, again, same store operating expenses quarter over quarter were negatively affected by a 9.2% increase in payroll and this should not come as a surprise because we have indicated for some time that our onsite staffing costs would increase as a result of our initiative to improve product presentation and increase the overall quality of number of units available for occupancy. On a sequential basis, operating expenses were up just .6% in the second quarter over the first quarter of this year. Our corporate housing division will have to work extremely hard this year to break even. The company is simply not yet seeing the corporate relocations and other business activity necessary to grow the top line. If the economy continues to improve, however, we will see corporate housing fundamentals also improve. Meanwhile, in the second quarter Equity Corporate Housing paid rents to Equity Residential of $3.1 million and for the full year 2004 we anticipate ECH paying approximately $13 million in rent to Equity Residential. Now just a couple of balance sheet items, in June we completed a $300 million, 5-year bond offering with a face rate of 4.75%. These notes were sold to yield 4.85% fixed, 98 basis points over the then 5-year treasury, and the proceeds from that issuance were used to payoff $300 million notes matured at 7.1%. And then there is currently 531 million dollars outstanding on our credit facility. In our earnings press release this quarter we have enhanced our disclosure on our development projects for our investors and analysts that are NAV centric. We provide information on projects completed not stabilized and projects completed and stabilized during the quarter. This enhanced information will help provide a better understanding of both project status and valuation of our development activity. With this information one can now back out of our reported operations, the contribution from properties not yet stabilized. This net number can then be used to determine performance from our stabilized portfolio that can be used to determine its NAV, however one chooses to get there. Then one can add back the actual cost of these unstabilized assets to complete the NAV picture.

Additionally, we modified the presentation of our estimated development cost. Previously we disclosed budgeted development costs as reflected in our development JV Partners budget which included EQR's preferred return on our invested equity. Based on FIN46 guidelines we eliminated the return payable to us by our JV Partners and instead include our total actual capital cost. I will also note in the development schedule we, along with our partners, elected to convert two of our joint venture development properties into condominiums. Both of these properties were developed with conversion as a possibility and the current market environment will allow us to capitalize on this opportunity. 13th and N is a 170-unit property in Washington, D.C., built in partnership with the JBG Companies. In very general numbers we built this property for approximately 228,000 a unit. It has a rental value of 293,000 a unit. And we expect to average $375,000 a unit as condominiums. JBG has been averaging 11 reservations a week and at the present time we have 68 reservations or 40% of the total, 51 of which are binding. Closings will begin this quarter. And we expect the conversion to produce approximately 2 cents of FFO, half of which will be recognized in 2004, and the balance in early 2005. In Irvine, California, our partner, Cerris Regis is overseeing the conversion of Watermark, a 535 unit property built in two phases. Phase one is complete and 97% occupied as a rental property. The conversion will start with the soon to be completed and currently unoccupied 276-unit second phase. We built Watermark for approximately $230,000 a unit and think it has an apartment value of $280,000 a unit. We expect to average an excess of $400,000 a unit as condominiums. And it is possible, but not yet certain at this time, if all of the state requirements will be met to have any closings at Watermark this year. We expect this conversion to produce 6 to 7 cents of overall FFO, perhaps 1 cent this year if we get through the process in time with the state with the balance in 2005 and 2006.

I'm pleased to announce that on July 29th we closed on our first acquisition in New York City. Hudson Crossing is located on 9th Avenue between 36th and 37th streets in Manhattan. The purchase price was 93.1 million dollars and was acquired at a cap rate of 5.2%. This property which was constructed in 2003 has 259 apartment units, a mixture of studios, one's and two-bedroom units, a master leased parking garage of 164 spaces and 5500 feet of fully leased retail space. After looking for several years in New York City, Hudson Crossing represented the right opportunity for us at the right time. The property is subject to a 20-year real estate tax abatement that essentially keeps the assessed value flat for the first 12 years and incrementally gets the property to a fully assessed position by year 20. And what this means is that more of any top line improvement will fall to the bottom line as less is eaten up by increasing real estate taxes.

We were also happy to announce last week that we completed the search for our new CFO and that Donna Brandin will join our company in late August as EVP and CFO. Donna is currently SVP and Treasurer of Cardinal Health, a $50 billion distributor of pharmaceuticals and other medical supplies and based in Columbus, Ohio. When we started this search in January we looked both inside and outside the real estate industry. And while we met with several strong candidates from the real estate space we became convinced very early on in the process that we would benefit greatly from adding someone to our senior management team from outside the industry. The experience Donna will bring to our company comes from her having served in finance functions at McDonald Douglas, Emerson Electric, Campbell Soup as well as Cardinal Health. We are thrilled that Donna has decided to join Equity Residential and the entire company is looking forward to her becoming part of senior management team later this month. Once she gets on board I will be able to concentrate more of my time on the portfolio management, transactions and the development part of our business that make up my new role announced at the end of last year. And I would like to wrap up my remarks by addressing guidance for the third quarter and balance of the year. Today we provided guidance for the third quarter of 53 to 55 cents per share and to maintain guidance of 215 to 229 per share for the full year 2004, but as previously indicated our expectations remain at the low end of that range. Now I would like to turn it over to Bruce Duncan.

