Essex Property Trust Inc (ESS) 2004 Q4 法說會逐字稿

Good day and welcome to this Essex Property Trust, Incorporated fourth quarter and year-end 2004 earnings results conference call. Today's call is being recorded. With us today are Mr. Keith Guericke, Chief Executive Officer; Mr. Robert Talbott, Senior Vice President; and Mr. Michael Schall, Chief Financial Officer. For opening remarks, I would like to turn the call over to Mr. Guericke. Please go ahead.

Thank you for joining us today. We are going to be making some comments on the call which are not historical facts, such as our expectations regarding markets, financial results and real estate projects. These statements are forward-looking statements which involve risks and uncertainty which could cause actual results to differ materially. Many of these risks are detailed in the Company's filings with the SEC and we encourage you to review them. On the website, you'll find some updated expectations for market rent performance for 2005. Also the website has a schedule titled permits and home prices which includes total residential permit activity for the larger U.S. metros, as well as information on median home prices and affordability. And that's all compared to our Essex markets. To get those details, go to our website under Analyst Resources.

As in prior calls, I'll update you by submarket on significant developments --by market including commercial absorption; which we view as a gauge of business expectations and job formation in the future. We finished 2004 with FFO per share at $4.49 on the strength of the promote that was provided by the sale of Fund I. The fourth quarter core operations provided FFO per share of $1.03. The pricing power that we'd expected to see in 2004 -- really that we expected to seen in the second half of the year didn't materialize as strongly as we'd hoped; however, as an offset to that we were able to reduce concessions year-over-year and also the operating division put some programs in place to control expenses that were effective. So even though the revenue wasn't quite as strong, our results came in where we had hoped. The other point I'd like to make is, I really see some reason for optimism for 2005. As you see as I go through my comments on each of these markets, there's some tangible evidence that these markets have improved and are continuing to improve.

I'd now like to start going through the markets starting with Seattle. In 2004, Seattle added 24,700 non-farm jobs. The unemployment rate declined by 1.6 percent during which time the labor force grew by 2.5 percent indicating significant increase in employment. Both of these results exceeded expectations. Boeing, just an update there, from December 4, 2003 through the 6th of this year; Boeing added 1,338 new workers, that's 2.5 percent. The new orders for the 787, used to be called the 7E7, are progressing well. They just recently got initial order of 60 planes from a Chinese consortium. So that seems to continue to go well. We don't anticipate any sharp job cuts at Boeing over the next several years. The office market continued to improve in Q4, absorbing 640,000 square feet; which is up 3.2 percent annual rate. Absorption for the year was approximately 1.5 million square feet. The industrial market posted a second straight strong quarter absorbing 1.57 million square feet; which is an annualized rate of 3.2 percent. Absorption in the second half of the year totalled 2.6 million square feet. Vicant (ph) Valley led the way absorbing 2.1 million square feet in the second half of 2004.

Going to the Bay Area, where we have 17 percent of our portfolio, our forecast of a new supply of both multi-family and single family is less than 1 percent. Overall, our Bay Area markets added 13,000 non-farm industry jobs, which is about half of our forecast. However, this growth was a significant improvement over the last three years, during which time the region lost 424,000 jobs. After falling sharply over the last few years, the Bay Area December year-over-year labor force growth was flat. And during the same period the unemployment rate fell from 6 percent to 4.6 percent.

Going to the specific markets now. San Francisco office market experienced positive absorption in each quarter in '04. And during the -- 2004 the market absorbed almost 3 million square feet. The industrial market experienced a strong quarter with absorption of 2.9 million square feet, or about a 4 percent annual absorption rate.

In Oakland, the East Bay office market experienced modest absorption in the quarter after a strong third quarter. In the fourth quarter, it totaled 159,000 square feet. And for the year, almost 800,000 feet. The industrial market absorbed just under 100,000 feet for the quarter and for 2004, 315,000.

San Jose, as we mentioned in the last quarter, remains relatively reliant on manufacturing jobs. More so than most of our other markets. The manufacturing sector continued to improve during the fourth quarter. Over the last three years, this sector had -- had lost 44,000, 32,000 and 15,000 jobs, respectively. As of December, year-over-year jobs were down 1,500 jobs. So, things seem to be stabilizing. At the end of the third quarter, the household survey of unemployment indicated year-over-year increase of employed workers. As of December the value was negative by 3,000. Despite this setback, the period of steep losses has ended and we anticipate positive growth in '05. For the first time in four years, the office and industrial markets both posted significant positive absorption. The office market absorbed 380,000 feet for the quarter, 640 for the year; and the industrial market posted 310,000 square feet for the quarter, even though for the year it was negative about 300,000. So, that's -- that's good news.

Southern California, after a strong first half, the non-farm industry jobs data were weaker in the second half. We believe that there will be some future revisions as the -- this always happens, and we expect to see a slight increase in reported jobs in Orange County; just based our experience down there and the strength of that market. The preliminary December-over-December job growth ended up at 57,000 jobs versus what we had originally thought of about 91,000 jobs for the year. I guess backing off from that, December year-over-year unemployment rate decreased from 5.6 to 4.9 percent for the region. During this time, the labor force grew at a healthy rate of about 1.8 percent, indicating increasing employment. After a strong absorption of 3.4 percent annualized in the third quarter, the Southern California office market posted moderate absorption of 1.1 million square feet in the fourth quarter. And this is broken down by area.

Orange County had 790,000 square feet of absorption. San Diego, about 251,000. And the tri-cities and L.A., about a 100 -- little over 100,000. For the year, Essex Southern California markets absorbed 6.5 million square feet of office space, which is about a 2 percent absorption rate. For the second straight quarter, Southern California industrial market posted solid absorption of 6 million square feet. The strongest submarkets were central San Diego, with just over a million square feet. San Gabriel Valley at 1.1 million square feet. Ventura County, 360,000 square feet. And north Orange County up 773,000 square feet.

