Essex Property Trust Inc (ESS) 2003 Q1 法說會逐字稿

Please stand by. Good day and welcome to the Essex Property Trust first quarter earnings conference call. Today's call is being recorded. With us are Mr. Keith Guericke, President and Chief Executive Officer, Mr. Robert Talbott, Senior Vice President of Operations, and Mr. Michael Schall, Senior Vice President and Chief Financial Officer. I'd like to turn the call over to Keith Guericke. Please go ahead, sir.

Welcome to our call. Again, this morning, we're going to be making comments on the call which are not historical facts such as our expectations regarding markets, financial results, and real estate projects.

These are forward-looking statements also which involve risks and uncertainty which could cause actual results to differ materially. Many of the results are detailed in the company's filings with the SEC and we even do you remember you to review them.

This morning, I want to update you on what we see in the markets with respect to job growth, new supply, single family home prices, and the a affordability of the single family homes.

Also, I’d like to update the acquisition for the remainder of the year. Robert Talbott is going to give you color on the individual markets. He's our operations executive, and Michael Schall will make his usual comments.

Since the last call there's been little change in economic news. Each positive news is followed by negative news of equal magnitude. However, the first three months of '03 did mark the sixth straight quarter of positive GEP growth. We have been the double dip session has reduced significantly.

In addition, the high level of uncertainty in association with the recent international conflict has been greatly reduced. At the same time, the equities market seemed to stabilize due to stronger earnings. Unfortunately, job growth has not started yet.

These results are consistent with our previous view that '03 will be characterized by stronger second-half leading to moderate overall growth for the U.S. in '03.

Consequently, our expectations for the performance of our apartment markets remain virtually unchanged from our last call. One noted exception is the impact of the war on our San Diego market. As we noted previously, the San Diego market has high exposure to troop movement, given the recent announcement of the eminent return of a significant portion of these troops. For example the USS constellation battle group is returning. We have higher confidence of achieving the results in this market.

I struggle about the information we're giving out. When I talk about these markets, it's my goal to give you meaningful information to help you understand our markets and why we believe they will outperform a majority of the markets in the country. I've given you data for many years with respect to single and multifamily units.

To complete the picture, I will also give you median home prices and affordability by market. And just so you know how we define affordability, it basically is the ratio that equals the median household income to the income required to purchase the median priced single family home.

So, therefore, a 100% value means that the median income household just qualifies to buy the median price home. If the affordability is 80%, that means the household with the median income only has 80% of the income required to buy the median-priced homes.

Now, let me get into each of the three major markets. And again, bear with me, and I apologize. In the future, we're going to include some of the data in the supplemental, but bear with me on this call. I have the typical reams of market data that I’m going to throw at you.

Starting in the northwest, which represents 23% of our portfolio, Seattle,, we expect to see 3,000 new multifamily units being built this year about 8/10 of 1% of existing start and 7,900 of single family, 1.2% of existing stock.

As I think you know, we have some models and Greenspan can't figure it out, but we try, to and we try to do a reasonable job at it. But one of the things we think that market is going to grow about 4/10 of 1% this year, which represents about 6,000 jobs for the year—and that is December over December, so December '03 over December '02. That's the projection.

At the end of the first quarter, if we track actual jobs relative to our production, we're 6,400 jobs behind the projection. In the Seattle MSA, the median home price is $254,000, and the affordability is 100%.

That means the family with the median household income can (ph.) afford the median-priced home. Moving down the coast of Portland, new supply is expected to be 1,300 units of multifamily or 6/10 of 1% of the existing stock. And single family 10,000 new units and 1.9% of stock.

Again, moderate growth, half a percent, represents 4800 jobs, tracking actual jobs at the end of the first quarter relative to the projection, we're 5,800 jobs behind where we expected to be. In Portland, the median price home is $180,000, and affordability index is 134%, which means that the median household income is 134% of what it takes to buy an median priced single family home. So as you can expect, there's a lot of home buying going on in this market.

In the Bay Area where we have 17% of the portfolio go through new supply by sub market or by MSA. And again, in all cases, they're very manageable. Starting in San Jose, say, new multifamily supply is 2,400 units, or 1.2% of stock. New single family supply is 1,700 units, or 4/10 of 1% of stock. In Oakland, 1,400 units of multifamily—1/2 of 1% of stock., 6,000 units of single family, or 1% stock. San Francisco 1,700 units of multifamily or 1/2% of stock, and new single family supply is 1,000 units or 3/10 of 1% of stock.

Job growth will be marginal but positive at about 20,000 jobs, which is about 7/10 of 1% for the entire Bay Area. And again this is measured actual jobs in place December over December.

Actual jobs at the end of the first quarter relative to the projection are as follows. In San Jose, we're 8,500 jobs behind. Oakland, 2,400 jobs ahead, and San Francisco, 1,600 jobs ahead.

Median home splices and affordability are as follows. Starting San Jose, $504,000, affordability 73%. Oakland is $412,000 with affordability of 78%, and San Francisco $511,000, with 68% affordability.

Going now to Southern California where 58% of the portfolio is located, and again we expect this sob to be our best region with respect to operating results for 2003. New supply for multifamily and single family follows.

