Essex Property Trust Inc (ESS) 2005 Q3 法說會逐字稿

Good day and welcome to the Essex’s Property Trust Inc. Third Quarter Earnings Results Conference Call. Today’s call is being recorded. With us are Mr. Keith Guericke, Chief Executive Officer, Mr. Bob Talbott, SVP Operations, Mr. Michael Dance, CFO, and Mr. Mike Schall, Senior Executive Vice President and Chief Operating Officer. For opening remarks, I would like to turn the call over to Mr. Guericke. Please go ahead sir.

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

Last night we reported earnings per share of $.35 and FFO at $1.15. For the quarter, the portfolio grew revenue of 4.4% on a quarter-over-quarter basis and 2.1% on a sequential basis. We’re pleased with those results and hopefully we can take you through it and give you some insight into that.

This morning-- first of all as typical, I’ve got several things that we talk about with respect to home prices and growth. And that information is on the website. And you can find that under Analyst Resources on the website. So again that covers new residential supply, permit activity, home prices, and what are expectations of growth in the particular markets.

On this call, I’d like to give you an update on the-- on our current market conditions and also comment on our acquisition, disposition and development activity. Industry job growth across our three regions as of September has met or exceeded our expectations. The labor force growth has increased significantly in Seattle and Northern California, while unemployment rates remain lower than previous year. These values in Southern California remain at previously reported high levels that exceed the national values. Commercial absorption in each region is stronger than anticipated. In my comments when I refer to commercial absorption, all rates are annualized.

Starting with Seattle, on a year-over-year job growth through September has been 48,000 jobs or 3.6% adjusting for the nearly 15,000 Boeing workers on strike. This growth is ahead of schedule by roughly 18,000 jobs. Unemployment rate fell to 4.7% in the third quarter from 4.9% during the same period last year. Labor force grew by 2.7% during this time. Supply is unchanged from previously published estimates of 8/10 of 1% of total supply. Year-to-date commercial absorption has totaled 7.2 million square feet or 3.4% annualized rate. Overall demand is outpacing our initial forecast resulting in effective rent growth already matching our year-end forecast. Reductions each quarter in concessions is driving these results. Occupancy has reduced-- has reached 94.5% for the market, which is just below the year-end forecast. Our portfolio is 97.3% occupied.

Going to Northern California, year-over-year job growth through September is 26,000 jobs or 9/10 of a percent. This growth is ahead of schedule by roughly 6,000 jobs. Unemployment rate fell to 5% in the third quarter from 5.7% in the same period last year. The labor force has grown by 1.8% during the same time period. Supply is unchanged from previously published estimates of 6/10 of 1% of total supply. Year-to-date commercial absorptions totaled 14.4 million square feet or 2.6% on annualized rate.

Northern California’s performance is mirroring Seattle. Demand is outpacing our initial forecasts, resulting in occupancy and effective rent growth that has matched or exceeded the high end of our year-end forecast across all three markets. Reductions in concessions have driven effective rent growth. Year over year, industry job growth now exceeds supply growth for the region. As expected, Oakland is the strongest market and San Jose the weakest. However, San Jose market is on target to achieve job growth above supply growth by the end of the year. Market occupancy for the region is 9 ½, excuse me 95.5%. Our portfolio is running at 97.3 for the quarter.

Now going to Southern California, same statistics. Year-over-year job growth through June, excuse me, through September is 81,000 or 1.2%. The unemployment rate has fallen to the 4.7% at the end of the third quarter from 5.8% during the same period last year. The labor force has grown by 2% during the same time period, which is very strong. Supply is unchanged from our previously published estimates of 8/10 of 1% of total supply. Year-to-date commercial absorption has totaled 20.5 million square feet or 1.6% on an annualized rate. Occupancy now exceeds 96% level, concessions remain virtually non-existent and market rents are up 2 to 4% for 2005, depending on the submarket. Industry job growth is significantly ahead in Los Angeles and flat or slightly behind in Ventura, Orange and San Diego. All of the markets continue to show strong labor force growth and sharp declines in unemployment rates.

