住宅地產 (EQR) 2005 Q2 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Equity Residential second quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you, Mr. McKenna, you may begin your conference.

Thank you. Good morning and thanks you for joining us to discuss Equity Residential second quarter 2005 financial results and outlook for the year. Our featured speakers today are Bruce Duncan, our CEO; Donna Brandin, our Chief Financial Officer; David Neithercut, our President; 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 assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn it over to Bruce.

Thanks, Marty and good morning. As you can see by our numbers, we had a good quarter. As we anticipated, business continues to improve across almost all of our markets. Occupancy is up, winter rates are up, and concessions are down. And we believe that this trend will continue throughout the rest of the year, which it hasn't done in each of the last three years. That is for the prior three years, we've had a slowdown during the summer months. This summer, we're not experiencing any such slowdown.

The apartment industry is getting ready to have its time in the sun as the perception of the value proposition of owning versus renting is starting to tip in favor of renting, given the significant increase in single family and condominium prices over the last few years. Think about it. In the face of annual double-digit increases in housing prices in many markets, our rents, on average, are not yet back to the levels they were in 2001. Rents are growing, but they have room to grow more. The apartment industry is also the beneficiary of reduced supply as a result of the significant increase in condominium conversions throughout the country. And the inability of apartment developers to economically compete with condo developers for new development sites.

More importantly, for us here at Equity Residential, we believe that the work we have done executing our strategic plan is starting to pay dividends. Over the last few years, we have significantly upgraded the quality of our portfolio by disposing of older, locationally-challenged apartment communities as well as apartment communities in secondary markets, and focused the bulk of our acquisitions in new properties, located in high-barrier to entry markets. As a result, our top 20 markets now represent over 82% of our net operating income, versus 65% in 2000. Our percentage of net operating income coming from high barrier markets has almost doubled to just under 60% over the same period. This is a significant change. And this is before taking into account two recently announced transactions which total over $1 billion are contracted by the Riverside apartments in New York City and Harbor Steps in Seattle. And David will talk about these investments along with the rest of our investment activities a bit later.

Our same-store revenue was up 3%, second quarter '05 over second quarter '04. If you break that number down further and look at our 20 largest markets, our revenue growth was 3.4% compared to 1.7% for our smaller markets, where we continue to reduce our exposure. Our portfolio while very diversified nationally is much better located and better quality than the norm. So, please don't think of us as a passive national index or proxy. Our best markets, in terms of revenue growth for the second quarter '05 versus second quarter '04, were the entire state of Florida, led by Orlando with a 9% increase. Phoenix, D.C.'s suburban Virginia, Portland, and the New York Metropolitan area. Our laggards continue to be Houston and Boston.

Let me now turn it over to Donna to give you a more detailed blow by blow of the second quarter as well as guidance for the third quarter. Then David, who at the end of May was promoted to President, in keeping with our announced succession plan, in which I am retiring as CEO at the end of the year, will bring you up to date on our very active investment activities, acquisitions, dispositions, developments, and condo conversions, and I will conclude with how we are positioned for the future. Donna?

Thanks, Bruce and good morning. For the second quarter of 2005, Equity Residential earned $0.44 per fully diluted share versus $0.39 per share for the second quarter 2004. Funds from operations for the quarter were $0.56 per share, compared to $0.56 per share for the same period last year. This was at the high end of our guidance range of $0.54 to $0.56. In the second quarter 2005, sales of condominiums resulted in a contribution to FFO of $16 million, or $0.05 per share, versus a contribution of 5 million or $0.02 per share last year. The $0.03 positive variance in FFO from condominiums was offset by the fact that last year in 2004, Q2, we had a $5.5 million, or $0.02 per share gain in the sale of vacant land. Again this year, we had $0.01 dilution associated with additional shares outstanding.

For the second quarter 2005, same-store results continued to reflect improving economic environment. Same-store revenues increased 3%, which was the primary result of a 1.1% increase in rental rates, a 44% reduction in concessions, as well as a slight improvement occupancy, up 10% -- up four-tenths of a percent to 94.1%. Same-store operating expenses increased 4.9% and same-store NOL for the quarter was up 1.8%. The operating expense increase was attributed to predominantly utility costs of 8% and higher maintenance and turnover costs. The higher maintenance and turnover costs were incurred to opportunistically take advantage of strong markets to ensure the Company had adequate ready product for lease. As a result, units increased 20% since the beginning of the year.

