住宅地產 (EQR) 2004 Q4 法說會逐字稿

Good morning. My name is Marvin and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Equity Residential fourth quarter 2004 earnings 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 question during this time simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you.

Mr. McKenna, you may begin your conference.

Thanks, Marvin.

Good morning and thank you for joining us to discuss Equity Residential's 2004 results and outlook for 2005. Our featured speakers today are Bruce Duncan, our President and CEO; Donna Brandin, our Chief Financial Officer; David Neithercut, our Executive VP of 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 within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

Now I will turn it over to Bruce.

Thank you, Marty, and good morning.

I want to begin the call today by talking about the progress we made in 2004 as we continue to execute our strategic plan. And then I will turn it over to Donna to discuss the results for the fourth quarter and full-year 2004, as well as our guidance for 2005.

David will then follow with an update on our investment activities, acquisitions, dispositions, developments and condo conversions. And I will conclude with an update on our progress in regard to procurement and centralizing pricing as well as how we're positioning ourselves for the future.

Equity Residential had a good year in 2004, and I would like to thank our entire team of 6,000 strong for all their great efforts.

Two years ago, we put in place a strategic plan to focus on three critical areas of our business. First, we wanted to upgrade the quality of our portfolio by both selling off older and locationally challenged assets as well as reduce the number of markets we operate in and increase our focus in higher barrier-to-entry markets. We also wanted to invest more money into our assets to bring them up to a higher level.

Second, we wanted to streamline our property management operation. At that time, we had four different operating divisions and each one was doing things in different ways. We wanted to harness the size and scale we have, owning over 200,000 apartments and drive value by reducing costs and increasing revenues, by taking advantage of our increasing dominance in the markets we serve.

Finally, we wanted to increase our focus on the development and training of our extremely talented and dedicated work force, as well as increase diversity and thought through good corporate good governance.

We are making great progress on all these fronts. On the investment side, over the last two years, that is 2003 and 2004, we have sold over 38,000 apartment units at very attractive prices. Think of it. It is like 2 and a half[inaudible.] Most of these assets were older and physically or locationally challenged as well as being in smaller, more tertiary markets. We have taken these proceeds and invested some of them into newer products, located primarily in higher barrier-to-entry market, increasing our overall percentage of NOI coming from high barrier-to-entry markets to over 57 percent today.

We have also invested money upgrading the quality of our remaining units.

Last year we transformed our development oversight group into a full-service development operation, focusing on building quality products in high barrier-to-entry markets, both by -- both on our own and through joint venture.

Finally, our condo conversion group did an outstanding job in 2004, selling almost 1,000 units and making a nice contribution to our FFO. We expect this group to continue to be a good contributor to our growth in the years to come and it continues to demonstrate the underlying value embedded in our portfolio.

In terms of our property operations, with the announcement today, we will have consolidated the four divisions into one, with Fred Tuomi becoming president of the group. Fred is an outstanding leader and has focused on implementing best practices throughout the organization. We are bringing greater focus on our operations by becoming more functional.

I would like to take a moment to recognize the wonderful human being and great parter of ours, Ed Geraghty, who has elected to leave our organization as a result of this consolidation. Ed joined us almost seven years ago and has made an outstanding contribution. He has been invaluable, promoting our culture of questioning authority and leading the Eastern division. We wish him well and he will always be part of the Equity family.

In terms of our people development, for the third year in a row, we have been designated one of the top 100 companies in the United States in terms of training, and the only real estate company included in the list. We have put in place succession plans and personal development plans from my level down to the regional manager level.

In 2003, we formed a diversity council and we are seeing the benefits of its work.

Finally, in terms of good corporate governance, less than three years ago we were ranked in the bottom 40 percent of public real estate companies and the bottom 10 percent of the S&P 500. Today, we are ranked first among all of the publicly traded real estate companies and third of all the companies in the S&P 500 index. So we're making great progress on our strategic plan but there is still more work to do.

Before I turn it over to Donna, let me comment briefly on the operating fundamentals. Business is clearly turned the corner as, for the third quarter in a row, we have had positive same-store revenue growth quarter over quarter, 2004 over 2003, something we have not experienced since 2001. In fact, our same-store revenue growth for 2004, I believe, was higher than all of our competitors who have reported to date. Considering our diverse market, this is quite an accomplishment.

We are excited about our operating prospects over the course of the next few years. That being said, as we sit here today, and consistent what we stated at the last call, we continue to be cautious about revenue growth in the early part of 2005, as we have not seen much of a pickup to date.

Now, let me turn it over to Donna.

Thanks, Bruce, and good morning, everyone.

This morning, I will be reviewing fourth quarter and full-year 2004 results, as well as providing 2005 guidance. FFO per fully diluted share for the fourth quarter 2004 was $0.56 compared to $0.45 for the same period of 2003. The difference in FFO per share was attributed primarily to the following items: in the fourth quarter of '03 you will recall we had a $0.07 per share charge related to the redemption of our series G convertible preferred shares. In Q4 in 2004, we had a $0.04 charge per share incremental condominium sales.