Ventura, 350 multifamily units or 7/10 of 1% of stock. Single family 2,400 units or 1.2%. Los Angeles is 7,600 units of multifamily which is a ½ of 1% of stock, and single family 7,900 units or 4/10 of a percent of stock. Orange County 3,000 units of multifamily, 9/10 of 1% of stock, and single family 6,000 units, 1% of stock. San Diego 4,500 of multifamily 1.2% of stock,, 8,400 of single family 1.3% of stock.

The employment picture in Southern California is much more positive than in our other markets. 2003 job growth is expected to be about 1%, which represents about 69,000 jobs, with unemployment rates at or better than national average. At the end of the first quarter, these markets overall are tracking ahead of that pace as follows.

Ventura is actually behind 3,500 jobs, but L.A. County is ahead 28,600 jobs, Orange County ahead 3,700 jobs, and San Diego ahead 7,300 jobs.

Let me give you the median home prices and Affordability for each of these MSAs now. Starting with Ventura again, median home prices $342,000, affordability is 89%. L. A County, $280,000, median home price with 89% affordability. Orange County, $415,000, median home price was 72% affordability. And San Diego is $356,000 median home price with 71% affordability.

As the above data demonstrates, our markets are generally not oversupplying, and the only market that had significant affordability are Portland and Seattle.

In these markets home prices continue to appreciate in the first quarter. As a result, despite the low interest rates, we've seen a decline in single family transactions in our California markets in the first quarter. In Northern California, total transactions have decreased 9%, or 2,238 transactions. March sales, home sales are down 15%. In Southern California for the quarter, home sales are down 2%, or 1473 transactions for the quarter. Looking alone at March alone transactions down 8%.

Data Quick is the source of the data. Data Quick has not made available Portland and Seattle yet. Based on the best information we could Garner from local periodicals , it seems they have had positive '02 first quarter verse '03 first quarter.

In addition the recent trends in rents in some of markets has significantly lowered the ratio of average ramps to median household incomes. This condition is particularly acute in Seattle and San Jose. Although we have limited reliable historical data, these levels are much lower than anytime over the last 15 years that we know about.

We believe the forces support the apartment markets in slow times. However, we also feel the conditions provide a significant upside when strong job growth returns.

Low average rents in relation to incomes indicate the ability to absorb higher-rent growth and market conditions become tight. Again as we've always stressed on these calls, we believe that the supply/demand fundamentals for both single and multifamily are important when you evaluate the markets and the operational success of multifamily companies.

I will quickly go into acquisitions. On the last call, I updated all of you on what I saw as the cap rates in our various markets. Those rates seem to be holding. We continue to be active in Southern California and expect to be able to complete $250m to $300m of acquisitions, in the 6.5 to 7 cap range by year end. I'd like to turn the call over to Robert Talbott.

Robert Talbott Thank you, Keith. Good morning. Today I'm going to update you on current market conditions in each of our major markets. As I previously stated, our operating strategies and objectives are market drive. We seek to maximize our relatives.

Looking at our entire portfolio as of this week, are at 95.7% occupied. We should note here that these figures are for the first of the week. And typically, the last week of the month, our occupancy is the highest. After the first, we should expect a slight temporary drop of 1% to 2%, as units on notice are vacated and we redid them for new occupants.

Let me turn now to some of our individual markets. In Seattle, we're still feeling effects of supply both from multifamily and single family and the continued weak job conditions. It continues to be a concessionary market. Concessions seem to be getting a lot of attention, so let me comment on our strategy and thoughts with respect to them. We, like many owners, prefer not to give concessions. However, when a market such as Seattle becomes dominated by concessions, we will meet the market to maintain occupancy.

We recognize when the market recovers the first sign of its strength will be the reduction or the elimination of the concessions, therefore, by renting to residents at a higher monthly rates, and using the concession up front, we're well positioned to increase our revenues when the recovery occurs. In the end we strive to strike a balance between the level of concessions and the amount we reduce the monthly rent.

We estimate market occupancy to be 93.5%. This information comes from third-party data. So these are broad-based MSA-level figures. Consequently, we would expect some sub markets to be doing better than that average. Giving the continued employment conditions previously discussed, we believe market rents in this area could decline yet another 2% to 3% by year end. As of this week, our occupancy is 95.6%, and our net availability, which we define as the sum of unleased vacant units and unpreleased units on notice expressed as a ratio of the total portfolio is 6.8%. Traffic from one year ago is up about 2%.

In Portland, the west side continues to be affected by the weak job market and healthy single family home markets. Consequently, it's still a concessionary market, with one month free being fairly common.

Market occupancy at 93%, and as in Seattle, with the employment conditions, we could see 2% to 3% in market rent reduction by year end.

This week our occupancy is 95%, and net availability is 8%. Traffic is up about 20% from a year ago.

In the Bay Area, occupancies generally seem to have stabilized. We are seeing some soft spots, particularly at the high end in our south Bay regions, mostly driven by Santa Clara County’s high unemployment, and the fact of what new supply comes into the market is concentrated in that area. We are estimating market occupancy is in San Francisco, Oakland MSA to be between %93 and 95%, and 93% in the San Jose MSA.

