UDR Inc (UDR) 2002 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to your United Dominion Realty Trust Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the program, please press star then zero on your touch-tone telephone. And as a reminder, ladies and gentlemen, this conference call is being recorded. I would now like to introduce your moderator for today's conference call Ms. Claire Koeneman of FRB Weber Shandwick. Ma'am you may begin.

Oh thanks. Hello everyone, welcome to United Dominion's 1-Q Conference Call. If anyone still needs a copy of the release you can go to FRB's website or UDR's to download a copy of that. I'm going to read a brief Safe Harbor and then turn the call over to management. They would like me to inform you that certain statements made during this conference call, which are not historical maybe deemed forward-looking statements within the mean of the Private Securities Litigation Reform Act of 1995. Although United Dominion Realty believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give not assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the Company's filings with SEC. Without further ado I'd like to turn the call over to Tom Toomey, UDR's Chief Executive Officer and President and he'll begin and introduce the rest of management.

Thank you operator and Claire for that introduction and again welcome to the United Dominion Realty Trust first quarter conference call. Joining me on the call today are Mark Wallis, Ella Neyland, Chris Genry and Kevin McCabe and a number of our associates around the country. Let me begin with the way I view these conference calls, they're an opportunity for us to A) Report our results, B) Tell you how we see the business going and lastly, to answer your questions, which we hope there are many of. Management's comments will take about 25 minutes and we will get started very quickly on those.

Let me start by reporting our results. The highlight and the critical points I would make would be that eight percent FFL growth over prior years and 13 percent AFFL growth, both should lead the sector. Second, we beat the first call of consensus estimates by one cent, third we delivered same store sales operating results at 2.8 percent and fourth we completed $437 million of capital transactions during the quarter. Each of these areas will be discussed in greater detail by the management team. So let's get started, we're going to turn the call over to Kevin.

Thanks Tom. My goal for the next several minutes is to provide some color related to three specific issues. One, first quarter results both from a year over year and sequential basis. Two, talk about some selected markets. And finally a preview of the second quarter of 2002.

Regarding the first quarter, we were pleased with our overall results from an operating perspective. First quarter 2002 community NY gross of 2.8 percent was a result of a 1.7 percent increase in revenues and flat operating expenses with last year. So those of our associates on the call, I'd like to thank you guys for rising to the occasion and delivering such strong numbers despite choppy economic conditions. Across the portfolio our occupancy rate of 93.5 percent was down from 93.8 percent the first quarter as well as down from the fourth quarters 94.2. Obviously occupancy rates remain a concern for us, however despite this deterioration in occupancy we are encouraged by our ability to grow revenue, albeit slowly during these choppy economic conditions. In fact in certain selected markets we've been able to raise rents on a unit by unit basis. And we believe that when job growth picks up, occupancy and rental rates should improve.

Our continued focus on lease maturity's and month-to-month leases continue to show progress. The number of months outside of compliance from a lease maturity standpoint fell by 150 and our month-to-month leases are down to 2.7 percent, both great numbers. As a result, we've been able to drive our turnover numbers down from an annualized 74.5 percent in the fourth quarter to our first quarter figure of 65.5 percent. Again, a little high from historical standards of about 57.8 percent for the first quarter of last year, but progress is being made. Concessions remain a concern. On a year-over-year basis, they increased $1.5 million to 4.1 million for the quarter. However, the stabilization that we saw in a sequential basis, it started between the third and fourth quarters, continued in the first quarter, increasing a modest $69,000.

From an expense standpoint, progress was made as well. The stringent guidelines we put in place towards the latter part of the fourth quarter, coupled with a decreased utility usage and pricing allowed us to keep expenses flat with last year. Payroll costs were reduced on a year over year basis by one percent, which when coupled with the 18.5 percent reduction in utilities, offset a 4.7 increase in taxes and insurance as well as a 9.4 percent increase in repairs and maintenance expenses, most all turnover related.

On a sequential quarter basis we continue to see improvement and continue challenges. Revenues decreased 0.1 percent from the fourth quarter, again primarily related to our slight occupancy decline. And expenses decreased 0.2 percent as well, leading to flat sequential performance in NOIs. Sequentially we were able to see some revenue increases in certain parts of the country, specifically Richmond, Baltimore, Houston and Seattle. And we saw a decline in sequential expenses in certain markets such as Charlotte, Dallas, Houston and Seattle.

Touch briefly on a couple of markets, I thought I would spend a couple of minutes running through our expectations for certain markets moving forward, the good, the bad and the ugly if you will. Again, not trying to predict the markets performance but rather our performance in our key cities. First the good. Those markets in which we expect growth include metro DC where we're looking to grow about six percent. Houston, Portland, Columbus, looking at about four percent. Dallas, Seattle, Arlington about three percent. And finally Richmond, Nashville and Columbia we're looking for about two percent growth. Markets where we believe we will be managing to flat growth targets include Phoenix, Tampa, Orlando and Raleigh. And finally those markets where we think we've got a lot of work to do include Atlanta, where we're targeting about a negative two percent growth. Charlotte, similar, negative two- percent growth. Greensboro, North Carolina, negative three and finally San Francisco about a negative 10.