Thank you, David. Good morning. We had a good second quarter and it's clear that the apartment market is finally turned the corner. Business is getting better as evidenced by the fact that we have positive same store rental revenues both second quarter 2004 over second quarter 2003 and also sequentially from first quarter 2004. The only question now is how long will it take before we see meaningful improvements in the revenue line. But we are well positioned to take advantage of this upturn. Let me spend a minute to bring you up-to-date on our project full potential. Equity Residential has always been a leader in the multi family industry in terms of operational excellence and innovation with such programs as rent with equity, coast to coast, block to block and renter's insurance. To take advantage of our enormous size and scale. But you cannot rest on your past successes. You have to constantly improve and increase efficiency and productivity. And it is with this constant quest to keep raising the bar that brought us to engage Bain and Company to look at various aspects of our operations. As we mentioned in our last call, we will spend approximately $13 million this year. Through the first half of the year, we have spent $5.6 million and we are investing for the long-term and not quarter by quarter. We're working on three areas, customer segmentation and retention, pricing and procurement. In terms of customer segmentation and retention, we have completed a 10,000 plus resident segmentation survey and are sorting through the survey findings. We will then create action steps to capture the value of the various segments.

In terms of pricing we continue to validate the effectiveness of using a revenue pricing management system and we will be able to give you more color on this on our next call. In regards to procurement, we have completed two of the three pilots for grounds and cleaning and we have staffed up our internal procurement department and are now ready to begin nationwide implementation complete by April of next year. The total procurement savings from grounds, cleaning, flooring and appliances should be 10-12 million on an annualized basis once fully implemented. Let me now turn to the trends in the transaction market. Despite the higher interest rate environment we see little change in pricing for a quality product in our 4 markets. The essence is driven by the same factors I talked about in our last call, significant investor demand, low relative interest rates and the condomania in some markets. Pricing has remained stable in the last quarter on 8 assets without conversion potential. Now it is completely driven by condo conversion value. This situation has evolved in markets like south Florida where have you few new multi family assets are being built for apartment use. And most sales of older assets are being sold to converters. On the disposition side we have seen slight downward changes in the outbound yield. Again, supported by condo pricing. We sold assets in such markets as Charlottesville, Virginia, Las Vegas and Orlando to third party condo converters. The demand for assets in secondary markets continues. Although we are hearing that some lenders are tightening underwriting criteria as rates have moved up, to date this hasn't affected pricing. Regarding our portfolio management activities, during the second quarter we continued to make progress in achieving our portfolio management goals. We sold 221 million worth of properties in an average cap rate of 5.9% in markets such as Phoenix, Detroit and Las Vegas with an average IRR in the mid 11's and an economic gain of 33 million dollars. We bought 224 million dollars worth of property marketed to Southern California, Seattle and Orlando and the average cap rate on these acquisitions was 5.9%. During the first six months of the year we sold $523 million worth of properties and an average cap rate of 6.3% and bought 448 million worth of properties and an average cap rate of 5.8% and we are on target to achieve our goals of selling $800 million of assets and buying $800 million of assets this year.

Now, let me take a minute to summarize the progress we have made in repositioning and upgrading our portfolio in the last four years. We have sold 3.3 billion dollars worth of assets and bought 2.9 billion. And we have increased our concentration of assets and high various entry markets from 34% of NOI in early 2000 to over 55% of NOI today. For example, we increased our concentration in Boston from 3.1% to 6%, in the New York metro area from 2.1% to 3.6%. In the D.C. market, from 5.1% to 8%. In Southern California we have increased from 8.4% to 15.7% which brings our total in California from 12.7% to 20.6% of NOI. And in south Florida, we've increased it from 3.8% to 6.5%. Let me now turn to our development activities. We currently have 7 projects under construction totaling $442 million. The majority of these projects are in Washington, D.C. and Southern California, and our forecast for stabilized yields on these assets is 8.5% which is down a little from our anticipated stabilized yield of 8.9%. Regarding new development projects, our original estimates called for trying to start $300 million of new development this year. At the present time, we are projecting approximately $170 million in development starts in 2004. We are continuing to focus our efforts on Southern California, the northeast and Washington, D.C.. Competition and pricing for new opportunities in these high markets continues to be highly competitive and we have also seen commodity pricing for construction materials increase 10-15%.

