Essex Property Trust Inc (ESS) 2002 Q1 法說會逐字稿

Hi. Your meeting is about to begin. Please be advised this call is being recorded. Good afternoon and welcome to the first quarter 2002 earning conference call for April 25, 2002. Your host for today is Keith Guericke. Mr. Guericke please go ahead.

Thank you. As typical with the call, we're going to split the call between myself and Michael Shaw. In addition, Bob Talbot is here, Mark Nichol, and a couple of the other folks from our management team. So, at the end when we have questions, if we need additional expertise, hopefully it's here. During this call we're going to be making some comments that are not historical facts, such as our expectations regarding markets, financial results, and real estate projects. These statements are forward-looking statements, which involve risks and uncertainty, which could cause actual results to differ materially. Many of these risks are detailed in the company's filings with the SEC and we encourage you to review them. In our last conference call, we anticipated a bottom in the current labor market cycle would be achieved by the second quarter of 2002. We expected that some of our markets would lag the overall trend, but that on aggregate, job growth would return to the West Coast region as well as the U.S. We felt that the Pacific Northwest and Silicon Valley would lag the rest of our MSAs in returning to a positive job growth. And that Southern California would be our strongest market with growth rates exceeding the national average. Evidence from the first quarter causes us to reiterate this job growth forecast. One of the things I like to compare California to is the U.S., and just give you a sense of how California is doing relative to the U.S. And, in December, if you will recall, there were 1,091,000 jobs had been lost December over December for the U.S. as a whole. California had 80,000 jobs. Well, I roll that forward to march, the U.S. has lost 1,272,000 jobs and year-over-year, California has lost 71,000 jobs. So, it's a slight improvement. So, with respect to growth rates, the U.S. has continued to decrease or lose more jobs at a faster rate than California. We believe that job growth is the most important thing -- well, that along with supply issues that face all of the markets. But, we're all looking for that inflection point as to when things are going to turn. And the catalyst in our markets is employment growth. I'm going to try and go through each of our markets and give you some statistics that at least gives you a sense of where we're at. And I'm going to talk about a couple of things that I haven't normally put into the script, but multi-family and single-family new supply, what the market occupancy is, what our portfolio occupancy is, and the number of new jobs it is going to take to absorb that new supply. And finally, job forecast for each of the markets.

I'm going to start in Seattle, which is the weakest market we're operating in today. The Seattle metro faces the extra risk from the reduction of the Boeing jobs. Boeing reduced its commercial aircraft workforce by roughly 20,000 workers since September 11th. About 12,000 of those have been on the Peugeot Sound. Job loss is relative to that marketplace, that MSA as of December, our last call, we reported 21,000 jobs lost. The revised numbers that they came in in March, were actually 66,000 jobs, so that market has had a tremendous number of jobs lost. As we stated in the last call, we expected Boeing cutbacks to proceed quickly during 2002, however, the current rate is quicker than we actually anticipated. So, we're expecting Boeing reductions to slow in the second half of 2002. Our direct exposure to Boeing is 174 units across Darth portfolio. Unemployment in the MSA is 6.3 percent. That's compared to the U.S. as a whole of 6.1 percent. Now, with respect to the statistics I was talking about a little bit earlier. New multi-family supply for this market is 3,400 units, which is 9/10 of 1 percent of the existing stock. New single-family supply is 7100 units, which is 1.2 percent of existing stock. The market occupancy for multi-family is 92 percent. Our portfolio occupancy is 90.6 percent. The new jobs needed to absorb this new supply is about 20,000 jobs, which is 1.5 percent job growth. The new jobs estimated for 2002 is flat, zero jobs. And new jobs estimated for 2003 is 25,000. So you can see the Seattle market is going to continue to struggle for the rest of this year before it gets better. At the end of this I'm going to talk about our projections for rent growth for the rest of the year. And so, will do all that at one time.

Going to Portland now, job losses in December in Portland were revised upward from 24,000 to 28,000. Portland, like San Jose and Seattle, lost a significant amount of manufacturing jobs. Losses in the manufacturing sector totaled 10,200 jobs. We expect the manufacturing sector in Portland to stabilize by June. As we forecasted, Portland experienced moderate job losses in the first quarter of 2002. We continue to forecast the return of job growth in the second half of 2002. Unemployment in the Portland MSA was 8.4 percent. New multi-family supply, 1,500 units, which is 7/10 of 1 percent of the existing stock. New single-family supply is 9,700 units, which is 1.8 percent of the existing stock. Market occupancy, 93 percent; our portfolio occupancy 91.8 percent. New jobs needed to absorb the new supply, 17,000 or 1.8 percent job growth. New jobs estimated in 2002, 4,000 jobs, in 2003, 23,500. Moving down the coast to Northern California, we're operating in three MSAs generally speaking. I'm feeling better about these markets. Occupancies are tightening and of rent, net of concessions are stabilizing. Starting with San Jose, job losses last December in San Jose were revised upward to 81,200, as compared to what we previously reported of 45,000 jobs lost. The losses in manufacturing business services, which contain the Internet-related jobs totaled 67,000 jobs. That represents about 15 percent of those two sectors. Now, they continue to lose jobs in the first quarter. But the losses were in line with expectations, both the manufacturing and business service sectors posted job gains in March. We continue to expect job losses, but at a much slower rate, to end by the third quarter. We continue to believe that San Jose will disproportionately benefit from increased government expenditures and an increase in high-tech security. San Jose economy should also benefit from re-pricing of the office and R and D space, plus the fact that there's significant space available for business expansion. Unemployment in the San Jose MSA is 7.4 percent; again that's compared to the U.S. at 6.1. New multi-family supply is 2,900 units, which is 1.5 percent of the existing stock and single-family supply is 1,700 units or 4/10 of 1 percent of the existing stock. The market occupancy here is 92 3/4 percent; the portfolio occupancy is actually significantly better than that at 96.6 percent. New jobs needed to absorb supply is 13,000 or 1.3 percent job growth. We're expecting to see about 2,400 jobs created in 2002. And about 18,000 jobs in 2003.