In summary, I believe the first quarter was a glimpse of our management teams commitment to bringing value to our shareholders through operations. The daily focus we're bringing to key metrics to drive our business are paying off and we continue to emphasize the back door. More importantly though, 2002 will be a year in which we dedicate ourselves to ensuring that we attract and retain our key talent. Recently we had analyses confirm that increased tenure at the community director and service level manage -- service manager level leads to improvement in NOI growth. We spent much of 2001 differentiating between our top performers and non-performers and we'll continue to do this in 2002. To help us in this area we recently revamped our recruiting efforts and established a hiring specialist in each of our seven areas, compared to essentially three full time resources in prior years, who will be challenged to bring the best available talent both inside and outside our industry to UDR and ensure that we keep that talent.

With all that said, we expect the second quarter to continue to be choppy but believe that our continued focus on managing to the downside and the fact that we operate a B class portfolio will lead to revenue growth in the one to two percent range. Expenses in the two to two and a half range. Flat occupancy and concession numbers all leading to increased same store sales in the one to one and a half percent range. With that, I'm going to turn the call over to Ella.

Thank you Kevin. The first quarter was a busy one for the capital market side of the company and before I go into details on some of that, I wanted to take an opportunity to tell you how we define capital transactions, of which we had $437 million the first quarter. Refinancings were $355 of that and I'll go through a little more detail on that. Acquisitions and dispositions, Mark will also cover about $39 million of acquisitions that contributed to our capital transactions. And finally, common stock offers and we had one in the first quarter of about $42 million.

During the quarter we refinanced about $355 million of existing debt that had a weighted average interest rate of a little over 7.8 percent and a weighted average maturity of about three years. The funding in the first quarter concluded the phased funding of the phase refinancing of the 31 loans that we discussed last quarter. Overall we lowered interest costs, thereby saving over $4 million per year on a fully fixed rate basis. And I think that actually bears repeating because we will see lower annual interest costs of at least $4 million per year for the approximately 10 year term of the refinance. As part of that we managed to extend maturities on that new debt from three to almost 10 years. With their interest only, we reduced our amortization and we created positive cash flow on a net present value basis of about $17 to $20 million. And these facilities, the Fannie's and Freddie's give us full right to substitutions. All of this is one of the factors that contributed to improving our fixed charge coverage ratio from last quarter, last quarter it was 2.15. Throughout this year we plan to continue to convert variable rate debt to fixed rate debt such that we expect our fixed charge coverage ratio to be around 2.2, 2.3 at year end, of this '02. And in the range of 2.2, 2.5 at the end of year '03.

For the maturities this year, 2002, we had some unsecured debt at $65 million that was maturing first quarter, we paid off all of that with the excess proceeds from this refinancing I just mentioned. The remaining maturities this year are about $53 million secured debt. Those have either been repaid through using this facility or they'll be repaid out of sales proceeds that Mark will talk about. So our maturity schedule for 2002 is done. Furthermore, as we go through our refinancing, our goal is to have no more than 10 percent of our debt, excluding the revolver, maturing in any one year. And we've made a lot of progress on that. Today, we only have one out of the next 10 years where we have more than $200 million, or 10 percent of our total debt maturing in that year.

With regard to floating rate debt, our press release showed that at March 31st our level was 37 percent, but we have either fixed or rate loss additional debt since that time to where our true floating rate debt is really 24 percent of total. And our goal is to convert additional debt throughout the year to get to a range of about 15 to 20 percent. And again that's not a huge number, just the difference between 24 and 20 percent's only another $80 million. Our unencumbered assets stand at $2.3 billion, approximately 54 percent of our NOI came from those assets in the first quarter. So these two barometers of our financial strength, the fixed charge coverage ratio and the level of our unencumbered pool are what we consider to be two very important measures for us. And we've seen substantial improvement in both of these over the last 12 months and they'll continue to be an important focus for us.

In the first quarter we saw another opportunity to issue commons, you'll probably recall in the fourth quarter we issued 4.1 million shares, this quarter we sold another 3 million shares to the Cowen and Sears Capital Management for net proceeds of 423, $42 million. It was an attractive price and it lined up with a use of proceeds to acquire additional apartment communities on the basis.

Finally, in the last week or so we were in the market, in the unsecured market. Our goal was to issue $150 million of unsecured, we thought that we would use that, we were going to use that to improve on maturity schedule and strengthen our balance sheet. The investor feedback that we got on the pricing didn't make sense to us so we pulled back, but we plan to be back in that market when the pricing improves for us. That's part of the emphasis on keeping and how important to be a rated company is to us.

