Essex Property Trust Inc (ESS) 2004 Q2 法說會逐字稿

Welcome to the Essex Property Trust second-quarter 2004 earnings results conference call. Today's call is being recorded. With us are Mr. Keith Guericke, Chief Executive Officer, Mr. Michael Schall, Chief Financial Officer, and Mr. Bob Talbot, Senior Vice president of Operations. For opening remarks, I would like to turn the call over to Mr. Guericke.

Thank you. Welcome to the second-quarter earnings call. We'll be making some comments on the call this morning that are not historical facts, such as our expectations regarding markets, financial results, and real estate projects. These statements are forward-looking statements which involve risks and uncertainty which could cause the actual results to differ materially. Many of these risks are detailed in the Company's filings with SEC and we encourage you to review them.

Eliminating the noise from this quarter's FFO, we're operating at the low end of the range that we have discussed. The important factors that we focus on are revenue growth and occupancy. On a year-over-year basis both of these metrics are positive. Our operating strategy has always been to operate at the highest occupancy possible. As a result, we did not get the same revenue pop on a quarter-over-quarter basis from improved occupancy as some of our peers did. However, in comparing our occupancy by market to our peers and to the general market occupancy, we are at or above both measures.

Today I want to update you on our markets, update the status of Fund I and Fund II, and give you some color on cap rates by market and how it is affecting our acquisition and development pipelines.

For each of our markets we construct our own seasonally-adjusted estimates of job growth. The data we have seen through June indicates we are at or above our expected growth path for each of our regions. At this time, we're maintaining our expectations of job growth presented at the beginning of the year. To get those details, go to our webpage under analyst resources for our 2004 job growth forecast for each of our markets. You'll also find our forecast for total residential supply by market; finally on this sheet, you will find our expectations for market rent performance over the year.

Also on the webpage is a schedule titled permits/home prices, which includes total residential permit activity for the larger U.S. metros, as well as information on median home prices and affordability as compared to our Essex markets. Bob Talbot will give information on the percent of turnover by market attributable to home purchases. I would just like to point out at this point that home prices in our markets are some of the highest in the nation, with new construction being less than 1 percent of existing stock.

Now, for additional information on each of our markets, starting with Seattle. In the Northwest, we have 22 percent of our portfolio. And our forecast for supply, new supply, remains unchanged from the previous quarter. Over the last 12 months, the unemployment rate has declined by 1.4 percent, during which time the labor force grew by 2.8 percent, indicating a significant increase in employment.

Last year, Boeing cut its Seattle workforce by 7900 jobs. Through June, Boeing has reduced the workforce by about 730 people. Recently, Boeing made an announcement that it plans to hire 2 to 3000 people this year in the Seattle area, primarily because of orders exceeding expectations.

The office market continued to show signs of modest improvement and the industrial market is flat after first quarter's strong absorption. Market apartment rents have been stable over the last three quarters, as we had anticipated. Market occupancy remained flat for this period at 93.5 percent; however, the Essex portfolio has maintained higher occupancy. Bob Talbot will elaborate later in the call.

Going to the Bay Area, where we have 17 percent of the portfolio. The forecast for new supply is less than 1 percent for both multi-family and single-family units. Each of our markets showed positive job growth consistent with our forecast.

In San Francisco, that MSA, the office market experienced a second straight quarter of strong, positive absorption. The market absorbed approximately 1 million square feet in Q2 and 1.7 million square feet for the year. The industrial market continued to improve as well. Over the last two quarters the vacancy rate has dropped from 12.8 percent to 10.1. Market apartment rents remained flat from Q4 '03. Occupancy dipped 50 basis points to 94.5. The use of modest concessions has increased over the last six months.

Going to the Oakland MSA, the East Bay office market experienced modest absorption in Q2. The industrial market was flat during the quarter. Market apartment rents also remained flat for Q2 '04, and down marginally from last year about 2 percent. Occupancy remained flat at 95 percent over the last quarter, and is flat from last year. Concessions of approximately two weeks have remained in the market; however, are being used less frequently.

Going to San Jose, as we mentioned last quarter, the San Jose MSA remains relatively more reliant on manufacturing jobs than our other markets. The U.S. manufacturing sector continued to improve in Q2, marking the second straight quarter of job growth. The San Jose MSA manufacturing sector has joined in the recovery. The level of manufacturing jobs increased in Q2 after a flat first quarter of '04. This sector posted losses of 3 percent and 4.3 percent during the same period the previous two years.

Over the last 12 months, the unemployment rate has declined by 2.5 percent, during which time the labor force fell by 2.7 percent. The net results of all that is a very small increase in the number of employed people year-over-year -- approximately 200 people. But if you compare that to December '03, we were down almost 20,000 and March '04 it was still down 10,000. So by that measure, there has been significant improvement. The San Jose office market recovered in Q2 after a weak first quarter in '04. Vacancy rates dropped from 19.3 percent to 17.7. The industrial market remained flat during the quarter.

Market apartment rents were flat from the previous quarter and down 3 percent from last year. Occupancy was up 25 basis points to 94.75 percent and 94 percent last year. Concessions continued to fall and were down to two to three weeks, from almost one month last year. However, I would remind you that this is market data; Essex results were better in all categories, as Talbot will talk about later.

In Southern California, our Southern California markets experienced a loss of 27,000 jobs in '03, with virtually all of these losses occurring in Los Angeles. Jobs in the Ventura County were roughly flat, while job growth was positive in Orange and San Diego counties. The job market has rebounded in the first half of '04, with each of our markets posting positive job growth.

Having said that, the unemployment rate has increased by 3/10 of a point, from 5.2 to 5.5 for all the Southern California markets as a whole. That's over the last six months. However, during the same time period the labor force grew by 6/10 of a percent, indicating increasing employment.

As previously noted, Southern California was down 27,000 jobs last year. As of June, year-over-year job growth was up 40,000 jobs. Additional positive factors -- the Southern California office market remained strong, absorbing 3.1 million square feet, or 1 percent of the stock. The strongest submarkets were the North Coastal San Diego area, which is 350,000 square feet; South Orange was 500,000 square feet; West Los Angeles 600,000 feet; and the San Fernando Valley 300,000 square feet.

The Southern California industrial market also posted a solid quarter, absorbing 9.6 million square feet of stock. The strongest submarkets were the Central North County San Diego, which is 1.5 million feet; the City of Commerce area of L.A. which is 1.2 million square feet; Ventura County 600,000 square feet; and (technical difficulty) about 700,000 square feet.