Now let me review our three best and worst markets in terms of revenue growths for the 2nd quarter this year versus the 2nd quarter last year in our 20 largest markets. I will start with the worst market. Denver was our worst market in the second quarter based on same store total revenue which declined 3.5% compared to the second quarter of 2003. Denver's economic recovery continues to lag behind the nation. On a more positive note, multi family construction is slowing somewhat this year with new deliveries in 2004 expected to be 3200 units, most of which have already hit the market. This is after approximately 7300 units were completed in 2003. Near term, the Denver market will remain weak due to the fact that employment growth is unexpected until sometime in 2005 or 2006. Our second worst market in the second quarter was Houston. With same store total revenues declining 3.1% versus the second quarter of 2003. The Houston economy is not recovering quickly. Record oil prices and active drilling has not offset job declines in trade and service sectors, although economic projections are for 49,000 new jobs in 2004, we believe this is optimistic with 15 to 20,000 new jobs more likely. New multi family construction continues to pose a significant problem for the Houston markets. Approximately 13,000 new units were added to inventory 2003, a total of 9300 units will be completed in 2004. With the combination of new construction running into the highest level in years combined with the sluggish economy, the Houston market is a mess and will remain so for some time. Dallas was our third worst market in the second quarter with a 2.2% decline in same store revenues versus second quarter of 03. The Dallas Ft. Worth economy lost 125,000 jobs in the past three years and just now seeing gradual improvement in the economy, but at a slower pace than the tax recovery. The supply of new apartments is stabilizing somewhat in Dallas. After the delivery of 11,400 units in 2003, approximately 8,000 units are forecasted to be slated in 2004. Now let's turn to our best markets within our largest 20. Orange County was our best market in the second quarter with same store revenues increasing 6 1/2% over the second quarter of 2003. Orange County has continued to add jobs throughout the first half of the year and has one of the lowest unemployment rates in the country at 3.6%. Construction of new multi family units picked up in 2004 to around 4,000 after completing around 1800 in 2003. In the short-term, this new supply will dampen apartment market performance, but longer term continued job growth and increasing housing prices will continue to increase demand for rental units. And Orange County should continue to deliver excellent results over the next 18-24 months. Our second best market in the second quarter was the inland empire which had a 6.2% increase in same store revenues over the second quarter of last year. The inland empire continues to add jobs, but at a slightly lower pace than earlier in the year. Forecasts for new multi family construction over 2300 new units this year down from 2900 units last year. And 4,000 units are projected for 2005. But with the strong demand, this increase in construction should not be a problem. Expectations continue to be high for the inland empire as job growth continues and home prices continue to increase. The DC suburban, Virginia market was our third best market in the second quarter with same store revenues increasing 5.4%. The DC area economy is one of the strongest in the nation with unemployment at approximately 3%. The federal government continues to be the driving force in the area. Despite the strong economy, new multi family construction will moderate revenue growth in most sub markets, but particularly in Montgomery county, Maryland. Forecast for the Washington, D.C. area are for approximately 11,000 new units in 2004. Up from 6300 units in 2003. The DC economy will continue to outperform the nation due to continued federal spending and its impasse on related industries and this growing employment should help offset some of the new supply.

Let me conclude by saying that Equity Residential is well positioned to take advantage of the improving apartment market. The last three years have been one of the worst downturns the apartment industry has experienced in terms of deteriorating operating fundamentals. During this time we've aggressively repositioned and upgraded the quality of our portfolio into fewer cities with the greater concentration in higher barage entry markets. We continued invest in our people and focused on operation excellence by leveraging our enormous size and scale. And finally we have a very strong balance sheet and great liquidity. All these factors should position us for above average growth as the economy and job growth continue to improve. With that, let's open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, press star and then the number 1 on your telephone key pad. We'll pause for just a moment to compile the Q & A roster. Your first question comes from Jordan Fendler with Smith Barney.

Good morning.

Morning.

Just on the guidance, your acquisitions and dispositions I think at the beginning of the year you expected would come in at a negative 150 basis-point spread and right now you are coming in at a negative 50 basis points I think. On the same store assumptions you are down 1.4% year to date versus full year guidance of down 4% at the low end. So how come you guys are still treking toward the low end of your guidance? If you're coming in a little bit better than you anticipated?

Well look at a couple things we have. We have the clause associated with Bain which is about 4 cents a share. As we mentioned earlier on our previous calls, the development portfolio is coming in slower -- is slower than we anticipated and that's probably worth two to three cents.

In addition I think, Jordan, what we have seen is improvements in occupancy and not yet have seen what we hope would be the ability to start moving the rental rate line item. We really need the traffic to sort of firm to support this rental -- to support this occupancy level to put us in a position to start trending rates and we're still cautious about that.

And I guess maybe Gerry, what are your expectations for sequential revenue growth for 3 q and 4 q?

