住宅地產 (EQR) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Paul and I will be your conference facilitator today. At this time I would like to welcome everyone to the Equity Residential third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. If you would like to ask a question during this time simply press star, then the No. 1 on your telephone keypads. If you would like to withdraw your question press star, then the No. 2. I will now like to turn the conference over to Mr. Martin McKenna. Thank you, sir, you may begin.

Thanks Paul. Good morning and thank you for joining us to discuss Equity Residential's third quarter 2004 results. Our featured speakers today are Bruce Duncan, our President and CEO, Donna Brandin, our Chief Financial Officer, David Neithercut, our Executive VP in Corporate Strategy, and Gerry Spector, our Chief Operating Officer. Our release is available in PDF format in the Investor Section of our Corporate website equityresidential.com.

Certain matters discussed during this conference call may constitute forward-looking statements in the meaning of the Federal Securities Law. 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 Bruce.

Thanks Marty. And good morning and happy election date. I'm going to begin the call today by talking briefly about our business overall and then turn it over to our wonderful new CFO, Donna Brandin, who will discuss our financial results for the quarter and 9-months and our guidance for the balance of the year.

Donna will be followed by our Executive Vice President in charge of Corporate Strategy. You also know him as our outstanding former CFO, David Neithercut, who will give you an update on our activities in terms of acquisitions, dispositions, development, and our condo conversion business. I will then conclude with an update on our progress on our continuous efforts to focus on operational excellence, as well as a review of our top and bottom 3-markets for the quarter, and how we are positioning ourselves for the future.

We had a good quarter. If you exclude the one-time cost associated with the 4 hurricanes of 5 cents a share, our results were at the high-end of our original guidance. For the second quarter in a row we had positive same-store revenue growth quarter-over-quarter 2004 over 2003, something we have not experienced since 2001.

Most of our markets are showing improvement. In fact, when you look at it, 16 of our Top-20 markets had positive quarter-over-quarter same-store revenue growth compared to 12 in the second quarter. However, there were a few notable laggards, which I will discuss later.

The demand for our product from buyers has never been stronger. It continues to be aided by low interest rates, as well as the strength of the condominium market. The strength of the condo market has put upward pressure on land prices, particularly in urban locations, and has made it difficult for apartment developers to compete on price. These rising land prices, as well as continuing increases in construction materials, such as steel and lumber, have increased the cost to develop rental apartments. And these increases in cost suggest that the supply of new rental apartments should be held in check over the next few years, which will be positive for our industry.

My macro concern continues to be the tepid job growth that we have experienced since the beginning of the summer. I am also concerned about the impact of oil prices over $50 a barrel, which is up 76% this year, on the economy and the consumer. We need the consumer's extra dollars to go towards rent increases at our apartment communities.

Alan Greenspan alluded to a pause in the economy at the beginning of the summer and we experienced that pause. Although our business is picking up, I thought that by this time in 2004 our revenue growth would be stronger than it is currently. Now, let me turn it over to Donna to take you through our financial results.

Good morning, everyone. And thank you for joining us on today's conference call. For the third quarter of 2004 Equity Residential earned 26 cents fully diluted per share, compared to 41 cents per share for the third quarter of 2003. The reduction is due primarily to lower gains from the sell of properties and increased insurance expenses related to the hurricanes, which I'll describe in a moment. Funds from operations were 50 cents per share for the quarter compared to 56 cents per share for the same-period last year.

In early September we announced that $9 million in uninsured property damage had been incurred as a result of Hurricanes Charley and Frances. At that time we revised third quarter guidance down by 3 cents a share to 50 to 51 cents a share. However, after this announcement when we experienced Hurricanes Ivan and Jeanne which resulted in an additional $5 million cost or 2 cent per share cost, the FFO of 50 cents is still in line with the revised guidance of 50 to 51 cents released on September 8th, 2004.

The 2 cent incremental negative variance from the 2 additional hurricanes was offset predominately by favorable expense variances impacted during Q3. They were specifically lower than anticipated real state taxes, lower property management taxes, and G&A expenses, as well as slightly-higher-than anticipated condo sales.

Let me turn my attention to same-store results. The same-store results do not, described in the Press Release and which I will discuss in a moment, do not include the $14 million or 5 cent per share FFO charge related to the hurricanes. Historically, we have included in same-store results expenses all of insured property damages as associated with events, such as storms.

However, because the hurricane was such an extraordinary event and because the impact of the hurricane was so significant, we believe that including the hurricane property damage expense in the results would actually distort the year-over-year comparison of the same-store results both this year and next year. In addition, by excluding this amount we believe it provided a much clearer picture and basis of comparison from period-to-period.

With that in mind, on a same-store basis for the third quarter 2004 versus the same-period in 2003, revenues increased 1.5%, operating expenses increased 4.4%, and net operating income decreased 0.4% [corrected from 4.4 % by Company following the call]. The 1.5% revenue increase is primarily a result of 39% reduction in move-in and renewal concessions, while rental rates remained flat and occupancy rates remained unchanged at 93.5%.

Bad debt expense decreased 8.4% or 320,000 to $3.5 million. As a percentage of revenue bad debt expense decreased 0.92% in Q3, '03 to 0.83% of total revenues in Q3, '04. The 4.4% increase in same-store operating expenses was driven predominantly by a 9.6% increase in payroll cost. This was a result of our continuing efforts to fill staffing positions at the property level as a part of our program to improve product presentation and overall service quality.

On a sequential basis from second quarter 2004 to third quarter 2004 same-store revenues increased 0.4% [corrected from 4% by Company following the call], operating expenses increased 3.9%, and NOI decreased 2%.

Let me turn my attention now to Equity Corporate Housing. While there are numerous signs that our economy has been improving, the corporate housing industry has not yet seen much benefit. Despite the fact our economy has been creating new jobs, the corporate housing business has not yet seen the relocations that normally accompany job growth really get back on its feet.