In conclusion, you know, basically I -- I think there's some -- you know, some reason to be positive with respect to what we're seeing. The absorption of both office and industrial for the -- are increasing, which bodes well for future job formation. In 2004, we've seen positive job formation in all of our markets. Unemployment is down in all of our markets. And as you will hear from Bob Talbott's comments, our occupancy at the end of January '05 are at the highest levels we've seen for a January in the last three years. Overall, I'm optimistic that our markets are improving, as demonstrated by the above data. Our 2005 success will depend on the market seeing pricing power and our ability to execute and get our share.

Fund II, just a quick update there, 2005 acquisitions guidance was $300 million, or $75 million per quarter. So far this quarter we've closed one deal at just over $20 million and we have approximately $100 million in contract. So we're on track to meet our expectations. Now I'd like to turn the call over to Bob Talbott.

Thanks, Keith. Good morning, everyone. Thank you all for joining us. Today I will discuss current conditions in each of our markets. Generally speaking, we're optimistic about the markets' prospects as the Bay Area is showing positive signs and the Pacific Northwest continues to improve. Before I run through each major market, let me remind everyone that the occupancy numbers I report are as -- are as of this past Monday, a point in time. The financial occupancies in our earnings release are the average for the quarter.

As of Monday, our stabilized portfolio was 96.5 percent occupied and our net availability, which is the sum of vacant and on notice units available to rent, expressed as a percentage of the portfolio, was 5 percent. Throughout each market, I'll also comment on our move-out activity as a result of home purchases during the quarter. For the portfolio, 17.5 percent of our fourth quarter moveouts were due to home purchases, which is consistent with our experience in the last quarter.

And now for our individual markets. I'll start with Seattle. Our occupancies in Seattle improved significantly in January. As of Monday, our portfolio is 97 percent occupied and net availability is 4 percent. Although concessions have not been completely eliminated from the market, we're seeing them used with less frequency and they are typically in the range of a half month free. Traffic for the fourth quarter was down 30 percent sequentially and for the same quarter one year ago, traffic was up 13 percent. You would expect traffic to decline going into the fourth quarter, so that's consistent with our expectations. Home purchases for the fourth quarter accounted for 19 percent of our moveouts, down slightly from the third quarter's 22 percent.

Let me also mention that Fairwood Pond, which is one of the properties we closed on last quarter, back in November; the property's transitioned well, it's currently 94 percent occupied. But all in all, Seattle continues to look solid.

Portland is also showing signs of continued improvement and strengthening. Occupancy as of this week is 97 percent and net availability is 6 percent. Concession activity is declining in the market but it hasn't been eliminated. We're seeing a half month to one month free offered for a one-year lease. Traffic is down 37 percent from the third quarter and is down 14 percent from the same quarter a year ago. During the fourth quarter, 27 percent of our moveouts were due to home purchases, which is down from the 29 percent we experienced in the previous quarter.

In the Bay Area, this is a market where we all seem to be waiting for a job recovery that's strong enough to fuel sustainable apartment demand and rent growth. Occupancy and availability have improved significantly. In the Oakland and San Francisco MSAs, we're 97 percent occupied and 5 percent available and in the San Jose MSA, we're 97.5 percent occupied and availability is 4 percent. We experienced a sequential increase in concessions during the quarter, as we responded to increased availability in a market that is still heavily offering concessions. We managed pricing based on the market, occupancy and availability. During the last quarter, as we saw availability increase, we moved quickly to solve it. Today with higher occupancy we're using fewer concessions. However, this is a market that still lacks pricing power, so even at 97 percent with low availability, while we can afford to be patient with pricing, we're still forced to meet the market.

Our strategy will continue to be that we're managing for occupancy, but looking for regular opportunities to increase rent. Traffic was down 22 percent from last quarter and is up 12 percent compared to a year ago, 19 percent of our moveouts for the quarter were due to home purchase, which is the same as the previous quarter. Also during the quarter, we transitioned the management on three properties, Harvard Cove, Carlmont Woods and Esplanade. To date we've been pleased with their performance as occupancies on all three properties are at 97 percent or higher.

Turning to the south, in L.A. and Ventura Counties, those markets continue to report consistent occupancy, this week they were at 96 percent occupied with net availability of 5 percent. Traffic compared to the third quarter was down 29 percent and it's up 12 percent compared to the same quarter a year ago. Concessions have declined and are typically limited to isolated locations that are responding to a short-term occupancy problem. In those cases, we're seeing anywhere from $500 to a month free being offered. Home purchases contributed to 15 percent of our total moveouts in the fourth quarter, which is consistent with the prior quarter's activity.

Orange County also continues to perform well. Occupancy as of this week is 96 percent and net availability is 5 percent. We continue to see little to no concession activity in the market. Traffic was down 24 percent from the third quarter and was flat when compared to the same quarter a year ago; 21 percent of our moveouts in the quarter were due to home purchases, which is an increase from the 15.5 percent we experienced in the previous quarter. I also want to comment on Parkwood, which was part of the 900-unit portfolio we bought during the last quarter. That property is located in Corona. It's transitioned in very well to the portfolio and it's currently 94 percent occupied.

Now, lastly in San Diego. There are no surprises in San Diego, either, with reported occupancy this week of 96 percent and availability of 6.5 percent. As in Orange County, we're seeing little to no concession activity and where they do exist, it's limited to those locations with short-term occupancy problems. Traffic was down 23 percent compared to the third quarter and flat compared to a year ago; 11 percent of our moveouts in the quarter were due to home purchases compared to 12 percent in the previous quarter. Now let me turn the call over to Mike Schall.

Thank you, Bob. And thanks, everyone, for being with us today. As usual, I want to note that the press release and supplemental reporting package is available on the website and/or you can call Investor Relations at our corporate offices in Palo Alto to obtain a copy. And I'm not going to cover all of the information that is -- is present in the supplemental reporting package. So, if you don't already have it, it's important that you get a copy. Comments this morning will include the following topics: First, the annual and quarterly operating results. Second, balance sheet. And third, estimates of FFO going forward.