For the 12 months ended 2004, fiscal -- FFO per share on a fully diluted basis was 214 compared to 215 for 2003. The $0.01 share per -- difference in FFO versus current year was attributed primarily to the following factors: In 2003, we had the series G redemption charge. In 2004, we incurred 15.2 million, or approximately $0.05 per share, related to the hurricanes -- Florida hurricanes, and we incurred $0.03 expense related to our pricing and procurement initiative.

The 2000 -- $2.14 FFO per share for the year was in line with our guidance provided during the third quarter conference call as well as our original 2004 guidance provided -- given a year ago, of 2.15 to 2.29, if you exclude the $0.05 impact of the Florida hurricanes.

For the fourth quarter, same-store results reflect the stabilization of the economy, as we had experienced mild growth in the fourth quarter same-store revenues of 1.6 percent versus fourth quarter 2003. The same-store revenue increase for the quarter was the result of a 29 percent reduction in move-ins and renewal concessions, as well as slight improvements in occupancy and rental rates.

Same-store operating expenses increased 3.7 percent and had same-store net NOI for the quarter was virtually flat, up .2 percent versus fourth quarter 2003. The 3.7 percent increase in same-store operating expenses was the result primarily of increased payroll, utilities, leasing, and advertising.

Sequentially, same-store results were in line with seasonal trends of slower traffic patterns. Same-store revenues for Q4 declined slightly from Q3. Same-store operating expenses declined sequentially by 2.4 percent, resulting in a positive NOI growth of 1.4 percent. The decline in costs on a sequential basis is primarily the result of reduced maintenance and grounds and the benefits of closed favorable real stale tax appeals.

For the full year, same-store results were slightly better than we previously projected. Revenue showed a modest increase of 0.9 percent, occupy for the year was virtually flat, 93 percent in '04 versus 93 percent for the prior year, but move-in and renewal concessions declined 29 percent. Operating costs increased 3.6 percent, resulting in a slight decrease in NOI for the year of .9 percent. If you recall, these results do exclude the impact of the Florida hurricanes.

The Equity corporate housing industry continues to show signs of slight improvement in an environment of moderate job growth and slower pickups in corporate relocations. ECH revenue increased 5 percent.

These incremental revenues resulted from focusing on higher value customers, increasing rates, and managing utilization. As a result of the 2004 operating loss of 600,000, it exceeded with $2.2 million over the benefits versus the 2.2 million loss in 2003. ECH paid Equity Properties $12.5 million of revenue. We will continue to monitor this business carefully, with the expectations of future improvements in line with increase in overall employment and corporate relocation.

I'm very pleased to announce that the condo results for the year were very strong with fourth quarter being the strongest quarter for the year. During this quarter, we sold 456 units, resulting in a gain of 16.4 million, versus 98 units and a gain of 2.8 million in 2003. For the full year 2004, we sold 977 units, for a gain of 32.1 million, compared to 411 units and a gain of $10.3 million.

All the gains discussed above are before the allocation of corporate overhead costs. David will discuss further this robust year for the condo group as well as the prospects for this business.

Equity continues to retain a solid balance sheet with adequate capacity flow on the -- the Company's cash flow requirements. As of 12/31/04, debt to total market capitalization was 35 percent. We plan to continue to -- our strategy of refinancing terms at as it matures.

It is our intention, based on today's market conditions, to read market the [inaudible] transaction in April 2005 at approximately secured coupon of 6.7 percent as opposed to to terminating this transaction. A termination will result in an immediate earnings charge. However, if market conditions become unfavorable, we will reevaluated that decision at that time.

At the end of the year, we had 150 million on Alliance credit. Today, we have 200 million outstanding.

In terms of guidance, I would first like to be in -- talk about same store guidance for 2005. We are projecting same-store revenue to increase in the range of 2 to 3 percent range. Same-store operating costs are projected to increase in the range of 3.6 to 5.6 -- 5 percent, excuse me, and same-store NOI is projected to be in the range of 0 to 3 percent for 2005. Although we are forecasting an improvement in same-store revenue above the level in 2004, our forecast reflects stable job growth year-over-year. As a result, we are forecasting occupancy to modestly increase from 93.3 percent to 94 percent.

The projected increase in same-store operating cost expenses is predominantly attributed to increases in four categories: Payroll, which accounts for 25 percent of our costs, are expected to increase 4.7 percent. The increase in payroll costs is primarily a result of increases to remain competitive in the marketplace, and an increase in head count to restore back to full staffing levels.

Utility costs, which account for 15 percent of our total operating costs, are expected to increase 7.9 percent, or $8 million, driven predominantly by natural gas prices.

Real estate taxes, which account for 25 percent of total operating costs are expected to increase 2.1 percent or $3.5 million.

Incremental salary and administrative costs of approximately $3 million to support the pricing and procurement initiative is also included.

We are providing FFO per share guidance for the full-year 2005 of 226 to 236. Improvement in same-store results, the sale of vacant land that David will discuss, and continued gains from condo sales are the primary drivers of this increase. The benefits are expected to be offset partially by higher interest expense as we are forecasting the Fed to continue to bring real interest rates in line with inflation. Guidance does not reflect the impact of the proposed sale of Rent.com.

For the quarter, FFO per share is expected to be $0.56 to $0.58 a share. This range incorporates a $0.03 gain related to the sale of vacant land, and excludes any potential impact of the proposed sale of Rent.com.