With regard to the ideal capital structure, we view that as about 45 to 50 percent equity in the form of common stock, 45 to 50 percent in the form of debt and up to 10 percent in med-type financing, whether it's preferreds or converts. We're well on our way to improving our financial ratios, the fixed charge coverage ratio in particular. Unencumbered asset pool and improvement in maturity schedules. So in closing, it was a busy, productive, profitable quarter. Lower interest costs, improved ratios, no maturity issues for 2002 and we improved the overall maturity schedule. So let me turn it over to Christopher.

Thanks Ella. I'd like to spend a few minutes on the call talking about earnings guidance for 2002 and 2003 as well as a couple of unusual or non-recurring items from our first quarter results.

With regard to guidance, obviously this pertains largely on our same store growth and we're very pleased with the growth rate that we experienced in the first quarter of 2.8 percent. Let me point out that our growth in same stores has been fairly consistent every month of the first quarter and we're very encouraged by that result. But we are holding our revenue growth assumptions for 2002 in the one and a half to two percent range with occupancy basically flat. Expense growth of about two percent, which gives us same store sales results in the one-sixth to two- percent growth range.

On the acquisitions and dispositions front, we continue to model consistent with our last call, about 375 to 400 million of dispositions. Three hundred to 350 million of acquisitions, a cap rate spread of about 100 basis points between the two and three to six months of dead capital time. As we indicated on our last conference call, we began this quarter to convert of our new Fannie Mae debt from floating to fixed, as Ella discussed, which brings a little more predictability to our interest costs. We're currently projecting '02 interest in the range of $130 to $132 million. And with the adjustments that I'll discuss momentarily, our overhead for 2002 should be in the 19 to $20 million range. So we've reaffirmed our $1.65 FFO guidance for 2002. Street consensus currently has us at $1.73 for 2003, we intend to come out with more formal guidance for 2003 in the coming quarter as our leasing, as our heavy leasing season gives us a little better insight into our revenue opportunities for 2003. At this point $1.73 would be at the low end of our current range of estimates for '03. We remain convinced that our focus on operations and on investing our capital in higher growth markets, combined with the rebounding economy, is going to give us another year of opportunity in the eight to 10 percent growth range.

Turning to first quarter results I'm going to address three areas briefly, the impairment loss on real estate, our G&A expenses and the extraordinary item with regard to extinguishment of debt. We're very committed to our portfolio repositioning strategy as a means for providing a higher rate of long-term growth for our shareholders and capitalizing on our property management strength. We've executed a series of contracts during the quarter, which will result in a net gain of seven to nine cents a share in the next quarters results. One of the contracts that we executed was at pricing below net-book value. And as you know, GAAP accounting requires us to recognize losses as soon as they become known, but the offsetting gains for those losses are not recognized until those transactions are actually closed. So in this quarter we took a two-cent per share hit to earnings related to these contracts, which under the NAREIT guidelines gets added back to FFO just as gains and losses on the sale of all depreciable real estate are adjustments to FFO.

Our quarterly G&A run rate remains in the four to four and a quarter million range as I discussed with you in last quarter's call. Our first quarter however, was impacted by a couple of significant adjustments. First off, I would point out that our incentive systems in the company are very heavily weighted to NOI growth and out-performance, so the results that we achieved in the first quarter resulted in a significant adjustment to our bonus accrual in the first quarter. And I know that we have a lot of associates who are out there listening on the call, I would echo Kevin's comments and say thank you very much for the strong performance that we were able to achieve this quarter. And I'd like to affirm to you our commitment to pay for this performance and the bonus pool is looking pretty good at this point.

We also recorded a significant charge this quarter in anticipation of the pending buyout of some long-term security monitoring contracts that the company currently has on approximately 25 percent of our portfolio. We've taken a hard look at all the markets where we currently offer security monitoring as an amenity and we've determined that in these certain markets our existing and potential customer base does not place a value on this amenity. And our cost of maintaining this amenity in those markets currently exceeds a million dollars a year. For this reason we've chosen to negotiate an early termination of these agreements in these markets which these contracts that we're negotiating have an average life of about seven years. We've tendered an offer to the provider of this service of $1.3 million to buyout these contracts. So during the first quarter, we booked an expense provision to cover this offer as well as associated consulting expenses that would be incurred in deriving and settling the final buyout amount for these contracts. Just to reiterate that to you, we've offered $1.3 million to buyout contracts that currently cost us over a million dollars a year and have an average life of seven years.