San Francisco, we don't have much in that portfolio, but that obviously effects in that MSA, but it obviously effects the other two MSAs, so let me quickly go through those. Statistics in the fourth quarter, actual job losses were 50,800 as compared to what we originally reported of 22,005. Overall, San Francisco showed a strong rebound in jobs in March and is on a path to add jobs for the year. Unemployment in the San Francisco MSA was 5.2 percent. New supply for multi-family is 2,000 units, which is 6/10 of 1 percent of the existing stock. Single-family supply is 1,100 units, which is 0.3 percent of stock. Market occupancy is 93 3/4; portfolio occupancy is 95 percent. Jobs needed to absorb the new supply 10,500 or 1 percent job growth. Jobs expected in 2002, 4400. Jobs expected in 2003, 21,000. The Oakland MSA deteriorated as well in the fourth quarter. Jobs lost were 12,003. As we originally reported that there were basically, zero loss or no growth in that submarket. This decline was due, mainly, to manufacturing losses. This sector stabilized in March, after losing jobs in January and February. Overall the MSA loss of a few thousand jobs in the first quarter. We expect to see flat to slightly positive growth for the next three months and positive job growth in the last four to five months. Unemployment in Oakland was 5.6 percent. New multi-family supply delivered 1,700 units, 6/10 of 1 percent of the existing stock. Single-family supply delivered 5,000 units or 8/10 of 1 percent of existing stock. Market occupancy for multi-family, 94.5 percent. Portfolio occupancy, 93.75 percent. New jobs needed to absorb this new supply, 13,500 or 1.3 percent job growth; 2002 jobs expected, 5,000; 2003 jobs expected 18,500. Going to Ventura County, again, the December numbers were revised slightly, to 700 jobs lost and all of this was accounted for in the manufacturing sector. The employment figures in Ventura were stronger than expected through March. We've revised our forecast up, from flat in 2002, to 1000 jobs. In 2003 we're maintaining our forecast. Unemployment for Ventura was 4.6 percent. The new multi-family supply in Ventura for the current year is expected to be 400 units, which is 8/10 of 1 percent of the existing stock. New single-family supply, 2,800 units, 1.5 percent of stock. Market occupancy, 94 percent; our portfolio occupancy 93.1 percent. Jobs needed to absorb new supply, 4,000; jobs estimated in 2002, 1000; jobs estimated in 2003, 5,800. Going to Los Angeles, year over job losses in December were revised upward, from 21,000 jobs lost to 31,000 jobs lost. Again, the manufacturing sector made up the majority of this. We're revising our job growth outlook for this market from flat or modest job losses, to modest job growth. Unemployment in LA was 6.5 percent at the end of March. New multi-family supply delivered in the year, 7,500, which is a 1/2 percent of the existing stock; and the single-family supply delivered is 7,800 units, which is 4/10 of a percent of the stock. Market occupancy, 94.5 percent; portfolio occupancy 92.3 percent. Jobs needed to absorb the new supply, 49,000 or 1.2 percent job growth. Jobs estimated in 2002, 9,700; jobs estimated in 2003, 78,000. Orange County, here we actually had positive -- we're not talking about job losses, we're talking about positive job growth, so, the positive job growth was revised downward from 1.5 percent to 1 percent, or 14,800 jobs as of the end of December. Job market has strengthened since December. Unemployment increased slightly in March, to 3.7 percent. Again, that's compared to the U.S. at 6.1 percent. New multi-family supply in this market is 2,900 units or 8/10 of 1 percent of the existing stock; new single-family supply is 6,000 units, 1 percent of stock; market occupancy, 95 percent; portfolio occupancy, 90.7 percent; jobs needed to absorb supply, 25,000 or 1.7 percent job growth; jobs estimated in 2002, 10,400; jobs estimated in 2003, 32,000.

San Diego was the strongest growth market in the region. It had job growth for December revised downward from 23,000 to 14,400, which represented 1.3 percent job growth. We expect San Diego to, once again, remain at the top of the national metric job growth rankings. San Diego has little exposure to the risk employment sectors. In addition, it, along with the Bay area, is a center for biotech research. Unemployment in that market at the end of March, was 3.8 percent. New multi-family supply being delivered, 55,000 units, which is 1.5 percent of stock. And single family supply, 8,600 units or 1.4 percent of stock. Market occupancy, 95.5 percent; portfolio occupancy, 93 percent; jobs needed to absorb new supply, 26,000. But again, let me just clarify. When I'm talking about new supply, I'm talking about new supply of multi-family and single-family, so, the numbers I've given you for each of these markets absorbs all of that. New jobs estimated in 2002, 15,000; new jobs estimated in 2003 is 38,000.

As we've always stressed, the total residential supply; that's multi-family and single-family, is a prime driver of a successful multi-family market. We've experienced a decline in residential permit activity recently in most of our markets. We believe that the supply-constrained markets provide the platform for quicker recovery in apartment occupancy and ultimately rent growth. None of our markets require above average job growth to return to conditions conducive to positive rent growth. We've updated our residential permit document on our website. For those of you who want to look at it, go to the investor relations tab and under that, analysts resources, and look under residential permit data, under the earnings release heading. You'll see, in many cases, that the permit activity listed is slightly different than the units that I've talked about being delivered. And in some cases the units that I've talked about being delivered is greater, which means that all the permits weren't used last year and they're being used this year, in addition to some of the permits that you're so -- they don't tie exactly, but that's the reason.

Our single-family markets remained strong last year despite the faltering economy. We believe that positive single-family growth will continue in all our markets, albeit at lower rates than last year. So, as our markets recover, there will not exist an overhang of newly built homes that will invariably become occupied at the expense of currently occupied apartments. These high median home prices even in slow markets continue to provide a firm foundation for the multi-family market. As we mentioned before, our limited new residential supply indicate that we don't need job growth in our markets, or extraordinary job growth in our markets, to absorb the new supply. We calculate the need for job growth between 1 and 1.8 percent in all of our markets, except San Diego, which is at 2.5 percent, to return our market to conditions that are conducive to rent growth. We believe that we will achieve these conditions beginning next year. I've talked about jobs and supply in our MSAs. Let me update you with what we see as far as rent growth for the rest of the year. The only significant change from last quarter is Seattle. Last quarter we said that we thought there'd be a 3 percent erosion in market rents. We are increasing that to 10 percent. In Portland, we're maintaining our last quarter at 0 to -2 percent; San Francisco, -3 percent; San Jose, -5 through June, flat the last six months; Oakland, -2 through June, up 2 for the last six months; Ventura, -2 through June, up 2 second half; LA, flat through June, up to 2 percent second half; Orange County and San Diego, we've increased both of those by about a 1/2 to 3 percent each.