Therefore, we expect Equity Corporate Housing to lose about 1.5 million in 2004, but that loss will be more than offset by the nearly $13 million of rent they will pay to Equity Properties. ECH currently has approximately 2800 units, down from a high of 4700 units when we purchased the business in mid-2000. ECH has approximately 36% of its units at Equity Owned Properties. While 2004 results are disappointing, we expect to have ECH realizing -- improving in performance in 2005 and beyond.

I'd like to turn now my attention to the Condominium Division. In the third quarter Press Release we have provided disclosure on the condo business. During the third quarter we sold 208 units which contributed $7.2 million before operating costs and that's to FFO. That brings our total activity through September 30th to 520 units sold, contributing 15.7 million to FFO before operating costs. This continues to be a successful business for the Company as David will talk about this issue in more detail.

Let me just turn my attention now to the balance sheet. In September we successfully completed a 500 million unsecured note at an interest rate of 5.27%. We used the proceeds to refinance existing debt that had matured throughout the year. Currently our floating rate debt as a percentage of total debt is 19%.

In 2005 we have approximately $650 million of debt maturing. The majority of this debt will also be refinanced with additional term financing. In addition, our $700 million bank facility matures in May of '05. We would fully expect to replace the $700 million line prior to May '05 and are in the process of starting discussions with our banks currently.

Now, let me turn my attention to the guidance section. In this morning's Press Release we provided guidance for the fourth quarter of FFO of 55 to 56 cents per share. For the full-year our guidance is now FFO to be 213 to 214 cents per share. This is 1 to 2 cents below our previous guidance.

Remember, if you back out the impact of the hurricanes we would be at 218 to 219 FFO per share range, which was consistent with our pre-hurricane guidance of coming in at the low-end of our range of 215 to 229. On a same-store basis we now expect the full-year to come in at 0.9% increase in revenues, a 3.8% increase in operating costs, and a 1.1% reduction in NOI.

We will now provide guidance for 2005 in conjunction with our fourth quarter earnings release on February 2nd, 2005. This will allow us to complete our budgeting process and incorporate the most updated market information into our guidance. Again, now I would like to turn it over to David.

Thank you, Donna. During the quarter we continued our efforts to reconfigure our portfolio by selling 8 properties, building 2,274 units. 3 of these properties were in Richmond, Virginia, and 1 each in Southeastern Michigan, Las Vegas, Kansas City, Tampa, and Everett, Washington. These assets were sold for a total of $133 million or $59,000 per unit at a projected forward 12-month cap rate of 6.7%. These assets averaged about 21-years-of-age and we realized a weighted average unleveraged IRR of 10.4% on these investments, including management fees. Economic gains for these properties sold during the quarter were $28.5 million.

Third quarter disposition activity brought our total dispositions for the first 9-months of the year to 39 properties totaling nearly 11,000 apartment units. Most importantly, during the year we have now sold all of our conventional apartment product in Kentucky; Greensboro, NC; Greenville, SC; Salt Lake City; and Richmond, Virginia. And in addition, we have just one conventional asset remaining in each of the following markets -- Kansas City, Las Vegas, Memphis, Northern Ohio, and Birmingham, Alabama, and we fully expect to be out of these markets entirely by the middle of next year.

As noted in the portfolio summary schedule that was included in the Press Release, we currently have 29 individual markets that represent 1% or more of our 2004 budgeted net operating income. So we are making great progress in reducing the number of markets in which we operate so as to narrow the focus of our management efforts and become more effective and efficient in our operations.

On the acquisition side, during the quarter we acquired 5 assets totaling 879 units for 186.5 million at a projected forward 12-month cap rate of 5.9%. And these assets were 1 in New York City which we announced on our second quarter call, a property in Cambridge, Mass., 2 properties in Northern Virginia, and a small phase of a Lexford property adjacent to one of our existing phases in Florida.

Through the third quarter we have acquired 18 properties totaling 4,400 units for $634.5 million and a projected forward 12-month cap of 5.8%, and that's for all the acquisitions for the first 9-months of the year.

In addition, last week we closed on our second asset in Manhattan. And this is a 238-unit property located at 71 Broadway in the city's Financial District. We paid $100 million for this asset or about $353,000 per unit or $465 per square foot of apartment space when you back out the retail component of the asset. The cap rate on this deal was 5.5% and we are excited about now having 2 assets in New York City. And we continue to look for additional opportunities there.

Also as noted in the Press Release, we have increased our acquisition expectations for the year to $900 million and have kept our disposition assumption at 800 million.

With respect to our condo businesses, Donna noted we had a very solid quarter. During the quarter we closed a total of 208 units of which 160 represented sales by our own Conversion Team, and 48 units at a joint-venture development property, and we elected to convert to condominiums this past summer as we discussed on our last earnings call. For the first 9-months of the year a total of 521 units were closed, 473 for our own account, and then the 48 with our partner.

In the supplemental information we provided in today's Press Release we have laid out the incremental gains we are realizing through this effort. Net of G&A and rental operations at these properties we have averaged $25,700 per unit for all of our conversions and for the deals we are converting ourselves, and that is without the radius of Logan Circle property, year-to-date we have averaged $23,400 per unit in net conversion profits.

We have also provided some information on our inventory -- on our unit inventory representing 1,268 units currently available for sale and 329 units sold but not yet closed. And for a unit to be considered sold it must be subject to a binding non-cancelable contract. For the fourth quarter we are projecting to close 293 units for a contribution to FFO for the quarter of about $7.5 million and 60 JV units for another $2.5 million, or $10 million total before G&A and operating expenses, or a net of about 9 million or 3 cents per share after these expenses.

Now, I want to address 2 topics that I think will really help everyone out there better understand this business. First, I want to point out where this business shows up on our P& L and then review with you our process for determining transfer value to our condo group’s taxable REIT subsidiary. The results from our condo activities appear in 3 line items of our P&L. And the schedule that we provided in this Press Release today hopefully brings them together and presents them in a clear picture of the net activities of this business.

The most significant part of the result of this business is captured in the gains or losses on sales of discontinued operations line item. In our FFO reconciliation we first back out all of the gains from this line item and then add back the gain contributed from our conversion activities. And these amounts were the $15,669,000 for the first 9-months of the year, and $7,199,000 for the third quarter that appear on the supplemental schedule.

