住宅地產 (EQR) 2005 Q1 法說會逐字稿

Good morning. My name is Miles and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Equity Residential first quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] Mr. McKenna, you may begin your conference.

Thanks, Miles. Good morning. Thank you for joining us to discuss Equity Residential's first quarter 2005 results and outlook for the year. 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 Jerry 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 assume no obligation to update or supplement these statements that become untrue because of subsequent events. Now I'll turn the call over to Bruce.

Thank you, Marty. Good morning. I want to begin the call today by talking about our progress executing our strategic plan as well as our announced succession plan and what you should expect during the transition period. Then I will comment on how the year's shaping up.

Donna will follow me and discuss the results for the first quarter as well as our guidance for the second quarter and the full year. David will then bring you up-to-date on our investment activities - acquisition, dispositions, development, and condo conversions. I will conclude with an update on our progress in regards to procurement and centralized pricing as well as how we are positioning ourselves for the future.

We continue to make great progress on executing our strategic plan focusing on the three critical areas of our business.

First, we significantly upgraded the quality of our portfolio over the last few years by disposing of older locationally challenged apartment communities as well as apartment communities in tertiary markets and focused the bulk of our new acquisitions in high-barrier gentry markets. As a result of this, our percentage of NOI coming from high-barrier markets has increased from a little over 30% four years ago to almost 60% today.

This was a major move. We are not the proxy for the national apartment market -- our portfolio quality is much higher than the norm.

Second, we have streamlined our property management operation. Two years ago, we had four operating divisions and each one was doing things in different ways. Today we have one team and we are focussed on harnessing the size and scale we have by owning nearly 200,000 apartments. This will drive value by reducing costs and increasing revenues by taking advantage of our increasing dominance in the markets we serve.

Finally, we have focussed on the development and training of our great people. We have an outstanding team of 6,000 wonderful human beings and a very special culture. With our diversity council and succession planning, which we put in place over the past two years, we are becoming even better. As part of this succession planning, I announced last month that I will be retiring in January of next year, with David becoming CEO at that time.

David has been with Equity for almost 15 years and is a world class talent. He has been CFO for ten years, and since the beginning of 2004 has been responsible for the investment side of the house. He has been a key driver of our strategic plan and will be focused this year on continuing our strategy of upgrading our portfolio. We will be working closely together over the rest of the year on all aspects of the business.

In terms of business, the year's shaping up the way we thought. Business continues to improve. If you look at our revenue metrics, they are all going in the right direction. Comparing this quarter to the same quarter last year as well as sequentially, occupancy is up, concessions are down, rental rates are up, apartment turnover is down, and delinquency and bad debt is down.

We anticipate that business will continue to strengthen over the course of the year, and that we will see the benefits of reduced rental supply as a result of the strong condominium market. This positive impact is being felt two ways.

First, the strong condo conversion market is reducing the inventory of existing rentals, and additionally, the strong condominium market has pushed up the price of land, making it difficult for apartment developers to compete with condo developers. Hence, there will be less new rental supply over the next few years. Especially at our price point. Our top performing markets include most of Florida, where we have a great portfolio of just under 30,000 apartment units and 15% of our NOI. Washington DC, Phoenix, Portland and Southern California. Our [inaudible] are Boston and Houston. With that, let me turn it over to Donna.

Thank you. Thanks Bruce and good morning everyone. As we hoped, our fully diluted share for the first quarter of 2005 was $0.74 compared to $0.,52 for the same period of 2004. The $0.74 was in the middle of our guidance range of $0.73 to $0.75. The 22 cent incremental increase was primarily attributed to the following items. We had 18 cents per share FFO gains from the sale of our rent.com. We had 3 cents per share FFO gain from the sale of vacant land. We had 3 cent incremental FFO gain from the sale of condominiums.

These increases in FFO were partially offset by, among other things, 3 cents per share in higher compensation expense due to the planned retirement of Bruce Duncan and the resignation of Ed Garrity, the former President of our Eastern Division.

For the first quarter of 2005, same-store results reflect continuing improvement in the economic environment. Same-store total revenues increased 2.4%, which was primarily the result of the 32% reduction in concessions as well as slight improvement in occupancy and rental rates. Same-store operating expenses increased 4.8%, and same-store NOI for the quarter was up 0.8% versus Q1 2004. The 4.8% increase in same-store operating expenses was a result primarily of increases in payroll and utilities, and increases associated with our pricing and procurement initiatives, which would lower expenses and provide incremental revenues. Weather-related costs in the northeast and southern California also contributed to higher expenses.

On a sequential basis, same-store revenues for Q1 increased 0.9 of a percent from Q4, same-store operating expenses increased sequentially by 2.5%, resulting in a slight decrease in NOI.