Our Southern California markets are no longer recovering but in a steady growth phase. Going forward, we expect modest improvement in job growth and stable high occupancy levels. Rent growth will be driven by wage and salary growth that accompanies tight labor markets. We also expect increased migration into the region from younger, well-educated workers seeking the high paying jobs and quality of life. Going forward, we expect stable job growth, strong wage growth and increased migration to put greater pressure on housing demand. We expect very little increase in total residential supply, particularly in single family homes, resulting in increasing market occupancy and rent growth across all of our regions. In the region as a whole, market occupancy is 96.2%. Our portfolio is running at 97.2%.

Now let me touch on acquisitions. As I mentioned in the past, the goal for the year is $325 million. Year to date, we’ve closed $180 million. Currently in contract, about $200 million, of which about $135 could close in the fourth quarter. Given current visibility, I expect by year end we will close to our target.

As I mentioned last call, we have listed five properties with condo maps for sale. In the quarter, we-- one property has gone into contract with a potential close before year end. The remaining properties have not received offers that were acceptable to us at this time. As you’ll recall, our goal was to sell these properties at sub-four caps.

Now let me touch on cap rates by market. In Seattle, cap rates are in the 4 ½ to 5 range. Unlike California markets, in Seattle or in the Washington area, with a small amount of money and a few-- two to three months time, almost any apartment can be converted to, entitled with a condo map. So the condo buyers are competing directly with the investors in that marketplace. And so there’s, there’s not really a fabrication of cap rates. However, Northern-- or in California, that’s not the case. Cap rates for apartments, which would be investment purchased by investors are in the 4 ½ to 5 cap range. Properties with condo maps are selling in the 3 ½ to 4 ½ range. In California it is unique in that-- if a property does not already have a condo map, the chance of getting one is not good and most buyers are not willing to spend the money or take the time and risk to try and get a map on it. In Southern California, which is more of a stable rental market, investment cap rates are the 4 ¾ to 5 ¼ range. However, it appears from our experience at least with our five condo projects that we’re trying to sell that the condo cap rates are moderating a little bit.

Now going to development, as disclosed in the supplemental, we have $133 million of development projects in the pipeline. In addition, we have a shadow pipeline of $450 million of deals primarily in Northern California. We have in the past talked about being more driven by acquisitions. However, as the aggressive cap rates we’re seeing in the acquisition side, we see development cap rates on today’s rent and this is important, cause we’re talking about today’s rents, today’s expenses. The cap rates in the 6 to 6.5% range and we think that that’s providing sufficient premium to take those development risks. So you’ll see up ramp up our development pipeline over time.

Finally, big picture, what’s driven our results this quarter, which I think are stacking up to be some of the best in the multi-family sector are new supply in our markets, less than 1% of stock, job growth and population growth across all of our markets, which we’re able to translate into rent and high occupancy.

Now I’d like to turn the call over to Bob Talbott.

Thanks Keith. Good morning everyone and thank you for joining us. This morning I will bring you up to date on conditions in our major markets. Broadly speaking, we’re pleased with the performance we’re achieving in each market. As I discussed last quarter, we have transitioned our operating strategy of maximizing cash flow by being less defensive and more aggressive with pushing rents. For the most part, our strategy is working as planned. And given that our occupancies are holding, we believe we can push harder, particularly with renewal increases to existing residents.

That said, going into the fourth quarter, which is seasonally a slower time, we want to maintain our higher occupancy and as of this past Monday, we appear to be in pretty good shape as the stabilized portfolio’s occupancy was 97.2% and our net availability was only 4%. Occupancy in each submarket was over 96% and net availability was no higher than around 5%.