Market occupancy in Los Angeles, Ventura and Orange County was flat at 95 to 95.5 percent during the quarter. Rents were flat to up slightly depending on the submarket. Concessions remained nominal. In San Diego, occupancy was down again by 25 basis points to 94.75 over the last quarter. Once again, military deployment continues to strain the North County area. Rents in the market remained flat; there was a small increases in the occurrence of concessions.

In conclusion to this, jobs are being formed, unemployment is generally down, occupancy is generally in the 94 to 95 percent range and concessions are subsiding. Our portfolio is poised to benefit from these positive factors, and we expect to see continued positive movement over the next two quarters.

Now let me take a minute and review cap rates by market. In Seattle, cap rates are continuing to get more aggressive. Last quarter's call, I indicated cap rates were in the 5.75 to 6.25 range. Cap rates have continued to ratchet down. There are several deals in this market that are in contract in the 5 cap range. I'm not suggesting one or two deals define a market, but clearly cap rates have dropped, probably at least another 50 basis points from last quarter.

In the Bay area, it appears that the low cap rates of 5.25 to 5.75 is starting to motivate some owners to sell. There are several transactions in the marketplace today. Southern California has also seen cap rates ratchet down during the quarter. The range in this market is 5.25 to 6, depending on the submarket. Another factor affecting cap rates in all of our markets are the condo converters, and there's many condo deals that are taking place at cap rates ranging in the three to four percent range.

Development pipeline, quickly. As we have talked about in the past, we need a risk premium of about 150 basis points over today's acquisition cap rates -- comparing today's development cap rate to today's acquisition cap rate. And as we've also mentioned, we've had a very difficult time underwriting to that standard. We currently have three transactions in contract - two in Southern California and one in Northern California. None of the transactions are far enough along to put on the predevelopment schedule, but there's hope that we may be able to underwrite them.

Acquisitions -- recall first quarter's acquisition activity was 166 million. During the second quarter we purchased an additional 75 million from our JV partners. All this activity was on balance sheet. The acquisition goal for the year is 325 million. Given the current acquisition activity, we're confident we will match that goal with acquisitions in the 5.5 to 6 cap rate range.

Fund I disposition. I think the press release covered the subject quite well; I would only add that there are five very strong investors in the best and final round, and I would expect a very competitive, strong bid at the end of the day. And in Fund II, the update there is as we announced, most of you saw the press release, I hope, July 1 -- that we had the first closing of the Fund. We expect the Fund to close -- final closing by the end of September, with total Funds in the 250 to $260 million range. Currently, Essex has committed 75 million to Fund II; however, this may be reduced to 50 million at or prior to the close.

Now I'd like to turn the call over to Bob Talbot, talking about operations.

Thanks, Keith. Good morning. Today I'll discuss current conditions in each of our major markets.

First let me mention that the occupancy numbers I report are as of this past Monday or for a point in time. The financial occupancies noted in the earnings release are the average occupancies for the quarter. The numbers I share with you are intended to provide you with some color on what we are currently experiencing out in the field.

In the beginning of this week, our stabilized portfolio was 96 percent occupied, and our net availability -- which as we define is the sum of vacant and unnoticed units available to rent expressed as a percentage of the portfolio -- was 6 percent.

Now looking at our individual markets, starting with Seattle. Seattle has continued to benefit from an improved job market with occupancy of 96 percent, which is the same occupancy as last quarter and a 1 percent improvement over the same time last year. Net availability is 6 percent compared to 5 percent last quarter and 8 percent last year.

I should also note here that sequential revenue was down for the quarter for two principal reasons. First, during the quarter financial occupancy dropped 3/10 of a percent, from an average of 95.9 percent to 95.6 percent. This accounts for roughly half of the decline. The remainder is attributable to the gain to lease we burned through during the quarter.

Concessions were essentially flat second quarter to first quarter; however, they declined sequentially each month during the quarter. Today, concessions are typically limited to vacant apartments in isolated submarkets. Where offered, we're seeing upfront concessions of $200 to a month free.

Traffic for the second quarter was up 22 percent sequentially, and for the same quarter a year ago traffic was up 13.5 percent. Home purchases for the second quarter accounted for 22 percent of our move-outs. This is up slightly from the first quarter's 19.5 percent, which is attributable to seasonality in the market. Now let's look at Portland.

Portland is continuing to show signs of improvement. Occupancy as of this week was 97 percent and net availability was 5 percent. Concession activity has also declined in our portfolio. While concessions are still prevalent in the market, they are of a smaller amount than we've previously experienced. Traffic is up 11 percent from the first quarter and up 15 percent from the same quarter last year. During the second quarter, 23 percent of our move-outs apartment were due to home purchases.

In the Bay Area, the Bay Area continues to remain stable with occupancies in the San Jose MSA and in the Oakland/San Francisco MSA of 96 percent. Net availability for both markets was 7 percent. This is higher than last quarter but not unusual for this time of year. Concessions are declining; however, they have not been completely eliminated from the market. When used, we're seeing a month free. On an effective basis, rents have not yet increased despite this high occupancy.

Traffic was essentially flat from last quarter and down 9 percent from a year ago. While this may seem somewhat surprising given occupancy and an overall sense of a strengthening market, it's difficult to draw any meaningful conclusions from traffic statistics alone as they can be affected by a number of variables. 15 percent of our move-outs this quarter were due to home purchases.

In L.A./Ventura, occupancy is a solid 95 percent with net availability of 5.5 percent. Traffic compared to the first quarter was up 29 percent and is up 3 percent from a year ago. Concession activity has been primarily limited to Ventura County and has been in the range of 250 to $500 on stabilized properties.

Home purchases contributed to 14 percent of our total move-outs in the second quarter. Orange County continues to perform well, with reported occupancy this week of 96 percent and net availability of 5.5 percent. Concession activity in the market is essentially unchanged. When a concession is offered it's in the $300 to $1000 range and is typically limited to a vacant apartment. Traffic is up 29 percent from the first quarter and up 10 percent from the same quarter a year ago. 14.5 percent of our move-outs in the second quarter were due to home purchases.

Finally, in San Diego. San Diego has stabilized after a challenging quarter. During the quarter, we experienced some pockets of softness related to troop activity and isolated management issues. The management issues are behind us and the troop activity is expected to be manageable going forward. Occupancy this week is 95 percent and availability is 5.5 percent. Concession activity is limited to those properties with lower occupancy and is typically a half-month free on a year lease. Traffic was up 20 percent compared to the first quarter and was flat from the first quarter one year ago. 11 percent of our move-outs in the second quarter were due to home purchases.