For our equity corporate housing sales and profit results for the first quarter of 2005 continues to show improvement over last year. Sales came in at just under $15 million for the quarter versus $14.6 for the same period in 2004. ECH paid $2.9 million in rents for lease units from EQR, and including this expense, ECH operated at a loss of $711,000, which was $260,000 improvement over the same period in 2004. They are forecasted to break even for 2005.

Despite - results from our condominium business in the first quarter are again excellent. During the first quarter, we sold 338 units resulting in an FFO gain of 13.7 million versus 125 units and a gain of 3.5 million in Q1 '04. The FFO gains discussed above are before the allocation of the corporate overhead allocation. David will discuss this business further in a few minutes.

Equity continues to maintain a solid balance sheet. We ended the quarter with total debt to total market capitalization of 37%. We have ample capacity to fund the company's cash flow requirements. On April 1, 2005, we entered in a new $1 billion three-year unsecured revolving credit facility which was at a lower cost and provided additional financing flexibility.

The investor demand for EQR debt was extremely strong in April. This gave us an opportunity to re-market the [inaudible] with superior execution resulting in an interest rate of 6.6%, which was below the old coupon rate of 6.7%. At the end of the quarter, we had $163 million outstanding on our line of credit and have currently $327 million outstanding.

In terms of guidance for the second quarter, FFO per share is expected to be 54 to 56 cents per share. This range does not include any additional gains related to the vacant land sales but it does include an additional 1 cent charge or reduction related to compensation expense associated with Bruce's early retirement. For the full-year 2005, we are maintaining our FFO share guidance of 243 to 253 per share.

We continue to remain comfortable with this range based on expectations of improved same-store results in Q2 through Q4, and potential for higher than budgeted condo sales and additional land sales. These benefits are expected to be partially offset by higher interest expense as we are expecting the short-term interest rates to rise in line with the forward curve for the remaining balance of the year.

David?

Thanks, Donna. Good morning, everybody.

As Bruce mentioned, during the quarter, we continued to execute our strategy of repositioning the portfolio and recycling capital from our older assets and to our slower growth markets into newer assets in our target markets which include many of the high-barrier markets. As we saw during 2004, it continues to be a great deal of money chasing institutional quality apartments, condo conversion opportunities, and vacant land that can be developed into condominiums. Nevertheless, we are on track to meet our goals for the year of both buying and selling a billion dollars of property.

On the disposition side in the first quarter, we sold 10 properties comprising 2,674 units for $425 million. That was done at a weighted average cap rate of 4.4%. Now, it's important to note that these figures include the sale of Water Terrace, which was the 450 unit luxury high raise in Marina Del Rey, California, which we sold early in the quarter for $305 million. That deal was not physically stabilized at the time and we think we sold that on 2005 numbers at about a 3.5% cap rate, and on fully stabilized numbers at about a 4.2% cap rate.

So cap rate on one off sale, that is excluding Water Terrace, was about 6.5% for the quarter. Just for purposes of comparison, the 780 million that we sold in 2004 was done at a cap rate at about 6.4%. So on the disposition side, cap rates are running about the same.

In addition, during the first quarter, we sold 338 units as condominiums for a total of $92 million. Of these, we sold 202 million -- I'm sorry, 202 units for our own account, and 136 units were sold by our joint venture partners in Washington D.C. and in Southern California. The apartment properties we sold during the quarter averaged 28 years of age, excluding Water Terrace, and sold at an average of $54,000 per unit, again excluding Water Terrace, which alone sold for $678,000 per unit.

The markets we're selling. We sold a 30-year-old asset in southeastern Michigan, two 20-year-old assets in St. Louis. We have three assets remaining in that market. We sold a 33-year-old asset in Atlanta, a 25-year-old property in Denver, and a couple of assets in which we had limited interests that remaining from our [Lexford] acquisition, one of those properties in Alabama and the other in Florida.

From an I.R.R. perspective, on an unleveraged I.R.R. excluding Water Terrace, was 12% for the properties that we sold during the first quarter. Water Terrace was a leveraged transaction. We did have construction debt on that property, and the return on our equity on that leveraged basis was about 18% on the Water Terrace transaction.

From a gains perspective, and again, this is just on the third party apartment sales only. So this does not exclude land sales and does not include the condominium conversions, was a total of $118 million of gain, and the economic gain was $86 million, about 73% of the total.