We still expect this year’s rent growth to be flat to down slightly depending on the sub market. As of this week, our occupancy in the San Francisco Oakland MSA is 95% with 7% net availability. In San Jose, MSA occupancy is 96% with 6% net available.

Concessions common at the high end of the market, but not yet limited in the middle. Typically we see a range of anywhere from two weeks to a month. Traffic is down about 2.5% from a year ago. The L. A, Ventura markets continue to be stable, on one of our bright spots. Minimal concession activity. If you see it at all, it is usually no more than $300.00 to $500.00 off the first month's rent.

We believe market occupancy is 95%, with expected rent growth depending on sub market this year to be between 2% and 4 %.

This week our occupancy is just under 96% with availability of also just under 6%. Traffic is up 7% from one year ago.

Orange County, also another bright spot for us particularly on the north end. The south is still a (inaudible) affected by some of the supply. Concessionary activity minimal. When used, it is usually $300.00 to $500.00, with an occasional month free down in the south County area.

Market occupancy is 95%, and we're expecting, again, by submarkets rent growth of 2% to 4% this year. This week our occupancy is 96%, and net availability 5.5%. Traffic is flat from a year ago.

Now let's talk about San Diego. Early in the quarter, we saw pockets of softness due the military deployments. Now that the war is ended, we're seeing occupancy in Camp Pendleton and Mira Mesa market start to improve, from their quarter lows, which got as low as in the mid-eighties. We have 3 buildings located in the vicinity of Camp Pendleton and Mira Mesa Naval Center, which were affected by the military. However as of this week, currently 90% occupied with a net availability of 12%.

Our San Diego portfolio though, is diversely located. We have a total military exposure of 12%.

Let me now comment on the Sacks Portfolio transition, which has continued to do well. Occupancy is 95% with 6% available. The only remaining asset that's not included in the two sets of figures I just gave you is presently 96% occupied with 8% available. We estimate the total market occupancy in San Diego to be 95%, and expect rent growth of 2% to 4%, depending on submarkets.

No real concessionary activity in the market other than military affected areas where you do see a month free. As we didn't manage many of these buildings in San Diego, I don't have meaningful traffic figures for you today. That's it. Let me turn the call over to Michael Schall.

Michael Schall Thanks, Bob. And welcome, everyone. As usual, I'm going to talk in a fair amount of detail about the quarterly financial results. I'm going to break that down into four topics. The quarterly over operating results loss-to-lease balance sheet and development, and estimates of FFO going forward. Also want to mention for those of you who haven't been on the call before that our press release that the supplemental reporting package is available on the web site. Or you can call the company, investor services in our offices in Palo Alto to obtain a copy.

First topic is quarterly FFO results. As you well, know, FFO for the quarter declined 4.4% to $1.08 from $1.13 in the first quarter of '02. As Keith and Bob have indicated the bright spot continues to be with the various Southern California market where we generated %7.2 revenue growth and 8.4% NOI growth.

The rate of decline in Northern California revenue was reduced slightly, to 10.2% decline in the first quarter versus an 11.4% decline in the fourth quarter of '02. A 13.4% decline in the third quarter of '02, and a 14.9% decline in the second quarter of '02.

Much of the reduction, however, is attributable to ease injury comparisons with the prior year results as opposed to real improvement in northern California in the current quarter.

The northwest trends follow a parent similar to Northern California, Al low the magnitude not as large. Couple of comments with respect to the quarterly results, starting with the internal growth. Again, Southern California continues to perform well. But this positive performance is offset by the conditions in Northern California and the northwest. Same property results at the worst point in the second quarter of 2002, where same (inaudible) revenues declined 6.8%. And Q3 of 2002, that decline was 5.5%, Q4 3.3% and in first quarter of 2003 the decline was 1.5%.

Sequentially, first quarter of '03 versus fourth quarter of '02, same property revenues declined .4%.

So, based on these trends, and assuming we don't have another (inaudible) down on the economic flash job front, which we don't expect, it appears the same store revenue declines well continue to abate throughout '03.

I have several comments about the components of the quarterly same-property revenue decline of 1.5 %.

The first is occupancy, which on the same store portfolio increased compared to the first quarter of the prior year. It was 95.2% for the first quarter '03 versus 92.8% for the first quarter of '02. The increase occupancy added approximately $1.2m to the same store revenue number. And that was, of the total, a 2.9%s positive offset to the 1.5% overall revenue decline.

As noted in previous calls during the difficult economic conditions, or strategy has been to continue focus on leasing occupancy and timing of lease expirations, and I think Bob and his group have done a good job at that.

Second component of the decrease in same store revenue, I wanted to touch on, is scheduled rent. As reflected in loss-to-lease number I will comment on later. Market rents by the end of the first quarter dropped 5.1% relative to March 31st, 20002. This was comprised of a 6.3% reduction in Northern California, a 12% reduction in the Pacific Northwest and a 1.8% reduction in Southern California. Overall the scheduled rent decline was 5.4% of scheduled rent.

