UDR Inc (UDR) 2004 Q1 法說會逐字稿

Good morning or afternoon, ladies and gentlemen and welcome to United Dominion Realty Trust first-quarter 2004 results conference call. At this time, all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today Tuesday, April 20, 2004. I would like to now like to turn the conference over to Ms. Klenneman (ph). Please go ahead.

Hello everyone and welcome to United Dominion's first-quarter conference call. The press release and supplemental package were distributed yesterday as well as furnished on Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package, the Company reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy of these documents they are available on our Company’s website at www.UGRT.com in the financial performance section.

Additionally we are hosting a live webcast of today's conference call so access in that section. At this time management would like me to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although UDR believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. Factors and risks that could cause actual results to differ materially from those expressed or implied as forward-looking statements are detailed in yesterday's release and from time to time in the Company's filings with the SEC. Additionally the Company does not undertake a duty to update any forward-looking statements.

So without further ad0, I would now like to turn the call over to United Dominion's CEO and President, Tom Toomey who will introduce the management with us today as well as start his formal remarks.

Thank you for that introduction, and good luck getting over that cold. But hello and welcome to United Dominion's first-quarter earnings call. Management's comments will take about 23 minutes, and then we will open up the conference call to questions.

UDR is off to a good start in 2004. As you'll note in our press release we've exceeded the consensus estimates and tightened our guidance. Simply stated, we see the business getting better, and we have made meaningful progress on our 2004 business plan.

With that summary I want to focus my comments on three areas. Our strategy, our value ads, what is going well, what is not and then I will turn the call over to Martha Carlin, who will discuss our operations.

First, our strategy. It remains the same because it works. Over the last three years you will find that our middle market product, our diversification of investments by market and economic lines has led to FFO growth of nearly five percent during this period. We have outperformed the average apartment REIT by 28 percent. This earnings growth has supported a dividend growth of six percent, one of only three apartment REITs to deliver a dividend increase each of the last three years.

Second, our value ads. I've outlined on a number of calls with you in the past our value ads. They include operations. Our focus in this area is paying off in reductions and concessions, resident turnover and associate turnover. We see some significant earnings growth as we return to normalized operating environment. Martha will give you the facts.

Second, in a recovering economy, our products will give us an opportunity to add value through rehabs and upgrades which provides superior returns. We have been working to build a team and identify those opportunities. Mark will add some color in this area. Third, we do not rely upon nonrecurring income.

Fourth, acquisition in sales. I'm glad to report that we are hitting our targeted returns on our 2003 acquisitions, which totaled in excess of 350 million attributed to good dealmakers and solid operating team.

The third area, what is going well and what is not. First, what's not. Our utility costs are increasing as expected eight to ten percent. With an economy that is driven by energy and with high oil prices this could deter the economic recovery underway. We had planned on this and forecasted and focused our sales force on increasing our penetration in utility rebills to residents, which now stand at two-thirds of available dollars to be rebilled.

Second, the interest rate environment. This is certainly in a state of flux with many anticipating a rise in rates. While I believe this will cause a disruption in the buying and selling of assets, I also believe it will cause opportunities. The good side of a rising interest rate environment and in fact we've seen it already, is mortgage rates have been up 50 basis points in the last four weeks. This should continue to reduce the number of residents moving out.

Third, our industry has an extraordinary high vacancy rate, and many markets still have active building programs. It's going to take some time for some of those markets to dig out from where they are.

What's going well? First, we have a very active pipeline in the acquisition and sales fronts at attractive prices. Mark will give you some color more on this topic. Second, our operating team is getting stronger and deeper. Our top 40 managers, leaders of our operation have an average of eight years experience with our Company. In addition to their years of experience in our industry, they know the markets, they know our assets, and they know our associates.

So in summary, we have made more money per share this quarter than last, and we will make more next quarter. I'm excited about our prospects because we have strengthened the balance sheet, we have improved the quality of our assets and a stronger operating team exists. These facts put us in a great position to take advantage of the recovery and in fact we will likely be one of ten apartment REITs to post positive year over year results for 2004. With that said, let me turn the call over to Martha to discuss operations.