In the first quarter on the acquisition side, we acquired nine assets totaling 2232 units, $284 million. This was done at a weighted average cap rate of 5.6%. Again, to compare it to the '04 total acquisitions of $900 million, that was done at 5.7, so this past quarter 5.6 compared to last year at 5.7. The average age of the assets we acquired was 4 years old, and these assets were located in Denver, Orlando, Raleigh, Seattle and Atlanta.

We're on track to meet our acquisition/disposition goals for 2005. We're going to continue to reduce exposure to older assets and slower growth markets. On the acquisition side, the markets of interest continued to be those desirable by everyone else in the space. The usual suspects, Southern Cal, the New York Metropolitan area, Florida and Washington D.C., but certainly as demonstrated by what we acquired in the first quarter, we've got other markets in which we operate and we continue to see what we think is good relative value and we'll continue to look in Atlanta, Denver, Phoenix, Seattle and Orlando.

On the development front, we pushed back one quarter the expected completion of a third phase of our [Bella Terra] project in Woodland Hills, California, due to the heavy rains this past winter. We have increased our budget on the Union Station deal in downtown L.A. by $500,000. That's to cover the cost we incurred in getting the property successfully mapped for condos, so we created a great deal of value in that process.

We continue to find it extremely extremely challenging to find quality development sites that are not going to single family builders or condominium converters. Nevertheless, we're still working diligently on a pretty significant pipeline of new development deals, and in 2005 our starts will likely range from $3 to $400 million. All will start in the third or fourth quarter of this year, and it will be some combination of Boston, Los Angeles, New Jersey and Washington, D.C.

We also have another 400 million or so that we're working on for 2006 starts in these same markets and yield expectations on all of our projected starts, both '05 and '06 in the development pipeline are from the low 7s to the mid 8s. That's how we're looking at those development yields today.

Included in these starts in both '05 and '06, in either one, could be 288 new units at our Charles River Park property in Boston, following several years of planning and maneuvering through the entitlement process in Boston, which is no easy task. We finally received all of the approvals necessary for these additional units and detailed construction drawings are currently in process. As Bruce noted, that's been a tough market for us, we're going to closely monitor that market but there may be an opportunity for us to commence construction on those additional units in the next year or so.

The condo business is on-plan for the first quarter and is currently expected to meet our goals for the year. As we mentioned in the past, and will continue to mention, that this business offers a terrific opportunity for us to sell our assets at premium prices to capture what we think is real additional value for our shareholders.

From the information we provided in today's press release, you can see our own conversion business continues to operate at a retail sales price of $150,000 to $200,000 per unit and we like this niche in the market. It presents a great opportunity to sell these older assets at significant premiums to apartment value and recycle all that capital into newer assets in other markets in which we operate.

In fact, in 2005 and year-to-date -- I'm sorry, 2004 and year-to-date 2005, we transferred a total of 13 assets with an average age of 21 years totaling nearly 2,000 units from our balance sheet to our condominium conversion group. And based on our transaction group's due diligence as well as broker's opinions of value that we get at the time of that transfer, we believe we transferred these assets at an effective forward 12 month cap rate of about 5.6%.

Based on actual performance to date on some of these conversions and our budgets on others, our pre-tax profit when added to the transfer price effectively reduces the cap rate on those dispositions of those transfers to 4.1%. I think that's a low cap rate on these older assets. If we were paying tax on those it would be closer to four and a half, probably a little less than four and a half, but still a very, very strong cap rate effective cap rate on those units of our own that we're selling through our condominium conversion process.

Bruce?

Thanks, David. Before we take questions, let me say a few things about the progress we are making on our procurement pricing initiatives.

We are pleased with results we are seeing from our procurement program. We have secured national contracts on appliances, carpeting and flooring, and regional and local contracts on cleaning and landscaping. These programs are providing quality goods and services to our properties while generating both savings and efficiencies. We project savings of $10 million in 2005, of which 60% will be capital savings, 40% expense savings, and a stabilized annual savings in the neighborhood of $12 million. The annual overhead to administer this program is a little less than $2 million.

Our pricing initiative of providing a centralized process for establishing rents, continues to be implemented. As we have said before, we expect a minimum annualized revenue lift of 1% associated with this new process on fully-implemented markets.

For 2005, we've incorporated a revenue lift of $8 million into our guidance at a cost of $2 million. We have fully rolled out the program in Denver, Portland, South Florida, Orlando, Phoenix, and Washington D.C., and are planning to start in Dallas in late May. To date, our results are encouraging but it's too early to draw a meaningful conclusion. We are also continuing to evaluate the benefits of implementing pricing software and will make a decision as to which system to utilize by the end of the year.