The second line item that captured some of this business is Property Management Expense. This includes all of the off-site costs we incur to run this business that are not capitalized directly to a specific conversion property. This is essentially the G&A of this business. And that totaled 1.97 million for the first 9-months of the year and $775,000 in the third quarter.

And the third and last line item that contained some of our conversion activity is Discontinued Operations Net. This captures all of the rental income and operating expenses of our property that occurred during a conversion. At early on in a conversion this is a positive number as the property is operating fairly normally and later turns negative as it moves through the conversion process. And that is a description of the line items that appear on that supplemental schedule, which gets everyone down to the net benefit from this conversion activity.

Regarding transfer value, we start with a thorough valuation analysis. And by that I mean a review of comparable sales, as well as solicitations of valuations from various brokers in the markets, and that's before we transfer these assets to our taxable REIT subsidiary.

Transfer value is not, and I repeat not based on what we think an asset is worth just as an apartment property, but what we believe we can get if we sold it to the highest bidder in the market, including to a condo converter. This is a very important point and I am not sure that we have made this very clear previously.

If we can sell an asset to a converter at a price that we think is a nice premium to apartment value, we will certainly do that. For our guys to do the conversion themselves, they must make a case that they can do so profitably considering the risk from the same price we could sell the asset to the converter. And I just tell you that of the 39 assets we have sold-to-date we believe we have sold 5 or 6 directly to condominium converters.

So the actual approval process internally for our conversions is done in 2 steps. And the first is the approval to sell at the subject price. And that's requested by our disposition and asset management groups who recommend the disposition at the determined price and present a thorough analysis supporting this request, and including, as I said, the brokers' valuations and the market comps that would include at conversion sales. Step 2 is a request by the condo group to buy the property at this price, and a comprehensive review of their profitability analysis at this transfer price.

So just in conclusion, this conversion activity enables us to realize incremental value in our assets for our shareholders, and I think we're doing a great job on that. We expect this opportunity to -- the opportunity to monetize this incremental value in our assets to continue for some time either through the premium sales to third-parties, which we have done or converting for our own account. And we will continue our conversion efforts in Phoenix, Seattle, Chicago, and Florida, and we will look to start this activity in other markets when appropriate.

Just briefly now in our development activities, the changes in the development disclosure provided today are essentially as follows -- our Ball Park Lofts in Denver and our North Pier Property on the Hudson River in New Jersey, and are stabilized, have been removed from the schedule totally.

As we announced in our second quarter earnings call our development partners are in the process of converting to condominiums both Watermarke in Irvine, California, and our 1300 N Street deal in Washington, D.C. And as a result they have been removed from the projects under the Development Section and can now be found on the Condo Conversion Schedule of our supplemental. Our property at 1210 Mass Avenue in Washington, D.C. has been completed and is now found in the Completed, Not Stabilized Section of the schedule.

The only other material change is the development schedule that I want to point out is that we've increased the total capital cost by $9 million for the 2400 M Street project in Washington, D.C. One half of this increase is the result of some additional carry costs due to a modest delay in the delivery of the building and some delays at the beginning of construction, as well as increases in fees, permits, real estate taxes and utilities. The other half of the increase is simply an accounting adjustment. Included in the previous budget as a reduction to the overall budget was nearly $5 million of rental income expected to be collected prior to stabilization of the project.

When looking at the total cost of a project, private developers characterize this income as a reduction to the budget. And that's just not how we need to look at it from a GAAP standpoint. So we have removed that income from the cost capitalization budget and we currently forecast a stabilized yield on this project, about 8.4%.

In the fourth quarter we expect to commence construction on the third and final phase of our Warner Ridge Property in Los Angeles. This 264-unit phase will cost approximately $72 million to build and will have a Pro Forma yield on cost of about 7.5%. And this will also be our last start for the year, which will bring our total starts for the year to $172 million. With that I would like to turn it back over to Bruce Duncan.

Thanks David. Let me give you an update on our continuing efforts to improve operations. As we discussed on previous calls we engaged Bain to look at various aspects of our operations and help us analyze our business model, examine current practices, quantify improvement opportunities, and develop ongoing metrics by which we can measure our performance. This project was designed to address 3 areas of opportunity -- Procurement, pricing, and customer segmentation and retention.

With respect to procurement we are working on 2 initiatives. First, we are refining our very successful National Purchasing program. We are enhancing this program for products such as appliances and carpetings, and we are creating several new national programs for products such as siding, roofing, and cabinets.

The second procurement initiative involves Contract Services. We were taking our smaller existing national program for services and expanding it, and building on the success of our National Purchasing program for products, and expanding it to Contract Services to leverage our scale in the market place to reduce prices paid for Contract Services at the national, regional, and property level.

We have completed 2 pilots and have produced savings above our initial projections. We have consolidated all facilities and procurement functions into our Centralized Property Operations Organization and are in the midst of a nationwide implementation of cleaning services procurement to be followed by landscaping services. We are also continuing our efforts to create national programs for Telecom, pest control, and carpet and flooring installation.

Bain's participation in this effort is complete. We expect a stabilize savings of 8.5 to $14 million per year from the currently identified programs. We estimate that the ongoing costs for these programs will be approximately $2 million per year.

With respect to pricing we are proceeding with 2 initiatives. We've designed a new centralized process for establishing rents for new customers, as well as renewal pricing. In October we began a nationwide implementation of the new centralized process, which will be complete at approximately 50% of our properties by June of 2005 with completion of 100% of our properties by the end of next year. We expect to see a minimum 1% revenue lift associated with this new process and we estimate that the ongoing costs will be approximately $4 million per year.

The other initiative in this area of pricing is our testing of pricing software. We have been looking at and testing pricing software for over a year, starting before we engaged Bain. And they have been helping us in the evaluation process.

