Essex Property Trust Inc (ESS) 2002 Q2 法說會逐字稿

Thank you. Good afternoon ladies and gentlemen and welcome to the Essex Property Trust second quarter earnings conference call. At this time all participants are placed in the listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Keith Guericke. Thank you, Mr.Guericke. You may begin.

Welcome to our second quarter earnings call. Today, we are going to be making some comments in the call, which are not historical facts, such as our expectations regarding markets, financial results, and real estate projects. These statements are forward-looking statements, which involve risk, 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. For the quarter ended June 2002, FSO was a dollar 17, 6.4 percent increase over the previous June. That number included 9 cents per share of non-recurring fees. I'll spend some time later in the call talking about nonrecurring income. In addition, I'm going to update the supply demands fundamental for our markets, talk a little about dispositions, update you on acquisitions and CAP rates and then finally talk about the company NAV based on the current CAP rates based in the marketplace.

Starting, with the market update, unemployment in the US has increased June-over-June from 4.7 percent to 6 percent, for California those numbers are 5.3 and 6.4 percent. As we have always stressed on these calls, it is the supply-demand fundamentals that drive operations, and the success of the multi-family companies. We continue to stress the importance of total residential supply to the performance of the Multi-family market. Although, single-family supply seems less relevant during periods of unusually high job growth, eventually every job boom must end or at least moderate. In markets with a large pipeline of relatively inexpensive single-family homes, recovery in the apartment market will lag. Over the last nine months, permit activity has slowed significantly in the Multi-family and single family sectors in the FX markets. For most of the other metros, single family permits has fallen slightly. However, Multi-family permits remained relatively constant. Given the forecast of a slow steady recovery in the US economy, we do not anticipate the return of above average job growth over the next 18 months.

During this period, we stick with benefit of supply constraints to magnify. Now, I'll start with Seattle, hit the highlights of each of these markets. Late last year,Boeing announced it was going to 20 to 30 thousand jobs by the end of 2002 or early 2003. Through July 4th of this year, Boeing had cut 26,600 jobs, 15000 of those jobs were in those Seattle area. The the reductions that boeing announced here have been quicker than anticipated. The company has recently announced that it expects total job cuts to end at 30,000. Therefore Boeing cuts that sort of 90 percent complete.

Also, Microsoft recently announced they were going to increase the R&D spending and increase employment in that sector by 5000 jobs in this coming fiscal year. This reinforces our job growth estimates. We expect these new jobs to disproportionately benefit the Eastside market where a majority of our portfolios is located. One other fact that we noticed around each quarter is the Boeing exposure. We currently have 209 units occupied across our portfolio up there that are tied to Boeing. Unemployment in County at the end of June was 6.2 percent. Now let me go through the supply-demand statistics. We supply for multifamily for the year 3400 units, which is nine tenths of one percent of the existing stock. New single family supplies 7500 units, 1.2 percent of the existing stock. Market occupancy, now, let me quantify this thing that market occupancy is a point in time data that was taken from local surveys up there. So it is different in economic occupancy but market occupancy for the market was 92 and a half percent.

The portfolio of financial occupancy for entire quarter was 93 percent and our physical occupancies are only for the portfolio again a point in time was 95.2 percent. New jobs needed to absorb the supply 21000 or one and a half percent job growth. Estimates jobs for 2002 is 4000 and for 2003 is 27000. Going to Portland, they experienced, you know, minor job losses in the first quarter 2002. Job growth has returned to the Portland MSA we expect this job growth to increase in the second half of the year. The manufacturing sector has stabilized after losing jobs for nine straight months; this sector added 1600 jobs over the last two months. Unemployment in the Portland MSA at the end of June was 7.1 percent. The multifamily supply in that market is units or seven tenths of one percent of stock, single-family supply 9700 units, 1.8 percent of stock. Market occupancy 93 percent, financial occupancies for the quarter in our portfolio was 93 percent. Physical occupancy of our portfolio at June, excuse me, July 28th, 95 percent. Jobs needed to absorb supply 17,000 or 1.8 percent job growth. Jobs estimated for 2002 is 4500 and 2003 is 23500.

We are to Northern California starting with Santa Fe second quarter manufacturing sectors stabilized with no net job change in May or June. Overall, however the market did add a few thousand jobs in those last two months. Businesses services was particularly strong with plenty of relatively affordable office space available we expect Santa Fe job market to show some improving strength of the second half of 2002. Unemployment Salas MSA was 7.6 percent at the end of June. Multi-family supply 2,900 units one and a half percent of stock.

Single family supply 1,700 units of four tenths of one percent of stock. Market occupancy in 93.5 percent, portfolio, of financial occupancy for the quarter at 94.7, physical occupancy for the portfolio at July 28, 97.2 percent, jobs needed to absorb supply 13,000, 1.3 percent job growth, estimated jobs for 2002 at 2,400, jobs estimated in 2003, 18,000. San Francisco jobs continued, job losses continued in the second quarter. Finance and Service sector remained weak in San Francisco, we didn't expect the market to climb better in the second half. We reduced our total job gross estimates for the year.