Now let me turn the call over to Mike.

Thanks, Bob, and thanks everyone for joining us today.

I would like to note that the press release and supplemental reporting packages are available on our website, or you can call our corporate offices to get a copy. As usual, I'm going to discuss the following topics on the call -- the quarterly financial results; second, the balance sheet; and third, estimates of FFO for the remainder of 2004.

So first topic, quarterly FFO results. As you know, FFO for the quarter was 97 cents a share, an 8 cent decline versus the $1.05 reported in the second quarter of 2003. Please note that the prior year amounts have been restated as a result of the adoption which was announced earlier of FAS 123 and FIN46R.

The results for the quarter were negatively impacted by nonrecurring charges that reduced FFO per share by 5 cents per share for the quarter. These items are detailed in the press release. Obviously, we strive to avoid such charges. In this case the sale of Golden Village and the Crest refinance are both an important part of our business plan for the rest of the year, and I'd like to take a minute to discuss each of those in a little more detail.

With respect to the sale of the Golden Village RV Park, we were approached by the master lessee and optionee to acquire the property from us earlier than as otherwise provided in the option agreement, which was necessary to facilitate his business plan for the property. The price that was paid was established by virtue of the option, which was below the allocated purchase price for the property that we established at the time of the Sachs merger.

Our motivation to sell the property rather than to continue under the master lease was to trigger the tax loss on the property which we estimate to be 5.1 million. This tax loss is expected to be used to offset potential gains from the sales of assets in the third and fourth quarter of 2004, including the possible sale of Fund I. Also I remind you that in aggregate, the option values are in excess of the purchase prices for the RV mobile home assets. This was, obviously, an exception to that.

Secondly, the refinance of the Crest apartments was also important for our business plan this year. Crest apartments is part of Fund I, and we refinanced that property, triggering a prepayment penalty, of which our pro rata share was approximately 300,000. It was important for the following reasons.

First, we wanted to -- in connection with the sale of Fund I, we wanted to eliminate any potential discount to value that might relate to a loan that had an above-market interest rate. And in this case the refinance loan had a 7.99 percent interest rate.

Second, we wanted to obtain -- we found a window to obtain very attractive financing. As you're well aware, the 10-year treasury has been pretty volatile. So we saw an opportunity to lock in a rate that we thought was attractive and would be attractive to any potential buyer in Fund I.

And finally, the refinance allowed us to return the invested equity in that property. And the way that the promoted interest works is the first 10 percent simple return goes to the limited partners. So in returning that money we were able to essentially stop the 10 percent accrual on the equity invested in the property, and that should help us generate a larger promote at a later date. So clearly, we think that returning the capital early will lead to a potentially larger promoted interest, and that will become apparent in the future. Again, excluding the impact of these items the FFO would have been approximately $1.02 per share, or about the same as in the first quarter and near the low end of our guidance range.

I want to make a couple of notes about the second quarter operations. First, miscellaneous nonrecurring income did not materially contribute to our results, and was down approximately 1 cent per share from the prior year. We continue to expect significant nonrecurring income in the balance of the year, with 1.7 million built into our guidance and only 16,000 realized through June. Most of the 1.7 million is related to the expected sale of the land parcel to a single-family developer.

Second, we acquired Fountain Park Apartments for 125 million in the first quarter, which was approximately 80 percent leased upon its acquisition. For the second quarter we reported financial occupancy of 87 percent versus 81 percent in the first quarter. The property has only recently reached stabilized operations and we are not capitalizing interest on any of the off-line units. Accordingly, the positive impact of this acquisition will not be fully realized until the third quarter of 2004.

Next comment -- same property concessions declined in every market on a year-over-year basis and sequentially in Northern California and the Northwest. This was most dramatic in Northern California, where concessions dropped from 166,000 in Q1 2004 to 97,000 in Q2 2004. Unlike concessions, however, turnover did not improve in the second quarter relative to the prior year. I ran it at an annualized rate of 63 percent for the second quarter of 2004 and 2003, and it did not match the year-over-year improvement that we saw in the first quarter of 2004, where annualized turnover was 47 percent for the quarter versus 54 percent for the first quarter of 2003. Turnover was one of the factors in higher operating expenses in Q2 versus Q1 2004, where sequential same-property expenses increased by 2.8 percent, or 422,000.

On a year-over-year basis, our Southern California REIT can continue to lead the portfolio with 3.4 percent same-store revenue growth, down from 4.4 percent growth reported in the first quarter of 2004. However, on a sequential basis, Southern California revenue declined 0.1 percent following a 0.3 percent decline in the first quarter of 2004. This is attributable to weakness in several Ventura County properties in the first quarter of 2004 which did not recover in the second quarter, and a 1.3 percent sequential revenue decline in the second quarter of 2004 in San Diego County -- and Bob has already mentioned that. The declines are primarily occupancy related. Southern California occupancy was unchanged at 95.2 percent versus the comparable quarter of 2003, and it was 1 percent lower than the occupancy reported for the first quarter of 2004.

Conditions continue to improve in Northern California and the Northwest. We see a positive overall direction in rents, occupancies, and concession. This progress, however, has been painfully slow. Northern California had the best sequential revenue growth at 0.6 percent, and it's year-over-year revenue decline was cut to 5.3 percent versus 8.2 percent in the March 2004 quarter.

I have a couple of comments on G&A expense. Our initial guidance for G&A for 2004 was 9.5 million. In connection with the adoption of FIN46 in the first quarter, we consolidate now Essex Management Corporation -- or EMC -- which was previously accounted for under the equity method of accounting. The consolidation of EMC increases G&A expense; it also, obviously, increases revenue as well. But the increase in G&A expense was approximately -- is approximately 2.9 million per year, for a total annualized G&A amount -- annualized G&A run rate of 12.4 million, or 3.1 million per quarter.

During the quarter, we wrote off as part of G&A the costs related to an abandoned development project for approximately 150,000, and we incurred higher costs for accounting services. Going forward, we are increasing the guidance expected to the G&A run rate from 3.1 million to 3.350 million, for the expected increase in costs due to compliance with Sarbanes-Oxley and the New York Stock Exchange listing requirements, which includes -- and is actually principally documentation in the audit of internal controls -- which as I understand it in discussions with others CFOs, I think, is being experienced across the board.