So again, as I did last quarter, in the interest of time, I will limit my submarket comments to issues of significant interest. Turning first to Seattle, it is continuing to perform well and Portland is recovering. Concession activity continues to decline. Our average concession per turn was $114 compared to $145 a year ago and $128 in the second quarter. In Seattle, traffic was down sequentially 5% and year over year it was down 10.6%. In Portland, traffic was up 4.6% sequentially and up 8.2% year over year.

Home purchase activity for the quarter represented 22.4% of our move-outs in Seattle compared to 19% a year ago and 32.9% in Portland compared to 28% a year ago. By the way, for the portfolio that figure is 17%, which is about the same as one year ago.

From the September home sales data we’ve seen, year-over-year sales volume was basically the same in Seattle. It was down in the area and in San Diego. However, home sale prices continue to increase. As of yet, we have not seen a significant effect on our move-outs with this slowing, most likely because so much of our portfolio is located in relatively expensive, single family home markets.

Finally, an update on new additions, we added Echo Ridge to the portfolio in early September and it is currently 93% occupied. And we added Morning Run in October and it’s presently 94% occupied.

Looking in Northern California, the market continues its upward trend. Concession activity per turn was $135 for the quarter. This is up from $105 per turn last quarter due largely to an isolated response at one property to remain competitive with a neighboring lease up. Otherwise, concession activity in the market has continued to decline as evidenced by comparing this quarter’s concession activity to the second quarter’s $223 per turn.

Traffic for the quarter was down 7.6% sequentially and down 19% year over year. Move-out activity attributable to home purchases was 17.6% for the quarter compared to 19% from the same quarter a year ago. Looking to Southern California, all of our major submarkets are performing well with concession activity limited primarily to San Diego. In San Diego they are generally being used on vacant apartments to marginally improve occupancy in select locations. Overall concessions per turn for the quarter were $83 compared to $127 last year and $97 last quarter.

Traffic for the L.A. Ventura area was down sequentially 13.8% and up 1.1% from a year ago. In Orange County, traffic was down sequentially 8.4% and up 26% from a year ago. And finally in San Diego, traffic was up 5% sequentially and it’s up 15% from a year ago.

Move-out activity attributable to home purchases was 13% for the quarter compared to 14.6% last year. This average is heavily skewed by San Diego where home purchases accounted for only 9% of our move-outs for the quarter, which is lower than last year’s 12.3%. I believe this decline in San Diego is caused by the lack of affordability in the market rather than a leveling off of home sales. Particularly if you consider that last quarter’s move-out activity accounted for 8% and that the affordability index in San Diego is approaching 50%.

As you know, in September we added Mirabella to our portfolio in L.A. and it’s currently 93% occupied.

Now let me turn the call over to Mike Dance. Mike?

Thanks Bob. My comments will highlight our quarterly financial results and will conclude with a discussion of the accounting for our exchangeable bond offering. Mike Schall will follow with an update on our guidance for the rest of the year.

Funds from operation per diluted share for the quarter was $1.15, a $.03 increase over the revised guidance we discussed on our second quarter conference call. Improvement in property operations is the biggest contributor to our strong results. Property revenues for the third quarter were up 12% from the same quarter last year for a total increase of $8.5 million. Same property, year-over-year revenues for the quarter are up $2.6 million or 4.4%. The increase in same property, year-over-year revenues is due to higher scheduled rents of $1.8 million, a drop in vacancies added another $600,000 and a reduction in concessions improved revenues by approximately $100,000.

Our participation in the condo conversion at the Essex at Lake Merritt added $.07 to the quarter’s FFO or $1.8 million which is net of taxes and allocated expenses. The quarterly results also include approximately $900,000 in promote distributions from Fund I.

The last item I want to address is the accounting for the $190 million exchangeable debt offering recently announced. The conversion feature is in effect an embedded option for the bondholders to participate in appreciation of our stock above a strike price of $103.25. Under generally accepted accounting principles, there is no financial statement expense for this feature and the only impact on FFO and net income will be the coupon interest we pay plus amortization of debt offering cost, which we estimate to be an effective rate of approximately 3.75%.