Corporate exposure in our portfolio as follows. Bay Area; we have 139 units, or 3.3 percent of the portfolio. Southern Cal, 328 units or 2.9 percent of the portfolio; and the Northwest, 88 units, or 1.6 percent of the portfolio. Going to acquisitions, currently, we have no deals in contract. It doesn't mean we're not trying. Our acquisition team is out there aggressively making offers, but due to the very low cap rates in the market place have been unable to put anything in contract. Dispositions since the end of the quarter, we've closed the sale of two properties in San Diego market for $52 million. These properties are sold on economic rents in the 7-cap range. Essex owns 20 percent of the properties. As a result, we're not going to be doing 1031 exchanges on those properties. During the remainder of the year, we may sell several more properties as we take advantage of the market to proven portfolio. Now, let me turn it over to Michael Shaw for the remaining comments.

Thanks. I'd like to thank all of you for joining us this morning, or afternoon, depending upon where you are. Please note that the press release and our supplemental reporting package is available on the website, www.EssixPropertyTrust.com. Following a similar agenda as previous calls, I'm going to talk about the quarterly financial results, (indecipherable). The balance sheet by an estimate of FFO going forward. So the first topic, quarterly FFO results. As you know, FFO per share increased 5.6 percent to $1.13, from $1.07 in the prior year. Internal growth continued to decline relative to the first quarter of 2001, as expected. I've indicated in previous calls that the year-over-year comparison will become increasingly difficult or will deteriorate through the second quarter of 2002. As you'll recall, the first six months of 2001 were very, very strong on the West Coast. Same property NOI declined by 6.1 percent and there are several factors that caused that reduction, which I want to spend a little bit more time on.

The first factor is same-store occupancy for the quarter was weak, actually weaker than we expected in comparison to a very strong quarter a year ago. Each market has been affected by a deteriorated job environment and it's consequent impact on households leading to declines in occupancy throughout our markets. Occupancy levels declined to 92.7 percent for the quarter, from 95.7 in the first quarter of 2001. That drop alone represented approximately 1,247,000 on the same-store portfolio, or 4.2 percent drop in same-store NOI out of the total 6.1 percent decline. And as you know, as difficult as occupancy is in itself, it's also the key to rental rates and pricing power. Market rents at the end of the first quarter had dropped another 2.5 percent relative to December 31, 2001, led by a 7.4 percent reduction of the Pacific Northwest, 4.4 percent in Northern California and essentially flat in Southern California. Second, same-property comment is to talk about concessions. They also increased during the quarter. As you know, we expense pre-rent in the initial period of the lease, rather than reporting leases on a net-effective basis. We recognized a 1,024,000 in concessions in Q1, of 2002, compared to 821,000 in the fourth quarter of 2001 and 132,000 in the first quarter of 2001. Essentially, we continued the concessions at the same level as we experienced in the month of December 2001, just carried forward. So, it picked-up throughout the third quarter and fourth quarter of last year, and then it leveled off at the level that we've reached during this quarter on a monthly basis. Not all of that concession number, however, was in the same-store calculation. 834,000 of that 1,024,000, related to the same-store properties and there are -- 88 percent of our consolidated units are now in the same-store calculations. Further note on Southern California, we expected Southern California to operate better than the actual results for the quarter indicated. Rents did increase in Southern California, but these increases were offset by occupancy declines and increased concessions. The breakdown of the 0.6 percent increase in same-property revenue has the following three primary components. One, rent increased by 5.8 percent but it was offset by increased vacancy amounting to 3.2 percent of revenues and concessions equal to 1.9 percent of revenues. Keith indicated we do not believe this is the beginning of a negative trend in Southern California, primarily because the region still has significant job growth and economic conditions in general are improving. The next factor in the same-store results is operating expenses, which decreased by 3 percent. Most of this decrease is attributable to utility expenses, which decreased 16.6 percent, essentially attributable to the high energy costs experienced in the Western United States a year ago. So, cost came down from those inflated levels that we saw in 2001. We previously reported that we've implemented RUBS. In California, beginning in the first quarter, but given the inherent lag built into the RUBS process, conceptually, we only convert units as leases expire and then there's a lag period before you collect. The California RUBS had a very minimal impact on utility expense reduction from the first quarter. A note about turnover, same property turnover percentage for the quarter increased to an annual level of 40 percent for 2002, from 37 percent in the comparable prior year quarter, but down 53 percent of the December 2001 quarter. We continue to try to manage our turnover ratio by making efforts to retain existing tenants, however, rental markets are substantially different than a year ago. Leading to relocations when people find new jobs or move closer to work, now that the apartment that they couldn't afford a year ago is now affordable. This situation explains the increased turnover in both Northern California and Seattle. The controllable expenses and property taxes were effectively unchanged for the quarter.