Third component of the overall result in same store revenue is concessions. The amount of concessions recognized during the quarter decreased relative to the quarter ended March 31st, '02. And on a sequential basis it decreased from the fourth quarter of '02. As reported previously we expense free rent in the initial period of the lease rather than reporting lease on a net effective basis. We recognize $599,000 in same store concessions in Q1 of '03, compared to $975,000 as of March 31st, 2002, and $668,000 for the quarter ended December 31st, 2002. And that reduction in concessions was a 1% offset to the overall 1.5% decline. So positive offset to the 1.5% same store revenue decline.

Turnover percentage changed little. It was 53% down from 55% in the prior year.

Next topic I'd like to talk about operating expenses which increased 7.8% for the quarter. In general, first quarter, same property operating expenses were larger than our guidance, which assumed 2.5% to 3.5%. And that increase is essentially due to a more conservative approach to our expense accruals. And if we look back historically for the last several years, we tend to have -- in terms of just bills presented, we tend to be light in the first quarter, so we made an estimate of what those bills are, which was a -- we tend to be light in the first quarter, and, so, we accrued more in this quarter. And that is expected to be reversed in the future as those bills are presented.

So it should happen all within this current year, we'll be heavier in expenses in Q1 and lighter ultimately in Q4. But end of the year, our tendency is to have all the expenses paid. So it is a timing issue within 2003, and that is what we expect. So, again, we reiterated in our guidance that same-property expenses will increase approximately 3% overall in '03.

A couple of additional comments on Southern California give you a breakdown of the results there. For the first quarter, occupancies were 95.2%, down from 96% in the fourth quarter, but up from 92% in the first quarter of '02. The breakdown of the 7.2% increase in same property revenue in Southern California was, number one, scheduled rents increased by 1.6%, occupancy increased represented 3.4% of the 7.2% increase, and a decrease in concessions represented 1.7% of the 7.2% increase. And the balance was other income.

Quick update on the results of the Sacks portfolio that you will recall we acquired by merger in December '02. For the quarter, we were slightly ahead of our acquisition budgets for the Sacks portfolio. As indicated previously, as Bob indicated, there were a couple of assets substantially behind because of troop deployments to Iraq. But overall, we were slightly ahead, despite the fact that on a couple of assets we were behind . And those assets, again, were located near a couple of the military bases directed affected by the troop deployments.

Comment on interest and other income which has, which has in general, become larger over the last several years, as we've increased our co-investment program. Interest and other income including the add back for joint venture depreciation decreased $2.5m to $5,271,000. The nonrecurring portion of those fees was $242,000, which is broken down in the supplement, and the largest component of that nonrecurring fee was just a one-time management fee.

Interest and amortization expense increased by $2.036m, to $10.9 million in the quarter. And that is essentially due to an increase in the weighted average outstanding debt of $162m, mostly related to the Sacks merger in December of '02. Average interest rate effectively unchanged at 6.8%. And we got a little bit of benefit from your line of credit. It contributed to about $90,000 to the FFO result for the quarter.

Finally, G&A increased $138,000, and the components of that are broken up in the supplement.

Second topic loss-to-lease, again, loss-to-lease is detailed in the supplemental package. We -- in summary, we define loss to lease as a difference between market rents per our pricing sheets and scheduled or in-place rents. Loss to lease March 31st was $6.1 million or 3% of scheduled rent, reflecting a decrease from $8.1m, 4% of scheduled rent last quarter. As with previous quarters, negative loss to lease in Northern California and Pacific Northwest has declined over time. It's now about $1.4 million. Southern California loss to lease $7.5 million or 6.5% of scheduled rent. Primary reason of define from Q4 to first quarter '03 was lower economic rent levels.

One other point on loss to lease. As you know we expense free rent up front, rather than amortizing it into a net effective rent number, so concessions are not reflected in the loss to lease number.

Third topic, development and balance sheet. Couple of quick comments on development projects. The first one is the Essex at Lake Marett, the high rise on the shores of Lake Marett in Oakland was removed from the development community schedule because it was stabilized in the first quarter. And that project, as you probably read in the press release, we are very pleased to have been awarded the Pillars of the Industry Award from the NAHB for the best high rise design architecture and construction.

Second point on development projects was also in the press release dealing with the Waterford Apartments. Water forked is a 238 unit in San Jose that was developed under a presale agreement between Essex and a local developer.

In summary, the presale agreement provided for a $35m base acquisition price, which we closed on the property at that price, plus an earn out amount that is based on a cap rate-type formula following stabilization. The contractual earn out date was November 2001--just after the September 11th tragedy, and the formula indicated that nothing was due. And as you will recall, rents were fluctuating wildly during this period, and that had a rather dramatic impact on the earn out amount.

Anyway, longer to short, this led to an arbitration in which the company was directed to issue 109,875OP units to the developer. This cost was capitalized to the basis of Waterford Apartments, and there remain a couple of minor issues to be decided, but we don't expect these to change the overall result significantly.

Capex we expect again for the year about 375 per weighted unit, and that should grow near inflation as we move forward. And that is broken out, as we stated before, in the queue--it will be broken out in the queue. Interest coverage was 3.6 times EBITDA, debt to market capital was 36% as of March 31st, '03.