So, first -- first topic, FFO results. As you know for the year, the Company generated FFO of $4.49 per share, a 9.8 percent increase from 2003 and better than the original guidance that was published in December of 2003, which had a midpoint of $4.24. The promote distributions related to the sale of Fund I were not included in that guidance number and were the single most important factor contributing to the outperformance and our FFO results. Operationally, we were slightly above plan as same property NOI grew by 0.8 percent as compared to 0.5 percent growth that was contained in the guidance. A breakdown of the results by market is included in the press release.

With respect to the fourth quarter of 2004, I have several comments. First, we completed the second portion of the sale of Essex Apartment Value Fund I, and -- which included the Company's direct ownership interest in Coronado North and those sales resulted in the quarter with a non-FFO gain of $25.2 million. We also received a promote distribution and wrote-off some -- some unamortized loan fees, both of which were included in FFO and they were approximately $3.5 million, net.

Last quarter, second comment, last quarter we mentioned that the accounting rules prevented us from recognizing the asset management fee from Fund II, which was organized earlier this year in the third quarter. Our Q4 guidance assumed that we would recognize both the third and fourth quarter asset management fees in Q4, an amount which totals $955,000. In Q4, we actually recognized 162,000 in asset management fee revenue from Fund II and a deferred recognition of fees in the amount of 793,000, which we expect to recognize in 2005. Long story short, the asset management fee in -- in Fund I and Fund II is structured as a gain allocation, in order for it to be good income; as opposed to structuring it as a fee. Which requires a gain allocation, which requires properties to be in that portfolio and given that we're just building the portfolio now, and the profits will come, we deferred recognition until there's is an operating cash flow coming out of Fund II. So that will happen in due course and those fees will be recognized.

Next topic, as you may recall, the operating expenses for the third quarter of 2004 increased by 4.4 percent and that was largely due to the adoption of a new expense accrual policy that came out -- came out of our S-Ox 404 process. Largely because of the accrual policy change in Q3, and higher expense levels in the fourth quarter of 2003, operating expenses in Q4 declined by 0.6 percent and overall for the year increased by 1.5 percent.

Next comment. As noted previously, the trend toward lower concessions was broken during the quarter as same property concessions increased to 381,000 from 274,000 for the quarter ended September 30, 2004. This increase is largely attributable to the increased vacancy and availability that we had at the end of Q3 and we carried into early -- early in Q4, which needed to be cured during a seasonally weaker fourth quarter. Bob's already -- already commented on that. But essentially we view the concession activity to be, you know, more one-time and fixing and dealing with an issue as opposed to a long-term indicator of a trend. This was particularly apparent in Northern California and the northwest regions. Despite the quarterly increase, same-property concessions for the quarter were less than half the levels experienced a year earlier and again, this supports our ongoing belief that the markets continue their slow but stable recovery, which will ultimately lead to increased pricing power.

Next comment on G&A, G&A was 4 million 148 for the quarter, approximately 250,000 higher than expect -- than the expected run rate of $3.9 million. The key component of that was the accrual of defense costs in connection with an employee-related lawsuit in the amount of $500,000. We believe that this accrual provides the, you know, costs of defense for the foreseeable future. We don't expect this to lead to a series of quarterly recurring charges in 2005. So, we're trying to, you know, recognize what the costs should be and, you know, accrue that up front, essentially.

Next -- next topic is the balance sheet. A few comments on the balance sheet. First, the flow of funds from the sale of Fund I and the related sales of the Company's 49.9 percent interest in Coronado North generated cash flows of approximately 90 million during the fourth quarter. In 2005, we expect further inflows of approximately 40 million as the Fund I sale to UDR is completed. Specifically, we expect the sale of Coronado South to occur in the March/April timeframe and the sale of Rivermark to occur in approximately August, 2005.

Major funds outflows during the fourth quarter included the following: First, we completed a 1031 exchange in the amount of $110 million. The properties acquired in the exchange included the Esplanade in San Jose, Fairwood Pond in the Seattle area, and the Woodside Village/Pinehurst apartments in Ventura County of Southern California. Again, $110 million. We also repaid a maturing loan with a 7.1 percent interest rate in the amount of $25.6 million.

As you know, the formation of Fund II means that our deal flow is essentially dedicated to Fund II through October 31, 2006. Fund II acquired a portfolio of three properties for an aggregate purchase price of $130 million, which were unencumbered -- or actually they were encumbered in connection with the transaction, with mortgages in the aggregate amount of $76.6 million, which had the fixed rate for nine years at 4.89 percent.

Third topic, FFO expectations for 2005, we issued a press release on December 17, 2004, which contained our FFO expectations for '05. The press release indicates an FFO guidance range of 437 to 445 for the year and for Q1 of 2005 we have a midpoint of $1.03 per share, also in that press release. As part of the 2005 guidance, we assume that same property revenues increased by 2.5 percent and operating expenses increased by 3 percent. These estimates are predicated on a moderately improving national economy with GDP growth estimated at 3.5 percent for 2005 and 1.6 percent growth in non-farm employment. Other companies with similar markets are expecting marginally better results, which I assume corresponds to a more optimistic national economic outlook.

Historically, we've tended to be a bit conservative in our guidance, which may be the case in 2005. The real issue is at what point do increasing occupancies demonstrate true housing scarcity leading to a significantly --leading to a significantly increased pricing power? Our guidance does not assume that we have reached that point in 2005; although, for the first time since the year 2000, it is possible that significantly increased pricing power will be experienced later on in the year.

That concludes my comments. I'd like to once again thank you for joining us and now would like to give you an opportunity to ask your questions. Thank you.

[Operator instructions] Jay Leupp, RBC Capital Markets.

Hi, good morning, here with David Ronco. First off, Keith, on the acquisition guidance that you talked about for 2005, or the assumption of $300 million per year, could you give us a little bit more color as to what you think the range of cap rates are going to be? Maybe by region. And what you think the geographical mix of your acquisitions will be this year?

Okay. Well, I think that -- as we -- I think we told you last quarter, our belief is that the best markets that we are in for the next couple of years are going to be Northern California and Seattle. And so the goal is to -- the goal is to get a significant portion, you know, probably 70 to 80 percent of the acquisitions coming out of those two markets. So that would equate to, you know, a quarter of a million bucks. Of the stuff that's the closing that we had that I mentioned over -- just a little over $20 million, was in Seattle and the two deals that we had in contract are in the Bay Area for about 100 -- just over $100 million. The cap rates are going to be, you know, in the 5 to 5.5 percent range and probably closer to the 5 range.