San Francisco faces the extra risk of heavy exposure to financial jobs, which typically do poorly at the end of cycles and low interest rates environment. Unemployment in the San Francisco MSA at the end of June was 5.5 percent. Multi-family supply in the pipeline 2,000 units, six tenths of one percent, single family supply 1,100 units 3 tenths of a percent , market occupancy 93 in the quarter, portfolio occupancy 94.7, physical occupancy July 28, 94.9, jobs needed to observe supply 10.5 or 1 percent. Estimated jobs for 2002, 2,000 jobs and for 2003, 21,000 jobs. Oakland remains the strongest job growth market in the area. The market has a few thousand new jobs in the first half of 2002. We expect job growth to continue at the same rate at the second half of the year. The 9,000 jobs over the previous year. The transportation sector was particularly strong in the last quarter rebounding from losses over the past year. Unemployment in Oakland MSA was 5.9 percent. The new multi-family supplied 1,700 units, six tenth of one percent of existing stock, and single family supply 5,000 units, eight tenths of one percent of stock.

Market occupancy 95 percent, Financial occupancy for the quarter 94.7, portfolio, physical occupancy at July 28, 96 percent, new jobs needed to observe supply 13,500 or 1.3 percent job growth. Jobs estimated 2002 was 9000 and estimated 2003, 18,500. In county California, job growth has been stronger in the first half than we expected. We are revising the job growth up to 7/10th of a percent for the year and maintaining our 2003 estimate. Our unemployment in that what can I say was 4.8 percent at the end of June. New multi-family supply 400 units or 8/10th percent of stock. New single-family supply 2800 units, 1.5 percent of stock, market occupancy 95 percent, portfolio financial occupancy 94 percent, physical occupancy July 28th is 2002, excuse me July 28th was 95.8 percent. Jobs needed to absorb the supply 4000 or 1.4 percent job growth.

We are estimating 2000 jobs in 2002 and 5800 jobs in 2003. That way with the only Southern California market to lose a significant amount of jobs last year. Largest losses came in manufacturing, motion pictures and business services. In the second quarter manufacturing job losses were much smaller. Motion pictures grew slightly and business services were up strongly. We are revising upward our forecast job growth to 20,000 jobs or a half percent of 2002. Unemployment in MSA at the end of June was 7.1 percent.

New multi-family supplies 7500 units or half percent of stock. New single-family supply 7800 units or 4/10th percent of stock. Market occupancy 95 and the portfolio financial occupancy is 94. Physical occupancy July 28th 96.7. New jobs needed to abosrb supply 49,000 to a 1.2 percent job growth. Jobs estimated in 2002, 20,000 and in 2003, 78,000. Orange county continues to out perform most metros in job growth during the first half of 2002. Job growth was stronger than anticipated during the first half. We are increasing our forecast job growth from 10,000 to 16,000 jobs. Like most other markets, manufacturing transportation had been the weaker sectors. These areas of the economy stabilize in the second quarter. The service sector has rebounded strongly from its slow down to end of last year particularly business services. Unemployment in the Orange County MSA 4 percent. Multi-family supply 2900 units or 8/10th of a percent of stock. New single-family supplies 6000, 1 percent of stock market occupancy 95 percent, portfolio financial occupancy for the quarter 94 percent, physical occupancy at July 28th for the portfolio 95.9 percent, Jobs needed to absorb supply 25000.

Jobs estimated 2002, 16000 and 2003, 32000. Finally, San Diego, it's continuing to lead the region in job growth, the region continues expands its infrastructure and revitalization of the downtown continues. Manufacturing sectors also showing signs of recovery. Unemployment end of June was 3.8 percent.

In this market, multi-family supply was 5500 units or 1.5 percent of stock, single family supply 8600 units or 1.4 percent of stock. The market occupancy 96 percent, financial occupancy 94 percent, portfolio physical occupancy July 28th 99.1 percent. Jobs needed to absorb the supply 2.1 or 26,000 and we are estimating 20,000 jobs in 2002 and 38,000 in 2003. Let me update when and where we see rent growth for the rest of the year. Seattle last quarter we talked 10 percent rent drop at the economic level. We think the majority of that has filtered through our portfolio as of now and there might be a point or two left to go but generally pretty flat going forward.

Portland flat for the rest of the year, San Francisco, Santa Fe and Oakland as a group are, you know, currently 95 to 97 percent occupied; however, we do have still have concessions in this marketplace. So, I could see somewhere between the rent concessions and maybe dropping just another point or two which frankly it is so hard to call that, you know, I would basically say it's going to be flat with concessions generally going away. Ventura County we expect to see 2 percent for the remainder of the year, LA up 2 percent for the remainder, and Orange and San Diego both up a point or two for the remainder of the year.