Next topic is the FSO expectations. We are leaving our FSO expectations unchanged for '03. The current estimate is 433 to 445 per Share, and, so, we think that that is still the appropriate target for us. That concludes my comments. I'd like to turn it back to the operator for questions. Thank you.

Thank you. The question-and-answer session today will be conducted electronically. If you would like to ask a question press star 1 on your touch-tone telephone. We'll take as many questions as time permits and proceed in the order you signal us. If you're joining us using a speakerphone, make sure the mute function is turned off to allow your signal to reach our equipment. Once again that is star 1 if you would like to ask a question.

We go to Kevin O'Shea with UBS Warburg.

The question is with respect to some of your preferred to units, are any thoughts on redeeming them as they become redeemable? It looks like the series B, I think, is currently redeemable and another 25million redeemable toward the end of the year.

Yeah, we are definitely looking at that. The series B is a 7 and 7/8 effective yield. We're not considering calling those securities. Over, in November of this year, the series C is callable in actually late November, and that's a $25 million traunch, and we're looking at possibly calling those.

Okay. With respect to your Calvin Avenue office loans, can you give us a sense as to whether you're no longer accruing interest on the first mortgage on the Mez piece, which I think may first mortgage which I think may have been matured in March?

Yeah, that matured in March. We are no longer accruing interest on that. And the conditions have changed little. That local office market continues to be in pretty difficult shape.

And the owner is having trouble leasing the building. It's essentially 110,000square-foot office building. It is on zero accrual, so certainly the overall impact to us is not getting significantly worse. So we'll leave it in that mode until something positive happens there.

Where does it stand in terms of the loan with the buyer of the office building? Is it an acceleration or in negotiations to try to work out another amount?

We are essentially pursuing that, you know, internally, initially, and then we're deciding what to do with it. We haven't made that decision at this point.

Kevin O'Shea Okay. Final question, Mike. Last call, you indicated with respect to nonrecurring fee income, the base expectation for '03 was around $1m. And looks like you were pretty much right on target in the first quarter. Has your overall expectation for the balance of the year changed.

You know, at this point in time, no, it really hasn't changed. We're expecting a small amount of nonrecurring fee income. And, if anything, we're hoping that the amount of recurring fee income related to essentially Essex's apartment value fund acquisitions might have put its us a little bit -- we might be better off in terms of recurring fee income, but the nonrecurring fee is on target at $1m.

Great. Thanks.

We have a question from David Ronko, with RBC Capital Markets.

I'm here for Jay Leup, RBC Capital Markets. Listening to your comments it sounds like things are still pretty bad in the northwest and think it will continue to be that way for a while. Why the notable improvement in (inaudible) it looks like in the fourth quarter was negative down 7.9% in Q1. I wonder if you could tell me why that happened?

Let's see. Sure, I'd be glad to comment on that. I think a lot of it -- actually, Mark Mikl here. There are two pieces, one is the same property comparisons gets easier as time rolls on, and I suspect that's a significant part of that.

In the fourth quarter 13.1% operating expense increase, where it dropped off to 7.6%. We like to look for at the revenues and the revenues went from 6.7% down to 3% in the quarter, in the current quarter. And we're basically, over the prior year, we're curing up occupancy from the prior year where it was a little softer.

Mark Mikl Yeah, actually, if I look at the prior year, see, 33102, Pacific northwest occupancy was 90.1%, and it's currently 94.5%. So that's a significant of it there.

Makes sense. Next question is, I know you guys talked about keeping with your, roughly, $300m acquisition target in the coming year. I wonder if you if you would talk a little about dispositions. Have your thoughts changed there at all? Talk about if you're selling some of the other assets you received.

With respect to the sacks portfolio, again, we are -- we purchased that portfolio as an opportunity, and we are going to continue to operate it until we, you know, really understand where all of the opportunities are. So we haven't made any commitments for dispositions of any of those.

Actually, that's not completely true. There's one very small part that's about a little over $1m that was in play when we did the merger, and that's continuing on, and we expect that to probably happen. It will happen -- if it happens, it will happen in the second quarter, and it's a very small profit on that deal.

With respect to other units, we have, actually, two properties that are listed with outside brokers that are in the Fund.

But within the company, we are not actively pursuing any dispositions right now. Part of the problem is everything that we own has huge appreciation, huge profits in it. And we have dedicated the deal flow to the Fund. And for us to sell properties, we really have to do a 1031, or we've got some serious tax problems. So until we get the Fund behind us, it doesn't make a lot of sense for us to dispose of properties.

Great. Thanks, guys.

Keith Guericke Okay.

We'll go to JP Morgan, Tony Paolone.

Tony Paolone Hi, guys. Looking at Southern California, another one of your peers this week broke out sequential NOI, and there were disparities between Los Angeles, Orange County and San Diego. Yours may have been in line with San Diego potentially being weaker than Los Angeles and Orange. Is that the case?

Well, actually, in the case of San Diego, with the exception of sacks, we only have one asset there that's in the same property pool. So I think that's probably one of it.

That asset had a same property NOI difference over last year of 2.4%, and 3.4% on revenue. So it was, you know, perhaps it was the weaker end of that. And I don't have this broken out by county, but in general, I think there is a fair amount of discrepancy between different parts of Southern California.