Let me conclude by saying that we are well-positioned to take advantage of the improving market. Our portfolio is much improved as a result of the aggressive repositioning we have done over the last few years. We've enhanced our ability to create value by forming an in-house development group to complement our third -party joint-venture development program. Our condo division is extracting additional value out of our portfolio as we focus on converting mostly our older apartment stock, which as David mentioned, has very moderate price points. Our balance sheet is very strong , and our new $1 billion line of credit gives us great flexibility. Our dividends is secure, and most importantly, business is getting better.

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

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Jordan Sadler with Smith Barney.

Good morning, everybody.

Good morning.

Good morning. I'm with [John Litt]. Question on guidance. You've raised by about 17 cents. And I know you have 18 cents as Donna detailed from rent.com offset by 3 cents of GNA from Bruce's severance -- can you give some additional color of where the additional two cents comes from, the gap, the 18 offset by threw 3 is only 15 cents.

What we said is that what we're expecting is improved same-store performance for the rest of --

He's talking about this quarter. Are you talking about this quarter or for the year?

The full year.

Yeah. What we're expecting is improved same-store performance in Q2 through Q4, so we're optimistic about that. We're also optimistic about potential upside on the condo sales as well as some potentially incremental land sales that we expect to offset that charge.

Okay. So a confluence of a few different things. So condo sale gains could be above 50 million and same-store over-all could come in toward the higher end of the range of 0 to 3%. Is that what I should take away?

There's potential there, yes. What we're saying is included in - we're keeping guidance the same as we had before. But we have in there, you know, my acceleration is about $10 million in total. It's going this year versus what 2 would have gone in 2006.

So, effectively we raised guidance. We're doing that because we believe in terms of business getting better and we look at the condo sales. If you look at where we are in condo sales, we closed 338 for the first quarter. For the year, we were fudging about 1850. So we're less than [inaudible] in terms of where we are. So we're anticipating a pickup there. We think there could be additional land sales as well.

So your comp is going to be fully expensed this year?

Yes.

Okay. Goes away to nothing in '06?

Yes.

Okay. Just one other question. Just maybe in terms of development. Can you talk about some of the pursuits or new land that you guys may have taken down and some of the pricing that you're seeing in terms of development?

The only land that we've taken down this past quarter, Jordan, is the Tyson's corner land that we talked about on the last call that we took down for $30 million and immediately flipped about a third of that property for $30 million. So our bland basis is up. The residual of that, which is about $20 million, and frankly we're valuing that land at close to 60.. So that'd be the only change from the end of the fourth quarter of last year.

So the 300 to 400 million of starts in the second half of the year, that land, has that been tied up yet?

Yeah. Some of that land is tied up by our joint-venture partners. We're working with them to start construction. So some of that won't come onto our balance sheet until we start construction.

Okay. And I guess lastly, just one market I thought was particularly strong was the suburban Virginia. Was there any one-time items going on there year-over-year?

Just I would say, Jerry Spector here. We're seeing a continuing increase in demand there, and supply being a little more constrained. And rent growth, all those factors are, we believe, will continue to maintain a strong result for that area.

Thank you.

Sure.

Your next question comes from the line of Lou Taylor with Deutsche Bank.

Yes, hi. Thank you. Good morning. Let's see. Maybe Jerry or Bruce, anyone who wants to take it, just in terms of just traffic, the regional and local level, where are you seeing the biggest increases in traffic and which markets are really not seeing increases or maybe seeing declines?

Traffic is down slightly this year, you know, from same-quarter a year ago up very slight. What we're seeing is that walk-in traffic is down a little everywhere. On the other hand, we've got more qualified traffic coming in, a lot more pickup in Internet traffic.

So we're not really seeing, in my opinion, any of these markets any unique changes from where they've been. I think the markets that are not performing well are not as a result of lack of traffic but supply.

You have a lot of supply going in in Houston still, which is a declining market for us. When you look at Boston, the traffic is about the same but you have more supply going into the Boston area than you have some time. Primarily the suburbs I would tell you. That's where we're coming across more problems is really with the competition, not with the lack of traffic.

Same question for Donna with regard to G&A run rate, what's a good range for the year? How do you see if falling by the quarters?

Basically we're looking at here by quarter, is 17 million in Q1, 12 and 12 and 12 so 53 million for the year. Kind of the way you get there is if you take the $17 million, you back out some of these unusual performance or compensation-related expenses and you get to a number of around $10 million, multiply that by four. We've had $2 million of additional expenses that have been deferred throughout the rest of the year that didn't -- were not incurred in Q1. So that gets you to 42 million. Then you add back Bruce, which was unbudgeted and get you to the 53 million for the year.

Last question is for David. With regards to the condo activity based on your experience to date, what kind of refinement do you see yourselves making to the plan maybe for second half of '06 or '05 in terms of types of properties you put in there or regions or age or unit mix? I mean, what kind of -- how is your strategy evolving here as you just get, you know, more projects under your belt?