David?

Thank you, Donna. As Bruce mentioned, throughout 2004, we continued to execute our strategy of repositioning the portfolio and recycling capital from older assets and/or slower growth markets and into newer assets in higher growth markets.

Four years ago, we had 34 percent of our NOI coming from high barrier markets and today, we have 57 percent of our NOI coming from those high barrier markets. We've also reduced the number of markets in which we operate, and today have 29 markets with 1 percent or more of our net operating income, and those represent 94 percent of our total net operating income.

On the transaction side, 2004 was a great year to be a seller and an extremely challenging year to be a buyer. It is an understatement to say that there is a lot of money chasing the institutional quality apartments, condo conversion opportunities, and vacant land that can be developed for condominiums. And frankly, I don't expect 2005 to be any different. With that being said we had a pretty successful year in 2004.

On the disposition side, in the fourth quarter, we sold 3400 rental units for $202 million at a weighted average cap rate of 6.4 percent.

For the full year 2004, and this is exclusive of condominium sales, we sold 14,159 rental units for $788 million at a weighted average cap rate of 6.4 percent. In addition, we sold $177 million of condominium units for our own account or with our JV partners.

The apartment properties we're selling are 20-year-old assets on average and sold at an average of $55,600 per unit. Our fourth quarter disposition, those assets were sold at an IRR of 11.3 percent and for the full year, the IRR on our dispositions was about 10 percent.

The economic gain on our fourth quarter dispositions were $61.5 million, and for the full year 2004, that economic gain was $135 million.

The markets we're selling continue to be those that we've shared with you in the past. We're selling assets in southeast Michigan. We've sold assets in Kansas City, where we only have one asset remaining today. We've sold totally out of Las Vegas now. We've sold an asset in the fourth quarter in Richmond, Virginia which has removed us from that market as well, and from St. Louis.

On the acquisition side, in the fourth quarter, we bought 1,763 units for $266 million at a weighted average cap rate of 5.5 percent. For the full year '04, we bought 6,182 units for $901 million at a weighted average cap rate of 5.7. These were 6-year-old assets on average and they averaged $145,700 per unit.

We put forth our acquisition and disposition goals for 2005 in today's press release and that is on the acquisition side, a billion dollars, and will be a daunting goal. On the disposition side also a billion dollars, but as noted in today's press release, we're 30 percent of the way there with the disposition of the Water Terrace property in Marina Del Rey, California.

On the disposition side in 2005 we will continue to reduce our exposure to older assets and slower growth markets. And on the acquisition side, you know, our markets of interest continue to be those desired by everyone else in the space. These include, among others, Southern California, the Washington, D.C. area, New York metropolitan area, and Florida.

But don't forget that we operate in other markets as well where we will also look for opportunities, including Atlanta, Denver, Phoenix, Seattle and in Orlando.

On the development side, in 2004 we completed five transactions, totaling 1,567 units, for a total development cost of $345 million. Those were our 1210 Mass Avenue property in Washington, D.C., which of 144 units; our 403-unit City View property in Chicago's western suburbs; our 170-unit 13th and N property in Washington, D.C., which we elected to convert to condominiums in 2004 and where we expect to be totally sold out in the first quarter of '05.

The second phase of our Bella Vista property in Woodland Hills, California, totaling 190 units; and then the 535-unit Watermark property in Irvine, California, where we have also elected to commence a condominium conversion and where we were able to start closing units there in December of 2004.

On the development side, we had three starts in 2004. That's our 278-unit property at Union Station in Los Angeles, downtown L.A. The third phase of our Bella Vista property in Woodland Hills, California, totaling 264 units. And in Waltham, Massachusetts, a property called Indian Ridge, suburban Boston, for 264 units. And I will tell that you all the properties we've completed as well as those we're starting, we believe we're building to a high 7, low 8 percent yield today.

2005 starts, we're hoping on the development side, it would be 300 to $400 million. We're working on opportunities there in Boston, southern California, New Jersey, and Washington, D.C. We also have another 400 million or so that we're working on which would be 2006 starts in these very same markets.

Now, ironically, we're also taking ourselves out of the development business in a way, by selling some land that we tied up with Lincoln Property Company in Tyson's Corner, Virginia. During the nearly two years that it took to get that property in title, the land value to a for-sale developer far exceeded the land value for an apartment development.

So last Friday, on the very day we took this 19-acre land parcel down for $30 million, we immediately sold 6 1/2 acres to a home builder for $32 million. We're currently assessing our options for the balance of this property.

On the condo side, as noted in the supplemental information in today's press release, we've grown our condominium conversion business in 2004 and we will continue to grow it in 2005. The conversion business continues to be a terrific opportunity for us to sell our assets at premium prices, to capture additional value for our shareholders.

In 2002, we converted 115 units. In 2003, we sold 411 units. And in 2004, we sold 816 for our own account, plus 161 by our joint venture partners for a total of 977 units. And in 2005, for our own account, we hope to sell 1500 units and have 350 units sold by our partners for a total of 1850.

So as in 2004, this business in 2005 will be primarily in Chicago, Seattle, Phoenix, southern Florida, southern California, and Washington, D.C.