I'd like to make some additional comments about insurance. Reported last quarter that we are expecting a 50 percent increase in insurance costs during the next year. We renewed most of our property and casualty insurance coverages during the quarter. We have one more piece left, which renews in June that has a differencing condition, essentially earthquake, and so I only have estimates of that particular cost. But as expected, the basic property insurance was the most difficult to renew. Our rates and insured values both increased, leading to an increase in coverage -- of cost in coverage greater than 50 percent, which was partially offset by smaller increases in liability coverage. On the property insurance, deductibles increased from 25,000 to 100,000, and although terrorism is included in our property insurance, it's more limited than it was in previous coverage and there are some gaps in coverage as you go through the layers of property insurance, in some layers. Overall, we expect, once again, to see property insurance costs increase by 40 to 50 percent for the year, again, in line with expectations, we continue to work with our lenders to address the higher deductibles and some of the gaps in coverage and so far we have not experienced problems in that area, and don't expect to in the future. Finally, as stated last quarter, relatively high rents and operating margins mean that the impact of insurance increases have a smaller overall impact on us, versus much of the apartment sector. Property casualty insurance expense for the portfolio was 348,000 for the consolidated portfolio for the quarter, which is 0.7 percent of revenue. A couple of brief comments on interest and amortization expense, which decreased by 560,00, to 9,024,000 during the quarter. That decrease is attributable to three factors. First, an increase in outstanding debt balances. Weighted average outstanding debt was 649 million for the quarter, which is an increase of 66 million from the comparable quarter of 2001. Offsetting that increase was a decrease in the average interest rate on the long-term debt portion of the portfolio to 6.8 percent from 7.1 percent and also a decrease on our line of credit rate from approximately 6 percent in last year to approximately 3 percent in the current quarter. Favorable interest rate reductions related to our line was approximately $750,000 for the quarter. Also, construction in progress has increased to 108.7 for the quarter, versus 50.7 million for the prior quarter and that led to an increase in capitalized interest to 1,696 million to 722,000 last year. Supplemental package now includes a new schedule, which indicates the components of interest in other income. As well as other operating data that is most requested by analysts and investors. As you know, the interest in other income line items has become significantly larger over the years as we have increased our co-investment program. Interest without income increased by 1.9 million to 5.9 million, versus 4 million and 60,000 a year ago. Including the add-back for joint venture depreciation, which is on the FFO reconciliation page, which increased 593,000, interest from other income increased 2,510,000.

A brief breakdown of that income is as follows. First, joint venture and downdering operations, which include the depreciation add-back increased by 1,045,000. Interest income increased 572,000 to 1.7 million. Fee income, most of which is related to the asset managements fee of the Essex department value fund, increased 678,000 to 1,019,000. And miscellaneous non-recurring income increased by 210,000 to 688,000. GNA decreased 174,000 to 1.7 million and the components of GNA are included in the supplement. The decrease, effectively, relates to an increased allocation of GNA to the management company, which is essentially in line with the increased revenues from the joint venture activities borne by that entity. Second topic, loss to lease, which continues to change rapidly in our portfolio, again we define loss to lease as the difference between market rents per pricing sheets, versus scheduled or in-place rents. Loss to lease for the portfolio at March 31st was 6.6 million, 3.5 percent scheduled rents down from 9.3 million, 4.8 percent of scheduled rent last quarter. Northern California loss-to-lease has been reduced, primarily due to lower rents and apartments being re-rented at the lower price. So Northern California was actually left with a gain-to-lease, or a negative loss-to-lease, of 3.2 million or 4.9 percent of scheduled rent. The Pacific Northwest loss-to-lease also turned to a gain-to-lease number and that was 787,000 or 1.4 percent of scheduled rent at March 31st. Southern California loss-to-lease decreased to 10.6 million or 9.1 percent of scheduled rent during the quarter. One additional point on loss of lease as we mentioned a year ago and as indicated in the supplement, is that we expense per rent up-front, rather than amortizing it into effective rent. So, concessions are not reflected in the loss-to-lease numbers that I gave them earlier. Third topic, balance sheet, related items. Capex (decipherable) the analysts 3.50 per weighted unit, which is about what we expected. Interest coverage remains strong, four times EBITDA. Debt to market cap was 33 percent at March 31st. So, we continue to have pretty strong balance sheet, which we expect to continue. WE have at final closing Essex Department Value Fund during the quarter. We ended up at equity capitalization of 250 million and Essex retaining a 24.1 percent limited partnership interests in the fund. The fund provides us with significant fire power to pursue new transactions at 65 percent leverage, the fund has approximately 700 million in capacity and has committed so far approximately 300 million. So, we expect the funds capacity to be available without taxing Essex's balance sheet in the near future when we hope to see some attractive opportunities out there in the acquisition and development market. Outlook (indecipherable) for the balance sheet to remain strong. I also want to note that the Board increased the dividend by 10 percent during the quarter. This was following last year's double-digit growth in FFO. And as we said before, the dividend is likely to follow very closely the FFO growth rate of the company. This represents the fifth consecutive year of double-digit dividend increases for the company.

Finally, I'd like to talk about our FFO expectations going forward. As we said in the earnings release, we expect FFO to remain, our guidance remain unchanged. Currently we have a range of 448 to 461 representing 2 percent to 5 percent FFO growth this year. However, there are two key assumptions that are changed with respect to that guidance. The first assumption change is, we are now expecting same property NOI to change from -3 to -5 percent for 2002, versus what we previously thought, which is -3 to 0 last quarter. Again, it relates to the continued deterioration of rents and occupancy levels and things not maybe turning as quickly as we thought they were going to, and a continuation of concessions. Fortunately, we have some things that will offset that impact, and we see increased fee income continuing through the next several quarters. Well, we see it continuing beyond that, but we certainly see it for the next couple of quarters as well, and also short-term interest rates are lower than we expected, so we're going to pick up some benefit there and essentially leave us unchanged in terms of guidance. So, I'd like to thank you for joining us. Now I'd like to give you an opportunity to ask questions. Thank you.

If you have any questions, please press "*" 1 on your touch tone phone. If you're using a speakerphone, please pick up your handset and press "*" 1 at that time. If your questions have been answered and you wish to withdraw your request, you may do so by pressing "*" 2. Please go ahead if you have any questions.

Hey guys. Dan Optenheim is here too. I have a couple of questions. The first, on the fund, you put the land parcel into the fund and I was curious if you have a philosophical view on whether you put land or land meaning the new development or acquisitions or both ,and how you chose what goes into the fund and what doesn't?

We wanted to be very clear not to have conflicts of interest between us and the fund, so we have committed to allocate all of our acquisitions, whether they be land or existing properties to the fund until we've -- over the next, essentially through December of 2003, until we fill the fund or met that date. There are a few exceptions. One is if we sell a property and we need a 1031 exchange. That's an exception. The other thing is, we have limited the amount, the percentage going to the fund to approximately 25 percent of development, so when we get -- actually, we're getting close to that right now, since we've got three development transactions allocated to the fund. So, future deals as we reach that 25 percent would go to the company.