As I discussed with you in our last conference call, the debt refinancing that we undertook involved the prepayment of certain -- or of the payment of certain prepayment and yield maintenance costs which we paid in the fourth quarter of last year as well as in the first quarter of this year. Nineteen million dollars total, a little over $2 million was expensed last year and the remainder was taken in this current quarter. Again this is a situation where GAAP accounting drives the timing of the expense, though we were able to announce the charged to earnings last quarter when we announced the transaction. We were not able to book the charged earnings until the debt was actually retired, which occurred this quarter. And at this point in time we don't anticipate incurring anymore of those charges in 2002, though we're always looking for more opportunities to save money by refinancing debt. That covers the extent of my remarks on our financial performance, I'll turn the call over to Mark.

Thanks Chris. I'm going to spend some time talking about the progress we're making towards repositioning the portfolio. Since our goal's to sell out of secondary and slower growth markets while we add to existing markets who are already having an operating platform. Now at this point in the year we've closed $59 million in acquisitions, we have another $100 million under contract that should close by the end of the second quarter, that's a total of 2,200 units. Now let me break that down quickly by market. That would add 650 units in Northern Virginia, 518 in Seattle, 416 to Denver, 400 units in Arlington Texas and 250 in Austin. We continue to work this acquisition pipeline, we've got around 400 million of assets in our core markets and their at various stages of due diligence.

I'm asked a lot, you know, about what our acquisition strategy is, so I want to just spend a little time outlining how we approach it and simply stated we look at it, generally, at a buy in three different ways. The first way would be the one next door. It's an asset that's located near other assets we own. It adds synergy to our existing operation. A prime example of this would be the purchase in North Arlington Texas. This community built in '93 is located in a half mile of two assets who are already owned. We knew the asset, we competed against it, we believed it was under formulation to our own assets in that sub-market.

Second way we look at it. Low occupancy in relation to the overall sub-market. An example of that would be the Barton Creek Community we've purchased in Austin. It's a well located middle-market asset in an "A" location, it's fallen below 90 percent occupancy, just due to lack of upkeep, units not ready, made ready for a lease and so on. And even though the overall market cycle in Austin is down, this asset has an immediate upside because it's performing below occupancies in that sub-market, and they're at 92, 93 percent to date, so it's a great opportunity.

Third way we look at it would be below market rent. It's opportunities where due to lack of professional management we believe that rents are below market. Lakefield Terrace in Arlington Virginia just closed as an example of this approach. The community, it's had no cosmetic renovation since '88, a significant number of month-to-month leases. It's a hundred percent lease with a manager's office that closes at 3:00 p.m. in the afternoon. This is an opportunity for us to step in, in 18 months we think we'll be at a cash on cash yield in excess of nine and a half percent. So that's what we're doing on the acquisition side, let me talk about selling quickly. Currently we have closed on $40 million in sales, which includes 950 units in Memphis, which Memphis was sold at an 8.3 cap. We also sold a little small commercial property in Eastern Tennessee. We have in the range $270 to $290 million of assets under contract or a letter of intent that should close by the end of the second quarter or early third quarter. So that's 6,600 units and you can look at that generally at an eight and a quarter cap rate.

Now the specifics, these sales would include another 376 units in Memphis, 439 units in Houston, 824 units in Fort Worth, 228 in Dallas, it would be a complete withdrawal from San Antonio, Tucson, Las Vegas and Naples Florida. So on or about the end of June we should have reduced our number of markets down from 62 to 55. So I think we're proceeding pretty well with our overall reposition strategy at an appropriate pace.

Let me talk just briefly about overall market conditions and the buying and selling side of things. With low interest rates we see a lot of players who might normally be selling assets sitting on the sidelines. They're taking the strategy of waiting out their respective market in the hopes that the market's going to get better and it's going to recover and they can sale at a better time. Now and then there are always some owners who take a more cautious view, they see choppy times ahead for the economy and they're willing to go ahead and sell those to the people we're pursuing. We're a cap-rate. You know I think cap- rates are hovering around eight percent depending on the market. We're able to buy and sale at about the same cap-rate right now. I think cap-rates are slightly lower than what we saw at the end of last year. But there are a lot of assets that owners are carrying with a heavy leverage and they're not experiencing the rate of growth they thought, that was predicted to them and this may bring more of our assets to market for sale, we'll just have to wait and see.

Last thing I want to mention about portfolio strategy is that each year we want to add an appropriate number of new assets to the company. We believe the cycle is approaching the time when new development starts to be warranted. We're looking at possible new development starts for three to four communities by the end of the year. Now I want to turn it back over to Tom.

Thank you Mark. I want to take a couple minutes and give you, if you will, the view of the industry from 40,000 feet, or my read of it. In the past we've stated there are three major factors driving our business, construction, competing housing alternatives and jobs-household formation and immigration. Looking at each of those areas a little bit closer. On the construction, what I'm struck by is that the average number of units under construction or the starts if you will, are still hovering between 275 and 300,000. This is pretty consistent with the last 10 years, but if you drive into it a little bit more in detail, what you find is, is that the number of tax credit or low income housing construction activity has actually increased during that 10 year period. So today, it's 50 to 60,000 units of that 275 to 300 is low income, or tax credit deals that are, frankly, not competitors to us for our product or our renters. So I think people are quietly watching this or actively watching construction starts and it certainly feels to me that we do not have a construction problem at this point and we don't see anything on the horizon to indicate that.