Expenses continued to trend toward the higher end of the guidance and are expected to continue to do so throughout the year. However, we expect the on site property costs to be 3.5 to 4% for the full year and off site property costs, required to support pricing and procurement initiatives, will keep us at the upper end of the range. At the same time, revenues are also expected to be at the higher end of the range in that we are expecting continued improving revenue trends and relatively -- to remain relatively strong throughout the year. Rental inventory continues to be absorbed by conversions to condominiums and the economy continues to improve, which should support positive revenue trends. On a sequential basis for the first quarter 2005 to the second quarter of 2005, same-store revenues increased 1.9%. This was driven by 0.7% improvements in occupancy to 94.1%. 15% lower concessions and 0.3% improvement in rental rates. Operating expenses increased 1.4% and NOL increased 2.3%.

Let me turn my attention to corporate housing. Equity corporate housing continues to improve and to be slightly profitable for the year and will contribute $14 million of revenues to Equity Residential. On the condominium side, David will go into more detail, but the results from our condominium business in the second quarter were again excellent. During the second quarter, we sold 434 units, resulting in a contribution to FFO of 16 million versus the sale of 188 units and a contribution to FFO of 5 million last year in Q2. The FFO impact discussed above are before the allocation of condo overhead costs.

We talked a lot about systems so I'm going to spend a little bit of time talking about some of our system technology investments. As you know, we've been talking to you about pricing and procurement initiatives we are working on that will yield significant revenue enhancements and reduce expenses and capital expenditures effectively. In order to more effectively implement these initiatives, as well as provide additional benefits which I will discuss later, we are in the process of implementing a new centralized computer operating system. First, in conjunction with our pricing initiatives, we're in the process of putting in place a yield management system. We have discussed with you in previous calls the fact that we've been testing the system, which will enable our property executives to have real-time data on each of our properties.

Second, in conjunction with our procurement initiative, we will be implementing a system to automate the tracking of operating and capital costs. This system enables the Company to separately track costs and electronically purchase appropriate products at each property down to the apartment unit level. This will enable the ability to more effectively manage costs as well as ensure compliance with third party vendor programs. In addition, it will facilitate the efficient ordering and payment processing with vendors. Third, we will be implementing a new centralized system called MRI. This system will enable us to fully integrate the benefits of pricing and procurement initiatives and relate to software technology. The new system is a centralized database developed by Intuit Real Estate Solutions, a dedicated provider of systems technology to the real estate sector. Currently we have been using our own internally-developed system, which was implemented in 1999. However, with the existence of superior technology available and thoroughly tested, which was not available before, we believe our existing systems should be upgraded in conjunction with the rollout of our pricing and procurement initiatives. Full levels of implementation is expected by the end of 2006. An additional benefit of this platform is that it would also facilitate transactions with our customers. Some examples include leasing, making payments online, and the establishment of a resident portal.

Now, let me discuss how the cost and related benefits associated with the above system enhancements will impact FFO and capital spending for the remainder of 2005, 2006, and beyond. The total capital spending associated with the system project is $16.5 million. This cost will be amortized over a seven-year period. We will incur $0.01 per share of additional expense to support the project in 2005, which is included in our guidance. In 2006 and 2007, the expenses to support these initiatives will be $0.03 per share. However, we are expecting offsetting revenues and cost benefits of $28 million or approximately $0.09 per share in 2006 and approximately $33 million or $0.10 per share in 2007. In addition to the P&L benefits, we will also realize capital savings related to the procurement project of approximately 6 to $7 million per year.

Now, let me turn my attention to the balance sheet. Equity's debt to market capitalization at the end of Q2 was 36%. During the quarter, we paid off $120 million, 7.25 bonds as well as redeemed $80 million of preferred stock, with interest rates ranging between 8 and 8.5%. As a result, the bank line balance increased to $428 million at June 30.

I will now turn my attention to guidance for the quarter and for the year. Third quarter and the year. I'd like to wrap up my remarks by addressing guidance for the third quarter and the balance of the year. Today, we provided guidance for the third quarter to be $0.55 to $0.57. Included in this guidance is approximately $0.02 per share of additional expense related to the early termination of debt and of preferred stock redemption. For the full year, we are maintaining our FFO per share guidance at 2.43 to 2.53. Our same-store performance is slightly ahead of our original expectations, our condo gains are also higher than budgeted. These benefits are being offset by $0.03 related to Bruce's early retirement, $0.02 related to early terminations of debt and $0.01 related to additional share dilution due to higher than expected stock option exercises. I'd like to now turn it over to David.