I am pleased to share with you this morning the first-quarter operating results and some perspective on the early second quarter. Again, we met expectations. That should come as no surprise as we been delivering our results consistently for the past three years. Our team has persevered through the top economic climate of the last three years and is starting to see signs of improvement in many markets. As you can see in the press release, revenues were up 900,000 sequentially. Let me tell you what I see as encouraging and disappointing in that number.

First, let me explain the primary components of this improvement and why I am encouraged. Declining concessions for the fourth consecutive quarter hosting a 7.5 percent decline or 317,000 sequentially and 10.2 percent decline or 444,000 year-over-year. Let me repeat that. Concessions declined for the fourth consecutive quarter. That is a trend reversal. Returning to a more normalized operating revenue level regarding concession should add another 4 to 7 million per year.

Occupancy is up 20 basis points sequentially to 93.1 percent, representing increased revenue of almost 300,000. While occupancy is still soft in a number of markets, Houston, Atlanta and Phoenix to name a few, we are seeing occupancy strengthening in many of our markets on the east and west coast. Returning to a more normalized occupancy level should add another 5 to 6 million revenue on an annualized basis.

And we continue to maintain our credit quality evidenced by our best debt, bad debt experience of the past four quarters. While I have seen many indicators that the tide is turning, I was disappointed that rents were essentially flat. However, this, too, can be seen as a positive in that rents in many of our markets are no longer declining. At this stage in the cycle it is easier to reduce concessions than to raise rents.

A few other key points in the business I would like to point out. On a year-over-year basis, 42 percent of our markets are showing positive NOI growth. Our military markets in Norfolk and North Carolina posted some of our strongest growth. On a sequential basis, 58 percent of our market had positive NOI growth indicating that the momentum is building. Our strongest sequential growth was in San Francisco where we are seeing increased traffic and less bargain hunting.

Resident turnover is down 1.3 percent year-over-year, and 4.6 percent sequentially. We've experienced another quarter of declining lease breaks and eviction. This trend will continue to help us grow the top line. Many of our stronger markets were those with the most significant progress in resident turnover on both the year-over-year and sequential basis.

The first quarter operations associate turnover is down 18 percent year-over-year and remained flat sequentially at 38 percent on an annualized basis from the fourth quarter. We believe that a well-trained and tenured staff on site translates to lower resident turnover, increased occupancy and a stronger bottom line.

Personnel costs increased year-over-year 4.4 percent as our focus on associate retention has moved us closer to full employment at the site and our associates received a pay increase in January. The first increase since early 2002.

Utility reimbursements continue to increase. Partially due to higher utility costs and partially due to stronger collection procedures of the site. Utilities were up significantly, 8 percent year-over-year and 10.4 percent sequentially. But we expected this and believe that this is a trend not likely to reverse in the near-term as rates continue to climb across the country. Our best hedge against this trend is to continue to insure that our residents are picking up a fair share of these costs. On a year-over-year basis the percentage of these utilities offset to residents increased from 45 percent to 50 percent. This translates to between 1.2 and 1.8 million on an annual basis.

Insurance and real estate taxes combined to increase 4.4 percent year-over-year. This increase is primarily due to a core insurance loss experience year in 2003. As I discussed on the last call, we continue to invest in our assets. Our interior upgrade programs delivered approximately 1200 kitchen upgrades at average cost of 2700 a unit and 500 washer/dryer insulations at an average cost of $1000 a unit during the first quarter to better position us for rent growth. We anticipate our average return on these investments will be between 15 and 18 percent, which would add approximately half a million annually to revenues.

Looking forward to the second quarter, I am pleased with what I've seen so far in April. Revenues are continuing their favorable trend due to continued increased occupancy and further declining concession. We are seeing improvement in our pricing power in selected markets and on specific unit types. While one month doesn't make a quarter, April looks stronger on a rent line year-over-year. We also expect utility costs to abate somewhat as we move into the spring and experience warmer temperatures.

In closing, I am cautiously optimistic that a recovery is underway, and we are moving toward a more normalized operating environment. We frequently get questions regarding what constitutes normal. For us normal represent stable occupancy at 94 percent and concessions in the 1.5 to 2 percent range. This will add approximately 9 to 13 million to the top line before any rent increases or 7 to 10 cents per share. The question you will have is at what pace? We will keep you posted. Ella?