I guess, Lou, much of what is going to have to take place in 2005 has already - properties that have been identified. But we continue to do deals in Seattle. We've transferred some assets in southern Florida from our balance sheet to the condo group and we continue to do that in Phoenix. So I don't see a meaningful change in the markets in which we operate or the types of properties that we're looking to convert.

Would you look to maybe stretch your age criteria a little bit? Maybe go with some things that are a little bit older. Where are you testing the limits?

I don't think we're really testing the limits at all. I think what we've got is well-located fundamentally good assets that we do major renovations to. I mean, the deals in Scottsdale are generally older but they're fundamentally sound assets with new kitchens, new baths and new mechanical equipment are selling extremely well. So I don't any we're really pushing the envelope anywhere. Those older assets are well-located and these in-field markets continue to have very strong demand.

Thank you.

Your next question comes from the line of Bob Stevenson with Morgan Stanley.

Good morning, guys. Did I hear correctly earlier in the call somebody said concessions were down 32%?

Yes, you did hear that.

What is that averaging on a per lease basis?

On a per-move-in basis down from 314 to 224.

What's been the trend in April. Have you seen a continued slide there?

Yes. There are continuing reduction of concessions.

Okay. All right. What is average rent in the portfolio these days?

On the conventional assets, not including [Lexford], is $956, and if you roll in the ;Lexford] at 516 the overall blended rate is $892 per unit.

Okay. And on that subject, are we -- are you guys seeing loss to lease in the portfolio yet?

We really don't focus on loss to lease that much because rates, you know, some of the markets are accruing rates at gross values with big amortized concessions, which we're starting to look at all of our leasing net effective rent. So loss to leases in these market conditions really is not all that meaningful, frankly because we're changing phase rents whenever we need to and changes the economic occupancy immediately.

Okay. Then where was turnover trending?

Turnover is down 0.4% from the same quarter a year ago. We're seeing a downward trend, probably toward an annual basis from 67 this year, we expect it to be close to 65%.

Lastly, question for David. You said the yield you expect on the '05 and '06 starts on the development pipeline are in the low sevens to mid eights. Where are you seeing development yields falling out for the current 530 pipeline?

The stuff that's currently under development?

Yes.

About in the same range. The stuff in the midwest will trail that the low sevens but generally in that same range, generally the mid sevens.

Thanks, guys.

Thank you.

Your next question comes from the line of William Atkinson with Merrill Lynch.

Thank you. In terms of the tone of the condo market, are you seeing the condo pricing premium either going up, going down or staying the same versus that of traditional apartments?

I'm not quite sure I understand the question. We're transferring assets from our balance sheet to our condominium conversion group at what we believe is the highest third party pricing we could achieve on that if we were to sell it to someone else. And I guess what I'll tell you is in the markets in which we're doing business -- south Florida, Phoenix -- we're seeing apartment values increase at a higher rate than what condominium pricing is increasing. So we're starting to see our yields, our profits get squeezed a little bit.

Okay. That's good. And in terms of taxes, you know, we've heard a little bit about local tax assessors perhaps using inappropriately low cap rates to value traditional apartments to get at the new tax assessment. Is that anything that you're running up against and that you might be spending more time in court as a result?

Absolutely. We have had a continuing effort in this. The way we've done this for years, there's no question there is a strong focus on the assessors looking at values a lot differently. But we are litigating a lot of the increases right now and are optimistic we'll be able to keep it in check.

Thank you.

Your next question comes from the line of Rich Anderson of Maxcor Financial.

Thanks. On the topic of condos and profits, I think you mentioned 30,000 a unit was the average you were seeing for the condos you were able to sell. Where is that number today? That was the number you mentioned in previous calls?

That's about the same. If you look at the schedule that we provided, Rich, you'll see what the average has been on our own units as well as the units our third party partners are selling.

I will tell that you there are a couple of line items that are significantly lower than that. That's because there were some costs that we picked up this quarter from the fourth quarter which gives the impression that the average per unit would be less in the first quarter, but generally, we're doing about $30,000 a unit on our own product and our partners are in the 50 to $60,000 per unit.

How do assets do when they are partially sold out? How does the building do generally? And what happens if the condo window closes and, you know, your condo group, you know, makes no more sense to run that and you're sort of left with a half-condo, half-multifamily building?

That's obviously a question that we ask ourselves every single day in the investment committee when we approve these things. I guess I can't think of a better group to try and manage for-rent apartment properties than Equity Residentials. Hopefully we won't encounter that. My guess is that at some point in the cycle we will, and when it does we'll take those assets back and we'll start running them as apartments.