Thanks, Donna. Good morning, everybody, as Bruce mentioned in his remarks, during the quarter, we continued to execute our strategy of reposition the portfolio and recycling capital from our older assets and our slower-growth markets into newer assets in our target markets, which include many of the high barrier markets. As we've seen for quite some time, there continues to be a great deal of money chasing institutional quality apartment deals, condo conversion opportunities, and vacant land that can be developed for condominiums. Nevertheless, because of access to several offmarket deals that I'm going to talk about in just a minute, we have increased our expectations for acquisitions for the year up to $2 billion, we have increased our dispositions goals to $1.4 billion.

By off market, I mean deals that were not shopped to any other buyer. These sellers came directly to us as a result of our relationships that we've built up over time and due to our reputation of doing what we say we will do. These opportunities will significantly further our strategy of allocating more capital to higher barrier markets, where we think we will earn a higher total return on our invested capital.

So, starting with dispositions, in the second quarter of 2005, we sold 14 properties, comprising 3,320 rental units for $219 million. And these were sold at a weighted average cap rate of 5.9%. That compares to 6.1% cap rate in the first quarter, excluding the Water Terrace property. In addition, during the second quarter we closed 434 units as condominiums for a total of $106 million and of these, we did 308 for our own account and 126 were closed by our joint venture partners. The properties we sold during the quarter average 19 years of age and sold at an average of $66,000 per unit. We sold assets in Dallas, Tulsa, Charlotte, St. Louis, Memphis, and Raleigh and the sales that really helped narrow the spread between our disposition and acquisition weighted average cap rates were a deal we sold in Southern California, which was 21 years old, we sold that deal for $176,000 per unit at a mid-4 cap rate. We sold a stick-built 16-year-old property in South Florida for $110,000 per unit at a mid 5 cap rate. And a 17-year-old asset on Boston's south side for $165,000 a unit for a low 5 cap rate.

The IRRs on the dispositions for the quarter were 10.3% unleveraged and the gains on these sales, these are on the third party apartment sales only, they do not include land sales or the condominium conversions. These gains were $78 million, of which 27 million, or 35%, represented the economic gain on those dispositions.

On the acquisition side in the second quarter, we acquired 11 assets, totaling 2,642 units or $446 million on a weighted average cap rate of 5.6%. These assets averaged three years of age and required -- were acquired for an average price of $170,000 per unit. Two of these assets were in Southern California, one in the Inland Empire and one in Los Angeles. Four assets were acquired in Florida. Two in Jacksonville and two in Palm Beach County. We acquired three assets in Seattle. One in New Jersey. And one in Waltham, Massachusetts.

As I mentioned previously, it's extremely competitive to get acquisitions done. This far we've managed to meet our goals by being creative and opportunistic. We've acquired several properties with owner as secured financing that really knocked a lot of people out of the box, having the ability to buy those assets. We also acquired a couple of assets while they were still under construction, with the sellers having a contractual obligation to complete the job. As I mentioned previously, we changed our transaction goals for the year, increased acquisitions from $1 billion to $2 billion and increased our disposition goals from 1 billion to 1.4 billion. And these goals changed due to a couple of terrific opportunities to acquire what we consider to be world-class assets in several offmarket transactions. And again, these opportunities -- these will significantly further the strategy of allocating more capital to our high barrier markets and they will also enable us to accelerate our disposition goals as we exit certain markets and/or assets that we think will underperform going forward.

The first of these off-market transactions was the 140, 160, and 180 Riverside Boulevard buildings in Manhattan's upper west side. These are located between 66th and 69th Street. These represent 1,325 apartment units, 40,000 square feet of retail space and 424 parking spaces. Our contract price for that purchase is $816 million and we believe we're buying the apartments at about $585,000 per unit or $730 per square foot and we believe that there are comparable trades taking place in the market today for similar properties at 900 to $1,000, if not more, per square foot.