Seattle, we're seeing cap rates very aggressive in that 5 percent range and actually there are several closings that were done by other folks that are under the 5 range. So, it's been very difficult to get any kind of volume up there. In the Bay Area, depending on -- on the specific submarket, the rates are, you know, in the 5 to -- actually we have one deal in contract that is -- is, on an economic basis slightly over a 6; but that's really an aberration from the norm. So, I would expect to see in that 5 to 5.5 range.

And Southern California is equally as aggressive. We're seeing, you know, in 5 to 5.5 range. We prefer not to pay those kind of cap rates down there, however, since we don't think the growth rates are going to be as high. I think we all understand this process, it's the cap rate plus the growth rate that really gets you where you need to be. So, we're holding out for a little bit higher cap rates there and if we can find some higher cap rates, we might shift, you know, the -- the acquisition pipeline further south, but right now we're not seeing that.

And then, Bob, you made some commentary about you were more optimistic this year about the rent growth environment. Interest rates continue to stay relatively low for home buyers. What do you think the dynamic is going to be that actually drives rents higher? Do you think it will be a combination of rising interest rates and a falloff in home purchases? Or just generic job growth? What scenario makes you feel optimistic particularly about the Bay Area?

Jay, mostly job growth. I mean we only have -- we have a relatively small percentage of our moveouts here that are attributable to home purchasing anyway. So it's not a -- it's not as big a factor for us. But this has been a market that's just been bouncing around, waiting for some demand to fuel it. Because we certainly don't have any risk on the supply side. So, you know, I think some of the absorption numbers that Keith mentioned in terms of office and industrial space, you know, give us reason to be a little bit optimistic.

Hey, Jay, I'd add one thing to that and that is we do our -- go through our market rankings and do our research, what we do is we qualify, you know, jobs leading to household formations. We subtract out, you know, all the household formations that are going to go to the new single family homes in the market and whatever is leftover represents multi-family demand. So, we absolutely consider each of those single family units.

And I think as Bob said, I think he's exactly right. It's the number of units that are being produced on the single family side. Because I don't think you're going to, you know, have two or three households in a single family home for the most part. That will happen every once in a while, but for the most part, it's like there's a relationship between how many single family homes are being produced and how much of your job growth is going to go to those single family homes and then what's left over for the multi-family. That's our big problem with a lot of the out-of-state areas that are producing 4 and 5 percent of their single family home stock a year. With very low interest rates, it's -- it almost doesn't matter what happens on the job site because that's just too many homes.

David Harris, Lehman Brothers.

Could you just give us a little highlight on what the employee litigation issue is about on -- that you referenced in your press release?

You know, we're not going to go through, you know, the issues. It's an employee-related suit. We try to -- you know, we try to communicate -- like the only reason it's in here is to talk about it so everyone can understand the impact on the -- on the run rate, FFO run rate, you know, I can't go into details about what it is.

Does this concern an employee that's a former employee? Or a current employee?

Former employee.

A former employee. Okay. Give me -- try and walk me through why the loss to lease in Southern California has declined from 9.8 in the third quarter to currently 6.9. When it looks like your sequential revenues in that location, actually went up.

Well, I think -- you know, loss to lease does vary from quarter-to-quarter, as we've seen. And, you know, it represents, you know, our take on the -- you know, -- number-wise it's a difference between market rents and scheduled rent in the quarter. So, if scheduled rent went up in the fourth quarter and market rents did not change, then that would cause loss to lease to decline. Again, declines of the magnitude that we're looking at here are hard to, you know, interpret as being indicative of much of anything and, you know, I think it has to do, as much with seasonality as anything else. So, I think it's, you know, essentially Q4 you have relatively flat market rents and although scheduled rents go up a notch, causes a small reduction in loss to lease. Again, I don't think it's big enough to be meaningful.

Okay. I mean the loss to lease had been stable for a couple of prior quarters, so, I was just a little surprised to see it decline to the extent it did. And my final question is on the development joint venture that you've announced in downtown L.A. Is this the first development joint venture that you guys have entered into and could you give us some color as to why you're not doing this 100 percent on your -- on your own account?

Well, we've -- we've done many development joint ventures in the past. In the recent past there has not been as many of them, but the strategy is to find the best development deals that we can in our core markets and that's been, you know, somewhat difficult to do. If we can joint venture with someone that has a deal tied up that's entitled, that's ready to go and we can provide the financing for the transaction to enable the transaction, that is something that we're very interested in. And that was the -- the case here. So, that's why we did it.

I would just say, additional to that, is that the -- the developer had the low-floater bonds in place. I mean everything was in place and he had, you know, worked for two or three years to get it to where it was. So, it was a great opportunity; we could come in and, as Mike said, step in very quickly and put our money to work without having to have to go through all of the -- the entitlement issues. So, we think, actually, at the end of the day it's a very good execution.

And your role in Essex is a capital provider or you're standing side-by-side in terms of the arrangement?

You know, it's kind of a blurry line because in certain respects, we're a capital provider. In other respects, you know, we're providing certain guarantees in connection with the construction loan. So we're basically blurring that line. We -- someone brought a deal-- an entitled deal to us and we are very financially committed to it and we will monitor it very closely. So even though it's their deal, we're -- you know, we view ourselves essentially in the army, side-by-side, shoulder-to-shoulder with them.

David, we'll also be managing the assets through the leaseup and beyond.

Okay, just so I can be clear, your activities here are in now way proscribed by your commitment to Fund II.

Could you say that again, your connection is very bad.

I'm sorry, it is a poor connection. Your activities as a developer, you could do further developments without in any way conflicting with your commitments with regard to Fund II.

Actually, this development deal was originated before the Fund II was in place. So, it was a pre-Fund II transaction. So, you know, as you are well aware, I mean, this stuff has a fairly long lead time and I believe Fund II was completed around sometime in late summer and this transaction was essentially committed to before then. But generally speaking, our development is in fund -- in fund -- would be in the fund format.