Okay, thanks. And Dennis (indecipherable). Mike, you're talking about the expectation of a slower turn in some of the markets. And I'm just wondering if you can talk about that and are there any markets where you're starting to see any positive signs in Northern California? And also, the second part is just wondering about the performance mid-market, the Essex portfolio is below the market for many of the markets. What's the cause of that?

We have Bob Talbot here who can maybe answer some of the issues with the market. But, with respect to where do we see the market? I think the primary issue is, I think Seattle is significantly weaker than we thought as I indicated, we're thinking the rent reductions for the remainder for this year will be 10 percent as opposed to 3 percent previously talked about. Northern California is getting stronger. Concession adjusted rents are stabilizing as you saw in Northern California, two of our three markets, our portfolio was above the market place and I think where we're weak and where we've missed it pretty significantly. I mean, many of the markets were within a point, point and a half and we missed it big time in Orange County, where I think the market is 95 percent and we're about 91 percent. So, maybe Bob can address that a little bit.

Okay, with respect to Orange County right now, where we have seen some softness has been in some of the Northern markets. I think what we have -- the number we have reported to day was all of Orange County. I think as we've studied it, it appears that some of the demand in South Orange County that has been attracted down there by the new development and some of the pricing becoming more attractive to tenants, has allowed them to perhaps draw down from the North Orange County area. We've also had a couple of spots where we've seen a fall-off. They're in communities where we have a fairly strong demand from foreign nationals and people immigrating from other areas and post-9-11 we have seen some fall-off in that area as well. These are specifics to Orange County. I think Keith covered the other two reasons unless you have a follow-up on that.

I think we're all set. Thanks very much.

Good morning, Keith, Mike and Bob. Bob, a long time. Here with Brett Johnson. I wanted to follow-up on your comments on Los Angeles; the 320 point occupancy drop. Could you give us a little bit more color on the dynamics in that market and if this is a supply-driven change in occupancy or are you trading rent growth for occupancy in that you've eeked out a slightly positive NOI, or is there something else going on?

I'm sorry. Are you talking about -- give me that one again. Are you talking about the rent, the 3.2 percent being the occupancy drop?

Yes. In Southern California. And if that is being driven by just a fall-off in demand or in the submarkets that you're in, are you seeing significant supply growth? You really can't tell from the macro data. Or, is there some other dynamic taking place there?

COMPANY REPRESENTATIVE There are a couple of pieces I would throw out, Jay. One piece is, we had a property that was a large property that got added to the same-store portfolio that had had some challenges from a management standpoint. And that alone, caused a significant portion of this occupancy drop. So, we had one issue where it actually, you know, much of that has been corrected after the first quarter. So, that was a piece of it. The other piece is, you know, there are certain parts of Southern California that have had a fair amount of supply and it's been a challenge to keep full. I guess what I'm referring to specifically is the South Orange County area. And you know, previously, the North Orange County area had been somewhat insulated from that, but this quarter I think more people moved out of Northern Orange County to perhaps buy a house -- and this is pretty anecdotal, I understand -- but, to buy a house in Orange County and to relocate in South Orange County. Because historically, if you look at rent levels in South Orange County, relative to rent levels in North Orange County, they became a lot closer recently, over the last six months than they had been for the last ten years. So, I think there was a change in, sort of, a rental value within Orange County. Because South Orange County has had essentially very limited rent growth. North Orange County has had significant rent growth. Those two value equations changed. I guess the analogy I'd make is back to Northern California, you know, where we haven't really seen a lot of demand growth per se, but what we have seen is moving out of the peripheral areas back into the core Silicone Valley areas, which has driven our occupancy in Silicone Valley back to, you know, 96 percent level. So, even though there hasn't been a demand associated, you know, adding new renters, there has been movement into the more core areas as people, you know, move closer to work and all the firemen and, you know, people that couldn't afford to live here, you know, now can, and they've moved back into the area. I think that there is a dynamic that has occurred in Orange County that is similar to that. Understand that's pretty anecdotal and I don't have any, you know, hard facts to support it necessarily. But, I think that that has happened. I think Ventura County at this point in time is performing much better, but we still have -- if we have a pocket of softness, it's really in that North Orange county market at this point in time.

Okay. And then just a couple of follow-up questions on the progress of the development project, the Essex on Lake Merit, it looks like you're getting close to beginning leasing units in June. Could you give us just a brief update there and if you changed your construction costs or yield expectations in the face of current market (indecipherable).

Jay, this is Bob Talbot. Let me speak on the marketing-leasing side of it. We actually opened the property about a week and a half ago for preview leasing. We've had a tremendous amount of interest in the property over 1,500 people have registered interest intentions off of our website. And we began a private kind of a preview touring through that week. In the past week and a half, we've rented about 30 units for a June 1 occupancy. So, we're off to a really good start that we're really excited about -- initial interest. At this time they're on schedule and we expect to be moving people in the first week of June. And I'll refer to Mike on the (indecipherable).

Yeah, I don't want to throw out a cap rate, you know, at this point in time, primarily because -- well, you can imagine. We'll starting the leasing at the bottom of the building. It's a 20-story high-rise on the shores of a Lake. It gets progressively -- our expectation is that it gets progressively more expensive as you go up the high-rise. But exactly what those due primmingsare, you know, is a topic of daily discussion essentially. So, I don't want to presume what those might be. And then the second factor is, we're pretty aggressive. If you look a the relationship between absorption in rent, I think we're of the opinion to fill these up quickly, so we'll be aggressive when it comes to rents, you know, up-front, out the gates. So, I don't really want to throw out a cap rate. Previously, the expectation was, you know, somewhere around a 9 percent cap rate, 9 to 9.5 percent. I think we're within 50 basis points either side of that. And so, I don't expect a big deviation in terms of cap rate, but I think we're certainly within the range. I mean, what we've said previously is that this property was purchased and conceived well before the spike in rent in the 2000 range, you know, 1999 to 2000 turn. So, as a result of that, I don't' think we conceived this based on inflated rents and as a result of that, we're not materially off on initial expectations. Hope that's good enough to answer your question.