As many of you know, this investment opportunity came to us directly from a partnership of private buyers who are under contract with a group of Chinese investors to acquire not just these three buildings, but in addition, all the vacant parcels south to 59th Street. Two of these three buildings we will acquire, those being 140 and 180 Riverside Boulevard, are subject to requirements that they be operated as rental properties for 20 years following completion. And have 80/20 requirements. That is 20% of the units must be leased to households earning no more than 50% of the area median income. So, the 140 building can be converted to condos in 2022 and the 180 building can be converted in 2019. The 160 building is not subject to this restriction and, therefore, is able to be converted to condominiums immediately.

We have considered the immediate sale and conversion of the 160 building and we've also considered a co-investment structure for the 140 and the 180 buildings. However, at the present time, we plan on acquiring all three buildings for our own account and intend to operate them as world class apartment assets. We will never say never to any of these other options, but at least for the time being we have elected not to pursue them. This is a very complicated transaction involving a lot of different parties and a lot of moving parts. And we expect to close some time between the end of August and the end of this year.

The second off-market acquisition scheduled to close in early September is the Harbor Steps property, which is located in the heart of downtown Seattle, just west of the CDB and south of Pike's Place market. Harbor Steps is 758 apartment units, 83,000 square feet of retail and has 635 parking spaces. We're paying $216.5 million effectively for this property, which is about $219,000 per apartment unit but $255 per apartment square foot. And that's a cap rate of 5.7%. This property is across the street from the Four Seasons new hotel that's being constructed where they're selling condominiums there for $1,500 per square foot and across from Washington Mutual's new 900,000 square foot office tower. We're delighted about this opportunity.

On the development front, there were no new developments started in the quarter. The only changes to the supplemental page in today's press release is that because of the heavy rains in the past winter in California, we pushed back by 1/4 the expected completion of our Union Station property in downtown Los Angeles and we've increased the budget for the third phase of our Bella Vista project in Woodland Hills, in California by $470,000. And both of those changes are a result of the rains.

Look, it continues to be extremely challenging to find quality development sites that are not going to single family builders or condo converters, but, nevertheless, we're working diligently and we've got a significant pipeline of new development deals. We continue to expect that our 2005 starts will range around $300 million. All of those are likely to start in fourth quarter. Those that don't will likely start in the first quarter of '05. And those that will be in Boston, New Jersey, and Washington, D.C. We also have another $400 million we're working on for 2006 in these same markets as well as Southern California. And we have several deals we're working on which could represent starts in 2007. And our yield expectations on this development pipeline continues to be low 7s to the mid-8s.

Lastly, the condo business, as Donna mentions, this continues to produce excellent results for the Company and continues to be a terrific opportunity for us to sell our assets at premium prices and capture additional value for our shareholders. We started the year with a goal of EQ of selling 1500 units -- wholly-owned units, so, that would be in our own conversion business, as well as 350 units by our joint venture partners. We continue to be on track to convert our 1500 wholly-owned units, but based on continued strength in these conversion markets, we expect to generate higher revenues and net profits than originally projected. In addition, we've increased our expectations from our joint venture partners to about 550 units for the year. These incremental closings will produce a positive FFO variance for the full year, as well. I'd like to turn it now back to Bruce Duncan.

Thanks, David. Let me conclude by reiterating what I said at the beginning of the call. Business is getting better. And we feel very confident that this improvement will continue throughout the remainder of 2005, which will give us a great start to 2006.

We at Equity are very well-positioned to take advantage of this upturn. We have a great team of people, almost 6,000 associates who are bright, energetic, working very hard, and doing a great job. Our portfolio is vastly improved as a result of the agressive repositioning we've done over the last few years. Think about where we were a few years ago versus where we are today. Although we continue to believe in having a national scope, we are much more concentrated in larger, higher-barrier to entry markets, with much better quality. We have enhanced our ability to create value by forming an in-house development group to add to our third party joint venture development program.

Our condo division, David just pointed out, is hitting on all cylinders and extracting additional value from our portfolio as we focus on converting mostly our older apartments stock, which have fairly modest price points. This is a long-term business for us and it is a profitable business for us. Although it represents only about 1% of our existing inventory this year. We have brought more structure and functionality to our property management operation by consolidating our four operating divisions into one and focused our efforts to harness the size and scale we have by owning and operating almost 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. Our balance sheet continues to be very strong and this gives us the financial capacity to commit to acquisitions such as the Riverside Apartments in New York City. And finally, our dividend is secure and paid out of our cash flow. With that, let's open it up for questions. Operator?