Once their share price exceeds the strike price of $103.25, we will apply the treasury share method for calculating diluted EPS and FFO per share. Under the treasury share method, the appreciation over the strike price is divided by the then current stock price to determine the dilutive impact of the bond offering.

That concludes my remarks and I will now turn it over to Mike Schall.

Thank you Mike and thank you everyone for joining us this morning. We are like many of you headed to [Nambre] later today, so hopefully we’ll see some of you there. I’m going to cover two topics on the call this morning. First topic is the sources and uses of cash in Q4 including the bond offering that Mike just discussed. A little bit of additional detail.

Please note actually in my comments, I do not know the outcome of the underwriters over a [lobbing] option, which involves up to $35 million in bonds and therefore I’m going to assume for purposes of these comments that the over a [lobbing] option is not exercised. The net proceeds of the offering were approximately $185 million. In addition to this amount, in Q4 we expect to obtain secured financings of approximately $54 million before the end of 2005. We expect the effective bond rate to be 3.75% as Mike just stated. And the anticipated interest rate on the secured financings of 5.55% or a blended average of approximately 4.15% on the total.

With these proceeds, we will number one, use $25 million to repurchase Essex stock, which has actually already occurred. We acquired subsequent to the bond offering, 286,073 shares at a price of $87.39. These shares were acquired by Essex Property Trust and will be retired. The, with estimated FFO of $4.46 a share in 2005, the ethical yield on the average repurchase price was 5.1%.

Number two, we will repay secured debt in the amount of $85 million with an average cost, effective cost of 6.36%. In connection with these payoffs, we expect to incur prepayment penalties in Q4 in the amount of approximately $2 million or $.08 a share approximately. And that will adjust our Q4 guidance, which I’ll get to in a moment.

Finally, we will repay our lines of credit in the estimated amount of $129 million and that has an average cost of 4.9%. Really the purpose of the, of the exchangeable bond offering was to reduce our lines of credit given the growing development pipeline that Keith discussed. And we’re finding that the development deals are longer term in nature and exceed the commitment period of Fund II, so a greater portion of the development activity is going to be funded on balance sheet. Accordingly, we wanted to make sure that we had plenty of availability on our lines. And we accomplished that with the, with the financing that I just discussed.

Overall we expect these transactions to be accretive by approximately $.11 per share in 2006. In 2005, we expect, we expect interest expense to decline by $.01 per share, again offset by $.08 per share in the, for the prepayment penalties which we run through FFO.

Also as a result of these transactions, we will have reduced our variable rate debt exposure to approximately 6% of total market capitalization. And most of that represents tax exempt or overrate financing which is inherently less sensitive to short-term rate increases as compared to LIBOR. We estimate that $260 million in asset values will become unencumbered as a result of the fixed debt repayment. And in connection with the new secured financings, we will place encumbrances on approximately $90 million in assets.

Now my second topic, which is FFO for the remainder of this year. By way of background, our press release in December of 2004 contained original guidance for 2005, which was a range of $4.37 to $4.45 based on same property revenue growth to 2.5%. This range was subsequent, subsequently increased to $4.47 to $4.53 in May earlier this year based on the improving economic conditions. In our second quarter conference call, we estimated FFO of $1.12 and $1.03 for the third and fourth quarter. The actual third quarter result was $1.15 as we talked about before, substantially of all which was attributable to improved operations.

For Q4, given the impact of the financing transactions that we just discussed, we expect FFO of $.97 per share. We have reduced the $1.03 that we talked about in last quarter’s call by the $.08 per share in prepayment penalties that we expect to incur in Q4. And we assume improved operations will contribute back $.02 per share. In addition, we have two offsetting $.01 items. The first is the positive effect of the financings, exchangeable bond financing of $.01 in Q4 2005, offset by some additional expense accruals which typically run high, higher at higher levels in Q4.