Over the last three years, we've made meaningful progress on improving the balance sheet and that strategy is basically completed. Our goal now is to stay on the railroad tracks that we've established. A part of that is managing our variable-rate debt within the guidelines that we previously provided as part of our 2004 guidance. The first quarter saw interest rates and spread volatility as job creation and the war news buffeted the capital market. Our guidance for 2004 was for a range of bond issuance of 125 to 425 million. So we now focus on opportunistic times to turn out our variable-rate debt in these disruptive markets.

For example, the February jobs number that set Treasury rates tumbling to sub-four, gave us an opportunity to issue bonds and term out debt. This allowed us to end the quarter at a variable-rate debt of 25 percent. Average cost of debt was five with a weighted average maturity of a little over seven years.

I want to take this opportunity to highlight two strengths of our balance sheet that often don't get the attention they warrant. One is the significant improvement in our unencumbered assets, and the other is our Fannie Mae credit facility. So taking each of them briefly. Not only has our amount of unencumbered assets increased to 2.9 billion with a current market value of 3.1 billion, but we've been including newly acquired assets into that pool. We added four Southern California assets, eight Northern California, four in D.C., and those assets alone were valued at $400 million and went into our unencumbered pool.

Second, our any Fannie facilities which represent 67 percent of total secured debt have complete rights of substitution. In fact, recently we did a one for three substitution in order to facilitate a sale. Although these credit facilities are counted as secured debt when comparing us to other companies, the fact that they are really a pool of assets securing these facilities makes them very different from typical properties specific debt. In fact only 13 percent of our total debt is properties specific debt that would need to be addressed as it relates to a sale. This gives us a great degree of flexibility and strong assets.

So in closing, we still have $68 million of swaps remaining that will burn off in the next two months, no real maturities for the balance of the year, and we are on track for the bond issuance in our 2004 guidance. So with that, I will turn it over to Mark.

Thanks, Ella. I am going to address the status of the execution of our repositioning strategy. First, I'll cover the acquisition pipeline, second I will talk about sales and then I will give a brief update on the development pipeline and rehab opportunities within the portfolio.

As the press release indicates, we closed on 106 million worth of assets adding to our core markets in the Dallas area and Maryland. Traditionally, it's harder to close deals in the first quarter because the brokerage community virtually shuts down the week of Thanksgiving and does not gear back up until mid January. However, we had previously negotiated in 2003 an option to buy the Texas asset; that allows us to close this transaction in the first quarter, and our acquisition team really focused on timely execution of the Maryland portfolio.

Both of these acquisitions are in core markets that did not require the addition of overhead. The Maryland assets have a weighted average of 13 years. It's a solid portfolio with an up-to-date amenity package; the asset in Plano, Texas was built in 2001 and is in an outstanding location.

Our acquisition pipeline overall remains active. We have approximately 300 million under letter of intent, and we are actively engaged in the appropriate due diligence. If these deals make it through due diligence, I would expect that 200 million would close by the end of the second quarter and the balance will close by late fall. 85 percent of these potential acquisitions are in California. And would increase our percent of NOI generated from California from 14 percent today to 17 percent, pushing us further toward our ultimate goal of having 20 percent of our NOI generated by the growth markets of California.

I want to talk a little bit about cap rates. Cap rates remain compressed. They are tied to basically three things; one, tied to the low cost of money; two, supply and demand and to buyers and sellers expectations of the future. In many markets buyers and sellers are coming to believe that we are at the end of the recession part of the cycle and that we are entering a prolonged recovery. This translates into more compressed cap rates. By historical standards, there's not a lot of product for sale. I do not see indications of that dramatically changing. So that puts downward pressure on cap rates.

Now significant rise in long-term interest rates should raise cap rates some, but the other two factors I mentioned should keep them at these historical lows. So we do not see a justification for taking the risk of waiting on the side lines to invest. When we see good buys at or below replacement cost with long-term upside, we're going to continue our strategy of being that buyers.

We sold only one asset for around 13 million this quarter, so on the surface it would appear we are just not selling much. However, we have an additional 1641 homes under contract for a sale price of 84 million that are set to close by the end of this month. The buyers completed their due diligence and now have 1.5 million of earnest money on deposit that is non-refundable. This closing was originally scheduled to close by the end of the first quarter, so when this is done, we will have sold close to 100 million within the first four months of the year at a straight cap of 7.1 percent. That is on track as to where we want to be at this point in time.