For example, you know, Keith gave you some supply numbers for Orange County. And the reality is Orange County is like two different worlds. The south end has almost all of that production of housing, and the north end is more of the fully-developed, 30-year-old type areas. And the north end has a big chunk of jobs. As a result, conditions, even within Orange County, are pretty different. , where the south end has struggled more than the north part of the county. So I don't know how to generalize exactly the result, but I agree with what you said, which is there's a pretty significant amount of variation between the strongest and the weakest parts of that area. Do you want to add something, Keith?

No.

In terms of on the operating expense side, if I'm reading you correctly, I it seems like there shouldn't be much change from the first quarter level as the year goes on. Is that fair?

Here's what I think. Here is what really happens. You know, the first quarter last year, we do an estimate at the end of every quarter on what amount of bills are outstanding, not submitted to us. And what tends to happen in the fourth quarter is everyone gets their operating expenses in so they start the year with essentially a fresh budget.

So we tend to run heavily in the fourth quarter. So you could probably say, get closer to four months of expenses submitted in the fourth quarter, and you flip around in the first quarter and end up with two months of expense in the first quarter. We're recognizing that. That occurred over the last couple of years, is we're a bit more aggressive in estimating what that might be in end of Q1.

We expect that that accrual will reverse itself as the bills are submitted, and by the time you get to the fourth quarter you're in the same position. We expect the bills to be submitted and paid in the fourth quarter so we start '04 with a clean budget. So the timing difference is going to be between Q1 and Q4, is what we expect.

As we look out to Q2 here, that we're in, on that sort of top line, assuming not a bringing change with expenses, then, your occupancy, thus far, is pretty good, maybe flat to maybe up a little bit? Any notable change in rental rates that would cause NOI to, maybe, be off as you go into the busy season?

As Bob commented, we expect to see southern California, which u which is the majority of the portfolio, to be positive 2% to 4% generally. Our weakness is going to with the northwest where we think there could be additional 2% to 3% erosion in rental rates at the market level.

And as Bob said, we fully believe that Northern California is at the bottom and is going to bump along. So the delta in, Northern California, is going to be concessions. Right now, we're seeing, you know, around two to three weeks, four weeks in the worst case, of concessions.

And if those can dry up and can go away, that's a one-year lease, a one-month concession is 8%. So there's a potential swing there. I don't expect it to get worse. The only market we see that could get slightly worse would be the northwest.

Okay. Last question. On the San Marcos development, which is in CIP, can you give us a feel for modeling purposes what kind of NOI is hitting, since it seems like it's in lease-up versus what's being capitalized?

Mark do you have something?

NOI for the quarter for San Marcos is $339,000.

Okay.

Is that enough information O do you need -- what else do you need there at the end of the quarter -- the occupancy at the end of the quarter is in the supplement.

In terms of the $339,000, what portion of the price, roughly, would that imply is out of being capitalized, if you will? Or what portion of the cost of the project is no longer being capitalized, guess?

By going back to the supplement, if you look at the leased percentage, that effectively is not perfect, but it would be the online percentage.

That's of quarter end.

So you have to extrapolate from a prior quarter.

Fair enough. Thanks.

Moving on, a question from Andrew Rosivach with Piper Jaffray.

Andrew Rosivach I apologize in advance, my phone keeps beeping. My first question, Keith, the $200m to $300m of acquisition, is that all going into the Fund?

Yes.

And what do you think the timing of that is?

Well, we've been very act active recently, and I think you could expect to see a chunk hit the second quarter, and then -- I think over the rest of the year, you should see us get it done.

Is there any kind of a sense of urgency to get the Fund fully invested? Correct me if I'm wrong, but tinge investors are paying fees on committed capital as well as invested.

This year it's paid on committed capital. In the future it's paid on invested capital. I think the one thing that we have always done and you need to know about us if you don't -- I think you do -- is that we generally try to be very sensible about our investments.

And we think that, you know, if we can't find good investments, we'll turn this money back to our partners because we get no advantage for making bad investments.

So what we really see right now is that there are a few investments out there that are in the 6.5 to 7 range in Southern California. We do believe there there's some rental growth. And if you marry that up with long-term 7 and 10 year debt, you can see 7-year debt at 4.7%, 4.8%. You can have positive cash on cash kinds of return with 65% to 70% leverage of close to 10%. We think that that's a good use of the Fund's money to make those kinds of investments.

Gotcha. Are these those portfolio deals, or sit one-off stuff.

One-off stuff.

Gotcha. And Keith, I wanted to ask you another broad question. Prop 13has been great for real estate owners in California. But we're hearing news back east the state is strapped for cash. Is there any concern that either through Prop 13 or one means or another that they may come after real estate owners to help with the fiscal crisis?

I don't think they're going to come after Prop 13. I think there are other type of tax revenues that are going to be attacked. Bob is here and he is in touch with our legislative group.

Nothing really that will directly affect or that would be directly targeted to real estate owners as having to carrying an unfair burden.

We have a question from Brian Legg from Merrill Lynch.