Second, competing housing alternatives. Everyday, we all, all of us pick up the morning paper and read about record home sales, low interest rate environment and we are certainly seeing this as our biggest challenge in the immediate future. During the first quarter we noted an enormous number of residents leaving to grab the--Cinderella's slipper if you will, the last bit of low interest rates that are out there. I may be frankly one of the few people that's out there to see interest rates rising because I think it would stem some of this tide. And it certainly weighed on our caution towards the balance of 2002 on the impact and delivery of our numbers. We've gone through to mitigate this and look at the impact of the rising interest rate on this particular segment and the impact it would have on us. And what we've found is, is that for every one-point interest rate rise in mortgages, it would raise on average the monthly home payment, mortgage payment, by $150. That's pretty significant and I think when we see that type of movement in rates you're going to see a lot of that, those residents staying with us longer, saving towards that home instead of jumping to it. So I think there's a recovery on the looming of this area, but I have to just wait for Mr. Greenspan to make up his mind.

On the third area, jobs, households, and immigration, just overall, unemployment looks like it's bottoming out, it's improving or at least bouncing along and not going to be that much of a negative impact going to the future. Immigration, there is very little data on an interim basis published on this, but in our markets that we have high immigration, it certainly feels like it's slowing. Or if, you know, if you will, not quite come to a standstill, but has slowed. Household formation, still going strong. The growing population, we certainly see that as still the benefactor, maybe not in the short-run but in the long run. Overall, the economy, in my view, you're seeing just a sluggish recovery. We're seeing full recovery out of the defense industry, consumer spending and housing. While if you will, the three T's, telecom, tourism and technology still lagging. Our results by market follow this. We'll keep monitoring those areas for recovery and we'll be moving our rents accordingly.

Let me now open it up for questions and we do appreciate all of you for your questions, so fire away.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the cue, please press the pound key. And if you're on a speakerphone, please lift the handset before asking your question. One moment for our first question. Our first question comes from Rob Stevenson from Morgan Stanley.

Good afternoon guys. In terms of the dispositions that you guys are looking at, what's the sort of market out there for you in sort of timing? I mean you talked before about that you're embedded in your numbers is a three to six-month downtime, has that been expanding over the past you know, few months, is it shrinking or is that more or less staying the same from previous guidance on that?

Well today, I think it strengthens where we are today at this point in time. And what we see out there, there's still a lot of leverage players in the market. In the local markets some of the small markets we're selling in we see, you know, good interest from the local leverage player. I think from the seller's side you see, some, a little more caution if the high bidder is that leverage player, but they're still in the game. But I think we're ahead on the time at this point in time.

All right and during the quarter what did you guys see in terms of delinquencies?

-- hoping we can sustain it, but we want to be cautious about that and more importantly we want to be able to execute our repositioning strategy in a timely, sensible fashion. And so it gives us latitude in executing that, which we think is the right thing for the company in the long run and that's what we're seeing and what we're forecasting in our modeling.

Alright. And can you go over the breakout again of the 2,200 units, you went by that pretty quickly? And also it sounds like a lot of these acquisitions are at the stressed markets, yet you think you're hitting them at the bottom and they're going to improve when you know, places like Austin you're hearing up to three months of free rent. Can you comment on why you think these properties will improve over the next 12 months?

Well, first of all these assets are brought to us by operations where they see that in that specific sub-market, and this is a well located asset in Barton Creek, that there's upsides, you know. There's a lot of sprucing up to do, none of it major and we think it's a good time to enter that market, that we can buy it at a good cap rate with upside in occupancy and you can't do that in the upside of the cycle. We've got enough built in, we're in Austin, so we know that it's choppy down there, but in that specific asset sub-market, 250 units, we like that long-term and are very comfortable with that. Let me go over those -- that breakdown too that you asked about.

OK.

Six hundred fifteen in Northern Virginia.

OK.

Five hundred eighteen in Seattle.

OK.

Four hundred sixteen in Denver, 400 in Arlington Texas.

OK.

And then the 250 in Austin.

OK. And it just surprising to me, Tom, that, just listening to your conference call how relatively upbeat it is compared to earlier calls and press releases. Do you think this is a function of your lower rent per unit, your B class quality portfolio versus the "A" class and do you expect some of the pain that's being felt in these "A" class portfolios, do you think that'll ever seep in into your operations?