This sale will remove us from two noncore markets and would trim off some of our lower market communities. We will continue our strategy of queuing our product for sale after adequate acquisitions have been procured. Detachment 8 details the status of our development pipeline of 1300 homes. We are underway in Rancho Cucamonga and Las Colinas and ahead of schedule in Houston. We have experienced some final permitting delays for a small 24 home addition in San Francisco but expect that to get on track soon and with a firming market there, our yield expectations are still in line with what we originally projected.

We are in the process of identifying rehab prospects within the portfolio and our asset quality group is currently doing due diligence on 6 communities and paying approximately 2500 homes. We expect to be able to realize future growth from some of these assets as we update and modernize these communities. So we continue to make steady progress in improving the quality of the portfolio.

I will now turn the call over to Chris.

Thanks, Mark, and greetings to everyone on today's call. I would like to spend a few minutes talking about our tightened earnings guidance and also about some of the investments that we are making to enhance our long-term growth and predictability. It has been six months since we first provided 2004 guidance, and I do have a couple of things to update with you.

First, as Ella discussed, the interest rate environment gave us a couple of opportunities to lock in some long-term financing at rates significantly better than we had initially modeled. So we opportunistically moved to lock in this debt a little earlier in the year than we had planned.

Second, our estimates for the timing and extent of short-term rate increases have changed, with less rate growth than we had previously forecast occurring later in the year than we had previously forecast. And third, the economy is showing signs of greater strength than I had expected at this point, so we remain cautious given the lack of significant job growth and declining levels of consumer sentiment about the future.

As Mark described, our capital transaction activity remains on target to meet our goals for the year. However, should we continue to see improving operating results, we would likely move to dispose of more real estate than we might otherwise, pushing dispositions closer to the 200 million level at the high end of our previously provided range. Although none of these factors individually would significantly impact our forecast earnings, they combine to increase our competence in the midpoint of our guidance range. So this quarter we've tightened the range by two cents on each end to a range of $1.50 to $1.58 per share of FFO.

For the detailed assumptions that support these numbers, both the original guidance as well as the revisions that we've just made, I would refer you to our website at UDRT.com.

From a long-term perspective, we continue to make investments that will enhance shareholder value and improve our rate of revenue and margin growth once this economy begins to consistently create jobs. While continuing to aggressively manage our overhead costs, we have been able to add the following incremental capabilities to our team that you might have noticed in our recent annual report. We now have a Vice President level position responsible for sales and marketing strategy. Priority one for Steve was to enhance our capabilities to drive traffic through the use of the Internet. Through these efforts, we've already seen Internet traffic increase over six fold, representing less than one percent of our total traffic a year ago and 4.5 percent of total traffic in the quarter that just ended.

We find that these Internet leads are typically prequalified, they've already developed some level of interest in the target community and as a result, they close at a higher rate. Combining this with other initiatives ongoing within our operations team, the result of the declining trend in our marketing costs per new lease add some relief to our site teams who can turn even of their attention to serving our existing customers.

Investors and customers alike will also notice the results of Steve's efforts with our new and improved website, most of which is accessible in Spanish as well as in English is rolled out within the next few weeks. We also have a Vice President level position responsible for talent acquisition. And we are being much more proactive in developing the channels of people into the industry from schools and other businesses. In screening that talent for both capabilities and team fit before they are hired and in making sure that vacant positions in critical customer focus areas do not remain vacant for long.

In addition, our Vice President of Talent Development has rolled out new management training and development programs to improve our capabilities in people management. And we have begun aggressively promoting people inside the Company into key positions of operations management. The combination of these and other improvement initiatives ongoing inside the Company today has resulted in a significant decline in our associate turnover, which contributes to the overall positive energy level within our operations, while also strengthening our relationships with existing customers and with each other.

We created an Executive Vice President level position for asset quality, and we've begun building a stronger team of resources dedicated to the maintenance, preservation and enhancement of our properties. Through its focus on purchasing leverage, capital allocation and the execution of property improvements just in time to meet the needs of the market, this team will drive significant returns on the incremental investment and increase ROI on the portfolio going forward.