Yeah, thanks, I appreciate that. And then last question, just a two-part question on events following the quarter here that you've announced. The $11 million of gain that you received on the sale of the two San Diego properties, your share of that in the joint venture, how do you intend to book that gain in the second quarter? And then the second part is just the $15 million land purchase in Santa Clara, can you gives us some feel for what your yield expectations are on that deal and also if it says anything about the market loosening-up somewhat in terms of being able to purchase land at reasonable prices?

I'll handle the first part of that and maybe someone else can chip in. The gain calculation, we're, you know, we're a 20 percent partner in that transaction, so we received that. We also have some incentives and other fees that relate to that. We have not 100 percent concluded on how we're going to treat it. I mean, I think the presumption is certainly as to the pro-ratus share of the gains, you know, that's treated like any other gain, i.e. not FFO. In terms of the incentive piece and the fees, you know, we're talking to our accountants about that and I don't want to state the conclusion, `cause I don't have the conclusion yet.

And with respect to the deal, we have -- the anticipation was that, you know, that sellers were going to become, a little bit more reasonable on the land side and we think that we were able to buy that piece of land at prices that were unheard of for the last year and a half to two years. And, you know, the typical thing that we're trying to do is look at where rents are today, where rents can be in two years when we deliver this, and we're trying to have a 9.5 cap when we deliver. And that's the goal, so it's been underwritten to a 9.5 cap and as we talked about our rent growth projections for the Bay area, we used the same kinds of, you know, lowered expectations for a year out and there was some positive expectations for the following year. But, not radical 20 percent increases. So, we think we've used very sensible assumptions and come to a 9.5 cap. The other thing that's very interesting is that the cost on this, given that there are contractors and subs out there now who are eager to get work, that the cost that we have underwritten this to is significantly less than we could have done even a year ago.

Very good. Thank you all.

Hi guys. I have one question as sort of just a backtrack on some of the data that you provided if you don't mind. And I got most of them, but Keith, you went a little quickly through some of the markets on your prognostication on, I think it was revenue growth. I got the Seattle. San Francisco, what were you expecting there?

Minus 3 percent.

For the year?

For the year.

Okay. And then San Jose was a -5 through June, is that right?

Correct.

And then what after that?

Essentially flat.

Okay. And then, what was Orange County?

Orange County 3 percent.

Okay. Up three?

Up three, yes.

Okay, great. The other question I have is, have you guys looked on it -- and I know the same-store portfolio composition has changed, but on a sequential basis from the fourth quarter, has there been a deceleration from there, or is it just that, like you've noted, the first two quarters of last year were so robust that you're still seeing acceleration in that type of contraction, on the year-over-year contraction?

Actually, we've looked at some run rates and try to -- When we gave guidance for the reduction in NOI, we looked at what kind of a contraction we were being faced with given our market range expectations. And, I think that we've been adequate in our estimations of what the contraction is to get to our lowered NOI forecast.

And Rich, let me just reiterate the part of my script that I had before, which is looking at economic rents Q4 -- I'm sorry, March 31, 2002, versus December 31, 2001, hopefully I was clear on describing that. But, Northern California market rents declined 4.4 percent, flat in Southern California, and negative 7.4 percent in the Northwest. So, I think those are the driving, you know, market (indecipherable) are some of the driving factors that are out there.

Okay. That was fourth quarter '01.

That was the fourth quarter '01, yeah, exactly, first quarter, versus fourth quarter.

Okay, very good. Thank you.

Oh, it's D, not David? Can I just go back on a couple of points that you touched upon already in the Q and A? With regard to the possibility, including the fees and incentives payment on the AEW sale, is that likely to lend itself to some lumpiness in your reported FFO if you would include them, Mike?

Yeah, if we do include them there would be some lumpiness, yeah, because they're, you know, they're some substantially, reasonably large numbers. We're still working through the calculations, talking to the accountants as I said before, so I don't want to go on record. But, then there are some fees that are in those transactions as well that are not the incentive fees, they're some other fees, which I think, pretty clearly will just be fee income. And I don't really want to throw out numbers at this point in time, but it actually, you know, some of the fees have been paid. So, not the -- in the case of AEW transaction we're still talking about the promote, but we have received some other fee income as a result of that transaction. So, that's one of the factors, David, is how that will affect, you know, how the lumpiness will affect us. Obviously, we'll disclose it either way. But, you know, I think the key areas that -- those transactions, you know, part of the reason we entered into those trisections was because we thought we could generate a higher return on investment capital from them and certainly the promote is a significant piece of that and a significant piece of our decision to go into those transactions. So, again, I don't want to go on record and say that we've concluded that accounting side as it relates to the incentive or promoted interest, but yeah, there will be some other fees, certainly, that will be included.

Okay. Two supplemental questions that follow on from that. To what extent do your assumptions assume that you will be generating more gains in fees from other sales, later in the year?

Well, there's really two things. One is the AEW transaction and the then the second potential source of fee income is the sale of a property in the Hawaii area, which is held by a off-balance sheet entity. So, that potentially could figure-out into the equation. There are a couple of other potential sales, some of which are in our Cullinvestment portfolio, that could occur. But, we have not included those in the results. What that we're essentially counting on is the one that closed, AEW venture or Casa Mangrove River Front and the off-balance sheet revenue. And other than that, we haven't included anything.

Okay. And just so I'm clear, in the range that you put out there, Mike, is the incentive included or excluded?

The incentive is not included in that, but like I said, there are some other fees that are included in that. There are some other fees that have been received that have been included in that.

Okay. Now, just turning to the assumptions on the same-store, I think last time you threw out occupancy assumptions to support your guidance range of 94, 95 for the year. Have those numbers come down?

Yes, they have come down. As you know, as you're well through the year, you have one data point now, which is -6.1. We did not achieve a (indecipherable) 7; you get in the first quarter. So, we started out in the whole and we're expecting to, perhaps, pick up some of that in Southern California and the Bay area. So, occupancy has, yes, it's dipped lower.

Would we be talking about 150 basis points? At those kinds of a range?