Next topic is the balance sheet. CapEx per unit in 2004 is expected to be 390 to $400 per weighted unit, unchanged from the past. The increase in interest expense and amortization of deferred financing costs for the quarter was 2.263 million, which is due to two principal components. First, net increase in the average outstanding debt balance of 226 million. And second, a 50 basis point reduction in the interest rate on both the line of credit and the average interest rate of our mortgage balances.

We expect -- as we've talked about in previous calls, we expect to redeem our 9.25 percent Series E (ph) preferred units, which are callable in September 2004. In connection with that redemption, we expect to incur a noncash charge of approximately 6 cents per share for the write-off of placement costs -- of the original placement cost for the financing several years ago.

The source of funds for this redemption is expected to be the sale of a property to a condo converter for a net sales price of 80 million. We expect the sale to occur in the next several weeks. For modeling purposes, you can assume that the asset being sold has an unleveraged yield of approximately 4 percent.

I have a couple of comments following up on Keith's comments on Essex's apartment value fund in the Fund I sale. I want to talk a little bit about the process there. As you know, we've made significant progress in marketing Fund I, and most of that progress is outlined in the press release. As you can imagine, this process is ongoing and inherently unpredictable.

Once a bidder is selected, we will begin a detailed due diligence process. And until that process has run its course we will not be in a position to discuss potential values or cap rates for the various properties or the portfolio. However, assuming the process proceeds as expected, we're estimating that the incentive fee, or promoted interest to Essex -- which is the (indiscernible) is owed on our general partnership interest; as you know, we are also a limited partner, and this would be in addition to our pro rata share, or pro rata gain allocation as a limited partner. Just our promoted interest could be in excess of $18 million. Of course, at this time we can't assure you that the sale of Fund I will be completed.

Balance sheet remains strong in general. Interest coverage, including all the debt that's been consolidated consistent with FIN46R; interest coverage is three times EBITDA and the ratio of debt to market cap is at 39.1 percent as of June 30, 2004.

The final topic I wanted to talk about -- FFO expectations for the year -- for the rest of the year. I guess as background to that, several things have occurred this year that have impacted our guidance, including the adoption of new accounting pronouncements and a variety of nonrecurring charges. To summarize these, we prepared a chart which is included in the press release under the heading Other Company Information.

For the year, our original guidance was a range of between 4.19 and 4.29 in the FFO, which specifically excluded write-offs and connections with the redemption of the preferred units that become callable at September 2004.

I would like to spend just a minute walking through each adjustment that's indicated in the press release.

The first adjustment relates to the adoption of FIN46R, which requires the consolidation, as you know, of certain variable interest entities. And we've talked about this in the past on the calls and issued a number of press releases to that effect. But in consolidating these entities, FFO was reduced by 6 cents a share, and that's principally due to the subordination fee owed to the Company being eliminated, and consolidation of one of these variable-interest entities.

Obviously, however, the fee is still owed to the Company, but will be recognized in full upon the termination of the venture several years from now. But it doesn't go away, I guess was the point I'm trying to make.

The second item is a 5 cent per share in nonrecurring items in the second quarter which have been described in the press release and in my previous comments. The third item is a 6 cent per share charge related to the write-off of the placement cost of the Series E preferred stock, which become redeemable in September 2004. And that was a footnote to our original guidance. We were going through the process of trying to renegotiate our preferred stock in unit transactions, and had we been successful in doing that we would have avoided the charge. And actually, we had two of those transactions -- one of them we were successful in renegotiating; this one we were not. Accordingly, we're expecting to incur that charge. And again, that was not a part of the initial guidance; that would be an adjustment.

Next item involves the expected sale of a property to a condo converter with the proceeds used to redeem the Series E preferred units. Previously, our guidance assumed the issuance of a new series of preferred shares or units at a 7 7/8 percent rate to redeem the 9.25 percent Series E preferred. No property sales were included in our guidance.

Now, we do not expect to complete a new preferred offering; rather, we will use the proceeds from the expected sale of property to fund the preferred redemption. The property being sold again yields approximately 4 percent of the sales price, creating dilution for about a month, because the money is going to sit in a -- you know, it will just be used to repay our line for a month -- and then soon as the call window -- or as soon as the redemption window opens up in September, it'll then go to redeem the preferred stock, which will be accretive going forward. So you'll see on the guidance where it's dilutive in Q3 and it's accretive in Q4; and that is the reason for that.

Finally, the next item is approximately 250,000 per quarter in increased costs related to the Sarbanes-Oxley, specifically the 404 audit, and consulting service in preparation for that audit. Again, I think that lots of people are experiencing similar outcomes there, which leaves us with our revised FFO guidance -- a range of 4.01 to 4.10 per share. This range continues to be quite large due to several of the unknown components, including whether operations will improve significantly in the second half of the year, and the extent to which nonrecurring revenue sources materialize. Please note that this range does not include the recognition of any of the promoted interest related to the sale of Essex apartment value Fund I. So that would be in addition to that.

That concludes my comments. I would like to thank you for joining us. And now if you have any questions, this is an opportunity to ask.

(OPERATOR INSTRUCTIONS). Jay Leupp, RBC capital.

Here with David Ronco. I was wondering, Mike or Keith, if you could discuss briefly the occupancy assumptions for the second half of the year? And also, Mike, you had mentioned that you have no asset sale disposition or asset dispositions assumptions in for the back half of the year in the guidance, but maybe if you could -- in addition to the joint venture you discussed -- discuss the possibility that we will see more noncore assets sold out of the John M. Sachs acquisition, or potentially some assets, non JV assets sold in the Seattle portfolio?

As to occupancy assumptions, I don't think that we're expecting a big change in that assumption. We're hoping, obviously, that as I said (indiscernible) in my comments -- it's a painfully slow process. So I would expect for more of the same -- an overall gradual trend toward improvement, but at a painfully slow pace.

One thing is that we -- in my comments -- we have historically tried to manage at relatively high occupancies. And so our budget for the year was at a relatively high occupancy period -- occupancy rate. So I don't know that we are necessarily going to, as Mike said, improve significantly over the budget.