And you can see for going through these statistics for these various markets we were operating in March that generally do not have excess supply issues to deal with both in the new supply or...excuse me...new single family or multifamily. The new supply represents less than 1.5 percent of supply in the North West and less than 1 percent in California. Our operations is executing well with occupancy for the majority of our markets in excess or in the majority of our portfolios in excess of the market occupancy of the respective submarkets. This recovery has been slower than any of its forecast with no significant job growth until 2003. We need additional job growth in our markets to create demand that will give us pricing power. In the interim, Essex is more than of collection of assets.

Essex is an entrepreneurial company with entrepreneurial management that understands the real estate business and can execute transactions to supplement lagging analyze. Management is focused on a variety of these transactions from GAAP financing to property in our taxable sum. We believe we can continue to create transactions that will contribute to quarterly . With think this is a rational business plans, it makes a lot more sense in jumping on it. The Dot-com bandwagon and that was rate a few years ago.

Let me tell about dispositions quickly. As disclosed in the press release, we sold four properties during the quarter. Three in the company and one held by the fund. This was done to take advantage of the market's variable cap rates. The reminder of the year, we could potentially sell, several more assets of the value of 75 to 100 million dollars. Acquisitions, despite the lack of acquisitions this year, it doesn't mean our acquisitions team is out playing golf, they are under-writing as many buildings now than we ever have, but have'nt been be able to get the cap rates we believe in.

You know, the herd-mentality is basically the same as the low cap rates appear to stay. We all believe that necessarily, we think the low cap rates have driven by low interest rates and a lack of alterantive investments. This can change, let me just share with you, what we believe the cap rates are by market and I will give you two measures, one, from an economic rent measure measure and the other we are looking in place ramps and these cap rates represent A minus to B plus markets looking at the product and cap rates are before rehab or other value added adjustments.

Starting with Seattle, analyzed on economic rent, we think the cap rates are above 7 and on in placed ramps seven and a quarter to seven and a half. In Portland, the cap rate on economic rent would be seven and a half on in-place rents about a 7. Bayarea economic rent is a six and a quarter, on in place rents, 6 and three quarters. In southern California, the cap rate on economic rent would be 6 in three quarters to seven and on in place rents, six and a quarter to six and a half.

As you throw in, there is that very, very few transactions in the Bay Area and Seattle with Southern California, there is actually, quite a few and if you would throw in eight properties in eight locations, the cap rates there would probably adjust down a whole 100 basis points. Despite the difficult environment which we expect to be able to acquire 100 million dollars by year-end, CAP rates that we do believe in. Finally let me share with you the impact of the above CAP rates of the company NAV. The range of NAV is provided by the analyst who cover us are from 42 dollars and 21cents to 54 dollars with an average of 47.82. If you apply the above economic coverage through our economic NOI, adjust for property tax reflect cost or team adjustment on California properties, the NAV for the company would range between 55 dollars and 57 dollars. With that let me turn the call over to Michael Schall.

Thank you Keith and thanks everyone for joining us. As in the past I am going to comment on the financial results of the company. I would like you to please note that the press release and our supplemental reporting package is available on our website or you may call the Investor Services Department in our corporate office in Pala Alto. It will follow a similar agenda as with the previous calls addressing the following topics, the quarterly financial results, last release, the balance sheet, and estimates of FFO for the remainder of 2002. First topic, quarterly FFO results. As you know the FFO per share for the quarter increased by 6.4 percent to a dollar 17 from a dollar 10 prior this year.

I have several comments about the components of these results starting with the discussion of internal growth and also is indicated in the press release, internal growth has continued to decline relative to the second quarter of 2001 and expected the year-over-year comparison had continued to deteriorate with same store NOI declining 10 percent. Total same store property revenue decreased 6.8 percent with the operating expenses increasing in 2.3 percent. On the income side several factors caused the reduction in same store NOI and these factors are as follows. First component is occupancy which dropped is compared to the second quarter, the prior year from 95.4 percent to 94 percent.

Each market has been affected as you all know by local economic conditions which has led to weaker than expected employment growth essentially in the primary driver level supply of occupancy and rents. The reduced occupancy in the second quarter of 2002 versus 2001 amounted to approximately 505,000 on the same store portfolio, which accounted for approximately 1.3 percent of the drop in the same-store revenue and the same-store revenue declined to 6.8 percent. During the quarter our strategy was to focus on the leasing and occupancy. As a result same property occupancy improved relative to the first quarter of 2002. It increased to 94 percent as it was 92.7 percent. To compensate, we are aggressive of pricing available units knowing that we needed to lease existing turns and increase the occupancy at the same time. Obviously the quarterly results represents an average of that 3 months period.

If you look at the month of June by itself financial occupancies for the portfolio was 94.9 percent. Second component of the decrease in same store NOI if the decline in scheduled rent which accounted approximately 3.8 percent or 6.8 percent climb in same-store revenue. As reflected in the last of these numbers we will comment on later market rents by the end of the second quarter had dropped 2.9 percent relative to the December 31, 2001 led by a 7.1 percent in the Pacific Northwest by 28 percent reduction in Northern California and rents in Southern California were essentially flat for those 2 comfortable periods. The third component of the drop in same-store NOI is concessions.