We will continue to evaluate the benefits of implementing pricing software. Our plans are to expand the test to get a better understanding of its impact and efficiency compared to the results achieved utilizing the new centralized pricing process, and we would expect this testing to be completed by the end of 2005.

In terms of customer segmentation and retention, we have conducted a large-scale renter survey to segment residences according to distinct and logical customer needs. Based on the findings of the survey we have narrowed Bain's focus to help us refine our sales and renewal process and customer service delivery, and leverage our call center operations to maximize efficiency. We have not yet determined Bain's involvement in this effort going forward into 2005, but in any case it will be significantly less than this year.

Now, let me review our 3 best and worst markets in terms of revenue growth for the third quarter this year versus the third quarter last year in our 20 largest markets. I'll start with the worst markets. The 3 worst markets in the third quarter were the same as in the second quarter and in the same order. Denver continues to be our worst market in the third quarter based on same-store total revenue, which declined 4.3% compared to the third quarter of 2003.

Denver's economic recovery continues to lag behind the nation. However, the good news is that multi-family construction continues to slow this year with new deliveries in 2004 expected to be 3200 units, most of which have already hit the market. This is down from 7300 units completed in 2003. 5,000 units are projected for 2005.

Concessions remain prevalent market wide with 2 months free on a typical 12-month lease. The Denver market will remain weak due to the fact that meaningful employment growth is not expected until late 2005 or 2006.

Our second worst market in the third quarter is Houston, with same-store total revenues declining 2.2% versus third quarter 2003. Houston continues to be plagued by too much multi-family construction. Nearly 14,000 new units were added to inventory in 2003, and approximately 8500 units will be completed this year. With the combination of too much new construction, combined with a sluggish economy, the Houston market remains weak. However, we are starting to see it bottoming as evidenced by the same-store revenues sequentially being essentially flat from the second quarter to the third quarter.

Dallas was our third worst market in third quarter, with a 1.5% decline in total same-store revenues versus third quarter in 2003. The Dallas Ft. Worth economy lost an estimated 125,000 jobs over the past 3 years. And we are just now beginning to see gradual improvement in the economy, but at a slower pace than in past recoveries.

The supply of new apartments is stabilizing somewhat in Dallas. After delivery of 11,400 units in 2003, approximately 8,000 units are forecasted for this year. Our occupancy is about 0.4% higher than the market average and we are seeing some slight decline in concessions, but our rate has dropped somewhat.

Now let me turn to our best markets within our largest 20. The D.C. Suburban/Virginia market was our best market in the second quarter -- in the third quarter, with same-store revenues increasing 9.5%. The D.C. area economy remains 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 this strong economy, new multi-family construction, particularly in Montgomery County, Maryland, will moderate revenue growth in most submarkets. Forecasts for the Washington D.C. area are for approximately 11,000 new units in 2004 versus 6300 units in 2003. The strong D.C. economy and conversion of a number of our rental properties to condominiums should help offset some of this new supply. We expect continued rent growth, as well as a reduction of concessions throughout 2005.

Our second best market in third quarter was the Inland Empire, which had an 8.6% increase in same-store revenues over the same-period last year. The Inland Empire continues to add jobs, but at a slightly slower pace than earlier in the year. Forecasts for new multi-family constructions are from 2300 new units this year, down from 2900 units last year. 4,000 units are projected for 2005, but with strong demand this increased construction should not be a problem. Expectations continue to be high for the Inland Empire which is the fastest growing urban area in California. A very pleasant surprise is that Phoenix was our third best market in third quarter with same-store total revenues up 6.6% versus the same-period last year. The Phoenix metro-economy is well-positioned to deliver 50,000 new jobs in 2004. The local unemployment rate dipped to 3.9% in August.

The Phoenix metropolitan area is on pace to set records for new home permits and retail activities. And the market looks like it will eclipse 2003's record 127,000 combined new home and retail closings. New multi-family construction is expected to deliver 4,000 units in 2004 and the pipeline is on pace for 5,000 units for 2005. We have seen a significant decrease in concessions, as well as a nice pick up in occupancy. And we expect more good news in 2005.

Let me close by talking about our long-term strategy for creating value for our shareholders. First and foremost we have an outstanding Management Team in place. We have augmented our existing team with the likes of our new CFO, Donna Brandin, Pat Mash, and Mark Tennison.

Pat is our Chief Revenue Officer reporting to Gerry Spector. All of our revenue functions report to her, including Pricing, Marketing, our Call Center operation, and Equity Corporate Housing. Prior to joining us, Pat was with United Airlines for almost 20 years where she was responsible for all of United's pricing worldwide in her last position, and prior to that was in charge of their very successful Mileage Plus Awards Program.

Mark Tennison, our Executive Vice President in charge of our Development Group, came to us after a very successful 6-year stint as Chief Operating Officer for Pritzker Residential where he established the fully-integrated multi-family company. Over the past 19 years Mark has developed nearly 12,000 units in major markets across the United States, including 5,000 units in the Eastern and Southeastern part of the country with Pritzker Residential and nearly 7,000 units of new development in the Northwest, West and Southwestern United States with Security Capital Pacific Trust.

Over the past 19 years Mark has developed, acquired, and operated multi-family properties in 20 states and 30 major metropolitan markets. We have charged Mark with the responsibility of building up our in-house development capability to augment our existing joint-venture relationship. Mark reports to David Neithercut.

In terms of operations we have focused our efforts on creating more value using our size and scale, both on the revenue and expense side. With this task it will cost us some money in the short run. It will pay great dividends in the future.

In terms of our portfolio, we are and will continue to be opportunistic. Over the last 3 years we have agressively repositioned and upgraded the quality of our portfolio. We have taken advantage of the demand for our product by selling out of smaller, slower growing communities, as well as locationally challenged assets in our core markets. And we invested those proceeds into better quality assets and better locations, and primarily higher barrier to entry markets. We have also invested money upgrading the appearance of quality of our remaining portfolio.

We have been ahead of the curve with the establishment of our in-house condo division 2 years ago. As David mentioned we have had good success with this group. And it is part of our long-term strategy to have this capability in-house to focus our efforts on maximizing the value of our portfolio. We have brought in seasoned professionals to run this business and have established operations in 4 markets where we have a sizable presence.