Let me go back to your other comment. So now, with the changes to the guidance, we actually are suggesting that this one property $80 million will be sold this year and the proceeds used to redeem the Series E preferreds. I just want to make sure that is clear. So that comes out of our portfolio at about a 4 cap and proceeds (indiscernible) to reduce the line of credit for about a month, and then go in to redeem the preferred. So I think that transaction sort of speaks for itself. As to other sales of mobile home parks, etc, etc -- you'll recall that when we did those transactions in the fourth quarter of 2003, they were set up with a window of approximately four to five years for (indiscernible) they would be master leased and then sold pursuant to an option 4 to 5 years hence. And that was really motivated by trying to make sure that we satisfied the four investment criteria so that we could 1031 out of those assets at a later date. In this case, this property had a loss, and therefore we didn't need to -- we don't need to 1031 out of it. And as a result, we could go ahead and sell it sooner. That is an exception to those assets. So I wouldn't expect that to occur in the future. As to other sales, obviously, Fund I is a very large one. But I don't -- we don't expect a lot of sale activity, other than the Fund I portfolio and the property that I mentioned specifically.

Okay. Just one follow-up question on your redevelopment portfolio, and particularly the properties that you're redeveloping in Southern California. Have you moved at all your return expectations based upon just the relative strength of the markets that you are in there?

I think our return expectations have been the same, but the level of activity has increased because our ability to get that return expectation, I think, is greater. So we have more units off-line than we did a year ago related to redevelopment activity, and I would expect -- as I think you are saying -- that as conditions improve, the ability to redevelop to hit our target return -- which is an incremental (indiscernible) 50 percent of our incremental investment return on a per annum basis -- our ability to hit that target increases as conditions improve.

Andrew Rosivach, Credit Suisse First Boston.

You know what's interesting about you guys is that there's a big bouncing ball, and then the fourth quarter ends up being actually around equal what you had before. And that's kind of what matters on a long-term basis. And I'd like to get a snapshot of what that is, just in terms of where you think your leverage will be, one; two, your floating-rate exposure, which is pretty high right now; and three, where that number kind of ends up in terms of same-store relative to, I think your initial same-store NOI full year guidance number was something like a midpoint of 0.5 percent.

With respect to the specific transaction that's going to take place in the fourth quarter, there is a -- as Mike described in his comments -- a piece of land that's been sold to a single-family developer. And that's done (indiscernible) dollars are up, and we're confident that that transaction will take place. And that's the basis for the increase in that quarter. Relative to where we are going forward, right now we are putting some numbers together (indiscernible) get that answer for you.

I can even jump through another generic one.

(multiple speakers)

We may struggle for a moment, but (multiple speakers) your question was multifaceted (multiple speakers) a lot of stuff. Give us a moment here.

Just real quick though, Andrew; it's mark. If you take a 109, which is the line (indiscernible) range, and take out the miscellaneous nonrecurring piece of 5 cents, that gives you a run rate of a 104. We're kind of -- if you take all the noise out, we're in the 102 range right now. So it assumes a slight enhancement (multiple speakers)

Let me go back to that for a minute. We have a number of things that are going to happen in the second half, including -- we renegotiated the rate on the Series B (ph) preferred; we're going to redeem the Series E preferred; we're leasing up the (indiscernible) office building; we're stabilizing the Fountain Park asset; we're stabilizing Parker Ranch and Richmond Phase II; and we acquired and will be in the operations on Tierra Vista and The Pointe at Cupertino. So there are lots of things that are aside from the -- that are aside from the same property operations that are going to impact the second half of the year. But I would expect the second half to get marginally better from that perspective alone, and then as Mark said -- so now go ahead, Mark, now talk about the (multiple speakers) portfolio as well.

(indiscernible) in our budget we do have an expectation that property ops will improve, and that is a function of the high and low-end of the range. The low-end is pretty much a very modest improvement, where the higher end is a little more substantial increase to the operating performance. As it relates to refis and things of that nature, there's really nothing else built in as it relates to terming out floating-rate debt, other than -- so there's no assumption that we have or built into our capital plan as it relates to a term-out of the variable rate.

Let me talk about that for a minute. As everyone knows, the floating-rate debt has really two components. One is the tax-exempt variable; it's 184 million, and that is fully amortizing, goes out until -- for about 25, 30-year maturities. And we're going to leave that in place. And we've done a lot of analysis over a long period of time that benchmarks that (technical difficulty) fixed-rate. We think it's very attractive because -- and it's inherently safer than LIBOR-based debt because it moves slower because essentially the tax impact (technical difficulty) into play. So for every point movement in LIBOR, you would expect somewhere around a 0.6 percent movement in the tax-exempt variable rate debt. So we're going to leave that in place, which leaves us with $199 million of line debt. And that debt we are not in a big hurry to refinance. We have couple in -- the principal reason is that we have some transactions out there that are going to involve big movements potentially of money, and we're going to need (multiple speakers)

Heaven forbid if the Fund got sold, you'd want to have a place to put the cash.

That has definitely occured to us -- so that's one piece. And if you look at it from a different perspective, take all that debt and you say -- okay, LIBOR goes up 1 percent; what is the impact on the Company? It comes back to somewhere around $10 per unit on our portfolio in rent, because our belief is it's not going to move all by itself; it's going to move because the economic conditions are improving and there is something else that compensates for it. So the scenario under which -- gee -- LIBOR or short-term rates move aggressively against you, and nothing else happens with the Company, we think is not the right scenario. So for all those reasons -- and actually one more; were much more concerned about interest rate or refinance risk than we are having a little bit of variable rate exposure. So for all those reasons we're not going to change this materially; having said that, the sale of Fund I would affect that number. The sale of this other asset we're talking about where you used 55 million for the Series E, but there's a piece left over, and we just want to have some debt to pay down. We're not going to touch the variable rate. We have $200 million worth of debt; I don't think that's an unreasonable amount, given what else is going on out there.

Let me sneak one more question in and then I will yield the floor. I know you are in the midst of the bidding process, but I was interested -- why do you feel comfortable putting out that at least $18 million number? What gives you the comfort level to come out and give that to guys like me who, obviously, are going to comment on it?

The problem here is that if we don't say something, we have the potential for lots of people to make lots of different assumptions and come to a lot of different conclusions about what that number might be. So the reason for disclosing the number really didn't have a lot to do with giving it to you in particular, Andrew, it was really (multiple speakers) and get everyone sort of consistent out there, so that everyone was looking in about the same range. Otherwise, I think you have issues of fair disclosure and that type of thing. So once we decided to make the Fund I sale a public announcement -- because I don't know how we could help it, given that we had a couple of hundred teasers and lots of marketing activity and everyone in the market kind of knows about it -- so we're sort of forced into making it a public process. And then once it's a public process, you're talking about what do you say about it. Clearly, we don't want to talk about cap rates and values; that can only do us harm. But we wanted to give everyone a sense of what that number might be. Now, that's obviously based on lots of different things -- the Fund portfolio; values in the markets have been discussed, which are at least through -- around the bidding; and a variety of other factors. So again, the primary objective was try to get everyone out there, get the information sort of on the same page about what those numbers might be.