The amount of concessions recognized during the quarter increased both relative to the second quarter 2001 and also relative to the first quarter of 2002. As you know we expense free rent in the initial period of the lease rather than reporting leases on a net effective basis. We have recognized a 1.06 million and concessions in the second quarter 2002 compared to 293,000 in the second quarter of 2001 compared to a million 23,000 in the first quarter of 2002. Of the million 63 total concession during the quarter 894,000 was in the same store. Calculation represented a 683,000 or increase over the prior year quarters in terms of the percentage as that caused a 1.7 percent of the 6.8 percent decline in same store revenue. Two other points about concessions in the second quarter.

First as mentioned earlier we are aggressive in pricing units in the second quarter in order to improve occupancy and it means the least explorations. Concessions were a part of that aggressive pricing. So they were driven up a bit as a resulted at second although the amount of concession increased the concession activity decline relative to the lease in activity. We are trying our lease exploration so that roughly half would expire during the summer months, typically are strongest leasing period. As reflected in the turn over percentages we have turned over approximately 21 percent more units in the second quarter as compared to the first quarter of 2002. At the same time concessions on the same-store portfolio increased approximately to 7 percent. Accordingly relative to units charged concessions declined modestly; I think this supports the belief that concessions are slowly declining in the market place. Fourth factor in same store results is operating expenses, which increased by 2.3 percent. The same-store controllable expenses were up 1.5 percent, utilities were down in 7.4 percent, real estate taxes 3.7 percent, and insurance was up 28 percent relative to the year ago. Want to note that we previously reported that we have implemented rubs program in California beginning in the first quarter of this year.

I have mentioned earlier that utility expenses have dropped by 7.4 percent close to that drop 4.6 percent related to the implementation of rubs and the impact of rubs will increase as leases turn in and more California residents are converted on to the rubs program. I want to also make a couple of additional comments about our Southern California portfolio which is the largest concentration of properties that we have. As you know Southern California continue to lead operating results largely attributable to its more diverse flat economy in general, and generally better job growth results as compared to other regions and at the end of the second quarter of 2002 occupancies, or I am sorry, at the end of the first quarter of 2002 occupancies in Southern California have slipped to 92.1 percent. We have since then improved the occupancy level to 94 percent for the quarter and if you look just the month of June it is increased to 95 percent and a breakdown of 2.2 percent increase in same property revenue of the Southern California is a rental increase, rent increased by 5.2 percent but they were offset by increased vacancy of 2.1 percent of revenues in concessions of 1.1 percent of revenue.

The next comment is on same property turnover I commented on that briefly before but essentially it increased as expected to 49 percent in the second quarter of 2002 versus 45 percent in the comparable prior year quarter and also increased from 40 percent in the first quarter 2002 not, which is understandable given our preference of turning leases in the strong summer months.

As Keith indicated fee and other income has become a significantly larger component of our results over the year as we have increased our current investment program, interest in other income including the add back for joint venture depreciation increased 2.6 million to 9.7 million versus 5.7 million in the second quarter 2001. The nonrecurring portion of these fees which are indicated as a separate item in the supplement is in million 880, which had two major components, one was a 1.1 million dollar fee related to the sale of two core investment assets at Riverfront and the second was an access fee related to a new cable contract for 550,000.

Next topic is interest and amortization expense, which decreased by 955,000 to 9.1 million in the quarter. There are three factors that drive that number. First is outstanding debt balances, waited average outstanding debt was 662 million for the quarter, an increase of 35.8 million from the comparable quarter of 2001. Average interest rate on long-term debt was effectively unchanged and the third piece is a decrease, you know, line of credit rate from approximately 5 percent in the prior year to approximately 3 percent in the current year. Favorable interest rate reduction on line of credit contributed about 500,000 to FFO during the quarter. Also capitalized interest increased 967,000 to a million and 548 in the current quarter with construction and progress increasing to a 123 million versus 63 million a year ago. Coming on, G&A increased 289,000 to a million and 565, again the components are broken out in the supplement, and essentially there are several components. The overall G&A declined to 227,000 and then there are several allocations, the first of which is an allocation to our management company, which increased by 220,000 and then there are some other allocations that are in supplement once again.

Next topic is loss to lease. Loss to lease is detailed in the supplemental disclosure package, briefly we define loss of lease as a difference between market rates per pricing sheets and scheduled or in place rate. Loss to lease for the portfolio on June 30th was 7.8 million or 3.7 percent of scheduled rate, which was up from 6.6 million or 3.5 percent of scheduled rate last quarter. Most of the increase relates to a reduction in the negative loss to lease or we call it gain to lease in Northern California, which was caused by turned or rear-ended units at the significant lower lease rates prevalent in the market. So, as such we realize a portion of the gain to lease during the quarter and so the loss to lease number improved as a result. One additional point of loss to lease is that we expense free rate, up 5000, amortizing it into effective rent amount, so concessions are not reflected in the loss to lease number.