We have no pride of authorship. If we think another buyer is willing to pay more for a potential condo asset in our condo group, we will sell it to that buyer. We do realize that the condo market is somewhat overheated in a number of markets; for example, South Florida, and we are factoring that into our analysis. As we have pointed out in the past, our typical price point to the end buyer is a relatively modest 150,000 to 170,000, and not the very high-end where we feel conversions will be more vulnerable to higher interest rates.

We continue to maintain a very strong balance sheet with great liquidity. We have the ability to do large transactions. That being said our goal is to maximize shareholder value, not getting larger for the sake of size alone. Sometimes in environments like this the best deal is no deal and we will use our balance sheet judicially. We'll continue to look for opportunities.

We like our position and we believe we will be able to deliver above-average returns to our investors on a risk-adjusted basis given the size and diversification of our enormous operating platform. With that, Operator, let's open it up for questions.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Brett Johnson, RBC Capital Markets.

Here with David [Rompose,] this is Jay Leupp calling. A couple of questions, David, first on the condominium business that you talked about. It looks like you're gearing up the last couple of years to make this a permanent business. How large in terms of your year-over-year earnings do you think this business really could become? And what do you think the 2 or 3 greatest risks are to either have it decline or go away?

To answer your first question it remains to be seen. We continue to believe that there is opportunity in many of our markets to realize this incremental value on the assets that we own. And if we believe that there are sufficient amount of properties in our inventory, then we'll establish an operation there and allow that team to go ahead and do that.

Again, as I mentioned we are currently in Seattle, and Phoenix, and Chicago, and South Florida, and we look at some additional markets as well as we move forward. How big this can get? Again, it remains to be seen, but I do believe it certainly can get larger from where it is today.

We are certainly subject to some interest rate risk, but as Bruce just mentioned I think that our price point does give us a lot more, I think, comfort than being at the higher end of the scale. Our absolute purchase prices are in this $150,000 range, it makes great sense for the first-time homebuyer, for the empty nest or snowbird or what have you.

I think the real risks in this business are I think development for a condo execution and that's certainly someplace that we're not interested in going right now. I think to sort of develop today for a condo delivery 2 years down the road and trying to anticipate pricing and the depth of the market at that time I think is really a challenge.

But generally what we've done is we've taken fairly small properties, what we consider more bite-sized kind of properties in this 150/200 sort of unit range and we've been able to blow those out pretty successfully.

And then just one follow-up, Bruce with the comments that you made on the Phoenix market recovering better than you expected, how well do you think you are positioned to take advantage of that? How meaningful could it be to your results over the next couple quarters? And how long do you think before it takes new development activity to kick up in that historically lowered barrier-to-entry market?

Let me start and then Gerry can jump in too. I would say Phoenix, our position in Phoenix -- we own almost 12,000 units in that market. And so we are well-positioned in terms of -- as the market picks up to show some good increase. Now, you have to remember for the last 3 years we've been hit hard in this market. So our average rent is pretty low. So we think we have an opportunity here as this market turns to experience a pretty good growth over the next few years.

The other advantage in that particular market right now is there is a lot of current supply being converted to condos depleting the rental stock. So even though there are certainly opportunities for new development, 2 things are going to prevent that. I think, No. 1 is the average price that everybody is getting out there can't support the development side of it, and the costs are going up dramatically. Both of those combined are going to make it more difficult in a lot of markets where you don't have the right kind of rent levels to support building.

So I think for awhile we are protected there, as well as the cost and values of single-family homes have been going up 8/9% a year and where apartment rents have been going down 8 or 9% a year. So the spread between rent and buyer are getting larger and I think that can continue to support, as long as there's job growth in that market, some good results in Phoenix.

Carey Callaghan, Goldman Sachs.

It's Dennis Maloney with Carey Callaghan here. Really just have a couple of questions on your markets. You mentioned that you're looking at Seattle to condo. There seems to be some differing views of the Seattle market out there and I was just wondering if you could comment on what your views are of that market. And then you mentioned that you recently bought a second New York City asset. What are you seeing happening across the river in Northern New Jersey?

Gerry Spector here. First of all I think Seattle -- we're seeing some momentum and some strength occurring there. There is job growth. There is a slowdown in the supply side, which has been extremely helpful in that market. And Boeing is showing some strength in that market and Microsoft continues to grow. So we see the economy there certainly turning around. There's not a lot of new supply going into that market. It's difficult to build there. Those are all favorable events for us.

On the condo side, single-family homes are very costly there. So there is a great opportunity for certainly entry-level pricing condos and I think we are going to continue to pursue all those options as well. But there -- right now we're in a good position from a supply point of view. The Bellevue market is a very strong market for us to look at right now as well. And so we are looking at that alternative.

In terms of the New York/New Jersey we're buying Manhattan assets. We bought 2 so far. The New Jersey side has gained a lot of momentum. We've had some significant sequential progress in that market. We look at the New York area on a current basis to continue to grow.

Supply has been cut down dramatically in New Jersey. Most of the supply has been absorbed throughout the New Jersey shores, opposite of Manhattan. We've had a good run there occupancy wise in rent growth.

We anticipate that market is going to strengthen again next year because of the supply not being there and jobs are continuing to come back and supply is cutting down. There's a lot of condos being delivered and converted in that area as well, which is again depleting supply. We look at that as being a very strong market for us not only this year but into next year as well.

And then just turning to the balance sheet. You have I think 300 million of MOPPRS retiring next year? At whose discretion are these either putable or callable? And if it's not yours do you anticipate incurring a debt extinguishment charge here?

No. We are not expecting to have a debt extinguishment charge. We will roll forward the debt instrument for an incremental 10 years. So effectively it requires us to re-issue a 10-year debt obligation at pretty comparable to the rate that was in the existing debt arrangement which was about 6.67%.

And then just a couple of minor items. What were concessions per move-in during the quarter and turnover? If you mentioned them I missed it.