Again, I'm not telling you that trees go to the sky in this business. My guess is we'll have a bump in the road somewhere along the way and we'll have to swoop in and take care of it. It's not as though we're a bunch of guys who think the condominium conversion sounds like a great idea, a great way to make some quick bucks and if things go awry they're not prepared to deal with them.

I think I asked this question in the past. Let me ask it again. In terms of putting the group together, what sort of, if any, write-off could there be if the condo business just ceases to work?

Well, we've got a several million dollar or so year overhead in that business. Again, it's going to grow if we continue to build that business. And then whatever write-offs you might have to incur if you over-improved some of these assets and feel like there's some kind of impairment on that. I'm telling you, the profits we're making have been terrific, and we're going to manage this as best we can.

But I'll also tell you, I think operating at this price point at which we operate. We're selling 150 to $200,000 retail sales price and we've got $30,000 of profit embedded in that, so we're selling 130 to 170 or 120 to 170. I like that price point. My guess is that if things start to go awry, we could have a fire sale and take care of those assets and really minimize any problems that a lot of other people might experience.

Okay. The last question is on [Lexford]. Are you still excited about -- as excited as you've been in the past about that division or is it something that maybe is, you know, not as compelling to operate anymore?

[Lexford] a positive NOI of about 5% for the quarter. Revenues were up about 2.7%. Expenses were down a little over 2%. We think it's a good price point for us. We think we've got a good group running it.

Also, you know, the deals that we put to market, we're getting good prices on it. We believe that we value that portfolio is significantly more than we paid. And it was the least volatile of all of our assets during the recession that we just went through over the last three years. It helped hold up the rest of the performance. I think in great times it won't grow quite as fast as some of the other assets but will do extremely well. We're still very bullish in terms of the overall [I.R.s] on that investment.

Do you see this as sort of a long-term diversifier of your portfolio despite everything you're doing elsewhere to improve markets and the quality of our assets?

Yeah.

Sort of hold on to this forever?

Nothings forever. I would say that what we've done, we continue to prunt the portfolio to get the concentration in certain areas. We probably sold over the last three years 6,000 units or so. We do prune it. We think the portfolio is in very good shape. You know, it's been a great investment for us.

Okay. Thank you.

Your next question comes from the line of Bill Crow with Raymond James.

Good morning, guys. Stepping back, David. You had talked about if condos start to falter, you could have a fire sale. I guess that's our big issue right now is if we do start to see some of the air come out of the condo bubble, we're going to see speculators putting the assets up for sale at fire sale prices. We're going to see the units coming back and competing on a rental basis. I guess the question is, are there any markets, any particular we're worried about sub-Florida where we're seeing increased competition from condos that are putting -- being put back on the rental market?

No. I'll tell you that we really think hard about south Florida's as well, just given the amount of investor condominium purchases that are taking place down there. I'll tell you, it certainly is a lot easier for Equity Residential to operate its properties and compete as a rental property than against guys who are trying to rent a one-off asset.

So we expect that if things do go awry there that we'll see some of those units come back onto the market. I won't tell you that they won't have impact on us. I like our operating advantages against a whole bunch of one-off individual condominium units when we've got professional sales people and leasing offices and our ability to advertise over the Internet and drive traffic to our properties and compete against a bunch of dentists who's got a one-off property somewhere.

Sure, but it's not going to help rental rates across the market?

No, I wouldn't think so.

Thank you.

Your next question comes from the line of Craig Leupold with Green Street Advisors.

Good morning. Kind of as a follow-up to that last question, David, you guys track what percentage of your condos are being sold to existing residents and what percentage are maybe being sold to investors?

Yes. It's interestingly not as high a percentage to existing residents. You know, when you look at what these things are selling at, I mean, they are worth more as condominiums. In general, the properties before we do the renovations to them are being leased at a rate to residents who might not be able to qualify at the higher value at the completion of the renovation.

So you are not seeing as much of that. We do closely watch investor purchase of our properties and we do limit investor purchase in our properties. I'll tell you that in property selling in California, they try and keep investors out totally. They've got a restriction on there that people can't sell units until all of the units in the property are sold. That's sent some investors packing.

We are closely watching that as well as closely watching secondary market sales of condominium units in these markets. So we're starting to see a whole lot of units come back into the secondary markets. That's certainly going to be a warning sign to us that there could be a lot more competition out there and that's something we have to keep an eye on.

Perfect. Excluding that southern California asset, what percentage would you guess are being sold in condo markets in general being sold to investors?

For Freddy and Fanny on the financing side, I think limit the amount of investors into a property to like 30% so we're making sure we are under that.