Next topic is the balance sheet. CAPEX for the quarter rounded an annualized clip of approximately 350 per weighted unit, which we expect to grow at near completion for the foreseeable future. In light of the increased interest in capitalized cost by the investing community, in our cash flow statement filed with our 10-Q, we will provide some additional detail for the wine item called additions to real estate. Essentially, we are going to breakdown the various categories in that wine item including expenditures per acquisitions upfront, for maintenance of such acquisitions. We have expenditures at the non-revenue generating CAPEX, interest coverage remains strong 4.2 times EBITDA. Debtor market capital is approximately 32.8 percent as of June 30th and we have a significant amount of firepower to fund new transactions in the form of ethics department value fund and assuming 65 percent leverage to the fund at approximately 700 million in total investment capacity of which it is committed to approximately 300 million.

We expect this to be available without taxing assets as balance sheet in the near future and so we have a significant amount of firepower available on as soon as we find transactions that are that meet our criteria. And its Keith indicated that is difficult to give in the corporate environment out there. As indicated in the press release subsequent to the end of the quarter we acquired an additional 400,000 shares of stock at an average price of 48. FFO expectations going forward, our FFO expectations remain unchanged for the year and we have a range of 448 to 461 representing 2 percent to 5 percent increase in FFO per share. However, we have again changed a couple of assumptions with respect to this guidance which are as follows: First, we are again revising downward to same property analyze assumption to a range of -5 to -7 percent for 2002 versus the previous range of -3 to -5 percent as discussed last quarter. Again it relates to worse than expected rental conditions for the rest of the year and their consequent impact on rents occupancy levels and the continuation of confessions.

That has been offset by increase b revenue and other miscellaneous nonrecurring income. So, the bottom end of that range assumes -7 percent in a wide growth and effectively no other nonrecurring income at the top end of the range assumes -5 percent in a wide growth for the year into full extent of the potential nonrecurring income that the company is working on. We will know that the timing of the non recurring income is not completely within our control and therefore we have maintained a larger range of potential assets allows us from here that we typically would at this time a year. And we are planning to comment on 2003 in the September calls, I am not going to make any comments about 2003 at this time.

Another topic, I know that expensing of stock options is initially been actively debated in the financial markets. We have not made the decision with respect to the treatment of higher options. However, the impact on Essex is relatively small with the compensation value of options of 560,000 for Essex in 2001 and 496,000 in the year 2000. The reason that these relatively small amounts for these relatively small amounts have been the boards decision to deamplify stock options for most senior executives, for example last option that was granted to the foremost senior executives was at 1997, instead the board has focused on programs that replicate the economic risks and rewards of the stock and then impactived these programs as already expensed. So that concludes my comments I like to thank you for joining us once again. Now I would like to give you an opportunity to ask questions.

Ladies and gentlemen, at this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1e on your touch-tone keypad. To remove your questions from the queue, please press star two. As for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, that is star one to ask a question and if you are using speakerphone, please pick up your hand set before pressing the star keys, and I will pause for a brief moment....

Our first question comes from Dan of Banc of America Securities. Please state your question.

Thanks. Just two good questions.

Wondering if you could go through the comments you made on the NAV, as it relates to CAP rates, I said that the current CAP rates may not stay low forever. Just wondering how much you think they will increase, as interest rates go up and what way would the, it is a very long term CAP rate that should be used in the NAV analysis? That is the first one...

Well, you know, I have to say that these are historically low CAP rates. I have never seen them; anybody's ever seen them. It is difficult. I mean, we have historically seen even in, if you go back to the early eighties, when CAP 1 interest rates were 14 to 16 percent, CAP rates were still in the you know the 8 or 9 range in, on the west coast. So, now that we have seen interest rates drop and go the other direction, we have got to see, you know, its just it seems, though logical to have rates where there at, or CAP rates where there at, I guess one of the reasons for our lack of activity in the acquisition field is we are not absolutely sure where they are going to go. I mean they could stay here, I suppose, because of the lack of maybe the lack of alternatives investments has a greater impact on the investment decisions of the rest of the world than, than the interest rates. We are not sure about that. But, if I will, you know, to be conservative, you know, we think that the interest rates and the CAP rates are clearly probably a half CAP low, just relative to CAP rates, I mean, just relative to interest rates.

Okay, great and then the second question. Only about a little more detail on the sale in Hawaii, just who the buyer is and just certainly large LCV on that mortgage you have originated, for them any risk of the stability of this buyer and also about the consulting fee that you received from that.

Well you see, you know the the buyer is a large private buyer. They have financial resources. They have business plan in place to replace the financing. We think that the, that the value of the , that is one of the market, actually that had very good well growth and strong occupancy. So, ultimately if we were to take it back, we would not feel uncomfortable with that position. But, we do believe that the buyer is capable and that the buyer will, will ultimately refinance us out.