Fund II gets the first option on any future deals?

On future deals, up to 25 percent of the fund. So, it's limited to 25 percent of the total activity. There would be a limit -- [inaudible] -- new development deals.

Andrew Rosivach, Credit Suisse First Boston.

Mike, I just couldn't tell when you were going through the detail, of the -- of the Fund I, Fund II fees. Was there anything that used to be in your '04 guidance that wasn't in your '05, that slipped from '04 to '05, which would increase the amount of promote, if you will, that's going to be in your '05 numbers relative to your prior guidance?

Of the promote, no. But of the asset management fee, we expected both the third quarter and fourth quarter asset management fee for Fund II to be recognized in Q4 and again, that got -- some portion of that got pushed; 793,000 got pushed into 2005.

Okay. And -- and when you gave your guidance in December, that wasn't something that you had baked in.

No, we had that as a Q4 trend -- Q4 transaction.

Josh Bederman of JP Morgan.

All my questions have been answered; thanks.

William Acheson, Merrill Lynch.

In the acquisition release that you put out yesterday, you mentioned a -- [indiscernible] -- current lease revenue, related to a master lease agreement. Is that included in your first quarter guidance?

Yes, it is. We have a very bad connection with you, too, Bill. So, bear with us to get there. But yes, that was included in the guidance and it was part of, if you go back to the December 17th press release, it's on the last page.

Oh, okay. And then the 300 million in acquisition guidance, is that exclusive of Fund II activity?

Yes, the assumption is that -- the assumption is that all activity will go into Fund -- into the fund. And so we're expecting to do $300 million of acquisitions, all of which would go to the fund.

Okay. Then on the fourth quarter acquisitions, is there some way you could perhaps give us a little bit more visibility on cap rates in the wholly owned acquisitions versus Fund II acquisitions? There was $110 million roughly that went to Essex and then $130 million that went to Fund II. Can you break out the relative caps on that?

You know, they're pretty much what Keith said, you know, about cap rates in general. They, you know, in Northern California they were around a 5 cap and the Southern California’s were a little higher, in the 5.5 to 5.75 range.

Okay. And then how about further disposition activity, irrespective of transactions with UDR?

Well, you know, the one thing that we continue to look at and have not made any commitments to is that we have 5 or 6 assets that have condo maps on it. And as the condo market continues to be very heated, we look at that as -- as a potential source of -- of low cost capital. It's something we continue to analyze and there's a potential that we could do something there, but we've made no commitments do it at this point in time. It's not in the guidance.

Okay. And then the G&A run rate, going forward, I mean, are we still plus or minus 4 million or is that going up?

No, I think we're back to the -- the G&A run rate that was in the guidance press release. You know, we're -- Sarbanes-Oxley, you know, year one, which was a -- had a big impact on 2004, will be less a factor, although still a factor in 2005. You know, it appears that we're in good shape there and, again, you know, the -- the purpose of the -- of disclosing the employee-related lawsuit was not to trigger, you know, recurring, you know, the thought there's a recurring expense going on there. But rather so everyone could identify what the FFO run rate -- the recurrent run rate was. So, I think we're okay there. So, I'd go back to the guidance. I think we're in good shape. In fact, the guidance in general I think is still-- still applicable. I don't have any major changes, except as Andrew noted earlier, we had some asset management fees slip from Q4 into 2005.

Craig Leupold, Green Street Advisors.

Keith, I was wondering if I can get your views, just in terms of, you know, the increased level of condo conversion activity and sort of where do you see that concentrated within your markets, most specifically? And do you expect to see some incremental revenue growth as more supply is being taken out of an otherwise undersupplied market to begin with?

I would say on the west coast, the majority of that has happened, has taken place, clearly in San Diego to this point. There are, you know, there was one property that was sold in Santa Clara, actually, Archstone sold it, it was sold to a very successful condo converter who converted it and sold it. There's one or two small deals in the Bay Area that are being currently looked at. We sold the Essex, which was sold to a condo converter and we're participating in that and that was converted. But beyond that, there's not a lot going on in Northern California.

And then in Southern California, there's-- there's the occasional one-off deal, but there's not -- not the activity that we've seen in San Diego. So, I would say San Diego is the primary recipient of all the condo conversions and beyond that, we're seeing it, just because it's so difficult if you don't have I map in place, it's just so difficult to get the entitlements to do it. You know, whether -- whether or not the reduction in supply is sufficient to drive prices, I don't think -- you know, again, I don't think that we're taking enough of -- enough of the units out of the marketplace to really affect the supply of existing units that would drive -- that would drive rentals. So, I think it's going to be, on the west coast, generally a pretty negligible effect as a result of the condo conversions.

Okay. And then, Mike, do you have sequential expense and NOI results? I know expenses can be lumpy and such, but I'm just trying to get a feel for what happened at the NOI level, going from Q3 to Q4?

Yes, you know, I guess that got dropped out of the press release. We'll put that back in and I'll call you later with that.

Okay. So, kind of related to some previous questions on kind of the nonrecurring revenue assumptions for '05. Has there been any other--any change in your guidance since 12/17? You did a good job of laying out all your expectations there.

Yeah, no, just, you know, the asset management fee slipped from Q4 to Q1, would be an obvious one. But we think the guidance is on target.

Okay. And what is your gross fee income assumption for -- not nonrecurring, but as you break it out in your supplement, the fee income line for '05?

Mark, do you have that number?

I don't have the detailed budget here in front of me.

Okay.

Yeah, we'll have to get that for you.

All right, one last one is how much lease income goes away with the sale of the manufactured home parks that you just announced?

That was -- that's already included in the guidance. So --

I'm thinking about what was in 4Q versus what will no longer be there, just trying to think about --

Do you have that, Mark?

I can follow up with you after if that's easier.

That's probably best.

Bill Crow, Raymond James.