Therefore, for 2005 we expect FFO per share to range from $4.46 to $4.47 per share. We are in the process of finishing our budgets for 2006 and we expect to release guidance in December of 2005.

That concludes my comments. Again, would like to thank you for joining us. And now, I’d like to give you an opportunity to ask any questions you might have. Back to you operator.

Thank you sir. [OPERATOR INSTRUCTIONS] We’ll take our first question from Caleb Piper with Delaware Investments.

Hey guys. It looks like I’m the only one on the call by the sound of things.

Everybody’s in Chicago.

Hey just a quick question on the $.11 accretion next year for more of the items that you went through. Can you sort of break that down for me? You mentioned once an accretive in the fourth quarter from everything and then if I annualize that, I don’t quite get the $.11. Can you-- so can you break that down for me?

Sure, well we, you know we didn’t have the certainty with respect to the timing of the transaction as you know. The 5 and 10-year treasury were moving, moving around and stock price was going up and down. So, with respect to the offering, we didn’t have, you know it wasn’t like we had advance warning. Therefore, we are just noticing some of the debt repayments now and then there’s a period of time that you typically have to wait. Long story short, the benefit of the $.01 is because we don’t have a full quarter of repayment to capture that reduction in cost of [inaudible]. So the fourth quarter is not a normal quarter for purposely for this thing.

Going into next year, I think I tried to break it out so that you could walk through how we got $.11. But essentially most of the accretion comes from the fact that the bonds have an effective cost of 3.75% as compared to the $85 million that we’re repaying with an average cost of 6.3%, 6.36%. That’s where most of the accretion comes from. A little bit more comes from the effective of line costs us 4.9% versus the blended average of everything that we’re going to do in Q4, 4.15%. So it’s just, if you go through the math, I think you will find the number you get is $.11 on an annualized basis. But because Q4, not all the transactions happen for the whole quarter, we’ve got these notice provisions on the secured financing. You’re not going to see the, that magnitude of benefit in Q4.

Right, okay. And have you prepaid the $85 million yet?

No we have not. We’ve--

Okay.

You know as soon as the financing was over, we noticed the lenders but typically there’s a 30-day period to wait.

Okay. And can you just talk about San Francisco? You know you sort of said that it sounded like there’s some strength. How does the market feel to you on the ground?

Well we certainly feel really strength in all the submarkets. The East Bay and San Francisco and the peninsula particularly are doing very well. San Jose is also doing well. If there’s an area though where you might still see, see some grumblings of a weak spot here and there it would be in some pockets in San Jose. It’s where, if there’s any, the little supply we’ve added has been predominantly in that area. But for the most part, we’re really starting to see the benefit of the job growth start to kick in for us.

Great and what sort of rent growth are you getting on renewals in San Francisco?

Well generally it’s the same rate, you know Chuck we’re expecting it to be at the same rate that we’re experience in the market. So in that 3 or 4% range, 5% range.

Okay. Great. Thanks guys.

Thanks Caleb.

Our next question is from Bill Pekowitz with Prudential Equity Group.

Hi guys. Just one quick question. Last couple of quarters your operating expense comparisons on the same store have been pretty favorable. I was just wondering what might be driving that and is that something that’s going to kind of reverse itself and then kind of normalize going forward?

You know we haven’t had huge increases in any line item of expense. And I know everyone’s concerned about gas and electric and we’re sort of concerned about that same thing. I guess from my perspective property taxes are pretty well locked in. They’re 2% for California, that’s most of our portfolio. So we have, we have not had big surprises there. And we’ve done a lot of work on our core policies to work through the expense stuff. So I think we have that and that started a year ago. So I think the year-over-year comparisons are better from that perspective. And we haven’t had as much pressure on expense growth over the last couple years. I think that, having said that, maybe just a little more pressure now given the impact of an improved economy and given the energy cost situation. So we’re, I think that that be the good news that we have this year may not continue into 2006, certainly not at the levels that we’ve had so far. We just haven’t had, we just haven’t had surprises on the expense side in 2005.