I will make an additional comment on the structure. You know the company is held on a taxable reserve, therefore it is a, you know, taxable transaction. We spend a lot of time working with tax counsel to make sure the appropriate, the appropriate, you know, compensation went to rate of the taxable entity together. So, you know, that was a structure that was devised to generate the wide results with tax counsel. And, so that is how that is going to go. I want also to comment that the, there is a loan fee as a part of that structure and are accounting is expected to advertise that over the 24 months, the term of that, that loan.

Okay, Thanks

Our next question comes from Andrew Rosiwach with UBS Warburg. Please state your question.

Good morning guys. I like to start off with a couple of financial questions for Mike. You went through the what is there in million 1.9 or miscellaneous non-recurring income was and you had mentioned something about a cable gains. I just was not fast enough to get it.

Yeah. It was 550,000.

So the million 9 is it is the million 1 fee for the two JVAs and what is that cable fee?

It was an access fee related to some cable contractors with some revenue shareholding agreements and there was some upfront funds paid to us.

And is there an extra couple 100 grand that is involved with something else?

Yeah you know, just as a general comment, we have you know, variety of just you know, miscellaneous seeds to come at so I do not know specifically what the break down of those are but you know, I think it is typical in every quarter that I can remember to have you know some level actually more than, probably 200,000 I am just going to swing as the account.

Okay. And I have a question on your fund furnishing cost. I see you are writing it down with this position gains. Do you also amortize any of those upfront costs as an expense against the income that you have received from the fund?

No. We are not amortizing. We are going to you know, take them against the our pro eradicate on the sale of the individual assets and then of course the piece we have not, you know, we have not really commented on this we a you know, promoted as well. So we are just going to take it against our share gains and then at the end of the day, we will get a promoted interest, which is non-included in the quarter and we have not calculated at this point in time for those but we do not expect just a streamlined type amortization. We expect to write them off readably and that was been sold in at a time.

Okay so at the end of the day, those are front cost and not going to run throughout the fall.

Correct.

Okay but where is that in the balance sheet?

In investments.

Okay. Last, Keith I just want to ask you a couple of questions on the activity based items. Are any of the 75-100 million of this positions you mentioned in your joint ventures?

One of them is. Not in the fund but in a joint venture.

And then that is another opportunity for a potential incentive pay?

Yes.

Okay last question Keith. Who passed your assets in California?

Well it is, one of them was a private American group. One of them was a pension fund and then the other down south was, two were 10 31 strange money. So 3 of the 4 properties were bought by private groups, two of them were driven by exchange money that was a pension fund.

Okay thanks a lot guys.

Question comes from David Harris with Lehman Brothers. Please state your question.

Yeah, hi everyone. I will open on the ballistic activities, seems like you moved an aweful lot way in the quarter. Quick couple of questions in terms of your NAY assumptions. It looks like your revised assumption range is now very close to what we have been running out in the first half of the year, could you give us a feel as to what your dynamics are in between the third and fourth quarter, we will obviously be improving or are we continuing to just bump along the bottom for the rest of the year?

I think the assumption David is to sort of bump along the bottom for the rest of the year. That's probably a good way to put it.

Now, I realize you don't want to get into any detail on 2003 but what would be your best guess as to where they are in terms of NAV and 2003, are we looking at some improvement halfway through the year or do you think it might cut in early?

Hey David, yeah, we don't prefer to talk about specifics but I mean just generally, if you look at the job flow that I have talked about in each of our markets, you can see again, this is subject to our best projections that we have and the rest of the world has but generally we are seeing most of our markets have significant job increases in 2003 and with, you know, supply generally under control, so you know, I mean it's not going to go from bumping along the bottom of the fourth quarter to screaming the first quarter, so the implication is going to be...we have to be somewhere towards the middle of the year, we will see some significant improvement.

Yeah, I guess I would add to that that you know the improvement that we see thus far has been pretty down gradual and I think that our expectation is that that will continue to be gradual, the same-store comparison that you have as you know as on June 30th that was of most vigorous same-store comparison because we had you know a lot of strength rolling into Q2 of the prior year. Q3 is you know such of the weak quarter begins and weaker quarters begin in Q4, so Q3 is somewhere in between where Q2 was and where Q3 was but next year the same-store comparison, the point I'm trying to make as the same-store comparisons are much easier next year relative to this year.

Okay and while we are talking in general about 2003 on the other income line which is obviously been such a help in terms of giving you some growth dimension to your earnings this year. Are we now at a sustainable run rate or are we seeing, do you think 2002 activity levels represent something of a little high but you are not going to...you are going to struggle to replicate in 2003?

No, I think we are looking at 2002 and the activity that we are able to create this year at the supplement to NAY, I don't know that we can replicate it as I ask we are pretty . We are looking for opportunities all the time. You know, if it went we can get back to buying a lot of profits that make a lot of sense or build a lot of profits that make a lot of sense, we need still a lot more time and energy doing that. But right now as I said, CAP rates whether they are up today, we've essentially done no acquisitions here and the people that we have here are capable of doing.....of creating values, so that's what they are focused on since as I said there aren't a lot of activity in the acquisition game right now.