With interest rates where they are, and frankly, even if they increase, we believe we can continue to grow this business and we're confident that we can meet our goal of doubling our 2004 unit sales in 2005. Our target markets have been strong conversions in the past and should be in the future. And frankly, we also like the price points that we operate at and we think we can sell a lot of product from our own balance sheet in this 150 to $200,000 per unit level.

And as always, when we analyze a conversion, we evaluate first what a property could be sold for to the highest third party bidder given the current state of the market and our risk/reward analysis for a conversion is based off of that starting point. If our conversion group cannot justify a conversion from that price, we will either sell it to a third party or continue to hold the asset as a rental investment.

And I think Water Terrace is a perfect case in point. That property closed on Monday for $305 million, on a wholesale that was $678,000 a unit, more than $600 per square foot, and that was certainly not a price point that worked within our conversion business, so we sold the opportunity to a third party at what we think was a substantial premium to apartment value.

And I will now turn it back over to Bruce.

Thanks, David. Let me give you a brief update on our efforts to extract even greater value from the size and scale of our portfolio. We continue to make progress.

On the procurement side, we are working on two initiatives. First, we are enhancing the national programs for products such as appliances and carpeting, and we're creating several new national programs for products such as siding, roofing, and cabinets.

The second procurement area is that of contract services, items such as cleaning and landscaping.

We have completed two pilots, which will produce savings above our initial projections. We're in the final stages of completing the implementation of our cleaning services and we are in the process of a nationwide rollout of landscaping services which will be complete by April 15.

We expect combined savings of between 10 and $13 million in 2005, which is a combination of savings of both operating expenses and capital items and projected stabilized annual savings in excess of $15 million per year, in the currently identified product and services program.

With respect to pricing, we are well underway with two initiatives. We have designed a new centralized process for establishing rent for new customers, as well as renewal pricing. We are currently testing this in Denver, Portland, and south Florida, and are just rolling it out in Washington, D.C. and Phoenix.

We expect to see a minimum 1 percent revenue lift associated with the new process and we will have controls in place to validate results and we will be able to report back on our first quarter call how we are doing.

We are also continuing to evaluate the benefits of implementing pricing software and are comparing this against the results achieved utilizing the new centralized pricing process. We would expect to make a decision as to which system to utilize by the end of 2005.

Let me close by saying that I'm very optimistic about our prospects over the next few years. Operating fundamentals are improving and the investment demand for our products has never been stronger. We have a great team in place and have a much improved portfolio.

We are being opportunistic, as evidenced by our sale of Water Terrace for a whopping price and the sale of the Tyson's Corner land. We are also extracting incremental profits out of our portfolio, as evidenced by the continued success of our condominium conversion group. We have great value embedded in our portfolio, and it is only increasing as replacement costs, be it land or construction materials, continue to increase.

The increase in land prices, particularly in major urban markets, has resulted in a strong condo market, will lead to fewer new multifamily rental projects being delivered over the next few years, which will be very good for our existing portfolio. So with rental demand for our product increasing, even without higher interest rates, reduced supply on the horizon and incredible investor demand for our assets and a much-improved portfolio, we like our position and look forward to the next few years.

With that, let's open it up for questions. Marvin?

Ladies and gentlemen, if you would like to ask a question at this time please press star then 1 on your telephone key pad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Jordan Sadler with Smith Barney.

Good morning, I'm here with Jon Litt. I had a question -- just on your guidance, Bruce, you were talking about the procurement savings and some of the revenue pricing initiatives. Has that been included in the overlay, I guess, after the buildup of that budget?

Yes, it has and if you look on the expense side, you know, as I said, it is a combination of both capital items and operating expenses, but that has been included in the guidance.

Okay. So on the revenue side, for instance, revenues just from a pure market perspective, may be up 1 percent to 2 1/4 percent without the new pricing initiative? Would that be the right way to look at it?

We have the revenues included but remember we're not -- in terms of where we're test marketing this, this new system.

And then just on the condo sales, as this gets to be a bigger part of your business, I was just curious if you can provide us with some metric with which we can use to measure the returns you're realizing on this, exactly. Other than just gains.

Well, I guess you can look at what we're earning on a per unit basis. You know, which has been averaging 30 or so thousand dollars per unit. As I think the incremental value that we're creating beyond the apartment value.

David, it is Jon Litt Curious, and maybe you covered this, what's the status on the NOLs offsetting the gains you're making here?

Basically, what we're expecting for the current year, 2005, is that we will have enough NOLs to shelter the expected condominium gains that we're going to realize.

And it looks like your margins last year were about 15 percent. Is that a good number to assume for this year?

Yeah, but, you know, they're going -- they're going down. I expect, just because of the -- we're transferring properties at higher value to the conversion group. So unless we can continue to increase prices, those margins might slip somewhat.

And do you --

We still think there is great value there. But I don't think we will see the same margins that we've see previously.

Do you expect to just sell some of your existing assets or do you think you will build assets that will be sold as condos?

I think we could do a combination. Like for instance, we're looking at a couple of developments to date that may have a condo component to it. You know, a couple of the assets we're converting right now were built as apartments and we're converting them to condominiums. It wasn't the intent when we started out. But we have a couple of pieces of land that we're working on that may have a condo component to it. But our basic business is going to be converting our existing inventory.