You said you expect to make the $250m to $300m of investments, and I know you have $4m of capacity, and your drop dead date is November. Do you feel fairly secure about that amount and is there any plan to extend the investment horizon?

Yeah I think we can get $250m to $300m done this year. I suspect that we could increase the investment horizon if we thought it was appropriate. I don't know that we necessarily will do it. But, you know, if we can get -- I mean, the other wildcard we didn't talk about is the development group, also any deals that they find can go into the Fund.

However, obviously, it takes a year to two years to build that stuff. It's not going to produce any revenue near term. So we haven't talked about it. But there's a couple of deals in the development pipeline that might also be available for the Fund that would, you know, fill out the Fund.

Correct me if I'm wrong, but isn't there a limit to how much you can contribute, 25% of the total?

That is correct.

And so I thought you were already tapped out at that. So they could just waive that instead of extending --

No, we're not.

Okay. And one other question. You talked about traffic in some of your markets, and sounded like traffic was down 20% in San Francisco and Portland, are you worried about that?

Actually, Bryan, it was only in Portland.

Okay.

The thing to be concerned about, at the time it's not in the quarter, so you get fluctuations. You're always worried when you see traffic down, but give where we are in those two areas, I'm probably less concerned about it at this point.

Okay. And last question, the shares that you did that you had to issue for Waterford Place, are those at in the share at the end of the quarter.

As of March 17th, they are. For the weighted they came in at March 17th.

For the year end, for the quarter end, that's the right share count to use?

That's right.

So obviously things have tailed off in that market. Do you have a yield on that acquisition after having capitalized another 6m of costs?

I will let Keith answer that question.

I didn't do it. I'm sure it's ugly. I suspect it's in the 6 range.

Brian Legg Do you know if you sold it, because it's a pretty nice looking asset, you could get your money out of it?

Yeah. If you look at the additional costs of capitalizing with our internal capitalized costs, we're at $180,000 all in capitalized, per unit. And if you compare that to new construction today, new construction today is at two and a quarter.

So relative to new to any new acquisition, it's still a good deal. Unfortunately, there was the transaction, the way it was structured, and the way the earn out was structured, the price should have been less. However, there was a dispute, and we had to work it out with the judge. And judges aren't perfect, so we had to issue a couple more dollars.

Okay. Thank you.

David Harris with Lehman Brothers. Please go ahead.

Yes, it's David, Schulman here. Mike, you were carrying at the end of the quarter $150m or so on your line at the trust level, and it was $71m at the value fund level. What are your thoughts about fixing any of that between now and year end.

I think, David, our approach to that has been to try to lock up future resources for the fix t rate debt. And I think we're comfortable leaving the -- it may not be exactly the form of the line, but leaving that component or variable in place -- or most of it in place -- for the remainder of the year.

Okay. Thank you.

And as a reminder, if you had like to ask a question today, please press star 1 on your touch-tone telephone. We'll hear from Dan Oppenheim with Banc of America Securities.

Thanks. Wondering about your expectations for job growth in the market. Sounds as if many of the markets that the job growth is behind your expectations, except Southern California, but for FFO you're still comfortable with the prior guidance. Is there a statistical issue with the way you're looking at that job growth rate, and the employment growth rate is back-end loaded for the year, and you're thinking if you're not at a quarter overall level right now you're blind, or is there some other way we should be looking at that.

John Lopez is here, and this is his projection. What he has done -- let me paraphrase quickly and he can get into the detail -- is he has tried to seasonally adjust his projections, but, yes, we are behind where we think we would be. But, John, would you explain with you think we'll ultimately come out.

I think you're right. It's basically a straight line forecast with seasonal adjustments. So it's not surprising we would be behind in the first quarter. If you look at the volatility associated with month-to-month job data, those numbers aren't so far behind that it gives us a major concern to--if it were worsens we would adjust our expectations down.

So what we've seen from past job growth cycles in slow times, we believe that those numbers are blind, we could still make -- we anticipate to be able to make up the end of the year.

The Bay Area, on prior calls, you've talked about the large -- with the large decline in rent, how some people would have been forced out of the area had moved back to sort of the middle income earners. I was wondering as the market stabilizes and recoveries, should we see higher turnover as some people are forced out again as they're on the verge of being able to afford the rent at the current levels?

I think what happened in the last cycle was so unusual . I hope that those people don't get forced out of the area again, obviously. But I think that Northern California, Silicon Valley, because it has some pretty incredible potential to deliver high-end income jobs at a fairly rapid clip, and it's so supply constrained, I think the volatility associated with Northern California will continue to be pretty large.

So if we get -- it depends on what happens. I mean, I'd expect a much more gradual recovery over time in Northern California. I don't think there's anything that we see out there that would cause a -- you know, what happened with the Y2K or an Internet type phenomenon that would cause a huge job growth like we saw the last time around. Hopefully it's more gradual and they will be able to live near their job like everyone wants to through this next cycle.

Thanks.

Let's hear from Rich Moore with McDonald Investments.

Dave Rogers here for Rich. The first one is on bad debts. What do you see trend wise in your major geographic areas?

We've got specifics. Hang on a second. It's actually pretty good.