So in summary, we remain on target to achieve our earnings guidance in 2004 while simultaneously making significant incremental investments in the quality and the capabilities of our team. All part of continuing to fulfill our commitment to deliver consistent, predictable results year after year. With that, Operator, I will turn the call back to you for questions.

(OPERATOR INSTRUCTIONS) Kerry Callahan (ph) .

I am here with Nora Credan (ph) as well. The same-store NOI guidance for the year at the fourth quarter conference call you indicated down one to up two, you were down three in the first quarter? Is that in line with your expectations? Is that just seasonality over the course of the year?

Yes, it is. We had originally planned that the first quarter would be just about exactly where it is and that we would see gradual improvement in those results through the balance of the year. We expect to see year-over-year growth in same stores by the third quarter.

On the capital spending side, you indicated in your release that the recurring CAPEX would be flat at about 470 per unit. In 2003 you upgraded -- you spent in upgrades about 15 million and change. What is your expectation for '04, and can you review for us again sort of the aggregate ROI? I know you talked about the kitchen and the washer and dryer ROI, but what is the aggregate amount and the aggregate return you are expecting?

We've given our operations teams across the company a target level to spend on ROI type investments that Martha described; new kitchens and baths, new washer/dryers, garage and parking facilities, so forth and so on. Targeting to spend a total of 25 to 30 million. And in addition to that, Mark and his team have a couple of significant entire property rehabs that they're looking at, that total about 2500 units. Those will be started over the next two years. So when you roll those together with the ROI investments, we are somewhere in the 75 million range of total spend for CAPEX over the next 18 to 24 months.

And the 25 to 30 for this year, do you have a sense of the return on that?

As Martha said, the targeted returns are in the 12 to 18 percent range.

Just lastly for LA, you indicated the -- you reference the hedges that roll off in April through July at 68 million, which looks like if you let it float it would be somewhat accretive. Are you intending to let it float?

It will roll off by July, and our plan is to maintain our variable-rate debt in that 25 to 28 percent range. The debt will be turned out throughout the year through the issuance of bonds.

Got it. Thank you.

Jordan Sadler.

Smith Barney. Good morning or afternoon. I had a question regarding the acquisition. Did you disclose what the cap rate is on the 300 million you have under due diligence right now?

We did not. Those cap rates you will see is we've got a couple of assets that are non-California that will come in close to the high six range, which is consistent with what you saw in the first two acquisitions. The California assets are going to be lower and let me qualify this, they are going to be probably six -- sub six before the benefit of some rehabs are going well with those assets. So that's what we're looking at now as we go through this due diligence.

What we look at is we've got some great opportunity out there in California on properties that are as Mark mentioned, in the middle of a rehab so cap rates are not going what is relevant. What is going to be relevant is what the stabilized returns are going to be and how long it takes to get there and what we are paying on a per unit. And like our view here is do not disclose more than what the deal is until it's done. And Mark said that we would get them done in the second quarter, we will see what happens and release the details with it then. What I can say is we've been out and looked at the assets; all of us here at this table and we're pretty happy with what we're going to get.

I guess you would expect another 100 or 150 basis points in the yield once those things stabilize?

I think that is a fair way to look at it.

And what part of California are those located in -- Northern or Southern?

There are four assets in Southern; we're looking at and three in Northern.

I guess just generally --

Any more questions and I will have to take my clothes off, Jordan. You are treading.

I'll switch to a new subject.

My whole team just relieved themselves. They were scared to death there for a moment.

I guess on the -- it seemed like you guys were encouraged about the improving economy and obviously rising rates. Can you maybe talk about the more recent trend? I know it is only 20 days that rates have really started moving up but maybe the recent trends you are seeing in traffic, is there anything yet to speak of?

The trend we are seeing in traffic is traffic is up slightly in most markets but that's a typical seasonality where we see traffic starting to increase going into the second quarter. We are not seeing a lot of rate increases. Again we are seeing occupancy increases and concessions burning off, although there are several markets in the East, Baltimore, Washington D.C. where we have some ability to start pushing rents, and San Francisco, we're seeing -- our renewals are not coming in and having to renew at a lower rate. So those rates are firming as well.