And how big do you think this business can grow to. I mean, what do you think, over the next 3 to 5 years, this will be?

I think it's easily, you know, in terms of our projections for next year, of being close to 2,000 units. I think we can easily keep it at that level or maybe increase it a little bit from there.

Do you want to increase it? Or, I mean, with the --

I think it depends, Jonathan -- Jon, on what the market is. Again, our price point, as David pointed out, we're not going after the high, high end. We're going after the 150 to $200,000 price point which we think is very sustainable and we've got a great inventory, if you will, if you look at our portfolio that we think we can -- you know, a product that we can continue to do this, year in and year out. But it all depends on -- if the market continues to be good and we think at that price point it will continue to be pretty good.

A question on your acquisition disposition program. Last year it was a negative spread. I think it was about 60, 70 basis points. With the sale of the Marina Del Rey asset, do you think that will be a flat spread this year?

I sure wouldn't expect it to be a flat spread, John. You know, the Marina Del Rey cap rate really doesn't make a whole lot of sense, just because the property wasn't stabilized. Just like there is no cap rate on the Watermark property or on the 13th and N property.

You know, my fear, frankly, is that that spread will continue to actually widen. I think that if interest rates do continue to kind of tick up, that we will see cap rates move faster on our -- the properties we're trying to sell than on the properties we're trying to buy. So, you know, my expectation would be to see that actually widen as we go forward.

And that's factored into your forecast for '05?

Yes, it is.

Thank you.

Thank you.

Your next question comes from Andrew Rosivach with CSFB. Please go ahead with your question.

Hey, good morning, guys. I'm sorry, did I miss this? Did you give what the condo sale gain is implied in your '05 guidance for the year?

I don't know if -- did we give it? What is implied is about $50 million.

About 50 million. And you did you about 30 last year?

We did 32 of gains before overhead last year.

Okay. And then on the procurement issues in the G&A side, what is your year-over-year G&A? Are you getting any break because you had the consulting costs in '04?

Well, what we're expecting for 2004, if you exclude unusual items, we're going to be at a run rate around 37 to $38 million. If you go into 2005, that run rate, excluding some unusual items, will be around 40 to $41 million, which contains two components. One, an inflationary component as well as one year of additional stock option expense which is around $2 million which would put us at the full run rate for stock option expense.

And so, on a -- for 2000 and beyond, you would be expecting more in the line with an inflationary kind of increase over that 40 to $41 million range.

So -- but -- say your fully loaded was 51,236 for '04, you're probably going to be flat to even, a little bit of a break in '05?

Yeah, if you add -- if you look at '05, we're going to be at 42.5.

All in.

All in.

Okay. Got it. Thanks.

And then just -- and I think you hit this, Bruce, but the -- you know, I guess with all the work that you guys have been doing on procurement, I was surprised that you had such a big uptick in same-store expense. What you're saying is, if this stuff starts working, starts clicking, it's incremental and would lead to an improvement in that same-store number?

Yes.

Okay. All right. Thanks a lot, guys.

Thank you.

Our next question comes from Rob Stevenson with Morgan Stanley. Please go ahead with your question.

Good morning, guys. Can you talk about where bad debt's been churning for you guys as well as turnover?

Gerry Spector here. Turnover for us for the year is down a bit, 4 tenths of a point from 67.4 to 67 percent. Even though we saw turnover increase slightly in the last quarter,

I think we're just starting to push through with more rent increases and we're going to see a slight uptick there. From the point of bad debt, our write-offs have really held well. We've actually gone down from in '03, 85 basis points, down to 77 basis points of write-off. With our delinquency balance relatively unchanged, we're still carrying about 3 percent delinquent on there. But at the end of the day the bad debt write-off is down maybe 5 to 7 percentage points.

Okay. And where was the average rental rate in the fourth quarter?

The average rental rate on our conventional portfolio was $957. And then if you blend in the Lexford assets, the lower price point assets of 514, the net composite balance would be 894.

Okay. And then, can you give us an update on the Fort Lewis military housing project?

Sure, in terms of fort Lewis, as you recall, we entered into this agreement, we invested about $10 million over the last couple of years, we've gotten all of our $10 million back and we anticipate in '05 earning about $4 million a year with no investment and again we think that will continue to grow over time. We've got about 3800 units there, and you know, we're in the process of adding units and we demolish some and keep adding, so it will be probably a net add over the next two or three years.

Okay. But you're net into what you're including, what you're adding there or whatever, winds up getting you to about $4 million of NOI a year, that's growing?

Yes. $4 million of NOI this year and we have no investment in the -- we've gotten back all of our $10 million we invested initially.

Okay. And then lastly, on the development pipeline, with the level of starts that David had indicated that you guys expect to start this year, I mean is -- are we still looking at sort of 18-month construction period, or has it gotten to the point where the markets and the assets that you guys really wanted to be developing are that the construction time period especially, when you have to include the permitting and approvals and everything is going to wind up being that, you know, 400 million, that your -- 350, 400 million you start this year doesn't really start to stabilize until the latter part of '07?