Yeah. I'm not sure. You know, what we did was we essentially rolled forward Q1 and then made some adjustments on what we thought could happen with total revenue. We didn't break it down into specifically occupancy; we just looked at total revenue. But, I think that we could expect a 50 to 75 basis point improvement in occupancy as far as those numbers versus the first quarter number.

Okay. Can I just turn (indecipherable) a question for you Keith, more on this year occupancy being below some of the markets that you described in your opening remarks? Just remind me, is that pure?

Well, obviously, Bob has a number -- has regionals that have relatively manageable portfolios, around 2000 units each. He has nine of them, ten of them, according to him. The decisions with respect to -- with the concessions or whether price reductions at minor levels are handled at the regional levels. If occupancy gets way out of whack, or if pricing, I'm sure, gets way out of whack, those decisions go to Bob. And in fact, he has discussions with both Mike and myself, with respect to, you know, what's to be done. Our general belief is that we're better off with occupancy than trying to hold rents. And so we have generally been really proactive in trying to adjust to the market and obtain occupancy. I would -- Michael alluded to one property that was a fairly large property in North LA, that, you know, for the quarter, it had a very poor management on site and it's been dealt with and there's new management on site and the occupancy on that particular property, you know, is back to 95 percent. So, you know, unfortunately, this is a business that can turn quite quickly and you have to deal with it quickly and in a quarter, it can have an effect.

Oh, nobody wants to hold your feet to the fire over one quarter, but isn't it reasonable to surmise or suppose that you guys are going to have more market average type occupancy over the next couple of quarters, in some of the markets where there's an, apparently, a sizeable downturn a the moment?

Personally, I am very proud of the fact that we've always been able to, you know, over-deliver over our promises. This, personally, is very painful for me to have this conversation. If there is any possibility in the world that we will be closer to the market, believe me, it will be met. So, yes, I would think it's fair to say that our occupancies are going to be much closer to the market occupancy going forward.

I'm not trying to make this painful. One final question I have is that you referred to the very competitive acquisition environment that's out there. Is that in any way, the hot prices that seem to be taking place in the market, is that in any way prompting a greater volume of activity from the sellers?

Not really. I mean, we're just starting to see some listings come to the market. We try to stay away from the listed properties generally, because, you know, they're over, you know, they're marked up and they're shopped hard and so they're over priced. And, so I guess if you're willing to go to the listed properties and go to the market, yeah, there are more properties coming to the market as we speak. Generally, they are going to be priced in the, you know, as we priced the two that we sold, you know, in the 7 cap on economics, which, you know, in San Diego there is a loss to lease and so on actual, it was in the low 60s. So, very strong cap rates from a seller's standpoint.

You guys have not been shabby at getting the dollars in on the fund though, have you? You've been very fast paced, I think. Okay. Thanks.

Hi guys. I just wanted to follow-up on that. With cap rates being so low, I would assume it's going to be tough to re-deploy. I believe you have like 450 million of dry powder. What do you think the timing -- do you think you'll meet the December '03 deadline to fully vest?

Well, our goal is to, and you know, we are not going to invest money just to invest it. If we can't investigation it, we will give it back to our investors. I hate to say that, but you know, we're going to make good deals. We're going to make the kind of deals that we've made historically. I think that things are going to loosen up. You know, there are some markets that are being hit very hard right now and both sellers, you know, could Seattle become a market that we'd be interested in in the next 12 months, I mean, it's certainly possible. I mean, we can bottom fish, we'll do it. So, you know, we're going to be entrepreneurial going forward as we've been historically and we're going to make the right decisions.

If you are opportunistic, do you underwrite to current occupancy? So, if you see a property that's below market occupancy or below historical average, say in the 80s, in maybe a Seattle, do you sort of, when you're doing your underwriting, get to your 9.5 percent or whatever cap rate you come up with, are you assuming that there's some increase of occupancy imbedded in your underwriting?

Well, it all depends Brian. Every situation is different. We don't make any portfolio level underwriting decisions and you know, John Lopez is in the room. He does a pretty good job of monitoring supply and demand within the regional markets and you know, if we see the job growth and see a limited supply and see the balance there, then we may underwrite some increase in occupancy. Otherwise, we're gonna just try to be realistic about, you know, what we can do and that's worked over a long time. I think this is a very unique period of time, just as we saw a couple of years ago, the rent increases. Brian, you and I talked about this quite a lot, you know, where we kept downplaying the amount of rent increase that we got and said it was totally, you know, something we hadn't seen in our careers and very unusual. I think this turn downward is sort of the flip side of that. Which is, you know, quite a bit more painful than we thought. So, to answer your question, I think that every situation will be different. I think that our expectations for Northern California, you know, given where occupancies are, given what's happening here, I think they'd be a step ahead of Seattle. You know, Seattle, you know, the projection for the next years still remains pretty difficult, so I don't see us assuming a big pick-up in occupancy in that market specifically. First of all, I think it will evolve in much better shape (indecipherable). It just depends on the market and we look at it in detail and we get pretty specific, as you know, when it comes to sub markets, supply-demand relationships and statistics. And based on that, you know, we extract how much new supply and how new demand is within a market place and we try to read that and read its consequent impact on rents. So, everything's done on a case-by-case basis and it's difficult to give you a general, overall response.

Okay. And along those line, just curious, the $15 million you paid for the piece of land in Santa Clara, what would that have cost you last year, this time last year?

Well, there's a couple of comps out there that would have been approximately $25,000 per unit higher. So, about 25,000 or even more.

Okay. And some housecleaning items. Your interest income dropped from 8 million in the fourth quarter, down to 6 million, despite having, you know, the income from the 844 units in the partnership you acquired. What caused the drop in interest income? And also, the million of fee income, do you see that growing over the quarter? Cause that was a pretty big jump from this time last year.

Hey, Joe. That had to do with in the fourth quarter we had the final fund aspect and the final carriage house. You know, where we picked-up effectively -- we were only accruing effectively, what the property was generating on an NOI basis. The fund actually ended-up paying us at little bit more than that. They're paying us a prime by three kind of concept. And so, we got to catch-up basically in the fourth quarter for those carried assets.