Well, it is hard to say, but I think what we're seeing now is kind of a slight increase -- a trending increase in rental income through August, and frankly for the rest of the year we would like to see some higher up tick in September, October, November, that you might have seen in traditional times, but since we're not really getting it in rate effectively right now, the biggest push is the opportunity we have is in pick up of occupancy, frankly and reduction of concessions which is where we have a primary driver right now as we are focused on reduction and concessions. But at the end of the day because we just turned the corner on our -- what we call gross rent potential, where we actually had an increase for the first time in a quite a few weeks. It takes time to build a momentum you have seen in the up tick in the last five months of the year that have you seen historically. We think it has to go through more of a cycle before you see an uptick in the last two quarters.

But you're still expecting it to move up? I mean the rental rate, you don't expect concessions will offset your occupancy gain?

No we'll be making great gains in reducing concessions right now. And we are moving the rate. I mean we actually had positive movement in the rate so those are all goods signs. But it is very nominal we are not talking a lot of dollars. But it is a reverse of the trend that we have seen over the last three years and that's the important thing we see right now. So I think we are seeing bottom baring nothing else and we are seeing some increase as you see in the same store basis so that all plays well for where we are going. And I think a lot of the dollar saves we have are pick ups and concessions.

On the condo sales, I thought you had -- were expecting a $10 million would roughly be your gains associated with condo sales for the full year. What are you expecting now?

We had budgeted about 12, and that was originally budgeted, Jordan, based on the condominium activity we were doing for our own account. We continue to budget at that level and what I have discussed as the condominium conversion we are doing with our third party partners would be additive to that.

I think Jon Litt has one as well.

Yeah, could you refresh me on the tax implications on the condo sales?

Well, the condo sales is done in a taxable rate subsidiary for us and so they are taxable. We do, however, have some net operating losses that we're able to avail ourselves of, so the numbers I am giving you are sort of, they are before taxes because we are not yet paying taxes on that and we won't for a year or so. But at which time we'll start paying taxes. So these are the net numbers to our bottom line.

Now, is it taxes -- ordinary tax rates or cap tax rates sf.

Ordinary tax rate. This is a business not an investment.

Thank you.

Your next question comes from Lou Taylor with Deutsche Bank.

Yes, thanks. Just staying with the condo theme, David or Gerry, could you guys just talk about whether your experience with these two projects is leading you to, a, do more condos in 05 and maybe even 06, and then, b, maybe doing more of it yourself as opposed to, you know with a partner or with a converter?

Well, I guess we have sort of stated publicly for some time, Lou that, we will take advantage of the opportunities as presented and we would expect that to increase from the levels that we're at on our own portfolio. And as opportunities present themselves to harvest premium value in these development transactions we feel obligated to harvest that and reinvest that money elsewhere. But we're going to do that cautiously. We have to do that prudently and understand the markets as well as understand the abilities and capabilities and experience of our partners, but we're -- what we believe is an opportunity to create incremental value, that's responsibility is we'll do that.

Do you see the bulk of the activity in the development pipeline or do you see going deeper into your existing asset portfolio?

We will go deeper in our existing assets, Lou. This year we'll do $100 million of sales in our existing assets and we anticipate that's about 700 units. We anticipate that next year we could do over a thousand units of our own portfolio.

Okay. And secondly, Bruce, can you -- you talked about the geographic market's best and worst. Can you talk a little about price points, whether you are seeing better demand at the a level, at the lexford, level, somewhere in between and if that is whether that's very much by market?

Gerry can pitch in. Lexford for the quarter had a positive NOI. They were up over 1% and our expenses --

Lou, in affect what we're seeing in most markets, pricing momentum in the a, in the higher end product. It is slower as you go down the line. That's not true in every sub market, but in general you can come to the conclusion that newer, higher end product is having a stronger recovery, even though lexford had a positive NOI, it was driven by a huge reduction in bad debt write off. The rents of the general product out there, the typical garden apartment product has collapsed down on the rates of our lexford product, driving the rental rate down slightly. I think there is a good chance lexor will have a good result, but driven through better expense controls and better control over bad debt write offs, but I'd say with the lower end product is probably going to be the slowest to come back as you would expect.

Great, thank you.

Yeah.

Your next question comes from David Harris with Lehman Brothers.

Good morning. Bruce, could you just elaborate a little more on your thinking about the acquisition in New York? Are you predicating it on optimism about growth and rentals? And where do you think you might be in terms of numbers of properties in a couple years time?

Well, it all depends, David. You know it has taken us three years of looking to finally find the property we like in New York. From our standpoint, what we like is the price point we are at, the smaller unit. We like the location. We think -- we continue to look in New York. We probably have two or three transactions we are looking at today. Whether we buy them or not, you know, I would not, you know, not put a probability on it. But again we think New York is a good market. We have had good success in New Jersey. We want to be there. But we're going to take our time and find the right transaction. And we think this one is very good especially given the price point we are at.