We did not mention it.

And I think Carey might have another question.

The turnover for the quarter is down but it is at 19.5% for the turnover and what was the other?

Last year it was 19.8 for the same-period. So turnover is about the same as it was last year and the other was concessions?

For move-in, yes.

I don't think we’ve got that number handy at our fingertips. If you want to get in touch with John later, Carey, he will be happy to get that number for you.

We'll follow-up, thanks. And one more. Just on the Bain, Bruce, I know you said you weren't prepared to give guidance on next year, but can you just help us think through this issue of the Bain spending? I think you indicated you would pay them about $13 million in fees this year. How should we think about it in '05? Is it going to be at that level or significantly less?

And then if you could just, you know you touched on some of the projected savings. But again maybe you could help us frame the net contribution from the procurement and the pricing system in '05.

I would say in terms of Bain for this year, for '04 we are going to spend a little over $10 million. For '05 when I say we haven't decided what the final amount is, it is going to be dramatically less. So I would think it would be less than $5 million. And in terms of looking at '05 I think you could say that on the cost side, the procurement side, we should be able to show improvement in that area to the tune of 8 to $10 million next year on the procurement side.

And I would say that on the revenue side, again we're not going to have the new pricing system implemented. It's not going to be complete until the end of next year. But we should get a benefit of that. If we get a 1% increase, that's worth $18 million a year if we got -- had it all implemented day one. So I would think we should get maybe 4 to $5 million of benefit next year, but that's going to be offset for the cost we have to put this system in place and run the system.

I think you said it was around $4 million.

There will be probably fairly small amount of upside on the revenue side in the first half of the year. Then we should see it ramping up in the second half because we will have a lot of our upfront costs in the first half. And then we will start seeing development in the second half.

To be clear on the procurement, the 8 to $10 million, is that net of the 2 million?

Yes.

Lou Taylor, Deutsche Bank.

Bruce can you expand, or Gerry expand a little bit on the expenses? And as you kind of look forward what's keeping the pressure on them? And what line items are you seeing the most pressure on?

It's really, there are 2 primary drivers on the expense side that continue. And it's really utilities which have been fairly modest this year, frankly, it's only been 2.5%. The biggest push we have seen is the payroll piece of the puzzle representing 25% of our cost on the expense side. We're running fairly high numbers and they are close to 9% in the payroll side.

A lot of that is being driven by increased health insurance costs that we are seeing, other insurance costs, unemployment comp, payroll tax load, but there is also salary. We are seeing a lot of salary pressures and we are addressing that. And that we're seeing salary levels at --right now we budgeted about 3.5% and we're seeing closer to 5.5 to 6% on total salary pressure.

And what's your expectation going forward? Do you think '05 will be a better year over '04? Or do you see the pressures continuing into '05?

I think there will still be some pressure in 2005 and I think utilities are going to be the wild card. But fortunately, for us the gas/electric piece of the puzzle only represents 5% of our total expense exposure. So even if that goes up exponentially it is going to have little impact. You have got to worry about categories like real estate taxes and payroll, which is a bigger chunk. The rest of our expenses under are relatively all under 2% on the same-store revenue or expense growth side. But I think payroll next year, the wild card is going to be health insurance costs continuing to put pressure on.

And I think that in our industry from what we can tell payroll wise there's a very tight labor market in terms of the kind of people that we look at with construction continuing to ramp up at the level that it has. It's putting a tremendous amount of continuing pressure on our payroll piece. I don't know that we can determine that yet, but I still anticipate payroll to be the leading cost factor next year driving the majority of that expense line.

All in all, Lou, we would expect expense to be down a little bit from where they are this year. That’s our hope.

A second question is for David. If you could just expand or just explain a little bit on your gains from your condo sales, what is the cost basis or what basis are you using to calculate the gains?

I'll let, Lou, the entire gain from the sales price that we sell to the individual user down to the Company's original basis finds its way into that gains and losses section of our P&L. What we carve out of that and add back to FFO is down, the gain realized only from the basis established by the transfer price from the Company to the condominium group. So we establish what we believe is the current fair value of that asset.

Again, I want to reiterate not simply as an apartment property, but what we think we can sell that asset to for a third-party. And that essentially establishes a new basis solely for the condominium group in the way that we look at it internally. Then they add their additional costs to that property that's a rehab, a renovated do or whatever they are going to do with it. And so the difference between their now basis and their disposition price is what remains in our FFO.

And last question is just what do you see the scope of the group becoming? Do you see yourselves just buying third-party apartments strictly for conversion to make a gain or are you going to just focus on your own portfolio right now?

Our main emphasis to focus on our own portfolio. We think there is a lot of value there that we can mine and that is the principal focus.

Jordan Sadler, Smith Barney.

Just looking at the portfolio sequentially, I know this is the quarter of highest turnover typically for you guys. I saw that occupancies were a little bit strained and went down 20 basis points or so. What was the reason for that? It seemed pretty consistent across your markets. Were you pushing rents or what?

I think that it's cyclical. We normally would see a little bit of a slide in occupancy there. We actually, the decline was less than it was last year, so it’s smoothing out a little bit. We're still seeing a decline in traffic this year relative to last year and actually last year was up from 2002. We're seeing a decline in traffic, on the other hand our occupancies have remained flat. And we are seeing most of the uptick in what we are doing literally in the reduction of concession.

So we think that there is more discipline in our pricing and our focus making sure we're not giving away any more than we have to, but with occupancy remaining fairly flat and tracked down. The 2 caveats are is that we have a little less turnover, which is helpful and reduction of concessions driving what's happening there.

And on a sequential basis what we're seeing is that the majority of our markets are flat to up on a sequential basis. There's (sic) really only 4 markets of any substance that are still negative and that's Dallas, Minneapolis, Denver, and our Lexford assets. And those are on a -- they have slowed a lot in terms of their sequential decline but they are still in decline.

I was purely focused on the occupancies I guess.

On the occupancies we've really seen very little change in our occupancy. And again, what we have seen sequentially is I would say more demonstrative of the cycle in the year.