Dallas we were surprised. Dallas was able to get it's occupancy up higher than the average market for our competition and that has translated into some rental rate increase in some of our properties there in Dallas.

Martha, what were the occupancies at the end of the quarter? I know the average 93.1.

93.8, roughly. We are looking at 94 and we are going into the early part of the quarter.

I think you're going to see other companies report similar results. I mean, Mark was out there every week looking at this and how we stack up and we're just seeing a general strengthening throughout many markets and probably it's a good sign. Our pricing strategy is more focused on pulling off concessions and so you're going to see other companies probably report higher occupancies or reductions in rates and higher occupancy, some combinations.

I think you're generally going to start to see a lot of people posting sequential revenue growth and how they get there is their own pricing philosophy. I'm pretty happy with ours because I think there's room in the occupancy side and as Martha highlighted, pulling off the concessions. We're looking at a revenue stream that's going to add 7 to $11 million when we get back to a normalized environment.

Now I notice sequentially you guys had a little bit of improvement on the revenue side, obviously and occupancies were up. But you talked -- just moving over to the upgrade program, I didn't catch what the full numbers were. I know you did 500 washers and dryers at a 1000 per unit and some kitchens and baths on top of that. How much of a contribution was that to your same-store NOI growth?

I don't have the -- it's very difficult to splay (ph) out exactly on a renewal how much of it is the firming market versus the ROI that we've done. But on our average return basis it will add about .5 million for the year for the ones that we did in the first quarter.

What was the total dollar amount invested during the quarter?

That was 3.7 million.

And 15 million last year in similar types of programs, or was that lower?

The 3.7 million is our kitchen upgrades, our washer/dryers. There is another miscellaneous 3 million in investments in some other types of upgrades, such as strict appliance upgrade, boilers, some exterior upgrades, some lighting enhancement.

Could you just remind me what the total amount of kitchen and bath upgrade and washer and dryer upgrades were last year? For the full year?

I don't have that.

Roughly 12.5 million. It's on attachment 10A of our press release.

Okay. And just lastly, it seems like you've obviously got the dispositions keyed up here to fund the acquisitions you have going forward. But at this point acquisitions are running ahead and seem to be pipeline-wise. What is the source of funding, source of cash that funds the acquisitions you have going forward?

Last year, it's kind of a two-year picture on the subject. You will find last year we raised nearly $300 million in equity in repairing the balance sheet. We will probably this year not be into the equity markets unless we pick up our acquisition pace in the pricing. Right now I would say we are comfortable executing in the 500 million in acquisitions, 100 to 150 million in sales, so a net 350 funded by unsecured debt. That's how we plan on executing our plan in 2004. Should we find numbers that go beyond both of those, you would find we might look at the market for equity, but we don't think it is necessary this year. Part of it is this team has been averaging about $600 million a year in capital transactions, and that's what we have been targeting this year. We think we will be very successful in doing that.

It would be another couple hundred million dollars of debt issuance we would be looking for?

I believe yes.

Stephen Swett.

Wachovia Securities. On the expense side, I think Martha said that it was 45 or 50 percent of the utilities that you were now billing through, and I think Tom you said earlier that it was two-thirds of the unit that you have the potential to bill through on?

Yes. Here's how it breaks out. To give you a kind of a short and I'll have Martha fill in the details. Today we've got about 40 million is our utility cost. 13 million of that because of regulation or common area we cannot bill back at this time. That leaves 27 million. Our billings to residents in collections were 18 million. So we are collecting about two-thirds; we've got about $9 million potential there, and we continue to look at how to get that $13 million number down. Martha's got it by encaption and by line if you want to know how much gas we're collecting in New Jersey on a Thursday; she can probably give you those numbers. But the (multiple speakers) .

I'm curious about that gap -- that 9 million between what you are collecting and what you think you can collect. Whether you have a plan in place to capture that 9 million?

We do have plans in place, and we are focused on a number of initiatives across the country. One of the biggest areas of opportunity is in natural gas. We do bill that back to residents in the Midwest and the East, but that is not billed back to residents in the markets in Texas and Arizona, primarily because none of our competition bills that back, and the gas that we use there is primarily for heating hot water. So it’s a little bit more difficult to bill back and the market just isn't fair today for us to be able to do that. But that is on the horizon once the market starts to firm back up. We still have some opportunity on the water and sewer side and we continue to make progress on that every month.