No, if acquisition environment improve somewhat, I'm right in assuming that the fund ready gets first refusals, so the 9 out of 10 acquisitions that you guys might announce would typically go to the fronts opposed to in direct ownership?

The fund has....actually the way the fund was done is they have the right of all deals, so the perception with the all deals would go to the fund until the funds were filled.

December 2003 the end of the commitment period.

Great, okay. Analyst, David Shulman wanted to have a supplemental question. Okay.

Hello, everybody....

Two questions, one is, isn't by definition an improvement in the acquisitions of the environment need not arise from the extraordinarily low CAP rates we are now seeing?

Yes.

Then thank you. Next question is this, what happens going forward instead of having job gains in the second half of the year, we saw it go flat as the stock market seems to be telling us and as the processing manager survey coming out today with the big drop and say beginning about a double dip, but we will say we sort of flat lined for the rest of the year-end jobs, what does that do to your numbers?

I think, I mean the areas where we have shown some increase in job growth, I mean if you look at Northern California, Seattle, Portland, the job growth that we are talking about for the second half is not significantly, it is so really only the couple of markets that we have got any significant job flow out there are Orange County, San Diego, and LA. But the answer is, it would have an impact and we have not calculated the impact specifically, but ...John is here may be he has a comment relative to this question.

Now we have seen the recent momentum is not that strong in our Southern California markets and so we are more optimistic now and the rest of our market, we are basically looking at flat growth here on, so I don't think there is a big risk to that.

The answer is we have not calculated it. We are thinking about the risk and that is relatively minor.

I hope you guys are right.

So do I.

Okay.

Our next question is from Brian with Merrill Lynch & Co. Please state your question.

Yeah, hi Keith, I am just looking at the 75 to 100 million of sales and the fact that you still have 400 million of dry powder in your fund, I mean can you replace those assets, you talked about a 100 million by the end of the year. I assume all those 100 million go into the fund?

I mean again potentially, we are trying to be getting the most guidance we can, if we were to sell those and we wanted to replace it we would do a 1031 and under the terms of working with a fund we can replace 1031 assets before allocating acquisitions to the fund. So that be answer to that and again as we are not committed to selling this you know 75 to 100 million dollars if we can get a price on these assets we will take the opportunity if we don't get a price there is no commitment to sell them.

Okay and with the challenging acquisition by minimum what is the chances that we go to O3 and we haven't gone much further from the $300 million committed?

Well again, you know, as I said last time we are trying to be as disciplined going forward as we have been in the past and there is no reason for us to spend dollars recklessly, you know, we don't ever want to have to give back investment dollars but we rather give back investment dollars than invest them unwisely. So, we are hopeful that we can't see opportunities that we know we got a good value-added process here, we are hopeful as we said we can do a100 million this year that we will have some value-added opportunities and that we will make profits on that.

And that implies to get fully invested you need to get up to do another 300 million.

That's right, that's right. But you know if you get us historically, we have done on the last few years 250 to 350, 250 to 350 million dollars in acquisitions, I guess not just acquisitions and developments, so you know, we have done one development deal so far this year, we got 2 or 3 in the pipeline that have some encouraging that are encouraging, so you know again, we think we will get it done but we are not going to do it, we are not going to it recklessly.

And all this acquisition, you know, they don't have to be in California, right.

They, you know, have to be in the West Coast, they have to be in our markets, so they would be Seattle, Portland or California but they don't have to be in California, per say.

And at times it is shocking that Seattle represent markets is still have 7 types caps on earth or there any other opportunities to bargain in some of the more distressed markets related to, you know, southern California for most of the dollars you want?

You know, and again we are out there hunting and packing in the end in doing everything we can to find good opportunities that we believe in, in southern California, we have not been aggressively looking at Seattle just because things seem to be terrific drops pretty significantly there and we think that Southern California has better job growth opportunities going forward as everybody does else does obviously. You know Portland is market that has been tough but, you know, there might be some opportunities there. Southern California remain the primary market so at the end of the market of the, we believe in, so we not necessarily going to the England Empire, I know that there is some job growth there but unfortunately if you look at the prices of single family housing out there and the amount of single-family housing that market could be could crash very easily so you know, we are going to deviate from our discipline to get this thing done.

And Mike, I'm looking at your maintenance and repairs line, it decreased by 550,000 both sequentially and year-over-year, what's going on in that line and is that sort of 1 quarter dip to go back to where it was on run rate?

You know, I don't have any detail on that other than you know just timing the type of issues.

Okay, I'll follow up with that and last question regarding in Northern California development, say both looks like the cost on this developments increased by 3 million versus switching at last quarter each, what types of yields do you expect on these developments?

Yeah, there was some cost increase that were reflected on the Essex, there were really 2 categories of cost, one is we have some disputed items with the general contractor which will work until we made a provision for the financials, the other cause was the...we were off on the capitalization piece and so we reflected the current estimate of that, CAP rate on that transaction is, you know, in the high 7s to low 8 range. In the asset, we had some difficulties with one of our major contractors and so we made an additional provision for increasing the cost there, CAP rate on that asset will be in the high 8s to low 9s.