And then moving on just to the condo sales, David I guess your previous guidance was for about $12 million for the full-year, but clearly you are beyond that. And now I guess you are closer to a $25 million number for this year?

Net number that's closer to a $22 million number.

And you mean net of operating expenses of G&A?

That's correct.

Is that a sustainable number? I know people have asked about the scope, but sort of in '05, you've talked about being able to do about a 1,000 units next year. Is that level of gain sustainable or should we expect it to increase or decrease?

We're sort of holding off guidance for next year until we get to the -- get into February. But clearly if you look at our inventory and our "solds" and not yet closed and you just look at how this is ramped up this year, I think one can assume that that business will continue to add profits next year.

And I appreciate the disclosure, I am just trying to understand the schedule. It says, sales year-to-date the price, I think it is 80 million roughly that's the total sales price that was sold gross.

Of those units closed, of those 521 units closed that is the sales price of those units.

And the sales price into your TRS implicitly should be less the 15 million?

You may be confused. That's the sales price. That's what we sold these units at.

I’m saying if I back out the 15 million that would be the transfer price, $65 million?

There's also incremental capital cost that would have been committed on the property to renovate, et cetera, that property. The difference is some of the gain that represents the difference between the Company's basis and what it transferred to the condominium to sell the division at is -- remains in the gains and losses on discontinued properties and that it added back to FFO -- added back to create FFO I should say. The only thing that stays in FFO is this net amount which is the gain over the basis established after the property is transferred to the condominium group.

So if I was trying to get a feel for what the transfer prices were, what would be the average cap rate on the transfers during the year? Your average for dispositions was 6.4% I see year-to-date. Would it be consistent with that? Above? Below?

No, we have actually sold properties to our condo group in the mid-5s. Some of the Chicago deals have been closer to 6, but the other properties have been in the mid-5s. They have been through the average that we have sold to third-parties.

Remember, the average age of the properties we have sold is probably 20-years old to the TRS.

Obviously, it's something much lower than that at the end of the day after it sold to the end-user.

I'm not sure I understand that.

Your cap rate -- your look back on the sales to the end-user and you said 10.4% was your IRR on sales year-to-date. But let's say just on the condo sales once they are sold to the end-user have you looked at the IRRs on that activity?

We have not. Those IRRs I have given you are solely those properties that we have sold to third-parties.

Then, lastly I guess on the Bain consulting, can you give us a little bit more clarity on what exactly, if it's not software implementation what exactly it is that's causing the potential 1% bump?

It's really putting in a disciplined pricing structure. Historically we have left it to our sites and our regional managers to set pricing in the field. They do not all have sufficient skills to do it on a consistent basis. What they have helped us do on the pricing side is establish a centralized group of people that are trained in yield management and pricing. And we've been hiring people out of places like the airlines, as well as the car rental agencies that understand pricing dynamics. And what they have helped us do is develop a model that we used to put data in effectively and come up with pricing.

Now, what it does not do automatically is delivering the pricing to the property automatically. What is happening is that our analysts are reviewing the data as it comes out and then they are putting together a recommendation and sending it to the property in IRF. So it is a somewhat manual process with some automation to it and we are continuing to evaluate completely automated approaches to that.

So that will be the centralized nature of it where you're doing it all in Chicago, if you will? And then sending prices to each individual property on a weekly basis, or something like that?

That is correct, on a weekly basis. Our interim solution, which we put together with Bain, is scheduled to be a once-a-week pricing model. If you go to an automated pricing model you can do it once-a-day, so that's really the difference. We're going to compare both approaches and see which ones give us -- if the cost benefit is there to move to an automated model, which would be a lot more expensive.

So that's not off the table yet?

No, not at all. We will continue to evaluate.

Last question was just on the acquisition after the end of the third quarter in New York, what's the growth assumption implicit in the 5.5 cap rate?

We've got -- well, it's interesting, that asset has got a tax abatement on it that sort of moderates and goes away over time. When we're talking about rental increases there of 5 and 6% early on because we believe that there's some lift there because of some of the other units that are being taken off market down there, the NOI will not grow as quickly as one would expect because of the change in the tax abatement. That's why we think that that cap rate is a little bit higher than what one would have expected in that market place today.

David Harris, Lehman Brothers.

David, I wonder if you could just elaborate a little bit more on, I think it was Bruce's suggestion that you are going to be ramping up capacity for development on the balance sheet?

We have come to the conclusion that that is a core competency that we ought to have in this Company as we move this business forward. In no respect do we believe that we will not continue to do joint-venture developments with quality partners around the country, we just do believe that in some markets it makes sense for us to have this capacity ourselves. And Mark Tennison is in the process of trying to put a team together to do that. And even in those markets I would expect that we would be doing things for our own account, as well as doing ventures with partners.

Now, I may not be able to get this -- any idea out of you at this stage, but are we talking about substantial increase in terms of the total size of the project whether it's on balance sheet or with joint-ventures into '05?

Now, my expectation is that the total amount of development that we're going to be doing in any one year will remain -- or close to what has sort of been our high watermark previously, which was 4 or 500 million and maybe go up modestly from there. It's just a question I think of how much of that market share will belong to partners and how much of that will be on our own account?

So the Chairman has not had a large change of heart here?

The Chairman wants us to be disciplined and measured.

One final question from me, on the retirement of Michael McHugh, who has been a long-standing servant of the Company in the Equity group, can we expect any additional cost there? I seem to remember a couple of years ago there was some substantial retirement packages in place for the prior CEO?

No. You should not anticipate any major costs in terms of that.

Andrea (sic) Rosivach, CSFB.

My questions have been answered. Thanks.

Rich Anderson, Maxcor Financial.

Assuming the condo sale business is sort of a finite window of opportunity, are there any costs that you might have to eventually write-off in the process of creating this division?

No. The costs that are being capitalized are going directly into the units, into the properties and we're expensing all of the additional overhead in G&A costs, Rich. There would not be a charge for any particular unless we got to a point where we put a lot of money into a property and then couldn't do a conversion on it, we felt like there was some sort of an impairment.