We've moved to a program where we are no longer having a third party bill or collect the funds for us. We collect those on-site and our collection percentages have increased on the average from 15 to 20 percent higher per site by collecting them, when we're collecting the rent versus having someone else try to collect it.

On the acquisition pipeline, the comment was made that the acquisition environment is very competitive and perhaps even more so than recently or late last year. And your volume on the pipeline was pretty good. Have you guys changed your pricing at all in terms of your cap rate targets? Or return hurdles?

I think I'll answer it this way. We are competitive on the larger deals. We've got a track record now that is giving us a little bit of an advantage there, I believe. And then the other thing is we do, as Tom mentioned and I mentioned also, when we see upside in rehab and our management team coming in and operating these things better, the cap rate is somewhat how you calculate it, and we are seeing upside, even though sometimes the going in sheer raw cap rate is a little bit low. We see we're going to be able to improve it, and that maybe translates into us being successful in some of these bids.

I would add some also color here that -- my attitude towards this is we are seeing some strengthening in individual markets. We are certainly gaining a lot of confidence in our operating team. And with the kitchen/bath programs we've seen the difference and when you go in and put some money into these assets right up front, we are getting the rents and the pops. It certainly makes us -- if you want to characterize it as aggressive, yes, aggressive and optimistic because we are actually getting the results. In 2003 those acquisitions of over 350 million were meeting or exceeding all our return hurdles. As so that tells me, not only are we just identifying it, we're delivering on it. And that's why I am being much more aggressive in this front, particularly in recovering markets.

One last question, Tom have you added all the management team you intend to add this year and is there any impact from the additional personnel on G&A?

I will let Chris address the overall G&A, but I can say that we are always out looking for more and more talent. What I've been impressed with is the results out of the new marketing team, out of the HR team. We are certainly out there looking for more talent in the rehab and repositioning of assets. We think we're going to pick up some of that skill in this sling right now as homeownership and the building out of those programs starts to tail off, we will find some skilled people in those areas and add them to it. Add them to our team. So will it be done? Will we add people? Yes. I', encouraged to always add people, especially the ones that pay for themselves. And those people will. Overall G&A?

I will give you a feel for the run rate. This quarter is a little low. We've done a good job of managing these costs, and a lot of the projects that I have described are just under way. Our guidance for the year was on G&A to be a million below to 2 million above where we were last year. Last year we were at 20.6 million. I think we are on target this year for about 20 million. So you're looking at a slightly higher run rate for the balance of the year, it’s probably more like 5, 5.1 million a quarter.

Rob Stevenson.

Morgan Stanley. Good afternoon. Just a couple of questions, most of the other ones have been answered. Mark, on your acquisitions and specifically on the ones in California, are you -- what is the level of the deferred maintenance that you are seeing on the B assets these days? Is it basically people haven’t put any CAPEX into these assets over the last few years trying to wring out every dollar?

I'm thinking California as you know because it's a tough market to build in, what you have out there is an older asset than we would buy in other markets. And it's a rehab market. And sometimes local guys underexecute on those rehabs. There is enough lipstick on it that it looks a little bit better and we see a little bit more that can be done. So I just characterize it as basically a lot of rehab type opportunities and that will continue because it's hard to find sites out there to build on.

How does that versus the nation as a whole -- when you are acquiring assets in Baltimore and Dallas, are there still given the age of the assets are there still levels of deferred maintenance which you guys -- they are surprising you not only on the acquisitions that you are executing but on the ones you are looking at?

I wouldn't say we're seeing across the board a lot of assets that need a great deal of deferred maintenance. What we are seeing in other markets outside of California, I would say if you told our guys, they are seeing a little bit newer products come to market. They may have been only held for three or four years by developers or private investors. So we are seeing opportunities on those assets where there's not a lot of deferred maintenance, but we see that they are pretty much under much undermanaged. And just where we can step in and do a better job and get more traffic and improve the operations.