There are several different questions in there, Rob. The first is, when we say start, we mean start. And I don't think construction's taking any longer, but it is taking us longer to get to the point of construction. And so I mean, years ago, we were buying property that might have been fully in title or fully zoned and we very soon after sort of working on transactions, we knew we were going to be able to start. The things we're looking at today will take a lot longer time to sort of incubate. But when we say start, we mean that is the year in which construction will commence.

And frankly, it is taking longer for these deals to get stabilized. These deals aren't seeing anything differently than what we're seeing in the rest of our market, with traffic down a little bit and so lease ups a little slower and probably a little more concessions than what we would have hoped, so it is taking longer to stabilize but no longer to actually build. But it is taking us longer to actually get to the point of being able to start construction.

Okay. And what have you guys been seeing recently in terms of construction costs and the availability to fine plan? I mean, the discussion you were talking about, about the Tyson's asset, I mean, would indicate that in the markets that you're looking at, is that any type of land warehousing is getting to be really difficult.

Again, two different questions in there. The first is certainly construction and we're suggesting that construction costs are up 15 to 20 percent. But the other real important thing is what's happening to land pricing and it is extremely challenging to find opportunities to buy property to build for income producing property.

And again, Tyson's Corner is just a classic example. For the same reasons we're having difficulty finding new land sites to buy, here was one that because we tied it up two years ago on the day we bought it, we were able to sell it at a very nice profit to a for-sale developer. Much of the stuff we're working on today which would be '05 starts and '06 starts are things that have been, you know, tied up and pricing set 12 or 24 months ago.

Okay. Thanks, guys.

Thank you.

Our next question comes from David Harris with Lehman Brothers. Please go ahead with your question.

Good morning, everyone. A couple of questions on detail for Donna, if I may. I've got a note in from the last conference call that there would be direct costs associated with the Bane advisory of about 5 million. Would that be still a good number for your '05 -- within the year '05 guidance, Donna?

No, we're expecting something more in line in the $2 million range.

Okay. And then that's it, one assumes?

Yes.

There is no run on into '06 on that?

Correct.

And then with regard to the exclusion of the rent.com benefits, you've not included within your guidance any pickup from the reinvestment of the proceeds here.

Correct.

Or is that diminimus within the context of the guidance.

Well, it's not diminimus, but basically we are owners of rent.com stock, and net exchange associated with that has some contingencies around that, and until we have definitive guidance and clarity around the fact that that exchange will in fact occur, because there are some of these contingencies, we've chose to be conservative and not include it in our guidance.

Okay. So just -- so I can be clear, you've not included it within your guidance for the year in terms of --

Or a quarter --

-- for the receipt of the gain.

Correct.

But you've also not included any reinvestment of that -- those proceeds by way of a pickup in terms of putting the money into perhaps an acquisition or development.

That is correct.

Okay.

That is correct.

And then finally, the $300 million of unsecured debt that comes due in April, if interest rates would be as they are now, and you chose to retire that debt, what charge, sort of size charge, might that result in in the second quarter?

Well, obviously it is going to be a function of interest rates at that time. The cost to terminate the transaction which we are not currently contemplating doing, would be somewhere around 25 to $30 million, FFO charge. We're not -- at this point, since we -- our advisors, our investment advisors have indicated that we can pretty much continue that transaction without incurring incremental cash costs, or economic costs to the corporation, we do not see a reason to terminate that transaction and allow it to go through its remarketing period.

If, however, we would find at that time that there would be an actual economic cost to the corporation, we would re-evaluate it and perhaps make a different determination at that point.

Okay. Thank you.

The next question comes from Lou Taylor with Deutsche Bank. Please go ahead with your question.

For Donna or David, you guys have -- you've talked about the gross gains, or I guess the overall gains from the condos before overhead and other internal allocations. What is the net that you saw in the fourth quarter and you expect in '05?

The net of the -- there's sort of the net number for '04 is what is disclosed on the condo supplemental page there, Lou, which is about $28 million. And then so the net for 2005 is about 50 to $51 million.

Okay. So those are net numbers.

Correct.

Okay. Secondly, Bruce, can you maybe talk about -- it looks like your Atlanta exposure, just as a percent of the overall portfolio, goes up in '05. Is that a conscious decision, or is that just a function of just how the asset dispositions and acquisitions are falling?

I'm sorry, I didn't hear the question. You said -- you're saying Atlanta --

It looks like your Atlanta exposure goes up next year, and is that a conscious decision or is that just kind of the net ebb and flow of things you've been buying and selling?

Well, I would say that we bought a number of things in the last year because we think the market is down and starting to come -- you know, turn around, and so we bought a couple of assets there, and we will continue to look for assets there, in terms of that market. Just as we bought some assets in Denver and Phoenix, in terms of -- as we believe the market's turning around in those markets as well.

So I would say that Atlanta, I would not expect that that NOI will go up significantly. And over time, we're going to be, continue to, you know, sell some of our older assets in that area.

So I would not, for your modeling purposes, I would not anticipate an increase in NOI in that area.

Okay. And then lastly, just, you know, Boston still looks like it's going to be a top three market this year and it still seems to be a little softer. What's your expectation for Boston in '05?

You mean -- our view is, as we said when we were visiting on your panel out in New York a month ago is, we're not as bullish on Boston as other people. We think it's going to be a a tough market. As we look back in -- for 2005, we think it will be our -- near the bottom, in terms of growth compared to our top, you know, 20 markets.