The only other thing that could potentially be a charge somewhere down the road is if there is some litigation or something from one of these condominium associations. But to sort of wind the business down wouldn't be a charge because we're not currently really capitalizing any of those expenses, those casuals are being expensed on a real-time basis.

With regard to getting to the process of getting to the point where you sold off all the units within a building, how is it that the building is managed after that? Does the EQR participate in property management for a condo building or do you --?

We turn that management over to a third-party manager with experience running those condominium associations.

Okay. And turning this last question to Bain, you mentioned the pricing and the $4 million of costs to create the centralized system and yet now you're also considering some pricing software. Are we to assume then that you would just sort of scrap all the work put in to create the centralized system if a software package started to make more sense?

We wouldn't scrap it, but it would be adjusted to -- even with the software package it takes resources and you just have to redirect them. And that $4 million run-rate would probably not be a whole lot different if you had an automated source. The automated source gives you more pricing on a more regular basis, but it doesn't necessarily reduce the costs. You have an increase of IT costs, as well as you still have staff requirements to do it. They are both centralized processes.

David Shulman, Lehman Brothers.

First question I have is in buildings that you have owned that you have converted, what percentage of the tenants who were sitting as tenants ended up buying units?

About 10 to 15%.

Next question is since the conversion business looks profitable, where on the income statement do we find the taxes paid by the TRF?

We've not paid taxes because we've been availing ourselves of some net operating losses that we've had. And I will tell you that when those taxes are starting to be paid then we'll reflect that on that schedule that tied all of that condominium activity together.

So essentially you are saying is that you've got carry forward NOLs, so this is basically a tax-free thus far. When do you expect to cross over and have that activity start paying cash taxes?

Well, This is Donna Brandin. We're in the process of rolling forward our 2004 tax return, so we don't have a final number on the NOLs. What I would say is that we would expect, based on the numbers that we're seeing on a preliminary basis that 2005 we would be able to protect the gains relative to the condo sales for the most part in 2005.

I'll also add to that, David, that the analysis that we do, the financial and profitability analysis that we do on all these condominiums is on an after-tax basis.

Next question -- is the transfer price the same for tax as it is for GAAP?

Yes.

Steve Sakwa, Merrill Lynch.

On some of the costs that you talked about in terms of saving, my first question is are some of the things like Bain, are those expensed as they go or because they're working on kind of longer term systems projects, those expenditures are capitalized?

They are expensed.

They are expensed. Okay.

They're expensed in the G&A. If you see that increase, that's really Bain.

And when you talk about the procurement savings next year, I assume those are really items more related to CapEx and so savings there may not actually kind of flow through at FFO, but maybe more of a reduction in CapEx?

It's a mix. There will be operating expense impacts, as well as capital. In terms of economic values it's hard to say right now.

No, I understand it is real savings, but it may not actually all sort of show up on the P&L.

That's correct.

Jordan Sadler, Smith Barney.

One quick follow-up. How much overhead has been capitalized year-to-date?

In the condo group?

In the condo group and together with development as well would be helpful.

We've got about -- I can't tell you year-to-date. We've got a budget of about a couple million dollars on the development side -- development business that gets capitalized into our individual development transactions, and there's nothing, no overhead on the condominium side. That's expensed as occurred.

How about capitalized interest for the quarter?

Hold on. About $10 million.

For the quarter?

Year-to-date.

Chris Pike, UBS.

Quick question for Bruce and Gerry, please chime in. Bruce, in the beginning of your comments you referred to the soft patch. Question is -- is it reasonable to assume, especially given some of your comments in the past with respect to a lag in apartment fundamentals, that we really haven't seen that soft patch manifest itself in apartment fundamentals and it still may be a month or 2 in the future?

I would say that business is not as robust as we would have thought it would be right now. It's good. As I mentioned we were --16 markets quarter-over-quarter were positive compared to 12, 3-months ago, so that's all good. But we’re not seeing that same growth that we would have anticipated a year-ago in terms of -- we would have thought we would be coming out of this in November being much stronger than we are. It's good but it could be stronger.

And we are continuing to see for the last 3-months of the year, including October, we're seeing an increase in the rent collections every month. So it's still positive. We're seeing some deterioration in some other income areas, but for the most part I would tell you that the revenue -- that the rental piece of the puzzle is moving in the positive direction month after month.

But it wouldn't be unreasonable to assume that the soft patch really hasn't fully manifested itself. And going into Q4, which is seasonally a weak period there can not only be seasonally weak results, but also a bit of an overhang from a weaker-than-expected trajectory going into the second part of the year?

I would not say that's true. I would tell that although it will soften from where it is now like it does every year, it's still going to be above previous years. So on a same-store basis you will definitely see an inflection -- a continued positive inflection there.

Craig Leupold, Green Street Advisors.

David, following on the question on the condo activity you indicated that it's an after-tax analysis. I'm wondering to what extent the volume might be higher today and in '05 as a result of the NOLs being in place and might we see once those NOLs shift, a reduction in condominium activity?

No. What I said, Craig, is when we do our analysis of a conversion, when we sit in an investment committee and talk about that we look at that after-tax, notwithstanding the fact that that particular conversion may benefit from a NOL. We believe that these deals are still making significant sense for us on an after-tax basis.

So the NOL at this point is just an added benefit?

I believe that that's the case. Yes.

What's the basic source of those NOLs?

The basic source of the NOLs is predominantly due to the losses we have had at the Equity Corporate Housing, as well as some losses associated with businesses that we have sold in the past.

There are no further questions at this time.

Great. Well with that we just want to reiterate that business is getting better. We're feeling we think we're organized. We really will show some good improvements over the next few years. We rejiggered the portfolio. We think that in terms of the balance sheet we've got a lot of capacity and we're looking forward to this upturn as it unfolds. So we look forward to seeing some of you at NAREIT in a couple weeks. If you have any questions please call John or Donna or myself. Thanks.

Ladies and gentlemen, this concludes today's conference. Thank you again for participating. You may now disconnect.