How are you handling the management of this property? Is it third party?

We're managing it.

You need to build up critical mass in this market place to justify the overhead?

Not really. Wae have a very strong presence in the market. We're right across the Hudson river in New Jersey big time. So we have a lot of units within 20 minutes of that location. So that's being run by our New Jersey-based group. And we have a lot of presence there, so we're not concerned at all about, you know, the focus on this deal.

Then the two or three transactions you referenced at some stage in development, are any of those developments are almost all acquisitions that you are potentially looking at?

Those are acquisitions.

Okay. And then, Gerry, how many of your tenants left to purchase homes? Are we sort of on trend or are you seeing any change in that?

No change at all. We are still at 22 to 23% range as we have been historically.

What's turnover? I don't know if I saw that in the --

Down a half point for the quarter -- it is 17 1/2%, so we're hoping that turnover is going to be down probably 2 percentage points for the year.

What are your initial thoughts from Bain coming in terms of your ability to retain tenants and I'm assuming drive downturn over in the portfolio?

We haven't really gotten all the results back on that. That is still pending investigation. We will probably have a stronger understanding of that in the third quarter. So, we went through a 10,000-customer survey and it is going to be, you know, the results of that are going to help drive some approach in affect of how we can do a little better job at retention and I think some of it is going to be price issues but I think a lot is better execution on certain focused areas. So at this time I think it is going to help generate a more aggressive reduction in turnover.

One final point of detail, David, there is no further land sales in the guidance for this year?

No, David, not at all.

Okay. Thank you.

Your next question comes from Andrew Rosivach with CSFB.

Good morning. Gerry, wanted to follow-up on a prior question about occupancy gains versus increasing represents. I have been following the apartment sector and it seems like everybody who kind of had some occupancy to pick up has had a nice sequential number. I had a couple guys that were already kind of at full occupancy and at that point you need to pick up rate. And you can get revenue growth. It is just slower. First of all, do you agree with that premise, and second of all, when do you think EQR gets to that point where you are fully occupied and you need to build up a loss to lease that could slow down your sequential revenue growth.

Certainly looking forward to that event and I do agree with your premise. I think that, you know, we have really about with the what we believe is a little stronger movement in the economy, have been focused a bit more in rate than we have frankly occupancy. Although we have had gains overall in the quarter on occupancy. We picked about 2.2 million dollars of revenue on occupancy and then concessions we picked up about 4.8 million in reduction on concessions whereas rate continued to decline in the quarter. But as we get further and further in -- actually July was the first point in time where we had a actual positive movement in our gross rent potential. We are starting to turn the corner, but it is a slow process. That's why I say the finish of the year, the only opportunity we have to drive any substantial numbers is pick up in vacancy and concession. And that's the -- the requirement to get that point is frankly traffic. We have to see if traffic is going to pick up. Because at this stage I wouldn't be optimistic based on what I'm seeing that traffic will be able to drive substantial changes in vacancy.

Yeah, and your weighted average for your same store was 93 7. Where were you at quarter end and how high do you think you can get it before you are just at frictional vacancy?

We are at 93 8 right now. So we are not seeing much change.

And then, David, I wanted to switch over a question to you, although this may be the last quarter I can ask you these kinds of questions because it is on the balance sheet.

You can ask him whenever you want.

Okay. Thanks. You still have a lot of maturities remaining this year and into 05, even if I back off the part of it that is attributable to your line of credit. What do you plan to do with that? Do you plan to re-fi all of it? Will any of it go a floating? And if you can give an idea the rate of security you put on them.

Well, what we are contemplating in our budget for this year and of course the -- what we do will be will be - will be a function of what we think is the most opportunistic execution at the time. What we will do at the time will be a function of some of that out this year or next year in a 10-year financing.

Okay. And a dumb question, should I know this, are there any preferred redeemable preferreds coming soon?

Not this year.

Thank you very much, guys.

Your next question comes from David Ronco with Royal Bank.

Good morning. Here with Jay Leupp. Bruce, you touched briefly on increased costs of development. I wondered if that had affected your budgets and targeted yields at all?

It hasn't affected our targeted yields on properties that are under development right now because we bid those out. But it does in terms of new potential projects. It will affect the underwriting in terms of the returns.

Okay. Can you give us some idea as to what projects going forward, what kind of yields you are targeting for those types of projects?.

Yeah, again, it depends on where you are, but I would say the range would be 7 to 8 1/2% and again that depends on the location.

Okay. Just a little more color on concessions, Jordan asked briefly about them. You said if I am not mistaken that they were down 25% annually for the quarter. I wondered if you could talk about what that -- what dollar number that equates to for a turn?

Well, the concessions are down in the quarter about 4.8 million dollars and year to date about 8.2 million dollars. So that's a dollar value of concession improvement. Same store. Thats the same store.

