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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good morning, ladies and gentlemen. Welcome to the Canadian Apartment Properties Real Estate Investment Trust second quarter 2004 results conference call. I would now like to turn the meeting over to Mr. Thomas Schwartz. Please go ahead, Mr. Schwartz.
THOMAS SCHWARTZ, PRESIDENT & CEO, CAP REIT: Thank you. Good morning and thank you for joining us today. Our results for the three and six months ended June 30, 2004 were issued by press release yesterday afternoon. The results, as well as our management's discussion and analysis and other supplementary information are also posted on our website it at capreit.com. Joining me on today's conference call is Yazdi Bharucha, CAP REIT's Chief Financial Officer. The most important event to discuss today is, of course, the completion of the ResREIT transaction, its impact on our financial results and our outlook going forward. As you know, on June 1, 2004, we completed a business combination agreement with Residential Equities Real Estate Investment Trust. The transaction transformed CAP REIT into one of Canada's largest multifamily residential property owners and with a national presence from coast to coast. The total purchase price consideration was $1.044 billion which was satisfied by the issuance of just under 22 million CAP REIT units, cash of $175 million, and the assumption of certain ResREIT debt and other liabilities. Since the completion of the acquisition of ResREIT on June 1, 2004, we have made considerable progress in integrating our new properties and people. Head office operational and financial staff are being merged together in CAP REIT's offices and the office space is being expanded for maximum efficiency. Our on-site property management is being combined and steps are being taken to streamline policies, procedures, marketing programs, and operating controls. CAP REIT also now has a dedicated Montreal district office to look after our growing portfolio in that region. We are also combining the best ideas and programs from each of our organizations to form what we believe is now one of the strongest players in the Canadian residential rental property business.
Before Yazdi reviews our financial results, let me quickly comment on the current challenges facing our business and how we've responded to these weaker market conditions. Low interest rates continue to make homeownership more affordable by decreasing the gap between owning and renting a home. The resulting reduced demand for rental accommodation has also been impacted by new condominium developments entering the market, particularly in urban areas. A number of these new condo units have also entered the rental market, creating new competition, and finally, immigration and youth job growth has been weak, resulting in reduced demand for rental accommodation from what are traditionally strong democratic groups. We have responded to these weaker market fundamentals by implementing a number of programs and initiatives aimed at attracting and retaining tenants. Our larger and stronger management team is highly experienced in the marketing of rental residential properties and we are adopting the best practices and ideas to keep our buildings as full as possible, while new and innovative marketing inten -- retention programs are being introduced at a number of locations to correct what we believe are short-term challenges. With the acquisition of the ResREIT properties, we have also significantly reduced our risk profile by enhancing both our geographic diversification and the blend in our portfolio between luxury, mid-tier and affordable properties. It is also important to remember that the residential rental sector remains one of the most stable segments of the Canadian real estate business. Compared to other types of real estate apartments and townhouses have been much less volatile and have consistently demonstrated solid growth and performance for many, many years. While we may be experiencing a modest decline in the sector's performance, we remain confident the rental residential sector's proven track record of growth and stability will soon resume. In fact, while our occupancies were down slightly at the end of this quarter, we believe the market has now stabilized and we could see some gradual improvement for the balance of the year. As a result, we believe we will achieve a NOI margin of approximately 52% for 2004 and meet our 85% payout ratio target for the third consecutive year.
I'll now turn things over to Yazdi to more fully review our financial results.
YAZDI BHARUCHA, CFO, CAP REIT: Thanks, Tom. Revenue in the second quarter of 2004 increased 36.3% to 44.5 million from 32.6 million in 2003. The increase is largely due to the one month contribution from the ResREIT properties in June. The six months ended June 30, 2004, revenues rose 20.1% to 78.5 million. Despite the weaker conditions in our markets, average occupancy has decreased only slightly to 96.9% at quarter end from 97.8% for properties owned as of June 30, 2003. Average monthly rents also remained stable at 889 per suite as of June 30, 2004 compared to 890 last year for properties owned as of June 30, 2003. We believe this performance continues to outperform the overall results currently being experienced in our market. Including the new ResREIT properties, portfolio occupancy was approximately 95.8% as of June 30, 2004. The decline is due to the weaker market conditions and to a small number of properties, including some acquired in the ResREIT transaction that are experiencing higher-than-average vacancies. A strong indicator that introducing new marketing strategies and repositioning initiatives to increase the occupancy in these properties. We are also continuing with our suite renovation program in order to attract and retain tenants in these and other properties. Net operating income in the second quarter increased 34.9% to 24.7 million, due largely to the contribution in June from the ResREIT properties. For the first six months of 2004, NOI increased 18.4% to 40.2 million. Operating expenses were higher in the quarter due primarily to the increase in the size of the property portfolio, including the ResREIT properties for one month. In addition, energy costs have increased as have repair and maintenance, advertising, and other marketing costs aimed at maximizing occupancies. Insurance rates and realty taxes are also higher this year than in 2003.
Despite these cost increases we were pleased to -- for the second quarter, the percentage of revenues declined only slightly to 55.6% as compared to 56.2% last year. For the six-month ended June 30, 2004, NOI was 51.2% of revenues compared to 52% last year. Stan indicated we now believe that NOI will be in the range of 52% for the full 2004 year. Notwithstanding the increase in NOI, net income this year has been negatively impacted primarily by four main factors. First due to the required change in accounting for depreciation adopted by all Canadian REITs on January 1, 2004. Depreciation expense increased by 3 million and 6.7 million respectively for the three and six month ended June 30, 2004. Secondly, in the second quarter, we began the amortization of intangible assets arising from the purchase of the ResREIT properties resulting in a charge of approximately 500,000. Currently, amortization …