Okay, great.

Long term, we love Boston. But you know, again, it is pretty weak right mow.

Okay. Thank you.

Your next question come Steve Sakwa with Merrill Lynch. Please go ahead with your question.

Thanks. David, not to beat a dead horse on this condo stuff, but if I look at page 21 of the supplemental, you show net incremental gain of $32 million. Which, you know, foots with the 32 million that you show on page 6 that, you know, reconciles back to FFO. And I'm just -- I guess I'm wondering about the overhead that you're talking about, you know, in the net number. I guess --

You just want to reconcile those two numbers?

Well I'm trying to figure out, it seems to me that you're running $32 million, I think, through the quote "FFO calculation," but then you're talking about a net gain of $28 million.

Yes. What we're doing is we're adding back the $32 million as the gain on the condominium conversion business. But then we're just letting you know, or people know, that embedded in the operating expenses of the Company are direct costs for the condominium business, which really takes that $32 million gain and creates -- and sort of shows that it's truly a $28 million net benefit to the company.

Okay. So that these people would, in effect, disappear if you shut the condo business down, would that 3 million just -- those would be people that would be let go?

Yes.

Well, yes. I mean that is -- that is, our people who are driving that business and building that business today, for us, and doing a terrific job. But if that business were to start to slow, that that would be costs that we wouldn't have to continue to necessarily carry in the Company. So those are specific direct costs related to that business.

Okay. That clarifies it.

Just back on the Fort Lewis question, I'm just wondering, you know, given that that has been a pretty profitable investment for you, Bruce, do you have any plans to, you know, expand that business, given the number of contracts that the government may be awarding over the next couple of years?

We look at it. I mean, we are in the hunt on a couple of things but I would not in -- for budgeting purposes, plan on that becoming a big part of our business. Remember it is only 4 million -- we have an NOI of a billion dollars and this is $4 million. And it is great business, but you know, it is hard to find the contracts like this one.

No, I know they've changed in terms of economics, but there are, you know, government's got a lot of contracts going out over the next, say, three years.

Right. And we participated in a number of them.

Okay. So you've gotten -- I guess you've gotten more active in this business in trying to secure new contracts?

Yes, but I would not -- again, don't count on that being, you know, an increased -- an increased part of our business.

Okay. Okay. I think David had mentioned that construction costs are up 15 to 20 percent. And obviously, you know, rents aren't. So David, what is your projection for your development yields on the 3 to 400 million that are you going to start in '05?

We think in the high 7s, low 8s. But again, we're not buying all that land necessarily at spot market prices today.

No, but I guess with, you know, steel off and concrete up, and every material that's going into these up --

But the markets are also improving in some of these markets we're building at -- building in as well.

Right, but I would assume that the NOI of the assets isn't going up nearly as quickly as --

No, I think -- it wasn't long ago when we were building to what we thought were high 8s and now I'm telling that you we're sort of building in the high 7s.

Okay. And I guess, what were the -- I guess, the '04, maybe, deliveries and what was your yield on the '04 development deliveries?

Well, the '04 deliveries are still in lease-up. So what I'm telling you is that we would expect those to also yield in that same sort of high 7, low 8 range, depending on the individual property. But it will take some time to actually get there.

Okay. And then I guess lastly, for Donna, just in terms of your interest rate outlook, what have you assumed, I guess, in terms of LIBOR increases for 2005?

On a year-over-year basis, basically, if you look at our interest expense forecast between 2004 and 2005, on average, we expect the Fed to continue to raise rates, and it results in incremental 1 percent increase on our floating rate debt, and approximately we have 20 percent of our debt that is exposed to that floating rate debt exposure. So, call it 12 million to $13 million of incremental interest expense on a year-over-year basis, that is now higher.

Okay. Thanks. That's it.

Thank you.

Our next question comes from Asad Kazim with Reef Funds.

Asad?

Why don't you go ahead and move on Marvin.

His question has been withdrawn. Your next question comes from Ross Nussbaum with Banc of America. Please go ahead with your question.

Hi, it's Karen Ford here. Just to go back to the Andrew's question. On the -- the expense guidance you gave of 3.6 to 5 percent growth seems higher than most of your competitors. Does that include that 1 percent procurement benefit or could we possibly see those numbers tick down to a more normalized level if the procurement program provides you with the 1 percent benefit?

We think you should expect those numbers for this year.

Okay. Is there a reason why you guys are just, you know, less optimistic about where expenses are going to be this year?

I think our views of utility costs are -- we think, you know, they could be high, and you know, 8 percent, and we also think think that, you know, in terms of payroll, in terms of -- that, you know, with costs embedded in the system.

The other thing I would add is, we had a tremendous year on the real estate tax side in terms of appeals and number of appeals that got closed and our year-over-year real estate increases are the lowest we've seen in years. And so what we're going back to is somewhat of a more normalized rate for next year, too, which is driving up expenses.

Okay. Final question. Have you guys seen any effect on January's either leasing or expense side from the bad weather that the country has experienced on both coasts so far this year?