Okay. Thank you.

Next question comes from Steve Sawaka with Merrill Lynch.

Good morning. Just a couple clarifying questions, David. I think you said 12 million in condo gains this year and then you mentioned something about a third party. I guess when I look at the income statement and reconciliation you booked 8 1/2.

That's correct.

So you are saying there is 3(ph) 1/2 million left or something in addition to that.

What I am saying is our budget runs at $12 million for this year and that is just on the condominium conversions of our own account, those we are doing of the properties that we currently own. And then what I discussed in my remarks about our conversions, whether there are development partners, those would be additive to the $12 million level. And I will tell you that because the -- the way these are booked, they get booked when an individual unit is closed. Depending on -- there could be units closed in -- on December 30th and some units closed on, you know, January 2nd. And so a lot of the -- there is some variability in the recognition of these FFO gains on condominium sales based on the closings. If we can get more closings done on our own account perhaps we can exceed the $12 million on our own account and if we can get more closings done this year, we may be able to recognize that that penny on the Watermark property in California so there is variability in those numbers.

Okay. Well, I guess, has anything in the first half of the year been attributable to the partners?

No. The only thing that's been attributable to the partners is the fact we have apartment properties we are not leasing. The 13th and N property is not available for lease and so it has really been a negative drag or it has been a drag for us in the -- not so much in the second quarter, but will be -- we'll have operating drag. But if we get some closings done this year, it will more than offset for that.

And it sounded like based on Bruce's comments you are rather optimistic that that number will probably accelerate in 2005.

Yes, our expectation is that we will continue to take advantage of the opportunities that present itself in the condominium and we have started a property in Florida and hope to establish a beachhead to do more conversions in Florida and we will get our condominium sales program up from the 715 or so units closed, budgeted to close this year and up toward the thousand units in 2005.

Okay. Then I just wanted to circle back on the GNA, because obviously the run rate and in the quarter was extremely high obviously attributable to Bain - is that kind of the run rate for the next two quarters then we should see that --

Yeah, we're budgeting GNA at 47 1/2 million dollars. And we have indicated because of the Bain fees of almost $13 million that's overstated for this year. But as we have also said, that going forward while we would expect those costs to sort of roll off, there could be some increases elsewhere in the company as we continue to pursue those initiatives that will be more than offset by benefits of the top line of the initiatives as well. In terms of GNA, we should be a 36 or so million dollars of run rate company.

Would you expect to pick up, I guess, incremental savings in 05 from the Bain study -- but not the full benefit?

That's correct. But -- but I think we will be in the 8 to 9 million dollars by 2005.

And I guess that runs both through revenue and reduction and expenses?

That's correct.

Okay. Thank you.

Before we take the next question let me just -- I have been corrected on something. We do have a very small 40 million dollar preference unit or preferred partnership unit that is callable of this year. Again, $40 million with an 8% handle. So there will be very little benefit to that calling that is secured away later this year. In addition we have to recognized the unamortized issue, so there will be a net negative this year. Operator.

Yes, your next question comes from Craig Leopold with Green Street Advisor.

Good morning. Bruce, I'm curious on this revenue management and procurement it seems like you guys are a little slower than some of your peers in terms of implementing some of these initiatives and I'm curious if that is a reflection that you have seen sort of seeing others doing it and being successful at it and changed your opinion of it, or if there were other things that we're working on and didn't think that this was the right way to go historically. I'm just curious as to -- I'm surprised it is behind some of the periods on these types of initiatives.

Craig, this is Gerry Spector. You know, we're not behind certainly in the procurement side. We have had better costs today than our competitors and continue to have better costs. What we're in the process of doing -- is fine-tuning it a little more. There is always more juice you can squeeze out of the lemon. The procurement side I challenge anybody to match up to our cost and structure. We always had that in place for years and we had our economists scale benefit of that. It doesn't mean we are at the maximum level. So we're looking at -- we are basically looking at everything and frankly after we get it all done and think we have done a great job, we'll turn around and look at it again. I think we're going to get more benefit. We continue to, you know, screw those screws in a little tighter and we will get more benefit. On the income side, I was not historically a big proponent of revenue management. Certainly during the late 90s and early 2000's we had very aggressive lending increases and revenue growth. With the methods that we used. We have revenue management systems built into our property level reporting and have left it primarily to the field people to push pricing. What we have found in a declining market is that the fear factor sets in and people either over -- you know, over react on the concession side, dropping rents too quickly and it was a little harder to control than we anticipated. I wouldn't say we are behind anybody else. If you look at most people that are managing the revenues, we have had historically more information and better reporting and better results than the majority of the people. It doesn't mean we are happy. Because as we saw, we ran into more problems in trying to control it on a down trend. It has been more difficult to get people's heads turned around and people probably need specific answers in those times as opposed to using judgment. And I think that's what we feel revenue management will do is help drive specific answers to the people and improve the results. But I would tell you, -- if the market turns and there is an increase in market, nobody knows how well these revenue management systems will work including us. We are looking at it different than our competitors and we are looking at how some of our competitor does it and looking strongly at main with a better way to manage this process especially in a declining market where I think we were probably disadvantaged.