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

Good morning, everybody. I am here with Jon Litt. First question, just touching on David, one of your last comments, on condo sales. It sounds like the contribution will be higher than expected but the guidance range for the full year is still the same. So, it's not really moving much off the mark. Is that the point? Moving up 10% or so?

Well, we're estimating higher than originally-projected gains from the condominiums, but as Donna mentioned, there are some things that are knocking us back down, so that we continue to maintain the original guidance range, notwithstanding higher than expected FFO contributions from the condominium side.

The condos, just ballpark, 60 million this year, instead of the 50 million I think you originally laid out?

I think rates we're going at $29 million for the first half and we're thinking we're going to second half is going to be around $37 million to give us a $65 million year-to-date number, which is $15 million above our budget. The thing we talked about on the last call was that our NOL could take us throughout the entire year for 2006 at that $50 million budgeted rate. However, now that we're pushing that rate up to the $65 million range, we are going to start to incur additional taxes in quarter 3 and quarter 4 at a rate of about 35 to 38%. So, that will take that incremental value of 15 million down by $5 million or so for taxes, which will be recorded in G&A.

Okay. And then the offset, just, you ran very thoroughly through the systems upgrades that you guys are doing. Number one, was the impact that you discussed alone for MRI or was it for all three combined pricing procurement and MRI? And then second, what's the full impact from all three for this year in terms of expenses? The second half of this year?

Okay, the -- all three of the MRIs implementations are going to really impact all three of the costs that we're gathering together, is for the procurement initiative as well as the old management and incorporating a new platform.

That was the 16.5 million.

Right.

And then we said we had $0.01 of additional expense associated with the system conversion and that is already included in guidance, as well.

Okay. And then should -- I guess, Bruce, you talked about in your opening comments that concessions were coming down. Can we get just a little bit more color on what you're seeing and how much you're giving away in terms of maybe day's rent, are you giving away a week on average, two weeks? And how that compares to previous quarters.

Yes, this quarter we are moving concession average -- $166 per move-in. The prior quarter, it was 225. If you look at the quarter a year ago, same-store, we were 279. So, we have moved on an annual basis from 279 average per move-in to 166.

What does that represent -- what is that, I guess, about a week's rent or so?

Our average rent is about $900 for the entire portfolio, 906.

Okay. Perfect. Thank you.

Your next question comes from the line of Jay Leupp with RBC Capital Management.

Hi, good morning here with David Ronco. Acquisition versus development yields, David, when you were talking earlier and in your press release of 5.6% average cap rate on acquisitions, where are your pencil development yields? And what are your hurdle rates right now on new sites that you're looking at for development, excluding what you're doing on the condominium side, but just pure operating apartments?

Well, our development deals, we're looking for appropriate yields that -- that account for the development risk over whatever deals are trading at -- stabilized deals are trading it going to market. I guess it allows me to just mention something that I think people really have to be aware of out there, when they're talking -- when they're looking at what people are saying, at what development yields are. Development yields today are obviously a function of where people think they're going to be able to rent these -- rent their properties. But they're even more a function of how long ago they tied up their land and how long ago they tied up their construction costs. And so someone who is -- who's talking about a yield today, a development yield today who owned their property three years ago, is going to be talking about a different development yield than someone who is building a property on a site that they bought yesterday.

And I will just tell you, we've got development yields that we're talking about that if we were to mark those to market today, the land, they might be different. We could have built our development property in Tyson's Corner at a terrific yield, but it didn't make sense because so much value had been created in the land, we opted to sell the property instead. I will just tell you, the way Equity Residential looks at developments, we look at what those yields will be relative to what the acquisition yields are in a market and making sure we're getting an appropriate spread to account for the development risk and then weighing that against potential development yields and acquisition yields in other markets.

Okay. And then on the same-store results, it looks like sequentially, revenues actually crossed over and grew at a faster rate than expenses. Although they're not doing that yet from a same-store standpoint year-over-year, are you assuming this to be happening in your guidance going forward? Or if not, when do you think we're going to cross over and start to see year-over-year revenue growth exceed expense growth?

We're on a trend right now where that will happen this year, for sure. Okay? And income trends are going up and expense trends are stabilizing, really. So, that's what you're going to see. You're not going to see -- your expense trends tend to be a little bit stronger in the first six months than the last.

Okay. And this is David Ronco. David or Donna, do you guys have any land sales gains baked into the second half guidance?

I'm sorry--?

No, no.

No.

Okay, thank you.