Okay. Another question. A lot of the talk on the both the acquisitions and dispositions etc, on the cap rate, when you take a look at the acquisitions that you guys have done recently, on a per unit basis where does this sort of compare to where you would have been able to do these acquisitions a year ago? Are we up, down, sort of flattish -- any sort of meaningful change on a per unit basis?

I would characterize it as flattish. We really look at replacement costs on these things, and we build enough to have a good handle on that and with a rehab team they know what replacement costs are. So it's pretty flat.

Last question, Tom. What is -- is there anything that you guys are planning on the management compensation level with the performance units and stuff like that?

No. I think we've outlined in our proxy our policies and those supported by our shareholders because they voted on every one of our programs. And the Board. So we generally spell it right out in the proxy. You can see this last year that we've made less money than the year before. Probably by average of about 11 percent and the simple answer was is our shareholders didn't get as much per share as they did the year before. So we look at it and say it's not just shareholder return, it's a combination of factors. And we are looking forward to this year where we return to being delivering positive earnings, growing earnings, increase our dividends -- so there is no change in policy there, and we fully disclose all our programs.

Andrew Roseveck (ph) .

Credit Suisse First Boston. Good morning. I think this questions is for Chris. The way the market has been crazy and that day your stock actually got down to 17 bucks, do you still have that buy back program that is kind of automatic that you get to a price of "X" and you buy? Is that in place?

I'm not aware that we've ever had that kind of program.

We don't have an automatic, but -- certainly we are setting there and my team can report that we're looking at it and saying well what if we release earnings early; can we get in the market and be buying shares?

So you don't have something in place that -- I thought you had something where you weren't caught by the window of earning season and you were able to buy whenever -- I think you got to a certain share price.

Maybe that's a good question for us. We should be investigating it. I hate being out of the market and not being able to take advantage of opportunities, when the market overreacts.

And a couple of questions probably for Ella. You mentioned that the secured pool size changes. What do you think you need to get to get to B-AA-2 (ph) and how important is that to you as a company?

As you know right now we are split rate since S&P took us up. So if we'd issued bonds recently, I think we would see a significant portion of the benefit of an upgrade probably already baked into our numbers. Just assuming at some we would get the final upgrade. But I think we are saying that it probably made about a 20 basis point difference and we probably saw most of that in our recent bond issuance.

And I know you guys have given this in your prior earnings number, what are your LIBOR expectations that are baked into your guidance?

We just -- as we updated our guidance yesterday and put it on our Web, with the narrowing of our range, we took our assumptions from LIBOR increasing 100 basis points by the end of 12 months to LIBOR increasing 50 basis points at the end of 12 months.

And how much of your floating-rate debt is tied to LIBOR versus the tax exempt that benchmarks?

Actually, the only thing that is tied to LIBOR is our revolver. The rest of it is DNBS (ph) which tracks a little below LIBOR and that is the Fannie Mae equivalent.

Thanks a lot.

We have in our press release -- it is like our revolver is 105.

Asad Kasim (ph) .

Another question on acquisitions. Just wondering since you are focusing on the West Coast, it's indicated that you're expecting higher growth up front, assuming that you are our targets across all markets, or is it because you are underwriting the same or slightly lower cap rates?

Was the question are we expecting higher growth?

The focus on California is that the company was significantly underweighted in that marketplace, and you'll look at our NOI's for 2004, 2005, 14 percent of the Company's NOI will be out of California. We think that target is in the 18 to 20 percent range and we will get there shortly. So that was one reason emphasizing that.

Second, the growth rate certainly over the next five, ten-year period in California is almost twice the national average. We think our middle market product and the differential between the housing and rent; we can have a lot of growth in our rents out there. And have seen that. You will look at our markets most recent performance supports that investment decision. So I think you will continue to see us build our investment out there. We certainly like the West Coast from a balancing of the Company and from a growth perspective. So I think we are cutting good deals out there.

Fantastic. Thanks, guys.

At this time there are no further questions.

What I do know is we've finished early. It gives you guys five minutes to get your lunch down and to the next call is the way this thing works. But let me say in closing, I thank you all for your time. For those associates on the call for their efforts, I ask that you take away from the call today three things. The recovery is taking hold. Second, our growth prospects for the future are being identified and delivered on and lastly, performance. We do what we say. Please take care. Have a good day.

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