Okay. Fair enough. One last question, I think you probably -- you may have given this number, but what is -- what were total concessions in the quarter?

The total concessions?

Yeah.

Let me just take a look here.

Your next question comes from --

We haven't answered the other question yet. The regular concessions were in the quarter 8.1 million dollars and our renewal concessions were 1.3 million dollars. That's with the total dollars worth.

Great. Thank you.

Okay. Go ahead, Kristi.

Okay, your next question comes from Assam Kaseem with Reese Securities.

Bruce, I think you said this and I may have miss heard you, but, you mentioned $13 million in savings next year from the procurement effort, I guess the bank consulting, so is that a gross number, the 13 million? And so effectively that's 13 million plus -- 13 million for half the year -- or half of 13 million for the year and then 13 million from not having Bain -- spending money on Bain next year, or whatever the other increase is in GNA maybe slightly off creases to offset that. Is that fair?

Here is what it is fair. On an annualized run rate basis we said 10-12 million dollars. So for next year we think it is reasonable we should be able to realize 8-9 million dollars. Okay? So an 8-9 million dollar gain. We also next year will not have the 13 million dollars of Bain. We don't know what that number will be, but it will be less than the 13 million dollars we're seeing today. So you will pick up there. And then we'll have a decent pick up from in terms of some of these development deals as it leads up.

Got it. And then finally, in terms of the revenue management, when do you folks plan on rolling that out through, I guess, through the portfolio, or is it still in, like the beta test phase at this moment?

It is still in beta test phase and we anticipate by the next quarter we'll let you know how we're planning to -- what we're planning to do and how we are planning to do it.

Wonderful. Thank you.

Your next question comes from Richard Paoli with AVP Investments.

Hi, guys. Not to totally harp it but on the condo conversions, maybe you can just give me some kind of dull stats. What were the number of units that were actually closed year to date?

We've closed 313 units year to date.

313. And the average profit per closing?

About 20,000 dollars, 21,000 dollars.

21 k. Is that a fair number to use -- I know it is a moving target.

On a general rule of thumb, Rich, we've been transferring these units to our condominium conversion company at about $100,000 a unit or about a 6% cap rate. And after putting in whatever renovation costs and accounting for GNA and overhead, we have been realizing about 21 or so thousand dollars profit per unit. So essentially about a 20% premium, if you will to the apartment valuation.

Okay. One other question --

let me just finish.

Sorry.

That is properties in Seattle, in Phoenix, in Chicago and so that average is going to be a function of what that mix is going forward.

Right. But for the balance of the year, it's not a -- it's not a bad number to use?

Correct.

Okay. Another question, I think Bruce you mentioned if I had the numbers right, that your development starts looking like they are going to be about 170,000 -- excuse me, 170 million down from 300?

Yeah.

I guess with the new accounting changes, right, from the FIN 46, I think it is, the developments are now consolidated, does that have an affect on your capitalized overhead, in other words, you have 442 rolling off in the next year and then it seems like the pick up might be a little lower. -- low other new stuff taken up.

No, once these properties are put into service, these units are put into service, it doesn't matter if we own them or they are off balance sheet in the joint venture. The accounting is generally the same.

My thought was more in terms of your -- you've got, you know, 442 in process now and it looks like that's taking a step down. Does that have any implications on -- on what you are capitalizing in terms of overhead for that?

No. No. Because of a percentage of what we do is through these venture partners, you know, we're able to pretty well leverage our own internal leverage of folks. Those costs are fully capitalized by the properties in process.

Okay. Thanks.

Your next question is a follow-up from Steve Sawaka with Merrill Lynch.

Yeah, Bruce, I forgot to ask, I wanted to circle back on I guess the slow down and development starts. How much of that is a function of, I guess, rising costs or perhaps, you know, revenues not maybe coming back as quickly as you thought? I'm just trying to get an understanding of what is driving that number down.

I think it is a couple things. Number one, some is competition. We have seen a lot in terms of for sites. It is very competitive and pricing is aggressive. So you have to figure out the deals that works for us. So that's a part of it. And some of it, frankly we have a couple transactions in terms of getting the zoning for the new development is taking longer than we anticipated.

Well, I guess given that your yields have come down and been, I guess, disappointing relative to your own expectations, have you changed your underwriting standards or how you go about underwriting a new project as you look forward over the next couple years? And might that hold back your starts?