Brian Legg, Merrill Lynch.

I asked this question last call, but are you going to be warehousing your -- some acquisitions on the balance sheet for the Fund II, much like you did for this Fund I?

No. We already had our first closing of Fund II, so we have cash available to invest when we fund investments, and we did not intentionally warehouse, because we just felt that we didn't need to do (technical difficulty) we had to have some credibility, and we had to show the investors what was available. But given Fund I is done and successful, we felt that we didn't need to do that for Fund II. And fact is, we didn't (technical difficulty) (indiscernible) mentioned my comments -- we should be closed by the end of September, with a total fund of approximately 250 to $260 million.

So like the acquisition in Cupertino -- that's going straight on your balance sheet?

Right.

How quickly do you think you can get the money out the door -- given you talk about the cap rates being so low -- how quickly can you go out there and invest that 700 million?

Last fund it took us two years, and we (technical difficulty) chose our spots. And I would -- we've got two years to do it again. And right now, cap rates are extraordinarily low. We are thinking that we can maybe get another maybe 75 to $100 million done this year. But that is probably about it. So I wouldn't expect us to -- we think the cap rates are going to hang out here for a little while and then probably inch up overtime. So we're not going to run out and invest it all overnight.

Just thinking to '05, with this disposition of your Fund I, what type of dilution do you think it will be before you can effectively reinvest your capital into Fund II?

It comes down to a couple of things. We have money being returned to us under Fund I. And remember the promote is something that is not -- it does not have a yield associated with it until it's realized. So we're going to be -- principally, the key driver to this whole thing is investing the promote in such a way that it generates a stabilized source of income over a long period of time. So that is a much bigger factor than the thing you're getting at, because we're going to be -- we'll be investing -- as funds come out of Fund I we'll be reinvesting them in Fund II. There's a little bit of a lag; there's not a huge spread in terms of cap rate on Fund I to Fund II. I don't think it's going to be a big thing. The fee differential will be something, but not a huge number. I think by far the largest number here is the investment of the Fund I promoted interest and what that might mean; I think everything else is sort of irrelevant.

Just help remind me -- what percentage of this Fund II are going to be in development? Is it similar to last one, where I think you had 25 percent of the fund was slated to be developments?

This fund is exactly the same as Fund I, with the only exception is that we have changed the allocation to a potentially greater portion allocated to Northern California and Seattle from an acquisition standpoint. But from a development standpoint, it's limited to 25 percent.

Are you just -- are you focusing only on San Francisco and Seattle, or can you invest back in Southern California in this bond or in Portland (indiscernible)?

Yes -- we can invest in all the markets that we are in at our discretion. We have given guidance to our investors that we were going to probably invest no more than 30 percent in Southern California, the rest being in Northern California or Seattle.

But given your cap rate range that you gave, you said some of the Seattle assets are trading in the low 5 percent range; Bay Area is 5.25 to 5.75, and Southern California is 5.25 to 6 percent. Do you really think that the growth is going to be that much greater in the Bay area and Seattle, that it makes sense to primarily focus on Seattle and the Bay area?

Obviously, we do. Again, some of the things that we're looking at is where rent levels are, where affordability is relative to Southern California. And you know, if you look at the affordability in the Bay Area and in Seattle, where (indiscernible) median incomes and median rents -- there's significantly greater opportunity for rental growth in the Bay Area and the Northwest than there is in Southern California right now. So that is our motivation.

David Harris, Lehman Brothers.

I've just got off the Pro Lodges (ph) call earlier on today; I thought I was going (indiscernible) in for an easier time looking at you fellows. You're making us earn our money today. Keith, in an environment where you've got condo bidders looking for property and prepared to pay 3 and 4 percent cap rates, why don't you sell more property and special out the dividend if you can't find sources to redeploy the capital at productive rates?

Well, we've got probably -- again, in California it's a little bit different than in some parts of the world, where if you don't have some kind of entitlement on the property already it's very difficult just to take a straight-up apartment and convert it to a condo. So I think we have got five or six properties in the portfolio that have condo entitlements that we could sell. And from our standpoint is, I guess we look at it from the standpoint (indiscernible) are we better off to try and grow the company, grow the company internally and take those dollars and do a 1031? We could sell it; we could sell some of those assets and then 1031 them; or as you say, just dividend the money out. We don't see a tremendous opportunity -- not opportunity; we see a tremendous reason to do that. I don't know that we'd get a lot of benefit for it; I'm not sure that as we talk to these investors who we're raising Fund II from, they're all thinking about where do we put our money to work. As we distribute money from Fund I, they're thinking about where do we put our money to work. So I'm assuming the whole world is awash in cash right now, and what we really need to do is continue to try and return a better -- a growth rate at a better return on our existing shareholders than distributing money. And that is the choice we've made; hopefully it's the right choice.

You don't think these cap rates are going to come south of this, though? This is about as top of the cycle as you get, isn't it?

I think so. I don't think that you're going to see cap rates go further -- go down lower than that. I think that you're going to probably see them float around here. And the condo craze is not going to go on forever; I suspect as interest rates move on home financing, that you'll condo prices moderate, and therefore you're going to see the condo converters be less aggressive in their pricing. Historically, there has not been this big a spread between the converters and the acquisition (indiscernible) apartment market.

Your sense is that if miss -- if you don't market these other five or six properties on which you have condo conversion rights, then you may have missed that opportunity to sell these properties (multiple speakers) cycle?

At that kind of premium in this cycle that's probably true. But again we've got to think about how do we redeploy and we've got an overall capital plan. We really look at those monies as part of the future capital base. So right now we have Fund II available that we can invest maybe at a little bit more aggressive cap rate because we can leverage it at 65 percent with -- even in today's world with a ten-year at 450, at 90 to 100 basis points we can still get ten-year financing at 540 to 550. And if we could pick our spots and either get superior growth or look for a 6, 6.25 caps we could make that work.