We effectively budget -- call it half a percent on drink delinquent -- half a percent of revenues for delinquency. And actually, to date, we're running under that -- looks like Southern California is in .2%, Northern California effectively the same, the northwest, also, about that same .2%. So it hasn't -- delinquency, for whatever reason, for a period of time, we've never seen large volatility tilt in that line item.

Is there any seasonal pattern at all?

Not really. I mean the numbers aren't very large. For whole portfolio, not the same property you're talking about, delinquencies of $47,000. And again, we don't actually accrue the delinquencies. The delinquencies are netted out at revenue anyway. But $47,000 is not a lot in our portfolio. And as opposed to a year ago quarter, it was $43,000. So it's a pretty small overall number.

Second question, then, just anything with mold-related issues that might concern you in your own portfolio.

You know, we occasionally have a situation come up, but they're all pretty small and relatively insignificant. Typically maybe a water leak, and we respond to it immediately and get it cleaned up. We have a protocol and response that's in place and we're been trained on it. I'm not aware of specific issues.

This is Rich. On the affordability could you give us insight as to the value of that? It strikes us all the numbers you gave us, it seems like only Portland would be anyplace where anybody could buy a house. So historically, what point was that affordability index shut down the housing market, if you will, in a given market.

Again, this is sort of a relative thing. And I was talking to John Lopez about this. For example, in Atlanta, the affordability index in Atlanta is 171%. So that means that the median household income is 171% of what it takes to buy the median house.

And median being the midpoint of the so, obviously, in California where you've got the to have affordability index in the 70's and 80's, relative to a lot of places in the country, it's not nearly as affordable.

But, obviously, you've got a swath of potential owners out there that can afford certainly bottom end and median price, again, being the midpoint. There are homes for sale there that are, you know, $350,000 to $450,000 and those are affordable at some level. But I think it's a good measure to look at when you're trying to figure out how much -- how potentially many residents you can lose from your apartments. Because, obviously the more that the affordable income can buy -- excuse me -- the median income can buy, the greater risk you are of losing residents to homeownership. That was the point I was trying to make.

I gotcha. And, I mean, historically speaking, are these affordability numbers coming down, I'd assume, pretty much?

Yes, and this affordability number, we're talking about 5% interest rates. So the interest rates, the affordability is a measure of income, interest rates, and home prices. So, if you saw L. A where the median home price is $280,000. I think the affordability is 81%, which is about the same as Orange County, which had significantly higher median home prices. But interest rates prices and incomes are factored into that affordability index affordability

Thanks.

Richard Paole (ph.) with ABP Investments.

Not to beat a horse to death here, but on the Fund, could you just walk through how you're handling the accounting of the fees? I think, Keith, you mentioned it's on committed capital at this point versus invested. And how do you recognize that? Is it just a straight line from inception to when the horizon date for the investment is.

Yeah. Yes, it is. So it's on the third-party capital, 1% of third-party capital is the asset management fee. In addition to that, obviously, there are some other fees which are, for example, property management. There's -- well, there's essentially market fees for property management, for development, and for redevelopment type of services that we would provide, and those fees would fluctuate in relation to the portfolio that we have accumulated.

So, if you can break down for me, say for this quarter, what was the fee for just, you know, the capital fee, I guess if you want to call it, that for lack of a better term? How much is that per quarter.

So the contributed capital is -- the third-party committed capital is $109m, so roughly $500,000.

Do you take any type of reserve for that? I guess you're technically entitled to that. What you would do if -- not to be a press pessimist, but if you don't hit the hurdle, are you entitled to it? Would you keep it or give it to your investors to keep goodwill in the future.

There's no plan to rebate any portion of it. Let's recall what that represents. We've dedicated our transaction-making, you know, part of our organization to essentially originating fund transactions, acquisition development deals, and there's a substantial cost to that. And the asset management fee is to compensate us for that dedication of resources, were are obviously pretty substantial.

We've got a pretty big development department and a pretty big acquisition department that essentially is focused opened fund-related activities. So that's what that's for.

Come December 31st, the thing that changes is we're no longer required to have originate transactions for the Fund, unless that's extended. And, so, then we go into essentially an asset management role. And, obviously, Bob's group and our asset management department become key parts of that thing.

But the development acquisition folks are free to originate transactions for the company else. Where so I think if you look at what the fee income represents and, you know, what resources we've dedicated, I think they align pretty well.

That's good. Yeah, because that helps offset G&A that you potentially not have were you not doing this level of activity.

Yeah, I think as everyone well knows, you know, the leveraged buyer has a pretty significant advantage. The fund is as Keith said, 65% to 70% leverage. We're tied up 7-year transactions, the high 4% range. To The return on the equity is pretty good on those transactions. It's hard to replicate those economics and the reformat, obviously.

So I think the Fund -- you know, while we talked about it as being a capital diversification strategy,, you know, I think it's doing what it was intended to do.

Thank you.

That does conclude the question-and-answer session. Keith Guericke, I'd like to turn the call back to you.

Thanks for joining us. We'll be back in New York for (inaudible). And if there are interest in 101's, please call us and set up meetings. Thanks a lot.

Thank you everyone for your participation today. That does conclude the presentation. You may now disconnect.--- 0