Again, we want to get 150 basis points, if you will, over -- as a minimum over what we can buy for. We think we're being very conservative on how we're underwriting properties to date. But at the end of the day, the properties we have in our portfolio we are happy with because we are thinking going out and selling these properties today there is a lot of value in them in terms of overall costs. That being said, going forward, we are spending a lot of time just making sure we get the right sites and making sure we are underwriting the costs right and we anticipate that, again, this year will be less than we anticipated, but next year could be better depending on the opportunity. We have a couple properties that we are, again in the process of rezoning and if we get that it could be a little bigger year than what it is this year.

Okay. Thank you.

Your next question comes from Chris Pike with UBS. Mr. Chris Pike, your line is open.

Sorry about that. Good morning, everyone. Most of my questions have been answered. Just one quick follow-up in terms of a specific market. Gerry, you indicated that Houston is having a tough time recently. Can you provide any type of color to where you can folks are seeing concessions trend in that market? And do you expect this market to fall off of one of your top 10 contributors from an NOI perspective going forward?

Well, the answer is that, you know, what I historically called it is a sloppy market and fairly volatile up and down. It depends on what sub markets you are in. Not everybody's results will look alike. Really there is a lot of different sub markets. Some are tighter and some are looser there. But at the end of the day, Houston is improving a little bit. The level of decline is improving. The supply -- if you are in the wrong sector and get a lot of supply, then it gets real sloppy there. But we are definitely lowering our exposure in Houston.

Yeah, Chris, our exposure, it is our 19th largest market. It is only 2.3% of NOI and it is not in the top 10.

Okay. So I guess just one last question in terms of markets. You bought a property up in Seattle. Gerry, I think last time we spoke you indicated at least in your opinion Seattle is a little soft. Was it an opportunistic acquisition? Or are your thoughts slowly changing towards that market?

Well, I think, you know, the supply side is well under control in Seattle. That's the good news. We are waiting for the economy to pick up. That being said we are continuing to lose a little rate still in Seattle. But we've had a little pick up in occupancy of value and reduction of concession which is driving a relatively flat result in Seattle. So I wouldn't say Seattle is bad. It has, you know, it is a high entry market and harder to build there and I think with any kind of movement in the economy, where it is flat now you will see positive moves there and we had an opportunistic purchase and we will look at that market because of the fact that there isn't a lot of new construction going on and it should recover well. In any kind of market recovery.

So your 8 properties out performing there as well?

I tell you, the Seattle properties are being dragged by the Tacoma side of the market. We have -- and that's really being driven by Ft. Lewis and troop movements. That's creating the softness I am referring to if you carved out Tacoma, Seattle is doing reasonably well as a defined market. And Tacoma is a little distortion of that. We wouldn't be buying properties in Tacoma at this point. I would tell you that brand-new development yields in Seattle are probably disappointing and, you know, there is a couple new deals we picked up and have had some pretty significant differences on what we projected and what we are getting. The middle market stuff is doing well.

What about cap rates? How do you see cap rates in that market?

Cap rates are in the 5 and 3/4 to 6% range.

And that's consistent with the acquisition through the quarter.

Yes.

Okay. Great. Thanks a lot, gentlemen.

Your next question comes from David Harris of Lehman Brothers.

Yes, thanks for coming back. Bruce, I wonder if you could just collaborate on the continued focus on increasing your exposure to high barrier to entry markets. I wonder, there is a theory that goes around that you may see better growth out of lower cost and lower cost locations in the country over the last next couple of years.

David, we believe in having a balanced portfolio. We like being -- we're national. We're in 30 markets around the country and we believe to have exposure to some of the good job creating markets such as the Atlantas, the Dallases. We are in Phoenix and we like that. We are at 55% high barrier entry market. We will be at that range, 55 to 65% high market with the balance in these big job markets. We do think markets come back and you will see better growth in those markets than you will see in the markets -- the higher various entry markets.

Thank you.

Kristi?

Yes, your next question is from David Ronco from Royal Bank Canada.

Just a couple follow-ups. I know you talked about the disappointing pace of lease of your developments. I wondered if you could talk about velocity in the second quarter, leasing velocity versus the first quarter and then perhaps maybe what you have done in terms of concession and rent at your developments and pick that up?

This is David. I don't have anything to tell about you how that has changed. I can just tell you as we gave guidance earlier in the year we indicated that this portfolio of properties in lease up would be a drag on the company this year. And we're continuing the concession on an as needed basis and we are in an occupancy driving mode in those properties. We manage many of them. Some have continued to be third party managed by our development partners and we are working with them closely to try and maximize occupancy in those properties. And we need to get that up.

Okay. Thanks.

There are no further questions at this time.

Great. Well, we just want to thank you for your time, for your support. If you have any questions please feel free to call and we'll talk to you next quarter. Thank you.

Thank you for participating in today's conference.