David, I would add one thing. In some of the cases you're more -- you're better off selling your newer assets to condo converters because they have higher property tax bases. Some of the older assets that are condo (indiscernible) have old tax bases, and that's a different kind of asset that we can benefit from. So the newer stuff is more aggressively looked at than the older things with lower tax bases. So we're doing that evaluation; we're selling one hopefully in the next several weeks, and there's others out there potentially.

But there seems to be a super-abundance of capital around, looking for RV and at manufactured home sites not least in the hands of the public companies at the moment. Why are you not accelerating sales there?

All those deals are optioned to the existing lessees, and they have options so we can't necessarily sell those to another party. Those transactions are essentially done. And when these parties -- I mean the transactions are done. When the option period is up, we expect them all to exercise their option and take those properties off our hands.

Everything is locked up; you don't have any flexibility in terms of pushing those sales forward?

That's correct.

Ross Nussbaum, Banc of America Securities.

I'm here with Karen Ford. A question with respect to the gain that you expect to record on the sale of the Fund I asset. Will you need to pay a special onetime dividend given where your payout ratio is in order to meet the 95 percent dividend payout requirement?

Obviously, there's -- I hat to go down that road -- it's a little premature given that we don't know what the sales price might be. And it's pretty sensitive to that. But based on an internal analysis, we think we can manage through without incurring a special distribution that would involve some 1031 exchange. I will -- and several other types of transactions in order to avoid that. But it's our current thought that we would not pay a special distribution at this point in time. Not that we would stay away from that; we would rather pay a special distribution than incur a corporate level tax.

Okay. If you can't find enough homes in the 1031 market then a special dividend sounds like it would be a possibility.

A possibility. Or if the purchase price is different from what we expect, is higher than what we expect, or any number of other possibilities.

How much higher from what you expect would it need to be to trigger (multiple speakers)

I can't tell you. We're just speculating on what might happen, which I don't really want to do at this point. I think it's to premature to do it.

I think Karen has a question as well.

You mentioned that your investment in Fund II was currently contemplated to be 75 million, might drop down to 50 million. Can you talk about the reasons why it might go down?

Right now we've committed 75 million to the transaction. We have several additional -- and we did that to get the first closing done by the end of June. And we currently have several additional -- essentially we're full up; we have several additional people or investors looking at it, and we may -- if they come to fruition we may allocate or resell part of our difference between 75 and 50 to them, to take us back down to 50. That's the issue. If that doesn't come to close we would leave our 75 in place and end up there with the 250 to 260 range.

Just switching gears over to the operating expense side. They were up 3.3 percent this quarter. I think your guidance at the beginning of the year was for 2.7 percent growth for the year. Is that still intact given what you saw this quarter? And you mentioned turnover was up this quarter and that contributed to the expense growth; was there anything else there that brought it up to 3.3?

I think that year-to-date basis we're still in the guidance range, so even though it was a little bit higher in the second quarter it's not beyond our guidance. Turnover costs were, obviously, one factor. Mark, did anything else -- you want to comment on anything else?

Not really. It was a little -- I think it's just a function of timing that we will -- I don't have any indication that we're not going to come in on our operating expense side as it relates to our guidance.

Chris Hartung, WR Hambrecht.

Focusing a little bit off the funds for a second, what do you have expectation-wise through the end of the year? Do you foresee concessions pretty much burning off by the end of the year? Or will they linger into 2005?

This is Bob Talbot. I mean, it's a crystal ball.

Chris, we're all listening (multiple speakers)

(multiple speakers) E.F. Hutton commercial (multiple speakers) dropped their pens. It really is a crystal ball. We're one operator in a marketplace and we're going -- as we always have we will compete with the marketplace. It certainly is an encouraging sign, and we'd like to believe that they will continue to burn off and ultimately go away. But it's a little tough for me to give you an exact date.

Fair enough. To Fund (inaudible) -- since you started marketing Fund II, have your thoughts on the allocation of the investments by market changed at all?

No. We started in, I think, November, and that's -- what -- six months, eight months ago. I don't think that the economics in any of our regions have changed. We still believe that Northern California and Seattle are going to be -- from a rental standpoint have better rental growth than Southern California. Not that Southern California is bad, but there'll just be better. We still think -- if we saw cap rates in Southern California really pop up and there was a -- we didn't need as much rental growth, certainly we would focus there. We have discretion and we can allocate those proceeds to the best opportunities in the marketplace. I think what we contemplated is still intact today.

Finally, are there any plans to take any current projects into redevelopment over the next year?

Yes, we have several. Right now we're in the process of looking at a large project in Woodland Hills. It's 400-plus units. We're also looking at a deal in L.A., and we're looking at a deal in the Bay Area, and a deal in Seattle. So we've got a pretty significant pipeline of existing projects on the balance sheet that are going to go into rehab. Now, I would just caution you that we're going to try -- the only -- the deal in Woodland Hills is a deal that is going to be a lot of external work, so we don't expect to create a lot of vacancy. The deal in the Bay Area, we are doing basically 10 units at a time, long-term. So we're trying to minimize occupancy disruption. And the Seattle project is a smaller project. And again, a lot of it's going to be external work, so we're going to try and keep occupancy as stable as possible with all of these projects.

So even with the projects we shouldn't see a huge increase in the number of units that are off-line and being capitalized?

Yes. That's the goal.

(OPERATOR INSTRUCTIONS). Craig Leupold, Green Street Advisors.

Keith, I'm curious -- you mentioned cap rates down -- flat to maybe down 50 basis points across your markets. I'm just wondering what kind of IRRs do you think are available on an unlevered basis in the market today, given that your previous comment that you don't think cap rates are going any lower, so presumably we may have residual cap rates that are much higher than where we are today. I'm just curious what kind of IRRs you think you're targeting, and what your general underwriting assumptions are on acquisitions today?

Let me go to our model which is a leveraged model, 65 percent leveraged in the Fund. And if we are buying in the 5.5 to 6 percent range, and we're selling -- the assumption is we're selling 6 to 7 years out at a cap rate that is 150 basis points higher than that, the 6.5 to 7 percent range -- the rental growth that you need in between on average is about 5.5 to 6 percent annually. And that is the basis for the model. And we think that is attainable.

Is that rental growth or is that NOI growth, that 5.5 to 6 percent?

That's rental growth. And that's a little bit deceiving because part of that -- that's an average growth rate at the rental. So we're going to have value-adds; we're going to have some opportunities to reposition properties. And again, the goal on the repositions are a 15 percent cash on cash return. So that sort of plays into it. So you have to consider that in the model.