Well a series of responses to questions there. As it relates to speaking to other companies and their experiences, you know I'd ask them, you know we try to do the best to run our company. As it relates to the middle market product versus the high end, my experience has told me over the years that middle markets weather down cycles better. Certainly a case, you know, if you ask an "A" operator he's going to give you his point of view. Mine just comes from year in and year out of watching markets go up and down. And people that we rent to are generally people that make an hourly wage. They do not have a lot of housing alternatives. They don't have a lot of discretionary income, they need a place to live and so they're very tied to staying where they're at and they're tied to their jobs. So I think they do weather the down cycle.

On the swing back up, they're certainly more sensitive to pricing. And we will have our issues when that cycle starts turning and what our hope is, is that again job growth, immigration take over and push us over the top. So I am upbeat. We've got a company that its culture has really grown a lot this last year. It is a company about performance, it's about rewards for performance, it's about being the best in each market. And on the national portfolios you add up the best in each market, you're going to be one of the best companies in this sector. We're very encouraged by where we're at. Upbeat. I think we've managed our revenue stream, our expenses, in a fashion anticipating and living through, if you will, this slow down. And we're seeing some of the fruits of it right now. On one level, I'm very grateful for 2.8, but I look at it and said we could've done better. Kevin knows that, our people at the site know better. We can do better and we will continue to improve. So I'm not one to step back and complain about a glass half full, I'm looking at it and saying it's 75 percent full and I want to get the last 25 percent. That's the type of people we are.

OK. And also what surprised me is that the concessions as a whole, you know the sequential increase in concessions, I think you said it's only $69,000 total. How do you equate that to what's going on with the rest of the industry where you're seeing, I mean you're hearing all these concessions increasing? Why do you think that in your sector you're not seeing the concessions?

I think a couple things. First, we went through and paid a very dear price last year for getting our properties into something called lease management. And to give you an example, if you have 360-unit community, and if I only have to lease 30 apartments this month, I have a completely different view than if I had to lease 60. And so we've made a very concentrated effort last year, and in fact, you'll see it in our turnovers numbers last year, we were up at 75, 80 percent, pushing residents into our lease management program, pushing our sites into it. And so now we're only trying to lease 30 units, which is a heck of a lot easier, not a lay-up, but easier than trying to push 60. If you're out there trying to do 60, you've got to offer concessions, which on top builds on concessions. Some residents, they drive home, they drive right through the entryway and what do they see? The sign that says $99 move in special. You go to our sites, you don't see that stuff. We do not insult our customers by telling them we took advantage of them. And oh, by the way, the market shifted and now they get a better deal. That's not the way we want to treat our residents so we don't hang those signs. We go door-to-door. We tell people where their market is, we show them the statistics and we execute lease management. So I think that's a lot of what we're finding works. And it will work just as well when we see the cycle turning back. That we will be able to raise rents quicker because we only have to find 30 residents.

OK. Thank you. Very good quarter, guys.

Thank you.

Thank you. Our next question comes from Steve Swett from Wachovia Securities.

Good afternoon. I have a couple of questions. First, when I look at the acquisition volumes you're talking about, both completed and deals that you're indicating you're going to close. How much product have you had to look at, have you had to pursue to reach that level of acquisitions? Are you're pursuing a lot more than you're able to get, or are you just able to find sort of diamonds in the rough?

Well I think at the end of last year there was a period where you could find some diamonds in the rough because there were fewer players. And I think we took advantage of that, most of the deals that we closed on. Now I think things are a little more normal and there's more players in the market and so we're looking at a lot of deals. You know we're in the oil business because we drill oil everyday, a lot of them are going to come up dry, dry holes, but if we don't drill we won't hit. And so, to answer your question, we're looking at more than we're obviously closing on today, because people are more back in the market. At the end of last year, in January it was a little bit of a quiet time and we talked a couple at the nine-cap rate.

So if I look at, you know, you've got a couple hundred million you're looking at closing you know, in fairly short order, you've assumed a certain amount of downtime before reinvestment. But are you going to have to get more aggressive on pricing, given that there's more people out there and the pricing now, the competition for product might be, might be higher than it was a couple of months ago?

Well, that's what I said I think in my comments, that I thought cap rates would move down somewhat and they're now closer to eight and earlier in the year they were closer to, what we were looking at, on the high side of eight. So yeah, I think there's going to be more competition out there. But we'll get our fair share of the deals.

I have a couple things Steve I would add to it. The way I look at it, today we look at five deals and probably close on one. Two years ago you might have been looking at three deals and closing on one. Five years ago you looked at one deal and you closed it. That's kind of what's happening, people are getting smarter about selling, they're more you know, cautious as it relates to the recovery. People are saying gosh, buy it at eight cap? I look at it and I say guys, if I'm buying something that's 85 percent at eight cap, that's not the market. I mean what happens is that property's gonna probably leap back up to 93 in short order. And so you're ending up betting a little bit on when the recovery occurs. On in place cash flows it certainly looks like a lower cap rate. We're tending to look at again, Mark outlined the three areas of our focus acquisitions and we're still seeing an active pipeline.