Okay. I guess the other thing was just, some of your peers have been talking about maybe starting to see some pressure just in labor costs as well. Are you guys seeing any of that yet or--?

Yes, we’re seeing labor cost pressure really throughout everything we do from construction to operating costs and really throughout the business. So I think that’s a fair statement. And I, and again so as I, as I just said, I think that the good news we’ve had this year won’t necessarily continue because the economies are improving. The-- Keith quoted the unemployment rates--

Right.

They’re declining. Everyone is scrambling to find good people. And all that translates into a more active labor market certainly. So yes I think that we echo what others have said in that regard.

Okay thank you.

Our next question is from Bill Crow with Raymond James.

Morning guys. Nice quarter. Are you surprised at all at this stage that you haven’t seen your move-outs for new homes start to decline and in fact, it’s gone up in a couple of markets?

Generally not because again as I alluded to in my comments, so much of the markets that we operate in are relatively expensive. And that affordability index has actually gone down pretty much in all of our markets. So it’s made it difficult for many of our residents. I mean if I were to break out the portfolio, Bill the-- perhaps more of our, of our top end A grade properties, that percentage is probably higher and I haven’t gone back to look at it. But if I was betting, I’d bet that we might have seen some decline there. But where most of our properties are solid Bs, home purchase activity just hasn’t been a big part of the move-outs to begin with so there’s really not a whole lot of it to change.

And Bill let me just add throw additional comment out there, that is we talk a lot about the impact of short-term rates and we’ve had 12 quarter point increases in from the Fed now. And that has got to have an impact on the adjustable rate mortgages, when you looked at the, look at the fully indexed rate. And we estimate that somewhere around half of the mortgages in California are variable rate financing. So it’s got to have an impact. In my experience, I haven’t been here 20 years about, this-- it kind of continues until you know one day it sort of all ends. And it seems to me it’s maybe kind of strange, I think there’s a lot of, a lot of people that feel like they missed the boat and feel like they want to try to stretch into a house. But I think the first sort of bad news if it gets out there, a lot of things change. And it changes rather dramatically.

Yes, no, I would anticipate that. I’m surprised we haven’t seen it yet. On the condo pricing in Southern California I guess it was, are they the same bidders that have been there before or just making lower offers? Is it an interest rate issue? Why do you think it’s kind of softened at this point from a cap rate perspective?

Well you know the buyers are, there’s a pool of buyers out there. And many of the same faces were there. There were a few new faces. But there’s pretty much a pool of condo buyers in, that play the Southern California market. And I think it’s, I think a couple of them, the issue was they’ve got a pipeline that’s full now. And their plate’s full. I think and I think another bunch of them basically looked at it and said, we think its interest rates and prices are cooling. And there’s just not enough margin left in it at a 3 ½ cap so, I think, I think that they are not seeing condo prices continue to increase. And therefore, if they want to maintain their margins, they’re not willing to step up. So I think the broth or the intent to be has sort of mellowed out a little bit. Not to say it couldn’t come back, but in Southern California. I think Northern California’s different. I think things up here are still pretty aggressive but there weren’t nearly as many condo or apartments that were traded in as condos to start with. So the supply is significantly smaller than it is in Southern California.

If we, if we start to see rising vacancies among condos, is that going to be a threat to you guys going forward? And, especially these people that have speculated?

I don’t think so because again and one of the things that I continue to beat on these calls is the fact that we’re building less than 1% of supply. I think if you’re in Atlanta or in some of the southern markets where you’re building 5 and 6% of stock and it doesn’t sell or it sells and it’s vacant. You got a problem. Here it doesn’t matter because we’re building less than 1% of stock. So if somebody lives there or they try and rent it, it’s-- the impact on the total market place is much different when your supply is constrained.