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

Thanks. Can you guys just -- David, talk about second half sales volume, A,, do you think there's any chance you could move higher? And then B, in terms of the cap rate, net cap rate spread on acquisitions, what do you think it will average in the second half?

That's a great question, Lou. Look, we are always selling assets. We always have a pretty robust pipeline of assets for sale and we manage that against the pipeline of acquisitions. We could sell a lot of assets this year, there continues to be a very strong demand for our assets and we think we're getting great absolute prices and very attractive cap rates on those dispositions, which has really -- which has narrowed the delta between our acquisition cap rates and our disposition cap rates. For the second half of the year, when we put the New York transitions -- transaction, they're at 4.5, you will likely see a wider gap on acquisitions and dispositions for the back half of the year. Again, that's going to be because we're going into this New York deal at 4.5. We, Lou, it's very difficult to say what that delta is going to be. Historically that's been 125 basis points. I think last year it was something like 90 basis points. This past quarter it was about 30 basis points and I think we continue to budget for the balance of the year at about 75 basis points.

And just secondly, just back to the condos for a sec, so, it sounds like your margins or your gains per unit is coming in ahead of where you thought. Is that causing you to maybe hold some units back to maybe sell next year? Or conversely looking to accelerate some more conversions this year?

Well, the deals that are in conversion we'll never hold back. You've heard us talk on this call in the past, that we are all about velocity. Once we get into the market on a conversion, we want to get it done. But we have been able to accelerate either -- in many instances, start pricing higher than original pro forma and then move pricing through the sales period at significant increases so that the last units we're selling are at considerable premiums to the first units being sold. What's also happening, Lou, is that as the condominium market improves, we're going to be transferring assets at higher prices to our condominium conversion group to reflect the fact that it's higher market pricing. So, it's going to be tough to say what's happening on margins. My guess is every deal that we transfer that we agree here at investment committee will be in that same 20% or so margin but that will lock down that sales price, the wholesale sales price and if retail prices continue to move, then you will see that margin expand out.

How about just with regards to condo demand, I mean are you seeing any let up anywhere?

I tell you, at the -- the price point at which we're selling, which has been the sort of starter home price point, we continue to see extremely strong demand. We sold out of property in Florida last week, incredible demand, does not seem to be any end currently in sight. Again, but I want to say in our price point. I'm not suggesting that we don't see any end in sight for across all of Florida, I'm just focusing on the types of product that we're bringing to market at our price point, continues to be a very strong demand.

All right. And then lastly with regards to G&A, last quarter you guys were guiding to around a $12 million quarterly run rate for the balance of the year. You guys came in a little higher than that. Anything -- what contributed to the higher G&A in the quarter?

Basically for the quarter we came in around $14 million range but if you back up the severance costs associated with Bruce, you're looking at a run rate somewhere around 44, $45 million. And that is sort of a pure run rate. Then you have to add that to get to the reported number of $10 million related to Bruce so it takes you up to the 54, 55 and then on top of that, we talked about the $5 million, incremental gain tax -- I'm sorry, incremental tax expense associated with the condo gain, which would also be Incorporated into G&A for this current year. So, that's going to take you up to the $63 million kind of range for -- on a reported basis. So, for a pure run rate, I would stick with the 44, $45 million range. Which is close to what we talked about last year on the call -- last time on the call.

Okay. Thank you.

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

Yes, thank you very much. I wanted to ask a quick question on Trump Place. Donald Trump is upset that the partnership group went ahead and sold without his explicit say-so and I was wondering if there was anything in the suit that would delay your acquisition of Trump Place?

Well, first of all, Bill, we're not a party of the suit and we're moving forward with the other party on track and does not appear that whatever it is that Trump is doing is going to impact our closing at this time.

Okay. I mean the only reason I ask is there's been some articles out there that have indicated that the one transaction was linked to the other transaction. So, I just wanted to double check on that.

Well, first -- they are linked. I'm not suggesting that they're not linked. We will only close on our properties if the residual also closes so that they -- our contract is linked to the other contract but we're moving forward, as is the other buyer, as though that -- the -- that lawsuit will not impact closing.

Okay. On the Marina Bay disposition that you made... It had been 52% leased in the prior quarter, actually went down in leasing in the -- in the third quarter and you sold it on July 1. I was just wondering, you had foreknowledge of the sale so you didn't put as much effort as you normally would have into the leasing there?