Okay. So, this quarter the 6 million, other than you're saying the income should grow, is a better base to start with?

Definitely.

And then on the interest expense line, it dropped $1 million sequentially and I was just wondering why that would be since the debt at the end of the quarter is higher than what it was in the fourth quarter?

In the fourth quarter, I believe -- there's a couple of pieces but, the main piece in the fourth quarter is we needed-up -- we have some interest rate caps on some of our bond deals that will be coming up for renewal and we basically, had to reserve, we started to accrue for those amounts and it was a large amount in the fourth quarter. That we accrued there.

Okay. So again, this quarter is a better, sort of, number to look at from a run rate?

Yes.

Okay. Let's see, I think most of my other questions have been -- you guys talked about successions and you think they've sort of flattened-out, do you think you'll see this million or so number increase through the rest of the year? Or do you think that number has sort of peaked and maybe will start sliding down?

I guess any question involving the future is a little bit uncertain. I think we expect it to increase in Seattle. We expect it to get a bit better in Northern California and Southern California. You know, I've analyzed that number a hundred different ways. It essentially has remained, you know, from December through March, on a monthly basis has remained pretty darn consistent and so, you know, my best estimate at this point in time is that it remains about the same for the foreseeable future, until once again, we see this supply and demand relationship improve since there's so much recovering economy. We just haven't seen that yet. I mean I think everyone's out there and we included, believe that the economy in general is getting better, but as we've seen from previous recessions, the tail end of that is actual job growth and we really haven't seen that yet. So, until we start seeing the job growth reignite, you know, which hopefully happens in the beginning of the second half of the year, we expect it to remain at about these levels.

And one last question, just a definitional question. Your financial occupancy, that's not economic occupancy, in other words, that doesn't include concessions, does it?

No. It does not.

Do you know what that number, I assume it's just the average occupancies, physical occupancies, is what that number is. Do you know what the number would be in economic occupancy numbers?

Well, Brian, we gave you this in-store concession number. We get it by region. You have the same-store data ---.

Right. Okay. Alright, thank you guys.

Hi guys, its Rich Moore. Just a couple of quick questions. The assets in San Diego that you sold, is there any broader thinking on that? Are you looking at maybe lightening-up down in the South and heading to other regions?

You know what, it's really, I mean San Diego is a good market, it's got good job growth, if you noticed in my comments with respect to new supply down there. It has more new supply relative to its existing stock than any of our other markets, although it has, you know, positive job growth. It had more to do with, you know, our partnership with an institutional partner. They wanted to take some profits. We saw it as a market that was very, very hot and we could, you know, we could get some great executions. And, you know, I think part of this business is knowing when to sell and take some profits off the table as well as riding it through. And that's what we did. It was more to do with just a really hot market that we could take some great profits and you know, it's not going to stay, you know, trees don't grow to the sky forever. So, we took it when we could get it.

If it's hot now, Keith, does that mean you may not be looking at future investments there as likely as other places?

You know, I mean, I think we've mentioned this last call, we'd love to be investing in the Bay area, unfortunately there's just nothing for sale here. If we buy anything in San Diego, it's going to have to be very selective and some market that has some unique supply constraints or a job nodes or something associated with it. If that answers your question.

Yes, that does, thanks. And the last thing is, when you do same-store numbers, does that include any of the JV assets?

Okay. Thanks.

Hi guys, how are ya? A few quick questions. I'll go ahead and beat the dead horse. Your increase in expected management income, is any of that due to non-transactional income that you just managed to outsize the fund from 210 to 250 so more money's coming in?

It was principally due to that. That was the majority of it. Mark, did you look at any other detail on the fee income?

It's really -- the fund asset management fee is the pick-up there over the prior year quarter.

I'm sorry. I mean in terms of your '02 guidance, that your fee income is going to be higher this year than you originally anticipated?

In our guidance we did not build-in any increases in fee income over and above. Just in-place portfolio on fund side and other third party transactions.

But, it sounds like the reason why you guys are still able to retain your guidance, even though your same-store is down, is because you're getting more money on the fund side. It sounds like some of it's transactional. Is other of it kind of more non-transactional, that you managed to have a larger fund?

That was a factor. I mean, a larger fund generated a larger asset management fee, there's no question about that. But, there is some portion of the fee income that relates to some transactional business. And that was the -- really, there were both pieces. I think that the -- if you're looking for a breakdown between what's transactional and what's not transaction related ---. I mean, there are, again, the only two pieces that we're included that would be transactions going forward are as they relate to the Riverfront Casa Mango, a transaction which is closed and you know, we said previously that we're not including the promote in our guidance, but we did get some other fees and they are included in there -- just plain fees. So, we are including that. And then we have one other transaction that we expect to close that will generate some fee incomes, so we're including that. But, other than those two specific items, we're not including anything else.

Can you guys give any decomposition of your forwarding fee income and JV income guidance for '02 and break it out between transactional income and just kind of, generic management fee income?

You're wanting us to, you know -- the numbers that we generate are a guidance. You want to get an idea of what the transactional related fee income is?

Well, just, you know, what's the overall '02 fee incomes going to be and how much of it is transactional?

Until we close the second deal ---.

You know what we'll do Andrew, is we'll look at that in connection with next quarter's call. Because we, you know, we have some discussions that have not been completed with respect to some of that fee income. So, we'll look at, perhaps, providing a little bit more detail next quarter.

Okay, that's fair.

Basically, we kept operating expenses consistent at a 3 percent growth.

The only other thing is we have a, you know, we have a, probably 75 base point increase in revenue relative to Q1, built in.

And that's pretty much because of occupancy?

Yeah,you know, occupancy again, you know, it's what we expect to happen in Northern California and Southern California relative to the first quarter, we expect it to be a little better. Seattle, we expect it to be worse. Netting those I would expect, you know, 50 to 75 basis points improvement in revenue, hold the expense line the same. That's what we've got.

Great. Thanks so much, guys.

There are no more further questions at this time.

Well, thanks a lot for joining the call and your continued support. I hope to talk with all of you next quarter. Thanks. Bye.

This concludes today's conference. Please disconnect your line and have a great day.