You -- you've proven to have a pretty good history, looking into the crystal ball and moving your portfolio around and -- and I'm just curious what that crystal ball shows from a cap rate perspective? If you were to look out 18 months or 24 months, what -- what degree of change would you anticipate and then how do you work that into your -- your purchase decision given that we're just not seeing much same-store growth?

Well, we -- you know, we try to be prudent about that, but I'm not sure when it comes to cap rate. Cap rate, we think, is tied into the broader capital markets and interest rates and other activities. In terms of how we underwrite property, you know, we have to generate a certain leverage return in the fund, that's where most of our acquisitions and development opportunities are, of around 18 percent, in order to, after fees, generate a, you know, 13 to 14 percent return to our investors. The magic to get to that means that we need to, you know, if you're going start it at 5 or 5.5 cap, you need to grow rents and part of that can be via rehab or a variety of other things. But you need to grow rents at about 5 to 6 percent a year and then we are assuming a 100 basis point increase in cap rate on the backside.

So, is 100 basis points the right number? You know, that sort of is assuming that we have some pressure on interest rates, and they go up 100 to 150 basis points over the next several years. And that's sort of our best estimate at this point in time and, you know, to a certain extent it sort of depends on the economy. It depends on so many conditions and so many factors that are sort of outside our control. So, we're assuming that cap rates will naturally increase and, you know, 100, 150 basis points, which is not obviously a huge increase given where that takes-- that takes us to 6, 6.5 type cap rates and that's still pretty aggressive relative to, you know, the 20 years that we've been in the business.

Paul Puryear is in here, as well. He's got a question for you.

Just curious, on the data that you've tracked for moveouts, and a pretty-- you've got the percentages for that -- that you lose to home purchases. Can you just talk about, you know, the remaining moveouts? I mean assuming -- and how closely do you track it? Do they move to other rental apartments? Do you have any information on that?

I don't have it with me. We do track -- basically every person that moves out is asked to provide us information as to why they're moving out. So, we track it for all reasons. Generally those reasons can be all over the board. They tend to mirror what's going on with the economy. There will be times where we see maybe an increase because people have lost their job or they're transferring to another area. You know, to a degree, apartments have a transient component, so you have people that are coming in and out and moving on as parts of their -- as parts of their lives. So, there is really no one component that dominates the portfolio over another. But it's a variety of things.

So, if they're moving to another area, do you know if they're moving to a rental or to ownership?

Generally, I mean it -- you know, there's -- it's not a science because you're dependent upon what that resident that's moving out will tell you. Sometimes they tell us the truth, sometimes they don't. We try and gauge it based on the forwarding address they give us, if they're giving us a forwarding address, oftentimes you can tell if it's an apartment because there is some sort of a unit number attached to it. But it's -- it's not a hard, fast -- a hard, fast answer every time.

Do you know -- let me follow-up one quick one. Of the percentage that you show that leave for single-family homes, do you have a breakout between those that are buying condos versus those that are buying traditional housing?

No, I don't.

Karin Ford, Banc of America Securities.

Wanted to ask you, I guess it's get getting close to the time of year when the board will reconsider the dividend and you guys have a very low payout ratio, obviously. Can you just give us your thoughts on what we might see with respect to the dividend?

Well, our policy is that we increase our dividend approximately the same level as our FFO growth and if you look at our, you know, look at our core. I wouldn't include the sort of one-time fees that we got from these promotes on Fund I, but sort of look at our core FFO growth, sort of average over the next year plus, you know, what we saw in 2004. It's -- it's fairly low, one, two, three percent. So, it's going to be in that range. We're not going to-- we're not going to increase the dividend at-- I think our FFO growth for the year was 9.8 percent or something. So, it's not going to be at that level, but it's going to be more at what our core portfolio grew, which is going to be in the lower 1 or 2 percent.

Gotcha. Are you bumping up at all against your payout restrictions?

We are managing it closely, yes, I mean we're, you know, somewhere at that level, but again, you know, you had some exogenous factors that affected that last year, including the sale of Fund I and gains that generated -- were generated by that. And our sale of Coronado South, we are expecting, you know, later this year, we are expecting to be in a taxable transaction. So we do have some room, without consideration to those one-time only transactions. But we monitor it pretty closely, obviously.

Steve Swett, Wachovia Securities.

Michael, on the redevelopment pipeline, in the fourth quarter was that sort of running at its normalized pace going forward or do you see that ramping up further into 2005?

Steve we see that ramping up. We're -- when you in sort of a defensive management mode, which we've been in for the last couple years, the last thing you want to do is be ripping apart apartment buildings and having scaffolding up and stuff like that when renters have lots of different alternatives. As conditions tighten up and the -- you've got more ability to move rents, we would expect to do more in the rehab area. So I would expect that to increase this year.

So -- so -- long-term that's some upside but in the near-term is that more units offline for a little bit longer period of time?

Yes, I think that's exactly what happens. I think there's a transition year and I think 2005 is sort of the transition year to greater, higher levels of redevelopment.

And then, just remind me, do you take those units listed out of the same-store pool?

Yes, we do. Actually I think we have an update on a question from Craig Leupold early. Mark, do you have that?

Yes, Craig, the Riviera contribution in the fourth quarter was 368,000. The sequential results on the same store operating expenses were down 0.1 percent and on NOI it was down 0.6 percent.

Richard Paoli, ABP Investments.

My question relates to -- it's sort of a follow-up from several others. First is the timing of this 793,000 of deferred asset management fee, will that come in as a lump sum or will it come -- bleed in as the number of assets in the Fund II grows?

There will be more, Rich, that will come into Q1. I'm not sure that we're going to get all the deferred amounts plus the Q1 '05 amount in Q1. I think some of that will leak into Q2. But I think we'll be caught up as of June 30th.

Okay. And my second question is, and if I could I guess summarize, it seems like you guys are pretty consistent with your outlook and as it was in December. Yet you've got this about $0.03 coming in and the guidance range hasn't been bumped up by $0.03. Would it be fair to say that you have a $0.03 cushion now or something else gave? I mean, you said that nothing else in your view changed. So is that fair to say?

I think that's fair to say.