Thank you.

Thank you.

High as I expected.

Our last question comes from Bill Crowe of Raymond James Associates, please state your question.

Hey guys it's Bill and Paul here, I think Paul actually has a question for you.

Yeah Keith, one short question. The metrics you used in the beginning of the call where you talked about the number of jobs you need to absorb the housing units that are in the supply pipeline

Right.

Where do you get those and what sort of numbers are those and do they differ market to market?

They differ market to market and there's some, its basically based on the median household income and how many job or wage earners you need to support a household and the range asking John here they range of high to low of what?

One and a half in the Pacific North West to two and a half to three in the LA, San Francisco area. ?

So that's the reason you can't take it and divide it out. Its really it gets down to how we look at the affordability and household income and what it takes to either rent or own a home in the various markets, so obviously the less expensive markets you need fewer jobs to absorb and the more expensive markets you need more jobs to absorb the supply.

Yeah, okay. Thanks.

Yeah.

Our next question comes from Richard of ABP Investments, please state your question.

Hi guys, sorry for the last minute question here but I was curious to know if you have any accretion built in, into your current guidance from the stock buybacks that you transacted subsequent to quarter end?

We expect them to such a replace some other income that could be dropping off, you know principally the effects of the sale of the Hawaii asset and some of the other sales so I think that's essentially a push on efforts to go forward.

Okay. And I just have one follow up question on, I guess on the first question from then, I didn't catch what cap rate you're using to get to you know, your earnings estimate of, I guess, 55 to 57 and then also what kind of run rate of the fee income are you using and what type of multiple are you putting on that?

The cap rate that we.that I ...to get to the 55-57 would be the cap rate that will avail that we described as being in place in the market today. Seattle 7, Portland 7.5, Bay Area 6.25, Sterling 6.75 to 7. And those were the cap rates that would equate back to the 55-57 dollar number for our NAV

Okay, and then one last, I guess, kind of theoretical question with regard to the cap rate issue I see your point with respective alternative, you know, investments if the market changes, but conceivably rates would be going up in an environment where you have a stronger economy and a fed would be backing off if its easing and then even on the long end of the curve if there was some fears of inflation, you know maybe the 10 year and then you know, the 5 year would be going up. Wouldn't that argue though that there would especially in the supply constrained area that you operate in, you know, much better lift of you know, what you are currently seeing in other words things are stronger than you expect and thus you know, you can get real big profit in that lie and there could be a speculative air to that in terms of people you know, paying up. So perhaps the CAP rate you know isn't that cheap as you guys were as expensive as you, you know think it is. Maybe a little too cautious.

I don't know. We will argue about that internally every day about what's the right thing to do and it clearly a 100 basis points you have to have a whole lot of growth in your market rents, just to maintain and you know, they will be covered, I guess, hindsight would be 20/20. At some point time we will figure that out, we'll all figure it out, but the right now we are airing to decide a conservatism.

I guess I would add a little bit to that. You know, your mission is doing two things, growing FFO per share and growing NAV per share. And if you look at acquiring in the current atmosphere, absent a 100 percent leverage scenario, if you assume a you know, ratable combination of debt and equity, its pretty hard to make that 6.5 to 7 CAP rate work. Looking at our blended cost of funds included again you got an equity combined, so its not growing that number and on there is some risk reward issues with respect to the growth and NAV per share, you know, if CAP rate stayed down forever we are obviously going to benefit on the existing portfolio and on a per share basis will do fine under that scenario. And if you acquire assets we are not going to be accreting to any NAV per share and the CAP rate stayed down and then of course if CAP rates move against you, you could actually lose something on NAV per share so, I think the risk reward the risk reward analysis and you know, as compared to what we view as our mission leads us to be at you know, little bit may be little more conservative than we might otherwise be.

Right and then a final thought. Some of your competitors who have suggested that land prices in certain sub markets have kind of come off the top year. Is that something that you are looking at in terms of you know were you can create more value and potentially is you know, these things need a little you know, zoning or time they could grow into you know, pretty nice return you know, vis-�is the CAP rates on acquisitions and then can you do development in the fund or is it just you know, this up and running properties?

We would agree with that. We do things that land values especially Northern California have come off a little bit and in fact as I think on the last call we had talked about an acquisition in Santa Clara, a piece of land that was going into the fund and the fund actually it does have two other pieces of land in it that will built out. So, we would agree that there are opportunities in selected markets, you have to be, you have to be out there and pretty selective about finding them but there are opportunities.

So we could expect more of that, I would say

We are going to, we are going to do what makes the most sense whether it is an acquisition or development, whatever gets the best return with least risk and you know there are sometimes, I mean we are going to do whatever makes the most sense for us. Right and we are looking at both.

Okay. Thanks for the time.

Gentleman there are no further questions at this time.

Thanks for joining us and we look forward to talking to all of you again in the next quarter. Thank you.