Well, it was sold to a condo converter. I think that sort of explains it all.

Okay. Okay. Then on the -- the Chicago condo market, there have been various articles, again in the press, relating to the fact that we might be reaching the top there and turning and you guys live and breathe Chicago. I was wondering if you could give us a little bit more color on that?

Well, I guess -- we've had a condominium conversion, a couple of properties, about 30 miles west of the loop. And I think much of what you will read in the paper is really what's happening in downtown high-rise condominium conversions and that market, like many, has been strong and everybody is sort of waiting for the bubble to burst and it doesn't seem to be bursting, but who the heck knows. Again, it's not impacting it. The stuff that we're converting out in the western suburbs is this low price point starter home stuff and what you're reading about in terms of downtown Chicago, we think will have no impact on our conversion business here in Chicago.

Okay, the $15 million land parcel. Where was that? And what was the dollars per square foot on that?

I'm not going to answer those questions, Bill. We are in the process of trying to assemble some additional parcels and it's extremely kind of confidential at this juncture. When that all gets resolved, we will give everybody more color.

And then just double checking on the G&A, when you add in the extra taxes for the condo sales, what was the year-end number that that got up to?

$5 million.

Yes, no, $5 million, but then the total when you add in Bruce's severance and then the run rates?

Oh, I'm sorry, somewhere around 63, $64 million on a reported basis.

53, 54?

63, 64.

Oh, okay. Thank you.

Your next question comes from the line of Ross Nussbaum with Banc of America Securities.

Good morning, it's Karen Ford here with Ross. I know you said there was no land sale gain on the guidance, but we had talked last quarter about a pretty big land parcel you guys were thinking about marketing in Tyson's Corner. Just wanted an update on that.

Karen it had to do with the Tyson's Corner piece of property. There is a possibility that we will sell the balance of the land between now and the end of the year. If we do, again we think we got great profit in that piece of land. But it's not in our guidance for the balance of the year.

Got you. Could you give us any more color on your decision, why you chose not to convert the 160 building and Trump Place at this time?

We just thought it was best for us to get the assets under management. Kind of season them a little bit with our own management, then make some decision, and then look at it down the road. It's something I guess we will look at it on a regular basis, but we felt that until we got the assets under management, we thought it would be -- would be premature.

And I think we can say that our management people, as they're getting their arms around the operation of the properties, are feeling very good about how we underwrote it and feeling very good that there's some potential there.

Okay. I think Ross has a question, as well.

Yes, hi, guys. I wanted to follow up on Trump Place, as well. And maybe you can help me understand. When you look at buying an asset at a 4.5 cap rate on a forward number, what kind of NOI growth assumptions are embedded into your decision to pursue an asset at that cap rate, when it's obviously below your weighted average cost of capital?

Weighted average cost of capital is a long-term concept and we look at our overall yield here as one that will far exceed our weighted average cost in capital. Certainly it is a low initial yield, but when we're buying this thing at $730 or so per square foot, we see comparable properties trading in that market at 900 to 1000 if not more, we feel pretty good at being able to create significant value for our shareholders.

How long do you think it takes to get the return on this asset up to a level that would be commensurate with your weighted average cost to capital?

You're talking about the current returns?

Yes, I'm trying to get a sense of--.

Look, I tell you -- I think that we've already, if you were to value these things at plus $900 a square foot, I think you'd see that we've already returned -- made a nice profit on these properties. If you're just looking for a cash return it will take a while. Just, from a pure operating return. But again, I think we've got this embedded option in this 160 building that if and when we ever decide to do something with it, will deliver an incredible return to the shareholders.

And just operationally, New York again, has been one of our top markets this year, and we think that it will continue to be very strong over the next few years just in terms of the cash flow growth.

Thank you.

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

Thanks, guys. Most of my questions have been answered. But I think earlier on I heard somebody say that the average rent in the portfolio is 906.

Yes, sir.

Is that same-store or is that for the total portfolio?

Total portfolio.

What was it for the same-store portfolio?

The same-store and total -- it's -- what that number includes is our Lexford portfolio and that dilutes the dollar value down--.

Right, we're 971 without Lexford. Lexford is like 518. So, all in we're 906.

Okay. And then in terms of preferred stuff, what -- what are -- have you guys redeemed and what will you be redeeming?