Certainly, the traffic in the northeast is down, and primarily due to weather, so we're a little bit off of what we would have forecasted in our budget for January in those markets, but that we have other markets that have been surprisingly up. So it is kind of all over the place. Clearly, weather does impact the numbers, but not -- it isn't very material. It gets caught up pretty quick by the next month. But we're starting out of the box from a revenue point of view and an occupancy point of view, pretty close to on-target, where we thought we would be.

Okay. Thank you.

Thank you.

Your next question comes from Anthony Polini with J.P. Morgan. Please go ahead with your question.

Thanks, just a few details here. For CapEx in 2005, what should we be assuming there per unit? It seems like it ticked up in the fourth quarter and you mentioned improving the portfolio a bit more.

That's correct. We anticipate the CapEx to continue on the same level that we saw in 2004. We're looking at somewhere between 950 and $1,000 a unit for CapEx.

Okay. And that's --

And continuing on probably, maybe up for another year before it stabilizes and comes down and it will start coming down accordingly, as we get all of [inaudible]

All right. Are there any EITF charges in your guidance relating to the -- I think you had 270 million in preferreds that -- to be called this year.

Yes, there are, and basically, our intention, at least at this point, is to -- because they are above market rate, to call those preferreds. Associated with that are unamortized deferred costs that would need to be written off from a P&L perspective. Net-net, the gain we receive on the interest rate savings are pretty close to what we're going to have to write off in terms of the unamortized costs.

However, on a prospective basis, you should expect to see 2006 and beyond, significant benefits associated with those for financing.

Okay. And along the same lines, the debt maturing in '05 outside of the line in the 300 million that you addressed, what is the rate on that?

That is around 7.7. We will pick about -- we will probably pick up around about 200 basis points of benefit on that, but that is going to be, you know, in September time frame, so you won't see a realized significant benefit on that until, again, '06.

Okay. Thank you.

Thank you.

Our next question comes from Craig Leupold with GreenStreet Advisors. Please go ahead with your question.

Yes. Just a follow-up to that last question. So what is in your guidance in terms of the redemption charge for first stop?

It is -- it's in the range of 6 to $7 million.

Okay. And then on the expense side, and I apologize, I know you've answered a few questions on this, I guess, you know, Gerry, what's your expectation? I mean obviously, your expenses are growing at a much higher rate thar your peers', or at least your projections are much higher for '05.

At what point are you sort of caught up in terms of payroll and such and, you know, thinking out further for '06, would you expect to get back to sort of an inflationary kind of expense growth number? Or is there still, you know, more work to be done in terms of, you know, increasing salaries or head counts or improving the properties?

Right. Well, I would tell you that this year, embedded in that -- the larger expense gain is really infrastructure we've been putting in place for pricing as well as procurement. That is going to be pretty much established through 2005. And that will stabilize and grow certainly no greater than inflation. And that will also impact other expenses that we see declining below inflation. So I would anticipate literally in 2006 we should get back not only to normalized levels but improved levels of expense in 2006.

Great. Thank you.

Thank you.

Your next question comes from Fred Taylor with Lord Abbott. Please go ahead with your question.

Yes, most of my questions have been answered but I don't have the supplement in front of me, I'm sorry, I'm away from my desk. Could you just kind of go over total CapEx for '05 including development and maintenance? You may have spoken to it. As well as total dollar amount of asset sales? I just -- you talked a lot about both of those but I didn't get the total dollars. I apologize.

Of course. On established properties, the total replacements in building improvements was $153 million. $997 per unit. That's just on the replacements and CapEx on the established properties.

Okay.

You add the CapEx that we added to our acquisition properties as well as some major work that we're doing to renovate and reposition some properties, the total CapEx was $212 million.

Okay.

Okay. And any other detail, well, you can get from the supplemental.

Okay. And total asset sales in terms of dollar amount? For '05 for condo conversions? I mean, cash generation.

Well, total dispositions for the full year were $788 million of apartment dispositions, plus $177 million of condominium sales. Not all of that 177 million was cash flow to EQR because that was done with joint venture partners. So roughly about half of that came to EQR.

Okay. Thank you very much.

You bet.

Next question is a follow-up question from Steve Sakwa. Please go ahead with your question.

Yeah, maybe I missed it, I didn't hear much discussion about the dividend and I guess given that things are slowly recovering, Bruce, I guess I would assume that the dividend would maybe be flat again in '05, but, you know, any thoughts you've got on that would be appreciated.

Well, we're going to continue to pay the dividend but I would not anticipate, you know, -- you know, we will continue to study what to do with the excess cash flow as it comes through the door, but I would not put it into your projections right now.

Well, I guess given the way -- I guess given where CapEx is running, and, you know, I guess on my numbers, I would show that you really maybe are not even covering the dividend, you know, with FFO, minus CapEx, so, I mean, is there a level or a payout ratio or something you feel comfortable trying to get to?

No, but I mean we've got a ways to go before we start, you know, thinking about raising the dividend. So I would say we think business is getting better, we're feeling, we're optimistic, we're getting, you know, different cash coming in through a number of different source, but I would say that, you know, our mission is to continue to make sure we're strong and we want to make sure we have a cushion before we start increasing the dividend.

Okay. Thanks.

There are no further questions.

Great. We thank you very much. We appreciate your support. And please call if you have any questions. Thank you.

This concludes today's conference call. You may disconnect at this time.