Okay. It looks like you mentioned there's some things that sort of are compressing margins in this quarter a bit. It looks like in this quarter your margins are about 15%. Overall, what kind of margins do you shoot for in terms of putting a project into the condo business?

We're seeing 15 to 20% margins. We look at, a lot of things change between the time we agree here at a transfer price of a property and when things actually get sold out. Some of the early deals in Phoenix, we agreed on a transfer price but by the time they got regulatory approvals and actually went to market, the condo market went through the roof and they got to experience much larger margins than what had been expected.

We came back and sold a second phase to the condo group at a higher price to account for that and so those margins came down. I'll tell you, we're selling these units out and raising prices throughout and are still seeing 15 to 20% or so margins. We're watching closely.

Does your margin hurdle change as you work through your N.O.L.s?

No. No. I mean, we think even on an after-tax basis this is good incremental value to us.

Last question related to the potential land sale gains. You know, you've got 200 some odd million dollars of land for future development on your balance sheet in C.I.P. Where does the balance of the vacant land that might be sold reside on the balance sheet? The book value versus what would be the fair market value -- I'm trying to get a sense of how much hidden value there is in that land portfolio.

Go ahead, David.

There's a lot of value on that land. We're carrying value at this [Tyson] land at 20 million bucks and it's worth 60. We'll split that with our partner. There's considerable uptick in value there. That C.I.P. is not only land but that's also those deals that our third party partners are building that's on our balance sheet. That C.I.P. is the deals under construction in Southern California, in D.C., in New England, as well as vacant land.

Okay, on the vacant land that really isn't specified for development, I'm trying to think about what the impact of land sale gains might be going forward?

Again, the only land sale that I think is contemplated is the sale of the potentially the Tyson's corner land. That would be an incremental gain of about $21 million.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] We know go to the line of Anthony Paolone with JPMorgan.

Hey, guys it's Josh Bederman. First of all, Cap Ex was low in the quarter relative to what I thought your run rate would be for the year? Can you guys talk about what you are seeing there?

Not seeing any change on our expectation for the year. Typically we run a little bit lower in the first part of the year just because we don't get it in place and the payments don't occur until a little later. We anticipate hitting our budget with Cap Ex.

Okay. That was 950 to 1,000?

Yes.

Okay. And the procurement , can you go over what you were going to see in savings in revenue benefit in '05 relative to what you were seeing last quarter? It sounded like it was a little lower. Not sure it there's a change there or what's going on.

Last quarter, I think we said it was 8.5 to 14 million. Now what we're seeing.

Are you focussed on revenue or --

I think revenue. I think you guys said expenses were about the same.

Yeah. Well, in terms of revenue, we're expecting about a 1% increase in terms of revenue lift. At this quarter what we're seeing for the year, we have in our budget $8 million of revenue lift because we wanted to roll out the program for a year with all the cities. We're rolling that out. We've got about 8 cities down today.

For this year, the impact on revenue we anticipate is about $8 million. On a full run rate basis yet remains to be seen, but we're hoping for a significant increase over that when you get into the year 2006. It will be fully implemented -- our goal is by 2007 -- where you should see the real full run rate.

Okay. And then just finally, you guys should have some [E.I.T.F. D-42] charges this year. Is that about 6 to 7 million? Is that correct?

Yes, that's about correct.

Okay. Thank you.

Your next question comes from the line of Asad Kazim.

Hi guys. Two questions. First one, what's the operating profit margin, or operating margin in the portfolio post all of the changes that the portfolio has gone through versus three years ago versus what they are today? Two, why don't you guys buy stock back? Is that a function of operating leverage kind of gone from the portfolio because of what you've sold and you haven't bought back as much over the years? Are those two decisions mutually exclusive?

We look at the margins. The margins two or three years ago were over 60%.

Now it's about 59% right now, and it was probably 62 - 63% and there are a couple of dynamics there. First of all the erosion of income affects that with the increasing growth of expenses. Regardless of the portfolio type, you have the erosion of the market.

The portfolio change helps to improve that over time. If you look at blended, it's still down, even though we have an improved portfolio and probably a better price point. That's primarily driven as a result of the decline in rents and continuing increases in the expenses over the last three years.

In terms of buying, looking at our stock, we look at that every day. We are going to continue our disposition program in terms of what we do with those proceeds in terms of going out in the marketplace and buying back our stock. We take a hard look. We think our stock is good value and we also have a lot of other things we're working on in the acquisition market.

Just one final one. Does it make any sense to do kitchen and bath on the entire portfolio if it's not going condo? Or any asset that's not going condo, is it worth doing k & b if it's just going to be a multi-family asset?