I know you haven’t given ’06 guidance yet, but as we, as we think about the progression from ’05 to ’06, you’ve got $.11 you talked about today from financing transactions. You obviously have whatever we assume for same store growth and things certainly feel better. What’s-- is there anything going against that whether it’s JV related or special items that are, that would knock that growth rate down next year?

You know one of the numbers is we, is that we’re still working on. So I don’t want to provide a lot of, a lot comment, a lot of detailed comment is. Yes, really two things. One is the affect of the expense levels next year. Again, still working on that but we know, everyone knows what’s going on with natural gas and energy costs. And there is some more pressure on labor costs. And then the other key pieces, we’ve had a pretty significant contribution for-- of other income that was part, that’s been part of our 2004 numbers with the promo recognition of Fund I that was $14.5 million in Q3 of the prior year.

And this year we’ve had, we’ve had the contribution from the condo sellout of the Essex and we’ve had some other promote, Fund I promote recognition, which is with Q4’s going to essentially completed. So we’ve had a lot of help from the other income line item. Next year we have the East Ridge Condos, our condo conversion loan there which will be a part of it and we have several other transactions that we’re still trying to work through the details on so. I think that those are the, those are the key pieces to what happens to our growth rate next year.

It sounds like it’s setting up to be a pretty good year though?

[Inaudible] to agree or disagree with that comment would be I think-- that’s usually--

We’ll see you in Chicago.

Yes, we’ll see you.

[OPERATOR INSTRUCTIONS] And our next question is from Ralph Block (ph) with Focus Financial.

Hey good morning guys.

Good morning.

Could you give us a little bit more color on your change in emphasis toward development versus acquisition, in terms of your rationale? And also how are you factoring in increasing land and construction costs when you look at future projects?

Sure well, one of the things is we try not to be, we try not to get locked into a particular program and trying to do what’s best for the growth of the company given the circumstances we’re dealing with. So the last couple years where we saw cap rates on acquisitions that were essentially the same as development, we just haven’t emphasized development very much and we’ve pushed acquisitions. Now as I said on the, in my comments, as acquisition cap rates getting pushed lower and we’re looking at development and we try and look at development realistically. We’re not talking about, like some of our peers talk about, 8 caps. We’re talking about 6 to 6.5 caps, which are on today’s expenses and today’s rents. And costs that we see in today’s market. Then what we’re doing is we’re trending costs forward.

But the other thing that we’re doing a little bit differently now then we’ve maybe done in the past is we’ve tried to be a very risk adverse development group. And we were looking at things, trying to make them riskless. And now what we’re doing, is we’re taking a little bit more risk. We’re going out on the and we’re looking at tying things up for two and three years, working through the entitlements. And so we may, we may not-- we’re not going to close anything till we get entitlements. But we may have to throw, burn off $100,000 in development costs or entitlement costs here and there. And we’re willing to take that risk for the premium on the improved development yields.

So I think it’s just we’re seeing the marketplace where acquisitions make absolutely no sense or little sense, developments making more sense. That could change over time and it always does. But we’re going to push our development pipeline out further and have things we’re going to have to work on them a lot longer than we had done in the past. So, I think that’s the primary change to what we’re doing.

Okay, so you’re essentially, this is really being motivated by a widening in the spread between acquisition cap rates and development yields. So that’s really what you’re looking at then?

Yes.

Okay thanks.

Gentlemen, it appears we have no further questions at this time. I’ll go ahead and turn it back to you for any additional closing remarks.

Well thank you for joining us. I know there are many fewer folks on the call today and everybody’s in Chicago and we’ll be there this afternoon. So hopefully we can catch up with some of you there and looking forward to it. And thank you for joining us today.

This does conclude today’s conference call. We thank you for your participation and have a good day.