The good news is our operating people for the first time in many years are engaged in actively driving properties, looking down the street and saying there's the one that's mismanaged that I can do a better job at. Good location. And they are an invaluable resource. It's much better than having Mark and 12 guys in a central function saying oh, here's the next package. Our people are driving up and down the street saying there's the one we want to buy because A) it's a great location and B) the people running it don't do as good a job as we can. And that's what you're going to see more and more of. And we're just now getting good enough in property management where we can turn them loose a little bit on this. And we're seeing more and more opportunities in my opinion.

OK. Just a couple of questions on the internal growth. You guys laid out your expectations for revenues and expenses and NOI for the rest of the year and I'm sorry, I didn't catch the numbers. I think it was one and a half to two percent revenues, two- percent expenses and what was the NOI in expectation?

It's 1.6 to two Steve.

One point six to two, OK. And then, just a last question. As you, conversation on concessions here, how exactly do you guys account for concessions? Do you account for revenues on a cash basis, in a basis? Just refresh my memory.

Well Steve, that's a great question. And when concessions grow to the extent that they have, it's one that we have to look at very hard. We believe very much that this is a cash business and we continue to book our revenues on a cash basis. We believe the lease life's that we sign and what those concessions are, calls for that form of accounting. As you probably know, GAAP requires that we account for our leases on a straight-line basis and we're constantly evaluating what the difference is between a straight-line approach to accounting for concessions and a cash basis. And we've been able to continue to account for these on a cash basis to this point.

OK. Thanks a lot.

Thank you.

Thank you. Our next question comes from John from Salomon Smith Barney.

Hi, actually Rich Anderson with John. Just following on some of the cap rates discussion. Tom you talked about some of the disciplines that you use in acquiring properties. What sort of increase in the cap rate do you get if you're buying at an eight and you have sort of a mismanagement opportunity, what on average do you get the cap rate to over say you know, a year or two?

Well, let me start about Lakefield Terrace, we just bought this deal. And that cap rate was, you know, about a seven and a half going in, but when you look at the pink carpet in the lobby, there's a lot of cosmetic things we're going to do there very quickly. That particular asset, the mechanical systems are pristine, but no cosmetic work done since '88, we'll come in there in a 12 month period, dress up the corridors, clean up the elevator , take down the chain link fence that's out front. It's got great drive-by and we expect that to be at nine and half, 10 percent in about 18 months. And that's now that's -- and that's one that has high occupancy. And some of the others Tom eluded to, we might find an asset that's in the 80s and we buy it at a cap rate of an eight. You know, you can do the math and you get it up to 92, 93 percent, were usually running over a nine- percent.

So, I mean is it 200 basis point improvement sort of the run rate or are those the exceptions and not necessarily the rule?

Well, I think it's a range. It's 100 to 200, yes.

OK. Regarding some of the refinancings that you've done, what would you expect to be your volume for the full year 2002? You were fairly successful in what you've done so far, what do you think is in the pipeline at this point?

At the end of last year we went through our secured debt portfolio, about 120 assets and we tagged 31 that were candidates that resulted in that net present value of say $17 to $20 million. Right now we don't anticipate doing any of those others, but we're constantly looking at the portfolio to see if there are other opportunities, especially since interest rates have dropped and sale opportunities come up.

OK. Early in the call you mentioned some of your best markets and I think one of them was Seattle and I was interested to hear why Seattle qualifies as a best market in your view, considering what's going on with the Boeing layoffs and what have you?

Again, it's not, we're not qualifying Seattle as one of the best markets in the country, what we're saying is that for us in Seattle, we're performing very, very well, both from a revenue growth standpoint and in our managing of expenses. We took a look, a very hard look at the Boeing layoff and found that the impact on us, at least as a was minimal. That's not to say that further repercussions on suppliers to Boeing may not impact us going forward, but that we've got a great operating team in Seattle and look for continued growth there.

And that three- percent growth rate is what you expect in 2002?

That's what we expect for the second quarter of 2002.

OK. Last question. Maybe this is sort of a conceptual question, and maybe it's for Tom or whoever. How far ahead of schedule would you say you are Tom when you came on board last year, with regards to the balance sheet improvements? And we're already talking about a fixed charge coverage ratio in the range of 2.2 or 2.3, I mean are you a year ahead of schedule given the interest rate environment or are you even further ahead of schedule than that?

Rich, when I came on board in February of 2001, I looked at the balance sheet and I really didn't see any opportunities at all. I saw us grinding it out slowly, so I think we may be a year to 18 months ahead of schedule. Certainly as our operations continue to improve, we're going to get that number back up to 2.3. And we see that as a very good goal and all I can say is I think the Fed.'s have created somewhere by my estimation, between $50 and $80 million of shareholder value by the refinancing that we've gone through. And we're thank you for it, thanks for the environment, wish we could have done something about grading it again. But it was a great opportunity. It certainly looks to us like it's closing. We're going to try to get as much done as we can before it does, but we're grateful.