That's a real interesting question, Asad, and one we're looking at across a lot of properties in our portfolio. What we're finding is in non-condo commodity markets, we're not quite seeing the return that we think is justified given the strong prices that we think we can sell these older assets at. When you take that sort of value, add to it the fully loaded costs of doing the up- grade and in some of these markets, you're pushing close to replacement costs which you could almost buy much newer or nearly brand-new assets at. That number's not adding up to us. There are other markets that do make sense and we're doing that in an asset in San Diego. We've got an asset in B.C. which we don't think is a condo property, but one that we do think will profit from a rehab, so we are looking at it, but it's not going to be quite as extensive as I know what other people in the space are contemplating.

Thanks a lot.

Your next question comes from the line of [Kerry Caligan] with Goldman Sachs.

I'm here with Dennis Malony as well. Just on the billion dollars buy and sell over the course of the year, what kind of spread should we expect? It looks like absent the Water Terrace transaction, which was unusual, that you were, you know, buying 5.6, selling 6.5. Would you expect that spread to continue over the balance of the billion dollars?

I don't see any reason why it would change materially but you never know. A lot of that will be a function of where we decide to buy and sell. So we've always budgeted closer to a more historical range of 125 or so basis points. I think we were as low as 80 a year ago and now we're 90 on the quarter. So I think you have to use your best guess. Somewhere between that and historical levels of 125 basis points would probably be appropriate.

And secondly, a development, you talked about the 300 -400 million of starts this year and next, as you look out beyond that, do you expect that to pick up significantly from there or is it kind of a steady state?

It's too early to call. Just you're looking at where land pricing is in the markets in which we want to be and what condominium converters and single family home builders are willing to pay. We're going to have to work awfully hard to maintain that sort of level. I think I'd like to get the number up, but it's going to be a challenge.

Thanks, guys.

Your next question comes from the line of [Richard Pauley] with A.B.P. Investments.

Hey, guys. Maybe I missed it, but on the second quarter guidance, what was the guidance for the condo gain? You said there was going to be no land sale gains.

Approximately $10 million. So 3 cents.

3 cents. Okay. And then again, the one cent charge what was that that you -- could you remind me of that? You said during the quarter you're going to see another 1 cent charge?

That has to do with me, Rich, over the next three quarters, we're going to be taking about one cent, about $2.5 million --

For the balance of the remaining three quarters, it would be about one cent?

Each of the three quarters, one cent , about a penny.

Let me just explain that. When Ed Garrity left us, everything that he had got was recognized in the quarter in which he left. With Bruce being here throughout the year, those things that will now accelerate vesting that would have vested and been charged the p&l in future years now get accelerated into this year but it will be ratably throughout the year.

Right. One other question, big picture, apparently there's a sizable portfolio on the market. Can you share your thoughts on that portfolio with us?

I think it had some good properties in good markets and some other properties that aren't that attractive to us. For our interest, it will be piecemeal.

Okay, thank you.

And your next question comes from the line of Jordan Sadler with Smith Barney.

Sorry, guys. Just a quick follow-up. Not to beat a dead horse on the condo business, but David, do you have or do you track the percent of down-payments that you're receiving on the condos and maybe the financing mix that you're seeing in five-year arms or floating versus fixed?

Yes. I'll tell that you it's probably not all that dissimilar to what's happening in starter homes of single-family homes throughout the country. There's a lot of very low down-payment and a lot of short-term variable rate financing. I mean, I don't think it's a whole lot different than what has sort of been moving much of the single-family home business over the last three or four years.

And it hasn't changed over the last couple of quarters at all?

I don't believe so, Jordan. I don't -- that's kind of fine-tuning over that last few quarters. Generally, we're watching it. We've not noticed any change. Again, it's not huge down-payments.

Now, it might be different than the stuff we're selling in D.C. and Southern California where you're talking about 500 or 600 a foot. That's a different price point. Generally in the product that we're selling, it's low down-payment and shorter terms or variable-rate financing.

On average, 5 to 10% did you say?

I'm sure.

Okay. Down, right? 5 to 10% down?

Yeah.

Thanks.

[OPERATOR INSTRUCTIONS] There are no further questions, are there any closing remarks?

We appreciate your support. You look back and we think it was a very good quarter. We think we're on track. We think the condo business is extracting greater value out of our portfolio. We feel very good about the organization and what we're doing. When you look at business, again, by almost any measure, you know, business is continuing to improve. We look forward to it improving throughout the year. Thank you very much.

Ladies and gentlemen, we do appreciate your joining us today. This does conclude our Equity Residential first quarter 2005 earnings conference call.