Yes, currently this year we redeemed 77 in Q1, Q2 80 and we're going to do another 125 in Q3. So, our objective, fundamentally, is to redeem as much as we can. This year we did not realize any significant benefits associated with those redemptions that are at say 8 to 9% yields because we had unamortized financing costs that we had to write off against that benefit. But next year we should realize from the activity in 2005, somewhere between 8 -- depending on how we refinance it, of course, 8 to $10 million of benefit in interest expense. In 2006, we plan -- we will probably roll out the same program and redeem the preferreds, which are expected to be somewhere around 170, $180 million. But also do carry amortization costs, so, I would not expect significant benefits there.

And in terms of what you're redeeming them with, are you planning to redeem forward stuff with other preferreds? Or are you basically just going to use disposition proceeds and then refinance it with debt?

A combination, but predominantly, unsecured debt.

Okay, so, I mean looking forward at this point, I mean long-term strategy at this point is more debt-oriented than preferred, until you get up to the point where the rating agencies start to have an issue?

Yes, and we have had discussions with the rating agencies in terms of our strategy and we don't see this being problematic from a rating perspective.

Okay. Thanks, guys.

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

Good morning. I was just wondering, the bulk of the spring leasing season took place under what seemed to be a little bit weaker economic views. How did it compare to your expectations going into that period? And how does it compare today to where we were 4, 5, 6 years ago?

The answer is that this is the first trend I've seen in about the last four years where you have a normal curve occurring, in terms of the spring, momentum taking place and the pricing moving up in the summer as opposed to stalling like we've seen, maybe since the year 2000, I would say, was the last what I would call normalized year. As 2001 came in, the spring started to sputter a little bit as a result of the technology bust and then 9/11 hit, which really screwed things up, but at this stage, we are -- our revenues are at the higher end of our expectation and are trending in that direction and we are seeing a more normalized curve that we were traditionally used to seeing throughout the '90s into 2000.

Great. Thank you.

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

Okay, Jerry, just following on to that last question, what do you expect to see kind of sequentially going from the second to third quarter in terms of revenue growth?

I don't really have that number handy but I would just tell you that we're seeing some real strong positive changes continuing on. So, I expect it to be fairly strong.

Okay. And then David, I guess, just on the Trump question, you talk about the optionality and sort of maybe all the value that you have created today, given where assets are selling on a per square foot basis. I guess I still am sort of struggling with the decision not to take advantage of that value creation, if it's really there today. Why delay? You still would have two-thirds of the assets to manage as apartments. Why not move forward? Do you really see the upside as an apartment asset being that much greater than the upside from converting to condos today?

Craig, I think what I've said is that we've decided not to pursue that at this time. But we will constantly monitor that. It's not as though if we don't exercise that option now we're boxed out from ever doing it or we're delayed for some long period of time. We believe that's an option that can be exercised at any time, but it's one that we don't believe it's appropriate to exercise until we get the property under management and really get our arms around what we have.

It's not so much that you decided not to do it, maybe upon acquisition or shortly there after, it's just that right now that's not the path that you're moving down.

Yes. And again, I don't want everybody to leave the call thinking that it's just going to be nine months, or six months before it happens. We're going to be watching this all the time. We believe strongly in the Manhattan market. And one could exercise that option too soon.

Okay. And then just a -- two other questions. One related to that and that is kind of -- just on -- on general deals, take Trump out of it, but deals that you're looking at for acquisitions opportunities that are kind of standard bread and butter apartment assets, so to speak, what kind of IRRs do you think are achievable in today's market given where cap rates are? And we're hearing about cap rates at sub 5.5% range for nearly every market. I'm just wondering kind of given the risk of residual cap rate movements higher, what you think IRRs are in the market today?

I think most -- a lot of what we've looked at at bread and butter stuff, we think are low 8 IRRs. I will tell you that we look very closely at not just what that exit cap rate is 10 years out, but what that exit price per unit and price per square foot is and whether or not we think that there's -- that's within reason. But we're pretty comfortable that we will achieve at least 8% IRRs on these transactions.

Great. And then last question, on preferred stocks, the redemption in third quarter, what kind of charge do you expect to incur as a result of that?

Approximately $4 million.

Great, thank you.

At this time, there are no further questions.

Great. Well, we'd just like to thank you for your time, thank you for your support. Please call us if you have any further questions and we look forward to talking to you next quarter. Thank you.

This does conclude today's Equity Residential second quarter earnings conference call. You may all now disconnect.