Okay. And the next question is -- the final question is, you spoke about moveouts into single-family. What were the general -- the turnover ratios in general? You said traffic was down. What were the turnover ratios in each of the regions? Not (indiscernible) submarkets, but North, South and Pacific Northwest; compared to last year?

Richard, it's in the supplement. They were generally --

Michael, we'll just go through them real quick.

Southern California was 50 percent, North California -- versus 51 percent a year ago; Northern California was 48 percent versus 46 percent a year ago; Pacific Northwest was 45 percent versus 47 percent; for a total of 48 percent versus 49 percent.

Chris Pike, UBS.

Quick question, Mike. I may have missed the -- when you guys were talking about the acquisitions in '05, the three hundred some-odd million. You talked about caps, did you talk about timing?

The assumption in the guidance was $75 million per quarter and I said we closed one deal in the Seattle in January. The press release just went out--

So does that timing still-- is that--

Yes, I think that timing is still going to be essentially there. We've got $100 million in contract and so clearly we're on-- we should be on board for the first couple quarters and if we can see opportunities I think that we'll-- we should hit the-- I wouldn't expect us to front load it. Let's put it that way.

Okay. And then in terms of Seattle. I'm just wondering, you're running a pretty high-- high occupancy rate, low availability. Are those statistics that you talked about before, are they pretty much spread through the various markets that you guys are in? Or are there modest market differentials in terms of occupancy and availability and such?

Chris, this is Bob. You know, I'm looking at it right now and it is pretty much across the board.

However, our portfolio tends to be east side predominantly. So there could be, you know, if you go north in this-- into some of the other areas, Snohomish County and some of the other areas, you may find somewhat different results, right? John Lopez is here too. John, what do you think?

Yes, you might find in Snohomish North, a little bit lower and maybe south by airport area is a little bit lower.

And if there's an asset-- if there's any assets in the portfolio that are a little bit lower than the -- you know, below the average that I reported, it's down in the Renton area and the southern end of Bellevue.

Okay. And then just the last question, I was talking to a couple of folks this morning and it was pointed out to me, on the second to last page of your supplemental, where you guys talk about the market-- for '05, with respect to supply jobs and the overall market condition. You know, is it fair to say that if you go back to your -- to your supplement -- or your guidance that you provided back a couple weeks ago and you look at the page 4, where it talks about the revenue growth per region--that should kind of foot out to what you're expecting? Or is this an overall market swatch of what you folks expect to happen in the respective regions?

Yeah, this is -- this comes directly from Mr. Lopez, our economist, who's also here with us today. And it represents the market, the MSA, which should be close to what we're doing in terms of market rent growth, but sometimes it can be different.

So, I mean, just-- let's say just look at Southern California, for example. You know, you're expecting occupancies 95 to 96 percent on average, you know, by the end of year. You're kind of there now in your current portfolio but you're expecting revenue growth of around 2.6 percent, yet you're also expecting rental rate growth, probably 3 and plus, if you look on a weighted average of where your properties are located. Is that to imply that maybe your properties are better situated or worse situated-- or am I just reading too much into this data?

No, I think you're raising, you know, a valid point. I think the issue is this is what's happening at the market rent level and, you know, what we are -- what our guidance is talking about is, you know, how it's going to be recognized. So, if there's $100 increase in rents today, we're obviously not going to show that -- it's not going to show up in our scheduled rent and through our financial statements for the next 12 to 18 months-- or ratably over that period of time. So, there is a difference, i.e. loss to lease, that's going to capture that differential. You know, basically the inherent deferral --

That you'll catch up, is what you're saying?

Yes, exactly. So that is definitely part of this business. It's part of why, you know, apartments tend to lag the general, you know, recovery of the economy. We tend to be back-end loaded and clearly we think that's the case here.

David Rodgers, of Key McDonald.

Hey, Mike, as a follow-up to Karin's question, would you anticipate borrowing against this year's dividend to cover the tax requirements?

We do not expect to have to borrow the dividend. Borrow against future dividends in order to cover the tax requirement. We think that we'll make it without regard to that. Again, I probably wasn't all that clear. On an ongoing run rate, we have some losses, so, you know, we have losses that we can use to offset transactional gains and clearly that was the case last year and we expect to be the case this year in 2005. So, we do have -- because of depreciation and other things, we do have, you know, some excess losses. We do have a net deficit that we can use for-- to offset transaction gains.

And then one question for Bob. In kind of thinking about the loss to lease in a different way, what are the rental rate changes, increases or decreases in each of your three regions on your renewals, say in the fourth quarter and maybe compared to the third quarter, if you've got that type of data?

I don't -- I don't have the -- you mean in terms of our renewal policy --

Well, your lease renewals and the rate differential on newly-signed versus the renewals coming up?

I don't have that information.

Okay.

I think you get there in loss to lease, though. I think what happened on loss to lease kind of demonstrates what happened, which is you had relatively flat market rents and -- you know, again, this is not a-- it's not a perfect science because you know, if we have increased availability like we did in Q4 we'll tend to push prices a little bit more aggressively. And then once you fix that issue, then pricing goes back to a more normal type of situation. But anyway, I think-- you know, I think what happened in Q4 is relatively flat, market rents, which is typical for Q4 and, you know, you have, you know, reason--small to reasonably sized increase in scheduled rent. And those were the two variables that were-- really played a part.

Steven Bloom, European Investors.

I'm not sure if you already touched on this, but it looks like in San Diego, you had the lower percentage of moveouts to single family housing? And that's usually one of the markets that's hotter in terms of some of the condo activity. Does that mean that condo activity is -- is much more speculative in for rent-type housing that you're moveouts to single family housing isn't higher? Or are you just in a different segment of the market?

San Diego has -- has among the best job growth and it has a bit more supply, than many of the other markets. And so it's hard to -- it's hard to attribute exactly, you know, exactly what -- where did those occupants of the condos go? Were they conversions of rentals or were they people buying second homes or were they new people coming into the market because the market had -- John Lopez is here, what was the growth rate -- the employment growth rate in San Diego last year?

It was roughly about 1.4 or 1.5 percent. Which was about 20,000 jobs.