On your comments about Seattle, what I would add is this. You know I'm looking at the census from 1990 to 2000, one thing that you realize out of the gate is that about 45 percent of the immigration in America occurred in five cities, Seattle being one of those five. And certainly benefited a great deal from the telecom and immigration run-ups. What we've seen is a precipitous drop, not just Boeing, it was the telecom and immigration drying up that caused Seattle to pull back dramatically. Looking at it now, a couple things are starting to emerge. Immigration I would think we'd start improving there. Employment and technology seem to have bottomed out, we hope are headed up. And there's been limited constructions. So we're very optimistic about the long-term prospects of Seattle and we'll probably be targeting it again for more and more acquisitions. So I think it's one of those cities that you know, everybody that's a developer out there stay away from and the rest of us operators are happy to be chasing it. Thanks for the question.

Thank you very much.

Once again ladies and gentlemen if you have a question at this time please press the one key on your touch-tone telephone. Our next question comes from Dan Oppenheim from Bank of America.

Hi. Most questions have been answered. Just wondering if you see anymore opportunities such as the -- the purchase of the security contracts and the other things you're working on for the future?

I think the security, excuse me, was a unique opportunity and one that we've frankly been working on for a couple quarters. We will probably do better jobs in our purchasing areas in the future. At this time we're focused and have spent the last year primarily on the revenue side. We saw that as probably, if you will, 75 percent of the opportunity. We see 25 percent opportunity, if you will, improvement in the bottom line coming out of the expense areas. I think we will bring more focus to that on the balance of 2002 and 2003. But again I reiterate, the biggest progress I think we've made is we've got a culture that is very focused on the bottom line and is getting rewarded for delivering on that bottom line. So not a lot of those types of situations are there out there, but I think we're going to continue to improve on expense areas. In particular, one area might be the real estate tax areas that you'll hear us talk more about in the future, about the improvement we made in there. We went out and hired a gentleman that ran the real estate tax appeal service for Arthur Anderson in Dallas, to come in and look at ours. As you realized 26 percent of our real estate, of our expenses, are real estate taxes. If you look at our peers in other companies, you'd probably see that number in the 22, 23 percent range, so that could be an area of improvement down the road. But again, we're kind of a company that when we do it, then we tell you about it. right now I'm kind of laying out what I think is there.

Great. And then the other question, talking about development starts, looking for a few before the end of the year, any specific markets you look towards?

Not New York.

It was a joke, I'm sorry.

(Inaudible) New York.

No. We're looking in North Virginia. Actually we've got a spot in Houston we've considered due to the strength of that market. And we have a couple of assets that have actually proven that market there. And we're looking in the west. Yeah, DC, Northern Virginia, California and in specific, a couple specific sub-markets that might be in Texas.

I think if the economy starts to turn you're going to see some opportunities popup. You know our lease up in Raleigh has picked up steam because frankly defense's spending has improved. We're going to be monitoring that as the economy recovers, where we think those particular markets are going to benefit. And Mark and his team are out kicking tires. It's certainly the time to be kicking tires and we'll report more as our progress proceeds.

Thanks.

Thank you. Our next question comes from Jessica from Real Estate Management.

Good morning, or good afternoon. I wondered with your stock price doing well and your financing in good shape and you've got some great plans for improving operating efficiencies since a lot of these have already worked, are you thinking seriously about looking at whole companies to buy? Are you thinking any differently than you have in the past?

Jessica, very fair question, it's good to hear your voice again. My sense about that is we have the second lowest multiple in the industry right now. I certainly feel that is unwarranted, but I'm not going to sit here and whine about it. I mean the answer is over time we deliver results, we should trade at or better than the average. That's the type of company we're trying to build. I think it's one of those periods where I would look at can we manage something and improve upon it? There's no, I won't rule it out, but I'm not saying it's on our radar screen and it makes a lot of sense for us to do right now. So with that I'd say we're focused on 2002 as in continuing to improve our operations, continuing to execute our repositioning to further those efforts, we would certainly think it as attractive. But right now I'm focused on those two areas and getting our multiple up.

Thanks.

Thank you. There appear to be no further questions at this time. I'd like to turn the program back to you for any further remarks.

Well thank you operator. In closing I want to thank you for your time. I know there's many things you could be doing and I appreciate the time you've spent with us today. In closing this was a good quarter. One in which our operating team delivered a pleasant surprise, one we pass on to our shareholders. Additionally we started to see our repositioning strategy being executed successfully and lastly the balance sheet has made significant strides. And lastly I would close again management is comfortable with its earnings guidance of 42 cents FFL for the second quarter and 165 for the balance of 2002. All of you take care, again thank you for your time.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program, you may now disconnect. Good day.

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