Hey, Craig. Just one other point of references. If you grow rents in the Bay Area by that 6 percent range for 7 years, you're still about 15 percent below the rents that were achieved in year 2000.

I guess with operating leverage you're assuming then NOIs are growing at very high single-digits to low double-digits?

Sounds about right; yes.

Have you thought about it on an unlevered basis? I'm just wondering at what point -- you guys are obviously in a market with Fund II. Do you see any resistance on the part of direct real estate investors as these cap rates continue to decline? At some point do people push away from the table?

I think it goes just back to the capital markets in general. As Keith said, there's a lot of money out there looking for a yield. And the landscape for competitive investment opportunities is a somewhat troubling one. So I think there continues to be a lot of money that is attracted to even a 5.5 percent unlevered yield on real estate. So, I don't see it -- it doesn't appear to be changing imminently. Keith, would you agree?

I agree.

It was interesting; there was an article in the Wall Street Journal yesterday about inflation-protected corporate bonds. I wonder at what point securities are created that start to compete with real estate and start to reverse this trend, or potentially reverse this trend on cap rates? And then a couple of specific questions on -- I think you said your acquisition target for the year was 325 million; you've done about 240 million year-to-date. 80 to 85 million -- I assume that all gets done through Fund II? Is that a gross investment amount as opposed to your pro rata share?

That's a gross number, not our pro rata share.

Could you speak to the project -- the development project that you abandoned, and kind of what happened there versus the other three projects that you say you kind of have kind of in the pipeline but not quite ready to put on a development sheet yet? And maybe how much money you might have invested in those? Just kind of trying to understand -- you have potential for future write-offs of this kind.

Sure. The deal that was dropped that we had done -- spent 150 on -- part of that was deposit and part of it was due diligence money -- but it was a deal in the Bay Area, and it was a fairly large piece. And it required some rezoning. And we believed that we were going to get -- and we had worked with the city; we had preliminary indications from the city that it was going to -- they would work with us. And then there was -- at some point in the process it became pretty clear that the city wasn't going to work with us and we weren't willing to spend any more money and so we dropped it. So it was rezoning it from one use to another, and that was the problem. Going forward with the three things we have, we don't -- they're in contract; they have refundable deposits in place and due diligence money of maybe 10 to 25,000 per project has been spent at this time. So nothing significant. But they all look fairly decent, and maybe -- we may be able to get our 7 percent kind of today's NOI looking at the project on an apples-to-apples kind of basis.

Last question. Mike, I think you gave the number as to what the average occupancy was at Playa Vista for the quarter, and I missed that.

Yes. It was 87 percent for the quarter versus 81 percent in the prior quarter. I think we're now 95 percent (multiple speakers) --

We crossed 95 percent last week occupancy at the property.

David Rodgers, Key McDonald.

The only real question I have left is really trying to figure out the timing of the rent growth that you're talking about, particularly in Northern California. Probably what you did in the first half, you had some year-over-year occupancy increases, a decline in same-store revenues of 5.3 percent. But your full-year target on the job sheet that you gave indicates flat year-over-year rent growth. Are you really expecting that to pick up significantly in the second half of the year? What's a better timing on that number?

I think you're right. I think the second half of the year has been our expectation that there is -- we had kind of the continued lag going in the first half of the year, and as the job markets continued to show positive signs -- and so far that's been on track -- we would expect that strength to finally hit us in the second half. I think our experience is that the demand -- apartment demand tends to lag the job growth recovery. So we are going to start to see that really -- expect to see it in the second half of the year, is correct.

I might just add to that, that the sheet I think you're referring to was prepared by our economist, and that is looking at what market rents were a year ago versus today. And that is somewhat different from the results of our portfolio, which are really tied to our scheduled rent in our portfolio, which can change differently from those numbers. I just want to make that point.

Chris Pike, UBS.

Keith, I guess at beginning of your call you indicated you had some softness in San Diego. You attributed a part of it to some management issues. Can you just remind me what was going on down there?

Mr. Talbot's here, and that is directly his responsibility. We'll let him -- he'll give it to you first-hand.

Chris, the management issues were unfortunately no different than the types of things you deal with from time to time when you're managing a lot of properties. We had some management turnover and a couple of different things that just caused a little blip in our occupancy in a couple of the bigger properties than we would have liked. And it was compounded, as I also mentioned, by some of the troop activity we had in the marketplace as well.

Was the softness more a function of management or was it equal -- relatively equal to the overall occupancy losses due to troop deployment?

I don't have an exact breakout of it. If you look at the fact that the market occupancy --

Let me ask the question a different way. The properties that were managed, did you see the occupancy drop more in those properties relative to the overall market?

Yes. I would say on one or two of them that's correct.

I just get back to the specifics. There were two larger properties -- one was 400 units and one was -- so when large properties go from 95 to 88, the impact is large on a region. And that was really the issue. And I think as Bob alluded to in his comments, those issues are behind us. There's good solid people in place. The current properties are occupied. One of them comes to mind is 96 percent; I'm not sure what the other one is at. But that was the issue, and I would (indiscernible) the troop deployment issue applied to two properties, and I think both of those are in the low to 95 --mid 92 to 95 range now. So I would guess that in absolute dollars the problem with management was a greater magnitude.

A follow-up question from some of your comments a couple of moments ago. In terms of the lag between job growth and apartment demand, if you were look at the three major regions that you guys talk about in your release, how long do you think it usually takes or historically has taken for job growth to ultimately turn into positive demand? Is it like two months, three months, nine months?

We're thinking two quarters is where you see -- and again, part of it is the starting point. Right now, one of the reasons that I give market data and Bob talks about our portfolio is that as Bob said, we are a lone operator here. And if we are at 96 percent occupancy but the market is at 94, we can't necessarily start pushing rents until the entire market gets there. So generally, like for example, San Diego is at 94.5 now, even though we are at -- currently at 95. We need the entire market to get there. So as these jobs settle out, we think there's probably a two-quarter lag.

I don't know if I saw this or I missed it -- and it may be in the press release -- but I think you were talking about concessions per turn year-over-year? Do you have a number on a sequential basis?

I don't think we have it at our fingertips. We can certainly call you and give it to you.

Gentlemen, there appear to be no further questions at this time.

This is Keith Guericke. Thanks for your participation, and (inaudible) talk to all of you next quarter. Thanks.

This does conclude today's conference.