So, it's difficult -- it's difficult to isolate it at that level of precision. Bob, do you have any additional comment on that?

Well, the only more is color and perhaps antidotal more than anything else. If you look at our San Diego portfolio, it -- a good many of those assets tend to be more of the general "B" quality assets. So, you're dealing with a profile that are-- are going to be more renters by necessity rather than renters by choice. So, in terms of that profile being able to then go off and move out and buy homes and you've had a good run up in home prices in San Diego. I mean, affordability has continued to be difficult there, I think it -- I looked at that low number and kind of concluded that it is indicative of the high home prices with a -- you know, a large part of our profile in those properties being those that have to rent. So, they're not able to -- they're not able to move out and start buying homes, even though the markets are out there and available to them.

Asad Kazim, RREEF Funds.

Hey, guys, just wondering if you could lay out perhaps what you guys are targeting today as a cash-on-cash going in? And then maybe a projected 10-year IRR on acquisitions and maybe you could break it out by -- by target markets, if that's possible?

Well, I sort of back up, but what we're looking at -- and we're not looking at 10 years, we're really looking at all of the acquisitions that we're doing right now are dedicated to the fund. And the fund IRR that we're trying to hit is an 18 and that's on a -- generally a five to seven-year life. And so basically what we're looking at is we're looking at cap rates and I think you may have missed this, but Mike went through it a little bit earlier. We're looking at cap rates going in at, you know, somewhere in the 5 to 5.5 percent range and we're looking at growth rates over that period of time of 5 to 6 percent. And that doesn't mean necessarily average every year, it may mean 2 or 3 percent for a couple year and maybe a couple of spikes of 8 or 9 when the market heats up and then back down. So -- and then we're assuming that we have to sell these things at the end at 100 to 150 -- well 100 basis points higher on the cap rate. So if the cap rate's going out at 6 to 6.5 and that kind of math will get you to the 18 IRR and that's really what we're looking at.

So-- and that's what you're going have to look at if you're going to be active in these marketplaces because the cap rates, you know, as I described them earlier, are pretty consistent in Northern California and Seattle as well as -- as well as -- [ indiscernible ] --

I guess just to add on to that, Asad, in Southern Cal, we're-- we're assuming that the ongoing growth rate, given that-- given a variety of issues down there, are little bit below Northern Cal and Seattle. So that's why we're really focusing on Northern Cal and Seattle. So, if you're getting an 18 in Northern Cal and Seattle, in Southern Cal you're probably around a 15-type, you know, leveraged -- leveraged IRR. And so you're not -- you're not quite there unless, again, you go back to a value-added -- there may be some value-added play that we have or bond financing or something else that might help you get there. But -- so Southern California becomes more of a special situation type, you know, investment program and Northern Cal and Seattle it's, you know, we're trying to grow as quickly as we can because we think we hit the overall return thresholds.

And Mike I guess just quick follow-up. If you guys are expecting 18 percent levered IRRs and I'm assuming, let's say with 60 percent leverage, that's roughly 7ish kind of unlevered. Is that's the new world order? Because -- I guess is what's your take on that since, you know, I guess historically, maybe even going back two years, going in apartment returns unlevered, probably 9ish percent. One, is that a fair statement? And two, how do you expect that to change? Maybe over the next couple of years?

I, you know, I'd say it's -- you know, I didn't -- I don't have in front of me the unleveraged equivalent of the, you know, the fund is 65 percent letter leveraged so that's the assumption there. I think that the unlevered we're looking at, you know, 8 -- I think we'll hopefully get to 8 to 10 percent, versus we've been in the 12 percent historically with-- if you look back at most of our acquisitions. So, I think that-- yes, I think that return thresholds are down a bit on a relative basis, and it's one of the reasons why we-- in the fund format we're pretty insistent upon trying to lock in, you know, debt at current rates. So when we acquired the 130 million in Fund II in Q4, we locked in 4.89 percent, you know, fixed rate financing for nine years. We think that's important because if interest rates do go up, we think-- and cap rates will ultimately follow them. You know, we want to have an assumable loan that can be traded along with the property to a buyer sometime in the future. We think that that provides a natural hedge to, you know, to the -- cap rate exposure that we all experience.

So, you know, I'd say unlevered, probably 8 to 10, which is probably around 200 -- 150, 200 basis points lower than historically, you know, our first five-year cap rate has been. Our first five-year post-acquisition IRR has been on an unlevered basis. And, yes, I think that's exactly attributable to the condition of the return markets.

[Operator Instructions] Josh Bederman, J.P. Morgan.

Just one quick clarification. When Karin Ford asked about the dividend, did you guys say you should think about core FFO growth, excluding the one-time gains of 1 to 3 percent?

Yeah, we said is that we're going to approximate our FFO growth and -- on an annual basis and so what we have done is tried to do that. So, I would -- what I had said is that I would expect to see our dividend growth -- our dividend increase this year, somewhere in the 1 to 3 percent range.

Okay. Just looking at your core guidance-- your core NOI guidance, you have about 2.3 percent and then you lever the Company, so, how does that tie? Seems like you should be, you know, upwards of 3 percent at least for core FFO?

Well, again, what we -- the policy is not -- is not a -- you know, a lock step situation, it's really a guidance issue for us and for the board. And we want to keep -- you know, our goal is to keep a very conservative payout ratio, but to also increase our dividend in -- in as an approximation of that to hold growth. So, that's what I would expect to see as a result of our-- our board meeting this coming quarter.

Okay. So, we should think more dividend growth in the 1 to 3 percent range. NOI-- sorry, FFO growth could be bit higher?

That's correct.

Actually one factor on the FFO growth, which is in the guidance press release, is the impact of variable rate loans, LIBOR has moved up pretty aggressively. So, much of the growth represented by the corporate portfolio has been eaten up in the LIBOR increase.

And, gentlemen, we have no further questions at this time. Mr. Guericke, I'd like to turn the call back over to you for any additional or closing remarks.

Well, thank you all for joining us and we appreciate your continued support and interest in the Company and hope to talk with all of you next quarter. Thank you very much.

Once again, that does conclude today's conference. You may now disconnect.